-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RQnOzW6xEmEQJG10ENgeYDIBQ3cLvgsag5JXA6phoVXiSf/2PEq6RejS5QpZFgG4 kRqTVo0XzWYbCBhfer/WuA== 0000944209-96-000374.txt : 19961018 0000944209-96-000374.hdr.sgml : 19961018 ACCESSION NUMBER: 0000944209-96-000374 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19961017 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED STATES FILTER CORP CENTRAL INDEX KEY: 0000318025 STANDARD INDUSTRIAL CLASSIFICATION: REFRIGERATION & SERVICE INDUSTRY MACHINERY [3580] IRS NUMBER: 330266015 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-14281 FILM NUMBER: 96644489 BUSINESS ADDRESS: STREET 1: 73 710 FRED WARING DR STE 222 CITY: PALM DESERT STATE: CA ZIP: 92260 BUSINESS PHONE: 6193400098 MAIL ADDRESS: STREET 1: 73 710 FRED WARING DRIVE SUITE 222 CITY: PALM DESERT STATE: CA ZIP: 92260 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TOXXIC CONTROL INC DATE OF NAME CHANGE: 19910401 FORMER COMPANY: FORMER CONFORMED NAME: NOVAN ENERGY INC DATE OF NAME CHANGE: 19871227 S-3 1 FORM S-3 CONVERTIBLE SUBORDINATED NOTES REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- UNITED STATES FILTER CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0266015 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 40-004 COOK STREET PALM DESERT, CALIFORNIA 92211 (619) 340-0098 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- DAMIAN C. GEORGINO VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY UNITED STATES FILTER CORPORATION 40-004 COOK STREET PALM DESERT, CALIFORNIA 92211 (619) 340-0098 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- Copies to: JANICE C. HARTMAN NICHOLAS P. SAGGESE KIRKPATRICK & LOCKHART LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM 1500 OLIVER BUILDING 300 SOUTH GRAND AVENUE, SUITE 3400 PITTSBURGH, PENNSYLVANIA 15222 LOS ANGELES, CALIFORNIA 90071 (412) 355-6500 (213) 687-5000 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------- Convertible Subordinated Notes due 2001................................ $201,250,000 100% $201,250,000 $60,985 - ------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share............................... (3) -- -- -- - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
(1) Includes $26,250,000 principal amount of Convertible Subordinated Notes due 2001 which may be issued upon exercise of an over-allotment option. (2) Estimated solely for the purpose of calculating the registration fee. (3) There are also registered hereunder such indeterminate number of shares of Common Stock, par value $.01 per share, of United States Filter Corporation as may be issuable upon conversion of the Convertible Subordinated Notes due 2001. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED OCTOBER 16, 1996 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS , 1996 $175,000,000 [LOGO OF UNITED STATES FILTER CORPORATION] % CONVERTIBLE SUBORDINATED NOTES DUE 2001 The % Convertible Subordinated Notes due 2001 (the "Notes") will be convertible at the option of the holder into shares of common stock, par value $.01 per share, of the Company (the "Common Stock"), at any time at or prior to maturity, unless previously redeemed, at a conversion price (the "Conversion Price") of $ per share (equivalent to a conversion rate of shares per $1,000 principal amount of Notes), subject to adjustment in certain events. Interest on the Notes is payable semi-annually on and of each year, commencing on . On October 14, 1996, the closing sale price of the Common Stock of the Company as reported on the New York Stock Exchange Composite Tape (where it is traded under the symbol "USF") was $34.38 per share. The Notes are redeemable, in whole or in part, at the option of the Company, at any time on or after , 1999, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. The Company will be required to offer to purchase the Notes upon a Change of Control (as defined), at 100% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The Notes are unsecured general obligations of the Company, subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company, and are subordinated by operation of law to all liabilities (including trade payables) of the Company's subsidiaries. The Indenture will not restrict the incurrence of Senior Indebtedness or other indebtedness by the Company or its subsidiaries. At June 30, 1996, as adjusted to give effect to the issuance and sale of the Notes and the application of estimated net proceeds therefrom and consummation of the acquisition transactions described herein, the Company would have had approximately $119.3 million of Senior Indebtedness, and the Company's subsidiaries would have had approximately $446.4 million of trade payables and accrued liabilities. See "Description of the Notes." Application will be made to list the Notes on the New York Stock Exchange. Concurrently with this offering (the "Notes Offering"), the Company is undertaking, pursuant to a separate Prospectus, domestic and international offerings of shares of Common Stock (the "Common Stock Offerings"). The net proceeds of the Notes Offering and the Common Stock Offerings are expected to be used to fund or to repay indebtedness to be incurred to fund the pending acquisitions by the Company of certain businesses and assets (collectively referred to as the Water Systems and Manufacturing Group and referred to herein as "WSMG") of Wheelabrator Technologies Inc. ("WTI") and the businesses of the Process Equipment Division ("PED") of United Utilities PLC; the balance, if any, will be used for working capital, capital expenditures and general corporate purposes, including possible future acquisitions. See "Recent and Pending Acquisitions" and "Use of Proceeds." SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS TO THE DISCOUNTS AND TO THE PUBLIC(1) COMMISSIONS(2) COMPANY(3) - -------------------------------------------------------------------------------- Per Note................................. % % % Total(4)................................. $ $ $
- -------------------------------------------------------------------------------- (1) Plus accrued interest, if any, from the date of issuance. (2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) Before deducting expenses payable by the Company estimated at $400,000. (4) The Company has granted to the Underwriters an option exercisable within 30 days after the date of this Prospectus to purchase up to an additional $26,250,000 aggregate principal amount of the Notes on the same terms as set forth above, at the Price to the Public, less the Underwriting Discounts and Commissions, solely for the purpose of covering over- allotments, if any. If such option were exercised in full, the total Price to the Public, total Underwriting Discounts and Commissions and total Proceeds to the Company would be $ , $ and $ , respectively. See "Underwriting." The Notes are offered by the several Underwriters when, as and if delivered to and accepted by them, subject to certain conditions, including their rights to withdraw, cancel or reject orders in whole or in part. It is expected that delivery of the Notes will be made in New York, New York on or about , 1996. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SALOMON BROTHERS INC DEUTSCHE MORGAN GRENFELL NATWEST SECURITIES LIMITED SMITH BARNEY INC. [Map depicting sales and service facilities located in North America, Europe and the Pacific Rim.] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AND THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE- COUNTER MARKET, ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including the Selected Consolidated Financial Data, the Company's Consolidated Financial Statements and Notes thereto and the Unaudited Pro Forma Combined Financial Information, included or incorporated by reference in this Prospectus. Except as otherwise specified, all information in this Prospectus has been adjusted to reflect a 3-for-2 split of the Common Stock effected July 15, 1996 and a 3-for-2 split of the Common Stock effected December 5, 1994, and does not give effect to the over-allotment option described under the caption "Underwriting." THE COMPANY The Company is a leading global provider of industrial and municipal water and wastewater treatment systems, products and services, with an installed base of systems that the Company believes is one of the largest worldwide. The Company offers a single-source solution to industrial and municipal customers through what the Company believes is the industry's broadest range of cost- effective systems, products, services and proven technologies. In addition, the Company has one of the industry's largest networks of sales and service facilities. The Company capitalizes on its large installed base, extensive distribution network and manufacturing capabilities to provide customers with ongoing local service and maintenance. The Company is also a leading provider of service deionization ("SDI") and outsourced water services, including the operation of water and wastewater treatment systems at customer sites. The Company has grown internally and through the strategic acquisition and successful integration of more than 45 United States based and international water and wastewater treatment companies since 1991. On a previously reported basis, the Company's revenues increased to $472.5 million for the fiscal year ended March 31, 1996 from $41.2 million for the fiscal year ended March 31, 1992, representing a compound annual growth rate of approximately 84%. The Company's revenues for the fiscal year ended March 31, 1996 would have been approximately $1.8 billion after giving effect to the completed acquisitions of Zimpro Environmental, Inc. ("Zimpro") and Davis Water & Waste Industries, Inc. ("Davis") and including, on a pro forma basis, the pending acquisitions of WSMG, PED, WaterPro Supplies Corporation ("WaterPro") and The Utility Supply Group, Inc. ("USG") as if such acquisitions were completed at the beginning of such year. Global population growth, economic expansion, scarcity of available water resources, heightened public concern about water quality and growing regulatory requirements have resulted in: (i) continued growth of the multibillion dollar water and wastewater treatment industry; and (ii) heightened demand for increasingly complex water and wastewater treatment systems. The water treatment industry is highly fragmented, with numerous regional participants who provide customers with a limited range of water and wastewater treatment solutions. The Company differentiates itself from competitors by serving as a single-source water and wastewater treatment provider capable of designing, manufacturing, operating, financing and maintaining water and wastewater systems on a local basis for industrial and municipal customers. The Company's customer base includes a broad range of major industrial customers, which require treated water as a necessary component of many products and industrial processes, and municipalities, which treat water and wastewater for their communities. Industrial customers include Chinese Petroleum, Coca-Cola, Dow Chemical, General Motors, Hyundai, Intel, Johnson & Johnson, Merck, Procter & Gamble and Samsung. Municipal customers include the Cities of Los Angeles, Minneapolis-St. Paul and St. Louis. 3 In order to achieve earnings growth and expand its operations to enhance its position as a leading global single-source provider of water and wastewater treatment systems and services, the Company has developed the following strategy: .Provide single-source water and wastewater treatment solutions to industrial and municipal customers .Pursue acquisitions that provide a strategic fit and contribute to revenue and earnings growth .Realize synergies and economies of scale from acquisitions .Expand global market presence, especially in the Pacific Rim region .Expand penetration of the municipal market .Capitalize on distribution strength to enhance local sales and service capabilities .Capitalize on outsourcing and privatization opportunities RECENT AND PENDING ACQUISITIONS The Company has become a leading single-source provider of cost-effective water and wastewater treatment systems primarily through acquisitions of businesses that have expanded the Company's geographic presence, industries served, installed base and range of products and technologies. The Company's acquisition strategy has also recently focused on establishing the Company as a leading distributor of water and wastewater distribution products and services to the industrial and municipal markets. The Company has entered into a definitive agreement with WTI to acquire WSMG for $369.6 million in cash, subject to adjustment. The Company and WTI have also signed a non-binding letter of intent to continue negotiating the formation of a joint venture (the "Joint Venture"). The Company has also entered into a definitive agreement to acquire PED from United Utilities PLC for approximately $195.3 million in cash and stock, subject to adjustment. Additionally, the Company has acquired the stock of Davis for approximately $100.0 million in stock and has entered into definitive agreements to acquire WaterPro for approximately $101.6 million in stock and USG for approximately $44.0 million (approximately $22.0 million in stock and approximately $22.0 million of assumed USG debt). WATER SYSTEMS AND MANUFACTURING GROUP WSMG provides a broad range of water and wastewater treatment products and technologies, as well as other environmental products, worldwide. For the fiscal year ended December 31, 1995, WSMG generated approximately $452.1 million of revenues, of which approximately 56% were attributable to sales in North America, with the remainder generated principally in Europe, the Pacific Rim and the Middle East. The Company believes that the acquisition of WSMG will significantly broaden the Company's product offerings, technological capabilities and municipal market penetration. WSMG is also expected to provide the Company with cross- selling opportunities as well as opportunities to rationalize operations and increase asset utilization. In addition, the Company believes that WSMG will provide it with the infrastructure required to capitalize on opportunities in the Pacific Rim and further strengthens the Company's presence in European markets. 4 PROPOSED JOINT VENTURE The Company and WTI are negotiating to form the Joint Venture to develop, finance, own and operate water and wastewater treatment facilities for both industrial and municipal customers in North America. The Company believes that the contemplated Joint Venture would be well-positioned to capitalize on opportunities in the growing industrial outsourcing and emerging municipal privatization markets. It is expected that the operating strategy of the contemplated Joint Venture would be to offer customers: (i) turnkey operation, including system design, manufacture, operation and maintenance on a local basis; (ii) warrantied performance; (iii) potential cost savings; and (iv) customized financing options. The Company believes that the Joint Venture would have several competitive advantages in securing industrial and municipal contracts, including the Company's extensive network of local sales and service facilities, and the Company's long-term industrial and municipal relationships. There can be no assurance as to whether or when or on what specific terms the Joint Venture will actually be formed. The Company is currently a 50% owner of Treated Water Outsourcing, a Nalco/U.S. Filter Joint Venture ("TWO"), which focuses on the outsourcing of industrial customers' water treatment needs. PROCESS EQUIPMENT DIVISION PED is a leading manufacturer and distributor of a broad range of water and wastewater treatment equipment sold primarily to the municipal market. For the fiscal year ended March 31, 1996, PED generated approximately $267.4 million of revenues, of which approximately 60% were attributable to sales in North America, with the remainder generated principally in Europe, Latin America and the Pacific Rim. For the fiscal year ended March 31, 1996, a majority of PED's revenues were attributable to sales in the municipal market. The Company believes that the acquisition of PED will significantly strengthen the Company's municipal water and wastewater treatment capabilities and provide the Company with opportunities to rationalize operations and increase asset utilization. Additionally, the Company believes that opportunities exist to expand PED's industrial sales by distributing PED's products through the Company's extensive network of sales and service facilities. DISTRIBUTION ACQUISITIONS The Company believes that the recent acquisition of Davis and the pending acquisitions of WaterPro and USG will establish the Company as a leading distributor of water and wastewater distribution products and services to the industrial and municipal markets. These recent and pending acquisitions are expected to enhance the Company's geographic presence and, through the addition of 105 distribution facilities, provide the Company with a strategically important local sales and service presence in the markets being served. Additionally, each of Davis, WaterPro and USG benefits from established relationships with municipalities. The Company believes that these relationships will provide it with an effective means of penetrating the municipal market and permit the Company to capitalize on opportunities to retrofit, replace and repair aging water infrastructure in the United States. The Company intends to utilize its distribution channels, local presence and single-source capabilities to sell its extensive product line, including capital equipment, replacement parts, and services, to customers in both the industrial and municipal markets. As a result, the Company believes that its distribution infrastructure will provide a mechanism to leverage its manufacturing capabilities and technology base. The Company also believes that the distribution acquisitions will provide cost-saving opportunities through rationalization of overhead expenses and realization of economies of scale and operating efficiencies. ---------------- The Company's principal executive offices are located at 40-004 Cook Street, Palm Desert, California 92211, and its telephone number is (619) 340-0098. References herein to the Company refer to United States Filter Corporation and its subsidiaries, unless the context requires otherwise. 5 THE OFFERING Securities Offered............... $175,000,000 principal amount of % Convertible Subordinated Notes due , 2001. Maturity......................... , 2001, unless earlier redeemed or converted. Interest Payment Dates........... and commencing , 1997. Conversion Rights................ The Notes are convertible into shares of Common Stock at any time prior to the close of business on the second business day prior to maturity, unless previously redeemed, at a conversion price of $ per share, subject to adjustment under certain circumstances as described herein. Accordingly, each $1,000 principal amount of Notes is convertible into shares of Common Stock, subject to adjustment, initially for an aggregate of shares. See "Capitalization." Optional Redemption.............. The Notes are redeemable, in whole or in part, at the option of the Company at any time on or after , 1999, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. Change of Control................ Upon a Change of Control, the Company will be required to offer to purchase the Notes at 100% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. Subordination.................... The Notes will be general, unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Indebtedness of the Company and will be structurally subordinated to all liabilities (including trade payables) of the Company's Subsidiaries. At June 30, 1996, as adjusted to give effect to the issuance and sale of the Notes and the application of the estimated net proceeds therefrom and consummation of the acquisition transactions described herein, the Company would have aggregate Senior Indebtedness of approximately $119.3 million and the Company's Subsidiaries would have had approximately $446.4 million of trade payables and accrued liabilities. The Indenture will not restrict the incurrence of Senior Indebtedness or other indebtedness by the Company or any of its Subsidiaries. Use of Proceeds.................. The net proceeds from the Notes Offering, together with the net proceeds from the Common Stock Offerings, will be used to fund or to repay indebtedness incurred to fund the pending acquisitions by the Company of WSMG and PED; the balance, if any, will be used for working capital, capital expenditures and general corporate purposes, including possible future acquisitions. If the net proceeds from the Notes Offering and the Common Stock Offerings are not available, the Company expects to fund the acquisitions of WSMG and PED from borrowings under committed bank credit facilities. See "Recent and Pending Acquisitions" and "Use of Proceeds." Listing.......................... Application will be made to list the Notes on the New York Stock Exchange.
6 Common Stock Traded.............. The Common Stock is traded on the New York Stock Exchange under the symbol "USF." Concurrent Offering.............. The Company is offering concurrently, pursuant to a separate Prospectus, 10,000,000 shares of Common Stock (10,654,206 shares if the U.S. underwriters' over-allotment option is exercised in full). Consummation of the Notes Offering is not a condition to consummation of the Common Stock Offerings, and consummation of the Common Stock Offerings is not a condition to consummation of the Notes Offering.
For a description of the terms of the Notes, see "Description of the Notes." For a description of the Common Stock, see "Description of Capital Stock." 7 SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following data present selected historical consolidated financial data of the Company (restated to reflect the acquisitions of Zimpro and Davis, which were accounted for as poolings of interests) as of the date and for the periods presented, and As Adjusted to give effect to: (i) the pending acquisitions of WSMG, PED, WaterPro and USG as if they had been consummated as of the beginning of the respective periods presented (in the case of Statement of Operations Data and Other Data) and as of June 30, 1996 (in the case of Balance Sheet Data); and (ii) the assumed borrowings under bank credit facilities of approximately $537.2 million to fund the cash portion of the consideration for such acquisitions. The As Further Adjusted column gives effect to: (i) the sale by the Company of the Notes and the anticipated application of the net proceeds therefrom; (ii) the sale by the Company of 10,000,000 shares of Common Stock in the Common Stock Offerings at an assumed public offering price of $34.38 per share and the anticipated application of the net proceeds therefrom; and (iii) the conversion of the Company's $60.0 million aggregate principal amount of 5% Convertible Subordinated Debentures due 2000 into 4,390,000 shares of Common Stock. The pro forma data is derived from the historical financial statements of the Company, WSMG, PED, WaterPro and USG giving effect to such pending acquisitions under the purchase method of accounting and based on assumptions and adjustments described under the caption "Unaudited Pro Forma Combined Financial Information." The pro forma adjustments are estimated and may differ from the actual adjustments when they become known. The pro forma data does not reflect certain cost savings that management believes may be realized following the acquisitions, through rationalization of operations and economies of scale. See "Unaudited Pro Forma Combined Financial Information."
FISCAL YEAR ENDED THREE MONTHS ENDED MARCH 31, 1996 JUNE 30, 1996 ------------------------------ ------------------------------- AS AS FURTHER AS FURTHER ACTUAL ADJUSTED ADJUSTED ACTUAL AS ADJUSTED ADJUSTED -------- ---------- ---------- -------- ----------- ---------- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues................ $727,903 $1,838,624 $1,838,624 $208,509 $501,946 $501,946 Gross profit............ 189,330 423,370 423,370 56,335 121,803 121,803 Operating income........ 40,647 81,171 81,171 14,815 28,712 28,712 Interest expense........ 14,419 56,542 25,188 4,390 14,828 6,990 Net income.............. 19,307 21,455 40,894 8,003 9,141 14,000 Net income per common share.................. $0.45 $0.44 $0.66 $0.16 $0.17 $0.20 Weighted average number of common shares outstanding............ 42,159 47,041 61,431 49,951 54,833 69,223 OTHER DATA: EBITDA(1)............... $67,227 $132,067 $132,067 $24,636 $44,945 $44,945 Ratio of EBITDA to interest expense....... 4.7x 2.3x 5.2x 5.6x 3.0x 6.4x
AS OF JUNE 30, 1996 ---------------------------------------- ACTUAL AS ADJUSTED AS FURTHER ADJUSTED -------- ----------- ------------------- BALANCE SHEET DATA: Working capital....................... $140,897 $ 389,320 $ 389,320 Total assets.......................... 888,870 1,947,172 1,951,728 Notes payable and long-term debt, including current portion............ 59,205 618,676 118,123 Convertible subordinated debt......... 199,975 199,975 315,000 Shareholders' equity.................. 385,146 545,425 935,509
- ------------------- (1) "EBITDA" consists of operating income plus depreciation and amortization. EBITDA data is presented because such data is used by certain investors to determine the Company's ability to meet debt service requirements. The Company considers EBITDA to be an indicative measure of the Company's operating performance. However, such information should not be considered as an alternative to net income, operating profit, cash flows from operations, or any other operating or liquidity performance measure prescribed by generally accepted accounting principles. 8 RISK FACTORS Prospective investors should consider carefully the following factors relating to the businesses of the Company, WSMG, PED, WaterPro and USG and the sale of the Notes, together with the other information and financial data included or incorporated by reference in this Prospectus, before acquiring Notes offered hereby. Information contained or incorporated by reference in this Prospectus contains "forward-looking statements" which can be identified by the use of forward-looking terminology such as "believes," "contemplates," "expects," "may," "will," "should," "would" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. No assurance can be given that the future results covered by the forward-looking statements will be achieved. The following matters constitute cautionary statements identifying important factors with respect to such forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results covered in such forward-looking statements. Other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. ACQUISITION STRATEGY In pursuit of its strategic objective of becoming the leading global single- source provider of water and wastewater treatment systems and services, the Company has, since 1991, acquired and successfully integrated more than 45 United States based and international businesses with strong market positions and substantial water and wastewater treatment expertise. The Company plans to continue to pursue acquisitions that complement its technologies, products and services, broaden its customer base and expand its global distribution network. 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. Although the Company generally has been successful in pursuing these 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. Consummation of the pending acquisitions of each of WSMG, PED, WaterPro and USG are subject to the satisfaction of certain conditions, including expiration or termination of applicable waiting periods under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Company has been notified that the waiting period with respect to USG has been terminated. There can be no assurance that any one or more of the remaining pending acquisitions will not be challenged on antitrust grounds, or if challenged, that the Company will prevail. There can also be no assurance as to whether or when the Company's pending acquisitions will be completed. The net proceeds to the Company of the Offerings and the Notes Offering are expected to be used to fund or to repay indebtedness used to fund the pending acquisitions of WSMG and PED; the balance, if any, will be used for working capital, capital expenditures and general corporate purposes, including possible future acquisitions. If either or both of the pending acquisitions of WSMG and PED are not completed, the net proceeds of the Offerings and the Notes Offering not used for those acquisitions will be added to working capital. See "Recent and Pending Acquisitions" and "Use of Proceeds." PROPOSED JOINT VENTURE The Company and WTI have entered into a non-binding letter of intent providing that they will continue negotiations with a view to the formation of the Joint Venture to develop, finance, own and operate water and wastewater treatment facilities for both industrial and municipal customers in North America. Formation of the Joint Venture as currently contemplated is subject to, among other things, obtaining consents of third parties. There can be no assurance as to whether or when or on what specific terms the Joint Venture will actually be formed. 9 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, nationalization and possible social, political and economic instability. In particular, the purchase price of approximately $195.3 million for the acquisition by the Company of PED is denominated in British pounds sterling. To the extent that the value of the United States dollar declines relative to pounds sterling prior to the closing of the acquisition, the cost to the Company of acquiring PED would increase commensurately. RELIANCE ON KEY PERSONNEL The Company's operations are, and will, after consummation of the Company's pending acquisitions, be dependent on the continued efforts of senior management, in particular Richard J. Heckmann, its Chairman of the Board, President and Chief Executive Officer. Should any of the senior managers be unable 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, and will, after consummation of the Company's pending acquisitions, be 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 contracts due to changes in estimates of costs to complete such contracts. There can be no assurance that future downward adjustments will not be material. CYCLICALITY AND SEASONALITY The sale 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, and will, after consummation of the Company's pending acquisitions, be 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 could have an 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. As a result of the acquisition of Davis and the pending acquisitions of WaterPro and USG, the sale of water and wastewater distribution equipment and supplies is expected to become a significant component of the Company's business. See "Recent and Pending Acquisitions." Cyclicality and seasonality of water and wastewater distribution equipment and supplies sales could have an adverse effect on the Company's revenues and profitability. 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 civil or criminal enforcement 10 actions or private actions that could have a materially adverse effect on the Company. In that regard, federal and state environmental regulatory authorities have commenced civil enforcement actions related to alleged multiple violations of applicable wastewater pretreatment standards by a wholly owned subsidiary of the Company at a Connecticut ion exchange regeneration facility acquired by the Company in October 1995 from Anjou International Company ("Anjou"). A grand jury investigation is pending which is believed to relate to the same conditions that were the subject of the civil actions. The Company has certain rights of indemnification from Anjou which may be available with respect to these matters. In addition, the Company's 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. 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 ("CERCLA"). 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. 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 or financial position. COMPETITION The water and wastewater treatment industry is fragmented and highly competitive. The Company competes with many United States based and international companies in its global markets. The principal methods of competition in the markets in which the Company competes are technology, prompt availability of local service capability, price, product specifications, customized design, product knowledge and reputation, ability to obtain sufficient performance bonds, timely delivery, the relative ease of system operation and maintenance, and the prompt availability of replacement parts. In the municipal contract bid process, pricing and ability to meet bid specifications are the primary considerations. While no competitor is considered dominant, there are competitors which have significantly greater resources than the Company, which, among other things, could be a competitive disadvantage to the Company in securing certain projects. TECHNOLOGICAL AND REGULATORY CHANGE The water and wastewater treatment business is characterized by changing technology, competitively imposed process standards and regulatory requirements, each of which influences the demand for the Company's products and services. Changes 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 technology 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 that 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. MUNICIPAL MARKET Completion of the Company's pending acquisitions will increase significantly the percentage of the Company's revenues 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. See "Recent and Pending Acquisitions" and "Business." 11 SHARES ELIGIBLE FOR FUTURE SALE The market price of the Common Stock could be adversely affected by the availability for public sale of shares held on September 30, 1996 by security holders of the Company, including: (i) up to 3,899,393 shares (as of October 15, 1996) which may be delivered by Laidlaw Inc. or its affiliates ("Laidlaw"), at Laidlaw's option in lieu of cash, at maturity pursuant to the terms of 5 3/4% Exchangeable Notes due 2000 of Laidlaw (the amount of shares or cash delivered or paid to be dependent within certain limits upon the value of the Common Stock at maturity); (ii) 3,919,646 shares issuable upon conversion of the Company's 5% Convertible Subordinated Debentures due 2000 (called for redemption on October 25, 1996) at a conversion price of $13.67 per share of Common Stock; (iii) 7,636,363 shares issuable upon conversion of the Company's 6% Convertible Subordinated Notes due 2005 at a conversion price of $18.33 per share of Common Stock; (iv) shares issuable upon conversion of the Notes at a conversion price of $ per share of Common Stock; (v) 2,908,171 outstanding shares that are currently registered for sale under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to two shelf registration statements; and (vi) 2,990,944 shares which are, and an estimated 3,748,000 shares which, following consummation of the pending acquisitions of WaterPro and USG, will be, subject to agreements pursuant to which the holders have certain rights to request the Company to register the sale of such holders' Common Stock under the Securities Act and/or, subject to certain conditions, to include certain percentages of such shares in other registration statements filed by the Company (1,980,000 of which shares also may be sold from time to time by the holder thereof pursuant to Rule 144 under the Securities Act. The shares referred to in clause (vi) include up to 845,794 shares that may be sold by Selling Stockholders upon exercise of the U.S. Underwriters' over-allotment option. In addition, the Company has registered for sale under the Securities Act 5,777,380 shares which may be issuable by the Company from time to time in connection with acquisitions of businesses from third parties. SUBORDINATION The Notes will be subordinated in right of payment to all existing and future Senior Indebtedness and will be structurally subordinated to all liabilities (including trade payables) of the Company's subsidiaries. The Indenture will not restrict the incurrence of Senior Indebtedness or other indebtedness by the Company or its subsidiaries. At June 30, 1996, the Company would have had approximately $119.3 million of Senior Indebtedness outstanding after giving effect to: (i) the acquisitions of WSMG, PED, USG and WaterPro; (ii) the sale of the Notes and the anticipated application of the net proceeds therefrom; (iii) the sale by the Company in the Common Stock Offerings of 10,000,000 shares of Common Stock at an assumed public offering price of $34.38 per share (based on the closing sale price per share of Common Stock on October 14, 1996 as reported on the New York Stock Exchange Composite Tape) and the anticipated application of the net proceeds therefrom; and (iv) the conversion of the Company's 5% Convertible Subordinated Debentures due 2000 into 4,390,000 shares of Common Stock. By reason of such subordination of the Notes, in the event of the insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up of the business of the Company or upon a default in payment with respect to any indebtedness of the Company or an event of default with respect to such indebtedness resulting in the acceleration thereof, the assets of the Company will be available to pay the amounts due on the Notes only after all Senior Indebtedness has been paid in full. The Notes will rank pari passu with other unsecured, subordinated obligations of the Company, including the Company's 6% Convertible Subordinated Notes due 2005. See "Description of the Notes--Subordination." The Company conducts its operations through its subsidiaries. Accordingly, the Company's ability to meet its cash obligations is dependent in part upon the ability of its subsidiaries to make cash distributions to the Company. The ability of its subsidiaries to make distributions to the Company is and will continue to be restricted by, among other limitations, applicable provisions of the laws of national or state governments and contractual provisions. The Indenture will not limit the ability of the Company's subsidiaries to incur such restrictions in the future. The right of the Company to participate in the assets of any subsidiary (and thus the ability of holders of the Notes to benefit indirectly from such assets) are generally subject to the prior claims of creditors, including trade creditors, of that subsidiary except to the extent that the Company is recognized as a creditor of such subsidiary, in which case the Company's claims would still be subject to any security interest of 12 other creditors of such subsidiary. The Notes, therefore, will be subordinated by operation of law to creditors, including trade creditors, of subsidiaries of the Company with respect to the assets of the subsidiaries against which such creditors have a claim. At June 30, 1996, as adjusted to give effect to the acquisitions of WSMG, PED, WaterPro and USG, the Company's subsidiaries would have had approximately $446.4 million of trade payables and accrued liabilities. ABSENCE OF EXISTING MARKET FOR NOTES The Notes will constitute a new issue of securities with no established trading market. Application has been made to list the Notes on the New York Stock Exchange. The Company has been advised by the Underwriters that, following completion of the offering of the Notes, they presently intend to make a market in the Notes. However, the Underwriters are not obligated to do so and any marketmaking activities may be discontinued at any time without notice. In addition, such marketmaking activity will be subject to the limits imposed by the Exchange Act. No assurance can be given that an active trading market for the Notes will develop or, if such market develops, as to the liquidity or sustainability of such market. If a trading market does not develop or is not maintained, holders of the Notes may experience difficulty in reselling the Notes or may be unable to sell them at all. If a market for the Notes develops, any such market may be discontinued at any time. If a public trading market develops for the Notes, future trading prices of the Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities. Depending on prevailing interest rates, the market for similar securities and other factors, including the financial condition of the Company, the Notes may trade at a discount from their principal amount. 13 RECENT AND PENDING ACQUISITIONS The Company has become a leading single-source provider of cost-effective water and wastewater treatment systems primarily through acquisitions of businesses that have expanded the Company's geographic presence, industries served, installed base, and range of products and technologies. The Company's pending acquisitions of WSMG and PED are expected to provide the Company with important products and technologies which enhance the Company's single-source provider capabilities. The Company believes that these acquisitions will also significantly expand the Company's municipal and wastewater treatment capabilities and international presence, particularly in the Pacific Rim and Europe. The Company is negotiating the formation of the Joint Venture to develop, finance, own and operate water and wastewater treatment facilities in North America. The Company believes that the contemplated Joint Venture would be well-positioned to capitalize on opportunities in the growing industrial outsourcing and emerging municipal privatization markets. The Company's acquisition strategy has also recently focused on establishing the Company as one of the industry's leading distributors of water and wastewater distribution products and services to both the industrial and municipal markets. The recent acquisition of Davis and the pending acquisitions of WaterPro and USG are expected to provide the Company with a platform to: (i) enhance the Company's local sales and service infrastructure; (ii) penetrate the municipal segment of the water and wastewater treatment market by capitalizing on each distribution company's long-term municipal relationships; (iii) leverage the Company's manufacturing capabilities and technology base; and (iv) capitalize on efficiencies from consolidation of operations and economies of scale. In addition, the Company believes that these distribution acquisitions will permit the Company to capitalize on opportunities to retrofit, replace and repair aging water infrastructure in the United States. Together, these recent and pending acquisitions are expected to distinguish further the Company as a leading single-source provider capable of designing, manufacturing, operating, financing and maintaining water and wastewater treatment systems on a local basis for industrial and municipal customers worldwide. WATER SYSTEMS AND MANUFACTURING GROUP On September 14, 1996, the Company entered into a definitive agreement to acquire WSMG from WTI for $369.6 million in cash, subject to possible post- closing adjustment. WSMG provides a broad range of water and wastewater treatment products and technologies, as well as other environmental products, worldwide. As of October 4, 1996, WSMG had 1,993 employees and 57 facilities located in 17 countries. For the fiscal year ended December 31, 1995, WSMG generated approximately $452.1 million of revenues, of which approximately 56% were attributable to sales in North America, with the remainder generated principally in Europe, the Pacific Rim and the Middle East. The Company believes that the acquisition of WSMG will significantly broaden the Company's product offerings, technological capabilities and municipal market penetration, WSMG is also expected to provide the Company with cross- selling opportunities as well as opportunities to rationalize operations and increase asset utilization. In addition, the Company believes that the acquisition of WSMG will provide it with the infrastructure required to capitalize on increasing opportunities in the Pacific Rim and will further strengthen the Company's presence in European markets. A description of certain of the WSMG business units follows. NEW PRODUCTS AND TECHNOLOGIES Johnson Screens. Johnson Screens is recognized as a leader in well screen design and development and screen installation. Johnson Screens' welded continuous-slot products are widely used in groundwater applications, oil and gas wells, and other industrial filtration applications worldwide. Johnson Screens is expected to provide the Company with an opportunity to sell additional products through the Company's extensive distribution channel of sales and service facilities. 14 HPD. HPD's primary water treatment technologies include evaporation and crystallization serving the pulp and paper, chemical, petrochemical, mining and power industries. These technologies are expected to enhance the Company's zero-discharge and product recovery techniques, thereby providing what the Company believes to be an important addition to its single-source provider capabilities. CPC Engineering. CPC designs water and wastewater treatment systems for municipalities on a standard or custom-engineered basis under the "Microfloc" brand name. CPC also produces solids screening, dewatering, conveying and grinding equipment used in municipal wastewater treatment, municipal storm water collection, and industrial wastewater treatment in the meat and poultry, food processing, pulp and paper, mining, petrochemical and power utility markets. Westates Carbon. Westates Carbon is a full-service granular activated carbon company. Westates Carbon offers systems, service and support, including a carbon reactivation facility. Westates Carbon is expected to provide the Company with the ability to recycle and reuse spent carbon utilized for both water and wastewater treatment applications. Memtek. Memtek products remove inorganic solids and heavy metals from contaminated wastewater for the microelectronics, metal finishing and industrial laundry marketplace. Sophisticated cross-flow membrane microfiltration products are expected to be an important addition to the Company's product offerings. Memtek products are sold under the brand names IX/ER(R), TOTALTREAT(TM), MEMCLEAN(TM), EVAP(TM), RMS(TM) and ACMS(TM). The Wheelabrator Corporation. The Wheelabrator Corporation ("WTC") designs and manufactures environmentally sound surface cleaning and preparation equipment and supplies. WTC also manufactures metal screening and grating used in wastewater separation and organic and inorganic waste handling. EXPANDED GLOBAL MARKET PRESENCE Darchet Engineering. Darchet serves the water and wastewater needs of the microelectronics, metal finishing and other industries in the Pacific Rim, with specific market presence in Singapore, Malaysia, Indonesia, Thailand and the Philippines. Darchet specializes in ion-exchange, reverse osmosis, ultrafiltration and conventional technologies. The Company believes Darchet will enhance the Company's growing market presence in the Pacific Rim. Sun Chi. Sun Chi, based in Taiwan, designs and installs wastewater treatment systems primarily for municipal applications. Sun Chi offers a wide range of biological treatment technologies, including dissolved air floatation, aerobic and anaerobic fluidized beds, ion exchange, oxidation, sequential biological reactors and denitrification. Sun Chi's installed base of systems in Taiwan, Malaysia, Indonesia, Thailand, the Philippines and China is also expected to enhance the Company's growing market presence in the Pacific Rim. Rossmark. Rossmark is an industry leader in northern Europe serving the industrial and municipal water and wastewater treatment markets. Rossmark's services include process engineering, systems design, turnkey water and wastewater treatment systems and equipment manufacturing. Rossmark has operations in the Netherlands, Belgium, the United Kingdom and Germany. PSS. PSS, based in Spain, uses evaporation, crystallization and membrane separation technologies, primarily in the chemical and pulp and paper industries. PSS is expected to expand the Company's zero-discharge capabilities in Europe and the Middle East. The Company anticipates that the acquisition of WSMG will be completed by the end of November 1996, although there can be no assurance that the acquisition will be consummated at such time or at all. 15 PROPOSED JOINT VENTURE The Company and WTI are negotiating to form the Joint Venture to develop, finance, own and operate water and wastewater treatment facilities for both industrial and municipal customers in North America. The Company anticipates that WTI would contribute to the Joint Venture its contract operations group, which is a leading operator of municipal water and wastewater treatment facilities in North America, and its industrial outsourcing and municipal privatization project development units, which contract with customers to provide a full range of long-term, on-site water and wastewater services. The Company expects to contribute certain build, own and operate industrial water and wastewater treatment contracts. The Company believes that the contemplated Joint Venture would be well- positioned to capitalize on opportunities in the growing industrial outsourcing and emerging municipal privatization markets. It is expected that the operating strategy for the Joint Venture would be to offer customers: (i) turnkey operation, including system design, manufacture, operation and maintenance on a local basis; (ii) warrantied performance; (iii) potential cost savings; and (iv) customized financing options. The Company believes that the Joint Venture would have several competitive advantages in securing industrial and municipal contracts, including the Company's extensive network of sales and service facilities, and the Company's long-term industrial and municipal relationships. There can be no assurance as to whether or when or on what specific terms the Joint Venture will actually be formed. The Company is currently a 50% owner of TWO, which focuses on the outsourcing of industrial customers' water treatment needs. PROCESS EQUIPMENT DIVISION On October 7, 1996, the Company entered into a definitive agreement to acquire PED from United Utilities PLC for approximately $195.3 million (based on exchange rates for British pounds sterling as of October 14, 1996), comprised of approximately $156.3 million in cash and approximately $39.0 million in shares of Common Stock, subject to possible post-closing adjustment. PED is a leading manufacturer and distributor of water and wastewater treatment equipment primarily to the municipal market. As of June 30, 1996, PED had approximately 1,935 employees and 17 facilities located in seven countries. For the fiscal year ended March 31, 1996, PED generated approximately $267.4 million of revenues, of which approximately 60% were attributable to sales in North America, with the remainder generated principally in Europe, Latin America and the Pacific Rim. For the fiscal year ended March 31, 1996, a majority of PED's revenues were attributable to sales in the municipal market. The Company believes that the acquisition of PED will significantly strengthen the Company's municipal water and wastewater treatment capabilities and provide the Company with opportunities to rationalize operations and increase asset utilization. Additionally, the Company believes that opportunities exist to expand PED's industrial sales by distributing PED's products through the Company's sales, service and distribution facilities. A description of certain PED business units follows. Envirex. Envirex manufactures wastewater treatment equipment, including screening, grit removal, biological treatment and solids collection equipment. The Company believes that Envirex has one of the largest number of wastewater treatment units installed worldwide as well as one of the broadest product lines in the wastewater equipment market. The Company believes that by integrating and rationalizing Envirex's product lines with the Company's existing wastewater products, it will enhance its municipal wastewater product lines, which in turn will enable the Company to establish more effective municipal sales channels. The Company also believes that it may be able to increase Envirex's sales to industrial markets through the Company's industrial distribution channels. Wallace & Tiernan. Wallace & Tiernan is one of the world leaders in the manufacture of water and wastewater disinfection systems and components. The Company believes that significant opportunities exist to use Wallace & Tiernan's global presence and large installed base to cross-sell certain of the Company's other products and services. Additionally, Wallace & Tiernan's large installed base is expected to continue to generate revenue from the sale of replacement parts and services. 16 Edwards & Jones/Asdor. Edwards & Jones designs, manufactures and installs biosolids handling equipment primarily for the municipal markets in Europe and the Pacific Rim, while Asdor performs the same functions in North America. The Company believes that the acquisition of Edwards & Jones will provide the Company with a critical mass of wastewater expertise in the European market and a channel to integrate further the Company's existing wastewater expertise into its European operations. General Filter/Acumem. General Filter is a leading provider of pre-treatment equipment, granular media filtration systems and microfiltration systems primarily to the municipal water markets in North America. Acumem sells microfiltration systems for the treatment of surface and groundwater to potable water standards for industrial and municipal users in the United States, the United Kingdom and Australia. It also offers a range of cross-flow microfiltration and ultrafiltration membrane systems for municipal tertiary wastewater treatment. Consolidated Electric. Consolidated Electric is a leading supplier of automation and control systems for municipal water and wastewater treatment equipment using liquid level pressure and flow sensors, automatic pump controllers/alternators, and remote control technology capabilities. The Company believes that these control systems will complement its existing design-build capabilities in both industrial and municipal markets. The Company anticipates that the acquisition of PED will be completed by the end of December 1996, although there can be no assurance that the acquisition will be consummated at such time or at all. DISTRIBUTION ACQUISITIONS The Company believes that the recent acquisition of Davis and the pending acquisitions of WaterPro and USG will establish the Company as a leading distributor of water and wastewater distribution products and services to the industrial and municipal markets. These recent and pending acquisitions are expected to enhance the Company's geographic presence and, through the addition of 105 distribution facilities, provide the Company with a strategically important local sales and service presence in the markets being served. Additionally, each of Davis, WaterPro and USG benefits from established relationships with municipalities. The Company believes that these relationships will provide it with an effective means of penetrating the municipal market and permit the Company to capitalize on opportunities to retrofit, replace and repair aging water infrastructure in the United States. The Company intends to utilize its distribution channels, local presence and single-source capabilities to sell its extensive product line, including capital equipment, replacement parts, and services to both the industrial and municipal markets. As a result, the Company believes that its distribution infrastructure will provide a mechanism to leverage its manufacturing capabilities and technology base. The Company also believes that the distribution acquisitions will provide cost-saving opportunities through rationalization of overhead expenses and realization of economies of scale and operating efficiencies. Davis Water and Waste Industries, Inc. In August 1996, the Company completed the acquisition of Davis, a leading distributor of water and wastewater distribution products and services to the industrial and municipal markets. Davis also designs, engineers, manufactures and installs water and wastewater treatment and pumping equipment. Davis has 32 distribution facilities located primarily in the southeastern United States which service more than 25,000 customers. For the fiscal year ended April 30, 1996, Davis generated approximately $226.5 million of revenues, of which approximately $178.2 million, or 79%, were attributable to the sale of distribution products and services, and approximately $48.3 million, or 21%, were attributable to manufacturing, installing, processing and servicing water and wastewater treatment and pumping equipment. The acquisition of Davis provides the Company with a significant distribution channel in the southeastern United States to market its line of products and services. WaterPro Supplies Corporation. In September 1996, the Company entered into a definitive agreement to acquire WaterPro, a leading distributor of water and wastewater distribution products and services to the industrial and municipal markets, for approximately $101.6 million in Common Stock (including the repayment of approximately $63.0 million in outstanding WaterPro debt with shares of Common Stock). WaterPro serves approximately 18,000 customers through its 43 distribution facilities in 18 states, located primarily in the 17 midwestern and mid-Atlantic United States. For the period April 7, 1995 to December 31, 1995, WaterPro generated approximately $187.5 million of revenues. The acquisition of WaterPro is expected to increase the Company's distribution presence in the midwestern and mid-Atlantic United States and expand the Company's presence in the municipal market. The Company expects that the acquisition of WaterPro will be completed by the end of October 1996, although there can be no assurance that the acquisition will be consummated by such time or at all. The Utility Supply Group, Inc. The Company has entered into a definitive agreement to acquire USG, a leading distributor of water and wastewater distribution products and services to the municipal market, for approximately $44.0 million, (including approximately $22.0 million of Common Stock and the assumption of approximately $22.0 million of USG debt by the Company), subject to adjustment. USG serves approximately 6,000 customers through 30 distribution and sales facilities, located primarily in Texas, Florida and California. For the fiscal year ended December 31, 1995, USG generated revenues of approximately $156.8 million. The acquisition of USG is expected to increase the Company's distribution presence in the western, southern and southeastern United States and to expand the Company's municipal customer base. The Company expects that the acquisition of USG will be completed by the end of October 1996, although there can be no assurance that the acquisition will be consummated by such time or at all. 18 USE OF PROCEEDS The net proceeds to the Company from the sale of the Notes are estimated to be $170.4 million ($196.1 million if the Underwriters' over-allotment option were exercised in full), after deducting estimated underwriting discounts and commissions and estimated offering expenses. The net proceeds to the Company from the Common Stock Offerings are estimated to be $330.1 million ($351.8 million if the underwriters' over-allotment option were exercised in full) based on the closing sale price per share of Common Stock on October 14, 1996 as reported on the New York Stock Exchange Composite Tape and after deducting estimated underwriting discounts and commissions and estimated offering expenses. The aggregate net proceeds of the Notes Offering and the Common Stock Offerings are expected to be used to fund or to repay indebtedness used to fund the pending acquisition by the Company of WSMG and to fund or to repay indebtedness used to fund the cash portion of the consideration for the pending acquisition by the Company of PED, in each case depending on whether such acquisition is completed after or before the consummation of the Notes Offering and the Common Stock Offerings. Consummation of the Notes Offering is not a condition to consummation of the Common Stock Offerings, and consummation of the Common Stock Offerings is not a condition to consummation of the Notes Offering. The balance of the net proceeds from the Notes Offering and the Common Stock Offerings, if any, will be used for working capital, capital expenditures and general corporate purposes, including possible future acquisitions. If either or both of the WSMG acquisition and the PED acquisition are not completed, the net proceeds from the Notes Offering and the Common Stock Offerings not used for such acquisitions will be added to working capital. See "Recent and Pending Acquisitions." To the extent that net proceeds from the Notes Offering and the Common Stock Offerings are not available, the Company expects to obtain all or part of the funds necessary to complete the WSMG acquisition and the PED acquisition from borrowings under bank credit facilities. The Company has received a commitment letter from The First National Bank of Boston pursuant to which, subject to the satisfaction of various conditions, credit facilities (the "Committed Credit Facilities") of up to $700.0 million would be made available to the Company to finance acquisitions (including the WSMG acquisition and the PED acquisition), to refinance any borrowings under the Company's current credit agreement, and for working capital and other general corporate purposes. Borrowings under the Committed Credit Facilities would bear interest at variable rates of up to 2.25% above certain Eurocurrency rates or 0.50% above The First National Bank of Boston's base rate and have a five year maturity. The Company anticipates that, following completion of the Notes Offering and the Common Stock Offerings, its bank credit facilities will be reduced to a level that the Company considers appropriate for its working capital and other needs. Pending utilization as described above, the net proceeds from the Notes Offering and the Common Stock Offerings will be invested in short-term, interest-bearing obligations. 19 CAPITALIZATION The following table sets forth the historical consolidated capitalization of the Company at June 30, 1996 (restated to reflect the acquisitions of Zimpro and Davis, which were accounted for as poolings of interests) and As Adjusted to give effect to: (i) the acquisitions of WSMG, PED, WaterPro and USG; and (ii) the assumed borrowing under the Committed Credit Facilities of approximately $537.2 million to fund the cash portion of the consideration for such acquisitions. The As Further Adjusted column gives effect to: (i) the sale by the Company of the Notes and the anticipated application of the net proceeds therefrom; (ii) the sale by the Company of 10,000,000 shares of Common Stock in the Common Stock Offerings at an assumed public offering price of $34.38 per share and the anticipated application of the net proceeds therefrom; and (iii) the conversion of the Company's 5% Convertible Subordinated Debentures due 2000 into 4,390,000 shares of Common Stock. This table should be read in conjunction with and is qualified by reference to the Company's Consolidated Financial Statements and related Notes thereto and the Unaudited Combined Pro Forma Financial Information included elsewhere herein. See "Recent and Pending Acquisitions" and "Use of Proceeds."
JUNE 30, 1996 ------------------------------ AS AS FURTHER ACTUAL ADJUSTED ADJUSTED -------- ---------- ---------- (IN THOUSANDS) Current portion of long-term debt(1)............ $ 1,677 $ 1,677 $ 1,677 ======== ========== ========== Long-term debt: Notes payable and long-term debt, excluding current portion(1)............................. $ 57,528 $ 616,999 $ 116,446 5% Convertible Subordinated Debentures due 2000. 59,975 59,975 -- 6% Convertible Subordinated Notes due 2005...... 140,000 140,000 140,000 % Convertible Subordinated Notes due 2001(2)... -- -- 175,000 -------- ---------- ---------- Total long-term debt, excluding current portion...................................... 257,503 816,974 431,446 -------- ---------- ---------- Shareholders' equity: Common Stock, 150,000,000 shares authorized, 48,555,920 shares (Actual), 53,438,331 shares (As Adjusted) and 67,828,331 shares (As Further Adjusted) issued and outstanding(3).. 343 392 535 Additional paid-in capital.................... 362,470 522,700 912,641 Currency translation adjustment............... 2,009 2,009 2,009 Retained earnings............................. 20,324 20,324 20,324 ======== ========== ========== Total shareholders' equity.................. 385,146 545,425 935,509 -------- ---------- ---------- Total capitalization...................... $642,649 $1,362,399 $1,366,955 ======== ========== ==========
- ------------------- (1) See Note 11 of Notes to Consolidated Financial Statements included elsewhere herein for additional information regarding the Company's long- term obligations. (2) Assumes no exercise of the Underwriters' over-allotment option. (3) The number of authorized shares of Common Stock was increased from 75,000,000 to 150,000,000 effective September 11, 1996. The 48,555,920 issued and outstanding shares do not include: (i) 4,390,000 shares issuable upon conversion of the Company's 5% Convertible Subordinated Debentures due 2000 (called for redemption on October 25, 1996); (ii) 7,636,363 shares issuable upon conversion of the Company's 6% Convertible Subordinated Notes due 2005; (iii) shares issuable upon conversion of the Notes; and (iv) 3,447,561 shares issuable upon exercise of stock options either outstanding or available for future grant under the Company's stock option plans. The 53,438,331 shares issued and outstanding on an As Adjusted basis includes an estimated 4,882,411 shares issuable in connection with the acquisitions of PED, WaterPro and USG. The 67,828,331 shares issued and outstanding on an As Further Adjusted basis includes the 10,000,000 shares to be issued in the Common Stock Offerings and the 4,390,000 shares issuable upon conversion of the Company's 5% Convertible Subordinated Debentures due 2000. Assumes no exercise of the U.S. underwriters' over-allotment option to acquire shares of Common Stock in the Common Stock Offerings. 20 PRICE RANGE OF COMMON STOCK The Common Stock of the Company is listed on the New York Stock Exchange and traded under the symbol "USF." The following table sets forth for the fiscal periods indicated the range of high and low sales prices of the Common Stock as reported on the New York Stock Exchange Composite Tape.
HIGH LOW ------ ------ Fiscal year ended March 31, 1995: First Quarter................................................... $ 9.67 $ 8.11 Second Quarter.................................................. 9.78 8.17 Third Quarter................................................... 10.75 8.78 Fourth Quarter.................................................. 11.25 10.00 Fiscal year ended March 31, 1996: First Quarter................................................... 13.09 9.92 Second Quarter.................................................. 16.09 12.50 Third Quarter................................................... 18.00 13.42 Fourth Quarter.................................................. 19.33 16.42 Fiscal year ended March 31, 1997: First Quarter................................................... 23.75 18.42 Second Quarter.................................................. 34.75 18.50 Third Quarter (through October 14, 1996)........................ 36.25 31.75
On October 14, 1996, the closing sale price of the Common Stock as reported on the New York Stock Exchange Composite Tape was $34.38 per share. DIVIDEND POLICY The Company currently intends to retain earnings to provide funds for the operation and expansion of its business and accordingly does not anticipate paying cash dividends on the Common Stock in the foreseeable future. Any payment of cash dividends on the Common Stock in the future will depend upon the Company's financial condition, earnings, capital requirements and such other factors as the Board of Directors deems relevant. Under the Company's credit agreement with The First National Bank of Boston and First Interstate Bank of California, no dividends may be paid on the Common Stock without the consent of those banks. 21 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following Unaudited Pro Forma Combined Financial Information presents the Pro Forma Combined Balance Sheet at June 30, 1996, giving effect to the pending acquisitions of WSMG, PED, WaterPro and USG as if they had been consummated on that date. Also presented are the Pro Forma Combined Statements of Operations for the fiscal year ended March 31, 1996 and the three months ended June 30, 1996, after giving effect to the pending acquisitions of WSMG, PED, WaterPro and USG as if they had been consummated as of the beginning of the respective periods presented. The Company's and PED's fiscal years end on March 31 and WSMG's, WaterPro's and USG's fiscal years end on December 31. The Pro Forma Balance Sheet combines the respective balance sheets of the Company, WSMG, PED, WaterPro and USG as of June 30, 1996. The Pro Forma Statement of Operations for the year ended March 31, 1996 combines the results of the Company and PED for such year with the results of WSMG, WaterPro and USG for the year ended December 31, 1995, and the Pro Forma Statement of Operations for the three months ended June 30, 1996 combines the results of each of the Company, WSMG, PED, WaterPro and USG for such three month period. All Company historical consolidated financial data has been restated to reflect the acquisitions in May 1996 and August 1996 of Zimpro and Davis, respectively, which acquisitions have been accounted for as poolings of interests. The As Adjusted column gives effect to: (i) the pending acquisitions of WSMG, PED, WaterPro and USG; and (ii) the assumed borrowings under the Committed Credit Facilities of approximately $537.2 million to fund the cash portion of the consideration for such acquisitions. The As Further Adjusted column gives effect to: (i) the sale by the Company of the Notes and the anticipated application of the net proceeds therefrom to the reduction of amounts outstanding under the Committed Credit Facilities; (ii) the sale by the Company of 10,000,000 shares of Common Stock in the Offerings at an assumed public offering price of $34.38 per share and the anticipated application of the net proceeds therefrom to the reduction of amounts outstanding under the Committed Credit Facilities; and (iii) the conversion of the Company's $60.0 million aggregate principal amount of 5% Convertible Subordinated Debentures due 2000 into 4,390,000 shares of Common Stock. The pro forma data is based on the historical combined statements of the Company, WSMG, PED, WaterPro and USG giving effect to such acquisitions under the purchase method of accounting and the assumptions and adjustments (which the Company believes to be reasonable) described in the accompanying Notes to Unaudited Pro Forma Combined Financial Information. Under the purchase method of accounting, assets acquired and liabilities assumed will be recorded at their estimated fair value at the date of acquisition. The pro forma adjustments set forth in the following Unaudited Pro Forma Combined Financial Information are estimated and may differ from the actual adjustments when they become known. The following Unaudited Pro Forma Combined Financial Information does not reflect certain cost savings that management believes may be realized following the acquisitions. These savings are expected to be realized primarily through rationalization of operations and implementation of strict cost controls and standardized operating procedures. Additionally, the Company believes the acquisitions will enable it to continue to achieve economies of scale, such as enhanced purchasing power and increased asset utilization. There can be no assurance that the acquisitions of WSMG, PED, WaterPro or USG will be consummated. The pro forma data is provided for comparative purposes only. It does not purport to be indicative of the results that actually would have occurred if the acquisitions of WSMG, PED, WaterPro and USG had been consummated on the dates indicated or that may be obtained in the future. The Unaudited Pro Forma Combined Financial Information should be read in conjunction with the notes thereto, the audited financial statements of WSMG, PED and WaterPro and the notes thereto, included elsewhere herein, and the Company's Consolidated Financial Statements and Notes thereto, included elsewhere herein. 22 UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1996 ----------------------------------------------------------------------------------------- HISTORICAL PRO FORMA ------------------------------------------- -------------------------------------------- ADJUSTMENTS INCREASE AS AS FURTHER COMPANY USG WATERPRO WSMG PED (DECREASE) NOTES ADJUSTED ADJUSTED -------- ------- -------- -------- -------- ----------- ---------- ---------- ---------- (IN THOUSANDS) ASSETS Current assets: Cash................... $ 9,523 $ 631 $ -- $ 21,464 $ 5,448 $ 37,066 $ 37,066 Short-term investments. 1,443 -- -- -- 1,751 3,194 3,194 Accounts receivable, net................... 205,888 24,143 62,018 97,286 157,459 546,794 546,794 Cost and estimated earnings in excess of billings on uncompleted contracts. 45,743 -- -- 18,942 -- 64,685 64,685 Inventories............ 77,865 16,306 28,443 46,720 56,099 225,433 225,433 Prepaid expenses....... 9,225 -- 1,673 -- -- 10,898 10,898 Deferred taxes......... 7,771 -- -- -- -- 7,771 7,771 Other current assets... 10,810 313 -- 3,216 -- 14,339 14,339 -------- ------- -------- -------- -------- ---------- ---------- Total current assets. 368,268 41,393 92,134 187,628 220,757 910,180 910,180 -------- ------- -------- -------- -------- ---------- ---------- Property, plant and equipment, net......... 169,754 2,840 5,405 53,076 29,522 260,597 260,597 Investment in leasehold interests, net......... 27,392 -- -- -- -- 27,392 27,392 Costs in excess of net assets of businesses acquired, net.......... 279,024 -- 14,203 155,801 -- $ 244,332 a(iii) 693,360 693,360 Other assets............ 44,432 981 -- 2,957 2,023 5,250 a(ii) 55,643 60,199 -------- ------- -------- -------- -------- ---------- ---------- Total assets......... $888,870 $45,214 $111,742 $399,462 $252,302 $1,947,172 $1,951,728 ======== ======= ======== ======== ======== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable....... $ 86,785 $16,741 $ 34,601 $ 53,977 $ 71,678 $ 263,782 $ 263,782 Accrued liabilities.... 97,795 2,464 5,887 47,404 34,262 187,812 187,812 Current portion of long-term debt........ 1,677 -- -- -- 78,201 $ (78,201) a(iv) 1,677 1,677 Revolving credit line with parent........... -- -- 60,679 -- -- (60,679) a(iv) -- -- Billings in excess of costs and estimated earnings on uncompleted contracts. 20,413 -- -- 24,149 -- 44,562 44,562 Other current liabilities........... 20,701 28 1,865 -- 433 23,027 23,027 -------- ------- -------- -------- -------- ---------- ---------- Total current liabilities......... 227,371 19,233 103,032 125,530 184,574 520,860 520,860 -------- ------- -------- -------- -------- ---------- ---------- Notes payable........... 48,281 16,731 -- -- -- 537,200 a(ii) 602,212 101,659 Long-term debt, excluding current portion................ 9,247 3,700 -- -- 1,840 14,787 14,787 Convertible subordinated debt................... 199,975 -- -- -- -- 199,975 315,000 Loan payable-parent..... -- -- -- -- 230,080 (230,080) a(iv) -- -- Deferred taxes.......... 1,929 -- 151 -- -- 2,080 2,080 Other liabilities....... 16,921 -- -- 13,196 31,716 61,833 61,833 -------- ------- -------- -------- -------- ---------- ---------- Total liabilities.... 503,724 39,664 103,183 138,726 448,210 1,401,747 1,016,219 -------- ------- -------- -------- -------- ---------- ---------- Shareholders' equity: Common stock........... 343 2,553 1 -- -- (2,505) a(i), a(v) 392 535 Additional paid-in capital............... 362,470 149 4,999 258,976 17,094 (120,988) a(i), a(v) 522,700 912,641 Translation adjustment. 2,009 -- -- 1,760 -- (1,760) a(v) 2,009 2,009 Retained earnings (accumulated deficit). 20,324 2,848 3,559 -- (213,002) 206,595 a(v) 20,324 20,324 -------- ------- -------- -------- -------- ---------- ---------- Total shareholders' equity.............. 385,146 5,550 8,559 260,736 (195,908) 545,425 935,509 -------- ------- -------- -------- -------- ---------- ---------- $888,870 $45,214 $111,742 $399,462 $252,302 $1,947,172 $1,951,728 ======== ======= ======== ======== ======== ========== ==========
The accompanying notes are an integral part of this pro forma combined financial information. 23 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 1996 --------------------------------------------------------------------------------------------- HISTORICAL PRO FORMA ----------------------------------------------- -------------------------------------------- ADJUSTMENTS INCREASE AS AS FURTHER COMPANY USG WATERPRO WSMG PED (DECREASE) NOTES ADJUSTED ADJUSTED -------- -------- -------- -------- -------- ----------- ----- ---------- ---------- (in thousands, except per share data) Revenues................ $727,903 $156,838 $234,391 $452,134 $267,358 $1,838,624 $1,838,624 Cost of sales........... 538,573 130,432 195,258 361,462 189,529 1,415,254 1,415,254 -------- -------- -------- -------- -------- ---------- ---------- Gross profit........... 189,330 26,406 39,133 90,672 77,829 423,370 423,370 Selling, general and administrative expenses............... 148,683 21,821 32,767 68,170 76,163 $ (5,405) b(i) 342,199 342,199 -------- -------- -------- -------- -------- ---------- ---------- Operating income (loss)................ 40,647 4,585 6,366 22,502 1,666 81,171 81,171 -------- -------- -------- -------- -------- ---------- ---------- Other income (expense): Interest expense....... (14,419) (2,227) (3,593) -- (19,865) (16,438) b(ii) (56,542) (25,188) Other.................. 5,134 (582) 657 4,767 -- 9,976 9,976 -------- -------- -------- -------- -------- ---------- ---------- (9,285) (2,809) (2,936) 4,767 (19,865) (46,566) (15,212) -------- -------- -------- -------- -------- ---------- ---------- Income (loss) before income taxes.......... 31,362 1,776 3,430 27,269 (18,199) 34,604 65,958 Provision (benefit) for income taxes........... 12,055 727 1,477 10,908 2,165 (14,182) b(iii) 13,150 25,064 -------- -------- -------- -------- -------- ---------- ---------- Net income (loss)...... $ 19,307 $ 1,049 $ 1,953 $ 16,361 $(20,364) $ 21,455 $ 40,894 ======== ======== ======== ======== ======== ========== ========== Net income per common share................. $ 0.45 $ 0.44 $ 0.66 ======== ========== ========== Weighted average number of common shares outstanding............ 42,159 47,041 61,431 ======== ========== ==========
The accompanying notes are an integral part of this pro forma combined financial information. 24 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 -------------------------------------------------------------------------------------- HISTORICAL PRO FORMA --------------------------------------------- --------------------------------------- ADJUSTMENTS INCREASE AS AS FURTHER COMPANY USG WATERPRO WSMG PED (DECREASE) NOTES ADJUSTED ADJUSTED -------- ------- -------- -------- ------- ----------- ------ -------- ---------- (in thousands, except per share data) Revenues................ $208,509 $40,740 $86,422 $112,094 $54,181 $501,946 $501,946 Cost of sales........... 152,174 33,107 70,890 87,397 36,575 380,143 380,143 -------- ------- ------- -------- ------- -------- -------- Gross profit........... 56,335 7,633 15,532 24,697 17,606 121,803 121,803 Selling, general and administrative expenses............... 41,520 6,328 11,270 16,445 16,570 $ 958 b(i) 93,091 93,091 -------- ------- ------- -------- ------- -------- -------- Operating income (loss)................ 14,815 1,305 4,262 8,252 1,036 28,712 28,712 -------- ------- ------- -------- ------- -------- -------- Other income (expense): Interest expense....... (4,390) (464) (1,175) -- (4,714) (4,085) b(ii) (14,828) (6,990) Other.................. 621 (1) 97 142 -- 859 859 -------- ------- ------- -------- ------- -------- -------- (3,769) (465) (1,078) 142 (4,714) (13,969) (6,131) -------- ------- ------- -------- ------- -------- -------- Income (loss) before income taxes.......... 11,046 840 (3,184) 8,394 (3,678) 14,743 22,581 Provision (benefit) for income taxes........... 3,043 339 1,167 3,357 1,433 (3,737) b(iii) 5,602 8,581 -------- ------- ------- -------- ------- -------- -------- Net income (loss)...... $ 8,003 $ 501 $ 2,017 $ 5,037 $(5,111) $ 9,141 $ 14,000 ======== ======= ======= ======== ======= ======== ======== Net income per common share................. $ 0.16 $ 0.17 $ 0.20 ======== ======== ======== Weighted average number of common shares outstanding........... 49,951 54,833 69,223 ======== ======== ========
The accompanying notes are an integral part of this pro forma combined financial information. 25 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION AS ADJUSTED a. The Pro Forma Combined Balance Sheet has been prepared to reflect the pending acquisitions by the Company of WSMG, PED, USG and WaterPro for aggregate estimated equity purchase prices comprised of the following:
EQUITY FORM OF PURCHASE ACQUIRED COMPANY CONSIDERATION PRICE ---------------- ------------- ----------- (in thousands) USG.................................. Common Stock $ 22,000 WaterPro............................. Common Stock 38,600 WSMG................................. Cash 369,600 PED (assuming an exchange rate of $1.56 per (Pounds))................. Cash $156,250 Common Stock 39,000 195,250 -------- Estimated transaction costs.......... 6,100 --------- $ 631,550 =========
In addition to the purchase prices described above, the Company will assume long-term indebtedness of approximately $22,000,000 ($20,431,000 at June 30, 1996) and $63,000,000 ($60,679,000 at June 30, 1996) in connection with the acquisitions of USG and WaterPro, respectively. The $63,000,000 of indebtedness related to WaterPro will be repaid with shares of Common Stock concurrently with the closing of such acquisition. The estimated net book value, as adjusted, of USG, WaterPro, WSMG and PED and the estimated fair value of their net assets as of the closing date are assumed to be $5,550,000, $8,559,000, $260,736,000 and $112,373,000, respectively. The aggregate difference between the estimated equity purchase prices and the estimated fair values of the net assets of USG, WaterPro, WSMG and PED is approximately $244,332,000 which has been recorded as costs in excess of net assets of businesses acquired attributable to such acquisitions in the accompanying Pro Forma Combined Balance Sheet. The As Adjusted column in the Pro Forma Combined Balance Sheet has been adjusted to reflect the above as follows: (i) To record the issuance of 4,882,411 shares of Common Stock for: (i) the Common Stock portion of the equity purchase prices; and (ii) the repayment of WaterPro parent company debt with Common Stock. (ii) To record the assumed incurrence of $537,200,000 of indebtedness (including bank commitment fees of $5,250,000) under the Committed Credit Facilities with an assumed effective interest rate of 7.50% to consummate the acquisitions of WSMG and PED. The Company, however, intends to retire a portion of such debt with the net proceeds of the Notes Offering and the Common Stock Offerings or, if completion of the Notes Offering and the Common Stock Offerings occurs prior to the completion of the acquisitions of WSMG and PED, to use such proceeds directly to acquire WSMG and PED. See "Use of Proceeds." (iii) To adjust goodwill for the difference between the estimated equity purchase prices and the estimated fair values of the net assets acquired. (iv) To eliminate: (i) the net loan payable of WaterPro to its parent company, which will be repaid by the Company with Common Stock; and (ii) the net loan payable of PED to its parent company, which will be contributed to PED's equity by such parent company. (v) To eliminate the equity of USG, WaterPro, WSMG and PED. AS FURTHER ADJUSTED The As Further Adjusted column gives effect to the Notes Offering and the Common Stock Offerings and the anticipated application of the net proceeds therefrom, which results in a reduction in long-term notes payable of $500,553,125 and a corresponding increase in shareholders' equity of $330,109,375 and in 26 convertible subordinated debt of $175,000,000 at June 30, 1996. Additionally, the As Further Adjusted column gives effect to the conversion of $60,000,000 aggregate principal amount of 5% Convertible Subordinated Debentures due 2000 into 4,390,000 shares of Common Stock. b. For the fiscal year ended March 31, 1996, the historical results of operations of USG, WaterPro and WSMG reflect their results of operations for the twelve months ended December 31, 1995 and reflect the results of operations of PED and the Company for the year ended March 31, 1996. The historical results of operations for the three months ended June 30, 1996 combines the results of each of the Company, WSMG, PED, WaterPro and USG for such three-month period. The Pro Forma Combined Statements of Operations gives effect to the following adjustments:
THREE MONTHS FISCAL YEAR ENDED ENDED JUNE 30, MARCH 31, 1996 1996 -------------- ------------ (in thousands) (i) Selling, general and administrative expenses: a) To eliminate the parent company management fees charged to PED, which charges would not have been incremental costs incurred by the Company; $ (2,253) $ (569) b) To adjust for costs related to a PED plant closure in the fiscal year ended March 31, 1996; (9,260) -- c) To adjust goodwill amortization to reflect the acquisitions of WSMG, PED, WaterPro and USG, with such goodwill amortized over 40 years. 6,108 1,527 -------- ------- $ (5,405) $ 958 ======== ======= (ii) To adjust interest expense related to the indebtedness that will be incurred to finance the acquisitions of WSMG and PED, net of historical interest expense recorded by WaterPro and PED on parent company debt, which interest expense has been eliminated. Interest on the indebtedness under the Committed Credit Facilities is assumed to be at an effective rate of 7.50% per annum. The Company, however, intends to retire a portion of such debt with the net proceeds of the Notes Offering and the Common Stock Offerings or, if completion of the Notes Offering and the Common Stock Offerings occurs prior to the completion of the acquisitions of WSMG and PED, to use such net proceeds directly to acquire WSMG and PED. See "Use of Proceeds." $(16,438) $(4,085) ======== ======= The As Further Adjusted column presented gives effect to the Notes Offering and the Common Stock Offerings and the anticipated application of the net proceeds therefrom, which results in a reduction in interest expense of $28,354,000 and $7,088,000 for the fiscal year ended March 31, 1996 and the three months ended June 30, 1996, respectively. See "Use of Proceeds." The As Further Adjusted column also gives effect to the conversion of $60,000,000 aggregate principal amount of 5% Convertible Subordinated Debentures due 2000 to Common Stock which results in a reduction in interest expense of $3,000,000 and $750,000 for the fiscal year ended March 31, 1996 and the three months ended June 30, 1996, respectively, and a resulting increase of 4,390,000 in shares of Common Stock outstanding. (iii) To adjust the provision for income taxes to reflect the combined results of operations. $(14,182) $(3,737) ======== =======
27 SELECTED CONSOLIDATED FINANCIAL DATA The Selected Consolidated Financial Data as of and for the fiscal years ended March 31, 1994, 1995 and 1996 are derived from the Consolidated Financial Statements and Notes thereto of the Company, which are included elsewhere herein. The financial data as of and for the three months ended June 30, 1995 and 1996 are derived from unaudited consolidated financial statements of the Company, which, in the opinion of the Company, reflect all adjustments (consisting principally of normal, recurring accruals) necessary for the fair statement of the financial position and results of operations for the periods presented and are not necessarily indicative of the results for any other interim period or for the full fiscal year. Historical consolidated financial data for the fiscal years ended March 31, 1994, 1995 and 1996 and the three months ended June 30, 1995 have been restated to reflect the acquisitions in May 1996 and August 1996 of Zimpro and Davis, respectively, which acquisitions have been accounted for as poolings of interests. Historical financial data for the three months ended June 30, 1996 include the operations of Zimpro and have been restated to reflect the operations of Davis. The data presented below are qualified in their entirety by and should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included elsewhere herein.
THREE MONTHS ENDED FISCAL YEAR ENDED MARCH 31,(1) JUNE 30,(1) ------------------------------ -------------------- 1994(2) 1995(3) 1996(4)(5) 1995 1996 -------- -------- ---------- --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues.................................................. $412,512 $519,359 $727,903 $ 158,173 $ 208,509 Cost of sales............................................. 326,848 398,755 538,573 119,323 152,174 -------- -------- -------- --------- --------- Gross profit.............................................. 85,664 120,604 189,330 38,850 56,335 Selling, general and administrative expenses.............. 90,719 97,481 148,683 30,233 41,520 -------- -------- -------- --------- --------- Operating income (loss)................................... (5,055) 23,123 40,647 8,617 14,815 Interest expense.......................................... (4,044) (7,514) (14,419) (3,012) (4,390) Other income (expense).................................... (7,382) 1,442 5,134 730 621 -------- -------- -------- --------- --------- Income (loss) before taxes................................ (16,481) 17,051 31,362 6,335 11,046 Provision (benefit) for income taxes...................... (7,087) 4,812 12,055 1,996 3,043 -------- -------- -------- --------- --------- Net income (loss)......................................... $ (9,394) $ 12,239 $ 19,307 $ 4,339 $ 8,003 ======== ======== ======== ========= ========= Net income (loss) per common share(6)..................... $(0.41) $0.41 $0.45 $0.12 $0.16 ======== ======== ======== ========= ========= Weighted average number of common shares outstanding...... 24,375 28,235 42,159 35,699 49,951 OTHER DATA: EBITDA(7)................................................. $6,237 $39,777 $67,227 $13,736 $24,636 Ratio of earnings to fixed charges(8)..................... -- 2.5x 2.5x 2.5x 3.1x Net income (loss) before Davis and Zimpro acquisitions.... $(2,541) $8,331 $20,290 $3,359 $6,917 Net income (loss) per common share before Davis and Zimpro acquisitions(6)............................... $(0.17) $0.34 $0.54 $0.11 $0.15 BALANCE SHEET DATA (AT PERIOD END): Working capital........................................... $ 97,855 $113,972 $123,757 $ 106,546 $ 140,897 Total assets.............................................. 357,354 482,723 876,505 614,101 888,870 Notes payable and long-term debt, including current portion.................................................. 29,758 57,116 53,436 66,531 59,205 Convertible subordinated debt............................. 60,000 105,000 200,000 105,000 199,975 Shareholders' equity...................................... 152,021 166,878 368,501 271,586 385,146
28 The historical consolidated financial data for the fiscal years ended March 31, 1994, 1995 and 1996 and for the three months ended June 30, 1995 have been restated to include the accounts and operations of Zimpro and Davis, which were merged with the Company in May 1996 and August 1996, respectively, and accounted for as poolings of interests. The historical consolidated financial data for the three months ended June 30, 1996 include the operations of Zimpro and have been restated to reflect the accounts and operations of Davis. Separate results of operations for each of the Company, Davis and Zimpro for the years ended March 31, 1994, 1995 and 1996 and the three months ended June 30, 1995 and 1996 are presented below.
FISCAL YEAR ENDED MARCH THREE MONTHS ENDED 31,(1) JUNE 30,(1) ----------------------------- -------------------- 1994(2) 1995(3) 1996(4)(5) 1995 1996 -------- -------- ---------- --------- --------- (UNAUDITED) REVENUES: (IN THOUSANDS, EXCEPT PER SHARE DATA) Company (as previously reported)................. $180,421 $272,032 $472,537 $ 91,539 $ 150,801 Davis...................... 202,621 215,649 226,489 59,684 57,708 Zimpro..................... 29,470 31,678 28,877 6,950 -- -------- -------- -------- --------- --------- Combined................. $412,512 $519,359 $727,903 $ 158,173 $ 208,509 ======== ======== ======== ========= ========= OPERATING INCOME (LOSS): Company (as previously reported)................. $ (4,874) $ 14,585 $ 34,955 $ 6,248 $ 13,243 Davis...................... 1,506 7,512 10,892 2,308 1,572 Zimpro..................... (1,687) 1,026 (5,200) 61 -- -------- -------- -------- --------- --------- Combined................. $ (5,055) $ 23,123 $ 40,647 $ 8,617 $ 14,815 ======== ======== ======== ========= ========= NET INCOME (LOSS): Company (as previously reported)................. $ (2,541) $ 8,331 $ 20,290 $ 3,359 $ 6,917 Davis...................... (5,340) 3,448 5,749 1,162 1,086 Zimpro..................... (1,513) 460 (6,732) (182) -- -------- -------- -------- --------- --------- Combined................. $ (9,394) $ 12,239 $ 19,307 $ 4,339 $ 8,003 ======== ======== ======== ========= ========= NET INCOME (LOSS) PER COMMON SHARE:(6) As previously reported..... $(0.17) $0.34 $0.54 $0.11 $0.15 As restated................ (0.41) 0.41 0.45 0.12 0.16
- ------------------- (1) The historical consolidated financial data for the fiscal years ended March 31, 1994, 1995 and 1996 and for the three months ended June 30, 1995 have been restated to include the accounts and operations of Zimpro and Davis, which were merged with the Company in May 1996 and August 1996, respectively, and accounted for as poolings of interests. The historical consolidated financial data for the three months ended June 30, 1996 include the operations of Zimpro and have been restated to include the accounts and operations of Davis. (2) The fiscal year ended March 31, 1994 includes four months of results of Ionpure Technologies Corporation and IP Holding Company ("Ionpure"), acquired December 1, 1993 and accounted for as a purchase. Selling, general and administrative expenses for the year ended March 31, 1994 reflect four months of integration of Ionpure and certain charges totalling $2,359,000 related to the rationalization of certain wastewater operations. Other expense for the year ended March 31, 1994 includes a charge of $8,895,000 to reflect a plan to shutdown and reorganize certain operations of Davis. (3) The fiscal year ended March 31, 1995 includes the results of operations of Smogless S.p.A., Crouzat S.A., Sation S.A., Seral Erich Alhauser GmbH and the Ceraflo ceramic product line from the dates of their respective acquisitions, accounted for as purchases. See Note 9 of Notes to Consolidated Financial Statements. (4) The fiscal year ended March 31, 1996 includes the results of operations of The Permutit Company Limited and The Permutit Company Pty Ltd., Interlake Water Systems, Arrowhead Industrial Water, Inc. and Polymetrics, Inc. from the dates of their respective acquisitions, accounted for as purchases. See Note 9 of Notes to Consolidated Financial Statements. (5) Selling, general and administrative expenses for the year ended March 31, 1996 includes charges totalling $3,337,000 related to the write-down of certain patents and equipment of Zimpro. (6) Net income (loss) per common share amounts are after dividends on the Series A Preferred Stock of $701,000 for the fiscal year ended March 31, 1994, $715,000 for the fiscal year ended March 31, 1995 and $537,000 for the fiscal year ended March 31, 1996. The Series A Preferred Stock was converted into shares of Common Stock in March 1996. (7) "EBITDA" consists of operating income plus depreciation and amortization. EBITDA data is presented because such data is used by certain investors to determine the Company's ability to meet debt service requirements. The Company considers EBITDA to be an indicative measure of the Company's operating performance. However, such information should not be considered as an alternative to net income, operating profit, cash flows from operations, or any other operating or liquidity performance measure prescribed by generally accepted accounting principles. (8) The ratio of earnings to fixed charges has been computed by dividing earnings available for fixed charges (income before provision for income taxes, plus fixed charges) by fixed charges. Fixed charges consist of interest expense (including amortization of deferred financing costs) and the portion of rental expense that is representative of the interest factor (deemed by the Company to be one-third). Fixed charges exceeded earnings before fixed charges by $9,099,000 for the year ended March 31, 1994. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. GENERAL The Company's strategy is to offer a single-source solution to industrial and municipal customers through what the Company believes is the industry's broadest range of cost-effective systems, products, services and proven technologies. Accordingly, since July 1991, the Company has acquired and integrated more than 45 businesses with substantial expertise in the design and manufacture of systems for the filtration and treatment of water and wastewater. Due to the magnitude of these acquisitions and the integration of the acquired operations with the Company's existing businesses, results of operations for prior periods are not necessarily comparable to or indicative of results of operations for current or future periods. RESULTS OF OPERATIONS In May and August 1996, the Company merged with Zimpro and Davis, respectively, in transactions accounted for as poolings of interests. Historical consolidated financial data for the fiscal years ended March 31, 1994 through March 31, 1996 and the three months ended June 30, 1995 have been restated to reflect the acquisitions in May 1996 and August 1996 of Zimpro and Davis, respectively, which acquisitions have been accounted for as poolings of interests. Historical financial data for the three months ended June 30, 1996 have been restated to reflect the operations of Davis. The following table sets forth for the periods indicated certain Selected Consolidated Financial Data as a percentage of total revenues.
THREE MONTHS FISCAL YEAR ENDED ENDED MARCH 31, JUNE 30, -------------------- -------------- 1994 1995 1996 1995 1996 ----- ----- ----- ------ ------ Revenues................................. 100.0 % 100.0% 100.0% 100.0% 100.0% Cost of sales............................ 79.2 76.8 74.0 75.4 73.0 ----- ----- ----- ------ ------ Gross profit............................. 20.8 23.2 26.0 24.6 27.0 Selling, general and administrative expenses................................ 22.0 18.8 20.4 19.1 19.9 ----- ----- ----- ------ ------ Operating income (loss).................. (1.2) 4.5 5.6 5.4 7.1 Interest expense......................... 1.0 1.4 2.0 1.9 2.1 Net income (loss)........................ (2.3) 2.4 2.7 2.7 3.8
The following table sets forth, as a percentage of the Company's total revenues, each of the Company's product categories by revenue for the periods indicated:
THREE MONTHS FISCAL YEAR ENDED ENDED MARCH 31, JUNE 30, --------------------- --------------- 1994 1995 1996 1995 1996 ----- ----- ----- ------ ------ Revenues by product category: Capital equipment.................. 41% 42% 39% 36% 40% Services and operations............ 9 9 20 15 21 Distribution....................... 37 33 25 31 22 Replacement parts, consumables and other............................. 13 16 16 18 17
THREE MONTHS ENDED JUNE 30, 1996 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1995 REVENUES Revenues for the three months ended June 30, 1996 were $208,509,000, an increase of $50,336,000 from $158,173,000 for the comparable period of the prior fiscal year. This 31.8% increase was due primarily to acquisitions completed by the Company after the first quarter ended June 30, 1995. 30 GROSS PROFIT Gross profit increased 45.0% to $56,335,000 for the three months ended June 30, 1996 from $38,850,000 for the comparable period of the prior fiscal year. Total gross profit as a percentage of revenue ("gross margin") increased to 27.0% for the three months ended June 30, 1996, compared to 24.6% for the comparable period of the prior fiscal year. The increase in gross margin for the three months ended June 30, 1996 was due to: (i) a continued strengthening of gross margin in the recurring and higher margin service-based revenue business; and (ii) rationalization of operations and increased economies of scale from the integration of acquisitions. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $41,520,000 for the three months ended June 30, 1996 from $30,233,000 for the comparable period of the prior fiscal year. This increase was primarily due to the addition of sales and administrative personnel accompanying the Company's recent acquisitions. As a percentage of revenues, selling, general and administrative expenses were 19.9% during the three months ended June 30, 1996, as compared to 19.1% for the comparable period of the prior year. Notwithstanding the increase in selling, general and administrative expenses as a percentage of revenues, operating income as a percentage of revenues increased from 5.4% for the three months ended June 30, 1995 to 7.1% for the corresponding period in fiscal 1996 due primarily to improvement in gross margin. INTEREST EXPENSE Interest expense increased to $4,390,000 for the three months ended June 30, 1996 from $3,012,000 for the comparable period of the prior fiscal year. Interest expense for the three months ended June 30, 1996 consists primarily of interest on the Company's 5% Convertible Subordinated Debentures due 2000 issued October 20, 1993 and the Company's 6% Convertible Subordinated Notes due 2005 issued September 18, 1995, respectively, and interest on increased borrowings under the Company's bank line of credit, which was used to finance the Company's revenue expansion and recent acquisitions. INCOME TAX EXPENSE Income tax expense increased to $3,043,000 for the three months ended June 30, 1996 from $1,996,000 for the comparable period of the prior fiscal year. This increase was attributable to increased income. The Company's effective tax rate for the three months ended June 30, 1996 was 27.5% and for the comparable period of the prior year was 31.5%. This decrease in effective rate is due primarily to the Company's utilization of certain net operating loss carryforwards for the three months ended June 30, 1996. See "Twelve Months Ended March 31, 1996 Compared with Twelve Months Ended March 31, 1995." NET INCOME Net income increased to $8,003,000 for the three months ended June 30, 1996 from $4,339,000 for the comparable period of the prior fiscal year. Net income per common share increased to $0.16 per share (based upon 49,951,000 weighted average common shares outstanding) for the three months ended June 30, 1996 from $0.12 per common share (based upon 35,699,000 weighted average common shares outstanding) for the comparable period of the prior fiscal year, after deducting $179,000 for dividends on the Company's preferred shares for the three months ended June 30, 1995. TWELVE MONTHS ENDED MARCH 31, 1996 COMPARED WITH TWELVE MONTHS ENDED MARCH 31, 1995 REVENUES Revenues for fiscal 1996 were $727,903,000, an increase of $208,544,000 from $519,359,000 for fiscal 1995. This 40.2% increase was due primarily to acquisitions completed by the Company in fiscal 1995 and 1996. See Note 9 of Notes to Consolidated Financial Statements related to acquisitions. 31 GROSS PROFIT Gross profit increased 57.0% to $189,330,000 for fiscal 1996 from $120,604,000 for fiscal 1995. Gross margin increased to 26.0% for fiscal 1996 as compared to 23.2% for fiscal 1995. The increase in gross margin through fiscal 1996 was due to: (i) a continued strengthening of gross margin in the recurring and higher margin service-based revenue business; (ii) rationalization of operations and economies of scale from the integration of acquisitions; and (iii) a focus on products with higher gross margins in Davis' distribution business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $148,683,000 for fiscal 1996 from $97,481,000 for fiscal 1995. This increase was primarily due to the addition of sales and administrative personnel accompanying the Company's recent acquisitions. As a percentage of revenues, selling, general and administrative expenses were 20.4% for fiscal 1996, as compared to 18.8% for fiscal 1995. This increase was due primarily to a write-down of certain patents and equipment totalling $3,193,000 at the Company's Zimpro subsidiary and, to a lesser extent, increased levels of incentive compensation earned by management and employees of Davis as compared to fiscal 1995. Notwithstanding the increase in selling, general and administrative expenses as a percentage of revenues, operating income as a percentage of revenues increased from 4.5% for fiscal 1995 to 5.6% for fiscal 1996 due primarily to improvement in gross margin. INTEREST EXPENSE Interest expense increased to $14,419,000 for fiscal 1996 from $7,514,000 for fiscal 1995. Interest expense for fiscal 1996 consisted primarily of interest on the Company's 5% Convertible Subordinated Debentures due 2000 issued October 20, 1993 and approximately seven months of interest on the Company's 6% Convertible Subordinated Notes due 2005 issued September 18, 1995, respectively, and interest on increased borrowings under the Company's bank line of credit, which was used to finance the Company's revenue expansion and recent acquisitions. INCOME TAX EXPENSE Income tax expense increased to $12,055,000 for fiscal 1996 from $4,812,000 for fiscal 1995. This increase was attributable to increased income. The Company's effective tax rate for fiscal 1996 was 38.4% and for fiscal 1995 was 28.2%. This increase in effective rate in fiscal 1996 is due primarily to a net loss before income taxes of $6,086,000 incurred at Zimpro (see "Selling, General and Administrative Expenses") for which no income tax benefit was recognized because its realization was not assured and because of the nondeductibility of certain items. As of March 31, 1996, the Company had net operating loss carryforwards in France of approximately $19,952,000 and other European countries of approximately $7,338,000 for which no financial statement benefit has been recognized. In addition, the Company had net operating loss carryforwards generated from its Liquipure subsidiary of approximately $14,362,000 for which financial statement benefit was recognized in fiscal 1996. The Company also had net operating loss carryforwards generated from Zimpro of approximately $2,905,000 for which financial statement benefit has not been recognized. In addition, the benefit of the French loss carryforwards must be shared equally between the Company and Aluminum Corporation of America until March 31, 1997. See Note 14 of Notes to Consolidated Financial Statements related to income taxes. NET INCOME Net income increased to $19,307,000 for fiscal 1996 from $12,239,000 for fiscal 1995. Net income per common share increased to $0.45 per share (based upon 42,159,000 weighted average common shares outstanding) for fiscal 1996 from $0.41 per common share (based upon 28,235,000 weighted average common shares outstanding) for fiscal 1995, after deducting $536,000 and $715,000 for dividends on the Company's preferred shares for fiscal 1996 and 1995, respectively. 32 TWELVE MONTHS ENDED MARCH 31, 1995 COMPARED WITH TWELVE MONTHS ENDED MARCH 31, 1994 REVENUES Revenues for fiscal 1995 were $519,359,000, an increase of $106,847,000 from $412,512,000 for fiscal 1994. This 25.9% increase was due primarily to acquisitions completed by the Company in fiscal 1994 and 1995. See Note 9 of Notes to Consolidated Financial Statements related to acquisitions. GROSS PROFIT Gross profit increased 40.8% to $120,604,000 for fiscal 1995 from $85,664,000 for fiscal 1994. Gross margin increased to 23.2% for fiscal 1995 as compared to 20.8% for fiscal 1994. The increase in gross margin through fiscal 1995 was due to: (i) a continued strengthening of gross margin in the recurring and higher margin service-based revenue business; and (ii) rationalization of operations and economies of scale from the Company's acquisitions. Gross margin in the Company's distribution business remained unchanged in fiscal 1995 as compared to fiscal 1994. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $97,481,000 for fiscal 1995 from $90,719,000 for fiscal 1994. This increase was primarily due to the addition of sales and administrative personnel accompanying the Company's recent acquisitions. As a percentage of revenues, selling, general and administrative expenses were 18.8% during fiscal 1995, as compared to 22.0% for fiscal 1994. This decrease in selling, general and administrative expenses as a percentage of revenues for fiscal 1995 as compared to fiscal 1994 was due primarily to (i) the Company's emphasis on cost reductions and administrative efficiencies gained through economies of scale, (ii) the write- off of certain intangibles in the Company's Continental Penfield subsidiary totalling $3,738,000 in fiscal 1994, and (iii) the exclusion from operating results in fiscal 1995 of a division of Davis which was shut down in fiscal 1994. See Note 8 of Notes to Consolidated Financial Statements related to such shutdown. Due primarily to the decrease in selling, general and administrative expenses as a percentage of revenues and the improvement in gross margin, operating income as a percentage of revenues increased from a loss of 1.2% for fiscal 1994 to 4.5% for fiscal 1995. INTEREST EXPENSE Interest expense increased to $7,514,000 for fiscal 1995 from $4,044,000 for fiscal 1994. Interest expense for fiscal 1995 consisted primarily of interest on the Company's 5% Convertible Subordinated Debentures due 2000 issued October 20, 1993 and interest on increased borrowings under the Company's bank line of credit, which was used to finance the Company's revenue expansion and recent acquisitions. INCOME TAX EXPENSE Income tax expense increased to $4,812,000 for fiscal 1995 from a tax benefit of $7,087,000 for fiscal 1994. This increase was attributable to increased income and the Company's partial recognition during fiscal 1994 of the future income tax benefit related to federal net operating loss carryforwards. As of March 31, 1995, the Company had net operating loss carryforwards in France of approximately $20,351,000 and other European countries of approximately $6,400,000 for which no financial statement benefit had been recognized. In addition, the Company had net operating loss carryforwards generated from its Liquipure subsidiary of approximately $13,500,000 for which no financial statement benefit was recognized. Future recognition of these carryforwards will be reflected if the above operations generate sufficient earnings before the expiration periods of the loss carryforwards. In addition, the benefit of the French loss carryforwards must be shared equally between the Company and Aluminum Corporation of America until March 31, 1997. See Note 14 of Notes to Consolidated Financial Statements related to income taxes. NET INCOME Net income increased to $12,239,000 for fiscal 1995 from a net loss of $9,394,000 for fiscal 1994. Net income per common share increased to $0.41 per share (based upon 28,235,000 weighted average common 33 shares outstanding) for fiscal 1995 from a net loss of $0.41 per common share (based upon 24,375,000 weighted average common shares outstanding) for fiscal 1994, after deducting $715,000 and $701,000 for dividends on the Company's preferred shares for fiscal 1995 and 1994, respectively. LIQUIDITY 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. At June 30, 1996, the Company had working capital of $140,897,000, including cash and short-term investments of $10,966,000. The Company's long-term debt at June 30, 1996 included $59,975,000 of 5% Convertible Subordinated Debentures due 2000, $140,000,000 of 6% Convertible Subordinated Notes due 2005 and other long-term debt totalling $10,924,000 and bearing interest at rates ranging from 2.0% to 11.5%. As of June 30, 1996, the Company had an existing bank line of credit of $135,000,000, of which there were outstanding borrowings of $48,281,000 and outstanding letters of credit of $14,753,000. To the extent that net proceeds of the Notes Offering and/or the Common Stock Offerings are not available, the Company expects to obtain all or part of the funds necessary to complete the WSMG acquisition and the PED acquisition from borrowings under bank credit facilities. The Company has received a commitment letter from The First National Bank of Boston pursuant to which, subject to the satisfaction of various conditions, credit facilities of up to $700,000,000 would be made available to the Company to finance acquisitions (including the WSMG acquisition and the PED acquisition), to refinance any borrowings under the Company's current credit agreement, and for working capital and other general corporate purposes. Borrowings under these committed credit facilities would bear interest at variable rates of up to 2.25% above certain Eurocurrency rates or 0.50% above The First National Bank of Boston's base rate and have a five year maturity. The Company anticipates that, following completion of the Notes Offering and/or the Common Stock Offerings, the Company's facilities will be reduced to a level that the Company considers appropriate for its working capital and other needs. As of March 31, 1996, the Company had net operating loss carryforwards generated from Societe des Ceramiques Techniques S.A. ("SCT") of approximately $19,952,000, for which no financial statement benefit has been recognized. Approximately $1,946,000 of net operating loss carryforwards will expire in fiscal years 1997 and 1998, while the remainder have an indefinite carryforward period. The Company also has net operating loss carryforwards in other European countries of approximately $7,338,000 which expire from fiscal 1997 to 2002 for which no financial statement benefit has been recognized. The Company also has net operating loss carryforwards generated from Zimpro of approximately $2,905,000 for which no financial statement benefit has been recognized. No benefit has been given to these net operating loss carryfowards because of the limited carryforward periods or the uncertain business conditions relating to the operations giving rise to such carryforwards. Future recognition of these net operating carryforwards will occur if the operations of SCT and Zimpro generate sufficient earnings before the expiration of the respective net operating loss carryforwards. In addition, in the case of SCT, until March 31, 1997, the benefit, if any, of such carryforwards is to be shared equally between the Company and Aluminum Company of America. The Company also has available at March 31, 1996, other net operating loss carryforwards for Federal income tax purposes of approximately $13,552,000 which expire from fiscal 2007 to 2010. Pursuant to an agreement to be entered into in conjunction with the pending acquisition of WaterPro, WaterPro stockholders and certain WaterPro debtholders to whom shares of Common Stock having an aggregate value (to be determined pursuant to the acquisition agreement) of approximately $100,000,000 are to be issued are to have the right, exercisable during the 90-day period commencing on the sixtieth day after the date of consummation of the acquisition transaction (expected by the end of October 1996) to require the Company to purchase all or any portion of such shares of Common Stock at a purchase price equal to the average of the closing prices of the Common Stock as reported by the New York Stock Exchange for each of the 25 trading days ending on the sixth day preceding the date of consummation of the acquisition transaction. 34 Pursuant to an agreement to be entered into in conjunction with the pending acquisition of PED, the Company has agreed to pay in cash the portion of the purchase price otherwise payable in shares of Common Stock if such shares are not at the time of issuance immediately saleable pursuant to the Company's shelf Registration Statement on Form S-4. In addition, the Agreement provides that if such shares are issued and then sold within a specified number of days after consummation of the acquisition for aggregate net proceeds of less than $39,000,000 (based on exchange rates for British pounds sterling as of October 14, 1996), the Company will pay the deficiency to PED in cash, and if the aggregate net proceeds exceed such amount, PED will pay the excess to the Company in cash. The Company believes its current cash position, cash flow from operations, and available borrowings under the Company's line of credit will be adequate to meet its anticipated cash needs for working capital, revenue growth, scheduled debt repayment and capital investment objectives for at least the next twelve months. 35 THE WATER TREATMENT INDUSTRY Global population growth, economic expansion, scarcity of available water resources, heightened public concern about water quality and growing regulatory and legislative requirements have resulted in the continued growth in demand for water and wastewater treatment. In addition to the need for potable water, industrial companies require treated water for most manufactured products, whether as an ingredient in the finished product or as part of the manufacturing process. Accordingly, most manufacturers utilize water treatment systems to purify their incoming water ("influent"). Public water departments, responsible for providing potable water, employ water treatment technology to purify their water supply. Furthermore, government regulations require most industrial companies and municipalities to treat their outgoing wastewater ("effluent"). Growing demand for treated water combined with the limited supply of usable water has created a significant need for cost-effective, sophisticated water and wastewater treatment solutions. Water and wastewater treatment has developed into a multi-billion dollar global industry. The global water and wastewater treatment industry is highly fragmented, with numerous regional participants who are limited in their geographic scope. This fragmentation is primarily due to local differences in water quality and supply, different levels of demand for water resulting from varying concentrations of industry and population, and local government regulation. Most participants in the water and wastewater treatment industry provide a limited number of treatment technologies, a limited number of products or services, or focus on a particular industry. While the number of industry participants ranges from several large companies to thousands of small local companies, there are few competitors in the industry that offer a full range of water and wastewater treatment equipment, technologies and services. Customers of the water and wastewater treatment industry can be classified into three broad categories: (i) industrial businesses, which include companies in such markets as power generation, chemical process, oil, pharmaceutical, microelectronics, automotive and steel; (ii) municipal and private suppliers of public water and wastewater services; and (iii) individual consumers of bottled water and household point-of-use products, such as domestic filtration systems and parts. INDUSTRIAL USERS Industrial users have a significant need for treated water because it is a necessary component in many products and industrial processes. The quality of water varies dramatically across geographic regions, and water contains impurities that, if untreated, can render it effectively useless for most industrial purposes. The use of untreated water in manufacturing processes can result not only in inconsistent product quality, but also in substantial equipment degradation, which can lead to costly maintenance or replacement costs. Consequently, most manufacturers treat their influent in order to maintain a consistently acceptable degree of purity. For example, treated water is an integral component of many consumer goods and is used in the manufacture of pharmaceutical products, microelectronics and chemicals. Food and beverage manufacturers require water with consistent quality to preserve uniformity of taste and appearance in their products. As a result of these process specifications, industrial customers often require a broad range of treatment technologies to treat their influent. In addition to treating their influent to ensure product quality, industrial users are often required to treat their effluent. Government regulations regarding the disposal of aqueous industrial waste, combined with public concern regarding industrial pollution, have led to increased awareness on the part of businesses and public utilities as to the benefits of wastewater treatment and waste minimization. In response to higher water prices and rising wastewater discharge fees, industrial manufacturers have also become aware of the cost-effectiveness of recycling their effluent. As a result of these factors, industrial companies increasingly require complex systems and equipment to treat and recycle process water and wastewater. Industrialization worldwide, manufacturers' desire to enhance productivity, rising water prices, increased regulation and emphasis on water recycling and reuse affect demand for industrial water and wastewater treatment and have resulted in the need for increasingly sophisticated industrial water and wastewater treatment 36 systems. Rather than committing the significant resources required to operate complex in-house systems, industrial customers are increasingly outsourcing their water and wastewater treatment needs to water and wastewater treatment companies to build, own and/or operate the customer's facilities or to provide treated water under contract. MUNICIPAL USERS Public awareness and governmental concern regarding the increasing scarcity of water, the quality of drinking water, and the potential health hazards associated with waste products discharged into the environment, have resulted in legislation, regulation and enforcement requiring strict standards for potable water and restrictions on the discharge of pollutants in wastewater. As a result, municipalities are experiencing increasing costs for water and wastewater treatment. The Company believes that, in many areas of the United States aged municipal water and wastewater treatment infrastructure is operating at or near capacity, is in need of substantial capital expenditures and is not well- equipped to satisfy increasing regulatory and legislative requirements. In addition, many municipalities are experiencing reduced economic resources. The Company believes that, as a result, many such customers are seeking innovative solutions to their water treatment needs, such as improved technologies and equipment, and various outsourcing and service options, such as contract operations and privatization. Privatization involves the transfer of ownership and operation of water and wastewater treatment facilities to companies capable of providing such services on a long-term basis. INDIVIDUAL USERS The market for individual users consists of bottled water and point-of-use products, such as residential filtration systems and parts. Consumers' needs vary by geographic location as a result of differing water qualities and level of economic development. This segment of the industry is highly fragmented, and the Company believes there are thousands of participants in the potable water and point-of-use products markets. 37 BUSINESS The Company is a leading global provider of industrial and municipal water and wastewater treatment systems, products and services, with an installed base of systems that the Company believes is one of the largest worldwide. The Company offers a single-source solution to industrial and municipal customers through what the Company believes is the industry's broadest range of cost- effective systems, products, services and proven technologies. In addition, the Company has one of the industry's largest global networks of sales and service facilities. The Company capitalizes on its large installed base, extensive distribution network and manufacturing capabilities to provide customers with ongoing local service and maintenance. The Company is also a leading provider of SDI and outsourced water services, including the operation of water and wastewater treatment systems at customer sites. The Company has grown internally and through the strategic acquisition and successful integration of more than 45 domestic and international water and wastewater treatment companies since 1991. On a previously reported basis, the Company's revenues have grown to $472.5 million for the fiscal year ended March 31, 1996 from $41.2 million for the fiscal year ended March 31, 1992, representing a compound annual growth rate of approximately 84%. The Company's revenues for the fiscal year ended March 31, 1996 would have been approximately $1.8 billion after giving effect to the acquisitions of Zimpro and Davis (accounted for as poolings of interests) and including, on a pro forma basis, the pending acquisitions of WSMG, PED, WaterPro and USG as if such acquisitions were completed at the beginning of such year. Global population growth, economic expansion, scarcity of available water resources, heightened public concern about water quality and growing regulatory requirements have resulted in: (i) continued growth of the multibillion dollar water and wastewater treatment industry; and (ii) heightened demand for increasingly complex water and wastewater treatment systems. The water and wastewater treatment industry is highly fragmented, with numerous regional participants who provide customers with a limited range of water and wastewater treatment solutions. The Company differentiates itself from competitors by serving as a single-source water and wastewater treatment provider capable of designing, manufacturing, operating, financing and maintaining water and wastewater systems on a local basis for industrial and municipal customers. The Company's customer base includes a broad range of major industrial customers, which require treated water as a necessary component of many products and industrial processes, and municipalities, which treat water and wastewater for their communities. Industrial customers include Chinese Petroleum, Coca-Cola, Dow Chemical, General Motors, Hyundai, Intel, Johnson & Johnson, Merck, Procter & Gamble, and Samsung. Municipal customers include the Cities of Los Angeles, Minneapolis-St. Paul, and St. Louis. STRATEGY In order to achieve earnings growth and expand its operations to enhance its position as a leading global single-source provider of water and wastewater treatment systems and services, the Company has developed the following strategy: PROVIDE SINGLE-SOURCE WATER AND WASTEWATER TREATMENT SOLUTIONS TO INDUSTRIAL AND MUNICIPAL CUSTOMERS. The Company believes that industrial and municipal users of water and wastewater treatment systems, products and services increasingly desire to obtain from a single source a broad range of systems, technologies and services. The Company addresses the full scope of its customers' water and wastewater treatment needs through what the Company believes is the industry's broadest line of cost-effective treatment systems, services and proven technologies. In addition, the Company has an extensive global distribution network through which it offers customers convenient local service and support. The Company also meets the diverse demands of its customers through its ability to sell systems outright, to sell systems and operate them for its customers, or to build, own, operate and finance such systems. PURSUE ACQUISITIONS THAT PROVIDE A STRATEGIC FIT AND CONTRIBUTE TO REVENUE AND EARNINGS GROWTH. In addition to growing internally, the Company has grown significantly since 1991 through the strategic 38 acquisition of more than 45 United States-based and international businesses with strong market positions and substantial water and wastewater treatment expertise. These acquisitions have enabled the Company to expand its geographic presence, industries served, installed base, range of products and technologies offered and network of sales and distribution facilities. The Company plans to continue to pursue acquisitions that complement its technologies, products and services, broaden its customer base and expand its global distribution network. REALIZE SYNERGIES AND ECONOMIES OF SCALE FROM ACQUISITIONS. The Company operates its business through an organizational structure which provides low overhead, minimizes redundancy and creates opportunities to achieve cost savings and synergies in its acquisitions. The Company has significant experience in integrating acquired businesses. The Company believes that the acquisition of Davis and the pending acquisitions of WSMG, PED, WaterPro and USG will provide cost savings through rationalization of operations and economies of scale, including increased asset utilization. The Company also believes that the integration of these recent and pending acquisitions will provide synergies, such as cross-selling of product lines to a broader customer base, expanded distribution and service capabilities and exchange of experience and technology. EXPAND GLOBAL MARKET PRESENCE, ESPECIALLY IN THE PACIFIC RIM REGION. The Company expects that population growth, economic expansion and continued degradation of water quality in both industrialized and less-developed countries will result in strong growth in international markets. The Company intends to further increase its international market presence by expanding its international operations and by acquiring additional international businesses. The Company believes that the proposed acquisitions of WSMG and PED will significantly strengthen the Company's capabilities in the Pacific Rim and Europe. EXPAND PENETRATION OF THE MUNICIPAL MARKET. The Company believes that the recent acquisition of Davis and the pending acquisitions of WSMG, PED, WaterPro and USG and the contemplated Joint Venture will significantly expand its presence in the municipal market. The Company intends to strengthen its municipal presence by utilizing WSMG's and PED's strong technologies, product offerings and reputation in the municipal market to capitalize on cross-selling opportunities and improve its municipal sales channels. Additionally, the Company intends to use its extensive distribution network, including the long-term municipal relationships and local service capabilities of Davis, WaterPro and USG, as a channel to expand its penetration of the municipal market. The Company believes that its combination of single-source provider capabilities, local service capabilities and long-term municipal relationships will provide a significant competitive advantage in penetrating the municipal market. CAPITALIZE ON DISTRIBUTION STRENGTH TO ENHANCE LOCAL SALES AND SERVICE CAPABILITIES. The Company believes that the acquisition of Davis and the pending acquisitions of WaterPro and USG will establish the Company as a leading distributor of water and wastewater distribution products and services to both the industrial and municipal markets. These acquisitions are expected to provide the Company with a platform to: (i) enhance the Company's local sales and service infrastructure; (ii) penetrate the municipal segment of the water and wastewater treatment market by capitalizing on each distribution company's long-term municipal relationships; (iii) leverage the Company's leading manufacturing capabilities and technology base; and (iv) capitalize upon efficiencies from consolidation of operations and economies of scale. In addition, the Company believes that these distribution acquisitions will allow the Company to capitalize on opportunities to retrofit, replace and repair aging water infrastructure in the United States. CAPITALIZE ON OUTSOURCING AND PRIVATIZATION OPPORTUNITIES. The Company believes that the contemplated Joint Venture would be well-positioned to capitalize on opportunities in the growing industrial outsourcing and emerging municipal privatization markets. It is expected that the operating strategy for the Joint Venture would be to offer customers: (i) turnkey operation, including system design, manufacture, operation, and maintenance on a local basis; (ii) warrantied performance; (iii) potential cost savings; and (iv) customized financing options. The Company believes that the Joint Venture would have several competitive advantages in securing industrial and municipal contracts, including the Company's extensive network of sales and 39 service facilities, and the Company's long-term industrial and municipal relationships. There can be no assurance as to whether or when or on what specific terms the Joint Venture will actually be formed. The Company is currently a 50% owner of TWO, which focuses on the outsourcing of industrial customers' water treatment needs. PRINCIPAL PRODUCTS AND SERVICES The Company's principal products and services can be divided into the following four groups: capital equipment, services, replacement parts and consumables, and distribution. CAPITAL EQUIPMENT. The Company manufactures both standard and customized water and wastewater treatment equipment. The Company believes that its systems utilize the industry's broadest range of proven physical, biological and chemical treatment technologies including, among others, continuous deionization, reverse osmosis, electrodialysis, adsorption and ion exchange, that can be combined and configured to meet wide-ranging customer needs. The Company designs, engineers, manufactures and assembles its systems at its manufacturing facilities located in the United States and internationally. Components that are not manufactured by the Company are purchased from vendors in the United States and internationally. The Company utilizes its distribution network including its global sales and service force, as well as manufacturers' representatives, to provide direct contact and service to its customers. SERVICES. The Company's service business consists of the following: SDI, outsourcing of water and wastewater treatment under long-term contracts, mobile water treatment and, following the pending acquisition of WSMG, carbon regeneration. SDI is a term given to portable water deionization treatment equipment that uses ion exchange resins as a filtration medium and is designed to connect easily to a local water supply. Resin is retrieved and transported by a Company service representative to a Company regeneration plant for chemical recharging when it is exhausted. Service-based revenues have been generally recurring in nature, and have historically generated higher profit margins than capital equipment sales. TWO, which is 50% owned by a subsidiary of Nalco Chemical Company ("Nalco") and 50% owned by a subsidiary of the Company, was formed to finance, build, own and operate water treatment systems at customer sites under long-term contracts and to focus on the outsourcing of industrial customers' water treatment needs. The Company and Nalco have entered into long-term supply and service agreements with TWO in order to support TWO's performance under such contracts. REPLACEMENT PARTS AND CONSUMABLES. The Company manufactures and sells replacement parts and consumables, such as membranes, ion exchange resin and carbon, manufactured by both the Company and other suppliers that are required to support water treatment systems. DISTRIBUTION. The Company believes that the acquisition of Davis and the pending acquisitions of WaterPro and USG will establish the Company as a leading distributor of water and wastewater distribution products and services. The Company emphasizes convenient customer support, with each distribution office servicing customers within approximately a 50 mile to 150 mile radius, depending on population density in the area. 40 CUSTOMER MARKETS AND PRODUCT APPLICATIONS The markets for the Company's services and products span many industries and many geographic locations, including the United States, Europe, Pacific Rim and Latin America. Information regarding the amount of revenue, operating income and assets attributable to United States and international sales for each of the past three fiscal years appears in Note 17 of Notes to Consolidated Financial Statements, included elsewhere herein. The following are industries that the Company serves and some of the products used therein: PHARMACEUTICAL AND BIOTECHNOLOGY. Process water used in the pharmaceutical and biotechnology industries must meet the highest standards of purity. Reverse osmosis in conjunction with CDI ("RO/CDI") technology provides high-purity water that meets the strictest quality specifications. The Company's ceramic membranes, in combination with other membrane or ion exchange equipment, meet these requirements by achieving nearly 100% contaminant removal. This equipment is used in fermentation, purification and recovery processes. Ion exchange technologies are also used to purify process streams, as well as to purify and recover antibiotics, vitamins and chemical elements. In addition, ion exchange is employed in industrial fermentation to process substrates. MICROELECTRONICS. Microelectronics manufacturing processes require ultra- high purity water to avoid contamination from even the smallest microscopic particles. The Company's ceramic membrane filters are advanced inorganic, multilayered filter media that provide superior contaminant removal in the most demanding environments. In addition, the Company's membrane and ion exchange technology is used by electronic components manufacturers to produce ultra-high purity water and to reduce the level of microcontamination in rinse waters. AUTOMOTIVE. The Company designs, manufactures, sells, services and operates, on a global basis, a broad portfolio of technologies for the automotive industry. The specific manufacturing processes include metal processing, metal finishing, assembly and non-metal processing. Each of these processes operates under the strictest of quality, process control and regulatory requirements. The Company offers all of the technologies necessary to meet these requirements including physical, chemical and biological methods. The Company can deliver these technologies as bid-to- specification equipment, full turnkey, service, build-own-operate or any combination of the above. Of particular importance are the Company's capabilities in the areas of water reuse and resource recovery. CHEMICAL AND PETROCHEMICAL. Incoming water supplies for chemical and petrochemical manufacturers require filtration and treatment to remove solid particles and dissolved impurities. The Company manufactures demineralizers, water softeners, clarifiers, multimedia filters and reverse osmosis systems to deliver water of controlled quality and content. Additionally, the Company's Membralox(R) and Ceraflo ceramic membranes are used to accomplish the separation of chemical and petrochemical streams in very harsh environments. FOOD AND BEVERAGE. The food and beverage industries require high-quality yet cost-effective water treatment systems. The Company offers physical and chemical filtration and treatment technologies to purify incoming water and refine and concentrate process fluids. Its ion exchange and ADSEP systems are advanced technologies for the separation of sugars and corn syrups. In the beverage industry, ceramic membrane filters achieve a high level of fluid purity using nonchemical processing techniques. METAL FINISHING. The Company's metal treatment and recovery systems facilitate regulatory compliance of effluent and reduce the level of heavy metals and solids generated from metal finishing operations such as printed circuit board manufacturing, electroplating, galvanizing and anodizing. The Company's key technology offerings include ion exchange, reverse osmosis, electrolytic recovery, adsorption filtration, ceramic membrane ultrafiltration, as well as a full complement of conventional precipitation settling and filtration technologies. 41 POWER GENERATION. Nuclear and fossil-fueled electric power plants are subject to steam generator and boiler corrosion and turbine fouling if damaging contaminants are not removed from the incoming and recirculating feedwater supplies. The Company's filtration membrane and ion exchange systems provide power plants with high-quality, demineralized boiler feedwater. The Company's tube filter and deep bed condensate polishing systems employ advanced resin separation and regeneration technologies to improve the quality of the condensate returned to the boiler. Sand and other media filters are used in cogeneration and other power plant applications. Nuclear-grade resins are available to meet the more stringent water quality requirements of nuclear power plants. OIL FIELD AND REFINERY. The petroleum industry uses large quantities of water for steam and water flooding of oil fields for the secondary recovery of oil. The Company's systems remove oil contaminants and suspended solids from the resurfaced water for reuse for down-hole water and steam injection. Refineries use the Company's oil/water separators to remove oil and suspended solids from process water and refinery effluents, as well as a full range of water purification equipment to remove dissolved solids. MEDICAL/DIALYSIS. RO/CDI systems produce a continuous stream of ultra-high purity water by removing organics, minerals and other contaminants while providing the necessary bacteria and endotoxin control for high-flux dialysis machines and other high-quality, high-capacity water requirements in the medical field. LABORATORY/RESEARCH AND DEVELOPMENT/QUALITY CONTROL/CHEMICAL ANALYSIS. Cartridge-type reverse osmosis filters, deionization systems, electrodialysis modules, ultrafiltration units, particle filters and activated carbon filters remove contaminants, bacteria, pyrogens and odor to provide point-of-use water polishing for critical and demanding laboratory applications. PULP AND PAPER. The Company's dissolved air flotation systems remove and recover suspended solids from waste streams for pulp and paper manufacturers and require considerably less floor space than conventional separation units. The Company's boiler feedwater treatment systems are also utilized in this industry. GROUNDWATER REMEDIATION AND LANDFILL LEACHATE TREATMENT. The Company's remediation systems are used to remove organic compounds and soluble metals from contaminated groundwater. Biosystems employ a "pump and treat" technology that incorporates equalization, separation of metals, biological treatment and clarification processes. The Company's leachate systems, combining chemical pre-treatment systems with biological treatment technologies, address the treatment or elimination of wastewater drainage into the groundwater and surrounding waterways. POTABLE WATER. Hotels and other institutions require high-quality yet affordable water treatment systems to meet consumer and regulatory standards. In addition, suppliers of drinking water are seeking alternative purification systems. The Company manufactures filtration, water treatment and clarification systems for the drinking water industry that meet United States Environmental Protection Agency ("EPA") standards under the Safe Drinking Water Act. Pre-assembled systems capable of handling low- and high-volume flows are also available. MUNICIPAL WASTEWATER TREATMENT, RECOVERY AND REUSE. Municipal sewage plants often utilize three stages of treatment (primary, secondary and tertiary) before discharge to the environment. In addition to offering equipment and systems to satisfy these requirements, the Company's membrane, reverse osmosis and ion exchange technologies add a fourth stage by removing remaining contaminants to a purity level that allows water to be recycled and reused in additional industrial applications. These technologies are cost-effective and reduce the adverse impact of industrial growth in communities where water tables are low. 42 BACKLOG The Company had the following backlog as of June 30, 1995 and 1996, which includes capital equipment purchase orders and revenues expected to be generated during the succeeding 12 months under certain long-term contracts. The capital equipment orders are scheduled for delivery and installation during the succeeding 12 months and are believed by the Company to be firm.
DATE AMOUNT ------------- ------------ June 30, 1995 $194,019,000 June 30, 1996 246,975,000
The rate of booking new orders varies from month to month. In addition, the orders have varying delivery schedules, and the Company's backlog as of any particular date may not be representative of actual revenues for any succeeding period. Certain of the Company's contracts for engineered products and services provide for progress payments during the engineering and manufacturing period. The balance is due upon acceptance or start-up or, in the case of most municipal and governmental purchasers, 90 to 180 days after delivery and installation. 43 MANAGEMENT The following table sets forth certain information regarding the directors and executive officers of the Company.
NAME AGE POSITION ---- --- -------- Richard J. 52 Chairman of the Board of Directors, Chief Executive Officer Heckmann and President Michael J. 42 Director and Executive Vice President Reardon Nicholas C. 35 Executive Vice President-Process Water Group Memmo Thierry 52 Executive Vice President-European Group Reyners Andrew D. 34 Executive Vice President-Wastewater Group Seidel R. Doyle 65 Director and Executive Vice President White Kevin L. 40 Vice President and Chief Financial Officer Spence Damian C. 36 Vice President, General Counsel and Secretary Georgino Tim L. Traff 38 Director and Senior Vice President John S. 58 Senior Vice President-Corporate Development Swartley James W. 34 Vice President, Controller and Treasurer Dierker Michael E. 35 Assistant General Counsel and Assistant Secretary Hulme, Jr. James E. 67 Director Clark John L. 59 Director Diederich Robert S. 47 Director Hillas Arthur B. 56 Director Laffer Alfred E. 51 Director Osborne, Jr. J. Danforth 49 Director Quayle C. Howard 58 Director Wilkins, Jr.
Richard J. Heckmann was elected Chairman of the Board of Directors, Chief Executive Officer and President of the Company on July 16, 1990. Mr. Heckmann was a Senior Vice President at Prudential-Bache Securities in Rancho Mirage, California from January 1982 to August 1990. He joined the U.S. Small Business Administration in 1977 and served as Associate Administrator for Finance and Investment from 1978 to 1979. Prior thereto he was founder and Chairman of the Board of Tower Scientific Corporation, a manufacturer of custom prosthetic devices, which was sold to Hexcel Corporation in 1977. Mr. Heckmann is a member of the management board of TWO. He is also a director of USA Waste Services, Inc. Michael J. Reardon was appointed Executive Vice President of the Company in June of 1995, having previously served as Executive Vice President and Chief Operating Officer, and prior to that as the Chief Financial Officer and Secretary of the Company. From May 1995 to April 1996, Mr. Reardon served as President of Arrowhead Industrial Water, Inc. He became President and General Manager of Illinois Water Treatment, Inc., a subsidiary of the Company, in March 1992. From 1981 to July 1990 he was Chief Financial Officer of The C&C Organization, a company engaged in restaurant ownership, management and construction. Mr. Reardon is a certified public accountant and was a senior auditor with Arthur Andersen & Co. from 1978 to 1981. Mr. Reardon is a member of the management board of TWO. In June 1978, Mr. Reardon received a B.S. in Business Administration from California State Polytechnic University, and in 1995 attended the Kellogg Management Institute, Northwestern University. Nicholas C. Memmo was appointed Executive Vice President-Process Water Group on July 1, 1995, having previously served as Senior Vice President and General Manager of Ionpure since March 7, 1994. He had previously been Senior Vice President-Sales & Marketing since December 8, 1992. Mr. Memmo had also been the senior operating officer of U.S. Filter/Whittier, Inc. since January 1992, having previously been Marketing Manager of that company since January 1991. He was appointed General Manager in April 1992. Mr. Memmo was employed from July 1984 to September 1988 with Hercules Incorporated, a New York Stock Exchange 44 specialty chemical and aerospace company, in sales, marketing and distribution positions. Mr. Memmo received a B.S. degree in chemical engineering from Drexel University. Between his employment with Hercules and the Company, he completed an M.B.A. program at the John E. Anderson Graduate School of Management at UCLA. Thierry Reyners was appointed Executive Vice President-European Group on July 1, 1995, having previously served as Senior Vice President-Europe since March 7, 1994. He had previously been Senior Vice President-European Sales since December 1, 1993, the date the Company acquired Ionpure. Mr. Reyners served as Vice President and General Manager-Europe of Ionpure Technologies Corporation from 1990 to December 1993, and from 1981 through 1989 he was employed by Millipore Corporation, including as European Area Manager from 1987 through 1989. Mr. Reyners has a Ph.D. in Organic Chemistry from the Research Institute in Natural Substances, University of Orsay, France and an M.B.A. from INSEAD, Fontainebleau, France. Andrew D. Seidel was appointed Executive Vice President-Wastewater Group on July 1, 1995, having previously served as Senior Vice President-Wastewater Group and General Manager of U.S. Filter, Inc., Warrendale, Pennsylvania, since September 28, 1993. He had previously served as Vice President-Membralox Group since December 8, 1992, and had been General Manager of Membralox since March 1992. From October 1991 to March 1992, Mr. Seidel was Marketing Manager for U.S. Filter/Marlboro, Inc. From October 1990 until his employment by the Company, he was a senior consultant with Deloitte & Touche Management Consulting. Mr. Seidel had various responsibilities with Hercules Incorporated from 1984 through 1988, including technical marketing and product management at Hercules Specialty Chemical Company and Quality Control/Process Engineering in Hercules Aerospace Company. Mr. Seidel received a B.S. degree in chemical engineering from the University of Pennsylvania. Between his employment with Hercules and Deloitte & Touche, he completed an M.B.A. program at the Wharton School, the University of Pennsylvania. R. Doyle White was appointed Executive Vice President on September 13, 1996. From 1993 to 1996, Mr. White served as Chairman of the Board of Directors, President and Chief Executive Officer of Davis. Mr. White was elected to the Board of Directors of Davis in 1981, promoted to President and Chief Operating Officer in 1982 and to President and Chief Executive Officer in 1986. He previously served as Vice President and General Manager of Irving-Moore Division of U.S. Natural Resources, Inc., a public company engaged in designing and manufacturing lumber dry kilns and automated lumber handling equipment. Mr. White also served in the United States Air Force from 1952 to 1960, where he was an Instructor Pilot. Mr. White received a degree in business administration from South Georgia College. Kevin L. Spence was appointed Vice President of the Company on December 8, 1991 and has been Chief Financial Officer of the Company since January 6, 1992 and was Treasurer from February 17, 1992 until June 9, 1995. From October 1989 through 1991 he was Chief Financial Officer, first with Cal-Star Financial, a mortgage banker, and then with American National Corporation, a manufacturer of bedding materials. Mr. Spence is a certified public accountant and was with KPMG Peat Marwick LLP from 1978 to September 1989 and a partner with that firm from July 1988. Damian C. Georgino was appointed Vice President, General Counsel and Secretary of the Company on August 4, 1995. From September 1992 through July 31, 1995, he served as a General Attorney with Aluminum Company of America ("Alcoa"), where his primary responsibilities included mergers and acquisitions and serving as chief legal counsel for several growing international manufacturing and service businesses. From June 1988 through August 1992, Mr. Georgino was an Attorney with Alcoa, where his primary responsibilities included securities, mergers and acquisitions and corporate finance. From June 1986 through May 1988, he was an associate with Houston Harbaugh P.C. Mr. Georgino received a B.S. degree in economics and political science from Dickinson College in 1982 and a received a JD/MBA joint degree from Emory University in 1986. Tim L. Traff was appointed Senior Vice President of the Company on December 8, 1992, having previously been Vice President-Corporate Development since March 1992. He had been President of Traff Capital Management, a money management company, since 1989. From 1985 to 1988 he was an analyst at SIT Investment, a money management company. Mr. Traff received a B.S. degree in business economics from the University of Minnesota. 45 John S. Swartley was appointed Senior Vice President-Corporate Development on July 1, 1995, having previously served as a Vice President since July 1994, when the Company acquired Liquipure Technologies, Inc. Mr. Swartley had started a new business in 1988 with venture capital backing from Warburg, Pincus Capital Company, L.P., and made a series of water treatment company acquisitions that ultimately became Liquipure. From 1982 through 1987 he was at Olin Corporation as president of its consumer products group, which dealt mainly with pool chemicals. From 1965 through 1982 he was with General Foods in various marketing, development and management positions. He received a degree in chemical engineering from Lehigh University and an M.B.A. degree from Harvard Business School. James W. Dierker was appointed Vice President, Controller and Treasurer on June 9, 1995. From July 1985 to June 1995 he was with KPMG Peat Marwick LLP, and was a senior manager with that firm at the time of his departure. Mr. Dierker is a certified public accountant, and received a B.S. degree in business administration with an emphasis in accounting from California State Polytechnic University. Michael E. Hulme, Jr. was appointed Assistant General Counsel and Assistant Secretary on February 13, 1996. From December 1994 through January 1996, he served as Vice President/Corporate Counsel of Forte Hotels, Inc., formerly a wholly owned subsidiary of Forte Plc, and from October 1992 through December 1994 as Corporate Counsel of Forte Hotels, Inc. His primary responsibilities included hotel and real estate development, acquisition and sale transactions. From 1989 through 1992 he was a business associate with the law firm of Duckor & Spradling, and from 1986 through 1989 he was an associate with the law firm of Best, Best & Krieger. Mr. Hulme received an B.A. degree in economics from the University of California at Davis in 1983 and received a JD from the University of Southern California in 1986. James E. Clark was President of Western Operations for Prudential Insurance from 1978 to June 1990. Since June 1990, he has been a consultant and a private investor. Mr. Clark is also Chairman of Asian-American Communication Company, Inc., and a director of Asian American Association, Inc., a joint venture with Sprint, and Durotest Corporation. He is also a trustee of the Yul Brynner Foundation. John L. Diederich has been Executive Vice President-Chairman's Counsel for Aluminum Company of America since August 1991. Prior to assuming his present position, he had been Group Vice President-Alcoa Metals and Chemicals since 1986 and a Vice President of Aluminum Company of America since 1982. Mr. Diederich is a trustee of Shadyside Hospital and a director of Alcoa Foundation. Robert S. Hillas has served as a Managing Director of E.M. Warburg, Pincus & Co., Inc., a private investment firm, since 1993. Previously, Mr. Hillas was a partner of DSV Management Ltd., a venture capital investment firm, and its affiliated venture capital partnerships. Mr. Hillas is currently a director of Advanced Technology Materials, Inc., Transition Systems, Inc. and several privately-held companies. Mr. Hillas was previously associated with Warburg, Pincus from 1972 until he joined DSV Management Ltd. in 1981. Mr. Hillas was graduated from Dartmouth College in 1970 with a Bachelor of Arts degree in Mathematics, and was graduated from Stanford University with an M.B.A. degree in 1972. Dr. Arthur B. Laffer has been Chairman and Chief Executive Officer of A.B. Laffer, V.A. Canto & Associates, an economic research and financial firm (and its predecessor, A.B. Laffer Associates), since founding the firm in 1979. He is also Chairman of Calport Asset Management, Inc., a money management firm. Dr. Laffer has been Chief Executive Officer of Laffer Advisors, Inc., a registered broker-dealer and investment advisor, since 1981. He was the Charles B. Thornton Professor of Business Economics at the University of Southern California from 1976 through 1984, Distinguished University Professor at Pepperdine University from October 1984 to September 1987, and was a member of President Reagan's economic policy advisory board. Dr. Laffer received a B.A. degree in economics from Yale University and later received an M.B.A. degree and a Ph.D. in economics from Stanford University. He is a director of Coinmach Laundry Corporation, Mastec, Inc., Nicholas Applegate Mutual and Growth Equity Funds and Value Vision, Inc. 46 Dr. Alfred E. Osborne, Jr. is Director of the Harold Price Center for Entrepreneurial Studies and Associate Professor of Business Economics at the John E. Anderson Graduate School of Management at UCLA. He has been on the UCLA faculty since 1972. Dr. Osborne was educated at Stanford University, where he earned a B.S. degree in electrical engineering, an M.B.A. in finance, a master's degree in economics and a Ph.D. in business-economics. He is a director of Greyhound Lines, Inc., Nordstrom, Inc., ReadiCare, Inc., SEDA Specialty Packaging Corporation and The Times Mirror Company. J. Danforth Quayle was the forty-fourth Vice President of the United States. He was graduated from DePaul University in 1969 with a B.A. degree in political science and from Indiana University in 1974 with a law degree. In 1976, Mr. Quayle was elected to Congress and in 1980 to the United States Senate, being reelected in 1986 and serving until 1989. As Vice President, he headed the Competitiveness and Space Councils for the President. Since leaving office in January 1993, Mr. Quayle served as Chairman of Circle Investors, Inc. (a private financial services and insurance holding company), and BTC, Inc. (a private company through which he operates certain of his personal business interests). He is a director of Amtran, Inc., Central Newspapers, Inc. and American Standard Companies, Inc. and is a member of the Board of Trustees of The Hudson Institute. C. Howard Wilkins, Jr. served as the United States Ambassador to the Netherlands from June 1989 to July 10, 1992. Prior to being Ambassador and thereafter, Mr. Wilkins has been Chairman of the Board of Maverick Restaurant Corp., which owns and operates restaurants under franchise agreements, and Maverick Development Corp. He was Vice Chairman of Pizza Hut, Inc. until 1975. From 1981 to 1983 Mr. Wilkins served as a director of U.S. Synthetic Fuels Corporation. Mr. Wilkins received a B.A. degree from Yale University in 1960. 47 SECURITY OWNERSHIP Set forth below is information as of September 30, 1996 concerning the ownership of Common Stock by all persons or entities known to the Company to be beneficial owners of more than five percent of the outstanding Common Stock, each director of the Company, certain executive officers and all directors and executive officers of the Company as a group. Unless otherwise indicated, the holders of all shares shown in the table have sole voting and investment power with respect to such shares.
NUMBER OF SHARES NAME(1) BENEFICIALLY OWNED(2) PERCENT OF CLASS(3) ------- --------------------- ------------------- Laidlaw, Inc.(4).................. 4,054,093 8.1% Warburg, Pincus Capital Company, L.P.(5).......................... 2,719,618 5.4 The TCW Group, Inc.(6)............ 2,508,900 5.0 Richard J. Heckmann(7)............ 1,134,182 2.3 Michael J. Reardon(8)............. 213,705 * R. Doyle White.................... 75,844 * Tim L. Traff...................... 247,081 * Nicholas C. Memmo(9).............. 91,892 * Thierry Reyners(10)............... 45,000 * Kevin L. Spence................... 90,000 * James E. Clark.................... 126,000 * John L. Diederich................. 65,250 * Robert S. Hillas(11).............. 2,719,618 5.4 Arthur B. Laffer(12).............. 106,875 * Alfred E. Osborne, Jr............. 108,525 * J. Danforth Quayle................ 27,000 * C. Howard Wilkins, Jr............. 103,500 * All Directors and Executive Offi- cers as a Group (19 persons)..... 5,346,607 10.7
- ------------------- (1) The address of each person listed, except as otherwise indicated, is c/o United States Filter Corporation, 40-004 Cook Street, Palm Desert, California 92211. (2) The number of shares shown includes shares that may be acquired upon the exercise of options exercisable within 60 days of September 30, 1996 as follows: Mr. Heckmann--440,325; Mr. Reardon--175,319; Mr. Traff--81,561; Mr. Memmo--91,874; Mr. Reyners--45,000; Mr. Spence--90,000; Mr. Clark-- 72,000; Mr. Diederich--63,000; Dr. Laffer--72,000; Dr. Osborne--72,000; Mr. Quayle--27,000; Mr. Wilkins--72,000; all Directors and Executive Officers as a Group--1,442,704. All options were granted pursuant to the Company's 1991 Employee Stock Option Plan or the Company's 1991 Directors Stock Option Plan. (3) An asterisk (*) indicates ownership of less than 1% of the Common Stock. (4) The address of Laidlaw, Inc. is 3221 North Service Road, Burlington, Ontario, Canada L7R 3Y8. The Company believes that Laidlaw, Inc. beneficially owns 3,899,393 shares as of October 15, 1996. (5) The address of Warburg, Pincus Capital Company, L.P. is 466 Lexington Avenue, New York, New York 10017. (6) The address of The TCW Group, Inc. is 865 South Figueroa Street, Los Angeles, California 90017. (7) Includes 19,050 shares held by Mr. Heckmann's wife and by Mr. Heckmann as custodian for his children as to which Mr. Heckmann may be deemed to have indirect beneficial ownership. (8) Includes 2,700 shares held in a trust for the benefit of Mr. Reardon's father-in-law. As the trustee, Mr. Reardon has voting and investment power with respect to the shares held by the trust and may be deemed to have indirect beneficial ownership of them. Mr. Reardon disclaims beneficial ownership of such shares. (9) Constitutes 18 shares held by Mr. Memmo's wife as custodian for his minor children. (10) Includes 1,050 shares held by Mr. Reyners' wife. (11) Constitutes shares owned by Warburg, Pincus Capital Company, L.P. ("Warburg"). The sole general partner of Warburg is Warburg, Pincus & Co., a New York general partnership ("WP"). E.M. Warburg, Pincus & Co., Inc. ("EMW"), through a wholly owned subsidiary, manages Warburg. WP owns all of the outstanding stock of EMW and, as the sole general partner of Warburg, has a 20% interest in the profits of Warburg. EMW owns 0.9% of the limited partnership interests in Warburg. Lionel I. Pincus is the managing partner of WP and may be deemed to control it. Mr. Hillas, a director of the Company, is a Managing Director of EMW and a general partner of WP. As such, Mr. Hillas may be deemed to have an indirect pecuniary interest in an indeterminate portion of the shares beneficially owned by Warburg. All of the shares indicated as owned by Mr. Hillas are owned directly by Warburg and are included herein because of Mr. Hillas' affiliation with Warburg. Mr. Hillas disclaims "beneficial ownership" of these shares within the meaning of Rule 13d-3 under the Exchange Act. (12) Includes 30,000 shares held by A.B. Laffer, V.A. Canto & Associates, a company controlled by Dr. Laffer. 48 DESCRIPTION OF THE NOTES Set forth below is a summary of certain provisions of the Notes. The Notes will be issued pursuant to an indenture (the "Indenture") to be dated as of , 1996, by and between the Company and State Street Bank and Trust Company of California, N.A., as trustee (the "Trustee"), a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The terms of the Indenture are also governed by certain provisions contained in the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following summary of the Notes and the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by, reference to all of the provisions of the Indenture, including the definitions therein of certain terms which are not otherwise defined in this Prospectus and those terms made a part of the Indenture by reference to the Trust Indenture Act as in effect on the date of the Indenture. Capitalized terms used herein without definition have the meanings ascribed to them in the Indenture. As used in this section "Description of the Notes," the "Company" refers to United States Filter Corporation, exclusive of its subsidiaries. Wherever particular provisions of the Indenture are referred to in this summary, such provisions are incorporated by reference as a part of the statements made and such statements are qualified in their entirety by such reference. GENERAL The Notes will be unsecured, subordinated, general obligations of the Company, limited in aggregate principal amount to $175,000,000 ($201,250,000 if the Underwriters' over-allotment option is exercised in full). The Notes will be subordinated in right of payment to all Senior Indebtedness of the Company, as described under "Subordination" below. The Notes will be issued only in fully registered form, without coupons, in denominations of $1,000 and integral multiples thereof. The Notes will mature on , 2001. The Notes will bear interest at the rate per annum stated on the cover page of this Prospectus from the date of issuance or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semiannually on and of each year, commencing , 1997 to the persons in whose names such Notes are registered at the close of business on or immediately preceding such Interest Payment Date. Principal of, premium, if any, and interest on, the Notes will be payable, the Notes will be convertible and the Notes may be presented for registration of transfer or exchange, at the office or agency of the Company maintained for such purpose, which office or agency shall be maintained in the Borough of Manhattan, The City of New York. Interest will be calculated on the basis of a 360-day year consisting of twelve 30-day months. At the option of the Company, payment of interest may be made by check mailed to the Holders of the Notes at the addresses set forth upon the registry books of the Registrar. No service charge will be made for any registration of transfer or exchange of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Until otherwise designated by the Company, the Company's office or agency will be the corporate trust office of the Trustee presently located at 725 South Figueroa Street, Suite 3100, Los Angeles, California 90017. CONVERSION RIGHTS The Holder of any Notes will have the right, at the Holder's option, to convert any portion of the principal amount thereof that is an integral multiple of $1,000 into shares of Common Stock, at any time prior to the close of business on the second Business Day prior to the Stated Maturity of the Notes (unless earlier redeemed or repurchased) at the Conversion Price set forth on the cover page of this Prospectus (subject to adjustment as described below). The right to convert a Note called for redemption or delivered for repurchase will terminate at the close of business on the Business Day prior to the Redemption Date or Repurchase Date for such Note, unless the Company subsequently fails to pay the applicable Redemption Price or Repurchase Price, as the case may be. In the case of any Note that has been converted after any Record Date, but on or before the next Interest Payment Date, interest the stated due date of which is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest shall be paid to the Holder of such 49 Note who is a Holder on such Record Date. Any Note so converted must be accompanied by payment to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of Notes being surrendered for conversion (unless such Note shall have been called for redemption, in which case no such payment shall be required). In all cases, Holders as of the Record Date immediately preceding , 1999 will receive the interest payment due on , 1999, even if such Holder surrenders a Note for conversion after such Record Date as a result of the Company's exercise of its right to redeem the Notes on or after , 1999. No fractional shares will be issued upon conversion but, in lieu thereof, an appropriate amount will be paid in cash by the Company based on the market price of Common Stock (as determined in accordance with the Indenture) at the close of business on the Date of Conversion. The Conversion Price will be subject to adjustment upon the occurrence of certain events, including: (a) any payment of a dividend (or other distribution) payable in Common Stock on any class of Capital Stock of the Company, (b) any issuance to all holders of Common Stock of rights, options or warrants entitling them to subscribe for or purchase Common Stock at less than the then current market price (as determined in accordance with the Indenture) of Common Stock; provided, however, that if such options or warrants are only exercisable upon the occurrence of certain triggering events, then the Conversion Price will not be adjusted until such triggering events occur, (c) any subdivision, combination or reclassification of Common Stock, (d) any distribution to all holders of Common Stock of evidences of indebtedness, shares of Capital Stock other than Common Stock, cash or other assets (including securities, but excluding those dividends, rights, options, warrants and distributions referred to above and excluding regular dividends and distributions paid exclusively in cash), (e) any distribution consisting exclusively of cash (excluding any cash portion of distributions referred to in (d) above, or cash distributed upon a merger or consolidation to which the second succeeding paragraph applies) to all holders of Common Stock in an aggregate amount that, combined together with (i) all other such all-cash distributions made within the then preceding 12 months in respect of which no adjustment has been made and (ii) any cash and the fair market value of other consideration paid or payable in respect of any tender offer by the Company or any of its Subsidiaries for Common Stock concluded within the preceding 12 months in respect of which no adjustment has been made, exceeds 15% of the Company's market capitalization (defined as being the product of the then current market price of the Common Stock times the number of shares of Common Stock then outstanding) on the record date of such distribution, and (f) the completion of a tender or exchange offer made by the Company or any of its Subsidiaries for Common Stock that involves an aggregate consideration that, together with (i) any cash and other consideration payable in a tender or exchange offer by the Company or any of its Subsidiaries for Common Stock expiring within the 12 months preceding the expiration of such tender or exchange offer in respect of which no adjustment has been made and (ii) the aggregate amount of any such all-cash distributions referred to in (e) above to all holders of Common Stock within the 12 months preceding the expiration of such tender or exchange offer in respect of which no adjustments have been made, exceeds 15% of the Company's market capitalization on the expiration of such tender offer. No adjustment of the Conversion Price will be required to be made until the cumulative adjustments amount to 1.0% or more of the Conversion Price as last adjusted. The Company reserves the right to make such reductions in the Conversion Price in addition to those required in the foregoing provisions as it considers to be advisable in order that any event treated for federal income tax purposes as a dividend of stock or stock rights will not be taxable to the recipients. In the event the Company elects to make such a reduction in the conversion price, the Company will comply with the requirements of Rule 14e-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any other securities laws and regulations thereunder if and to the extent that such laws and regulations are applicable in connection with the reduction of the Conversion Price. In the event that the Company distributes rights or warrants (other than those referred to in (b) in the preceding paragraph) pro rata to holders of Common Stock, so long as any such rights or warrants have not expired or been redeemed by the Company, the Holder of any Note surrendered for conversion will be entitled to receive upon such conversion, in addition to the shares of Common Stock issuable upon such conversion (the "Conversion Shares"), a number of rights or warrants to be determined as follows: (i) if such conversion occurs on or prior to the date for the distribution to the holders of rights or warrants of separate certificates evidencing such rights or warrants (the "Distribution Date"), the same number of rights or warrants to which a holder of a 50 number of shares of Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the rights or warrants, and (ii) if such conversion occurs after such Distribution Date, the same number of rights or warrants to which a holder of the number of shares of Common Stock into which such Note was convertible immediately prior to such Distribution Date would have been entitled on such Distribution Date in accordance with the terms and provisions of and applicable to the rights or warrants. The conversion price of the Notes will not be subject to adjustment on account of any declaration, distribution or exercise of such rights or warrants. In case of any reclassification, consolidation or merger of the Company with or into another person or any merger of another person with or into the Company (with certain exceptions), or in case of any sale, transfer or conveyance of all or substantially all of the assets of the Company (computed on a consolidated basis), each Note then outstanding will, without the consent of any Holder of Notes, become convertible only into the kind and amount of securities, cash and other property receivable upon such reclassification, consolidation, merger, sale, transfer or conveyance by a holder of the number of shares of Common Stock into which such Note was convertible immediately prior thereto, after giving effect to any adjustment event, who failed to exercise any rights of election and received per share the kind and amount received per share by a plurality of non-electing shares. SUBORDINATION The Notes will be general, unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Indebtedness of the Company. At June 30, 1996, as adjusted to give effect to the issuance and sale of the Notes and the application of the net proceeds therefrom, the Company would have had approximately $119.3 million of Senior Indebtedness outstanding. The Notes are subordinated by operation of law in right of payment to all liabilities (including trade payables) of the Company's Subsidiaries. The Company's Subsidiaries had approximately $446.4 million of trade payables and accrued liabilities outstanding at June 30, 1996. The Indenture will not restrict the incurrence of Senior Indebtedness or other indebtedness by the Company or its Subsidiaries. The Indenture will provide that no payment may be made by the Company on account of the principal of, premium, if any, and interest on the Notes, or to acquire any of the Notes (including repurchases of Notes at the option of the Holder) for cash or property (other than Junior Securities), or on account of the redemption provisions of the Notes, (i) upon the maturity of any Senior Indebtedness of the Company by lapse of time, acceleration (unless waived) or otherwise, unless and until all principal of, premium, if any, and interest on such Senior Indebtedness are first paid in full (or such payment is duly provided for), or (ii) in the event of default in the payment of any principal of, premium, if any, or interest on any Senior Indebtedness of the Company when it becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise (a "Payment Default"), unless and until such Payment Default has been cured or waived or otherwise has ceased to exist. Upon (i) the happening of an event of default (other than a Payment Default) that permits the holders of Senior Indebtedness or their representative immediately to accelerate its maturity and (ii) written notice of such event of default given to the Company and the Trustee by the holders of at least 25% in the aggregate principal amount outstanding of such Senior Indebtedness or their representative (a "Payment Notice"), then, unless and until such event of default has been cured or waived or otherwise has ceased to exist, no payment (by setoff or otherwise) may be made by or on behalf of the Company on account of the principal of, premium, if any, interest on the Notes, or to acquire or repurchase any of the Notes for cash or property, or on account of the redemption provisions of the Notes, in any such case other than payments made with Junior Securities of the Company. Notwithstanding the foregoing, unless (i) the Senior Indebtedness in respect of which such Event of Default exists has been declared due and payable in its entirety within 179 days after the Payment Notice is delivered as set forth above (the "Payment Blockage Period"), and (ii) such declaration has not been rescinded or waived, at the end of the Payment Blockage Period, the Company shall be required to pay all sums not paid to the Holders 51 of the Notes during the Payment Blockage Period due to the foregoing prohibitions and to resume all other payments as and when due on the Notes. Any number of Payment Notices may be given; provided, however, that (i) not more than one Payment Notice shall be given within a period of any 360 consecutive days, and (ii) no event of default that existed upon the date of such Payment Notice or the commencement of such Payment Blockage Period (whether or not such event of default is on the same issue of Senior Indebtedness) shall be made the basis for the commencement of any other Payment Blockage Period. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company (other than Junior Securities) shall be received by the Trustee or the Holders at a time when such payment or distribution is prohibited by the foregoing provisions, such payment or distribution shall be held in trust for the benefit of the holders of Senior Indebtedness of the Company, and shall be paid or delivered by the Trustee or such Holders, as the case may be, to the holders of the Senior Indebtedness of the Company remaining unpaid or unprovided for or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any of such Senior Indebtedness of the Company may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness of the Company held or represented by each, for application to the payment of all Senior Indebtedness of the Company remaining unpaid, to the extent necessary to pay or to provide for the payment of all such Senior Indebtedness in full after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness. Upon any distribution of assets of the Company upon any dissolution, winding up, total or partial liquidation or reorganization of the Company, whether voluntary or involuntary, in bankruptcy, insolvency, receivership or a similar proceeding or upon assignment for the benefit of creditors or any marshalling of assets or liabilities, (i) the holders of all Senior Indebtedness of the Company will first be entitled to receive payment in full (or have such payment duly provided for) before the Holders are entitled to receive any payment on account of the principal of, premium, if any, or interest on, the Notes (other than Junior Securities) and (ii) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than Junior Securities) to which the Holders or the Trustee on behalf of the Holders would be entitled (by setoff or otherwise), except for the subordination provisions contained in the Indenture, will be paid by the liquidating trustee or agent or other person making such a payment or distribution directly to the holders of Senior Indebtedness of the Company or their representative to the extent necessary to make payment in full of all such Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness. No provision contained in the Indenture or the Notes will affect the obligation of the Company, which is absolute and unconditional, to pay, when due, principal of, premium, if any, and interest on the Notes. The subordination provisions of the Indenture and the Notes will not prevent the occurrence of any Default or Event of Default under the Indenture or limit the rights of the Trustee or any Holder, subject to the two preceding paragraphs, to pursue any other rights or remedies with respect to the Notes. The Company conducts certain of its operations through its Subsidiaries. Accordingly, the Company's ability to meet its cash obligations is dependent upon the ability of its Subsidiaries to make cash distributions to the Company. The ability of its Subsidiaries to make distributions to the Company is and will continue to be restricted by, among other limitations, applicable provisions of the laws of national and state governments and contractual provisions. The Indenture will not limit the ability of the Company's Subsidiaries to incur such restrictions in the future. The right of the Company to participate in the assets of any Subsidiary (and thus the ability of Holders of the Notes to benefit indirectly from such assets) is generally subject to the prior claims of creditors, including trade creditors, of that Subsidiary, except to the extent that the Company is recognized as a creditor of such Subsidiary, in which case the Company's claims would still be subject to any security interest of other creditors of such Subsidiary. The Notes, therefore, will be subordinated by operation of law to creditors, including trade creditors, of Subsidiaries of the Company with respect to the assets of the Subsidiaries against which such creditors have a more direct claim. 52 As a result of these subordination provisions, in the event of the liquidation, bankruptcy, reorganization, insolvency, receivership or similar proceeding or an assignment for the benefit of the creditors of the Company or any of its Subsidiaries or a marshalling of assets or liabilities of the Company and its Subsidiaries, Holders of the Notes may receive ratably less than other creditors. REDEMPTION AT THE COMPANY'S OPTION The Notes will not be subject to redemption prior to , 1999. On and after such date, the Notes will be redeemable at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days notice to each Holder of Notes, at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the 12-month period commencing of the years indicated below:
YEAR PERCENTAGE 1999.......................................................... % 2000 and thereafter........................................... %
in each case (subject to the right of Holders of record on a Record Date to receive interest due on an Interest Payment Date that is on or prior to such Redemption Date) together with accrued and unpaid interest, if any, to the Redemption Date. In the case of a partial redemption, the Trustee shall select the Notes or portions thereof for redemption on a pro rata basis, by lot or in such other manner it deems appropriate and fair. The Notes may be redeemed in part in multiples of $1,000 only. The Notes will not have the benefit of any sinking fund. Notice of any redemption will be sent, by first-class mail, at least 30 days and not more than 60 days prior to the date fixed for redemption, to the Holder of each Note to be redeemed to such Holder's last address as then shown upon the registry books of the Registrar. The notice of redemption must state the Redemption Date, the Redemption Price and the amount of accrued interest to be paid. Any notice that relates to a Note to be redeemed in part only must state the portion of the principal amount to be redeemed and must state that on and after the Redemption Date, upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion thereof will be issued. On and after the Redemption Date, interest will cease to accrue on the Notes or portions thereof called for redemption, unless the Company defaults in its obligations with respect thereto. REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL The Indenture will provide that in the event that a Change of Control (as defined) has occurred, each Holder of Notes will have the right, at such Holder's option, pursuant to an irrevocable and unconditional offer by the Company (the "Repurchase Offer"), to require the Company to repurchase all or any part of such Holder's Notes (provided that the principal amount of such Notes must be $1,000 or an integral multiple thereof) on the date (the "Repurchase Date") that is no later than 45 Business Days after the occurrence of such Change of Control at a cash price (the "Repurchase Price") equal to 100% of the principal amount thereof, together with accrued and unpaid interest to the Repurchase Date. The Repurchase Offer shall be made within 25 Business Days following a Change of Control and shall remain open for 20 Business Days following its commencement (the "Repurchase Offer Period"). Upon expiration of the Repurchase Offer Period, the Company shall purchase all Notes tendered in response to the Repurchase Offer. If required by applicable law, the Repurchase Date and the Repurchase Offer Period may be extended as so required; however, if so extended, it shall nevertheless constitute an Event of Default if the Repurchase Date does not occur within 60 Business Days of the Change of Control. 53 The Indenture will provide that a "Change of Control" occurs upon any of the following events: (i) upon any merger or consolidation of the Company with or into any person or any sale, transfer or other conveyance, whether direct or indirect, of all or substantially all of the assets of the Company, on a consolidated basis, in one transaction or a series of related transactions, if, immediately after giving effect to such transaction, any "person" or "group" is or becomes the "beneficial owner," directly or indirectly, of more than 50% of the total voting power in the aggregate normally entitled to vote in the election of directors, managers, or trustees, as applicable, of the transferee or surviving entity, (ii) when any "person" or "group" is or becomes the "beneficial owner," directly or indirectly, of more than 50% of the total voting power in the aggregate normally entitled to vote in the election of directors of the Company, (iii) when, during any period of 12 consecutive months after the Issue Date, individuals who at the beginning of any such 12-month period constituted the Board of Directors of the Company (together with any new directors whose election by such Board or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office, (iv) a sale or disposition, whether directly or indirectly, by the Company of all or substantially all of its assets, or (v) the pro rata distribution by the Company to its stockholders of substantially all of its assets. For purposes of this definition of "Change of Control," (i) the terms "person" and "group" shall have the meaning used for purposes of Rules 13d-3 and 13d-5 of the Exchange Act as in effect on the Issue Date, whether or not applicable; and (ii) the term "beneficial owner" shall have the meaning used in Rules 13d-3 and 13d-5 under the Exchange Act as in effect on the Issue Date, whether or not applicable, except that a "person" shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time or upon the occurrence of certain events. The phrase "all or substantially all" of the assets of the Company is likely to be interpreted by reference to applicable state law at the relevant time, and will be dependent on the facts and circumstances existing at such time. As a result, there may be a degree of uncertainty in ascertaining whether a sale or transfer is of "all or substantially all" of the assets of the Company. On or before the Repurchase Date, the Company will (i) accept for payment Notes or portions thereof properly tendered pursuant to the Repurchase Offer, (ii) deposit with the Paying Agent cash sufficient to pay the Repurchase Price (together with accrued and unpaid interest) of all Notes so tendered and (iii) deliver to the Trustee Notes so accepted, together with an Officers' Certificate listing the Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to the Holders of Notes so accepted payment in an amount equal to the Repurchase Price (plus accrued and unpaid interest), and the Trustee will promptly authenticate and mail or deliver to such Holders a new Note or Notes equal in principal amount to any unpurchased portion of the Notes surrendered. Any Notes not so accepted will be promptly mailed or delivered by the Company to the Holder thereof. The Company will publicly announce the results of the Repurchase Offer on or as soon as practicable after the Repurchase Date. The Change of Control purchase feature of the Notes may make more difficult or discourage a takeover of the Company, and, thus, the removal of incumbent management. The Change of Control purchase feature resulted from negotiations between the Company and the Underwriters. The provisions of the Indenture relating to a Change of Control may not afford the Holders protection in the event of a highly leveraged transaction, reorganization, restructuring, merger, spin-off or similar transaction that may adversely affect Holders, if such transaction does not constitute a Change of Control, as set forth above. In addition, the Company may not have sufficient financial resources available to fulfill its obligation to repurchase the Notes upon a Change of Control or to repurchase other debt securities of the Company or its Subsidiaries providing similar rights to the Holders thereof. 54 To the extent applicable, the Company will comply with Section 14 of the Exchange Act and the provisions of Regulation 14E and any other tender offer rules under the Exchange Act and any other securities laws, rules and regulations that may then be applicable to any offer by the Company to purchase the Notes at the option of Holders upon a Change of Control. LIMITATION ON MERGER, SALE OR CONSOLIDATION The Indenture will provide that the Company may not, directly or indirectly, consolidate with or merge with or into another person or sell, lease, convey or transfer all or substantially all of its assets (computed on a consolidated basis), whether in a single transaction or a series of related transactions, to another person or group of affiliated persons, unless (i) either (a) in the case of a merger or consolidation, the Company is the surviving entity or (b) the resulting, surviving or transferee entity is a corporation organized under the laws of the United States, any state thereof or the District of Columbia and expressly assumes by supplemental indenture all of the obligations of the Company in connection with the Notes and the Indenture; (ii) no Default or Event of Default shall exist or shall occur immediately after giving effect on a pro forma basis to such transaction; and (iii) the resulting, surviving or transferee entity immediately thereafter has a Consolidated Net Worth no less than that of the Company immediately prior thereto. Upon any consolidation or merger or any transfer of all or substantially all of the assets of the Company in accordance with the foregoing, the successor corporation formed by such consolidation or into which the Company is merged or to which such transfer is made, shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture with the same effect as if such successor corporation had been named therein as the Company, and the Company will be released from its obligations under the Indenture and the Notes, except as to any obligations that arise from or as a result of such transaction. REPORTS Whether or not the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall deliver to the Trustee and to each Holder, within 15 days after it is or would have been required to file such with the Securities and Exchange Commission (the "Commission"), annual and quarterly consolidated financial statements substantially equivalent to financial statements that would have been included in reports filed with the Commission if the Company was subject to the requirements of Section 13 or 15(d) of the Exchange Act, including, with respect to annual information only, a report thereon by the Company's certified independent public accountants as such would be required in such reports to the Commission and, in each case, together with a management's discussion and analysis of results of operations and financial condition as such would be so required. EVENTS OF DEFAULT AND REMEDIES The Indenture will define an Event of Default as (i) the failure by the Company to pay any installment of interest on the Notes as and when due and payable and the continuance of any such failure for 30 days, (ii) the failure by the Company to pay all or any part of the principal of, or premium, if any, on the Notes when and as the same become due and payable at maturity, redemption, by acceleration or otherwise, including, without limitation, pursuant to any Repurchase Offer, (iii) the failure of the Company to perform any conversion of Notes required under the Indenture and the continuance of any such failure for 30 days, (iv) the failure by the Company to observe or perform any other covenant or agreement contained in the Notes or the Indenture and, subject to certain exceptions, the continuance of such failure for a period of 60 days after written notice is given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Notes outstanding, (v) certain events of bankruptcy, insolvency or reorganization in respect of the Company or any of its Significant Subsidiaries, (vi) a default in the payment of principal, premium or interest when due that extends beyond any stated period of grace applicable thereto or an acceleration for any other reason of the maturity of any Indebtedness of the Company or any of its Subsidiaries with an aggregate principal amount in excess of $25 million, and (vii) final unsatisfied judgments not covered by insurance aggregating in excess of $25 million, at any one time rendered against the Company or any of its Subsidiaries and not stayed, 55 bonded or discharged within 75 days. The Indenture will provide that if a Default occurs and is continuing, the Trustee must, within 90 days after the occurrence of such default, give to the Holders notice of such default. The Indenture will provide that if an Event of Default occurs and is continuing (other than an Event of Default specified in clause (v) above), then in every such case, unless the principal of all of the Notes shall have already become due and payable, either the Trustee or the Holders of 25% in aggregate principal amount of the Notes then outstanding, by notice in writing to the Company (and to the Trustee if given by Holders) (an "Acceleration Notice"), may declare all principal and accrued interest thereon to be due and payable immediately. If an Event of Default specified in clause (v) above occurs, all principal and accrued interest thereon will be immediately due and payable on all outstanding Notes without any declaration or other act on the part of the Trustee or the Holders. The Holders of no less than a majority in aggregate principal amount of Notes generally are authorized to rescind such acceleration if all existing Events of Default, other than the nonpayment of the principal of, premium, if any, and interest on, the Notes that have become due solely by such acceleration, have been cured or waived. Prior to the declaration of acceleration of the maturity of the Notes, the Holders of a majority in aggregate principal amount of the Notes at the time outstanding may waive on behalf of all the Holders any default, except a default in the payment of principal of, premium, if any, or interest on any Note not yet cured, or a default with respect to any covenant or provision that cannot be modified or amended without the consent of the Holder of each outstanding Note affected. Subject to the provisions of the Indenture relating to the duties of the Trustee, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request, order or direction of any of the Holders, unless such Holders have offered to the Trustee reasonable security or indemnity. Subject to all provisions of the Indenture and applicable law, the Holders of a majority in aggregate principal amount of the Notes at the time outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee. AMENDMENTS AND SUPPLEMENTS The Indenture will contain provisions permiting the Company and the Trustee to enter into a supplemental indenture for certain limited purposes without the consent of the Holders. With the consent of the Holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding, the Company and the Trustee are permitted to amend or supplement the Indenture or any supplemental indenture or modify the rights of the Holders; provided, further, that no such modification may, without the consent of each Holder affected thereby: (i) change the Stated Maturity of any Note or reduce the principal amount thereof or the rate (or extend the time for payment) of interest thereon or any premium payable upon the redemption thereof, or change the place of payment where, or the coin or currency in which, any Note or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment or the conversion of any Note on or after the due date thereof (including, in the case of redemption, on or after the Redemption Date), or reduce the Repurchase Price, or alter the change of control provisions or redemption provisions in a manner adverse to the Holders, (ii) reduce the percentage in principal amount of the outstanding Notes, the consent of whose Holders is required for any such amendment, supplemental indenture or waiver provided for in the Indenture, (iii) adversely affect the right of such Holder to convert Notes, or (iv) modify any of the waiver provisions, except to increase any required percentage or to provide that certain other provisions of the Indenture cannot be modified or waived without the consent of the Holder of each outstanding Note affected thereby. NO PERSONAL LIABILITY OF STOCKHOLDERS, OFFICERS, DIRECTORS AND EMPLOYEES The Indenture will provide that no past, present or future stockholder, employee, officer or director, as such, of the Company or any successor corporation shall have any personal liability in respect of the obligations of the Company under the Indenture or the Notes by reason of his, her or its status as such stockholder, employee, officer or director. 56 TRANSFER AND EXCHANGE A Holder may transfer or exchange the Notes in accordance with the Indenture. The Company may require a Holder, among other things, to furnish appropriate endorsements and transfer documents, and to pay any taxes and fees required by law or permitted by the Indenture. The Company is not required to transfer or exchange any Notes selected for redemption. Also, the Company is not required to transfer or exchange any Notes for a period of 15 days before a selection of Notes to be redeemed. The registered Holder of a Note may be treated as the owner of it for all purposes. BOOK-ENTRY, DELIVERY AND FORM Except as set forth below, the Notes will initially be issued in the form of one or more registered Notes in global form (the "Global Notes"). Each Global Note will be deposited on the date of the closing of the sale of the Notes (the "Closing Date") with, or on behalf of, The Depository Trust Company (the "Depositary") and registered in the name of Cede & Co., as nominee of the Depositary. The Company has been advised that the Depositary is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. The Depositary holds securities that its participants ("Participants") deposit with it. The Depositary also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations ("Direct Participants"). The Depositary is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to the Depository Trust Company system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). The rules applicable to the Depositary and its Participants are on file with the Commission. The Company expects that pursuant to procedures established by the Depositary (i) upon deposit of the Global Notes, the Depositary will credit the accounts of Participants designated by the Underwriters with an interest in the Global Note and (ii) ownership of the Notes evidenced by the Global Notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by the Depositary (with respect to the interests of Participants), the Participants and the Indirect Participants. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own and that security interests in negotiable instruments can only be perfected by delivery of certificates representing the instruments. Consequently, the ability to transfer Notes evidenced by the Global Note will be limited to such extent. So long as the Depositary or its nominee is the registered owner of a Note, the Depositary or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by the Global Note for all purposes under the Indenture. Except as provided below, owners of beneficial interests in a Global Note will not be entitled to have Notes represented by such Global Note registered in their names, will not receive or be entitled to receive physical delivery of Certificated Notes, and will not be considered the owners or holders thereof under the Indenture for any purpose, including with respect to the giving of any directions, instructions or approvals to the Trustee thereunder. As a result, the ability of a person having a beneficial interest in Notes represented by a Global Note to pledge such interest to persons or entities that do not participate in the Depositary's system, or to otherwise take actions with respect to such interest, may be affected by the lack of a physical certificate evidencing such interest. 57 Neither the Company nor the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of Notes by the Depositary, or for maintaining, supervising or reviewing any records of the Depositary relating to such Notes. Payments with respect to the principal of, premium, if any, and interest on, any Note represented by a Global Note registered in the name of the Depositary or its nominee on the applicable record date will be payable by the Trustee to or at the direction of the Depositary or its nominee in its capacity as the registered Holder of the Global Note representing such Notes under the Indenture. Under the terms of the Indenture, the Company and the Trustee may treat the persons in whose names the Notes, including the Global Notes, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither the Company nor the Trustee has or will have any responsibility or liability for the payment of such amounts to beneficial owners of Notes (including principal, premium, if any, or interest), or to immediately credit the accounts of the relevant Participants with such payment, in amounts proportionate to their respective holdings in principal amount of beneficial interests in the Global Note as shown on the records of the Depositary. Payments by the Participants and the Indirect Participants to the beneficial owners of Notes will be governed by standing instructions and customary practice and will be the sole responsibility of the Participants or the Indirect Participants. Certificated Notes If (i) the Company notifies the Trustee in writing that the Depositary is no longer willing or able to act as a depositary and the Company is unable to locate a qualified successor within 90 days or (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of Notes in definitive form under the Indenture, then, upon surrender by the Depositary of the Global Notes, Certificated Notes will be issued to each person that the Depositary identifies as the beneficial owner of the Notes represented by Global Notes. In addition, subject to certain conditions, any person having a beneficial interest in a Global Note may, upon request to the Trustee, exchange such beneficial interest for Notes in the form of Certificated Notes. Upon any such issuance, the Trustee is required to register such Certificated Notes in the name of such person or persons (or the nominee of any thereof), and cause the same to be delivered thereto. Neither the Company nor the Trustee shall be liable for any delay by the Depositary or any Participant or Indirect Participant in identifying the beneficial owners of the Notes, and the Company and the Trustee may conclusively rely on, and shall be protected in relying on, instructions from the Depositary for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of the Notes to be issued). The information in this section concerning the Depositary and the Depositary's book-entry system has been obtained from sources that the Company believes to be reliable. The Company will have no responsibility for the performance by the Depositary or its Participants of their respective obligations as described hereunder or under the rules and procedures governing their respective operations. SAME-DAY FUNDS SETTLEMENT AND PAYMENT The Indenture will require that payments in respect of the Notes represented by the Global Notes (including principal, premium, if any, and interest) be made by wire transfer of immediately available funds to the accounts specified by the Depositary. With respect to Notes represented by Certificated Notes, the Company will make all payments of principal, premium, if any, and interest, by mailing a check to each such Holder's registered address. The Notes will trade in the Depositary's Same-Day Funds Settlement System until maturity, or until the Notes are issued in certificated form, and secondary market trading activity in the Notes will therefore be required by the Depositary to settle in immediately available funds. No assurance can be given as to the effect, if any, of settlement in immediately available funds on trading activity in the Notes. 58 CERTAIN DEFINITIONS "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to close. "Capital Stock" means, with respect to any corporation, any and all shares, interests, rights to purchase (other than convertible or exchangeable Indebtedness), warrants, options, participations or other equivalents of or interests (however designated) in stock issued by that corporation. "Consolidated Net Worth" of any person at any date means the aggregate consolidated stockholders' equity of such person (plus amounts of equity attributable to preferred stock) and its consolidated Subsidiaries, as would be shown on the consolidated balance sheet of such person prepared in accordance with GAAP, adjusted to exclude (to the extent included in calculating such consolidated stockholders' equity), (a) the amount of any such stockholders' equity attributable to Disqualified Capital Stock or treasury stock of such person and its consolidated Subsidiaries and (b) all upward revaluations and other write-ups in the book value of any asset of such person or a consolidated Subsidiary of such person subsequent to the Issue Date. "Disqualified Capital Stock" means (a) except as set forth in (b), with respect to any person, Capital Stock of such person that, by its terms or by the terms of any security into which it is convertible, exercisable or exchangeable, is, or upon the happening of an event or the passage of time would be, required to be redeemed or repurchased (including at the option of the holder thereof) by such person or any of its Subsidiaries, in whole or in part, on or prior to the Stated Maturity of the Securities and (b) with respect to any Subsidiary of such person (including with respect to any Subsidiary of the Company), any Capital Stock other than any common stock with no preference, privileges, or redemption or repayment provisions. "Indebtedness" of any person means, without duplication, (a) all liabilities and obligations, contingent or otherwise, of any such person, (i) in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), (ii) evidenced by bonds, notes, debentures or similar instruments, (iii) representing the balance deferred and unpaid of the purchase price of any property or services, except such as would constitute trade payables to trade creditors in the ordinary course of business, (iv) evidenced by bankers' acceptances or similar instruments issued or accepted by banks, (v) for the payment of money relating to a Capitalized Lease Obligation, or (vi) evidenced by a letter of credit or a reimbursement obligation of such person with respect to any letter of credit; (b) all net obligations of such person under Interest Swap and Hedging Obligations; (c) all liabilities of others of the kind described in the preceding clauses (a) or (b) that such person has guaranteed or that is otherwise its legal liability and all obligations to purchase, redeem or acquire any Capital Stock; and (d) any and all deferrals, renewals, extensions, refinancings and refundings (whether direct or indirect) of any liability of the kind described in any of the preceding clauses (a), (b) or (c), or this clause (d), whether or not between or among the same parties. "Issue Date" means the date of first issuance of the Notes under the Indenture. "Junior Securities" of any person means any Qualified Capital Stock and any Indebtedness of such person that is subordinated in right of payment to the Notes and has no scheduled installment of principal due, by redemption, sinking fund payment or otherwise, on or prior to the Stated Maturity of the Notes. "Qualified Capital Stock" means any Capital Stock of the Company that is not Disqualified Capital Stock. "Senior Indebtedness" means any Indebtedness of the Company, whether outstanding on the date of the Indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the Company, unless the instrument creating or evidencing such Indebtedness provides that such Indebtedness is not senior or superior in right of payment to the Notes or to other Indebtedness which is pari passu with, or subordinated to, the Notes; provided that in no event shall Senior Indebtedness include (a) Indebtedness of the Company owed or owing to any Subsidiary of the Company or any officer, director or employee of the Company or any Subsidiary of the 59 Company, (b) Indebtedness to trade creditors, (c) the Company's 6% Convertible Subordinated Notes due 2005 or (d) any liability for taxes owed or owing by the Company. "Significant Subsidiary" means any Subsidiary which is a "significant subsidiary" of the Company within the meaning of Rule 1.02(w) of Regulation S- X promulgated by the Commission as in effect as of the date of the Indenture. "Stated Maturity" when used with respect to any Note means , 2001. "Subsidiary" with respect to any person, means (i) a corporation a majority of whose Capital Stock with voting power normally entitled to vote in the election of directors is at the time. directly or indirectly. owned by such person, by such person and one or more Subsidiaries of such person or by one or more Subsidiaries of such person, (ii) a partnership in which such person or a Subsidiary of such person is, at the time, a general partner and owns alone or together with one or more Subsidiaries of such person a majority of the partnership interests, or (iii) any other person (other than a corporation) in which such person, one or more Subsidiaries of such person, or such person and one or more Subsidiaries of such person, directly or indirectly, at the date of determination thereof, has at least a majority ownership interest. 60 DESCRIPTION OF CAPITAL STOCK GENERAL As of September 30, 1996, the Company was authorized to issue 150,000,000 shares of Common Stock, of which 50,009,131 shares were issued and outstanding, and 3,000,000 shares of preferred stock, par value $.10 per share, of which none were issued and outstanding. Of the unissued shares of Common Stock as of such date, 3,919,646 shares were reserved for issuance upon conversion of the Company's 5% Convertible Subordinated Debentures due 2000 (called for redemption on October 25, 1996), 7,636,363 shares were reserved for issuance upon conversion of the Company's 6% Convertible Subordinated Notes due 2005 and an aggregate of 3,447,561 shares were reserved for issuance upon exercise of options either outstanding or available for future grant under the Company's stock option plans for employees and directors. COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record by them on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors; thus, the holders of shares having more than 50% of the Company's voting power (including both common and voting preferred shares) voting for the election of directors can elect all of the directors. The holders of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefor, subject to the prior rights of preferred stockholders. In the event of liquidation, dissolution or winding up of the Company's affairs, the holders of Common Stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, including any preferred stock, that has preference over the Common Stock. Except as described below under "Stock Purchase Rights," holders of shares of Common Stock, as such, have no conversion, preemptive or other subscription rights, and there are no redemption or sinking fund provisions applicable to the Common Stock. PREFERRED STOCK Shares of preferred stock may be issued without stockholder approval. The Board of Directors is authorized to issue such shares in one or more series and to fix the rights, preferences, privileges, qualifications, limitations and restrictions thereof, including dividend rights and rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without any vote or action by the stockholders. The Company has no current plans for the issuance of any shares of preferred stock. Any preferred stock to be issued could rank prior to the Common Stock with respect to dividend rights and rights of liquidation. The Board of Directors, without stockholder approval, may issue preferred stock with voting and conversion rights that could adversely affect the voting power of holders of Common Stock or create impediments to persons seeking to gain control of the Company. STOCK PURCHASE RIGHTS Laidlaw, which, as of October 15, 1996, held 3,899,393 shares of Common Stock, has certain rights to purchase voting securities of the Company in order to maintain its percentage voting interest. Except in connection with mergers or other acquisitions or in the ordinary course under an employee stock option or stock bonus plan, in the event the Company proposes to sell or issue shares of voting securities, Laidlaw has the right to purchase, on the same terms as the proposed sale or issuance, that number of shares or rights as will maintain its percentage interest in the voting securities of the Company, assuming the conversion of all convertible securities and the exercise of all options and warrants then outstanding. In addition, Laidlaw has other purchase rights with respect to sales or issuances of securities by the Company at prices below 85% of current market price at the time of sale or issuance or the prevailing customary price for such securities or their equivalent. CERTAIN VOTING ARRANGEMENTS Pursuant to the agreements whereby the Company acquired Smogless S.p.A. in September 1994, Laidlaw has agreed to vote all shares owned by it for the nominees of the Company's Board for election to the Board, 61 and on all other matters in the same proportion as the votes cast by other holders of voting securities, other than those that relate to any business combination or similar transaction involving the Company or any amendment to the Company's Certificate of Incorporation or Bylaws. CERTAIN CHARTER AND BYLAW PROVISIONS The Company's Certificate of Incorporation (the "Certificate") places certain restrictions on the voting rights of a "Related Person," defined therein as any person who directly or indirectly owns 5% or more of the outstanding voting stock of the Company. The founders and the original directors of the Company are excluded from the definition of "Related Persons," as are seven named individuals including Richard J. Heckmann, the Chairman of the Board, President and Chief Executive Officer of the Company. These voting restrictions apply in two situations. First, the vote of a director who is also a Related Person is not counted in the vote of the Board of Directors to call a meeting of stockholders where that meeting will consider a proposal made by the Related Person director. Second, any amendments to the Certificate that relate to specified Articles therein (those dealing with corporate governance, limitation of director liability or amendments to the Certificate), in addition to being approved by the Board of Directors and a majority of the Company's outstanding voting stock, must also be approved by either (i) a majority of directors who are not Related Persons, or (ii) the holders of at least 80% of the Company's outstanding voting stock, provided that if the change was proposed by or on behalf of a Related Person, then approval by the holders of a majority of the outstanding voting stock not held by Related Persons is also required. In addition, any amendment to the Company's Bylaws must be approved by one of the methods specified in clauses (i) and (ii) in the preceding sentence. The Certificate and the Company's Bylaws provide that the Board of Directors shall fix the number of directors and that the Board shall be divided into three classes, each consisting of one-third of the total number of directors (or as nearly as may be possible). Stockholders may not take action by written consent. Meetings of stockholders may be called only by the Board of Directors (or by a majority of its members). Stockholder proposals, including director nominations, may be considered at a meeting only if written notice of that proposal is delivered to the Company from 30 to 60 days in advance of the meeting, or within ten days after notice of the meeting is first given to stockholders. DELAWARE ANTI-TAKEOVER LAW Section 203 of the Delaware General Corporation Law ("Section 203") provides, in general, that a stockholder acquiring more than 15% of the outstanding voting shares of a corporation subject to the statute (an "Interested Stockholder"), but less than 85% of such shares, may not engage in certain "Business Combinations" with the corporation for a period of three years subsequent to the date on which the stockholder became an Interested Stockholder unless (i) prior to such date the corporation's board of directors has approved either the Business Combination or the transaction in which the stockholder became an Interested Stockholder or (ii) the Business Combination is approved by the corporation's board of directors and authorized by a vote of at least two-thirds of the outstanding voting stock of the corporation not owned by the Interested Stockholder. Section 203 defines the term "Business Combination" to encompass a wide variety of transactions with or caused by an Interested Stockholder in which the Interested Stockholder receives or could receive a benefit on other than a pro rata basis with other stockholders, including mergers, certain asset sales, certain issuances of additional shares to the Interested Stockholder, transactions with the corporation that increase the proportionate interest of the Interested Stockholder or transactions in which the Interested Stockholder receives certain other benefits. These provisions could have the effect of delaying, deferring or preventing a change of control of the Company. The Company's stockholders, by adopting an amendment to the Certificate or Bylaws of the Company, may elect not to be governed by Section 203, effective twelve months after adoption. Neither the Certificate nor the Bylaws of the Company currently excludes the Company from the restrictions imposed by Section 203. 62 CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following is a summary of certain Federal income tax considerations for original purchasers of the Notes and is based on the Federal income tax law now in effect, which is subject to change, possibly retroactively. This summary does not discuss all aspects of Federal income taxation that may be relevant to particular holders of Notes in light of their individual investment circumstances or to certain types of investors subject to special tax rules (e.g., financial institutions, insurance companies, tax-exempt organizations, and foreign taxpayers), nor does it discuss any aspects of state, local or foreign tax law consequences. This summary assumes that investors will hold their Notes as "capital assets" (generally, property held for investment) under the Internal Revenue Code of 1986, as amended. Prospective purchasers are urged to consult their tax advisors regarding the specific Federal, state, local, and foreign income and other tax consequences of purchasing, holding, converting, and disposing of the Notes. SALE OR EXCHANGE A holder will recognize capital gain or loss upon the sale or other disposition of a Note in an amount equal to the difference between the amount realized from such disposition and his tax basis in the Note. Such gain or loss will be long-term if the Note has been held for more than one year. CONVERSION A holder's conversion of a Note into Common Stock is generally not a taxable event (except with respect to cash received in lieu of a fractional share). The holder's tax basis in the Common Stock received on conversion of a Note will be the same as the holder's tax basis in the Note at the time of conversion (exclusive of any tax basis allocable to a fractional share), and the holding period for the Common Stock received on conversion will include the holding period of the Note converted. CONSTRUCTIVE DIVIDEND If at any time the Company makes a distribution of property to shareholders that would be taxable to such shareholders as a dividend for Federal income tax purposes and, in accordance with the antidilution provisions of the Notes, the Conversion Price of the Notes is decreased, the amount of such decrease may be deemed to be the payment of a taxable dividend to holders. For example, a decrease in the Conversion Price in the event of distributions of evidence of indebtedness or assets of the Company will generally result in deemed dividend treatment to holders, but generally a decrease in the event of stock dividends or the distribution of rights to subscribe for shares will not. See "Description of the Notes--Conversion Rights." 63 UNDERWRITING Subject to the terms and conditions contained in the Underwriting Agreement (the "Underwriting Agreement"), each of the several Underwriters named below has severally agreed to purchase from the Company the principal amount of Notes set forth opposite its name below, at the public offering price set forth on the cover page of this Prospectus, less the underwriting discount:
PRINCIPAL AMOUNT OF UNDERWRITERS NOTES ------------ ------------ Donaldson, Lufkin & Jenrette Securities Corporation............ $ Salomon Brothers Inc........................................... Deutsche Morgan Grenfell Inc................................... NatWest Securities Limited..................................... Smith Barney Inc. ............................................. ------------ Total........................................................ $175,000,000 ============
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the Notes offered hereby are subject to approval of certain legal matters by counsel and to certain other conditions. If any of the Notes are purchased by the Underwriters pursuant to the Underwriting Agreement, all such Notes (other than those covered by the over-allotment option described below) must be purchased. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Representatives have advised the Company that the Underwriters propose to offer the Notes to the public initially at the price set forth on the cover page of this Prospectus and to certain dealers (who may include the Underwriters) at such price, less a concession not in excess of % of the principal amount of the Notes. The Underwriters may allow, and such dealers may re-allow, discounts not in excess of % of the principal amount of the Notes to any other Underwriter and certain other dealers. After the Offerings, the offering price and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option to purchase up to an additional $26,250,000 aggregate principal amount of the Notes, at the initial public offering price less underwriting discounts and commissions, solely to cover over-allotments. Such option may be exercised at any time until 30 days after the date of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase an amount of Notes proportionate to such Underwriter's initial commitment as indicated in the preceding table. The Company and its executive officers and directors, and certain other stockholders, who collectively are the beneficial owners of an aggregate of 12,389,192 shares of Common Stock, have agreed, subject to certain exceptions, with the Underwriters not to, directly or indirectly, offer, sell, contract to sell, grant any option to purchase or otherwise dispose of, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), any shares of Common Stock or any securities convertible into or exercisable or exchangeable for, or warrants, options or rights to purchase or acquire, Common Stock or in any other manner transfer all or a portion of the economic consequences associated with the ownership of any Common Stock, or enter into any agreement to do any of the foregoing, for a period of 90 days after the date of this Prospectus. The Notes will constitute a new issue of securities with no established trading market. The Underwriters presently intend to make a market in the Notes. However, the Underwriters are not obligated to do so and any market- making activities may be discontinued at any time without notice. Application will be made to list the Notes on the New York Stock Exchange. However, no assurance can be given that an active trading market for the Notes will develop or, if such market develops, as to the liquidity or sustainability of such market. 64 DLJ has in the past provided, and may in the future provide, investment banking services for the Company and an affiliate of DLJ has committed to funding a portion of the Committed Credit Facilities. The Company has also engaged DLJ to provide certain financial advisory services to the Company for customary fees. Additionally, certain of the Underwriters are participating as underwriters in the Common Stock Offerings. LEGAL MATTERS The valid issuance of the Notes offered hereby will be passed upon for the Company by Damian C. Georgino, Vice President, General Counsel and Secretary of the Company. Certain legal matters will be passed upon for the Company by Kirkpatrick & Lockhart LLP, Pittsburgh, Pennsylvania, and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, Los Angeles, California. INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The consolidated financial statements of United States Filter Corporation and its subsidiaries as of March 31, 1995 and 1996 and for each of the three years in the period ended March 31, 1996, except for the consolidated financial statements of Davis Water & Waste Industries, Inc. and its subsidiaries as of April 30, 1996 and 1995 and for each of the three years in the period ended April 30, 1996, have been audited by KPMG Peat Marwick LLP, independent certified public accountants, as stated in their report appearing herein and in the Registration Statement. The consolidated financial statements of Davis Water & Waste Industries, Inc. and its subsidiaries, which have been consolidated with those of the Company, have been audited by Price Waterhouse LLP as stated in their report included herein. Such financial statements of the Company and its consolidated subsidiaries are included herein in reliance upon the report of such firms. Both of the foregoing accounting firms are independent auditors. The combined financial statements of the Systems and Manufacturing Group of Wheelabrator Technologies Inc. as of December 31, 1994 and 1995 and for each of the years in the three year period ended December 31, 1995 have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, which report is included herein, and upon the authority of said firm as experts in accounting and auditing. The aggregated financial statements of the United Utilities PLC Process Equipment Division as of March 31, 1996 and 1995 and for each of the years in the two year period ended March 31, 1996 have been included herein and in the Registration Statement in reliance upon the report of KPMG Audit Plc, independent chartered accountants, which report is included herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Davis Water & Waste Industries, Inc. incorporated in this Prospectus by reference to the audited historical financial statements included in United States Filter Corporation's Form 8-K dated June 27, 1996 have been so incorporated in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of Zimpro Environmental, Inc. as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 incorporated herein by reference, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon incorporated by reference elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The audited financial statements of WaterPro Supplies Corporation as of December 31, 1995 and for the period from April 7, 1995 to December 31, 1995 included in this prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. 65 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act, and in accordance therewith files periodic reports, proxy solicitation materials and other information with the Commission. Such reports, proxy solicitation materials and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Seven World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can also be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Such reports, proxy and information statements and other information may be found at the Commission's Web site address, http://www.sec.gov. The Common Stock is listed on the New York Stock Exchange. Such reports, proxy solicitation materials and other information can also be inspected and copied at the New York Stock Exchange at 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a registration statement on Form S-3 (herein, together with all amendments and exhibits thereto, referred to as the "Registration Statement") under the Securities Act, with respect to the offering made hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which are omitted in accordance with the rules and regulations of the Commission. Such additional information may be obtained from the Commission's principal office in Washington, D.C. as set forth above. For further information, reference is hereby made to the Registration Statement, including the exhibits filed as a part thereof or incorporated by reference therein. Statements made in this Prospectus as to the contents of any documents referred to are not necessarily complete, and in each instance reference is made to such exhibit for a more complete description and each such statement is modified in its entirety by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission (File No. 1-10728) pursuant to the Exchange Act are incorporated herein by reference: the Company's Annual Report on Form 10-K for the year ended March 31, 1996; the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996; the Company's Current Reports on Form 8-K dated May 31, 1996 (as amended on Form 8-K/A dated June 28, 1996), June 10, 1996, June 27, 1996, July 15, 1996 (two such Current Reports), August 23, 1996 and September 6, 1996; and the description of the Common Stock contained in the Company's Registration Statement on Form 8-A, as the same may be amended. All reports and other documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering made by this Prospectus shall be deemed to be incorporated by reference herein. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is incorporated or deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, a copy of any or all of the documents that are incorporated herein by reference, other than exhibits to such information (unless such exhibits are specifically incorporated by reference into such documents). Requests should be directed to the Vice President, General Counsel and Secretary of United States Filter Corporation at 40-004 Cook Street, Palm Desert, California 92211 (telephone (619) 340-0098). 66 INDEX TO FINANCIAL STATEMENTS
PAGE ---- UNITED STATES FILTER CORPORATION Independent Auditors' Report--KPMG Peat Marwick LLP....................... F-2 Report of Independent Accountants--Price Waterhouse LLP................... F-3 Financial Statements: Consolidated Balance Sheets as of March 31, 1995 and 1996 and June 30, 1996 (unaudited)....................................................... F-4 Consolidated Statements of Operations for the Years Ended March 31, 1994, 1995 and 1996 and the three months ended June 30, 1995 and 1996 (unaudited)............................................................ F-6 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1994, 1995 and 1996 and the three months ended June 30, 1996 (unaudited)............................................................ F-7 Consolidated Statements of Cash Flows for the Years Ended March 31, 1994, 1995 and 1996 and the three months ended June 30, 1995 and 1996 (unaudited)............................................................ F-9 Notes to Consolidated Financial Statements.............................. F-11 WATERPRO SUPPLIES CORPORATION Report of Independent Public Accountants--Arthur Andersen LLP............. F-29 Financial Statements: Balance Sheets as of December 31, 1995 and June 30, 1996 (unaudited).... F-30 Statements of Operations For the Period From April 7, 1995 to December 31, 1995 and the six months ended June 30, 1996 (unaudited)............ F-31 Statements of Stockholders' Investment for the Period from April 7, 1995 to December 31, 1995 and the six months ended June 30, 1996 (unaudited)............................................................ F-32 Statements of Cash Flows for the Period April 7, 1995 to December 31, 1995 and the six months ended June 30, 1996 (unaudited)................ F-33 Notes to Financial Statements........................................... F-34 WHEELABRATOR TECHNOLOGIES INC.--SYSTEMS AND MANUFACTURING GROUP Independent Auditors' Report--KPMG Peat Marwick LLP....................... F-37 Financial Statements: Combined Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (unaudited)....................................................... F-38 Combined Income Statements for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996 (unaudited)... F-39 Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996 (unaudited)............................................................ F-40 Notes to Consolidated Financial Statements.............................. F-41 UNITED UTILITIES PLC--PROCESS DIVISION Statement of United Utilities PLC directors' responsibilities............. F-47 Auditors' Report to the Board of Directors of United Utilities PLC--KPMG Audit Plc ............................................................... F-48 Financial Statements: Profit and Loss Account for the years ended March 31, 1996 and 1995 and the three months ended June 30, 1995 and 1996 (unaudited).............. F-49 Balance Sheets as of March 31, 1996 and 1995 and June 30, 1996 (unaudited)............................................................ F-50 Cash Flow Statement for the year ended March 31, 1996................... F-51 Notes to Financial Statements .......................................... F-52
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders United States Filter Corporation: We have audited the accompanying consolidated balance sheets of United States Filter Corporation and subsidiaries as of March 31, 1995 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the consolidated financial statements of Davis Water & Waste Industries, Inc., which statements reflect total assets constituting 17 percent and 9 percent in 1995 and 1996, respectively, and total revenues constituting 49 percent, 42 percent and 31 percent in 1994, 1995 and 1996, respectively, of the related consolidated totals. Those consolidated financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Davis Water & Waste Industries, Inc., is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United States Filter Corporation and subsidiaries as of March 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Orange County, California June 7, 1996, except as to the acquisitions of Davis Water & Waste Industries, Inc. and Zimpro Environmental Inc., which are as of August 23, 1996 and May 31, 1996, respectively, the common stock split, which is as of July 15, 1996, and note 20 which is as of October 7, 1996. F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of DAVIS WATER & WASTE INDUSTRIES, Inc. In our opinion, the consolidated balance sheet and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows of Davis Water & Waste Industries, Inc. and its subsidiaries (not presented seperately herein) present fairly, in all material respects, their financial position at April 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Davis Water & Waste Industries, Inc. and its subsidiaries for any period subsequent to April 30, 1996. Price Waterhouse LLP Atlanta, Georgia June 13, 1996 F-3 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, ------------------------- 1995 1996 JUNE 30, 1996 ------------ ------------ ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents (note 2).... $ 20,020,000 $ 18,405,000 $ 9,523,000 Short-term investments (note 3)....... 2,418,000 65,000 1,443,000 Accounts receivable, less allowance for doubtful accounts of $4,643,000 at March 31, 1995, $9,857,000 at March 31, 1996 and $9,891,000 at June 30, 1996 (unaudited) (note 10)....... 138,891,000 218,855,000 205,888,000 Costs and estimated earnings in excess of billings on uncompleted contracts (note 10)............................ 21,808,000 33,575,000 45,743,000 Inventories (note 4).................. 55,328,000 75,313,000 77,865,000 Prepaid expenses...................... 3,489,000 7,922,000 9,225,000 Deferred taxes (note 14).............. 9,746,000 7,771,000 7,771,000 Other current assets.................. 6,882,000 10,073,000 10,810,000 ------------ ------------ ------------ Total current assets............... 258,582,000 371,979,000 368,268,000 ------------ ------------ ------------ Property, plant and equipment, net (notes 5 and 11)...................... 79,495,000 165,989,000 169,754,000 Investment in leasehold interests, net (note 6).............................. 20,390,000 27,688,000 27,392,000 Cost in excess of net assets of busi- nesses acquired, net (notes 7 and 9).. 99,162,000 271,891,000 279,024,000 Other assets (note 8).................. 25,094,000 38,958,000 44,432,000 ------------ ------------ ------------ $482,723,000 $876,505,000 $888,870,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--(CONTINUED)
MARCH 31, -------------------------- JUNE 30, 1995 1996 1996 ------------ ------------ ------------ (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable...................... $ 64,478,000 $100,224,000 $ 86,785,000 Accrued liabilities (note 13)......... 50,684,000 102,415,000 97,795,000 Current portion of long-term debt (note 11)............................ 4,336,000 7,892,000 1,677,000 Billings in excess of costs and estimated earnings on uncompleted contracts (note 10).................. 19,263,000 15,797,000 20,413,000 Other current liabilities............. 5,849,000 21,894,000 20,701,000 ------------ ------------ ------------ Total current liabilities.......... 144,610,000 248,222,000 227,371,000 ------------ ------------ ------------ Notes payable (note 11)................ 37,648,000 35,756,000 48,281,000 Long-term debt, excluding current por- tion (note 11)........................ 15,132,000 9,788,000 9,247,000 Convertible subordinated debentures (note 12)............................. 105,000,000 200,000,000 199,975,000 Deferred taxes (note 14)............... 8,293,000 1,223,000 1,929,000 Other liabilities...................... 5,162,000 13,015,000 16,921,000 ------------ ------------ ------------ Total liabilities.................. 315,845,000 508,004,000 503,724,000 ------------ ------------ ------------ Shareholders' equity (notes 9 and 15): Series A voting cumulative convertible preferred stock, $.10 par value, $25 liquidation preference. Authorized and issued 880,000 shares at March 31, 1995............................. 22,071,000 -- -- Series B voting convertible preferred stock, $.10 par value, $27 liquidation preference. Authorized 250,000 shares; outstanding 185,185 shares at March 31, 1995............................. 3,506,000 -- -- Common stock, par value $.01. Authorized 150,000,000 shares; issued and outstanding 28,524,965 and 47,873,133 and 48,555,920 at March 31, 1995 and 1996, and June 30, 1996 (unaudited), respectively............ 209,000 338,000 343,000 Additional paid-in capital............ 145,224,000 351,254,000 362,470,000 Currency translation adjustment....... (2,026,000) 1,836,000 2,009,000 Retained earnings (accumulated defi- cit)................................. (2,106,000) 15,073,000 20,324,000 ------------ ------------ ------------ Total shareholders' equity......... 166,878,000 368,501,000 385,146,000 Commitments and contingencies (notes 11, 15, 16 and 18) Subsequent events (notes 9 and 20)..... ------------ ------------ ------------ $482,723,000 $876,505,000 $888,870,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-5 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE YEARS ENDED MARCH 31, 30, ---------------------------------------- -------------------------- 1994 1995 1996 1995 1996 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Revenues................ $412,512,000 $519,359,000 $727,903,000 $158,173,000 $208,509,000 Costs of sales.......... 326,848,000 398,755,000 538,573,000 119,323,000 152,174,000 ------------ ------------ ------------ ------------ ------------ Gross profit.......... 85,664,000 120,604,000 189,330,000 38,850,000 56,335,000 Selling, general and administrative expenses............... 90,719,000 97,481,000 148,683,000 30,233,000 41,520,000 ------------ ------------ ------------ ------------ ------------ Operating income (loss)............... (5,055,000) 23,123,000 40,647,000 8,617,000 14,815,000 Other income (expense): Interest expense....... (4,044,000) (7,514,000) (14,419,000) (3,012,000) (4,390,000) Interest income and other................. (7,382,000) 1,442,000 5,134,000 730,000 621,000 ------------ ------------ ------------ ------------ ------------ (11,426,000) (6,072,000) (9,285,000) (2,282,000) (3,769,000) ------------ ------------ ------------ ------------ ------------ Income (loss) before income tax expense (benefit)............ (16,481,000) 17,051,000 31,362,000 6,335,000 11,046,000 Income tax expense (benefit) (note 14).... (7,087,000) 4,812,000 12,055,000 1,996,000 3,043,000 ------------ ------------ ------------ ------------ ------------ Net income (loss)..... $ (9,394,000) $ 12,239,000 $ 19,307,000 $ 4,339,000 $ 8,003,000 ============ ============ ============ ============ ============ Net income (loss) per common share (primary and fully diluted) (notes 1 and 15) after reduction for dividends on preferred stock of $.03, $.02 and $.01 for the years ended March 31, 1994, 1995 and 1996, respectively..... $ (0.41) $ 0.41 $ 0.45 $ 0.12 $ 0.16 ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. F-6 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 1994, 1995 AND 1996, AND THREE MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
CONVERTIBLE PREFERRED STOCK COMMON STOCK RETAINED --------------------- ------------------- ADDITIONAL CURRENCY EARNINGS NUMBER OF NUMBER OF PAID-IN TRANSLATION (ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) TOTAL --------- ----------- ---------- -------- ----------- ----------- ------------ ----------- Balance at March 31, 1993, as previously reported............... 880,000 $22,071,000 16,622,261 $ 74,000 79,456,000 304,000 (22,274,000) 79,631,000 Restatement for acquisitions of Zimpro and Davis, acquired through pooling of interests (note 9)..... -- -- 5,694,960 57,000 13,656,000 -- 19,697,000 33,410,000 --------- ----------- ---------- -------- ----------- ---------- ----------- ----------- Balance at March 31, 1993, restated......... 880,000 22,071,000 22,317,221 131,000 93,112,000 304,000 (2,577,000) 113,041,000 Compensation related to excess of fair value of director stock options over exercise price (note 15).............. -- -- -- -- 80,000 -- -- 80,000 Exercise of common stock options (note 15)...... -- -- 236,931 1,000 1,254,000 -- -- 1,255,000 Issuance of common stock in connection with acquisitions (note 9).. -- -- 4,585,122 20,000 48,469,000 -- -- 48,489,000 Dividends paid on preferred stock (note 15).............. -- -- -- -- -- -- (701,000) (701,000) Shareholders' equity transactions of Liquipure, Zimpro and Davis prior to merger.. -- -- -- -- 14,000 -- (203,000) (189,000) Currency translation adjustment............. -- -- -- -- -- (560,000) -- (560,000) Net loss................ -- -- -- -- -- -- (9,394,000) (9,394,000) --------- ----------- ---------- -------- ----------- ---------- ----------- ----------- Balance at March 31, 1994................... 880,000 22,071,000 27,139,274 152,000 142,929,000 (256,000) (12,875,000) 152,021,000 Net loss of Liquipure for the three months ended March 31, 1994 (note 9)............... -- -- -- -- -- -- (313,000) (313,000) Compensation related to excess of fair value of director stock options over exercise price (note 15).............. -- -- -- -- 122,000 -- -- 122,000 Exercise of common stock options (note 15)...... -- -- 241,040 2,000 1,420,000 -- -- 1,422,000 Issuance of common stock in connection with acquisitions (note 9).. -- -- 1,056,151 5,000 8,982,000 -- -- 8,987,000 Dividends paid on preferred stock (note 15).............. -- -- -- -- -- -- (715,000) (715,000) Reduction in valuation of common stock issued in connection with Ionpure acquisition (note 9)............... -- -- -- -- (9,123,000) -- -- (9,123,000) Preferred stock issued in connection with acquisition of Smogless (note 9)............... 185,185 3,506,000 -- -- -- -- -- 3,506,000 Issuance of common stock to pay off indebtedness (note 9)............... -- -- 88,500 -- 700,000 -- -- 700,000 Par value of shares issued in connection with three-for-two stock split (note 15).. -- -- -- 50,000 (50,000) -- -- -- Income tax benefit from exercise of stock options................ -- -- -- -- 387,000 -- -- 387,000 Shareholders' equity transactions of Zimpro and Davis prior to merger................. -- -- -- -- (143,000) -- (442,000) (585,000) Currency translation adjustment............. -- -- -- -- -- (1,770,000) -- (1,770,000) Net income.............. -- -- -- -- -- -- 12,239,000 12,239,000 --------- ----------- ---------- -------- ----------- ---------- ----------- ----------- Balance at March 31, 1995................... 1,065,185 $25,577,000 28,524,965 209,000 145,224,000 (2,026,000) (2,106,000) 166,878,000
See accompanying notes to consolidated financial statements. F-7 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--(CONTINUED)
CONVERTIBLE PREFERRED STOCK COMMON STOCK RETAINED ----------------------- ------------------- ADDITIONAL CURRENCY EARNINGS NUMBER NUMBER OF PAID-IN TRANSLATION (ACCUMULATED OF SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) TOTAL --------- ------------ ---------- -------- ----------- ----------- ------------ ----------- Compensation related to excess of fair value of director stock options over exercise price (note 15).............. -- $ -- -- $ -- 112,000 -- -- 112,000 Conversion of preferred shares to common shares (note 15).............. (925,667) (22,936,000) 2,082,750 14,000 22,922,000 -- -- -- Redemption of Series B convertible preferred stock (note 15)........ (139,518) (2,641,000) -- -- (2,068,000) -- -- (4,709,000) Issuance of common stock in connection with acquisitions (note 9).. -- -- 2,453,411 16,000 36,284,000 -- -- 36,300,000 Shares issued through public offering, net of offering costs of $6,106,000 (note 15).............. -- -- 10,350,000 69,000 97,325,000 -- -- 97,394,000 Conversion of subordinated debentures to common stock (note 12).................... -- -- 3,750,000 25,000 44,975,000 -- -- 45,000,000 Dividends paid on preferred stock (note 15).................... -- -- -- -- -- -- (715,000) (715,000) Exercise of common stock options (note 15)...... -- -- 487,885 3,000 3,678,000 -- -- 3,681,000 Issuance of common stock to acquire assets (note 15).................... -- -- 224,122 2,000 2,974,000 -- -- 2,976,000 Shareholders' equity transactions of Zimpro and Davis prior to merger................. -- -- -- -- (172,000) -- (1,413,000) (1,585,000) Currency translation adjustment............. -- -- -- -- -- 3,862,000 -- 3,862,000 Net income.............. -- -- -- -- -- -- 19,307,000 19,307,000 -------- ------------ ---------- -------- ----------- --------- ---------- ----------- Balance at March 31, 1996................... -- -- 47,873,133 338,000 351,254,000 1,836,000 15,073,000 368,501,000 Net loss of Zimpro for the three months ended March 31, 1996 (note 9) (unaudited) ........... -- -- -- -- -- -- (606,000) (606,000) Exercise of common stock options (unaudited) ... -- -- 74,546 1,000 687,000 -- -- 688,000 Issuance of common stock in connection with acquisitions (unaudited) ........... -- -- 433,923 3,000 7,038,000 -- -- 7,041,000 Shareholders' equity transactions of Zimpro and Davis prior to merger (unaudited) .... -- -- -- -- 132,000 -- (2,146,000) (2,014,000) Issuance of common stock to pay off indebtedness (unaudited) ........... -- -- 172,491 1,000 3,334,000 -- -- 3,335,000 Conversion of subordinated debentures to common stock (unaudited) ........... -- -- 1,827 -- 25,000 -- -- 25,000 Currency translation adjustment (unaudited) ....................... -- -- -- -- -- 173,000 -- 173,000 Net income (unaudited) . -- -- -- -- -- -- 8,003,000 8,003,000 -------- ------------ ---------- -------- ----------- --------- ---------- ----------- Balance at June 30, 1996 (unaudited)............ -- $ -- 48,555,920 $343,000 362,470,000 2,009,000 20,324,000 385,146,000 ======== ============ ========== ======== =========== ========= ========== ===========
See accompanying notes to consolidated financial statements. F-8 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS YEARS ENDED MARCH 31, ENDED JUNE 30, ----------------------------------------- ------------------------- 1994 1995 1996 1995 1996 ------------ ------------ ------------- ------------ ----------- (UNAUDITED) Cash flows from operating activities: Net income (loss)..... $ (9,394,000) $ 12,239,000 $ 19,307,000 $ 4,339,000 $ 8,003,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Deferred income taxes. (9,281,000) 713,000 (4,479,000) 218,000 -- Depreciation and amortization......... 11,292,000 16,654,000 26,580,000 5,119,000 10,076,000 Provision for doubtful accounts............. 1,326,000 2,030,000 5,929,000 800,000 668,000 (Gain) loss on sale of property and equipment............ 81,000 388,000 (243,000) (161,000) 1,000 Stock and stock option compensation......... 80,000 122,000 112,000 28,000 -- (Decrease) increase in closure reserves and write off of intangible assets.... 12,633,000 (1,480,000) 768,000 (800,000) 151,000 Change in operating assets and liabilities: (Increase) decrease in accounts receivable.......... (13,737,000) (6,966,000) (25,900,000) (4,602,000) 16,103,000 (Increase) decrease in costs and estimated earnings in excess of billings on uncompleted contracts........... (11,820,000) 2,046,000 (4,599,000) (10,970,000) (12,086,000) Increase in inventories......... (4,510,000) (5,016,000) (4,215,000) (6,290,000) (2,494,000) (Increase) decrease in prepaid expenses and other assets.... 608,000 (3,763,000) (7,055,000) (4,500,000) (8,225,000) Increase (decrease) in accounts payable and accrued expenses............ 15,283,000 (14,110,000) (1,726,000) (8,555,000) (15,777,000) Increase (decrease) in billings in excess of costs and estimated earnings on uncompleted contracts........... 866,000 2,529,000 (4,096,000) (2,282,000) 4,574,000 Increase (decrease) in other liabilities......... 50,000 (2,117,000) (725,000) 7,078,000 (1,929,000) ------------ ------------ ------------- ------------ ----------- Net cash provided by (used in) operating activities......... (6,523,000) 3,269,000 (342,000) (20,578,000) (935,000) ------------ ------------ ------------- ------------ ----------- Cash flows from investing activities: Investment in leasehold interests.. (15,766,000) (6,397,000) (8,347,000) -- -- Purchase of property, plant and equipment.. (8,050,000) (18,304,000) (28,392,000) (4,100,000) (11,427,000) Proceeds from disposal of equipment......... 252,000 877,000 7,670,000 1,283,000 79,000 (Purchase) sale of short-term investments.......... (15,625,000) 13,207,000 9,938,000 (2,979,000) (1,378,000) Payment for purchase of acquisitions, net of cash acquired..... (987,000) (2,240,000) (206,600,000) (91,739,000) (5,209,000) ------------ ------------ ------------- ------------ ----------- Net cash used in investing activities......... (40,176,000) (12,857,000) (225,731,000) (97,535,000) (17,935,000) ------------ ------------ ------------- ------------ ----------- Cash flows from financing activities: Net proceeds from sale (purchase) of common stock................ 14,000 (164,000) 97,232,000 97,862,000 924,000 Net proceeds from sale of convertible subordinated debentures........... 57,923,000 -- 136,249,000 -- -- Proceeds from exercise of common stock options.............. 1,242,000 1,422,000 3,681,000 -- -- Principal payments of debt................. (56,572,000) (65,409,000) (72,347,000) (13,912,000) (16,308,000) Dividends paid........ (861,000) (1,136,000) (2,138,000) (494,000) (40,000) Payment to repurchase Series B preferred stock................ -- -- (4,709,000) -- -- Net proceeds from borrowings on note payable.............. 57,638,000 74,678,000 66,490,000 23,629,000 25,412,000 ------------ ------------ ------------- ------------ ----------- Net cash provided by financing activities......... 59,384,000 9,391,000 224,458,000 107,085,000 9,988,000 ------------ ------------ ------------- ------------ ----------- Net increase (decrease) in cash and cash equivalents........ 12,685,000 (197,000) (1,615,000) (11,028,000) (8,882,000) Cash and cash equivalents at beginning of period... 7,532,000 20,217,000 20,020,000 20,020,000 18,405,000 ------------ ------------ ------------- ------------ ----------- Cash and cash equivalents at end of period................ $ 20,217,000 $ 20,020,000 $ 18,405,000 $ 8,992,000 $ 9,523,000 ============ ============ ============= ============ ===========
See accompanying notes to consolidated financial statements. F-9 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
THREE MONTHS ENDED JUNE 30, ---------- ---------- ----------- --------------------- 1994 1995 1996 1995 1996 ---------- ---------- ----------- ---------- ---------- (UNAUDITED) Supplemental disclosures of cash flow information: Cash paid during the period for interest... $2,786,000 $7,603,000 $14,615,000 $3,341,000 $3,242,000 ========== ========== =========== ========== ========== Cash paid during the period for income taxes................. $1,709,000 $2,626,000 $ 6,807,000 $ 357,000 $1,424,000 ========== ========== =========== ========== ========== Noncash investing and financing activities consisted of the fol- lowing: Common stock issued: Satisfaction of debt.. $ -- $ 700,000 $ -- $ -- $ -- Conversion of debentures........... -- -- 45,000,000 -- -- Purchase of property.. -- -- 2,976,000 -- -- Property, plant and equipment exchanged for receivables....... -- -- 5,318,000 -- -- ---------- ---------- ----------- ---------- ---------- $ -- $ 700,000 $53,294,000 $ -- $ -- ========== ========== =========== ========== ==========
See accompanying notes to consolidated financial statements. F-10 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of United States Filter Corporation and its wholly owned subsidiaries (the "Company") (see note 9). All significant intercompany accounts and transactions have been eliminated in consolidation. REVENUE RECOGNITION Method of Accounting for Contracts The accounting records of the Company are maintained and income is reported for financial reporting and income tax purposes for long-term contracts principally under the percentage-of-completion method of accounting. Under this method, an estimated percentage for each contract, based on the cost of work performed to date that has contributed to contract performance compared to the total estimated cost, is applied to total estimated revenue. Provision is made for the entire amount of future estimated losses on contracts in progress in the period in which such losses are determined. Claims for additional contract compensation due the Company are not reflected in the accounts until the year in which such claims are allowed, except where contract terms specifically provide for certain claims. Contract costs include all direct material and labor and those indirect costs related to contract performance. General and administrative expenses are charged to expense as incurred. Products and Services Sales of other products and services are recorded as products are shipped or services rendered. INCOME TAXES The Company follows Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. United States income taxes are not provided on the undistributed earnings of its foreign subsidiaries as such earnings are intended to be indefinitely reinvested in those operations. FOREIGN CURRENCY TRANSLATION In accordance with Statement of Financial Accounting Standard No. 52, "Foreign Currency Translation," the assets and liabilities denominated in foreign currency are translated into U.S. dollars at the current rate of exchange existing at period-end and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are included as a separate component of shareholders' equity. The transaction gains and losses included in net income (loss) are immaterial. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. F-11 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the respective assets which range from 3 to 25 years. Leasehold improvements are amortized on the straight-line method over the lesser of their estimated useful lives or the related lease term. COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED Cost in excess of net assets of businesses acquired is amortized on the straight-line method principally over 40 years. The Company evaluates the recoverability of these costs based upon expectations of nondiscounted cash flows and operating income of each subsidiary. Based upon its most recent analysis, the Company believes that no material impairment exists at March 31, 1996. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES Investments in unconsolidated joint ventures are accounted for using the equity method, under which the Company's share of earnings or losses from these joint ventures is reflected in income as earned and dividends are credited against the investment when received. UNAMORTIZED DEBT ISSUANCE COSTS Unamortized debt issuance costs, aggregating $1,735,000 and $5,450,000 at March 31, 1995 and 1996, respectively, have been deferred and are being amortized over the term of the related convertible subordinated debentures (note 12). WARRANTIES The Company's products are generally under warranty against defects in material and workmanship for a period of one year. The Company has accrued for estimated future warranty costs. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short maturity of these instruments. The carrying amount of the Company's revolving credit facility approximates its fair value because the interest rate on the instrument changes with market interest rates. The fair value of the Company's long-term debt (including current portion) is estimated to be equal to the carrying amounts based on quoted market prices for similar issues or on the current rates offered to the Company for debt of the same remaining securities. RECLASSIFICATIONS Certain amounts in the 1995 consolidated financial statements have been reclassified to conform with the 1996 presentation. F-12 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements for the three months ended June 30, 1995 and 1996 are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring items, considered necessary for a fair presentation have been included. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted from the interim consolidated financial statements. The results of operations for the three months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ending March 31, 1997. INCOME (LOSS) PER COMMON SHARE Income (loss) per common share is computed based on the weighted average number of shares outstanding. Common stock equivalents consisting of convertible preferred stock and options are included in the computation of income (loss) per share when their effect is dilutive. Primary and fully diluted income (loss) per common share were calculated as follows:
THREE MONTHS ENDED YEARS ENDED MARCH 31, JUNE 30, -------------------------------------- ---------------------- 1994 1995 1996 1995 1996 ------------ ----------- ----------- ---------- ---------- (UNAUDITED) Net income (loss)....... $ (9,394,000) $12,239,000 $19,307,000 $4,339,000 $8,003,000 Dividends on preferred stock.................. (701,000) (715,000) (536,000) (179,000) -- ------------ ----------- ----------- ---------- ---------- Adjusted net income (loss) applicable to common shares.......... $(10,095,000) $11,524,000 $18,771,000 $4,160,000 $8,003,000 ============ =========== =========== ========== ========== Weighted average shares outstanding............ 23,934,000 27,866,000 41,036,000 35,009,000 48,370,000 Add: Exercise of options reduced by the number of shares purchased with proceeds......... 441,000 369,000 1,123,000 690,000 1,581,000 ------------ ----------- ----------- ---------- ---------- Adjusted weighted average shares outstanding............ 24,375,000 28,235,000 42,159,000 35,699,000 49,951,000 ============ =========== =========== ========== ========== Income (loss) per common share: Net income (loss)..... $ (0.38) $ 0.43 $ 0.46 $ 0.12 $ 0.16 Dividends on preferred stock................ (0.03) (0.02) (0.01) (0.00) (0.00) ------------ ----------- ----------- ---------- ---------- Adjusted income (loss) per common share....... $ (0.41) $ 0.41 $ 0.45 $ 0.12 $ 0.16 ============ =========== =========== ========== ==========
On March 4, 1996, the preferred shareholder tendered its Series A Preferred stock for conversion into Company common stock thus eliminating further dividends (see note 15). (2) CASH AND CASH EQUIVALENTS Cash equivalents consist of demand deposits and certificates of deposit with original maturities of 90 days or less. (3) SHORT-TERM INVESTMENTS Short-term investments consist of highly liquid municipal issues with original maturities of more than 90 days when purchased, and are carried at amortized cost, which approximates market value. F-13 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (4) INVENTORIES Inventories at March 31, 1995 and 1996 and June 30, 1996 (unaudited) consist of:
MARCH 31, ----------------------- JUNE 30, 1995 1996 1996 ----------- ----------- ----------- (UNAUDITED) Raw materials............................ $15,298,000 $21,578,000 $24,303,000 Work-in-process.......................... 13,436,000 17,997,000 17,764,000 Finished goods........................... 26,594,000 35,738,000 35,798,000 ----------- ----------- ----------- $55,328,000 $75,313,000 $77,865,000 =========== =========== ===========
(5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at March 31, 1995 and 1996 consist of:
1995 1996 ------------ ------------ Land............................................. $ 4,352,000 $ 8,988,000 Buildings and improvements....................... 32,879,000 41,338,000 Equipment........................................ 55,068,000 129,903,000 Furniture and fixtures........................... 13,456,000 24,812,000 Vehicles......................................... 1,185,000 2,719,000 Construction in progress......................... 5,370,000 17,191,000 ------------ ------------ 112,310,000 224,951,000 Less accumulated depreciation.................... (32,815,000) (58,962,000) ------------ ------------ $ 79,495,000 $165,989,000 ============ ============
During fiscal 1996, the Company's Zimpro subsidiary (note 9) evaluated the ongoing value of equipment in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of ("FAS 121"). Based upon this evaluation, it was determined that certain equipment with a carrying value of $768,000 was impaired and was written down by $689,000 to its estimated fair value. (6) INVESTMENT IN LEASEHOLD INTERESTS The Company has concession agreements to build and operate wastewater treatment plants in Mexico. The terms of the concessions are approximately 15 to 18 years, as amended, and include monthly payments to be received by the Company at various prices per cubic meter of sewage treated at the facilities based upon the Company's initial investments, fixed operating expenses and variable operating expenses. The Company is amortizing the investments on a straight-line basis over the terms of the concessions. Accumulated amortization at March 31, 1995 and 1996 totaled $955,000 and $2,026,000, respectively. The investments are stated at cost which does not exceed market based on projected non-discounted future cash flows. (7) COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED Cost in excess of net assets of businesses acquired and accumulated amortization at March 31, 1995 and 1996 consists of the following:
1995 1996 ------------ ------------ Cost in excess of net assets of businesses acquired...................................... $104,831,000 $283,275,000 Less accumulated amortization.................. (5,669,000) (11,384,000) ------------ ------------ $ 99,162,000 $271,891,000 ============ ============
F-14 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (8) OTHER ASSETS Other assets at March 31, 1995 and 1996 consist of:
1995 1996 ----------- ----------- Investment in unconsolidated joint ventures......... $ 7,592,000 $12,419,000 Long-term receivables and advances.................. 3,508,000 6,415,000 Other assets at amortized cost: Operating permits and development costs........... 1,819,000 1,212,000 Deferred debt costs............................... 1,735,000 5,450,000 Patents........................................... 4,355,000 2,469,000 Other............................................... 6,085,000 10,993,000 ----------- ----------- $25,094,000 $38,958,000 =========== ===========
The above amounts reflect accumulated amortization of $4,600,000 and $1,982,000 at March 31, 1995 and 1996, respectively. The carrying amount of these other assets approximate their fair value. During fiscal 1996, the Company's Zimpro subsidiary evaluated the ongoing value of certain patents in accordance with FAS 121. Based upon this evaluation, it was determined that patents with a carrying value of $3,556,000 were impaired and were written down by $2,648,000 to their estimated fair value. During the fourth quarter of fiscal 1994, the Company's Davis subsidiary (note 9) adopted a plan to shutdown or reorganize the operations of its wholly-owned subsidiary, The Taulman Company ("Taulman"). The pre-tax loss provision for these actions recorded in fiscal 1994 includes the write-off of intangible assets totaling $2,908,000 associated with Taulman and the accrual of $5,987,000 to provide for anticipated losses during the shutdown period. During fiscal 1995, an additional $678,000 was added to the accrual for future anticipated losses. The Taulman shutdown represents the discontinuation of a product line. Therefore, Taulman's results of operations through the fourth quarter of fiscal 1994 were included as components of continuing operations in the consolidated statement of operations for fiscal 1994. Taulman's results of operations during fiscal 1995, 1996 and in future periods have been or will be charged against the reserve for anticipated losses during the shutdown period. As of March 31, 1996 the balance in the reserve was $2,082,000. Certain income, expense, asset and liability information with respect to Taulman for the three most recent fiscal years is as follows:
AS OF OR FOR THE YEAR ENDED MARCH 31, ------------------------------- 1994 1995 1996 ---------- ---------- --------- Net sales............... 15,871,000 11,252,000 4,843,000 Cost of products sold... 14,465,000 9,791,000 5,370,000 Selling, general and administrative expense. 4,302,000 3,445,000 1,913,000 Assets.................. 12,523,000 5,252,000 3,626,000 Liabilities............. 10,111,000 2,614,000 2,730,000
(9) ACQUISITIONS On May 31, 1996, a wholly owned subsidiary of the Company merged with and into Zimpro Environmental, Inc. ("Zimpro"), in a tax free reorganization. In connection with this acquisition, the Company issued 877,611 shares of the Company's common stock for all of the outstanding common and preferred shares of Zimpro pursuant to an Agreement and Plan of Merger among the Company, Landegger Environmental Holdings, Inc., The Black Clawson Company, a trust, and two limited partnerships in the John Hancock Capital Growth Fund F-15 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ("The Hancock Funds") (collectively the "Stockholders"). In addition, the Company liquidated existing indebtedness to The Hancock Funds in exchange for 172,491 shares of Company common stock and $1,000,000 in cash. Zimpro, based in Wisconsin, manufactures wastewater treatment equipment with proprietary technologies in wet air oxidation, landfill leachate treatment systems, ground water remediation, filtration and sludge treatment systems. This transaction has been accounted for as a pooling of interests and, accordingly, the consolidated financial statements and notes thereto for all periods presented have been restated to include the accounts and operations of Zimpro. On August 23, 1996, the businesses of the Company and Davis Water & Waste Industries, Inc. ("Davis"), were merged upon the exchange of 4,817,349 shares of the Company's common stock for all of the outstanding common and shares of Davis pursuant to an Agreement and Plan of Merger between the Company and Davis. Davis manufactures and markets products relating to the distribution of water and wastewater. Davis also designs, engineers, manufactures, sells and installs water and wastewater treatment equipment to comply with applicable health and water quality standards. This transaction has been accounted for as a pooling of interests and, accordingly, the consolidated financial statements and notes thereto for all periods presented have been restated to include the accounts and operations of Davis. Separate results of operations of the combined entities for the years ended March 31, 1994, 1995 and 1996 and the three months ended June 30, 1995 and 1996 (unaudited) are as follows:
THREE MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, --------------------------------------- -------------------------- 1994 1995 1996 1995 1996 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Revenues: U.S. Filter (as previously reported).. $180,421,000 $272,032,000 $472,537,000 $ 91,539,000 $150,801,000 Zimpro................. 29,470,000 31,678,000 28,877,000 6,950,000 -- Davis.................. 202,621,000 215,649,000 226,489,000 59,684,000 57,708,000 ------------ ------------ ------------ ------------ ------------ Combined............ $412,512,000 $519,359,000 $727,903,000 $158,173,000 $208,509,000 ============ ============ ============ ============ ============ Net income (loss) U.S. Filter (as previously reported).. $ (2,541,000) $ 8,331,000 $ 20,290,000 $ 3,359,000 $ 6,917,000 Zimpro................. (1,513,000) 460,000 (6,732,000) (182,000) -- Davis.................. (5,340,000) 3,448,000 5,749,000 1,162,000 1,086,000 ------------ ------------ ------------ ------------ ------------ Combined............ $ (9,394,000) $ 12,239,000 $ 19,307,000 $ 4,339,000 $ 8,003,000 ============ ============ ============ ============ ============ Net income (loss) per common share and common equivalent share: As previously reported. $ (0.17) $ 0.34 $ 0.54 $ 0.11 $ 0.15 ============ ============ ============ ============ ============ As restated............ $ (0.41) $ 0.41 $ 0.45 $ 0.12 $ 0.16 ============ ============ ============ ============ ============
F-16 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On October 2, 1995, the Company completed the acquisition of all of the outstanding capital stock of Polymetrics, Inc., and subsidiaries, a California corporation ("Polymetrics"), pursuant to a Stock Purchase Agreement dated as of August 30, 1995, as amended, between the Company and Anjou International Company, a U.S. subsidiary of Compagnie Generale des Eaux of France. The total purchase price for the acquisition of Polymetrics including acquisition costs, was approximately $60,200,000 consisting of $51,700,000 in cash and the delivery of 586,844 shares of Company common stock. The transaction was effective as of October 1, 1995. Polymetrics designs, manufactures, installs and services water treatment systems for the electronics, pharmaceutical, laboratory, power generation and cogeneration industries. Polymetrics also provides water treatment services, including service deionization ("SDI"). The acquisition of Polymetrics has been accounted for as a purchase and, accordingly, the results of operations of Polymetrics are included in the Company's consolidated statement of operations from the date of acquisition. The excess of fair value of net assets acquired was approximately $47,600,000 and is being amortized on a straight-line basis over 40 years. On August 11, 1995, the Company purchased substantially all of the assets and assumed certain liabilities of Continental H/2/O Services, Inc., d/b/a Interlake Water Systems, an Illinois corporation ("Interlake"), pursuant to an Asset Purchase Agreement among the Company, Interlake and the Stockholders of Interlake. The acquisition was effective as of August 1, 1995. The purchase price for the acquisition of Interlake, including acquisition costs, was approximately $27,100,000 consisting of $20,100,000 in cash and the delivery of 498,054 shares of Company common stock. Interlake provides water treatment services, including SDI, in Illinois and Michigan. In addition, Interlake sells and services a broad range of complex water treatment systems and was the largest distributor of the Company's Continental product line in the United States. The acquisition of Interlake has been accounted for as a purchase and, accordingly, the results of operations of Interlake are included in the Company's consolidated statements of operations from the date of acquisition. The excess of fair value of net assets acquired was approximately $19,000,000, and is being amortized on a straight-line basis over 40 years. On April 3, 1995, the Company acquired all of the outstanding capital stock of The Permutit Company Limited, a U.K. corporation, and The Permutit Company Pty. Ltd., an Australian corporation (collectively "The Permutit Group"), pursuant to a Share Purchase Agreement between the Company and Thames Water PLC, a U.K. corporation. The aggregate purchase price was approximately $10,000,000 and was paid entirely in cash. The Permutit Group provides a range of products, including pre-engineered water treatment systems for the pharmaceutical, laboratory and chemical markets and other commercial customers. The acquisition of The Permutit Group has been accounted for as a purchase and, accordingly, the results of operations of The Permutit Group are included in the Company's consolidated statements of operations from the date of acquisition. The excess of cost over fair value of net assets acquired was approximately $7,200,000 and is being amortized on a straight-line basis over 40 years. On May 4, 1995, the Company completed the acquisition of all of the outstanding capital stock of Arrowhead Industrial Water, Inc. ("AIW") from The B.F. Goodrich Company ("Goodrich") pursuant to a Stock Purchase Agreement dated as of February 27, 1995, as amended. The acquisition was effective as of April 30, 1995. The purchase price, as adjusted, was $84,300,000 consisting of $82,000,000 in cash and the delivery of 131,616 shares of Company common stock. AIW, headquartered in Lincolnshire, Illinois, is a supplier of owned and operated on-site industrial water treatment systems in the United States and also provides emergency and temporary mobile water treatment systems. F-17 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The acquisition of AIW has been accounted for as a purchase and, accordingly, the results of operations of AIW are included in the Company's consolidated statements of operations from the date of acquisition. The excess of fair value of net assets acquired was approximately $36,400,000 and is being amortized on a straight-line basis over 40 years. During the year ended March 31, 1996, the Company completed other acquisitions with an aggregate purchase price of approximately $58,900,000, consisting of $40,084,000 in cash and the delivery of 1,232,166 shares of Company Common Stock. The excess of fair value of net assets acquired was approximately $68,200,000, and is being amortized on a straight-line basis over 40 years. Supplementary information related to the acquisitions of Polymetrics, Interlake, The Permutit Group and AIW for the March 31, 1996 consolidated statement of cash flows is as follows: Assets acquired................................................ $230,986,000 Liabilities assumed............................................ (50,911,000) Common stock issued............................................ (17,484,000) ------------ Cash paid...................................................... 162,591,000 Fees and expenses.............................................. 1,514,000 Less cash acquired............................................. (894,000) ------------ Net cash paid................................................ $163,211,000 ============
Summarized below are the unaudited pro forma results of operations of the Company as though Polymetrics, Interlake, The Permutit Group and AIW had been acquired on April 1, 1994:
1995 1996 ------------ ------------- Revenue.......................................... $398,187,000 $ 508,783,000 ============ ============= Net income....................................... $ 7,039,000 $ 21,164,000 ============ ============= Net income per common share...................... $ 0.27 $ 0.55 ============ =============
On August 10, 1994, the Company acquired from Millipore Corporation the Ceraflo(R) ceramic product line. The total price of the product line was approximately $2,500,000 and consisted of 304,094 shares of Company common stock. On July 27, 1994, the Company acquired Seral Erich Alhauser GmbH ("Seral") by means of a purchase of Seral's outstanding capital stock. The total purchase price was $8,100,000 and consisted of $4,250,000 in cash and 450,000 shares of Company common stock. Seral, located in Germany, designs, manufactures, installs and services water purification products and systems. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of Seral are included in the Company's consolidated statement of operations for the period from the date of acquisition to March 31, 1995. The excess cost over the fair value of net assets acquired was approximately $8,222,000 and is being amortized on a straight-line basis over 40 years. On November 30, 1994, the Company completed the acquisition of the Crouzat Group ("Crouzat") by means of a purchase of all of Crouzat's outstanding capital stock. The total purchase price was $5,750,000, of which $4,640,000 was paid in cash at closing, with three annual payments of $370,000 in 1995, 1996 and 1997. Crouzat comprises three sites in France and primarily services ultrapure water purification products and had revenues in 1994 of approximately $6,000,000. The acquisition has been accounted for as a purchase and, F-18 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) accordingly, the results of the operations of Crouzat are included in the consolidated statement of operations for the period from the date of acquisition to March 31, 1995. The excess cost over the fair value of net assets acquired was approximately $3,800,000 and is being amortized on a straight-line basis over 40 years. On May 27, 1994, the Company completed the acquisition of Sation, S.A. ("Sation") by means of a purchase of all of Sation's outstanding capital stock. The total purchase price of $1,546,000 consisted of $755,000 in cash and 84,375 shares of Company stock. Sation, located in Barcelona, Spain, primarily services ultrapure water purification products. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of Sation are included in the Company's consolidated statement of operations for the period from the date of acquisition to March 31, 1995. The excess cost over the fair value of net assets acquired was $1,148,000 and is being amortized on a straight-line basis over 40 years. Effective August 31, 1994, the Company, through two of the Company's subsidiaries, acquired all of the outstanding capital stock of Smogless S.p.A. ("Smogless") from Laidlaw, Inc. The total consideration for the acquisition of Smogless (excluding acquisition costs of $396,000) consists of the following: (i) $45,000,000 in aggregate principal amount of subordinated debt of Ionpure Italy due August 31, 2001 and bearing interest at 6.5% for the period January 1, 1995 through September 30, 1995 and 4.5% thereafter, (ii) common stock purchase warrants exercisable in whole or part at any time on or before August 31, 2001 by the surrender of the subordinated debt at the rate of $12.00 in principal amount of subordinated debt for each share of common stock, (iii) 185,185 shares of a new Series B Voting Convertible Preferred Stock, (iv) 27,000 shares of the Company's common stock, and (v) $700,000 in cash. Smogless is headquartered in Milan, Italy and provides a broad range of services for wastewater treatment, including feasibility studies, process evaluation, plant design, construction and commissioning and design of specialized machinery. The acquisition of Smogless has been accounted for as a purchase and, accordingly, the results of operations of Smogless for the 7 months ended March 31, 1995 are included in the Company's consolidated statement of operations for the year ended March 31, 1995. The excess of cost over fair value of net assets acquired was approximately $39,340,000 and is being amortized on a straight-line basis over 40 years. Supplementary information related to the acquisitions of Seral, Crouzat, Sation and Smogless for the consolidated statement of cash flows for the year ended March 31, 1995 is as follows: Assets acquired............................................... $ 136,327,000 Liabilities assumed........................................... (117,641,000) Preferred stock issued........................................ (3,506,000) Common stock issued........................................... (4,835,000) ------------- Cash paid..................................................... 10,345,000 Fees and expenses............................................. 1,117,000 Less cash acquired............................................ (9,707,000) ------------- Net cash acquired........................................... $ 1,755,000 =============
Summarized below are the unaudited pro forma results of operations of the Company as though Smogless had been acquired on April 1, 1993:
1994 1995 ------------ ------------ Revenues......................................... $230,538,000 $293,104,000 ============ ============ Net income....................................... $ 526,000 $ 10,400,000 ============ ============ Net income (loss) per common share............... $ (0.01) $ 0.43 ============ ============
F-19 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On July 8, 1994, the business of the Company and Liquipure Technologies, Inc. ("Liquipure") were merged upon the exchange of 2,778,332 shares of the Company's common stock for all of the outstanding common and preferred shares of Liquipure. In addition, the Company issued 67,500 shares of its common stock to one of the shareholders of Liquipure in satisfaction of a $700,000 loan, plus accrued interest. Liquipure, based in Connecticut, provides SDI products and services through company operated and franchised dealers, and designs, manufactures, installs and services ultrapure water purification products and systems primarily for the pharmaceutical market and also manufactures standard, ultrapure water products for the laboratory market. This transaction has been accounted for as a pooling of interests and, accordingly, the consolidated financial statements and notes thereto for all periods presented have been restated to include the accounts and operations of Liquipure. Separate results of operations of the combined entities for the year ended March 31, 1994 are as follows:
1994 ------------ Revenues: U.S. Filter (as previously reported)......................... $147,870,000 Liquipure.................................................... 32,551,000 ------------ Combined.................................................. $180,421,000 ============ Net income (loss): U.S. Filter (as previously reported)......................... $ 4,986,000 Liquipure.................................................... (7,527,000) ------------ Combined.................................................. $ (2,541,000) ============
Separate unaudited results of operations of the combined entities for the period April 1, 1994 to the effective date of the merger and included in the consolidated statement of operations for the year ended March 31, 1995 are as follows:
NET INCOME REVENUES (LOSS) ----------- ---------- U.S. Filter.......................................... $47,857,000 $1,414,000 Liquipure............................................ 7,206,000 (307,000) ----------- ---------- Combined......................................... $55,063,000 $1,107,000 =========== ==========
All pro forma information presented above is in response to applicable accounting rules relating to business acquisitions. This pro forma information does not purport to be indicative of the results that actually would have been obtained if the combined operations had been conducted during the periods presented and is not intended to be a projection of future results due to extensive changes being made in the organization, facilities, personnel and other costs of the acquired companies. F-20 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (10) CONTRACT BILLING STATUS Information with respect to the billing status of contracts in process at March 31, 1995 and 1996 is as follows:
1995 1996 ------------- ------------- Contract costs incurred to date............... $ 143,886,000 $ 243,976,000 Estimated profits............................. 47,904,000 80,700,000 ------------- ------------- Contract revenue earned to date............... 191,790,000 324,676,000 Less billings to date......................... (189,245,000) (306,898,000) ------------- ------------- Cost and estimated earnings in excess of bill- ings, net.................................... $ 2,545,000 $ 17,778,000 ============= =============
The above amounts are included in the accompanying consolidated balance sheets as:
1995 1996 ------------- ------------- Costs and estimated earnings in excess of billings on uncompleted contracts............ $ 21,808,000 $ 33,575,000 Billings in excess of costs and estimated earnings on uncompleted contracts............ (19,263,000) (15,797,000) ------------- ------------- $ 2,545,000 $ 17,778,000 ============= =============
Accounts receivable include retainage which has been billed, but is not due pursuant to retainage provisions in construction contracts until completion of performance and acceptance by the customer. This retainage aggregated $5,729,000 and $4,760,000 at March 31, 1995 and 1996, respectively. Substantially all retained balances are collectible within one year. (11) LONG-TERM DEBT Long-term debt at March 31, 1995 and 1996 consists of the following:
1995 1996 ------------- ------------- Mortgage notes payable, secured by land and buildings, interest rates ranging from 2% to 8.5%, due in 1999 through 2009............... $ 7,396,000 $ 7,180,000 Guaranteed bank notes, interest rates ranging from 6.0% to 9.2%, due in 1997 through 2004.. 1,911,000 1,276,000 Unsecured notes payable, interest rates ranging from 7% to 11.5%, due in 1997 through 1999......................................... 1,353,000 1,007,000 Other......................................... 8,808,000 8,217,000 ------------- ------------- 19,468,000 17,680,000 Less current portion.......................... (4,336,000) (7,892,000) ------------- ------------- $ 15,132,000 $ 9,788,000 ============= =============
The aggregate maturities of long-term debt for each of the five years subsequent to March 31, 1996 are as follows: 1997, $7,892,000; 1998, $1,494,000; 1999, $815,000; 2000, $598,000; 2001, $580,000; and thereafter, $6,301,000. The Company has a long-term, unsecured revolving line of credit with a bank of up to $135,000,000, of which $30,413,000 was outstanding at March 31, 1996. The line of credit expires November 30, 1999 and bears interest at the bank's prime rate plus 0.25% or, in certain circumstances, Eurodollar rate. The line of credit is F-21 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) subject to certain covenants for which the Company was in compliance at March 31, 1996. At March 31, 1996, $14,036,000 of standby letters of credit were issued under this line of credit. The Company's Davis subsidiary had a long-term, secured revolving line of credit with a bank of up to $30,000,000, of which $5,343,000 was outstanding at March 31, 1996. This line of credit bore interest at the bank's prime rate or, in certain circumstances, LIBOR plus or minus various basis points. (12) CONVERTIBLE SUBORDINATED DEBENTURES On October 20, 1993, the Company sold $60,000,000 aggregate principal amount of 5% convertible subordinated debentures due October 15, 2000. The debentures are convertible into common stock at any time prior to maturity, redemption or repurchase at a conversion price of $13.67 per share, subject to adjustment in certain circumstances. The debentures are not redeemable prior to October 25, 1996, at which time the debentures are redeemable at the option of the Company, in whole or in part, at specified redemption prices plus accrued and unpaid interest to the date of redemption. Interest is payable on April 15 and October 15, commencing April 15, 1994. On September 18, 1995 the Company sold $140,000,000 aggregate principal amount of 6% Convertible Subordinated Notes due September 15, 2005. The notes are convertible into common stock at any time prior to maturity, redemption or repurchase at a conversion price of $18.33 per share, subject to adjustment in certain circumstances. The notes are not redeemable prior to September 23, 1998 at which time the notes are redeemable at the option of the Company, in whole or in part, at specified redemption prices plus accrued and unpaid interest to the date of redemption. Interest is payable semi-annually on March 15 and September 15 of each year, commencing on March 15, 1996. Effective August 31, 1994, the Company issued $45,000,000 of subordinated debt with common stock purchase warrants in connection with the acquisition of Smogless (see note 9). On September 18, 1995, these warrants to purchase 3,750,000 shares of Company common stock were exercised in exchange for the delivery of the $45,000,000 principal amount of subordinated debt. (13) ACCRUED LIABILITIES Accrued liabilities at March 31, 1995 and 1996 consist of the following:
1995 1996 ----------- ------------ Accrued job costs, start-up and customer deposits. $10,916,000 $ 26,329,000 Payroll, benefits and related taxes............... 9,008,000 18,450,000 Warranty.......................................... 3,866,000 6,631,000 Sales, property and other taxes................... 5,653,000 5,335,000 Interest.......................................... 1,771,000 3,204,000 Sales commission.................................. 2,949,000 3,674,000 Future remediation, relocation & closure costs.... 4,807,000 21,968,000 Other............................................. 11,714,000 16,824,000 ----------- ------------ $50,684,000 $102,415,000 =========== ============
F-22 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (14) INCOME TAXES Income tax expense (benefit) from continuing operations for the years ended March 31, 1994, 1995 and 1996 consist of:
1994 1995 1996 ----------- ---------- ----------- Federal: Current.............................. $ 1,343,000 $2,274,000 $ 3,484,000 Deferred............................. (7,864,000) 736,000 1,872,000 State: Current.............................. 265,000 682,000 878,000 Deferred............................. (850,000) (454,000) (504,000) Foreign: Current.............................. 19,000 20,000 4,085,000 Deferred............................. -- 1,554,000 2,240,000 ----------- ---------- ----------- $(7,087,000) $4,812,000 $12,055,000 =========== ========== ===========
Total income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal corporate tax rate of 34% for 1994 and 1995 and 35% for 1996 to income from continuing operations before income taxes as a result of the following:
1994 1995 1996 ----------- ---------- ----------- Expected income tax provision (benefit)............................ $(5,603,000) $5,797,000 $10,976,000 Permanent differences................. (300,000) 24,000 1,573,000 State franchise tax, net of Federal tax benefit.......................... (406,000) 346,000 666,000 Change in balance of valuation allowance for deferred tax assets allocated to income tax expense...... (2,930,000) (1,392,000) (2,590,000) Net operating loss carryforward unable to be utilized....................... 2,559,000 -- -- Difference in U.S. tax rate and foreign tax rates.................... -- 511,000 2,032,000 Benefit of foreign net operating loss carryforwards........................ (255,000) (581,000) (761,000) Other................................. (152,000) 107,000 159,000 ----------- ---------- ----------- $(7,087,000) $4,812,000 $12,055,000 =========== ========== ===========
As of March 31, 1996, the Company has net operating loss carryforwards in France of approximately $19,952,000. Approximately $1,946,000 of the operating losses expire in the years 1997-1998, while the remainder have an indefinite carryforward period. Any benefit of the French loss carryforward must be shared equally between the Company and Alcoa until March 31, 1997. As of March 31, 1996, the Company also has net operating loss carryforwards in other European countries of approximately $7,338,000 which expire from 1997 to 2002. As of March 31, 1996, the Company also has net operating loss carryforwards generated from Liquipure of $14,362,000, which has been recognized in fiscal 1996. These loss carryforwards expire from 2002 to 2007. In addition, the Company has net operating loss carryforwards generated from Zimpro of $2,905,000, which have not been recognized due to the uncertainty as to future realizability of these carryforwards. These loss carryforwards expire in 2009. The Company also has available, at March 31, 1996, other net operating loss and foreign tax credit carryforwards for U.S. Federal income tax purposes of approximately $13,552,000 which expire in 1999 to 2010. F-23 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The sources and tax effects of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities are as follows:
1995 1996 ------------ ------------ Deferred tax assets: Operating loss carryforwards.................... $ 17,077,000 $ 27,664,000 Pension......................................... 725,000 832,000 Inventory....................................... 2,288,000 3,540,000 Allowance for doubtful accounts................. 1,196,000 1,776,000 Long-term contracts............................. 1,084,000 175,000 Warranty........................................ 822,000 1,837,000 Vacation........................................ 712,000 1,030,000 Other accruals.................................. 668,000 1,134,000 Tax credits..................................... 258,000 501,000 Closure reserves................................ 2,488,000 1,524,000 Other........................................... 1,677,000 3,936,000 ------------ ------------ 28,995,000 43,949,000 Valuation allowance............................. (10,503,000) (19,946,000) ------------ ------------ Total deferred tax assets.................... 18,492,000 24,003,000 Deferred tax liabilities: Depreciation and amortization................... 7,148,000 12,129,000 Prepaid expenses................................ 243,000 500,000 Long-term contracts............................. -- 4,206,000 Other........................................... 9,648,000 620,000 ------------ ------------ 17,039,000 17,455,000 ------------ ------------ Net deferred tax assets...................... $ 1,453,000 $ 6,548,000 ============ ============
The Company believes that it is more likely than not that the net deferred tax assets, including Federal net operating loss carryforwards, will be realized prior to their expiration. This belief is based on recent and anticipated future earnings and, in part, on the fact that the Company has completed several acquisitions during and including the three years ended March 31, 1996 of companies with strong earnings potential. A valuation allowance of $19,946,000 at March 31, 1996 has been recognized and consists primarily of state and foreign net operating losses which may not be realized prior to their expiration periods. (15) SHAREHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK In January 1992 and September 1994, the Company issued 880,000 shares of a new Series A Cumulative Convertible Preferred Stock and 185,185 shares of a new Series B Convertible Preferred Stock, respectively, in connection with acquisitions. On September 18, 1995, the Company repurchased and canceled 139,518 shares of Series B Preferred stock for $4,709,000, and converted 45,667 shares of Series B Preferred Stock into 102,750 shares of Company common stock. On March 4, 1996, the holder of the Company's Series A Preferred Stock tendered the 880,000 preferred shares for conversion into 1,980,000 shares of Company common stock pursuant to terms of the security. F-24 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) COMMON STOCK On December 5, 1994, the Company paid in the form of a stock dividend a 3- for-2 split of the Company's common stock. The par value of the new shares issued was $50,000 which was transferred from additional paid-in-capital to the common stock account. All references to income (loss) per share and other common stock information in the accompanying consolidated financial statements and notes thereto have been restated to reflect the 3-for-2 split. On May 3, 1995, the Company completed an underwritten public offering of 10,350,000 shares of its common stock at a price equal to $10.00 per share. The net proceeds to the Company, after underwriting discounts and commissions and before other related expenses, were $98,118,000. On July 15, 1996, the Company paid in the form of a stock dividend a 3-for-2 split of the Company's common stock. All references to income (loss) per share and other common stock information in the accompanying consolidated financial statements and notes thereto have been restated to reflect the 3-for-2 split. OPTIONS Under the Company's 1991 Employee Stock Option Plan (the "Plan"), the exercise price of options granted is equal to their fair market value at the date of grant and the maximum term of the option may not exceed 10 years. If the optionee is a holder of more than 10% of the outstanding common stock of the Company, the option price per share is increased to at least 110% of fair market value, and the option term is limited to 5 years. The total number of shares of common stock authorized under the Plan is 3,881,250 shares. Each option granted becomes exercisable on a cumulative basis, 25% six months following the date of grant and 25% on each subsequent anniversary of the grant date. Under the Company's 1991 Director Stock Option Plan (the "Directors Plan"), the exercise price of options granted was equal to the higher of $2.00 below the market price or 60% of the market price on the date of grant. Effective April 1, 1996 the Directors Plan was amended to grant options equal to their fair market value at the date of grant. Under the Plan, each director of the Company who is not a full-time employee of the Company will receive each year an option to purchase 12,000 shares of common stock. The total number of shares available under the Directors Plan is 562,500 shares. Compensation expense of $80,000, $122,000 and $112,000 was recorded in 1994, 1995 and 1996, respectively, related to the Directors Plan. Transactions involving the Plan and Directors Plan are summarized as follows:
NUMBER OF AGGREGATE SHARES EXERCISE PRICE VALUE --------- -------------- ----------- Balance at March 31, 1993............. 1,499,793 $1.35 to 22.67 $10,525,000 Options granted....................... 719,459 1.35 to 10.95 6,904,000 Options exercised..................... (236,931) 2.45 to 9.28 (1,255,000) Options canceled...................... (56,439) 7.33 to 22.67 (532,000) --------- -------------- ----------- Balance at March 31, 1994............. 1,925,882 1.35 to 10.95 15,642,000 Options granted....................... 898,290 1.35 to 10.59 7,650,000 Options exercised..................... (241,040) 2.45 to 9.83 (1,422,000) Options canceled...................... (40,785) 7.33 to 9.83 (375,000) --------- -------------- ----------- Balance at March 31, 1995............. 2,542,347 1.35 to 10.95 21,495,000 Options granted....................... 1,013,250 9.04 to 18.67 12,764,000 Options exercised..................... (487,886) 1.35 to 10.95 (3,678,000) Options canceled...................... (20,626) 8.53 to 10.58 (183,000) --------- -------------- ----------- Balance at March 31, 1996............. 3,047,085 $1.35 to 18.67 $30,398,000 ========= ============== ===========
F-25 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In connection with the warrants, options, convertible debentures and preferred stock, the Company has reserved 13,342,754 shares at March 31, 1995 and 15,474,000 shares at March 31, 1996 for future issuance. (16) RETIREMENT PLANS Pursuant to the terms of a collective bargaining agreement, one of the Company's U.S. subsidiaries has a defined benefit pension plan covering substantially all of its hourly employees. Pension plan benefits are generally based upon years of service and compensation. The Company's funding policy is to contribute at least the minimum amounts required by the Employee Retirement Income Security Act of 1974 or additional amounts to assure that plan assets will be adequate to provide retirement benefits. Plan assets are invested in broadly diversified portfolios of government obligations, mutual funds and fixed income and equity securities. The accumulated benefit obligation under this plan is not material to the consolidated financial statements. The Company has a defined contribution plan (under IRC Section 401(k)) covering substantially all U.S. salaried and hourly participating employees which provide for contributions based primarily upon compensation levels and employee contributions. The Company funds its contributions to these plans as accrued. Defined contribution plan expense to the Company was $519,000, $810,000 and $1,631,000 for the years ended March 31, 1994, 1995 and 1996, respectively. The Company's Davis subsidiary had a defined benefit pension plan covering substantially all of its employees. Upon acquisition of Davis by the Company, the defined benefit pension plan was frozen and all liabilities have been fully accrued. The pension plan expense for prior years was not significant. (17) BUSINESS SEGMENT DATA AND EXPORT SALES The Company's sole business segment is the design, manufacture, operation, distribution and service of equipment and supplies for filtration, water treatment and wastewater treatment for industrial and municipal customers. There were no sales to any individual customers which accounted for 10% or more of revenue in fiscal 1994, 1995 and 1996. Export sales accounted for $28,881,000, $37,940,000 and $58,560,000 in fiscal 1994, 1995 and 1996, respectively. Information about the Company's operations in different geographic locations for the years ended March 31, 1994, 1995 and 1996 is as follows:
1994 1995 1996 ------------- ------------ ------------ Revenues from unaffiliated customers: United States.................. $ 364,593,000 $406,593,000 $515,036,000 Foreign........................ 47,919,000 112,766,000 212,867,000 ------------- ------------ ------------ $412,512,000 $519,359,000 $727,903,000 ============= ============ ============ Operating income (loss): United States.................. $ (6,318,000) $ 16,695,000 $ 23,566,000 Foreign........................ 1,263,000 6,428,000 17,081,000 ------------- ------------ ------------ $ (5,055,000) $ 23,123,000 $ 40,647,000 ============= ============ ============ Identifiable assets: United States.................. $ 332,700,000 $318,594,000 $574,838,000 Foreign........................ 24,654,000 164,129,000 301,667,000 ------------- ------------ ------------ $ 357,354,000 $482,723,000 $876,505,000 ============= ============ ============
F-26 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (18) COMMITMENTS AND CONTINGENT LIABILITIES COMMITMENTS The Company and its subsidiaries lease certain facilities and equipment under various noncancelable and month-to-month leases. These leases are accounted for as operating leases. Rent expense aggregated $6,521,000, $8,033,000 and $8,991,000 in 1994, 1995 and 1996, respectively. A summary of the future minimum annual rental commitments as of March 31, 1996, under operating leases follows:
OPERATING LEASES ----------- Fiscal year ending: 1997........................................................... $ 7,481,000 1998........................................................... 5,852,000 1999........................................................... 5,073,000 2000........................................................... 2,591,000 2001........................................................... 1,180,000 Thereafter..................................................... 960,000 ----------- Total minimum lease payments................................... $23,137,000 ===========
CONTINGENT LIABILITIES In December of 1995, allegations were made by federal and state environmental regulatory authorities of multiple violations in connection with wastewater discharges at a facility owned by the Company. The facility was acquired by the Company as part of its acquisition of Polymetrics on October 2, 1995 (note 9). The Company has rights of indemnity from the seller which could be available if monetary damages and penalties are incurred in connection with any alleged violations occurring prior to the Company's acquisition of Polymetrics. In the opinion of management, the ultimate liability that may result from the above matter will not have a material adverse effect on the Company's consolidated financial position or results of operations. Legal proceedings pending against the Company consist of litigation incidental to the Company's business and in the opinion of management, based in part upon the opinion of counsel, the outcome of such litigation will not materially affect the Company's consolidated financial position or results of operations. (19) QUARTERLY FINANCIAL DATA (UNAUDITED)
GROSS NET INCOME REVENUES PROFIT NET INCOME PER SHARE* ------------ ----------- ---------- ---------- 1995 First quarter................ $113,638,000 $24,761,000 $1,801,000 $0.06 Second quarter............... 130,522,000 30,324,000 3,215,000 0.11 Third quarter................ 133,027,000 31,195,000 3,192,000 0.11 Fourth quarter............... 142,172,000 34,324,000 4,031,000 0.13 1996 First quarter................ $158,173,000 $38,850,000 $4,339,000 $0.12 Second quarter............... 173,927,000 46,156,000 6,371,000 0.15 Third quarter................ 186,663,000 49,172,000 7,002,000 0.15 Fourth quarter............... 209,140,000 55,152,000 1,595,000 0.03 1997 First quarter................ $208,509,000 $56,335,000 $8,003,000 $0.16
- --------------------- * Per common and common equivalent share F-27 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (20) SUBSEQUENT EVENTS On September 6, 1996, the Company entered into an agreement and plan of merger with various parties in connection with a proposed acquisition by the Company of all of the outstanding capital stock of the Utility Supply Group, Inc. ("USG"). The purchase price for USG will be approximately $44,000,000, consisting of approximately $22,000,000 of the Company's common stock and assumption of USG debt of approximately $22,000,000. USG is a leading provider of water and wastewater related products and services to industrial and municipal customers through 30 offices in the United States. USG had revenues of $156,838,000 and net income of $1,048,000 for the year ended December 31, 1995. The proposed transaction is expected to be completed in October 1996, and will be accounted for as a purchase. On September 10, 1996, the Company entered into a stock purchase agreement in connection with a proposed acquisition of WaterPro Supplies Corporation ("WaterPro"). The purchase price for WaterPro will be approximately $101,600,000, consisting entirely of the Company's common stock. WaterPro is the largest national distributor of water and wastewater related products and services for municipal water, sewer authorities and underground contractors, and has 43 locations throughout the United States. WaterPro had revenues of $187,540,000 and net income of $2,329,000 for the period April 7, 1995 to December 31, 1995. The proposed transaction is expected to be completed in October 1996, and will be accounted for as a purchase. On September 14, 1996, the Company entered into a purchase and sale agreement with Wheelabrator Technologies Inc. ("Wheelabrator") in connection with a proposed acquisition by the Company of Wheelabrator's Water Systems and Manufacturing Group ("WSMG"). Pursuant to the terms of the definitive agreement, the Company will pay approximately $369,600,000 in cash for WSMG, which provides a broad range of water and wastewater engineering, technology and systems. In addition, the Company and Wheelabrator announced an agreement in principle to establish a joint venture to develop, finance, own and operate water and wastewater infrastructure in North America. WSMG had revenues of $293,207,000, $364,335,000 and $452,134,000 for the years ended December 31, 1993, 1994 and 1995, respectively. In addition, WSMG had net income of $13,454,000, $13,226,000 and $16,361,000 for the years ended December 31, 1993, 1994 and 1995, respectively. The proposed transaction is expected to be completed in November 1996, and will be accounted for as a purchase. On October 7, 1996, the Company entered into a purchase and sale agreement with United Utilities PLC and certain of its subsidiaries in connection with a proposed acquisition by the Company of its Process Equipment Division ("PED"). In accordance with the terms of the definitive agreement, the Company will pay approximately $150,000,000 in cash and approximately $35,000,000 in common stock for PED, which provides a broad range of water and wastewater engineering technology and systems. PED had revenues of $254,955,000 and $267,358,000 for the years ended March 31, 1995 and 1996, respectively, and net loss of $13,576,000 and $39,496,000 for the years ended March 31, 1995 and 1996, respectively. The proposed transaction is expected to be completed in December 1996, and will be accounted for as a purchase. F-28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of WaterPro Supplies Corporation: We have audited the accompanying balance sheet of WaterPro Supplies Corporation as of December 31, 1995, and the related statements of operations, stockholders' investment and cash flows for the period from April 7, 1995 to December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WaterPro Supplies Corporation as of December 31, 1995, and the results of its operations and its cash flows for the period from April 7, 1995 to December 31, 1995, in conformity with generally accepted accounting principles. Arthur Andersen LLP Minneapolis, Minnesota, February 8, 1996 F-29 WATERPRO SUPPLIES CORPORATION BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER JUNE 30, 31, 1995 1996 -------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $ 1,508 $ -- Trade accounts receivable, less allowance for doubtful accounts of $233 in 1995 and $338 in 1996.............. 46,730 62,018 Inventories............................................. 19,707 28,443 Other current assets.................................... 1,780 1,673 ------- -------- Total current assets.................................. 69,725 92,134 ------- -------- PROPERTY AND EQUIPMENT: Land, buildings and leasehold improvements.............. 2,189 2,224 Machinery and equipment................................. 9,763 9,722 Accumulated depreciation................................ (5,622) (6,541) ------- -------- Net property and equipment............................ 6,330 5,405 OTHER ASSETS, principally goodwill........................ 14,715 14,203 ------- -------- $90,770 $111,742 ======= ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Revolving credit line with Parent....................... $56,400 $ 60,679 Accounts payable........................................ 18,567 34,601 Accrued liabilities..................................... 5,331 5,887 Income taxes payable.................................... 3,092 1,865 ------- -------- Total current liabilities............................. 83,390 103,032 DEFERRED INCOME TAXES..................................... 51 151 ------- -------- Total liabilities..................................... 83,441 103,183 ------- -------- COMMITMENTS AND CONTINGENCIES (Note 6).................... STOCKHOLDERS' INVESTMENT: Common stock, $.01 par value, 200,000 shares authorized; 50,000 shares issued and outstanding 1 1 Paid-in capital......................................... 4,999 4,999 Retained earnings....................................... 2,329 3,559 ------- -------- Total stockholders' investment........................ 7,329 8,559 ------- -------- $90,770 $111,742 ======= ========
The accompanying notes are an integral part of this balance sheet. F-30 WATERPRO SUPPLIES CORPORATION STATEMENT OF OPERATIONS (IN THOUSANDS)
APRIL 7, 1995 TO SIX MONTHS ENDED DECEMBER 31,1995 JUNE 30, 1996 ---------------- ---------------- (UNAUDITED) NET SALES................... $187,540 $137,304 COST OF SALES............... 156,180 112,893 -------- -------- Gross profit............ 31,360 24,411 -------- -------- OPERATING EXPENSES: Warehouse and delivery.... 4,182 3,375 Selling................... 5,878 5,032 General and administrative........... 13,992 11,809 -------- -------- Total operating expenses............... 24,052 20,216 -------- -------- Income from operations.. 7,308 4,195 OTHER INCOME (EXPENSE): Interest expense.......... (3,593) (2,282) Other income, net......... 291 229 -------- -------- Income before provision for income taxes....... 4,006 2,142 PROVISION FOR INCOME TAXES.. 1,677 912 -------- -------- NET INCOME.................. $ 2,329 $ 1,230 ======== ========
The accompanying notes are an integral part of this financial statement. F-31 WATERPRO SUPPLIES CORPORATION STATEMENTS OF STOCKHOLDERS' INVESTMENT FOR THE PERIOD FROM APRIL 7, 1995 TO DECEMBER 31, 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TOTAL ------------- PAID-IN RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS INVESTMENT ------ ------ ------- -------- ------------- BALANCE, April 7, 1995............ 50,000 $ 1 $4,999 $ -- $5,000 Net income...................... -- -- -- 2,329 2,329 ------ --- ------ ------ ------ BALANCE, December 31, 1995........ 50,000 1 4,999 2,329 7,329 Net income (unaudited).......... -- -- -- 1,230 1,230 ------ --- ------ ------ ------ BALANCE, June 30, 1996 (unaudited)...................... 50,000 $1 $4,999 $3,559 $8,559 ====== === ====== ====== ======
The accompanying notes are an integral part of this financial statement. F-32 WATERPRO SUPPLIES CORPORATION STATEMENT OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS APRIL 7, 1995 TO ENDED JUNE 30, DECEMBER 31, 1995 1996 ----------------- -------------- (UNAUDITED) OPERATING ACTIVITIES: Net income.................................. $ 2,329 $ 1,230 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization............. 2,050 1,282 Deferred income taxes..................... (1,416) 164 Change in current operating items: Trade accounts receivable............... (3,057) (15,462) Inventories............................. 5,276 (8,922) Other current assets.................... 53 43 Accounts payable........................ 3,195 16,034 Accrued liabilities..................... 1,931 556 Provision for losses on accounts receivable............................. 233 175 Provision for inventory devaluation..... 77 186 Income taxes payable.................... 3,094 (1,228) -------- ------- Net cash provided by operating activities........................... 13,765 (5,942) -------- ------- INVESTING ACTIVITIES: Acquisition, net of cash paid............... (16,596) -- (Purchases)/disposals of property and equipment (net)............................ (341) 155 -------- ------- Net cash used by investing activities. (16,937) 155 -------- ------- FINANCING ACTIVITIES: Net borrowings from Parent.................. 5,955 4,279 -------- ------- Net cash used by financing activities. 5,955 4,279 -------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. 2,783 (1,508) CASH AND CASH EQUIVALENTS, beginning of period....................................... (1,275) 1,508 -------- ------- CASH AND CASH EQUIVALENTS, end of period...... $ 1,508 $ -- ======== ======= NONCASH DISCLOSURES: Interest paid............................... $ 3,219 $ 2,287 Taxes paid.................................. $ 25 $ 1,949 ======== =======
The accompanying notes are an integral part of this financial statement. F-33 WATERPRO SUPPLIES CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 1. DESCRIPTION OF BUSINESS: WaterPro Supplies Corporation (the Company), a Massachusetts corporation, is principally engaged in the wholesale distribution of components for repairing and expanding municipal water supply and wastewater collections systems. Management has made estimates that affect the reported amounts and disclosure of contingencies at the date of the financial statements. The ultimate results could differ from those estimates. WaterPro Supplies Corporation was acquired by Edmundson International, Inc. (the Parent), along with related parties, effective April 7, 1995 under an agreement dated March 2, 1995. Under the agreement, the Parent paid $52.8 million in cash for 100% of the stock of the Company. The amount of the purchase price was pushed down to the Company in the form of a note totaling $47.8 million and equity of $5.0 million. The acquisition was accounted for using the purchase method of accounting, and as such, the purchase price was allocated to the assets and liabilities acquired based on the estimated fair values at the acquisition date. The acquisition price exceeded the underlying equity in net assets by $12.9 million, which is being amortized over a period of 15 years. The statement of operations is presented for the period from the acquisition date of April 7, 1995 to December 31, 1995. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Cash and Cash Equivalents The Company considers all financial instruments which are highly liquid, are readily convertible to cash and have original maturities of three months or less to be cash equivalents. Cash and cash equivalents include cash and money market funds. Inventories Inventories are stated at the lower of cost or market using the weighted- average pricing method, which approximates the first-in, first-out (FIFO) method. At December 31, 1995, inventory is stated net of reserves of $876,000 which are provided based on a formula to recognize slow-moving and obsolete inventory. Property and Equipment Property and equipment are stated at cost. Depreciation is provided principally using the straight-line method over the estimated useful lives of the related assets for financial reporting purposes and, in certain instances, on an accelerated basis for income tax reporting purposes. Lives used for computing depreciation are as follows: Land improvements.............................................. 5-15 years Buildings...................................................... 40 years Machinery and equipment........................................ 3-5 years
Other Assets Other assets consists principally of goodwill which is being amortized over 15 years. Amounts are shown on the accompanying balance sheet net of $638,000 of accumulated amortization. Income Taxes The Company is a part of the Parent's consolidated federal income tax return. Under a tax sharing arrangement with the Parent, the proportionate share of all benefits and liabilities are allocated back and recorded F-34 WATERPRO SUPPLIES CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 by the Company. As such, all related tax assets and liabilities are recorded as if the Company were filing a return on a stand-alone basis. The Company maintains its income taxes under the liability method, whereby deferred income tax assets and liabilities are recognized for the differences between financial and income tax reporting bases of assets and liabilities based on enacted tax rates and laws. Accounting Pronouncements During 1995, the Company adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS 121 establishes accounting standards for the recognition and measurement of impairment of long-lived assets to be held or disposed. The adoption of SFAS 121 did not have a material impact on the Company's financial position or results of operations. Unaudited Interim Financial Statements The financial statements for the six months ended June 30, 1996 are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring items, considered necessary for a fair presentation have been included. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted from the interim financial statements. The results of operations for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. 3. ACQUISITION: On December 17, 1995, the Company acquired the Utility Systems Division of Price Brothers Company (Price Brothers) in an asset purchase agreement. Under the arrangement, the Company paid $16.6 million in cash. Certain real estate was also purchased directly by the Parent and leased back to the Company. The acquisition was accounted for using the purchase method of accounting, and as such, the purchase price was allocated to the assets and liabilities acquired based on their estimated fair values at the date of the acquisition. The acquisition cost exceeded the underlying equity in net assets by approximately $2.5 million, which is being amortized over a period of 15 years. 4. FINANCING ARRANGEMENTS: The Company has a $75.0 million revolving credit line with the Parent available to meets its working capital needs and for acquisition activity. The Company had $56.4 million outstanding on the line of credit as of December 31, 1995. Interest is charged based on the prime rate in effect at the beginning of each month. 5. INCOME TAXES: A summary of the components of the provision for income taxes for the period April 7 to December 31, 1995 is as follows (in thousands): Current: Federal........................................................ $ 2,444 State.......................................................... 649 Deferred......................................................... (1,416) ------- $ 1,677 =======
F-35 WATERPRO SUPPLIES CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 A reconciliation of income taxes computed using the statutory federal income tax rate and recorded provision for income taxes during the period April 7 to December 31, 1995 is as follows (in thousands): Federal income taxes.............................................. $1,501 State income taxes, net of federal tax benefit.................. 229 Other differences............................................... (53) ------ Provision for income taxes...................................... $1,677 ======
The significant components of the deferred tax asset and liability accounts are as follows as of December 31, 1995 (in thousands): Current deferred tax assets: Accruals and reserves not currently deductible.................. $1,465 ------ Total......................................................... $1,465 ====== Noncurrent deferred tax liabilities: Depreciation.................................................... $ 151 ------ Total......................................................... $ 151 ======
6. COMMITMENTS AND CONTINGENCIES: Operating Leases The Company has entered into operating lease agreements, principally for warehouse and office space. Certain of these lease agreements are with related entities. Rent expense related to these leases was $36,000 in 1995. Rent expense and other costs associated with all leases were $1,549,000 in the period April 7 to December 31, 1995. Combined future minimum lease payments are as follows (in thousands): 1996............................................................... $1,772 1997............................................................... 1,731 1998............................................................... 1,572 1999............................................................... 1,029 2000............................................................... 744 Thereafter......................................................... 1,422 ------ $8,270 ======
Litigation Matters The Company has been named as a defendant in lawsuits in the normal course of business. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. F-36 INDEPENDENT AUDITORS' REPORT The Board of Directors Wheelabrator Technologies Inc.: The Board of Directors United States Filter Corporation: We have audited the accompanying combined balance sheets of the Systems and Manufacturing Group of Wheelabrator Technologies Inc. (the "Businesses") as of December 31, 1994 and 1995, and the related combined statements of income and cash flows for each of the years in the three-year period ended December 31, 1995. These financial statements are the responsibility of the management of the Businesses. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Systems and Manufacturing Group of Wheelabrator Technologies Inc. as of December 31, 1994 and 1995 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Chicago, Illinois October 15, 1996 F-37 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ----------------- JUNE 30, ASSETS 1994 1995 1996 ------ -------- -------- ----------- (UNAUDITED) Current Assets: Cash and cash equivalents.......................... $ 25,122 $ 25,092 $ 21,464 Accounts receivable, net........................... 81,490 87,526 97,286 Inventories........................................ 31,527 48,407 46,720 Costs and estimated earnings in excess of billings on uncompleted contracts.......................... 20,498 22,710 18,942 Other current assets............................... 2,920 2,028 3,216 -------- -------- -------- Total current assets............................. 161,557 185,763 187,628 -------- -------- -------- Property, plant, and equipment, net.................. 48,253 47,354 53,076 Goodwill, net........................................ 151,483 158,074 155,801 Other assets......................................... 5,365 3,756 2,957 -------- -------- -------- Total assets..................................... $366,658 $394,947 $399,462 ======== ======== ======== LIABILITIES AND GROUP EQUITY ---------------------------- Current Liabilities: Accounts payable................................... $ 56,485 $ 53,163 $ 53,977 Accrued liabilities................................ 51,615 47,816 47,404 Advance payment on contracts....................... 19,802 19,966 24,149 -------- -------- -------- Total current liabilities........................ 127,902 120,945 125,530 -------- -------- -------- Other long-term liabilities.......................... 17,732 16,003 13,196 Commitments and contingencies........................ Group Equity: Group equity....................................... 220,527 255,816 258,976 Cumulative translation adjustment.................. 497 2,183 1,760 -------- -------- -------- Total group equity................................. 221,024 257,999 260,736 -------- -------- -------- Total liabilities and group equity............... $366,658 $394,947 $399,462 ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. F-38 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP COMBINED INCOME STATEMENTS (IN THOUSANDS)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, --------------------------- ------------------ 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- (UNAUDITED) Revenue........................ $293,207 $364,335 $452,134 $226,613 $222,648 Operating expenses............. 222,384 281,946 361,462 180,279 173,709 -------- -------- -------- -------- -------- Gross margin................. 70,823 82,389 90,672 46,334 48,939 Selling, general & administrative expenses....... 47,261 62,224 68,170 34,387 32,962 -------- -------- -------- -------- -------- Operating income............. 23,562 20,165 22,502 11,947 15,977 Gain (loss) on sale of assets.. (5) 955 4,212 (8) 28 Interest, net.................. 288 168 423 178 310 Other income (expense), net.... (1,421) 755 132 80 (34) -------- -------- -------- -------- -------- Income before pro forma income tax provision........ 22,424 22,043 27,269 12,197 16,281 Pro forma income tax provision. 8,970 8,817 10,908 4,879 6,512 -------- -------- -------- -------- -------- Net income................... $ 13,454 $ 13,226 $ 16,361 $ 7,318 $ 9,769 ======== ======== ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. F-39 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------- ------------------ 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- (UNAUDITED) Operating Activities: Net income................. $ 13,454 $ 13,226 $ 16,361 $ 7,318 $ 9,769 Adjustment to reconcile net income to cash flows from operating activities:..... Depreciation and amortization............ 5,581 9,608 11,211 5,514 5,960 Changes in assets and liabilities, net of effects of acquired businesses:............. Accounts receivable.... (2,088) (8,116) (5,292) (17,999) (9,700) Inventories............ 5,254 (6,423) (11,222) (1,540) 1,687 Costs and estimated earnings in excess of billings on uncompleted contracts. (17,182) 3,014 (2,212) (827) 3,768 Accounts payable....... 5,865 4,327 (4,143) (5,300) 814 Accrued liabilities.... 3,213 (2,889) (4,182) 1,681 (412) Advance payments on contracts............. (982) (239) (6,358) (6,564) 4,183 Other, net................. 4,603 2,310 (2,973) 3,476 (2,968) -------- -------- -------- -------- -------- Net cash provided by (used for) operating activities............ 17,718 14,818 (8,810) (14,241) 13,101 -------- -------- -------- -------- -------- Investing Activities: Capital expenditures....... (4,202) (5,075) (9,817) (3,768) (11,974) Sale of property, plant, and equipment............. 5,805 3,834 8,054 2,704 419 Cash paid for acquisitions, net of acquired cash...... (24,790) (18,848) (5,746) -- -- Other, net................. -- (1,375) 46 (765) -- -------- -------- -------- -------- -------- Net cash provided by (used for) investing activities.............. (23,187) (21,464) (7,463) (1,829) (11,555) -------- -------- -------- -------- -------- Financing Activities: Increase (decrease) in group equity.............. 6,073 20,073 20,614 12,048 (7,032) Other, net................. -- 3,423 (4,371) (554) 1,858 -------- -------- -------- -------- -------- Net cash provided by (used for) investing activities.............. 6,073 23,496 16,243 11,494 (5,174) -------- -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents........ 604 16,850 (30) (4,576) (3,628) Cash and cash equivalents at beginning of period......... 7,668 8,272 25,122 25,092 25,092 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period............... $ 8,272 $ 25,122 $225,092 $220,516 $ 21,464 ======== ======== ======== ======== ======== Significant noncash investing activities Liabilities assumed in acquisitions.............. $ 29,883 $ 74,067 $ 8,232 $ -- $ -- ======== ======== ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. F-40 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1 BUSINESS DESCRIPTION AND BASIS OF PRESENTATION The Systems and Manufacturing Group (the "Businesses") of Wheelabrator Technologies Inc. ("WTI") provide products and services to customers in the water, wastewater and general industrial markets, primarily in the United States, Europe and Asia. The majority of the Businesses have been acquired by WTI in the last three years. Certain other Businesses have been owned by WTI or its predecessors since prior to 1993. The Businesses have no separate legal status or existence. The assets and liabilities comprising the majority of the U.S. based Businesses are owned by a wholly owned subsidiary of WTI. In connection with a proposed transaction whereby WTI would sell the Businesses to United States Filter Corporation ("USF"), WTI and USF have entered into a definitive Purchase and Sale Agreement dated September 14, 1996 (the "Agreement"), the terms of which provide for certain assets to be purchased and certain liabilities assumed by USF in connection with Businesses based in the United States. Additionally, the Agreement provides for certain liabilities relating to the Businesses to be retained by WTI and for WTI to indemnify USF in connection with certain other matters (collectively the "Retained Liabilities"). These financial statements reflect the financial condition, results of operations and cash flows for the Businesses on a combined basis, excluding the Retained Liabilities, for all periods presented. NOTE 2 SIGNIFICANT ACCOUNT POLICIES Combined Financial Statements The combined financial statements include the accounts of the Businesses and the majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Investments in affiliates WTI does not control are accounted for using the equity method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, income, expenses and disclosures of contingencies. Future events could alter such estimates. Concentrations The Businesses offer a multitude of products and services to a diverse customer base. Management believes the Businesses have no significant customer, supplier, product line, credit risk, geographic or other concentrations that could expose the Businesses to adverse, near-term severe financial impacts. Revenue Recognition Revenues from certain long-term engineering and equipment supply contracts are recognized on the percentage-of-completion basis, with estimated losses recognized in full when identified. All other revenues are recognized when services are rendered or products are shipped. Foreign Currency Foreign subsidiaries' income statement accounts are translated at the average exchange rates in effect during the period, while assets and liabilities are translated at the rates of exchange at the balance sheet date. The resulting balance sheet translation adjustments are charged or credited directly to group equity. Foreign exchange transaction gains and losses realized during 1993, 1994 and 1995 were not significant. F-41 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Combined Statements of Cash Flows For purposes of the Combined Statements of Cash Flows, all highly liquid instruments purchased with an original maturity of three months or less are considered to be cash equivalents. Derivative Financial Instruments From time to time, the Businesses use derivative instruments to manage currency risk. Immaterial amounts of various currencies were sold forward for delivery at various dates in 1995 to hedge foreign exchange exposure on specifically identified transactions. Gains or losses on these transactions are included in the measurement of the subsequent transaction. Where deemed advantageous, management will enter similar hedges in the future to mitigate foreign exchange exposure. Fair Value of Financial Instruments Financial instruments of the Businesses consist primarily of cash and cash equivalents, receivables and accounts payable. The book values of such instruments are considered to be representative of their respective fair values. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value). Property, Plant and Equipment Property, plant, and equipment (including major improvements) are capitalized and stated at cost. Items of an ordinary maintenance or repair nature are charged directly to operating expense. The cost less estimated salvage value of property, plant, and equipment is generally depreciated on a straight-line basis over estimated useful lives that range from 3 to 35 years. Goodwill The excess of cost over fair value of the net assets of acquired businesses ("goodwill") is amortized on a straight-line basis over 40 years. The accumulated amortization balances as of December 31, 1994 and 1995 were $8.2 million and $12.2 million, respectively. On an ongoing basis, the realizability of goodwill is measured by the ability of the acquired businesses to generate current and undiscounted expected future cash flows in excess of unamortized goodwill. If such realizability were in doubt, an adjustment would be made to reduce the carrying value of the goodwill. No such adjustments have been made with respect to the Businesses. Pro Forma Income Taxes Certain of the assets and liabilities comprising the Businesses are not stand alone, taxable entities (see Note 1). The taxable income from Businesses operating in the United States have been included in the consolidated federal tax returns of WTI for all periods presented. Entities outside the United States are taxable in the jurisdictions in which they are organized or are doing business. For the purposes of the accompanying combined financial statements, a pro forma income tax expense has been provided at 40 percent of reported combined pretax income. F-42 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Contracts in Process Information with respect to contracts in process at December 31, 1994 and 1995 follows. Contracts in process are included in the combined balance sheets under the following captions (in thousands):
YEARS ENDED DECEMBER 31, ---------------- 1994 1995 ------- ------- Costs and earnings in excess of billings................ $20,498 $22,710 Advance payments on contracts........................... (19,802) (19,966) ------- ------- Total contracts in process............................ $ 696 $ 2,744 ======= =======
All contracts in process are expected to be billed and collected within two years. Accounts receivable include retainage that has been billed but is not due until completion pursuant to the terms of the contract. Such retainage at December 31, 1995 was $3.7 million, all of which (except for amounts provided for) is expected to be collected within one year. At December 31, 1994, retainage was $3.0 million. Accounting Pronouncements Effective January 1, 1994, the Businesses adopted Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Postemployment Benefits" ("FAS 112"). This new statement established accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. The adoption of FAS 112 did not have a material impact on the combined financial statements of the Businesses since its accounting prior to adoption of FAS 112 was substantially in compliance with the new standard. Also effective during 1994 was Statement of Financial Accounting Standards No. 115, "Accounting for Certain Debt and Equity Securities" ("FAS 115"). The Businesses do not have significant investments and does not contemplate acquiring significant investments of the type covered in FAS 115. The Businesses are required to adopt Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), beginning in 1996. Management does not believe the adoption of FAS 121 will have a material impact on the combined financial statements of the Businesses. Unaudited Interim Information The combined financial statements as of June 30, 1996 and for the six months ended June 30, 1995 and 1996 are unaudited. In the opinion of management, the unaudited combined financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted from the interim combined financial statements. The results of operations for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. F-43 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3. GROUP EQUITY, ALLOCATIONS AND OTHER RELATED PARTY TRANSACTIONS Group Equity The group equity account reflects the activity between WTI and the Businesses, a summary of which follows (in thousands):
YEARS ENDED DECEMBER 31, --------------------------- 1993 1994 1995 -------- -------- -------- Beginning balance............................ $168,198 $187,725 $221,024 Net income................................... 13,454 13,226 16,361 Net intercompany transactions................ 6,969 18,680 18,928 Translation adjustment....................... (896) 1,393 1,686 -------- -------- -------- Ending balance............................. $187,725 $221,024 $257,999 ======== ======== ========
Cash Management Certain of the Businesses participate in WTI's centralized cash management system and, as such, their cash funding requirements have been met by WTI and all excess cash has been transferred to WTI. Allocations The combined income statements includes all direct costs of the Businesses as well as certain corporate costs directly identified with the Businesses. WTI has not allocated interest income or expense to the Businesses. In the opinion of management, these allocations have been made on a basis which is believed to be reasonable for a group of businesses operating within the structure of a larger parent organization. However, the allocations are not necessarily indicative of the level of expenses which might have been incurred by the Businesses operating as a stand-alone entity. NOTE 4. ACQUISITIONS The Businesses include three environmental services businesses acquired in 1993, six acquired in 1994 and one acquired in 1996 in exchange for consideration, net of cash acquired and including assumed debt, of approximately $24.8 million, $21.5 million and $5.7 million, respectively. The Businesses utilize the purchase method of accounting, and the purchase price of the acquisitions has been allocated to their respective net assets based upon estimated fair market values. The results of operations of acquired entities have been included in the Businesses' combined financial statements from their respective dates of acquisition. The pro forma effect of the acquisitions made during 1993, 1994 and 1995 was not material. NOTE 5. PRO FORMA INCOME TAXES The Businesses reported income before income tax for each of the years indicated on the accompanying combined statements of income. During such periods, the Businesses operating in the United States were included in WTI's consolidated federal income tax returns. Those Businesses located outside of the United States are taxable in the jurisdictions in which they are organized. For the purposes of the accompanying combined financial statements, a pro forma income tax expense has been provided at 40% of reported combined pretax income. F-44 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 6. BENEFIT PLANS Substantially all employees based in the United States are participants in the Wheelabrator-Rust Savings and Retirement Plan, which is a qualified defined contribution plan consisting of a contributory component and a non- contributory component. Under the terms of the contributory component, eligible employees may elect to contribute a portion of their annual compensation and the Businesses are required to match a minimum of 30 percent of the first six percent of eligible compensation contributed by an employee. Under the terms of the non-contributory component, eligible employees receive an annual contribution equal to a minimum of three percent of their eligible earnings. The Businesses' contributions to such plans during 1993, 1994 and 1995 amounted to approximately $1.7 million, $2.1 million and $2.4 million, respectively. The Businesses based outside the United States have in place various other plans that are not significant that provide pension and welfare benefits to certain active and former employees. NOTE 7. ADDITIONAL FINANCIAL INFORMATION The allowance for doubtful accounts was $3.7 million and $4.3 million as of December 31, 1994 and 1995, respectively. The following is a summary of inventories (in thousands):
DECEMBER 31, --------------- 1994 1995 ------- ------- Raw materials............................................. $ 7,697 $21,429 Work in process........................................... 14,276 15,259 Finished goods............................................ 9,554 11,719 ------- ------- Total inventories....................................... $31,527 $48,407 ======= =======
The following is a summary of property, plant and equipment (in thousands):
DECEMBER 31, ------------------ 1994 1995 -------- -------- Land.................................................. $ 847 $ 743 Machinery and equipment............................... 51,005 53,484 Buildings and improvements............................ 39,174 37,661 Less: accumulated depreciation........................ (42,773) (44,534) -------- -------- Total property, plant, and equipment................ $ 48,253 $ 47,354 ======== ========
Depreciation of property, plant, and equipment for the years ended December 31, 1993, 1994 and 1995 was $4.9 million, $5.9 million, and $7.0 million, respectively. The following is a summary of accrued liabilities (in thousands):
DECEMBER 31, --------------- 1994 1995 ------- ------- Wages, salaries and benefits............................. $ 8,453 $ 8,936 Warranties and contract reserves......................... 9,149 11,100 Other.................................................... 34,013 27,780 ------- ------- Total accrued liabilities.............................. $51,615 $47,816 ======= =======
F-45 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Noncancelable operating lease payments at December 31, 1995 are due as follows (in thousands):
OPERATING LEASES --------- 1996............................... $ 4,290 1997............................... 3,613 1998............................... 3,172 1999............................... 2,670 2000............................... 2,648 Thereafter......................... 15,290 ------- Total............................ $31,683 =======
Total rent expense was $2.2 million, $2.6 million and $2.8 million in 1993, 1994 and 1995, respectively. NOTE 8. COMMITMENTS AND CONTINGENCIES There are various lawsuits and claims pending against the Businesses that have arisen in the normal course of business and related mainly to matters of product liability, personal injury, and property damage. The outcomes of these matters are not presently determinable, but in the opinion of management, based on the advice of counsel, the ultimate resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Businesses. The Businesses are self-insured for general liability claims up to $2.0 million per occurrence. Liability insurance in effect during the last several years provides coverage for environmental matters only to a limited extent. In the normal course of business, the Businesses have issued or are parties to bank letters of credit, performance bonds, and other guarantees. Certain of the Businesses operate in the environmental industry and are involved with the protection of the environment. As such, a significant portion of the Businesses' operating costs and capital expenditures could be characterized as costs of environmental protection. While the Businesses are faced, in the normal course of its business, with the need to expend funds for environmental protection, it is not expected that such expenditures will have a material adverse effect on financial condition or results of operations. F-46 UNITED UTILITIES PLC PROCESS DIVISION STATEMENT OF UNITED UTILITIES PLC DIRECTORS' RESPONSIBILITIES The directors have assumed the responsibility to prepare financial statements for each financial year which present fairly the financial position of the division and of the profit or loss of the division for that period. In preparing those financial statements, the directors are required to: . select suitable accounting policies and then apply them consistently; . make judgements and estimates that are reasonable and prudent; . state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; . prepare the financial statements on the going concern basis unless it is inappropriate to presume that the companies within the division will continue in business. The directors are responsible for maintaining proper accounting records which disclose with reasonable accuracy at any time the financial position of the division and to enable them to ensure that the financial statements comply with relevant aspects of the Companies Act 1985. They are also responsible for safeguarding the assets of the division and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. F-47 AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF UNITED UTILITIES PLC We have audited the accompanying aggregated balance sheets of the United Utilities PLC Process Division as at 31 March 1996 and 31 March 1995, the related aggregated profit and loss accounts for each of the years in the two year period ended 31 March 1996 and the cash flow for the year ended 31 March 1996. These aggregated financial statements are the responsibility of the Directors of United Utilities PLC. Our responsibility is to express an opinion on these aggregated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United Kingdom which are substantially the same as auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aggregated financial statements referred to above present fairly, in all material respects, the financial position of the United Utilities PLC Process Division at 31 March 1996 and 31 March 1995, the results of its operations for each of the years in the two year period ended 31 March 1996 and the cash flow for the year ended 31 March 1996 in conformity with generally accepted accounting principles in the United Kingdom. KPMG AUDIT PLC Manchester Chartered Accountants Registered Auditors 16 October 1996 F-48 UNITED UTILITIES PLC PROCESS DIVISION PROFIT AND LOSS ACCOUNT
US $ US $ AUDITED UNAUDITED YEAR ENDED 3 MONTHS ENDED -------------------- ------------------ 31 MARCH 31 MARCH 30 JUNE 30 JUNE NOTE 1996 1995 1996 1995 ---- --------- --------- -------- -------- $000 $000 $000 $000 Turnover........................ 2 267,358 254,955 54,181 46,190 Cost of sales................... (189,529) (179,057) (36,575) (33,877) --------- --------- -------- -------- Gross profit.................... 77,829 75,898 17,606 12,313 Net operating costs and administrative expenses........ 3 (63,983) (65,321) (16,662) (16,134) Business restructuring.......... 4 (31,312) -- -- -- --------- --------- -------- -------- Operating (loss)/profit......... (17,466) 10,577 944 (3,821) Profit on disposal of fixed assets......................... 5 -- 1,833 -- -- --------- --------- -------- -------- (Loss)/profit on ordinary activities..................... (17,466) 12,410 944 (3,821) Net interest.................... 6 (19,865) (19,925) (4,714) (4,914) --------- --------- -------- -------- Loss on ordinary activities before taxation................ (37,331) (7,515) (3,770) (8,735) Taxation on loss on ordinary activities..................... 8 (2,165) (6,061) (1,433) (8) --------- --------- -------- -------- Loss on ordinary activities after taxation................. (39,496) (13,576) (5,203) (8,743) --------- --------- -------- -------- Retained loss for the financial year/period.................... (39,496) (13,576) (5,203) (8,743) ========= ========= ======== ========
A statement of movements on the profit and loss account is given in note 17. The above results all arise from continuing activities. There is no difference between the loss on ordinary activities before taxation and the retained loss for the period stated above, and their historical cost equivalents. There are no recognised gains or losses other than those included in the results above and therefore no separate statement of total recognised gains and losses has been presented. F-49 UNITED UTILITIES PLC PROCESS DIVISION BALANCE SHEETS
US $ US $ AUDITED UNAUDITED ------------------ --------- 31 MARCH 31 MARCH 31 JUNE NOTE 1996 1995 1996 ---- -------- -------- --------- $000 $000 $000 Fixed assets Tangible assets............................ 9 34,865 35,734 37,216 Investments................................ 10 1,526 1,780 1,546 Intangible assets.......................... 11 869 -- 1,302 -------- -------- -------- 37,260 37,514 40,064 -------- -------- -------- Current assets Stocks..................................... 12 55,556 57,729 56,099 Debtors.................................... 13 184,249 152,118 157,459 Cash at bank and in hand................... 2,438 7,393 7,199 -------- -------- -------- 242,243 217,240 220,757 Creditors: (amounts falling due within one year)...................................... 14 (197,760) (170,055) (184,574) -------- -------- -------- Net current assets.......................... 44,483 47,185 36,183 -------- -------- -------- Total assets less current liabilities....... 81,743 84,699 76,247 Creditors: (amounts falling due after more than one year)............................. 14 (231,325) (225,064) (231,920) Provisions for liabilities and charges...... 15 (33,178) (2,450) (31,716) -------- -------- -------- Net liabilities............................. (182,760) (142,815) (187,389) ======== ======== ======== Capital and reserves Aggregated called up share capital......... 16 4,426 4,698 4,477 Share premium account...................... 17 12,262 12,262 12,262 Capital redemption reserve................. 17 350 373 355 Revaluation reserve........................ 17 7,580 9,798 7,679 Profit and loss account.................... 17 (207,378) (169,946) (212,162) -------- -------- -------- Shareholders' funds........................ (182,760) (142,815) (187,389) ======== ======== ========
Approved by the Board of directors on 16 October 1996 and signed on its behalf by: R. Ferguson Director F-50 UNITED UTILITIES PLC PROCESS DIVISION CASH FLOW STATEMENT
US $ AUDITED YEAR ENDED NOTE 31 MARCH 1996 ---- ------------- $000 Net cash inflow from operating activities............. 20 (30,320) ------- Returns on investments and servicing of finance....... Interest received................................... 600 Interest paid....................................... (2,880) ------- Net cash outflow from returns on investments and servicing of finance................................. (2,280) ------- Taxation.............................................. Corporation tax paid................................ (1,007) ------- Cash flow from operations after tax................... (33,607) ------- Investing activities.................................. Purchase of tangible fixed assets................... (6,394) Expenditure on capitalized development costs........ (869) Receipts from sales of tangible fixed assets........ 364 ------- Net cash outflow from investing activities............ (6,899) ------- Decrease in cash and cash equivalents................. 20 (40,506) =======
F-51 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) 1. ACCOUNTING POLICIES BASIS OF PREPARATION OF FINANCIAL STATEMENTS The aggregated financial statements incorporate the financial statements of each of the entities which constitute the Process Division of United Utilities PLC as detailed in note 21. The financial statements have been prepared under the historical cost convention and in accordance with applicable accounting standards and with UK generally accepted accounting principles. BASIS OF AGGREGATION The Process Division is composed of the entities set out in note 21, all of which are owned by United Utilities PLC. There is no single holding company for the Process Division. The figures presented in these financial statements have been prepared by combining the results of all these entities. All intra group Process Division transactions and balances have been eliminated. As the Process Division is not a statutory entity, directors emoluments have not been disclosed. CASH FLOW STATEMENT As its parent undertaking, United Utilities PLC, publishes a consolidated cash flow statement, the Process Division is exempt, under Financial Reporting Standard 1, from preparing such a statement. Notwithstanding this exemption, a cash flow statement has been provided for the year ended 31 March 1996. Comparative cash flow information, which would have been required had the exemption not been available, has not been provided. UNAUDITED INTERIM AGGREGATED FINANCIAL STATEMENTS The aggregated financial statements for the three months ended 30 June, 1995 and 1996 are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring items, considered necessary for a fair presentation have been included. Certain information and all footnote disclosures normally included in financial statements have been excluded from the interim aggregated financial statements. The results of operations for the three months ended 30 June, 1996 are not necessarily indicative of the results that may be expected for the year ending 31 March, 1997. TURNOVER Turnover represents the income receivable in the ordinary course of business for goods or services provided and excludes VAT and foreign sales tax. RESEARCH AND DEVELOPMENT Expenditure on research and development is written off against profits in the year in which it is incurred. Development expenditure incurred on projects which meet the criteria of SSAP 13 is capitalized and amortized over 5 years. GOODWILL The net assets of companies and businesses acquired are incorporated into the aggregated financial statements at their fair value to the Process Division and after adjustments to bring the accounting policies of the companies and businesses acquired into alignment with those of the Division. Past fair value adjustments include provisions for reorganisation and restructuring costs. In the year ended 31 March 1996, in accordance with F-52 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) Financial Reporting Standard 7, reorganisation and restructuring costs have not been included in fair value adjustments. If the estimates on which these provisions are based prove to be in excess of actual expenditure, the unutilised surplus provisions will not be taken to profit and loss, but will be credited to reserves as a recalculation of goodwill. TANGIBLE FIXED ASSETS Additions are included at cost. Freehold land is not depreciated. Other assets are depreciated evenly over their estimated economic lives which are principally as follows: Buildings........................................................ 30-60 years Fixtures, fittings, tools, equipment and motor vehicles.......... 3-40 years Capitalised computer software costs.............................. 3-10 years
LEASED ASSETS Assets financed by leasing arrangements which transfer substantially all the risks and rewards of ownership to the lessee (finance leases) are capitalised in the balance sheet and the corresponding capital cost is shown as an obligation to the lessor. Leasing repayments comprise both a capital and a finance element. The finance element is written off to the profit and loss account so as to produce an approximately constant periodic rate of charge on the outstanding obligation. Such assets are depreciated over the shorter of their estimated useful lives and the period of the lease. Operating lease rentals are charged to the profit and loss account on a straight line basis over the period of the lease. FIXED ASSET INVESTMENTS Investments held as fixed assets are stated at cost less amounts written off for permanent diminution. STOCKS Stocks are stated at cost less any provision necessary to recognise damage and obsolescence. Long term contract work in progress is stated at cost, net of amounts transferred to cost of sales, after deducting payments received in advance and making provision for foreseeable losses. Finished goods and goods for resale are stated at the lower of cost, including appropriate production overheads, and net realisable value. PENSIONS Approximately half of the Division's employees belong to pension schemes which provide for defined benefits based on final pensionable pay. Pension costs are charged against profits over the estimated remaining service lives of employees. FOREIGN CURRENCY For the convenience of the reader, these financial statements have been stated in US dollars. The balance sheets have been translated into dollars at exchange rates applicable at the year end. The profit and loss accounts are translated into dollars using the average rate. Differences arising from the application of the closing rate to opening net assets, offset by translation differences on foreign currency loans which finance investments in overseas subsidiary undertakings, together with differences between profits and losses translated at average rates and at closing rates, are recorded as a movement in reserves. F-53 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) DEFERRED TAXATION Provision is made for deferred taxation where a liability is considered likely to arise in the foreseeable future. ASSOCIATED UNDERTAKINGS The appropriate share of the results of associated undertakings is recognised in the aggregated profit and loss account where the directors consider that the Division is in a position to exert significant influence over the associated undertakings. REVALUATION RESERVE Surpluses or deficits arising as a result of the incorporation of land and buildings valuations in the accounts are taken to the revaluation reserve unless the deficit exceeds the accumulated surpluses when it would be taken directly to the profit and loss account. 2. TURNOVER, PROFIT AND NET ASSETS BY BUSINESS Turnover, loss or profit before interest and taxation and net assets were all attributable to the same class of business namely Process Equipment. The geographical analysis of these items is shown below: By geographical origin:
PROFIT/(LOSS) BEFORE INTEREST AND NET OPERATING TURNOVER TAX ASSETS --------------- --------------- --------------- 1996 1995 1996 1995 1996 1995 ------- ------- ------- ------ ------- ------- $000 $000 $000 $000 $000 $000 United Kingdom.................. 47,344 45,401 3,763 4,427 29,337 30,539 Europe.......................... 30,117 29,077 2,737 3,368 12,774 11,348 The Americas.................... 181,916 172,525 (24,313) 4,207 84,573 80,888 Rest of the world............... 7,981 7,952 347 408 3,406 2,919 ------- ------- ------- ------ ------- ------- 267,358 254,955 (17,466) 12,410 130,090 125,694 ======= ======= ======= ====== ======= =======
The geographical destination of turnover does not differ materially from the geographical origin analysis above. Net operating assets comprise fixed assets and net current (liabilities)/assets and provisions excluding net borrowings, investments and taxation. F-54 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) 3. NET OPERATING COSTS AND ADMINISTRATIVE EXPENSES
31 MARCH 31 MARCH -------- -------- 1996 1995 -------- -------- $000 $000 Distribution costs......................................... 33,117 29,230 Administrative expenses.................................... 30,866 36,091 ------ ------ 63,983 65,321 ====== ======
31 MARCH 31 MARCH -------- -------- 1996 1995 -------- -------- $000 $000 Net operating costs and administrative expenses include: Operating lease rentals--hire of plant and machinery..... 1,187 1,148 --other........................................ 1,286 1,223 Depreciation............................................. 4,016 3,196 Auditors remuneration --audit................................................ 247 207 --other fees........................................... 48 127 --Research and development costs....................... 2,410 481 ----- -----
Additional non-audit fees of $424,000 were charged against provisions for liabilities and charges in 1996. 4. BUSINESS RESTRUCTURING The exceptional business restructuring expense charged in 1996 of $31,312,000 relates to the relocation of the operations of Wallace & Tiernan Inc. 5. PROFIT ON DISPOSAL OF FIXED ASSETS The profit disposal of fixed assets in the year ended 31 March 1995 relates wholly to the disposal of land and buildings held by Wallace & Tiernan Limited. 6. NET INTEREST
31 MARCH 31 MARCH -------- -------- 1996 1995 -------- -------- $000 $000 Interest payable: To non Process Division Group undertakings............... 23,003 22,662 To external parties...................................... 4,604 3,054 Interest receivable: From non Process Division Group undertakings............. (7,452) (5,267) From external parties.................................... (290) (524) ------ ------ 19,865 19,925 ====== ======
F-55 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) 7. EMPLOYEE COSTS The aggregate remuneration of all employees of the Division comprised:
31 MARCH 31 MARCH -------- -------- 1996 1995 -------- -------- $000 $000 Wages and salaries......................................... 71,477 68,970 Social security costs...................................... 11,389 10,613 Other pension costs & payroll expenses..................... 5,960 6,318 ------ ------ 88,826 85,901 ====== ======
31 MARCH 31 MARCH -------- -------- 1996 1995 -------- -------- Average number of employees during the year were........... 1,976 2,071 ===== =====
8. TAXATION ON PROFIT ON ORDINARY ACTIVITIES
31 MARCH 31 MARCH -------- -------- 1996 1995 -------- -------- $000 $000 UK corporation tax at 33% (1995:33%)....................... 1,217 3,279 Overseas corporate taxes................................... 948 2,782 ----- ----- 2,165 6,061 ===== =====
9. TANGIBLE FIXED ASSETS
FIXTURES, LAND FITTINGS, ASSETS IN & TOOLS & COURSE OF BUILDINGS EQUIPMENT VEHICLES CONSTRUCTION TOTAL --------- --------- -------- ------------ ------ $000 $000 $000 $000 $000 Cost or Valuation At 1 April 1995.......... 23,028 32,014 1,175 876 57,093 Revaluations............. (1,775) -- -- -- (1,775) Additions................ 1,357 4,659 378 -- 6,394 Disposals................ -- (756) (101) -- (857) Transfers................ -- 15 -- (287) (272) Foreign exchange......... (941) (1,031) (34) (17) (2,023) ------ ------ ----- ---- ------ At 31 March 1996......... 21,669 34,901 1,418 572 58,560 ------ ------ ----- ---- ------ Depreciation At 1 April 1995.......... 3,167 17,376 816 -- 21,359 Charge for the year...... 321 3,551 144 -- 4,016 Revaluations............. (104) -- -- -- (104) Disposals................ -- (677) (93) -- (770) Foreign exchange......... (192) (587) (27) -- (806) ------ ------ ----- ---- ------ At 31 March 1996......... 3,192 19,663 840 -- 23,695 ------ ------ ----- ---- ------ Net book value At 31 March 1996......... 18,477 15,238 578 572 34,865 ====== ====== ===== ==== ====== At 31 March 1995......... 19,861 14,638 359 876 35,734 ====== ====== ===== ==== ======
F-56 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) A revaluation of the freehold land and buildings at the Tonbridge site of Wallace & Tiernan Limited as at 31 March 1996 was undertaken by King Sturge & Co., an independent firm of qualified chartered surveyors. The valuation was made in accordance with the Royal Institute of Chartered Surveyors Statements of Asset Valuation Practice. The valuation of the operational part of the site was on a depreciated replacement cost basis and the non-operational part on an open market value basis. No capital gains tax is expected to arise in the event of a sale of the site and hence no deferred tax is currently provided in respect of this revaluation. If the land and buildings had not been revalued to $8,700,000 (1995: $10,850,000) they would have been shown at their historical cost net book value of $1,120,000 (1995: $1,052,000). 10. FIXED ASSET INVESTMENTS
31 MARCH 31 MARCH 1996 1995 -------- -------- $000 $000 Investments in associated companies........................ 1,526 1,780 ======= =======
A schedule of the Division's principal operating entities and associated undertakings is given in note 21. 11. INTANGIBLE ASSETS The intangible asset of $869,000 (1995: nil) represents development costs incurred and capitalised by one of the entities in the Process Division during the year. 12. STOCKS
31 MARCH 31 MARCH 1996 1995 -------- -------- $000 $000 Raw materials and consumables.............................. 17,760 18,308 Work in progress........................................... 15,233 16,558 Finished goods and goods for resale........................ 22,563 22,863 ------- ------- 55,556 57,729 ======= =======
13. DEBTORS
31 MARCH 31 MARCH 1996 1995 -------- -------- $000 $000 Amounts falling due within one year: Trade debtors............................................. 101,615 80,317 Amounts owed by non Process Division Group undertakings... 72,663 61,449 Other debtors............................................. 8,634 9,550 Prepayments and accrued income............................ 1,337 802 ------- ------- 184,249 152,118 ======= =======
F-57 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) 14 CREDITORS
31 MARCH 31 MARCH 1996 1995 -------- -------- $000 $000 Amounts falling due within one year: Bank loans and overdrafts.......................... 85,489 52,618 Payments received on account....................... 4,670 1,223 Trade creditors.................................... 23,385 22,435 Amounts owed to non-Process Division Group undertakings...................................... 56,613 50,571 UK Corporation tax................................. 156 -- Other taxation and social security................. -- 3,200 Accruals and deferred income....................... 27,447 40,008 ------- ------- 197,760 170,055 ======= ======= Amounts falling due after more than one year: Bank loans and overdrafts.......................... 1,839 2,059 Amounts owed to non-Process Division Group undertakings................................... 220,516 213,760 Other creditors.................................... 8,970 9,245 ------- ------- 231,325 225,064 ======= =======
Bank loans and overdrafts outstanding at 31 March 1996 and 31 March 1995 are all repayable within one year. 15. PROVISIONS FOR LIABILITIES AND CHARGES
DEFERRED RESTRUCTURING TAXATION OTHER TOTAL ------------- -------- ----- ------ $000 $000 $000 $000 Division Balance at 1 April 1995.............. -- 1,846 604 2,450 Applied during the year.............. -- -- (450) (450) Provided in the year................. 31,312 -- -- 31,312 Foreign exchange..................... -- (97) (37) (134) ------ ----- ---- ------ Balance at March 31, 1996.............. 31,312 1,749 117 33,178 ====== ===== ==== ======
16. SHARE CAPITAL The total share capital of the Process Division represents the summation of the share capital of all the Process Division companies not eliminated by sub consolidations. These share capitals are converted to US dollars at the appropriate year end exchange rate.
1996 1995 1996 1995 ---- ---- ---- ---- $000 $000 $000 $000 WALLACE & TIERNAN INC Authorised 100 ordinary shares of $1 each.......................... -- -- -- -- Allotted, called up and fully paid 100 ordinary shares of $1 each.......................... -- -- -- --
F-58 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS)
1996 1995 ----------- ----------- (Pounds)000 (Pounds)000 WALLACE & TIERNAN LTD Authorised 3,000,000 ordinary shares of (Pounds)1 each.................................. 3,000 3,000 ----- ----- Allotted, called up and fully paid 2,588,066 ordinary shares of (Pounds)1 each.................................. 2,588 2,588 3,963 4,215 ----- ----- 1996 1995 ----------- ----------- A$000 A$000 WALLACE & TIERNAN PACIFIC PTY LTD Authorised 75,000 ordinary shares of A$2.......... 150 150 ----- ----- Allotted, called up and fully paid 55,000 ordinary shares of A$2.......... 110 110 86 81 ----- ----- 1996 1995 ----------- ----------- $000 $000 GENERAL FILTER Authorised 1,000 ordinary shares of $0.01......... -- -- ----- ----- Allotted, called up and fully paid 1,000 ordinary shares of $0.01......... -- -- ----- ----- 1996 1995 ----------- ----------- $000 $000 ENVIREX LTD Authorised 100,000 ordinary shares of $0.01....... 1 1 ----- ----- 100,000 preference shares of $1........ 100 100 ----- ----- Allotted, called up and fully paid 100,000 ordinary shares of $0.01....... 1 1 1 1 1996 1995 1996 1995 ----------- ----------- ----- ----- (Pounds)000 (Pounds)000 $000 $000 EDWARDS & JONES HOLDINGS LTD Authorised 157,000 ordinary shares of (Pounds)1... 157 157 ----- ----- 74,000 10.5% cumulative convertible participating preferred ordinary shares of (Pounds)1................... 74 74 ----- ----- Allotted, called up and fully paid 136,000 ordinary shares of (Pounds)1... 136 136 208 222 ----- ----- 1996 1995 ----------- ----------- (Pounds)000 (Pounds)000 EDWARDS & JONES LTD Authorised 110,000 ordinary shares of (Pounds)1... 110 110 ----- ----- Allotted, called up and fully paid 110,000 ordinary shares of (Pounds)1... 110 110 168 179 ----- -----
F-59 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS)
1996 1995 1996 1995 ---- ---- ----- ----- $000 $000 $000 $000 CONSOLIDATED ELECTRIC CO. Authorised 100 ordinary shares of $1............................. -- -- --- --- Allotted, called up and fully paid 100 ordinary shares of $1............................. -- -- -- -- ----- ----- 4,426 4,698 ===== =====
17. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
GROUP SHARE CAPITAL PROFIT SHARE PREMIUM REDEMPTION REVALUATION AND LOSS SHAREHOLDERS' CAPITAL ACCOUNT RESERVE RESERVE ACCOUNT FUNDS ------- ------- ---------- ----------- -------- ------------- $000 $000 $000 $000 $000 $000 Balance at 1 April 1995. 4,698 12,262 373 9,798 (169,946) (142,815) Retained loss for the year................... -- -- -- -- (39,496) (39,496) Revaluation in year..... -- -- -- (1,671) -- (1,671) Foreign exchange........ (272) -- (23) (547) 2,064 1,222 ----- ------ --- ------ -------- -------- Balance at 31 March 1996................... 4,426 12,262 350 7,580 (207,378) (182,760) ===== ====== === ====== ======== ========
The cumulative amount of goodwill written off to reserves at 31 March 1996 was $191,709,000 (1995: $204,239,000). 18. LEASE OBLIGATIONS The following annual obligations under operating leases for plant and machinery vehicle and other equipment expire:
31 MARCH 31 MARCH 1996 1995 -------- -------- $000 $000 Within one year............................................ 597 368 In the second to fifth year inclusive...................... 1,998 2,359 After five years........................................... 323 -- ----- ----- 2,918 2,727 ===== ===== The following annual obligations under operating leases for land and buildings expire: 31 MARCH 31 MARCH 1996 995 -------- -------- $000 $000 Within one year............................................ 17 160 In the second to fifth year inclusive...................... 676 463 ----- ----- 693 623 ===== =====
19. CAPITAL AND OTHER COMMITMENTS Capital investment authorised by the directors of entities within the Process Division but not contracted nor provided for as at 31 March 1996 amounted to $768,000 (1995: $1,019,000). Capital commitments which had been contracted but not provided for as at 31 March 1996 amounted to $412,000 (1995: $1,009,000). F-60 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) 20. NOTES TO THE CASH FLOW STATEMENT Reconciliation of operating profit to net cash inflow from operating activities.
31 MARCH 1996 -------- $000 Operating loss........................................... (17,466) ------- Non cash items Depreciation............................................. 4,016 Profit on sale of fixed assets........................... (5) Increase in provisions................................... 30,728 Foreign exchange adjustment to profit in the year........ (336) ------- 34,403 ======= Movement in working capital Decrease in stocks....................................... 2,173 (Increase) in debtors.................................... (32,131) (Decrease) in creditors.................................. (20,746) Increase in advance payments............................. 3,447 ------- (47,257) ======= Net cash inflow from operating activities................ (30,320) ======= Analysis of cash and cash equivalents 31 MARCH 31 MARCH 1996 1995 -------- -------- $000 $000 Cash at bank and in hand................................. 2,438 7,393 Bank overdraft........................................... (87,328) (54,677) ------- ------- (84,890) (47,284) ======= ======= Analysis of changes in cash and cash equivalents 1996 -------- $000 At 1 April 1995.......................................... (47,284) Net cash outflow from financing.......................... (40,506) Exchange adjustments..................................... 2,900 ------- At 31 March 1996......................................... (84,890) =======
F-61 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) 21. PROCESS DIVISION Details of principal operating entities in the Process Division, all of which are unlisted, are detailed below. These undertakings are included within the aggregated Process Division financial statements.
NATURE OF BUSINESS ---------------------------------------- Great Britain: Wallace & Tiernan Limited Manufacture of equipment Edwards and Jones Limited for water and wastewater Acumem UK (unincorporated) treatment processes USA: Envirex Inc Manufacture of equipment General Filter Company Inc for water and wastewater Wallace & Tiernan Inc treatment processes Consolidated Electric Company Asdor Inc. Australia: Wallace & Tiernan Pacific Pty Manufacture of equipment Limited for water and wastewater treatment processes Canada: Asdor Limited Suppliers of equipment Wallace & Tiernan Canada Inc for water and wastewater Filtration Seco Inc. treatment processes Germany: Wallace & Tiernan GmbH Manufacture of equipment Edwards & Jones GmbH for water and wastewater treatment processes Associated undertakings include: Spain: CIDA Hidroquimica SA Design and installation of equipment and systems for water and wastewater treatment
The country under which each undertaking appears is both the country of its incorporation and of its principal operations. All of the Great Britain undertakings are registered in England and Wales. Shares are held indirectly by United Utilities PLC. 22. PENSIONS The Process Division operates a number of pension schemes in the UK, the USA, Europe, Australia and Canada. The major schemes are of the defined benefit type. Edwards & Jones Limited operated two pension schemes in 1993 providing retirement benefits for its employees and directors. The funds of both schemes were transferred into the Water Pension Scheme, a defined benefit scheme, operated by United Utilities PLC, during 1993/94. Contributions are based on the pension costs of all United Kingdom subsidiary undertakings of United Utilities PLC participating in the Water Pension Scheme. The accounts of United Utilities PLC contain particulars of the current actuarial position of the Water Pension Scheme. Since 1 January 1990, Wallace & Tiernan Limited and substantially all its employees have subscribed to the Wallace & Tiernan Pension Scheme, which is a funded defined benefit scheme providing benefits based on F-62 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) final pensionable pay. Contributions to the scheme are charged to the profit and loss account so as to spread the cost of pensions over employees' working lives with the company. The contributions are determined by a qualified actuary. The most recent valuation was undertaken as at 1 July 1994 by the scheme's actuary. The valuation method used for the calculation of normal costs and liabilities was the projected unit method, while that used for the assets was the discounted expected cash flow method. The assumptions which have the most significant effect on the results of the valuation are those relating to the rates of return on investments and salary and pension increases. It was assumed that the investment returns would be 9% per annum, that the rate of salary increase would be 7% per annum, and that pensions would increase at the rate of 3% per annum. The market value of scheme assets at the date of the valuation was (Pounds)9,638,000 and the actuarial value of those assets represented approximately 95% of the benefits that had accrued to members after allowing for expected future increases in earnings. It is intended that this deficit, amounting to (Pounds)543,000 will be eliminated by additional company contributions over a period of 13 years. For the non UK schemes the defined benefit arrangements have been reviewed on consistent assumptions and any balance of surplus spread forward to derive the pension cost. 23. ULTIMATE PARENT COMPANY The ultimate parent undertaking of all the entities in the Process Division is United Utilities PLC, a company registered in England. Copies of the United Utilities PLC accounts are available from the registered office at Dawson House, Great Sankey, Warrington, WA5 3LW, United Kingdom. The accounts of United Utilities PLC represent the largest and smallest consolidation within which all the companies in the Process Division are consolidated. 24. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES These aggregated financial statements have been prepared in accordance with UK GAAP which differs in certain significant respects from US GAAP. The significant differences as they relate to the United Utilities PLC Process Division, are summarised in the following paragraphs. Statement of cash flows: Basis of Preparation United Utilities PLC Process Division's statement of cash flows is prepared in accordance with UK Financial Reporting Standard 1 (FRS 1), the objectives and principles of which are similar to those set out in Statement of Financial Accounting Standards 95 (SFAS 95), "Statement of Cash Flows" under US GAAP. The principal differences between FRS 1 and SFAS 95 relate to classification. Cash flows from taxation and returns on investments and servicing of finance under FRS 1 would be included as operating activities under SFAS 95. Under FRS 1 net cash and cash equivalents include short-term borrowings repayable within three months from the date of their advance. Under SFAS 95 short-term borrowings repayable within three months from the date of their advance and overdraft balances would not be included within cash and cash equivalents and movements on those borrowings and overdraft balances would be included in financing activities. PROVISIONS In the US there are strict rules about the timing of recognition of on-going restructuring costs; whereas in the UK there is at present some flexibility. Given that restructuring provisions can involve very large costs, the differences can be significant. F-63 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) FIXED ASSET REVALUATION In the US fixed assets must be carried at depreciated cost whereas in the UK fixed assets may be revalued. Depreciation would then be booked on the revalued amount. DEVELOPMENT EXPENDITURE In the US the rules prohibit the carrying of development costs as an asset. In the UK they may, at the company's option, be carried as an asset if the following criteria are met: . there is a clearly defined project; . the related costs are separately identifiable; . there is a reasonable certainty that the project is technically feasible and commercially viable; . future revenues are reasonably expected to exceed future development, production, selling and administration costs; . adequate financial resources exist to complete the project. GOODWILL In the US positive goodwill is treated in the same way as any other acquired intangible. Such assets must be capitalised and subsequently amortised over their expected useful lives which may not exceed 40 years. In the UK positive goodwill may be written off directly against reserves which is the policy adopted by the Process Division. F-64 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR- MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO- SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRIT- ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIV- ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICA- TION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSE- QUENT TO ITS DATE. ------------ TABLE OF CONTENTS
PAGE Prospectus Summary........................................................ 3 Risk Factors.............................................................. 9 Recent and Pending Acquisitions........................................... 14 Use of Proceeds........................................................... 19 Capitalization............................................................ 20 Price Range of Common Stock............................................... 21 Dividend Policy........................................................... 21 Unaudited Pro Forma Combined Financial Information........................ 22 Selected Consolidated Financial Data...................................... 28 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 30 The Water Treatment Industry.............................................. 36 Business.................................................................. 38 Management................................................................ 44 Security Ownership........................................................ 48 Description of the Notes.................................................. 49 Description of Capital Stock.............................................. 61 Certain Federal Income Tax Consequences................................... 63 Underwriting.............................................................. 64 Legal Matters............................................................. 65 Independent Certified Public Accountants.................................. 65 Available Information..................................................... 66 Incorporation of Certain Documents by Reference........................... 66 Index to Financial Statements............................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- $175,000,000 LOGO UNITED STATES FILTER CORPORATION % CONVERTIBLE SUBORDINATED NOTES DUE 2001 ---------------- PROSPECTUS ---------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SALOMON BROTHERS INC DEUTSCHE MORGAN GRENFELL NATWEST SECURITIES LIMITED SMITH BARNEY INC. , 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated expenses to be incurred by the Company in connection with the issuance and distribution of the securities being registered, other than underwriting discounts and commissions. Registration fee...................................................... $ 60,985 NASD fee.............................................................. 20,625 Printing.............................................................. * Accounting fees....................................................... * Legal fees............................................................ * Blue sky qualification fees........................................... * Trustee fees.......................................................... * Rating agency fees.................................................... * Miscellaneous......................................................... * -------- Total............................................................. $400,000 ========
- --------------------- *To be furnished by amendment. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Certificate of Incorporation and the By-laws of the Company provide for the indemnification of directors and officers to the fullest extent permitted by the General Corporation Law of the State of Delaware, the state of incorporation of the Company. Section 145 of the General Corporation Law of the State of Delaware authorizes indemnification when a person is made a party or is threatened to be made a party to any proceeding by reason of the fact that such person is or was a director, officer, employee or agent of the corporation or is or was serving as a director, officer, employee or agent of another enterprise, at the request of the corporation, and if such person acted in good faith and in a manner reasonably believed by him or her to be in, or not opposed to, the best interests of the corporation. With respect to any criminal proceeding, such person must have had no reasonable cause to believe that his or her conduct was unlawful. If it is determined that the conduct of such person meets these standards, he or she may be indemnified for expenses incurred (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such proceeding. If such a proceeding is brought by or in the right of the corporation (i.e., a derivative suit), such person may be indemnified against expenses actually and reasonably incurred if he or she acted in good faith and in a manner reasonably believed by him or her to be in, or not opposed to, the best interests of the corporation. There can be no indemnification with respect to any matter as to which such person is adjudged to be liable to the corporation; however, a court may, even in such case, allow such information to such person for such expenses as the court deems proper. Where such person is successful in any such proceeding, he or she is entitled to be indemnified against expenses actually and reasonably incurred by him or her. In all other cases, indemnification is made by the corporation upon determination by it that indemnification of such person is proper because such person has met the applicable standard of conduct. The Company maintains an errors and omissions liability policy for the benefit of its officers and directors, which may cover certain liabilities of such individuals to the Company. II-1 ITEM 16. EXHIBITS. The following exhibits are filed with or incorporated by reference in this Registration Statement:
EXHIBIT NO. DESCRIPTION 1.1 Form of Underwriting Agreement (to be filed by amendment) 2.1 Purchase and Sale Agreement, dated as of September 14, 1996, between Wheelabrator Technologies Inc. and United States Filter Corporation 2.2 Agreement, dated October 7, 1996, between United Utilities PLC and certain of its subsidiaries and United States Filter Corporation (to be filed by amendment) 2.3 Stock Purchase Agreement, dated as of September 10, 1996, among Edmundson International, Inc., United States Filter Corporation and WaterPro Supplies Corporation 4.1 Indenture, dated as of , 1996, between United States Filter Corporation and State Street Bank and Trust Company of California, N.A., as Trustee (to be filed by amendment) 4.2 Form of Convertible Subordinated Note due 2001 (included in Indenture to be filed as Exhibit 4.1) 5.1 Opinion of Damian C. Georgino as to the legality of the securities being registered (to be filed by amendment) 12.1 Computation of Ratio of Earnings to Fixed Charges 23.1 Consents of KPMG Peat Marwick LLP and KPMG Audit Plc 23.2 Consent of Price Waterhouse LLP 23.3 Consent of Ernst & Young LLP 23.4 Consent of Arthur Andersen LLP 23.5 Consent of Damian C. Georgino (to be included in Exhibit 5.1) 24.1 Power of Attorney 25.1 Statement of Eligibility and Qualification of State Street Bank and Trust Company of California, N.A., as Trustee (to be filed by amendment)
ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-2 The undersigned registrant hereby undertakes that: (1) For the purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palm Desert, State of California, on October 15, 1996. UNITED STATES FILTER CORPORATION By: /s/ Richard J. Heckmann ___________________________________ Richard J. Heckmann Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. POWER OF ATTORNEY Know all persons by these presents, that each person whose signature appears below constitutes and appoints Kevin L. Spence and Damian C. Georgino, and each of them, his true and lawful attorney-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this registration statement (including pursuant to Rule 462(b)), and to file the same with all exhibits thereto, and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
CAPACITY DATE /s/ Richard J. Heckmann Chairman of the Board, October 15, 1996 ____________________________________ President and Chief Richard J. Heckmann Executive Officer (Principal Executive Officer) and a Director /s/ Kevin L. Spence Vice President and Chief October 15, 1996 ____________________________________ Financial Officer Kevin L. Spence (Principal Financial and Accounting Officer) /s/ Michael J. Reardon Executive Vice President and October 15, 1996 ____________________________________ a Director Michael J. Reardon /s/ Tim L. Traff Senior Vice President and a October 15, 1996 ____________________________________ Director Tim L. Traff /s/ R. Doyle White Executive Vice President and October 15, 1996 ____________________________________ a Director R. Doyle White
CAPACITY DATE /s/ James E. Clark Director October 15, 1996 ____________________________________ James E. Clark Director October , 1996 ____________________________________ John L. Diederich /s/ Robert S. Hillas Director October 15, 1996 ____________________________________ Robert S. Hillas /s/ Arthur B. Laffer Director October 15, 1996 ____________________________________ Arthur B. Laffer /s/ Alfred E. Osborne, Jr. Director October 15, 1996 ____________________________________ Alfred E. Osborne, Jr. /s/ J. Danforth Quayle Director October 15, 1996 ____________________________________ J. Danforth Quayle /s/ C. Howard Wilkins, Jr. Director October 15, 1996 ____________________________________ C. Howard Wilkins, Jr.
EXHIBIT INDEX
SEQUENTIAL EXHIBIT NO. DESCRIPTION PAGE NO. 2.1 Purchase and Sale Agreement, dated as of September 14, 1996, between Wheelabrator Technologies Inc. and United States Filter Corporation...................... 2.3 Stock Purchase Agreement, dated as of September 10, 1996, among Edmundson International, Inc., United States Filter Corporation and WaterPro Supplies Corporation........................................... 12.1 Computation of Ratio of Earnings to Fixed Charges..... 23.1 Consents of KPMG Peat Marwick LLP and KPMG Audit Plc.. 23.2 Consent of Price Waterhouse LLP....................... 23.3 Consent of Ernst & Young LLP.......................... 23.4 Consent of Arthur Andersen LLP........................ 24.1 Power of Attorney (included on signature page)........
EX-2.1 2 AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT Exhibit 2.1 EXECUTION COPY AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT between WHEELABRATOR TECHNOLOGIES INC. ("Seller") and UNITED STATES FILTER CORPORATION ("Purchaser") September 14, 1996 TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS 1.1 Defined Terms . . . . . . . . . . . . . . . . . . . 1 ARTICLE II PURCHASE AND SALE 2.1 Purchase and Sale of Shares and Domestic Assets. . . . . . . . . . . . . . . . . . . . . . 11 2.2 Payment at Closing .. . . . . . . . . . . . . . . 14 2.3 Closing Balance Sheet . . . . . . . . . . . . . . 15 2.4 Procedures for Assets not Transferable . . . . . 17 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER 3.1 Authority of Seller . . . . . . . . . . . . . . . 18 3.2 Shares and Subsidiaries . . . . . . . . . . . . . 19 3.3 Real Property . . . . . . . . . . . . . . . . . . 20 3.4 Leases . . . . . . . . . . . . . . . . . . . . . 20 3.5 Intellectual Property . . . . . . . . . . . . . . 21 3.6 Title to Assets . . . . . . . . . . . . . . . . . 21 3.7 No Adverse Change . . . . . . . . . . . . . . . . 22 3.8 Tax Matters . . . . . . . . . . . . . . . . . . . 22 3.9 Litigation . . . . . . . . . . . . . . . . . . . 23 3.10 ERISA . . . . . . . . . . . . . . . . . . . . . 23 3.11 Material Contracts . . . . . . . . . . . . . . . 25 3.12 Brokers . . . . . . . . . . . . . . . . . . . . 25 3.13 Environmental . . . . . . . . . . . . . . . . . 26 3.14 Qualification . . . . . . . . . . . . . . . . . 28 3.15 Compliance with Law; Regulatory Compliance. . . 28 3.16 Financial Statements . . . . . . . . . . . . . . 29 3.17 Indebtedness; Parent Guarantees. . . . . . . . . 29 3.18 Employment . . . . . . . . . . . . . . . . . . . 30 3.19 Labor Relations . . . . . . . . . . . . . . . . 31 3.20 Inventory . . . . . . . . . . . . . . . . . . . 31 3.21 Receivables. . . . . . . . . . . . . . . . . . . 31 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER 4.1 Authority of Purchaser . . . . . . . . . . . . . 32 4.2 Brokers . . . . . . . . . . . . . . . . . . . . . 33 4.3 Securities . . . . . . . . . . . . . . . . . . . 33 -i- 4.4 Financing . . . . . . . . . . . . . . . . . . . . 33 ARTICLE V COVENANTS OF SELLER 5.1 Corporate and Other Actions. . . . . . . . . . . 33 5.2 Full Access. . . . . . . . . . . . . . . . . . . 33 5.3 Ordinary Course of Business. . . . . . . . . . . 34 5.4 Payment of Taxes . . . . . . . . . . . . . . . . 36 5.5 HSR Filings . . . . . . . . . . . . . . . . . . 36 5.6 Litigation Support and Access After Closing. . . 36 5.7 No Solicitation. . . . . . . . . . . . . . . . . 36 5.8 Employment Solicitation. . . . . . . . . . . . . 37 5.9 Failure to Close . . . . . . . . . . . . . . . . 37 5.10 Filings. . . . . . . . . . . . . . . . . . . . . 38 5.11 Insurance. . . . . . . . . . . . . . . . . . . . 38 ARTICLE VI COVENANTS OF PURCHASER 6.1 Corporate and Other Actions. . . . . . . . . . . 38 6.2 Confidentiality. . . . . . . . . . . . . . . . . 38 6.3 Employees; Benefit Plans. . . . . . . . . . . . 38 6.4 Full Access. . . . . . . . . . . . . . . . . . . 40 6.5 Insurance. . . . . . . . . . . . . . . . . . . . 40 6.6 Use of Name. . . . . . . . . . . . . . . . . . . 40 6.7 HSR Filings. . . . . . . . . . . . . . . . . . . 40 6.8 Litigation Support and Access After Closing. . . 40 6.9 Parent Guarantees. . . . . . . . . . . . . . . . 41 6.10 Knowledge. . . . . . . . . . . . . . . . . . . . 41 ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER 7.1 Warranties True . . . . . . . . . . . . . . . . . 41 7.2 Compliance with Agreements and Covenants . . . . 41 7.3 HSR Act . . . . . . . . . . . . . . . . . . . . . 42 7.4 Injunctions . . . . . . . . . . . . . . . . . . . 42 7.5 Deliveries by Seller . . . . . . . . . . . . . . 42 7.6 No Material Adverse Change . . . . . . . . . . . 42 7.7 Materiality Standard . . . . . . . . . . . . . . 42 ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER 8.1 Warranties True . . . . . . . . . . . . . . . . 42 -ii- 8.2 Compliance with Agreements and Covenants . . . . 43 8.3 HSR Act . . . . . . . . . . . . . . . . . . . . . 43 8.4 Injunctions . . . . . . . . . . . . . . . . . . . 43 8.5 Deliveries by Purchaser . . . . . . . . . . . . . 43 ARTICLE IX CLOSING 9.1 Closing . . . . . . . . . . . . . . . . . . . . . 43 9.2 Seller's Deliveries . . . . . . . . . . . . . . . 43 9.3 Purchaser's Deliveries . . . . . . . . . . . . . 44 9.4 Termination . . . . . . . . . . . . . . . . . . . 45 ARTICLE X SURVIVAL AND INDEMNIFICATION 10.1 Survival . . . . . . . . . . . . . . . . . . . . 46 10.2 Indemnification by Seller . . . . . . . . . . . 46 10.3 Limitations . . . . . . . . . . . . . . . . . . 47 10.4 Indemnification by Purchaser . . . . . . . . . . 48 10.5 Procedures . . . . . . . . . . . . . . . . . . . 48 10.6 Calculations . . . . . . . . . . . . . . . . . . 49 ARTICLE XI TAXES 11.1 Filing Tax Returns; Payment of Taxes . . . . . . 49 11.2 Tax Benefits . . . . . . . . . . . . . . . . . . 50 11.3 Tax Cooperation . . . . . . . . . . . . . . . . 50 11.4 Section 338(h)(1) Election . . . . . . . . . . . 51 11.5 Tax Sharing Arrangements . . . . . . . . . . . . 51 ARTICLE XII MISCELLANEOUS 12.1 Expenses . . . . . . . . . . . . . . . . . . . 51 12.2 Amendment . . . . . . . . . . . . . . . . . . . 52 12.3 Notices . . . . . . . . . . . . . . . . . . . . 52 12.4 Waivers . . . . . . . . . . . . . . . . . . . . 53 12.5 Counterparts . . . . . . . . . . . . . . . . . 53 12.6 Headings . . . . . . . . . . . . . . . . . . . 53 12.7 Applicable Law . . . . . . . . . . . . . . . . 53 12.8 Assignment . . . . . . . . . . . . . . . . . . 53 12.9 No Third Party Beneficiaries . . . . . . . . . 53 12.10 Arbitration . . . . . . . . . . . . . . . . . . 53 12.11 Schedules . . . . . . . . . . . . . . . . . . . 54 12.12 Incorporation . . . . . . . . . . . . . . . . . 54 -iii- 12.13 Knowledge Defined . . . . . . . . . . . . . . . 54 12.14 Public Announcements . . . . . . . . . . . . . 54 12.15 Complete Agreement . . . . . . . . . . . . . . 55 12.16 Interpretation . . . . . . . . . . . . . . . . 55 12.17 Further Assurances . . . . . . . . . . . . . . 55 -iv- Schedule 1.2 - Minority Subsidiaries Schedule 1.3 - The Shares Schedule 1.4 - Subsidiaries Schedule 2.1(b) - Certain Retained Matters Schedule 2.1(c)(I) - Environmental Liabilities Schedule 2.1(c)(II) - Retained Claims Schedule 2.1(c)(III) - Certain Litigation Schedule 2.1(d) - Transferred Assets Schedule 2.2 - Payment Allocation Schedule 2.3 - Accounting Conventions Schedule 3.1 - Authority of Seller Schedule 3.2 - Ownership Schedule 3.3 - Real Property Schedule 3.4 - Leases Schedule 3.5 - Intellectual Property Schedule 3.6 - Title to Assets Schedule 3.7 - No Adverse Change Schedule 3.8 - Tax Matters Schedule 3.9 - Litigation Schedule 3.10 - ERISA Schedule 3.11 - Material Contracts Schedule 3.13 - Environmental Schedule 3.15 - Compliance Schedule 3.16 - Financial Statements Schedule 3.17 - Indebtedness Schedule 3.18 - Employment Schedule 3.19 - Labor Relations Schedule 5.3(I) - Capital Expenditures Schedule 6.3(e) - Excluded Employees Schedule 12.13(a) - Knowledge of Seller Schedule 12.13(b) - Knowledge of Purchaser Exhibit A - Insurance Agreement Exhibit B - Stock Retention Agreement Exhibit C - Trade Name and Service Mark License Agreement Exhibit D - Business Development Agreement Exhibit E - Non-Competition Agreement -v- AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT --------------------------- THIS AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT is entered into as of the 14th day of September, 1996, between Wheelabrator Technologies Inc., a Delaware corporation ("Seller"), and United States Filter Corporation, a Delaware corporation ("Purchaser"). WHEREAS, subject to the terms and conditions set forth herein, Seller desires to cause the sale, assignment and transfer to Purchaser, and Purchaser desires to purchase, assume and take assignment and delivery of, (A) the stock of certain of Seller's indirect subsidiaries and certain other entities, and (B) substantially all of the assets and liabilities of the Johnson Screens, Wheelabrator Corporation and Water Process divisions of Seller's wholly owned subsidiary, Wheelabrator Water Technologies Inc. ("WWTI"). Certain capitalized terms used herein shall have the meanings ascribed to such terms below. WHEREAS, on September 14, 1996, the parties entered into a Purchase and Sale Agreement providing for the foregoing, which Agreement the parties now wish to amend in certain respects and restate in its entirety, which Amended and Restated Purchase and Sale Agreement shall be deemed to be entered into as of the 14th day of September, 1996. NOW, THEREFORE, in consideration of the premises and the mutual promises herein contained, it is hereby agreed as follows: ARTICLE I DEFINITIONS 1.1 Defined Terms. The following terms shall have the following meanings: ------------- "Accounting Conventions" shall mean the agreements, assumptions and conventions used in connection with preparing the Financial Statements and to be used in connection with preparing the Closing Balance Sheet, as set forth on Schedule 2.3. ------------ "Acquisition Proposal" shall have the meaning set forth in Section 5.7. ----------- "Affiliate" means any Person controlling, controlled by, or under common control with, another Person; for purposes of this definition (and for such purposes only), "control" shall mean the ownership, directly or indirectly, of 50% or more of the outstanding equity securities or ownership interests of a Person. "Agreement" means this Agreement, including all Schedules and Exhibits hereto, as it may be amended from time to time in accordance with its terms. "Allocation" shall have the meaning set forth in Section 11.4. ------------ "Balance Sheet" means the unaudited combined balance sheet of the Business as of August 31, 1996. "Base Tangible Net Book Value" means (a) $110,600,000, if the Closing occurs on or as of October 31, 1996; (b) $113,600,000, if the Closing occurs on or as of November 30, 1996; or (c) $116,600,000, if the Closing occurs on or as of December 31, 1996. "Benefit Plans" means written and unwritten "employee benefit plans" within the meaning of Section 3(3) of ERISA, and any other written and unwritten profit sharing, pension, savings, deferred compensation, fringe benefits, insurance, medical, medical reimbursement, life, disability, accident, post-retirement health or welfare benefit, stock option, stock purchase, sick pay, vacation, employment, severance, termination or other plan, agreement, contract, policy, trust fund or arrangement, whether or not funded, in each case only to the extent maintained in the United States by or for the benefit of the Divisions. The term "Benefit Plans" does not include plans maintained or required by governmental authorities. "Business" shall mean, collectively, the following: (a) the businesses of the Subsidiaries (after the transfer contemplated at Section 2.1(d) -------------- below); (b) the business of the Johnson Screens division of WWTI; (c) the business of the Wheelabrator Corporation division of WWTI; and (d) the businesses of the Water Process division of WWTI, including the HPD, CPC Engineering, Wiesemann, McCormick and Memtek business lines. "Business" does not include the Excluded Businesses. "Closing" shall mean the closing of the purchase and sale transactions contemplated by this Agreement. "Closing Balance Sheet" shall have the meaning set forth in Section 2.3. ------------ -2- "Closing Date" shall have the meaning set forth in Section 9.1. ----------- "Code" means the Internal Revenue Code of 1986, as amended. "Controlled Group Member" shall have the meaning set forth in Section 3.10. ------------ "Default" means, with respect to any contract, lease or agreement, a breach of any obligation thereunder that would give the counterparty thereto (a) the right to terminate such contract, lease or agreement, (b) the right to accelerate all payments due under such contract, lease or agreement or (c) a bona fide claim for damages in excess of $250,000. "Default" shall not include claims under warranties or process guarantees. "Divisions" means the Johnson Screens, Wheelabrator Corporation, and Water Process (including the HPD, CPC Engineering, Wiesemann and Memtek business lines) divisions of WWTI. "DOL" shall have the meaning set forth in Section 5.10. ------------- "Domestic Assets" shall have the meaning set forth in Section 2.1(b). -------------- "Employment Agreements" shall have the meaning set forth in Section 3.18. ------------ "Environmental Action" shall mean any civil, criminal or administrative action, suit, summons, citation, complaint, claim, demand, judgment, order, Lien, notice of violation, proceeding or hearing, or investigation based upon or related to (i) any Environmental Law or Environmental Condition, or (ii) the presence, manufacture, generation, processing, distribution, use, sale, receipt, storage, disposal, transport, treatment, handling, Release or threatened Release of any Hazardous Material. "Environmental Approvals" shall mean collectively all Governmental Approvals required under Environmental Laws. "Environmental Condition" shall mean the presence of a Hazardous Material (other than a naturally occurring substance) on, at or in a property (including, but not limited to, the presence in surface water, groundwater, soils or subsurface strata). -3- "Environmental Laws" means all applicable Federal, state, local or foreign Laws relating primarily to pollution or protection of the environment, as such Laws exist on the Closing Date, including, without limitation, Laws relating to Releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes (including, without limitation, Hazardous Materials) into the indoor or outdoor environment (including, without limitation, ambient air, surface water, ground water or land), or otherwise relating primarily to the manufacture, use, treatment, storage, transportation or disposal of Hazardous Materials. "Environmental Liabilities" mean the liabilities set forth on Schedule 2.1(c)(I). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Excluded Assets" shall have the meaning set forth in Section 2.1(b). -------------- "Excluded Businesses" means (a) those assets, liabilities and operations of Wheelabrator Clean Air Systems Inc. and Wheelabrator Canada Inc. to be transferred pursuant to Section 2.1(d) below and retained by -------------- Seller, (b) all of the BioGro line of business of WWTI, (c) the EOS line of business of WWTI, (d) the contracts, operations, and businesses and other assets included within the Excluded Assets and (e) the privatization and industrial outsourcing development group of WWTI. "Financial Statements" shall have the meaning set forth in Section 3.16. ------------ "GAAP" means United States generally accepted accounting principles, as in effect on the date of this Agreement. "Governmental Approvals" shall have the meaning set forth in Section 3.15(b). --------------- "Governmental Filings" means any plans, filings, reports, notifications, or other submissions required to be made to any governmental authority. "Hazardous Material" means any substance which is defined as a hazardous substance, hazardous material, hazardous chemical, hazardous waste, toxic substance, pollutant, solid waste, municipal waste, industrial waste or contaminant under any Environmental Law, or any substance which is regulated -4- under any Environmental Law, and including, without limitation, petroleum and related materials. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indebtedness" shall have the meaning set forth in Section 3.17. ------------ "Insurance Agreement" shall mean the Insurance Agreement set forth on Exhibit A hereto. --------- "Intellectual Property" means all domestic and foreign patents and registered and unregistered trade names, fictitious names, logos and brand names, copyrights, trademarks (and associated goodwill), processes, software, know-how, trade secrets, service marks and patents, and other proprietary rights, and licenses and applications for any of the foregoing, used exclusively by the Divisions or Subsidiaries in the operation of the Business or owned by any Subsidiary. "IRS" shall have the meaning set forth at Section 3.10 ------------ "Law" means any law, statute, regulation, ordinance, rule, order, decree, judgment, consent decree, settlement agreement or governmental requirement (including, without limitation, common laws) enacted, promulgated, entered into, agreed to or imposed by any court or other governmental authority or body; provided, that the term "Law" shall not -------- include any Environmental Law. "Liabilities" means all liabilities (excluding all Retained Liabilities) of, or arising from the operation of, the Subsidiaries, the Divisions, the Business and the Domestic Assets, whether absolute or contingent, known or unknown, including, without limitation: (a) all the obligations under any agreements, contracts, leases, instruments, purchase orders, sales orders, warranties, guaranties and commitments (including, without limitation, outstanding bids and contracts in process) to which any of Seller, WWTI (with respect to the Business) or the Subsidiaries are a party or otherwise bound (including, without limitation, matters relating to both open and completed contracts); (b) current liabilities, including such liabilities (i) reflected on the Balance Sheet to the extent not paid on the Closing Date or (ii) incurred in the ordinary course of business (or otherwise, with the written -5- consent of Purchaser) after the date of the Balance Sheet; (c) all claims arising from products sold or services provided on or prior to the Closing Date, including, without limitation, warranty claims, process guaranty claims, property damage claims, and personal injury claims; (d) any claims by employees of the Business, including, without limitation, worker's compensation claims, disability claims, severance claims, retirement claims, claims for termination pay, vacation pay, profit sharing, thirteenth month or other statutory or non-statutory bonus, or any claim for violation of applicable Law pertaining to employment (provided, that it is understood that the parties' -------- allocations of liabilities set forth in Section 6.3 with respect to the ----------- matters set forth therein shall be controlling); (e) all Taxes that have been accrued and are not payable and that accrue after the Closing Date; (f) any other liability, absolute, contingent, known or unknown, related to the assets, liabilities, operations or products of the Subsidiaries, the Divisions, the Business and the Domestic Assets. "Lien" means any lien, security interest, mortgage, deed of trust, pledge, conditional sale agreement, easement, lease or other charge or encumbrance. "Loss" or "Losses" mean any and all damages, losses, actions, proceedings, causes of action, obligations, liabilities, claims, encumbrances, penalties, demands, assessments, judgments, Reserve Losses, costs and expenses including, without limitation, court costs and reasonable attorneys' and consultants' fees and costs of litigation but shall not include (a) any interest with respect thereto or (b) economic, consequential, punitive or incidental damages claimed, incurred or suffered by Purchaser or its Affiliates; provided, that the exclusion set forth in this clause (b) shall not apply with respect to economic, consequential, punitive or indirect damages required to be actually paid by Purchaser to any Person not affiliated with Purchaser. "Material" when used (a) to describe or modify a reference to the Business, the Subsidiaries and/or Divisions, and/or (b) to describe or modify the effect of any event or situation or state of affairs, means material to the assets, operations or financial condition of the Business taken as a -6- whole unless otherwise specifically limited or defined, and whether or not initial capitalization is used. "Material Adverse Change" means a Material adverse change in the assets, operations or financial condition of the Business taken as a whole, for or during the period indicated. "Material Adverse Effect" means a Material adverse effect on the assets, operations or financial condition of the Business taken as a whole. "Material Contracts" means any (a) joint venture or partnership agreement pursuant to which WWTI (with respect to the Business) or any of the Subsidiaries (other than any Minority Subsidiary) hold an equity interest in any entity (but excluding any project-specific joint venture agreements not included elsewhere in this definition), (b) agreement pursuant to which WWTI (with respect to the Business) or any of the Subsidiaries (other than any Minority Subsidiary) have the right to use any Intellectual Property that is Material, (c) collective bargaining agreement (other than such arrangements imposed or mandated by applicable foreign Law) to which WWTI (with respect to the Business) or any of the Subsidiaries (other than any Minority Subsidiary) are a party, (d) contract, agreement, commitment or obligation relating to the Business and by which WWTI (with respect to the Business) or any of the Subsidiaries (other than any Minority Subsidiary) are bound for the purchase or sale of goods or services and which could reasonably be expected to provide for payments to or from WWTI (with respect to the Business) or any of the Subsidiaries over the life of such contract, agreement, commitment or obligation, in an amount of $1,000,000 (or foreign currency equivalent) or more (other than any such items (i) terminable by WWTI or the Subsidiary party thereto on 30 days or less notice without liability, penalties or additional cost, (ii) that are agreements providing for the acquisition of the stock or assets of another entity by Seller, WWTI (with respect to the Business) or any Subsidiary, which acquisition has closed, (iii) that are contracts, the provision of goods and services under which has been substantially completed and that does not have future billings in excess of $1,000,000, notwithstanding that retainage may be held under such contracts, that contractual warranty periods thereunder may not have expired or that such contracts may be considered "open" from an accounting or other non-operational standpoint, or (iv) that constitute a sales representative or distribution agreement under which there have not, during the most recent fiscal year, been payments made by WWTI or the Subsidiary party thereto in excess of $1,000,000), or (e) contract or agreement of WWTI (with respect to the Business) or the Subsidiaries which, if terminated or lost, -7- could reasonably be expected to have a Material Adverse Effect. "Minority Subsidiaries" shall mean the Subsidiaries noted as such on Schedule 1.2 hereto. ------------ "Non-Competition Agreement" means the Non-Competition Agreement in the form of Exhibit E. ---------- "Non-U.S. Pension Plans" shall have the meaning set forth in Section 3.10. ------------ "Parent Guarantees" means all guarantees, agreements, pledges, mortgages, letters of credit, bonds or other instruments of Seller and its Affiliates (other than the Subsidiaries and WWTI (with respect to the Business)) guaranteeing, securing or becoming otherwise obligated with respect to any actual or contingent liabilities of the Business, WWTI or any of the Subsidiaries. "Permitted Exceptions" shall have the meaning set forth in Section 3.6(a). -------------- "Person" means any individual, corporation, partnership, association, limited liability company, trust, governmental or quasi-governmental authority or body or other entity or organization. "Post-Closing Adjustment" shall have the meaning set forth in Section 2.3(b). The Post-Closing Adjustment may be a positive or negative -------------- amount (i.e., resulting in a payment to either the Seller or Purchaser). "Purchase Price" shall have the meaning set forth in Section 2.2, ----------- subject to adjustment as set forth in Section 2.3. ----------- "Purchaser" shall have the meaning specified in the preamble hereof. "Purchaser Indemnified Party" shall have the meaning set forth in Section 10.2. ------------ "Purchaser Plans" shall have the meaning set forth in Section 6.3. ----------- "Qualified Plan" shall have the meaning set forth in Section 3.10. ------------ "Real Property" shall have the meaning set forth in Section 3.3. ----------- -8- "Release" shall mean the spilling, leaking, pumping, pouring, emitting, discharging, injecting, escaping, leaching, dumping or disposal of any Hazardous Material into surface water, groundwater, soil, the land surface or subsurface, or ambient air. "Reserve Losses" shall have the meaning set forth in Section 10.2(b). --------------- "Reserved Matters" shall mean the following matters with respect to the Business, each as of the Closing Date: (a) accounts receivable, (b) amounts relating to the completion of the contracts in process of the Business, Divisions and Subsidiaries, (c) claims arising from products sold or services provided, including product or service warranty claims and process guaranty claims, (d) worker's compensation claims, disability claims, personal injury claims and severance claims, (e) inventory (including, without limitation, finished goods, supplies and raw materials) and (f) litigation; provided, however, that Reserved Matters shall not include -------- ------- matters known to Seller which should have been, but are not, included on Schedule 3.9 or 3.11. ------------ ---- "Reserves" means the aggregate amount of the reserves established on the Closing Balance Sheet specifically identified with, or available to be utilized for, the Reserved Matters as of the Closing Date, established in accordance with GAAP (as modified by the Accounting Conventions) and in accordance with the Accounting Conventions. "Response Action" shall mean any action taken in the investigation, removal, confinement, remediation or cleanup of a Release or any Environmental Condition. "Response" and "Response Actions" include, without limitation, any action which constitutes a "removal" action or "remedial" action as defined by (s) 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (s) 9601(23) and (24) and which is necessary and consistent with the National Contingency Plan promulgated thereunder. "Retained Claims" shall have the meaning set forth in Section 2.1(c). -------------- "Retained Liabilities" shall have the meaning set forth in Section 2.1(c). -------------- "Section 338(h)(10) Elections" shall have the meaning specified in Section 11.4. ------------ "Seller" shall have the meaning specified in the preamble hereof. -------- -9- "Seller Indemnified Party" shall have the meaning set forth in Section 10.4. ------------ "Seller Tax Period" means the period (including all prior taxable years) ending on and including the Closing Date. "Seller Plans" shall have the meaning set forth in Section 3.10. ------------- "Shares" means all the shares of capital stock and quotas of share capital set forth on Schedule 1.3. ------------- "Stock Retention Agreement" shall have the meaning set forth in Section 2.4(c). - -------------- "Subsidiary" or "Subsidiaries" means the entities listed on Schedule 1.4. ------------- "Tangible Net Book Value" shall mean total assets (excluding goodwill) less total liabilities of the Business as of the date of the Closing Balance Sheet. The Tangible Net Book Value shall be calculated according to the Accounting Conventions and in a manner consistent with the calculation thereof on the Balance Sheet. "Taxes" mean all taxes, charges, fees, duties, levies or other assessments, including (without limitation) income, gross receipts, capital stock, net proceeds, ad valorem, turnover, real, personal and other property (tangible and intangible), sales, use, franchise, excise, value added, stamp, leasing, lease, user, transfer, fuel, excess profits, occupational, interest equalization, windfall profits, unitary, severance and employees' income withholding, unemployment and Social Security taxes, duties, assessments and charges (including the recapture of any tax items such as investment tax credits) which are imposed by the United States, or any state, local or foreign government or subdivision or agency thereof, including, without limitation, any interest, penalties or additions to tax related thereto imposed by any taxing authority (including any interest or penalties with respect to such Taxes), it being understood that any Taxes, penalties or interest attributable to the operations of any Subsidiary (including, without limitation, penalties or interest payable as a result of an audit of any tax return) shall be deemed to have accrued in the period to which such Taxes, penalties or interest are attributable. "Trade Name and Service Mark License Agreement" shall have the meaning set forth at Section 6.6. ----------- -10- "UK Microfloc Contracts" means all agreements, contracts and arrangements entered into prior to the date hereof and relating to Microfloc projects to which JFS (UK) Limited, Tilghman-Wheelabrator Ltd. or any other Subsidiary is a named party. "WCAI" shall have the meaning set forth in Section 2.2(b). "WWTI" shall have the meaning set forth in the recital hereof. ARTICLE II PURCHASE AND SALE 2.1 Purchase and Sale of Shares and Domestic Assets. Subject to the terms ------------------------------------------------ and conditions hereof, at the Closing: (a) Seller shall cause the sale, assignment and delivery to Purchaser, and Purchaser shall purchase and take assignment and delivery of, the Shares. (b) Seller shall cause the sale, assignment and delivery to Purchaser, and Purchaser shall purchase and take assignment and delivery of, the assets, real, personal, tangible or intangible, used primarily by the Divisions in the operation of the Business (collectively, the "Domestic Assets"). The Domestic Assets include, but are not limited to: (i) all assets of the Divisions reflected on the Balance Sheet (except assets reflected thereon which have been disposed of or used in the ordinary course of business after the date of the Balance Sheet); (ii) all assets acquired by the Divisions after the date of the Balance Sheet and reflected on the Closing Balance Sheet; (iii) all accounts and notes receivable relating to the Business as operated by the Divisions or arising from the operation of the Divisions; (iv) all inventory, stock in trade, work-in-process, and raw materials, including supplies inventory and unbilled costs on engineering contracts relating exclusively to the Business as operated by the Divisions or resulting from the operation of the Divisions; -11- (v) all sales order files, systems order files, purchase order files, manufacturing records, customer lists and business files and records in Seller's control to the extent relating to the Business; (vi) all Intellectual Property owned by WWTI and relating exclusively to the Business, including, without limitation, all royalties, rights and interests in connection with any license of such Intellectual Property; (vii) all rights and interest to or in all agreements, contracts, guarantees, letters of credit, sales contracts, leases, purchase orders, sales orders, purchase contracts, service contracts, outstanding bids and contracts in process, or sales representative or distributorship contracts, in each case relating exclusively to the Business and regardless of whether currently in process or completed, including, without limitation, Material Contracts and Leases; (viii) all machinery and equipment used by the Divisions in the Business; (ix) all rights of WWTI, to the extent relating exclusively to or arising out of the operation of the Business, with respect to any claims, demands, causes of action, judgments and pending litigation; (x) the Real Property (and all improvements thereon) and Leases (as defined in Sections 3.3 and 3.4) of WWTI relating exclusively to the ------------ --- operation of the Divisions; (xi) all right, title and interest in the Governmental Approvals of WWTI relating exclusively to the operation of the Divisions, to the extent transferable; and (xii) all assets of the Divisions located on (i) the Real Property and (ii) the real property that is the subject of the Leases of WWTI relating exclusively to the operation of the Divisions, on the date hereof and on the Closing Date. The Domestic Assets shall not include, and Purchaser shall not purchase and take assignment and delivery of, the following (the "Excluded Assets"): (1) all rights of WWTI (relating to the operation of the Business) for rebates or refunds related to Taxes; (2) all securities of any Person not constituting a Subsidiary; -12- (3) the "triangle" mark (blue triangle) and all names, trade names and trademarks containing the name "Wheelabrator" (other than as provided in the Trade Name and Service Mark License Agreement), it being further understood that any marks owned by any Subsidiary with respect to the "triangle" mark (blue triangle) and all names, trade names and trademarks containing the name "Wheelabrator"' will be retained by Seller and transferred to Seller by each Subsidiary prior to Closing; (4) all legal, accounting and tax records pertaining primarily to the Retained Liabilities and Excluded Assets; (5) all minute books, stock books and corporate records related primarily to the Affiliates of Seller operating the Divisions; (6) any intercompany balances due to or from Seller or any Affiliate of Seller, as in effect on the Closing Date; (7) the rights of WWTI and its Affiliates pursuant to the agreements listed on Schedule 2.1(b)(I), other than the rights to be assigned to ------------------ Purchaser identified thereon; (8) the rights and interests described on Schedule 2.1(b)(II); (9) all assets of the Excluded Businesses, including, without limitation, all equity interests, revenue rights, contract business prospects, customer lists, other confidential information, privatization and industrial outsourcing development projects, and other assets of the municipal and industrial wastewater facilities management business of the EOS division and the privatization and outsourcing development groups of WWTI; (10) the capital stock of JFS (UK) Limited; and (11) the assets relating to the grate blocks of Wheelabrator Environmental Systems Inc. set forth on Schedule 2.1(b)(III). (c) Purchaser shall assume and agree to pay, perform or satisfy, in accordance with their respective terms, all of the Liabilities. Notwithstanding clause (c) above, Purchaser shall not assume and shall not be liable for the following liabilities of Seller, WWTI, the Subsidiaries or the Divisions (collectively, the "Retained Liabilities"): (i) the Environmental Liabilities, (ii) all liabilities under or with respect to the Seller Plans, including but not limited to liabilities for post-retirement health -13- benefits and life insurance under such plans, (iii) all liabilities and obligations of, or arising out of, the Excluded Businesses, including, without limitation, claims against Wheelabrator Clean Air Systems Inc. and Wheelabrator Canada Inc. relating to the operation, ownership or use of the assets transferred to a subsidiary of Seller in accordance with Section 2.1(d) below, -------------- (iv) all claims or obligations with respect to, or arising out of, the Excluded Assets, (v) all intercompany payables due to Seller or any Affiliate of Seller, (vi) all liabilities and obligations of WWTI or its Affiliates arising in connection with the litigation set forth on Schedule 2.1(c)(III), (vii) all -------------------- liabilities and obligations of WWTI or its Affiliates arising in connection with the matters set forth on Schedule 2.1(c)(II) (the "Retained Claims"), and ------------------- (viii) severance and termination obligations retained by Seller under Section 6.3. - ------------ (d) Prior to Closing, Wheelabrator Clean Air Systems Inc. shall transfer to a subsidiary of Seller all of its assets which do not constitute part of its (i) ARI LoCat sulfur recovery business, (ii) AMCEC solvent recovery business, (iii) Altech Measurement Systems business, (iv) Huntington Energy Systems regenerative thermal oxidation and the ARI EconAbator catalytic oxidation businesses, or (v) Westates Carbon business. Such transferred assets are described on Schedule 2.1(d) and shall include all assets used in the Wheelabrator Air - --------------- Pollution Control business of Wheelabrator Clean Air Systems Inc. The transferee entity shall assume all liabilities or obligations of, or claims against, Wheelabrator Clean Air Systems Inc. relating to the operation, ownership or use of such assets. Prior to Closing, Wheelabrator Canada Inc. shall transfer to a subsidiary of Seller all capital stock owned in Glegg Industries, Inc., all rights and obligations under that certain Strategic Alliance Agreement and other agreements entered into in connection with the acquisition of the capital stock investment in Glegg Industries Inc., and all of the assets used in the Wheelabrator Air Pollution Control business. Such entity shall assume all liabilities or obligations of, or claims against, Wheelabrator Canada Inc. relating to the operation, ownership or use of such assets. Prior to Closing, Seller shall cause the transfer or dividend of the shares of JFS (UK) Limited to Seller or one of its subsidiaries or Affiliates. The instruments of transfer and assumption necessary to effect the matters contemplated by this Section 2.1(d) -------------- shall be substantially in the same form as the other instruments of transfer between Seller and Purchaser pursuant to this Agreement. 2.2 Payment at Closing. (a) Subject to the terms and conditions hereof, at ------------------ the Closing, Purchaser shall pay by wire transfer of same-day funds, the sum of $369,600,000 (the "Purchase Price") to Seller, less any amount to be paid into escrow pursuant to Section 2.2(b) below. The Purchase Price may be adjusted ------------- following the Closing pursuant to Section 2.3. The Purchase Price ------------ -14- shall be allocated as set forth on Schedule 2.2 among the Shares, the Domestic ------------ Assets and the non-competition covenant set forth in the Non-Competition Agreement, which Schedule 2.2 shall be agreed to by the parties as soon as ------------ practical (but in no event greater than 30 days) after the Closing Date and thereafter immediately constitute a part of this Agreement as if attached hereto on the date hereof. The parties shall adhere to Schedule 2.2 for purposes of any ------------ tax report or filing made by any such party. (b) Seller shall retain the shares of common stock of Westates Carbon- Arizona, Inc. ("WCAI") until (i) all necessary Environmental Approvals have been received in connection with a change of control of WCAI and the transfer of its "Part A" RCRA permit and (ii) the Seller has received the consents of the Colorado River Indian Tribes ("CRIT") and the duly authorized representative of the Secretary of the Interior to the assignment of the Lease between WCAI and CRIT dated July 20, 1990 (if required), so as to enable the Seller to cause the transfer of such shares to Purchaser. Upon receipt of such Environmental Approvals and such consents, Seller shall promptly cause the transfer to Purchaser of such shares upon payment of the amount withheld by Purchaser under this Section 2.2(b) (with interest thereon as provided below). Such payment and -------------- transfer shall occur within three (3) business days of Seller's delivery of written notice to Purchaser that such Environmental Approvals and consents have been obtained. Seller and Purchaser agree that $10,000,000 of the Purchase Price shall be paid by Purchaser into escrow at Closing with an escrow agent mutually agreeable to Seller and Purchaser on the Closing Date, to be held by such escrow agent pursuant to an escrow agreement with mutually agreeable terms. Such amount shall be paid to Seller, with interest thereon, upon the transfer of the shares of WCAI to Purchaser. Promptly after the date of this Agreement (and in any event within 15 days thereof), Purchaser (with the cooperation of Seller) shall make all necessary filings to obtain such Environmental Approvals and both such consents, and shall use its best efforts to obtain such Environmental Approvals and consents as promptly as practicable, including the posting of necessary financial assurances in connection therewith. In the event that the required Environmental Approvals and consents are obtained prior to Closing, the portion of the Purchase Price described above shall not be retained by Purchaser and paid into escrow, and the shares of WCAI shall not be retained by Seller. In the event that the shares of WCAI are retained by Seller, the Tangible Net Book Value on the Closing Balance Sheet, and the applicable Base Tangible Net Book Value shall not be adjusted, notwithstanding the fact that such shares have not been transferred. -15- 2.3 Closing Balance Sheet. (a) Within thirty (30) days following the Closing ---------------------- Date, Seller shall deliver to Purchaser a consolidated balance sheet for the Business dated as of the Closing Date (the "Closing Balance Sheet"). The Closing Balance Sheet shall be prepared by Seller at its own expense with the assistance of the former personnel of the Divisions and personnel of the Subsidiaries, each as may be reasonably requested by Seller. The parties agree that the Closing Balance Sheet shall be prepared in accordance with GAAP (as modified by the Accounting Conventions) and giving effect to the Accounting Conventions. The Closing Balance Sheet shall not take into consideration any events occurring after the Closing Date. Following the delivery of the Closing Balance Sheet to Purchaser, Seller shall permit Purchaser's accountants access to and review of all work papers and other pertinent information requested from time to time and used in connection with the preparation of the Closing Balance Sheet. (b) The Purchase Price shall be increased by the amount that the Tangible Net Book Value as shown on the Closing Balance Sheet is greater, or shall be reduced by the amount that the Tangible Net Book Value as shown on the Closing Balance Sheet is less, than the Base Tangible Net Book Value. Such increase or decrease, as finally determined, shall be referred to herein as the "Post- Closing Adjustment." The Post-Closing Adjustment shall be remitted by wire transfer of same-day funds, not later than the tenth (10th) day after the Closing Balance Sheet becomes final and binding pursuant to Section 2.3(c) -------------- below. The Purchase Price shall be deemed to be (i) decreased to the extent that the Post-Closing Adjustment is due from Seller to Purchaser or (ii) increased to the extent that the Post-Closing Adjustment is due from Purchaser to Seller. (c) If Purchaser notifies Seller in writing within thirty (30) days after receipt of the Closing Balance Sheet that Purchaser believes that the Closing Balance Sheet fails to present fairly in all material respects the financial condition of the Business in accordance with GAAP (as modified by the Accounting Conventions) and in accordance with the Accounting Conventions and that the resolution of such dispute in the manner proposed by Purchaser would result in an adjustment to the Tangible Net Book Value reflected on the Closing Balance Sheet of at least $500,000, and such notice states with reasonable specificity the basis for such disagreement and the amount of the adjustment to Tangible Net Book Value that would result, Seller and Purchaser shall attempt in good faith to resolve such dispute as soon as possible. If Purchaser fails to object as required by this Section 2.3(c), the Closing Balance Sheet as prepared by -------------- Seller, and the Net Tangible Book Value shown thereon, shall be conclusive and binding on the parties. If the Purchaser so objects and the parties are unable to resolve such dispute within thirty (30) days after Seller's receipt of such notice, the dispute shall be submitted for determination to -16- a certified public accounting firm mutually acceptable to Seller and Purchaser. (If the parties cannot agree on such an accounting firm, the dispute shall be submitted for determination to the Chicago office of Coopers & Lybrand.) Any portion of the Post-Closing Adjustment that is not in dispute shall be paid within five (5) business days after the date Purchaser presents its notice of objection, regardless of the pendency of such dispute. Such public accounting firm shall review and decide the issues that are the subject of such dispute as specified in such notice within thirty (30) days after such submission. The decision of such accounting firm shall be set forth in writing and delivered to Seller and Purchaser. The decision of such accounting firm shall be final and binding on Seller and Purchaser, and the Closing Balance Sheet and the Tangible Net Book Value reflected thereon shall constitute the final and binding "Closing Balance Sheet" and "Tangible Net Book Value" for purposes of determining the Post-Closing Adjustment (as defined above); provided, that the -------- Closing Balance Sheet and the Tangible Net Book Value reflected thereon shall not be adjusted unless the decision of such public accounting firm would result in an adjustment to the Tangible Net Book Value of at least $500,000. The fees and costs of such public accounting firm shall be borne by Purchaser and Seller in proportion to the amount by which the final Post-Closing Adjustment reflects their respective positions before commencing the dispute resolution process; provided, that, if no adjustment is permitted due to the immediately preceding - -------- sentence, Purchaser shall bear all such fees and costs. Any payment awarded by the expert accounting firm to either party shall bear interest at the rate of 8% per annum, accruing from the date that Purchaser delivers its notice of objection pursuant to this part (c) until the date payment is made. 2.4 Procedures for Assets not Transferable. (a) If any contract, agreement, --------------------------------------- property or right (including, without limitation, any Governmental Approval) included in the Domestic Assets is not assignable or transferable without the consent of any third party, and such consent has not been obtained prior to the Closing Date and the Closing occurs, this Agreement and the related instruments of transfer shall not constitute an assignment or transfer thereof and Purchaser shall not assume Seller's obligations with respect thereto. In such case, Seller shall use commercially reasonable efforts to obtain such consent as soon as possible after the Closing Date or otherwise obtain for Purchaser the practical benefit of such contract, agreement, property or right and Purchaser shall cooperate with Seller in that endeavor. If any order for the purchase of goods or services included in the Domestic Assets is not assignable by Seller, Purchaser agrees to purchase from Seller at the purchase order price all property or services thereunder and Seller agrees to sell the same to Purchaser at such price, on the terms set forth therein. If any sales order or service order included in the Domestic Assets is not assignable by Seller, Purchaser agrees to sell to Seller any products required -17- to complete such sales order or service order at the same price provided for therein and otherwise to complete such contracts on behalf of Seller and Seller agrees to purchase the same from Purchaser at such price. Purchaser shall provide all services necessary to complete such contracts and orders, and Seller shall hold for Purchaser's account and promptly remit to Purchaser all amounts payable with respect to such contracts. Prior to and after the Closing, Purchaser and Seller shall cooperate to obtain all necessary consents to the transfer of the Domestic Assets. (b) If Purchaser and Seller are unable to obtain any required consents to assign or subcontract any particular contract, or Seller and Purchaser agree that no such consent will be obtained, and no other mutually satisfactory arrangements are agreed to, then (i) such contract shall be deemed not to have been transferred to Purchaser, and (ii) the Seller and Purchaser shall treat such unassigned contract as if Seller and Purchaser had entered into a seconding arrangement with respect to such unassigned contract as of the Closing Date. To implement the retroactive treatment of any unassigned contract as a seconded contract, Seller and Purchaser will enter into a seconding agreement in mutually agreeable form at the appropriate time. (c) At Closing, Purchaser and Seller shall enter into a Stock Retention Agreement in the form of Exhibit B hereto (the "Stock Retention Agreement") with --------- respect to the Subsidiaries listed on Schedule 1.3. Pursuant to the Stock ------------ Retention Agreement, (i) Seller (either directly or through one of its wholly owned subsidiaries) shall continue to hold legal title to any capital stock included in the Shares for which a necessary consent to transfer has not been obtained, (ii) Purchaser shall have all beneficial ownership of such capital stock, and (iii) legal title to such capital stock shall transfer to Purchaser upon such necessary consent having been granted. Prior to and after the Closing, Purchaser and Seller shall cooperate to obtain all necessary consents to the transfer of the Shares that are subject to the Stock Retention Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Purchaser as follows: 3.1 Authority of Seller. Seller is a corporation duly organized, validly -------------------- existing and in good standing under the laws of Delaware. Seller has all requisite corporate power and authority to carry out the transactions contemplated herein. The execution and delivery of this Agreement by Seller has been duly authorized by all necessary corporate action. This Agreement has been duly -18- and validly executed and delivered by Seller and constitutes the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as may be limited by (a) applicable bankruptcy, insolvency, moratorium, reorganization or similar Laws from time to time in effect which affect creditors' rights generally, or (b) legal and equitable limitations on the availability of specific remedies. The execution and delivery of this Agreement by Seller does not, and the consummation of the transactions contemplated hereby and performance of the obligations hereunder, assuming the receipt of the consents, approvals and waivers listed on Schedule 3.1, will not: ------------ (i) violate or conflict with any term, condition or provision of (A) the charter, by-laws or analogous organizational documents of Seller or any entity that will be making any sale, transfer or assignment hereunder, or (B) any applicable Law or contract binding on Seller or Material Contract, which violation could reasonably be expected to have a Material Adverse Effect; or (ii) result in the creation of any Lien upon any of the Shares or the Domestic Assets or any property of any of the Subsidiaries. Except as set forth on Schedule 3.1, the failure of any Person claiming through Seller to authorize or - ------------ approve this Agreement or the transactions contemplated hereby will not give any Person the right to enjoin, rescind or otherwise prevent or impede the sale of each and every asset and share constituting the Domestic Assets and the Shares. 3.2 Shares and Subsidiaries. (a) All of the Shares are duly authorized, ------------------------ validly issued, fully paid and nonassessable. Upon transfer of the Shares, Purchaser will receive (a) directly or indirectly, all issued and outstanding capital stock or share capital of the Subsidiaries listed on Schedule 1.4, ------------- except the Minority Subsidiaries and except as disclosed on Schedule 3.2 and (b) ------------ to Seller's knowledge, an ownership interest in the Minority Subsidiaries such that Purchaser will own a percentage of the equity and voting power of each Minority Subsidiary as set forth on Schedule 3.2 hereto (it being understood ------------ that Seller would not have knowledge of the shares held by other shareholders of the Minority Subsidiaries currently or as of any particular time). At Closing, (i) Purchaser shall receive legal (except as contemplated by Section 2.4(c)) -------------- and beneficial title to the Shares listed on Schedule 1.3, free and clear of all ------------ Liens, except for Permitted Exceptions or as set forth on Schedule 3.2 and (ii) ------------ all of the property owned by the Subsidiaries (other than the Minority Subsidiaries) shall be free and clear of all Liens, except for Permitted Exceptions or as set forth on Schedule 3.2. ------------ (b) Set forth on Schedule 3.2 is a complete list of each Subsidiary and ------------ interest therein that Purchaser is acquiring by purchase of the Shares, and a list of all entities in which such acquired Subsidiaries (other than Minority Subsidiaries) own capital stock or share capital. All of the Shares listed on Schedule 1.3, and all of the capital stock or share capital of the - ------------ -19- Subsidiaries (other than the Minority Subsidiaries) are duly authorized and issued, fully paid and nonassessable and held free of Liens, other than Permitted Exceptions or as set forth on Schedule 3.2. ------------- (c) Except as set forth on Schedule 3.2 and except with respect to Minority ------------ Subsidiaries, there are no outstanding options, rights, warrants, contracts or commitments for the issuance or sale by any Subsidiary of, or any securities of any Subsidiary convertible into or exchangeable for, any shares of capital stock or other share capital of any Subsidiary. (d) Except as set forth on Schedule 3.2, each Subsidiary (other than any of ------------ the Minority Subsidiaries) is a corporation or limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, with all requisite corporate power to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect. (e) Each of the Subsidiaries (other than the Minority Subsidiaries) is an indirect, wholly owned subsidiary of Seller. The capital stock or share capital of the Minority Subsidiaries included in the Shares and listed on Schedule 1.3 ------------ are held beneficially by a wholly owned subsidiary of Seller. 3.3 Real Property. Set forth on Schedule 3.3 is a list of all real property -------------- ------------ owned by WWTI (with respect to the Business) and included in the Domestic Assets or owned by a Subsidiary (other than any Minority Subsidiary) (the "Real Property"). The Real Property is owned by the title holder thereof, free and clear of all Liens, except Permitted Exceptions. Legal title to all Real Property (other than Real Property owned by the Subsidiaries) shall be conveyed to Purchaser at Closing, free and clear of all Liens, except Permitted Exceptions. The use and operation of all Real Property conforms to all restrictive covenants, zoning restrictions and restrictions and conditions affecting title, except for such non-conformity that could not reasonably be expected to materially interfere with the continued use of such Real Property in the conduct of normal business operations. 3.4 Leases. Set forth on Schedule 3.4 is a list of all real property leases ------- ------------ which are included in the Domestic Assets or to which any Subsidiary (other than any Minority Subsidiary) is party as lessee and a list of all leases of personal property which are included in the Domestic Assets or to which any Subsidiary (other than any Minority Subsidiary) is a party as a lessee, in any case having remaining rental value of at least $250,000 (the "Leases"). All rentals currently due under such Leases have been paid. Seller, WWTI and/or each Subsidiary (as the case may be) has a -20- valid leasehold interest in each Lease, in each case free and clear of all Liens, except Permitted Exceptions. Seller has made available to Purchaser a copy of each Lease (as amended). The Leases are the valid and binding obligations of WWTI or the Subsidiaries (as the case may be). Neither Seller, WWTI nor any of the Subsidiaries has received any notice of Default by any Subsidiary thereunder which has not been remedied or waived and which Default could reasonably be expected to have a Material Adverse Effect. Neither Seller, WWTI nor any of the Subsidiaries nor any Affiliate thereof has received any notice or has any knowledge of any pending or threatened condemnation proceeding or assessment for public improvements affecting any Real Property or any real property leased pursuant to a Lease or of any sale or other disposition thereof in lieu of condemnation, which proceeding, assessment, sale or other disposition could reasonably be expected to materially interfere with the continued use of any Real Property or any real property subject to a Material Lease in the conduct of normal business operations. Except as set forth on Schedule 3.4, no ------------ approval or consent of any Person is needed in order for the Leases (excluding Leases for sales offices) to continue in full force and effect following consummation of the transactions contemplated by this Agreement. 3.5 Intellectual Property. Set forth on Schedule 3.5 is a list of the --------------------- ------------ registered patents, copyrights and trademarks included in the Intellectual Property (the "Registered Intellectual Property"). Except as set forth on Schedule 3.5, no adverse claim in any Registered Intellectual Property is - ------------ pending or, to Seller's knowledge, has been threatened, which claim could reasonably be expected to have a Material Adverse Effect. Seller, WWTI or one or more of the Subsidiaries, as the case may be, has title to all Registered Intellectual Property, free and clear of all Liens other than Permitted Exceptions, and all such title of WWTI in the Registered Intellectual Property shall be conveyed to Purchaser at Closing. No Registered Intellectual Property is the subject of any interference, oppositions, re-examinations, or cancellation, except as set forth on Schedule 3.5. To the knowledge of Seller, ------------ no Person is infringing upon, nor has any Person misappropriated any Registered Intellectual Property, which infringement could reasonably be expected to have a Material Adverse Effect. Seller has received no notice of infringement by any of the Divisions or any of the Subsidiaries upon the intellectual property rights of any other person, which notice of infringement could reasonably be expected to have a Material Adverse Effect. 3.6 Title to Assets. (a) Each of the Subsidiaries (other than any Minority --------------- Subsidiary) has, and at the Closing will have, title to its property (including, without limitation, real, personal and intangible and contract rights), free and clear of all Liens, except: (i) Liens reflected in the Balance Sheet; (ii) Liens that could not reasonably be expected to materially interfere -21- with the continued use of such properties in the conduct of normal business operations; (iii) mortgages, Liens, pledges, charges or encumbrances listed on any Schedule hereto; (iv) imperfections or irregularities of title, easements and covenants running with the land that could not reasonably be expected to materially interfere with the continued use of such properties in the conduct of normal business operations; and (v) (A) contractor's, materialman's, supplier's, worker's, carrier's, employee's, installment sale, title retention and similar Liens arising by operation of applicable Law; (B) the rights of customers, suppliers and subcontractors in the ordinary course of business under general principles of commercial law; and (C) Liens for current Taxes not yet due, provided that none of the foregoing, in the aggregate, could reasonably be expected to materially interfere with the continued use of such properties in the conduct of normal business operations. The Liens described at clauses (i) through (v) above shall be collectively referred to as the "Permitted Exceptions." (b) Subject to Sections 2.4(a) and (b), at Closing, Purchaser shall acquire --------------- --- title to the Domestic Assets, free and clear of all Liens, other than Permitted Exceptions. The Domestic Assets and property owned by the Subsidiaries (other than any Minority Subsidiary) includes all property (including, without limitation, real, personal, and intangible property and contract rights) required for the operation of the Business in substantially the same manner as it has been operated prior to Closing. 3.7 No Adverse Change. Except as set forth on Schedule 3.7, since the date ----------------- ------------ of the Balance Sheet there has not occurred: (a) any Material Adverse Change; (b) any loss of or damage to any of the properties of WWTI (with respect to the Business) or any of the Subsidiaries (other than any Minority Subsidiary) that could reasonably be expected to Materially interfere with the continued use of such properties in the conduct of normal business operations; (c) any Lien placed on any of the properties of the Subsidiaries (other than any Minority Subsidiary), other than Permitted Exceptions; (d) any amendment to or change in the charter, by-laws or analogous organizational documents of any Subsidiary (other than any Minority Subsidiary); (e) the execution by WWTI (with respect to the Business) or any of the Subsidiaries (other than any Minority Subsidiary) of any Material Contract, other than (i) in the ordinary course of business, (ii) with the permission of Purchaser, or (iii) in connection with the transactions contemplated hereby; or (f) any strike, picket or work stoppage by any employees of the Subsidiaries (other than any Minority Subsidiary) or Divisions that has Materially interfered, or could reasonably be expected to Materially interfere, with the continued conduct of normal operations of the Business. 3.8 Tax Matters. WWTI (with respect to the Business) has filed or has ----------- caused to be filed all Federal, state, local and -22- foreign tax returns and reports required to have been filed relating to the Business. The Subsidiaries (other than the Minority Subsidiaries) have filed or caused to be filed all tax returns and reports required to have been filed relating to the Business, except for failures to file returns and reports which could not reasonably be expected to have a Material Adverse Effect. All amounts shown on such returns and reports are accurate and Seller has or will have caused to be paid all Taxes shown as due and payable on such returns and reports, except for the portion of such Taxes being contested in good faith. Except as set forth on Schedule 3.8, neither Seller, WWTI nor any of the ------------ Subsidiaries (other than any Minority Subsidiary) nor any Affiliate of any of them has received notice of: (a) any audit or examination of any tax return relating to the Business; or (b) any material adjustment proposed by any governmental agency of any liability for Taxes relating to the Business. 3.9 Litigation. Except as set forth on Schedule 3.9, there is no demand, ---------- ------------ suit, action, arbitration or legal, administrative or other proceeding, or claim known to Seller, pending or, to Seller's knowledge, threatened against any of the Subsidiaries (other than any Minority Subsidiary) and WWTI (with respect to the Business) which could individually or collectively reasonably be expected to have a Material Adverse Effect. Except as set forth on Schedule 3.9, none of the ------------ Subsidiaries (other than any Minority Subsidiary) and WWTI (with respect to the Business) are subject to any order, judgment, decree, stipulation or consent of or with any court, governmental body, agency or instrumentality, domestic or foreign, which could reasonably be expected to have a Material Adverse Effect. 3.10 ERISA. (a) Schedule 3.10 contains a list of all Benefit Plans (i) ----- maintained or sponsored by Seller for employees of WWTI and its Divisions or (ii) with respect to which Seller is obligated to contribute for employees of WWTI and its Divisions, or (iii) that otherwise cover any of the current or former employees of WWTI and its Divisions, or their beneficiaries ("Seller Plans"). (b) With respect to each Seller Plan, Seller has made available to Purchaser a true and correct copy of (i) such Seller Plan (or in the case of an unwritten Seller Plan, a written summary thereof); (ii) the most recent annual report (Form 5500) filed with the Internal Revenue Service ("IRS"), (iii) each trust agreement, if any, relating to such Seller Plan and (iv) the most recent actuarial report or valuation relating to a Seller Plan subject to Title IV of ERISA. (c) Except as set forth on Schedule 3.10, each of the Seller Plans and all ------------- related trusts, insurance contracts and funds have been created, maintained, funded and administered in all respects in material compliance with all applicable Laws and in material -23- compliance with the Plan document, trust agreement, insurance policy or other writing creating the same or applicable thereto. No Seller Plan is or is proposed to be under audit or investigation, and no completed audit of any Seller Plan has resulted in the imposition of any tax, fine or penalty which has not been satisfied. To the knowledge of the Seller, no prohibited transaction (within the meaning of Section 406 of ERISA and Section 4975 of the Code) with respect to any Seller Plan exists or has occurred which could impose any material liability on the Purchaser. To the knowledge of the Seller, neither Seller nor any member of Seller's controlled group of corporations (within the meaning of Sections 414(b), 414(c) and 414(m) of the Code ("Controlled Group Member")) nor any administrator or fiduciary of any Seller Plan, nor any agent of any of the foregoing, has engaged in any transaction or acted or failed to act in a manner that will subject Seller, any Subsidiary, or any Controlled Group Member to any material liability for a breach of fiduciary duty or other duty under ERISA or any other applicable Law. Except as set forth in Schedule -------- 3.10, no post-retirement benefits are provided under any Seller Plan that is a - ---- welfare benefit plan as described in ERISA Section 3(1) except as required under Section 4980B of the Code. (d) Except as set forth in Schedule 3.10, no Seller Plan is a multiemployer ------------- plan within the meaning of Section 3(37) or Section 4001(a)(30) of ERISA or a defined benefit plan as defined in Section 3(35) of ERISA. (e) With respect to the Seller Plans, individually and in the aggregate, no event has occurred, and to the knowledge of Seller, there exists no condition or set of circumstances, that is reasonably likely to have a Material Adverse Effect under ERISA, the Code, or any applicable law, in connection with the Seller Plans. (f) With respect to the Seller Plans, individually and in the aggregate, there are no funded benefit obligations for which contributions have not been made or properly accrued and there are no unfunded benefit obligations which have not been accounted for by reserves, or otherwise properly footnoted in accordance with GAAP, in the Financial Statements. (g) Except as set forth on Schedule 3.10, WWTI and the Divisions have no ------------- obligation to contribute to any Benefit Plan of the type described Title IV of ERISA, including but not limited to, in Sections 4062, 4063 or 4064 of ERISA or Section 413(c) of the Code (any of which shall be hereinafter called a "Title IV Plan"). Except as set forth on Schedule 3.10, Seller does not have any ------------- liability, and after the Closing Date Seller will not have any liability (i) under Code Section 412(n), with respect to any Benefit Plan sponsored or maintained by a Controlled Group Member, and (ii) under Title IV of ERISA with respect to any Benefit Plan -24- sponsored or maintained by a Controlled Group Member, including, but not limited to, any withdrawal liability under a Multiemployer Plan, as defined below, incurred within the five-year period ending on the date of execution of this Agreement and any liability for unfunded benefits under a defined benefit pension plan terminated or transferred out of any corporation that may be aggregated with Seller under ERISA Section 4001(a)(14) or ERISA Section 4001(b) (the "Controlled Group") within the five-year period ending on the date of execution of this Agreement. (h) Schedule 3.10 discloses each Seller Plan that purports to be a qualified plan under Section 401(a) of the Code and exempt from United States federal income tax under Section 501(a) of the Code ("Qualified Plan"). With respect to each Qualified Plan, a determination letter (or opinion or notification letter, if applicable) has been received from the IRS that such plan is qualified under Section 401(a) of the Code, as amended by the Tax Reform Act of 1986 and all subsequent Code amendments, and the Treasury Regulations thereunder, and exempt from federal income tax under Section 501(a) of the Code. To the knowledge of the Seller, no fiduciary of any Qualified Plan, nor any agent of the foregoing, has done or failed to do anything that would adversely affect the qualified status of the Qualified Plan or the qualified status of any related trust. (i) Schedule 3.10 contains a list of all Material Non-U.S. Pension Plans (as defined below) (i) maintained or sponsored by the Subsidiaries for their non-U.S. employees or (ii) with respect to which the Subsidiaries are obligated to contribute for their non U.S. employees, or (iii) that otherwise cover any of the current or former non-U.S. employees of the Subsidiaries and their beneficiaries. For purposes of this Agreement, a "Non-U.S. Pension Plan" is a written employee benefit plan that provides retirement or pension benefits to the non-U.S. employees of any of the Subsidiaries, excluding any plans maintained or required by applicable law or governmental authorities. The Seller has heretofore delivered or made available to Purchaser copies or summaries of all such plans. (j) Except as set forth on Schedule 3.10, each of the Non U.S. Pension Plans and all related trusts, insurance contracts and funds have been created, maintained, funded and administered in all respects in material compliance with all applicable Laws and in material compliance with the governing document, trust agreement, insurance policy or other writing creating the same or applicable thereto. 3.11 Material Contracts. Set forth on Schedule 3.11 is a list of all ------------------ ------------- Material Contracts. There have been made available to Purchaser copies of all Material Contracts that are in writing (including all amendments thereto, if any). The Material Contracts -25- are the valid and binding obligation of Seller, WWTI or the Subsidiaries (as the case may be). None of Seller, WWTI or the Subsidiaries (as the case may be) is in Default thereunder, nor, to the knowledge of Seller, is any other party to any such Material Contract in Default thereunder except any such Default (i) as to which requisite waivers or consents have been obtained, (ii) which is curable and is cured within the applicable period for cure permitted under the contract, (iii) relating to the matters disclosed on Schedule 3.9, or (iv) that could not ------------ reasonably be expected to have a Material Adverse Effect. 3.12 Brokers. No broker or investment banker acting on behalf of Seller or ------- its Affiliates or under the authority of any of them is or will be entitled to any broker's or finder's fee or any other commission or similar fee directly or indirectly from Purchaser in-connection with any of the transactions contemplated herein. 3.13 Environmental. Except as disclosed on Schedule 3.13 or Schedule ------------- -------- 2.1(c)(I): - --------- (a) To Seller's knowledge, there have been, and there exist, no events, incidents, conditions, actions, agreements or circumstances which could reasonably be expected to give rise to any liability, loss or expense under any Environmental Law, or form the basis for any Environmental Action, with respect to Seller or WWTI (with respect to the Business) or the Subsidiaries, or any Real Property or property subject to the Leases, which liability, loss or expense or Environmental Action could reasonably be expected to have a Material Adverse Effect. None of Seller, WWTI, or any of the Subsidiaries (during the period affiliated with Seller and excluding Minority Subsidiaries) has received any written notice from any governmental authority or other person, and to the knowledge of Seller, no such notice has been issued to any other Person which indicates the occurrence or existence of events, incidents, conditions, actions, agreements or circumstances which could reasonably be expected to give rise to any liability, loss or expense under any Environmental Law or form the basis for any Environmental Action with respect to Seller or WWTI (with respect to the Business), the Divisions or Subsidiaries (other than any Minority Subsidiary) or the Real Property or property subject to the Leases, in each case which liability, loss or expense or Environmental Action could reasonably be expected to have a Material Adverse Effect. (b) No Hazardous Material is being or, to Seller's knowledge, has been, Released on or to any property or facility owned, leased, or operated by Seller or WWTI (with respect to the Business), the Subsidiaries (other than any Minority Subsidiary) or the Divisions in such manner that -26- under any Environmental Law: (i) would impose liability for damages, investigation, or Response Actions that could reasonably be expected to have a Material Adverse Effect; (ii) would affect the value of the Domestic Assets, Divisions or Subsidiaries (other than any Minority Subsidiary) (or their respective businesses, property or assets) that could reasonably be expected to have a Material Adverse Effect; or (iii) would result in the imposition of a Lien (other than Permitted Exceptions) on the property or assets of the Divisions or Subsidiaries (other than any Minority Subsidiary). No notice of any restriction on present or future use is required to be placed at any Real Property or property subject to a Lease or in any deed to any Real Property, which restriction could reasonably be expected to materially interfere with the continued use of such Real Property or property subject to a Lease in the conduct of normal business operations. (c) No Hazardous Material has been Released at any other site by the Divisions or Subsidiaries (during the period affiliated with Seller and excluding Minority Subsidiaries) or by any contractor or agent acting on their behalf during the applicable period (including but not limited to any person transporting or distributing Hazardous Materials on behalf of the Divisions or Subsidiaries, other than any Minority Subsidiary) in such manner that under any Environmental Law would impose liability for damages, investigation, or Response Actions, which liability could reasonably be expected to have a Material Adverse Effect. (d) To Seller's knowledge, any underground or aboveground storage tanks and associated piping currently on the Real Property are in sound condition and have been properly maintained, tested and monitored in compliance with applicable Environmental Laws in all material respects, and no spills or leaks have occurred from or in relation with such tanks and piping on the Real Property or property subject to a Lease, which spills or leaks could reasonably be expected to have a Material Adverse Effect. To Seller's knowledge, any tanks on the Real Property or property subject to a Lease which were previously removed from service while such property was controlled by a Division or Subsidiary (while affiliated with Seller and excluding Minority Subsidiaries) have been properly closed, in compliance with all applicable Environmental Laws. With respect to each such tank which has been removed from service or closed, except for instances which would not have a Material Adverse Effect, testing and observations confirm either that there were no spills, leaks or other contamination related to such tanks and associated piping, or that any such contamination has been removed. -27- (e) Seller, WWTI (with respect to the Business), and the Subsidiaries (other than any Minority Subsidiary) possess all Environmental Approvals required for the conduct of the Business and the operations on, and uses of, the Real Property and property subject to the Material Leases, in the manner in which the Business, operations and uses are currently being conducted, except where the failure to do so could not reasonably be expected to materially interfere with such Business, operations or use. Schedule 3.13 sets forth a list of all such Environmental Approvals, ------------- identifying the nature thereof. All such Environmental Approvals are in full force and effect, and each such Environmental Approval is final, any fixed period for appeal or review having elapsed. To the knowledge of Seller, WWTI and the Subsidiaries, no suit, action, proceeding or appeal is pending or threatened to revoke, suspend or materially and adversely modify (except the permitting process at WCAI) any such Environmental Approval. Neither Seller, WWTI, nor any Division or Subsidiary (other than a Minority Subsidiary has received notice from a Governmental Authority that it is in material violation of any such Governmental Approval. (f) Seller, WWTI (with respect to the Business), the Divisions and Subsidiaries (other than any Minority Subsidiary) have made all Governmental Filings required under all applicable Environmental Laws with respect to the conduct of the Business and the operations on, and use of, the Real Property and property subject to the Leases, in the manner in which the Business, operations and use are currently being conducted, expect for such filings, the absence of which could not reasonably be expected to materially interfere with such Business, operations or use. 3.14 Qualification. Each of the Subsidiaries (other than any Minority ------------- Subsidiary) is duly qualified to do business in each jurisdiction where the conduct of its business or ownership of its properties requires such qualification, except where the failure to qualify could not reasonably be expected to have a Material Adverse Effect. None of Seller, WWTI, (with respect to the Business) or the Subsidiaries (other than any Minority Subsidiary) is subject to any contractual restriction that prohibits it from carrying on the Business in the areas of the world where the Business has been conducted, except for such restrictions that could not reasonably be expected to have a Material Adverse Effect. 3.15 Compliance with Law: Regulatory Compliance. (a) Except as set forth in ------------------------------------------ Schedule 3.15, none of WWTI or Seller (with respect to the Business), the - ------------- Divisions or the Subsidiaries (other than any Minority Subsidiary) is or has within the past three years (or such shorter period of time that the Subsidiary in question has been an Affiliate of Seller) been in violation of any applicable Law -28- (excluding Environmental Laws), ordinance or other requirement of any governmental authority relating to it or its securities, property, operations or business, which has resulted in a fine or penalty in excess of $10,000, nor does Seller have notice of any such violation. (b) Seller and WWTI (with respect to the Business), and the Divisions and Subsidiaries possess (other than any Minority Subsidiary), or have made timely application for, all governmental approvals with and under all Laws (excluding Environmental Laws) required to carry on the Business as presently conducted (the "Governmental Approvals"), except for such Governmental Approvals the absence of which could not reasonably be expected to materially interfere with the continued conduct of the Business in the normal course. Schedule 3.15 sets ------------- forth a list of all Governmental Approvals (other than Environmental Approvals) referred to in the foregoing sentence, identifying each such Governmental Approval by number and indicating the holder, the issuer and the nature thereof. All such Governmental Approvals referred to in the foregoing sentence are in full force and effect. Neither Seller, WWTI (with respect to the Business) nor any Division or Subsidiary (other than any Minority Subsidiary) is in violation of any such Governmental Approval, which violation could reasonably be expected to materially interfere with the continued conduct of the Business in the ordinary course. Except as disclosed in Schedule 3.15, no proceeding is pending ------------- or, to the knowledge of Seller, threatened to revoke, suspend or materially modify any Governmental Approval (other than Environmental Approvals) or deny any renewal thereof, except any such matter that could not reasonably be expected to Materially interfere with the continued conduct of the Business in the ordinary course. (c) Except as disclosed in Schedule 3.15, Seller, WWTI, the Divisions and ------------- the Subsidiaries (other than any Minority Subsidiary) have made all governmental filings required to be made with any governmental authority with respect to the operation of the Business, except for filings under Environmental Laws and such filings the absence of which could not reasonably be expected to Materially interfere with the continued conduct of the Business in the ordinary course. 3.16 Financial Statements. Schedule 3.16 is a true and complete copy of the -------------------- ------------- unaudited, combined Balance Sheet as of August 31, 1996 and the related unaudited, combined statement of income, before tax, for the eight-month period then ended for the Business (including the Minority Subsidiaries) (together, the "Financial Statements"). Except as disclosed in Schedule 2.3 hereto, the ------------ Financial Statements were prepared in accordance with GAAP applied on a consistent basis throughout the period involved (except as may be indicated in the Accounting Conventions) and in accordance with the Accounting Conventions and fairly present the -29- financial position of the Business as at such date and the results of the operation of the Business for the period then ended. 3.17 Indebtedness; Parent Guarantees. (a) Schedule 3.17 sets forth a list ------------------------------- ------------- of each instrument which evidences Indebtedness, and the aggregate principal amount thereof outstanding as of the date hereof, and lists each such instrument that contains a restriction, limitation or encumbrance, of any kind, on the ability of any Subsidiary (other than any Minority Subsidiary) to pay dividends on its respective capital stock. All of such instruments are the valid and binding obligation of the Subsidiaries or Divisions (as the case may be). None of Seller, WWTI, the Subsidiaries (other than any Minority Subsidiary) or Divisions (as the case may be) is in Default thereunder nor, to the knowledge of Seller, is any other party to any such instrument in Default thereunder, nor, to the knowledge of Seller, does any condition exist that, with the giving of notice or lapse of time or both, would constitute a Default thereunder, which Default could reasonably be expected to have a Material Adverse Effect. "Indebtedness" as used herein shall mean, with respect to Seller or WWTI (in connection with the Business), the Subsidiaries (other than any Minority Subsidiary) or Divisions (other than, in each case, amounts due to Seller or any Affiliate of Seller or other amounts constituting intercompany accounts): (i) all indebtedness as of August 31, 1996 for borrowed money, draws under letters of credit or amounts due under bonds; (ii) all indebtedness for borrowed money of any Person secured by any Lien upon any Domestic Asset or property or asset of any Subsidiary or guaranteed by any Subsidiary (other than customary rights of off-set or other rights with respect to funds or documents in possession of a bank); and (iii) all amendments, renewals, extensions or refundings of any of the foregoing. Schedule 3.17 sets forth a list of the Parent Guarantees. ------------- (b) Except as described in Schedule 3.17, to the knowledge of Seller, there ------------- are no claims for indemnity asserted by any officer, director or employee of the Subsidiaries (other than any Minority Subsidiary) or Divisions which remain unresolved. (c) None of the Subsidiaries (other than any Minority Subsidiary) has guaranteed or assumed any Indebtedness or liability of Seller or any Affiliate of Seller. 3.18 Employment. (a) Schedule 3.18 sets forth a list of all employment ---------- ------------- agreements with any officer, director or employee of the Divisions or Subsidiaries (other than any Minority Subsidiary) (a) entered into outside the ordinary course of business in the case of non-United States Subsidiaries (as evaluated by reference to the custom and practice of the jurisdiction of incorporation of the Subsidiary at issue) or (b) providing for severance payments exceeding $100,000 in excess of statutorily required amounts (the -30- "Employment Agreements"). Seller has previously furnished to Purchaser copies of all Employment Agreements, together with all amendments thereto (if any). Since the date of the Balance Sheet, none of Seller or WWTI (with respect to the Business) or any Subsidiary (other than any Minority Subsidiary) or Division has (i) effected any Material increase in salary, wage or other compensation of any kind, whether current or deferred, to any officer, director or employee, other than in the ordinary course of business in accordance with past practice, or as required by applicable Law or any Employment Agreement, or (ii) made any contribution to any trust or plan for the benefit of employees except as required by the terms thereof as now in effect. Set forth at Schedule 3.18 is a list of (or Seller will provide prior to Closing a list of) all officers and directors of the Subsidiaries. 3.19 Labor Relations. Except as set forth on Schedule 3.9 or Schedule 3.19, --------------- ------------ ------------- no employee of the Subsidiaries (other than any Minority Subsidiary) or Divisions is represented by any union or other labor organization and no collective bargaining agreements with respect to the Business are in effect. No representation election, arbitration proceeding, grievance, labor strike, slowdown or stoppage is pending or, to the knowledge of Seller, threatened against, the Subsidiaries (other than any Minority Subsidiary) or Divisions, which in any case could reasonably be expected to materially interfere with the continued conduct of the Business in the ordinary course. No complaint with respect to the Subsidiaries (other than any Minority Subsidiary) or Divisions is pending or, to the knowledge of Seller, threatened before the National Labor Relations Board, the Equal Employment Opportunity Commission or any similar state or local or foreign agency, by or on behalf of any employee of the Subsidiaries (other than any Minority Subsidiary) or Divisions, other than as disclosed on any Schedule hereto, which complaint could reasonably be expected to have a Material Adverse Effect. 3.20 Inventory. All of the finished goods inventories of the Subsidiaries --------- (other than any Minority Subsidiary) or Divisions are, net of reserves on the Balance Sheet, saleable in the ordinary course of the business within a reasonable time. 3.21 Receivables. All receivables of the Subsidiaries (other than any ----------- Minority Subsidiary) and Divisions arose or will arise from transactions of such Subsidiaries and Divisions in the ordinary course of business. DISCLAIMERS: - ----------- The representations and warranties set forth in this Article III shall not apply with respect to any Minority Subsidiary or the Excluded Businesses. No representation is made, and all -31- representations, express, implied or otherwise, are disclaimed, with respect to any Minority Subsidiary including, without limitation, the operations, assets, capitalization, stock or liabilities thereof. The foregoing disclaimer shall not apply to the representations set forth in the last sentence of Section 3.2(a). -------------- EXCEPT TO THE EXTENT OF THE EXPRESS REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT, PURCHASER IS ACQUIRING THE SHARES AND THE DOMESTIC ASSETS SOLELY IN RELIANCE ON ITS OWN INVESTIGATION. SELLER DISCLAIMS ALL EXPRESS WARRANTIES NOT CONTAINED IN THIS AGREEMENT AND ALL IMPLIED WARRANTIES INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO MACHINERY, EQUIPMENT AND OTHER TANGIBLE ASSETS. PURCHASER IS ACQUIRING ALL TANGIBLE ASSETS ON AN "AS-IS, WHERE-IS"' BASIS. EXCEPT AS EXPRESSLY SET FORTH IN SECTION 3.13 HEREOF, PURCHASER WAIVES ALL RIGHTS TO INDEMNIFICATION OR CONTRIBUTION FOR ENVIRONMENTAL CONDITIONS AGAINST SELLER ON, AT, OR MIGRATING FROM THE REAL PROPERTY OR PROPERTY SUBJECT TO THE LEASES, INCLUDING, WITHOUT LIMITATION, ANY RIGHTS TO INDEMNIFICATION OR CONTRIBUTION PURSUANT TO THE COMPREHENSIVE ENVIRONMENTAL RESPONSE COMPENSATION AND LIABILITY ACT AND ANY SIMILAR STATE LAWS. Seller disclaims any representations or warranties to Purchaser, except as specifically set forth in this Agreement. In particular, Seller disclaims any representation or warranty with respect to any information concerning the Subsidiaries and Divisions, the Business or the Domestic Assets including, without limitation, any financial projection or forecast relating to the Business, the Domestic Assets or the Subsidiaries and Divisions. With respect to any such projection or forecast delivered to Purchaser, Purchaser acknowledges that (a) there are uncertainties inherent in such projections and forecasts and (b) Purchaser is familiar with such uncertainties and takes full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts. Purchaser shall have no claim against Seller, and Seller shall have no liability to Purchaser, with respect to any such disclaimed information, including, without limitation, any financial projection or forecast relating to the Subsidiaries and Divisions, the Business or the Domestic Assets. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to Seller as follows: 4.1 Authority of Purchaser. Purchaser is a corporation duly organized, ---------------------- validly existing and in good standing under the laws of Delaware, with all requisite corporate power and authority to carry -32- out its obligations under this Agreement. The execution, delivery and performance of this Agreement by Purchaser has been duly authorized by all necessary corporate action. This Agreement has been duly and validly executed and delivered by Purchaser and constitutes the legal, valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except as may be limited by: (a) applicable bankruptcy, insolvency, moratorium, reorganization or similar laws from time to time in effect that affect creditors' rights generally; or (b) legal and equitable limitations on the availability of specific remedies. The execution and delivery of this Agreement by Purchaser does not, and the consummation of the transactions contemplated hereby and performance by Purchaser of its obligations hereunder will not violate or conflict with any provision of: (A) the Certificate of Incorporation or by-laws of Purchaser; or (B) any applicable Law or agreement which violation could reasonably be expected to have a material adverse effect on the financial condition of Purchaser. The failure of any Person claiming through Purchaser and not a party hereto to authorized or approve this Agreement or the transactions contemplated hereby will not give any-Person the right to enjoin, rescind or otherwise prevent or impede the purchase or the other transactions contemplated hereby. 4.2 Brokers. No broker or investment banker acting on behalf of Purchaser ------- is or will be entitled to any broker's or finder's fee or any other commission or similar fee directly or indirectly from Seller or any of its Affiliates in connection with any of the transactions contemplated hereby. Purchaser shall pay all fees due to Donaldson, Lufkin & Jenrette Securities Corporation arising in connection with this Agreement. 4.3 Securities. Purchaser hereby acknowledges that the Shares being ---------- purchased by Purchaser hereunder are not registered under the Securities Act of 1933 or registered or qualified for sale under any state or foreign securities Law and cannot be resold without registration thereunder or exemption therefrom. Purchaser is acquiring such Shares for its own account as principal, for investment and not with a view toward the sale or distribution thereof. Purchaser has sufficient knowledge and experience in financial and business matters to enable it to evaluate the risks of investment in such Shares and has the ability to bear the economic risks of such investment. 4.4 Financing. At Closing, Purchaser shall have sufficient funds available --------- to effect the purchases and other obligations of Purchaser hereunder. -33- ARTICLE V COVENANTS OF SELLER Seller hereby covenants to and agrees with Purchaser as follows: 5.1 Corporate and Other Actions. Prior to the Closing Date, Seller shall --------------------------- use all commercially reasonable efforts to fulfill its obligations under this Agreement and to consummate the transactions contemplated hereby. 5.2 Full Access. Prior to the Closing Date, Seller shall cause the ----------- Subsidiaries and Divisions to afford Purchaser and its counsel, accountants and other authorized representatives, with reasonable prior notice, reasonable access during normal business hours (when accompanied by an authorized representative of the Subsidiaries and Divisions) to the respective premises, properties, personnel, books and records of the Business. Purchaser shall cooperate with Seller to minimize the disruption occasioned by such access. 5.3 Ordinary Course of Business. Prior to the Closing Date, Seller shall --------------------------- cause the Subsidiaries (other than the Minority Subsidiaries) and Divisions to be operated in the usual and ordinary course of business in substantially the same manner as heretofore conducted, to pay all debts and Taxes when due (subject to good faith disputes over such debts or Taxes) and to pay or perform all other obligations when due (subject to good faith disputes). Except as otherwise consented to in writing by Purchaser, Seller shall use its commercially reasonable efforts consistent with past practices and policies to (a) preserve intact the assets and properties of the Business, (b) keep available the services of the present officers and key employees of the Business, and (c) preserve relationships with customers, suppliers, distributors, licensors, licensees, and others having dealings with the Business; it being understood that the matters referred to in clauses (a), (b) and (c) above may be adversely affected by the announcement of the transactions contemplated hereby. Seller shall promptly notify Purchaser of any occurrence not in the ordinary course of business of the Business, which occurrence could reasonably be expected to have a Material Adverse Effect. In particular, and not by means of limitation, none of the Subsidiaries (excluding the Minority Subsidiaries) shall, except as permitted by this Agreement or as required by applicable Law, (i) issue any shares of, or any securities convertible into any shares of, their respective capital stock or share capital, or any other securities, accept any subscription for shares of their respective capital stock, issue options, warrants or similar instruments granting the right to purchase any shares of their respective capital stock, (ii) declare, pay or set aside for payment, any -34- dividend or other distribution on their respective capital stock or share capital, (iii) directly or indirectly, redeem, purchase or otherwise acquire any shares of their respective capital stock or share capital, (iv) alter, amend or repeal any provision of its articles of incorporation or bylaws or other organic documents, (v) change the number or identity of its directors (other than as a result of the death, retirement or resignation of a director), or (vi) form or acquire any subsidiaries not existing as of the date of this Agreement. In addition, and not in limitation of the foregoing, between the date hereof and the Closing Date, Seller shall cause WWTI (with respect to the Business) and Subsidiaries (other than the Minority Subsidiaries) to: (A) preserve and maintain the corporate existence of Seller, WWTI and the Subsidiaries (other than the Minority Subsidiaries) and all rights, privileges and franchises reasonably necessary or desirable in the normal conduct of the Business, except to the extent contemplated by any transactions permitted by this Agreement; (B) not (except in the ordinary course of business) purchase any assets or stock of any corporation, partnership, association or other business organization or entity or any division thereof for use in the Business or by the Subsidiaries (other than the Minority Subsidiaries), nor agree to do so; (C) not sell, lease, assign, transfer or otherwise dispose of any of the assets of the Business (including, without limitation, Intellectual Property), nor suffer to exist or create any Lien on any of the assets of the Business, except as permitted by this Agreement or in the ordinary course of business and except that assets which are obsolete may be disposed of; (D) not incur any Indebtedness in excess of $1,000,000, (other than intercompany Indebtedness with respect to the Divisions) or the issuance of or drawings under letters of credit or utilization of overdraft facilities, each in the ordinary course of Business; (E) not, except in the ordinary course of business, enter into, modify or terminate any Material Contracts or Leases or Employment Agreements, or agree to do so; (F) maintain the books, accounts and records of the Business in the usual, ordinary and regular manner and in material compliance with all applicable Laws; -35- (G) use its commercially reasonable efforts to meet its obligations under all Material Contracts and Leases and not become in Default thereunder; (H) maintain the assets of the Business in good repair, order and condition, reasonable wear and tear excepted, and maintain insurance upon the Business and assets thereof at least comparable in amount and kind to that in effect on the date hereof; (I) not authorize or make any capital expenditure in connection with the Business in excess of $1,000,000 individually, except for the matters set forth on Schedule 5.3(I); and --------------- (J) use its commercially reasonable efforts not to violate any Law applicable to the Business, nor violate any order, injunction or decree applicable thereto. 5.4 Payment of Taxes. Prior to Closing, Seller shall pay or cause to be ---------------- paid on a timely basis, or provide an adequate reserve for, all Taxes that have accrued with respect to the operations of the Subsidiaries (other than the Minority Subsidiaries) for the Seller Tax Period. 5.5 HSR Filings. As promptly as practicable, Seller shall (in cooperation ----------- with Purchaser) make all filings and submissions under the HSR Act and any foreign competition, investment, foreign exchange, tax or other foreign laws. 5.6 Litigation Support and Access After Closing. In the event and for so ------------------------------------------- long as Purchaser or any of its Affiliates is a party to any action, suit, proceeding, hearing, investigation, complaint, claim or demand ("Litigation") in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on, prior to or after the Closing Date, involving the Business, the Domestic Assets or the Subsidiaries, Seller will cooperate with Purchaser and its counsel, make available its personnel, and provide such testimony and access to its books and records as shall be necessary in connection with the Litigation. Seller acknowledges and agrees that, from and after the Closing, Purchaser will be entitled to possession of all documents, books, records, agreements, and financial data of any sort relating exclusively to the Business, other than the Excluded Assets or Retained Liabilities. Furthermore, for a period of five (5) years following the Closing Date, Seller shall preserve the books and records of the Business (to the extent possession thereof is not taken by Purchaser) and shall provide such access to such books and records as Purchaser shall reasonably request. -36- 5.7 No Solicitation. (a) Subject to Section 5.7(b) below, from and after --------------- -------------- the date hereof until the Closing Date, Seller shall not, directly or indirectly, through any officer, director, key employee, representative, Affiliate, or agent of Seller, the Divisions or any of the Subsidiaries, (i) solicit, initiate, or encourage any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, business combination, sale of assets, sale of shares of capital stock or similar transactions to the extent involving the Domestic Assets or the Shares, other than the transactions with Purchaser contemplated by this Agreement (any of the foregoing inquiries or proposals being referred to in this Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or discussions concerning, or provide any non-public information to any person or entity reacting to, any Acquisition Proposal, or (iii) agree to approve or recommend any Acquisition Proposal. Seller shall notify Purchaser immediately upon receipt by Seller (or its advisors) of any Acquisition Proposal or any request for non-public information in connection with a possible Acquisition Proposal or for access to the properties, books or records of the Business by any person or entity. Such notice shall be made orally and in writing and shall indicate in reasonable detail the identity of the offeror and the terms and conditions of such proposal, inquiry or contact. (b) Nothing in this Agreement shall prohibit Seller from furnishing information to, or entering into discussions or negotiations with, or completing any transaction with any person or entity that makes an unsolicited written bona fide proposal to acquire all or any of the Domestic Assets or any of the Subsidiaries (whether pursuant to a merger, consolidation, share exchange, business combination, tender or exchange offer or stock or asset purchase) and in respect of which such person or entity has the necessary funds or written commitments therefor if, and only to the extent that, the Board of Directors of Seller, after consultation with and based upon the written advice of counsel reasonably acceptable to Purchaser and the written advice of a banking firm reasonably acceptable to Purchaser that the Acquisition Proposal is more favorable to Seller from a financial point of view then the transaction contemplated by this Agreement, determines in good faith that such action is necessary for the Board of Directors of Seller to comply with its fiduciary duties to stockholders under applicable Law. 5.8 Employee Solicitation. Until the second anniversary of the Closing --------------------- Date, neither the Seller nor any subsidiary of Seller shall solicit any management employee employed by any of the Divisions or any of the Subsidiaries, at the time of the solicitation, to leave the employ of any of the Divisions or any of its Subsidiaries; provided, that nothing contained herein shall prevent -------- or restrict the Seller or any of its subsidiaries from (i) -37- soliciting or employing any individual to be employed by Seller or one of its subsidiaries in a business that is not competitive with the Business, (ii) employing any individual who responds to a general solicitation for employment made by or on behalf of the Seller or any of its subsidiaries, or (iii) employing any individual who, after the Closing, initiates contact with the Seller or any of its subsidiaries for purposes of seeking employment. 5.9 Failure to Close. If (i) the transactions contemplated hereby are not ---------------- consummated by December 31, 1996, (ii) Purchaser terminates this Agreement pursuant to Section 9.4(b), and (iii) Seller is in breach of its obligations -------------- under Section 5.7, then Seller shall pay Purchaser the amount of $20,000,000 as ----------- liquidated damages and not as a penalty. Seller shall pay such liquidated damages to Purchaser within three (3) business days after its receipt of Purchaser's notice of termination by wire transfer to an account designated by Purchaser in its notice of termination. Interest on any delinquent portion of such payment shall accrue at the rate of 10% per annum. Recovery of such liquidated damages shall be the sole and exclusive remedy of Purchaser against Seller if the events described in clauses (i), (ii) and (iii) above occur. Purchaser shall be entitled to recover such liquidated damages regardless of the amount of damages actually incurred, the parties agreeing that actual damages would be difficult to determine and that the amount set forth herein is a fair and equitable amount to compensate Purchaser. 5.10 Filings. Seller shall be solely responsible for (i) all late filing ------- penalties assessed by the IRS and the U.S. Department of Labor ("DOL") respecting any 5500 form for any Benefit Plan and (ii) taxes or penalties levied by the IRS or DOL respecting the lack of a written plan document containing any Benefit Plan, including but not limited to Seller's severance pay plan. 5.11 Insurance. Seller will comply with its obligations under the Insurance --------- Agreement as if such obligations were set forth fully herein. ARTICLE VI COVENANTS OF PURCHASER Purchaser hereby covenants to and agrees with Seller as follows: 6.1 Corporate and Other Actions. Prior to the Closing Date, Purchaser shall --------------------------- use all commercially reasonable efforts to fulfill its obligations under this Agreement and to consummate the transactions contemplated hereby. Purchaser shall promptly file -38- and prosecute applications for any licenses and permits required for it to own the Domestic Assets or own the Shares. 6.2 Confidentiality. Purchaser affirms its obligations under the letter --------------- agreement dated July 23, 1996 between WWTI and Purchaser. 6.3 Employees; Benefit Plans. (a) For periods on and after the Closing ------------------------ Date, Purchaser shall employ, or cause the Subsidiaries to continue to employ, the employees of the Subsidiaries and Divisions, and to allow such employees to participate in Purchaser's current employee benefit plans. Notwithstanding the foregoing, Purchaser shall not be required to so employ any of the employees listed on Schedule 6.3(e)(I) but may offer employment to any such employee prior ------------------ to October 3l, 1996 and, if such offer is accepted, such employee shall become an employee of Purchaser on the Closing Date; and provided that without the -------- prior written consent of the Seller, Purchaser shall not employ, and shall not solicit for employment, those employees of the Business listed on Schedule -------- 6.3(e)(II) hereto. - ---------- Effective as of the Closing Date, employees of the Subsidiaries and Divisions shall cease to participate in all Seller Plans. Employees of the Subsidiaries and Divisions shall be given credit for their service with the Seller and its Affiliates under the employee benefit plans, programs and arrangements maintained by Purchaser (the "Purchaser Plans") for their service with the Seller and its affiliates for purposes of any eligibility requirements and waiting periods, and such employees shall be treated as having satisfied any applicable pre-existing condition limitations, deductibles, copayments and out- of-pocket limits under the Purchaser Plans to the extent that such items would have been satisfied under the Benefit Plan in which the employee participated immediately prior to the Closing Date that provided the same category or type of benefit. (b) As soon after the Closing hereunder as is reasonably possible, the assets and liabilities under the Wheelabrator-Rust Savings and Retirement Plan ("Seller's 401(k) Plan") allocable to the employees of Seller who will be employed by Purchaser subsequent to the Closing hereunder ("Transferred Employees") shall be transferred directly from the Seller's 401(k) Plan and the trust fund thereunder to the United States Filter Corporation 401(k) Plan ("Purchasers 401(k) Plan") and the trust fund thereunder in accordance with the requirements of Section 401(a)(12) of the Code, and subject further to the 30- day advance-notification-to-the-IRS requirement under Section 6058(b) of the Code if required by the existence of a suspense account under the Seller's 401(k) Plan or for any other reason. After the date of such transfer of assets and liabilities under the Seller's 401(k) Plan and trust fund thereunder to the Purchaser's 401(k) Plan and trust fund -39- thereunder, all of the rights and options applicable to the Transferred Employees' account balances under the Seller's 401(k) Plan shall be preserved as to such account balances under the Purchaser's 401(k) Plan, and all subsequent benefit accruals allocable to the Transferred Employees under the Purchaser's 401(k) Plan shall be based on the terms and provisions of the Purchaser's 401(k) Plan. Seller and Purchaser shall take all corporate actions and execute all documents, including, but not limited to, Plan amendments and 5310-A filings, as are necessary to effect the foregoing spin-off from the Seller's 401(k) Plan to the Purchaser's 401(k) Plan. (c) The parties acknowledge and agree that all provisions contained in this Agreement with respect to Benefit Plans or employee compensation are included for the sole benefit of the respective parties hereto and shall not create any right in any other Person, including, without limitation, any employees of the Divisions and Subsidiaries, any participant in any Benefit Plan or any beneficiary thereof. (d) The Purchaser agrees that it shall be responsible for all termination and severance payments with respect to employees of the Divisions and Subsidiaries (including the employees listed on Schedule 6.3(e)(I) who become ------------------ employees of Purchaser on the Closing Date, but excluding the employees listed on Schedule 6.3(e)(II) and the employees listed on Schedule 6.3(e)(I) who do not ------------------- ------------------ become employees of Purchaser on the Closing Date) arising on account of events occurring after the Closing Date. 6.4 Full Access. From and after the Closing Date, Purchaser shall cause the ----------- Subsidiaries and Divisions to afford Seller and its counsel, accountants and other authorized representatives, with two days' prior notice, reasonable access during normal business hours (when accompanied by an authorized representative of the Subsidiaries and Divisions) to the respective premises, properties, personnel, books and records of the Subsidiaries and Divisions and any other assets or information that Seller reasonably deems necessary to prepare the Closing Balance Sheet and any report or return required to be filed by Seller including, without limitation, any tax return. Personnel of the Subsidiaries and Divisions shall assist Seller in the preparation of the Closing Balance Sheet; however, Seller shall not be obligated to compensate such personnel, Purchaser - ------- or Subsidiaries and Divisions for such assistance. 6.5 Insurance. Purchaser will comply with its obligations under the --------- Insurance Agreement as if such obligations were set forth fully herein. 6.6 Use of Name. Purchaser shall refrain, and shall cause its Affiliates to ----------- refrain, from using the name "Wheelabrator" or -40- any derivation thereof, except in accordance with the provisions of the "Trade Name and Service Mark License Agreement" to be executed by the parties in the form of Exhibit D hereto. --------- 6.7 HSR Filings. As promptly as practicable, Purchaser shall (in ----------- cooperation with Seller) make all filings and submissions under the HSR Act and any foreign competition, investment, foreign exchange, tax or other foreign laws. 6.8 Litigation Support and Access After Closing. In the event and for so ------------------------------------------- long as Seller or any of its Affiliates is a party to any action, suit, proceeding, hearing, investigation, complaint, claim or demand ("Litigation") in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on, prior to or after the Closing Date, involving the Business, the Domestic Assets or the Subsidiaries, Purchaser will cooperate with Seller and its counsel, make available its personnel, and provide such testimony and access to its books and records as shall be necessary in connection with the Litigation. Purchaser acknowledges and agrees that, from and after the Closing, Seller will be entitled to possession of all documents, books, records, agreements, and financial data of any sort relating exclusively to the Excluded Assets or Retained Liabilities, to the extent that such items are in Purchaser's control. 6.9 Parent Guarantees. Purchaser will use its best efforts to obtain the ----------------- release of all Parent Guarantees as of the Closing Date, whether by substituting its own credit or guarantee therefor, or otherwise. In the event that any Parent Guarantees nevertheless remain outstanding following the Closing Date, Purchaser shall indemnify and hold harmless the Seller from any Losses or other payments made or demanded to be made thereunder, and shall not take any action that increases the amount of any Parent Guarantee. 6.10 Knowledge. Purchaser shall promptly inform Seller, by written notice, --------- of any breach of Seller's representations and warranties of which Purchaser obtains knowledge. ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER The obligation of Purchaser to purchase the Shares and Domestic Assets as provided herein is, at the option of Purchaser, subject to satisfaction of each of the following conditions precedent on or before the Closing Date: -41- 7.1 Warranties True. The representations and warranties of Seller contained --------------- herein shall be true and correct in all Material respects as of the date of this Agreement and (except to the extent such representations and warranties are made as of an earlier date, which representations and warranties shall be true and correct in all Material respects at and as of such date) as of the Closing Date as though made on and as of the Closing Date, in each case giving effect to any updates of Schedules delivered by Seller to Purchaser reflecting events occurring or arising between the date of this Agreement and the Closing Date (which updates shall not include any updates to Schedule 3.6, and shall not ------------ identify matters that are, individually or in the aggregate, Materially adverse). 7.2 Compliance with Agreements and Covenants. Seller shall have performed ---------------------------------------- and complied with, in all Material respects, its obligations and agreements hereunder. 7.3 HSR Act. All required notice and waiting periods under the HSR Act ------- shall have expired or otherwise been terminated. 7.4 Injunctions. No court or governmental authority shall have issued an ----------- order which shall then be in effect restraining or prohibiting the completion of the sale of any substantial part of the Domestic Assets and the Shares. 7.5 Deliveries by Seller. Seller shall be able to effect the deliveries -------------------- required pursuant to Section 9.2 below. ----------- 7.6 No Material Adverse Change. There shall not have occurred, between the -------------------------- date of this Agreement and the Closing Date, any Material Adverse Change. 7.7 Materiality Standard. For purposes of Section 7.1 and Section 7.6 -------------------- ----------- ----------- above (and only for such purposes), the parties agree that one or more circumstances or events shall not be deemed to be "Material" if the aggregate adverse economic effect of such circumstances or events does not exceed 10% of the Purchase Price. The parties agree that the 10% standard in this Section 7.7 ----------- shall not be an admission on the part of either of them that any other issues involving an interpretation of the term "material" or any derivation thereof as it appears other than in Section 7.1 or Section 7.6 hereof shall be addressed in ----------- ----------- the context of such standard, and the parties expressly and forever covenant and agree that they will not use this Section 7.7 in making any such interpretation. ----------- -42- ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER The obligation of Seller to cause the sale of the Shares and the Domestic Assets as provided herein is, at the option of Seller, subject to the satisfaction of each of the following conditions precedent on or before the Closing Date: 8.1 Warranties True. The representations and warranties of Purchaser --------------- contained herein shall be true and correct in all Material respects as of the date of this Agreement and (except to the extent such representations and warranties are made as of an earlier date, which representations and warranties shall be true and correct in all Material respects at and as of such date) as of the Closing Date as though made on and as of the Closing Date, in each case except for changes expressly contemplated by this Agreement. 8.2 Compliance with Agreements and Covenants. Purchaser shall have ---------------------------------------- performed and complied with, in all material respects, its obligations and agreements hereunder. 8.3 HSR Act. All required notice and waiting periods under the HSR Act ------- shall have expired or been waived. 8.4 Injunctions. No court or governmental authority shall have issued an ----------- order which shall then be in effect restraining or prohibiting the completion of the sale of any substantial part of Domestic Assets and the Shares. 8.5 Deliveries by Purchaser. Purchaser shall be able to effect the ----------------------- deliveries required pursuant to Section 9.3 below. ----------- ARTICLE IX CLOSING 9.1 Closing. The Closing shall take place at the offices of Mayer, Brown & ------- Platt, 190 South LaSalle Street, Chicago, Illinois 60603 at 10:00 A.M. on or as of the last business day of a calendar month. The Closing shall take place within 10 days of the date on which all of the conditions precedent set forth in Article VII and Article VIII have been satisfied or waived, or such other date - ----------- ------------ as is mutually agreeable to Seller and Purchaser (the "Closing Date"). 9.2 Seller's Deliveries. At the Closing, Seller shall deliver to Purchaser: ------------------- -43- (a) a certificate, signed by an officer of Seller, certifying satisfaction of the condition at Section 7.1 above; ----------- (b) certificates evidencing the Shares, duly endorsed in blank or accompanied by duly executed stock powers or ordres de mouvement, notarial deeds and/or such other transfer documents as may be necessary to transfer to Purchaser the Shares; (c) resignations of the respective Boards of Directors and officers of each of the Subsidiaries (other than the Minority Subsidiaries) as shall be designated by Purchaser in writing not less than five (5) days prior to the Closing Date; (d) a duly executed copy of the Trade Name and Service Mark License Agreement; (e) a bill of sale, deeds and instrument of assignment and other instruments reasonably deemed necessary by Purchaser for the conveyance of the Domestic Assets; (f) an assignment of all transferable licenses or permits included in the Domestic Assets; (g) a duly executed copy of the Business Development Agreement in the form of Exhibit E hereto; (h) updates of Seller's Schedules to this Agreement reflecting events occurring or arising between the date of this Agreement and the Closing Date (which Schedules shall supplement the Schedules attached hereto but shall not include any updates of Schedule 3.6, and shall not identify ------------ matters that are, individually or in the aggregate, Materially adverse); (i) a duly executed copy of the Insurance Agreement; (j) a duly executed copy of the Stock Retention Agreement, if required; (k) a duly executed copy of the Non-Competition Agreement; (l) documentation reasonably acceptable to Purchaser, making available to Purchaser the right to use the JD Edwards software currently utilized by Seller in the conduct of the Business; (m) any other items required to be delivered by Seller under the terms and provisions of this Agreement; and -44- (n) any releases obtained of the Parent Guarantees. 9.3 Purchasers Deliveries. At the Closing, the Purchaser shall deliver to --------------------- Seller: (a) a certificate, signed by an officer of Purchaser, certifying satisfaction of the condition at Section 8.1 above; ----------- (b) confirmation of the wire transfer to Seller of same-day funds in the amount of the Purchase Price; (c) a duly executed copy of the Trade Name and Service Mark License Agreement; (d) a duly executed copy of the Business Development Agreement; (e) a duly executed copy of the Non-Competition Agreement; (f) a duly executed copy of the Insurance Agreement; (g) a duly executed copy of the Stock Retention Agreement, if required; (h) a certificate, signed by a duly authorized officer of Purchaser on behalf of Purchaser, certifying that Purchaser has no knowledge of any breach of or inaccuracy in, any of the representations and warranties of Seller set forth in this Agreement, except as set forth in such certificate (it being understood that upon delivery of such certificate, the contents thereof shall be deemed to be a representation and warranty of Purchaser); (i) assumption agreement, relating to the assumption by Purchaser of the Liabilities; (j) notarial deeds and/or such other transfer documents as may be necessary to transfer to Purchaser the Shares of certain of the Subsidiaries; (k) a duly executed copy of the Non-Competition Agreement; (l) any other items required to be delivered by Purchaser under the terms and provisions of this Agreement; and (m) any releases obtained of the Parent Guarantees. 9.4 Termination. This Agreement shall terminate: ----------- -45- (a) upon the mutual agreement of Seller and Purchaser; (b) upon written notice from Purchaser to Seller if each of the conditions precedent set forth in Article VII has not been satisfied on or before ----------- December 31, 1996; or (c) upon written notice from Seller to Purchaser if each of the conditions precedent set forth in Article VIII has not been satisfied on or before ------------ December 31, 1996. No termination of this Agreement shall release Seller from any liability under Section 5.9. No party shall be relieved of liability for any breach of this - ----------- Agreement, unless such breach is otherwise excused by the express terms hereof. Sections 5.6, 6.2, 12.1 and 12.14 shall survive the termination of this - ----------------------- ----- Agreement. ARTICLE X SURVIVAL AND INDEMNIFICATION 10.1 Survival. The representations and warranties of the -------- parties contained herein or in any certificate or writing delivered pursuant hereto shall survive the Closing until the first anniversary of the Closing Date; provided, that, the -------- ---- representations and warranties contained at the last sentence of Section 3.2(a) and the first sentence of Section 3.6(b) shall -------------- -------------- survive the Closing forever. The covenants and agreements contained herein shall survive the Closing for the period designated or, if no period is so designated, forever. 10.2 Indemnification by Seller. (a) Subject to the terms of ------------------------- Section 10.3, Seller agrees to indemnify, defend and hold harmless ------------ Purchaser, its officers, directors, Affiliates, successors and assigns (the "Purchaser Indemnified Parties") against any and all Losses suffered by any Purchaser Indemnified Party from and after the point at which such Losses in the aggregate exceed $2,000,000 (at which point Seller shall indemnify Purchaser for all such Losses, beginning from the first dollar of such Losses) and (i) are caused by any breach of the representations, warranties, covenants (including, without limitation, Seller's failure to pay, perform and satisfy the Retained Liabilities) or agreements of Seller set forth in this Agreement, or (ii) constitute Reserve Losses (as defined below), or (iii) result from a claim or cause of action brought by Betz Dearborn with respect to the matters identified on Schedule 2.1(b)(II); ------------------- -46- provided, that, (A) no claim may be made, and no Losses shall be applied - -------------- against the foregoing deductible amount, with respect to any matter that individually does not cause a Loss in excess of $50,000, exclusive of attorney's fees, court costs and costs of litigation; (B) the foregoing $50,000 and $2,000,000 limitations will not apply to Seller's obligations with respect to the Insurance Agreement (or any other agreement entered into in connection therewith), Seller's payment obligation under Section 2.3(c) above, any breach -------------- of the representations and warranties contained in the last sentence of Section 3.2(a), the first sentence of Section 3.6(b), or Section 3.12 or any - -------------- -------------- ------------ Losses incurred with respect to the Retained Liabilities (other than the Retained Claims, as to which such limitations shall apply); and (C) Purchaser's right of recovery for Reserve Losses is subject to Section 10.2(b) below; and --------------- provided, further, that Purchaser shall not be entitled to indemnification - -------- ------- pursuant to Section 10.2(a)(i) above in respect of Reserved Matters, it being ------------------ understood that the parties' agreement with respect to indemnification for Reserved Matters is set forth in Section 10.2(a)(ii). ------------------- (b) On or before the first anniversary of the Closing Date, Purchaser may assert claims for aggregate Losses incurred in respect of Reserved Matters, to the extent that such aggregate Losses exceed the aggregate amount of the Reserves (the "Reserve Losses"). Purchaser shall assert any such claim by written notice to Seller, which notice must be delivered on or before the first anniversary of the Closing Date. Purchaser's claim notice shall specify, in reasonable detail, (i) the aggregate amount of Losses incurred in respect of Reserved Matters and (ii) the reason that Purchaser asserts that the total Reserves were not established as of the Closing Date on a basis consistent with the Balance Sheet and in accordance with the Accounting Conventions. Purchaser shall be entitled to indemnification with respect to the claimed Losses (A) only if it prevails on its assertion that the Reserves were not established on a basis consistent with the Balance Sheet and in accordance with the Accounting Conventions, and (B) only to the extent that such Losses would have been covered by the Reserves, had the Reserves been so established. (c) In addition to the indemnification obligations set forth in Section ------- 10.2(a) above, Seller agrees to indemnify, defend and hold harmless the - ------- Purchaser Indemnified Parties against 50% of any and all Losses (which, for purposes of this Section 10.2(c) only, shall include project costs net of --------------- project billings after the Closing Date) suffered by any Purchaser Indemnified Party, without application of the $50,000, $2,000,000, 10% or one-year limitations set forth elsewhere in this Section 10.2, arising from or relating ------------ to (i) a salt crystallization system being installed for FRIMA, B.V., and (ii) the HPD Division's Sudwestdeutsche Saltwerk project; provided, that the -------- foregoing indemnity shall only be applicable to the extent that the aggregate Losses suffered by the Purchaser -47- Indemnified Parties with respect to items (i) and (ii) above exceed the estimated costs-to-complete, net of remaining billings, for such projects as reflected in the calculation of earned revenues for such projects on the books of HPD as of August 31, 1996. 10.3 Limitations. The aggregate liability of Seller to the Purchaser ----------- Indemnified Parties under Section 10.2 or otherwise under this Agreement, or of ------------ Purchaser to the Seller Indemnified Parties under Section 10.4(a) (but only --------------- with respect to a breach of the representations and warranties set forth in Sections 4.1, 4.2 or 4.3) shall not exceed ten percent (10%) of the Purchase - ------------ --- --- Price, as such Purchase Price is finally determined in accordance with the procedures set forth in Section 2.3; provided, that, such limitation shall not ----------- -------- ---- apply with respect to any obligation of Seller under the Insurance Agreement (or any other agreement entered into in connection herewith), payment obligations of Seller set forth at Section 2.3(c) above, any breach of Section -------------- ------- 3.12, the indemnity set forth in Section 10.2(c) above or any Losses incurred - ---- --------------- with respect to the Retained Liabilities (other than the Retained Claims, as to which such limitation shall apply) by Purchaser or any Losses incurred with respect to the Liabilities or the Parent Guarantees by Seller. No claim for indemnification may be made hereunder unless written notice of such claim, in reasonable detail, is given to Seller or Purchaser, as the case may be, on or prior to the expiration of the survival period set forth in Section 10.1. The ------------ indemnification provided by Section 10.2 shall not apply in the case of any ------------ breach of any representation or warranty of which Purchaser had knowledge prior to the Closing. The rights and remedies set forth in this Article X shall --------- constitute the sole and exclusive rights and remedies of Seller and any Seller Indemnified Party against Purchaser and Purchaser and any Purchaser Indemnified Party against Seller with respect to this Agreement, the events giving rise to this Agreement and the transactions contemplated herein. 10.4 Indemnification by Purchaser. Purchaser agrees to indemnify, defend ---------------------------- and hold harmless Seller, its officers, directors, Affiliates, successors and assigns (the "Seller Indemnified Parties") against any and all Losses suffered by any Seller Indemnified Party and which: (a) are caused by any breach of the representations, warranties, covenants or agreements of Purchaser set forth in this Agreement including, without limitation, Purchaser's failure to pay, perform and satisfy, and hold Seller and its Affiliates harmless from, the Liabilities; (b) arise under any of the Parent Guarantees; or -48- (c) otherwise arise from the operation of the Business, the Divisions, the Subsidiaries or the Domestic Assets from and after the Closing Date. 10.5 Procedures. The indemnified party shall promptly notify the ---------- indemnifying party in writing of all matters which may give rise to the right to indemnification hereunder. If the indemnifying party does not receive notice of any matter known to the indemnified party and as to which the indemnified party is entitled to indemnification hereunder in time to contest the determination of any such liability, the indemnifying party shall not be obligated to indemnify the indemnified party with respect thereto, to the extent that such delay is actually prejudicial to the rights or obligations of the indemnifying party. The indemnifying party shall have the right: (a) with the consent of the indemnified party, which shall not be unreasonably withheld or delayed, to settle all indemnifiable matters related to claims by third parties which are susceptible to being settled and (b) to defend through counsel of its own choosing, at its own expense, any action which may be brought by a third party in connection therewith. The indemnified party shall have the right to have its counsel participate fully in such defense at its own expense but shall have no right to settle any indemnifiable matter without the written consent of the indemnifying party. The indemnified party and the indemnifying party shall keep each other reasonably informed of the progress of any litigation or settlement negotiations with third parties in connection with a matter indemnified against hereunder. The indemnifying party and the indemnified party shall permit each other reasonable access to books and records and otherwise cooperate with all reasonable requests of each other in connection with any indemnifiable matter resulting from a claim by any third party. 10.6 Calculations. The amount of indemnity payable under Section 10.2 or ------------ ------------ Section 10.4 above shall be reduced by proceeds received by the Purchaser - ------------ Indemnified Party or the Seller Indemnified Party, as the case may be, from insurance policies or other indemnities covering the damage, loss, liability or expense that is the subject of the claim for indemnity. To the extent that insurance proceeds are received in a year other than the year in which the indemnity is paid, the indemnified party shall make a payment to the indemnifying party in the amount of such insurance proceeds in the year in which they are received. -49- ARTICLE XI TAXES 11.1 Filing Tax Returns; Payment of Taxes. (a) As soon as practicable after ------------------------------------ the Closing Date, Seller will prepare and file all appropriate tax returns for the operations of the Subsidiaries (other than the Minority Subsidiaries) for all tax periods ending on or before the Closing Date, including, for those jurisdictions and tax authorities that permit or require a short period tax return, for the period ending on the Closing Date, and Seller will pay any tax due thereon and will indemnify the Purchaser for any such taxes and for any taxes imposed by reason of section 1502-6 of the Treasury regulations or similar provisions under state, local or foreign Law. In the case of a jurisdiction that does not permit a short period tax return with respect to a subsidiary incorporated in the United States, the Closing Date will be treated as the end of the subsidiary's taxable year and the Seller will pay any taxes that would be due for such hypothetical taxable year. Any item that would affect the determination of taxes for this hypothetical taxable year that cannot be identified as being attributable to the time prior to the Closing Date, will be allocated pro rata throughout the Subsidiary's entire taxable year. Without undue disruption to the operations of such Subsidiaries, Purchaser shall cause the Subsidiaries to cooperate fully and promptly in connection with Seller's preparation and filing of such returns. The books and records of the Subsidiaries will be maintained, and the Federal, state and other income tax returns of Seller's consolidated group will be filed, so as to accurately reflect the operations of the Subsidiaries through the end of the Closing Date. Seller shall have no responsibility for filing any tax return for the operations of the Subsidiaries for any period ending after the Closing Date. (b) Seller shall be entitled to any refunds of Taxes (including interest received thereon) paid with respect to the operations of the Subsidiaries for any period included in the Seller Tax Period, except for any such refunds reflected on the Closing Balance Sheet. Purchaser shall be entitled to all other refunds of Taxes (including interest received thereon) with respect to the operations of the Subsidiaries. Refunds to which Seller is not entitled shall be retained by the Subsidiaries, and shall not be paid to Seller, and if received by Seller, shall be paid over to Purchaser within ten (10) business days after receipt. Purchaser shall cause the Subsidiaries to cooperate, at no cost to Purchaser, with Seller in any petition for or proceeding relating to any refund. 11.2 Tax Benefits. If, as the result of a final determination or other action by any taxing authority, the tax liability of any Subsidiary for a period after the Closing Date is -50- increased because of the erroneous timing of an item of income, deduction, or credit which, when corrected, produces a realized tax benefit available to Seller or any of its Affiliates in a tax period including or ending before the Closing Date, Seller shall pay to Purchaser upon its receipt or application of all or any portion of such tax benefit an amount equal to the amount of such tax benefit or portion thereof (including any interest related thereto). If, as the result of a final determination or other action by any taxing authority, the tax liability of any Subsidiary for a period prior to the Closing Date is increased because of the erroneous timing of an item of income, deduction, or credit which, when corrected, produces a tax benefit available to Purchaser or any of its Affiliates in a tax period beginning after the Closing Date, Purchaser shall pay to Seller upon its receipt or application of all or any portion of such tax benefit an amount equal to the amount of such tax benefit or portion thereof (including any interest related thereto). 11.3 Tax Cooperation. Purchaser and Seller will cooperate fully with each --------------- other in connection with (a) the preparation and filing of any Federal, state, local or foreign tax returns for the operations of the Subsidiaries within the Seller Tax Period, and (b) any audit examination by any government taxing authority of the returns referred to in clause (a). Such cooperation shall include, without limitation, the furnishing or making available of records, books of account or other materials of the Subsidiaries necessary or helpful for the defense against assertions of any taxing authority as to any tax returns which include operations of the Subsidiaries within the Seller Tax Period. However, nothing herein shall entitle Purchaser to interfere with Seller's right to make any judgments or to take any actions it deems appropriate in connection with the disposition of any audits. Seller shall control, and have the sole right to contest or settle, any audit or other tax matter attributable to the Seller Tax Period. 11.4 Section 338(h)(1) Election. If the Purchaser requests, Seller will -------------------------- join with the Purchaser in making timely elections under Section 338(h)(10) of the Code (and any corresponding elections under state or local Tax law) (collectively, the "Section 338(h)(10) Elections") with respect to the purchase and sale of the Shares of Wheelabrator Water Technologies International Holdings Inc. Initial drafts of the materials required to make such joint elections will be prepared by Seller. Purchaser and Seller shall (i) take, and cooperate with each other to take, all actions necessary and appropriate to effect and preserve the timely Section 338(h)(10) Elections in accordance with Section 338 of the Code and the Treasury Regulations thereunder and (ii) Purchaser and Seller shall report the sale of such shares pursuant to this Agreement consistent with the Section 338(h)(10) Elections and shall take no position contrary thereto or inconsistent therewith in any Tax return, any discussion with or proceeding before any -51- governmental authority, or otherwise. The allocation of the "adjusted grossed- up basis" (within the meaning of Treas. Reg. (s) 1.338(b)-l(c)) among the tangible and intangible assets (the "Allocation") market values of such assets as agreed upon by the Purchaser and the Seller. The Allocation shall be used by Seller and Purchaser for purposes of allocating the "deemed selling price" and neither party shall file any Tax return or schedule that is inconsistent with the Allocation. Seller shall be responsible for and shall indemnify and hold Purchaser harmless from any Taxes that arise from or as a result of the Section 338(h)(10) Election. 11.5 Tax Sharinq Arrangements. Any tax sharing arrangement between the ------------------------ Seller or its Affiliates, on the one hand, and any of the Subsidiaries, on the other hand, will be null and void immediately following the Closing. ARTICLE XII MISCELLANEOUS 12.1 Expenses. Except as provided below, each party hereto shall bear its -------- own expenses with respect to this transaction. The parties shall jointly share any sales, stamp, documentary, registration, recording, conveyancing, transfer or similar taxes and notarial and filing fees applicable to the transfer of the Domestic Assets and the Shares. Purchaser shall bear the costs and expenses of any title insurance. 12.2 Amendment. This Agreement may be amended, modified or supplemented --------- only in writing signed by each of the parties hereto. 12.3 Notices. Any written notice to be given hereunder shall be deemed ------- given: (a) when received, if given in person or by courier; (b) on the date of transmission, if sent by telex, telecopy or other wire transmission (receipt confirmed); (c) three (3) days after being deposited in the U.S. mail, certified or registered mail, postage prepaid; and (d) if sent by a nationally recognized overnight delivery service, the day following the date given to such overnight delivery service (specified for overnight delivery). All notices shall be addressed as follows: If to Seller, addressed as follows: Wheelabrator Water Technologies Inc. 3003 Butterfield Road Oak Brook, IL 60521 Attention: General Counsel Telephone: (630) 572-2422 Facsimile: (630) 572-1415 -52- with a copy to: Wheelabrator Technologies Inc. 3003 Butterfield Road Oak Brook, IL 60521 Attention: General Counsel Telephone: (630) 572-8840 Facsimile: (630) 218-1553 If to Purchaser, addressed as follows: United States Filter Corporation 40-004 Cook Street Palm Desert, California 92211 Attention: General Counsel Telephone: (619) 340-0098 Facsimile: (619) 341-9368 with a copy to: Kirkpatrick & Lockhart 1500 Oliver Building Pittsburgh, Pennsylvania 15222 Attention: Janice C. Hartman, Esq. Telephone: (412) 355-6444 Facsimile: (412) 355-6501 12.4 Waivers. The failure of a party to require performance of any ------- provision hereof shall not affect its right at a later time to enforce the same. No waiver by a party of any term, covenant, representation or warranty contained herein shall be effective unless in writing. No such waiver in any one instance shall be deemed a further or continuing waiver of any such term, covenant, representation or warranty in any other instance. 12.5 Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.6 Headings. The headings preceding the text of Articles and Sections -------- of this Agreement and the Schedules and Exhibits thereto are for convenience only and shall not be deemed part of this Agreement. 12.7 Applicable Law. This Agreement shall be governed by and construed -------------- and enforced in accordance with the internal laws, and not the laws of conflicts, of the State of Illinois. 12.8 Assignment. This Agreement shall be binding upon and inure to the ---------- benefit of the parties and their respective successors and assigns; provided, -------- that no assignment of either party's rights -53- or obligations may be made without the written consent of the other party, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Purchaser may assign all rights hereunder to any one or more wholly owned subsidiaries; provided that Purchaser shall continue to be bound -------- in all respects hereunder. 12.9 No Third Party Beneficiaries. This Agreement is solely for the benefit ---------------------------- of the parties hereto and no provision of this Agreement shall be deemed to confer any remedy, claim or right upon any third party. 12.10 Arbitration. All disputes arising in connection with this Agreement ----------- or any modification or extension hereof, or the breach or invalidity hereof (other than disputes relating to the termination of this Agreement or the failure to close) shall be settled by binding arbitration in Chicago under the UNCITRAL arbitration rules in effect on the date hereof, such arbitration to be conducted by a single arbitrator appointed by the parties or, failing agreement within one month of the demand for arbitration, by the American Arbitration Association (AAA) at the request of one of the parties. The AAA shall administer the arbitration under its "Procedure for Cases under the UNCITRAL Arbitration Rules." In addition to the rules governing such arbitration, the parties shall have at their disposal the pretrial discovery rights as are then available under applicable law; provided that any dispute between the parties relating to -------- discovery shall be submitted to the arbitrator for resolution. The arbitrator may, for his convenience or that of the parties, take evidence at places other than Chicago without changing the situs of the proceedings. The arbitrator shall dispose of any dispute in such manner as he, in his discretion, shall determine, but in so doing he shall be required to receive the submission of the parties with respect to said dispute. The arbitrator shall base his award with respect to the matter before him on the contents of this Agreement and on the provisions of the applicable law as herein provided. The decision of the arbitrator shall be rendered in writing with all reasonable expedition and shall be final and binding on the parties hereto. Judgment upon the arbitration award rendered may be entered in any court having jurisdiction, or application may be made to any such court for judicial acceptance of the award and an order of enforcement of execution, as the case may be. 12.11 Schedules. Purchaser agrees that any disclosure by Seller in any --------- Schedule attached hereto shall constitute a disclosure under each other Schedule referred to herein, whether or not such disclosure is specifically referenced within such other Schedule. The parties also acknowledge that an effect of this -54- Amended and Restated Purchase and Sale Agreement is to amend and restate, in their entirety, Schedules 2.1(d), 2.3, 3.2 and 3.16, in the form attached hereto; all other Schedules shall be in the form delivered on September 14, 1996. 12.12 Incorporation. The respective Schedules and Exhibits attached hereto ------------- and referred to herein are incorporated into and form a part of this Agreement. 12.13 Knowledge Defined. For purposes of this Agreement, the term ----------------- "knowledge of Seller" or variations thereof shall be limited to the actual knowledge of those individuals listed on Schedule 12.13(a), and the term ----------------- "knowledge of Purchaser" or variations thereof shall be limited to the actual knowledge of those individuals listed on Schedule 12.13(b); and the knowledge of ----------------- each shall reflect due inquiry by such individuals in connection with the statement qualified by such knowledge. 12.14 Public Announcements. Seller and Purchaser each agree that they and -------------------- their Affiliates will not issue any press release with respect to this Agreement or the transactions contemplated hereby without the prior approval of other party, which shall not be unreasonably withheld, except as may be required by Law or by any stock exchanges having jurisdiction over Seller, Purchaser or their Affiliates. 12.15 Complete Agreement. This Agreement constitutes the complete ------------------ agreement of the parties with respect to the subject matter hereof and supersedes all prior discussions, negotiations and understandings. The preamble and recitals set forth at the beginning of this Agreement are incorporated in and form a part of this Agreement. 12.16 Interpretation. When a reference is made in this Agreement to -------------- Sections, such reference shall be to a Section of this Agreement unless indicated. Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation," whether or not expressly stated. 12.17 Further Assurances. Each of the parties hereto agrees to use its ------------------ commercially reasonable efforts, both before and after the Closing, to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws and existing agreements or otherwise required to be taken or done by it to consummate the transactions contemplated hereby and to more fully and effectively vest in Purchaser title to the Domestic Assets and the Shares. -55- IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first written above. WHEELABRATOR TECHNOLOGIES INC. By: /s/ William Keightly ---------------------------- Name: William Keightley Title: Authorized Representative UNITED STATES FILTER CORPORATION By: ---------------------------- Name: Kevin L. Spence Title: Vice President and Chief Financial Officer -56- IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first written above. WHEELABRATOR TECHNOLOGIES INC. By: --------------------------- Name: William Keightley Title: Authorized Representative UNITED STATES FILTER CORPORATION By: /s/ Kevin L. Spence ---------------------------- Name: Kevin L. Spence Title: Vice President and Chief Financial Officer -57- EX-2.3 3 STOCK PURCHASE AGREEMENT DATED SEPT. 10, 1996 EXHIBIT 2.3 Stock Purchase Agreement (this "Agreement"), dated as of September 10, 1996, by and among EDMUNDSON INTERNATIONAL, INC., a California corporation ("Seller"), UNITED STATES FILTER CORPORATION, a Delaware corporation ("Buyer"), and WATERPRO SUPPLIES CORPORATION, a Massachusetts corporation (the "Company"). Seller desires to sell all of the issued and outstanding shares of capital stock of the Company, consisting of 50,000 shares of common stock (the "Company Shares"), to Buyer, and Buyer desires to purchase the Company Shares, on the terms and subject to the conditions set forth below. In consideration of the representations, warranties, covenants and agreements contained herein, Seller, Buyer and the Company, each intending to be legally bound hereby, agree as set forth below. ARTICLE I DEFINITIONS; CONSTRUCTION ------------------------- 1.01. Definitions. As used in this Agreement, the following terms have the ----------- meanings specified in this Section 1.01. All accounting terms not specifically ------------ defined herein shall be construed in accordance with GAAP. "Affiliate" means, with respect to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with such Person. "Agreement" means this Stock Purchase Agreement, as it may be amended from time to time. "Balance Sheet Date" means December 31, 1995. "Benefit Plan" has the meaning given that term in Section 3.23(a). --------------- "Business" means the business of selling and distributing products and services used in the installation and operation of underground water, wastewater and natural gas systems, as conducted by the Company. "Buyer" means United States Filter Corporation, a Delaware corporation. "Buyer Damages" has the meaning given that term in Section 7.02. ------------ "Buyer Indemnitees" has the meaning given that term in Section 7.02. ------------ "CERCLIS" means the U.S. Comprehensive Environmental Response Compensation Liability Information System List pursuant to Superfund. "Closing" has the meaning given that term in Section 2.03. ------------ "Closing Date" has the meaning given that term in Section 2.03. ------------ "Code" means the U.S. Internal Revenue Code of 1986, as amended, and the applicable rulings and regulations thereunder. "Company" means WaterPro Supplies Corporation, a Massachusetts corporation. "Company Group" means any corporation that may be aggregated with the Company under Sections 414(b), (c), (m) or (o) of the Code. "Company Plan" has the meaning given that term in Section 3.23(a). --------------- "Company Shares" has the meaning given that term in the introductory paragraph of this Agreement. "Company Stockholder Ownership Percentage" means the percentage of ownership of aggregate Company Shares held by each Company Stockholder as identified in Schedule 3.03. ------------- "Company Stockholders" means Seller and the entity and individuals for which Seller is agent, each as identified in Schedule 3.03. ------------- "Contract" and "Contracts" have the respective meanings given those terms in Section 3.15. ------------ "Damages" has the meaning given that term in Section 7.06. ------------ "Debt Repayment USF Shares" has the meaning given that term in Section 2.04. - ------------ "Defined Benefit Plan" has the meaning given that term in Section 3.23(e). --------------- "Encumbrance" means any liability, debt, mortgage, deed of trust, pledge, security interest, encumbrance, option, right of first refusal, agreement of sale, adverse claim, easement, lien, lease, assessment, restrictive covenant, encroachment, right-of-way, burden or charge of any kind or nature whatsoever or any item similar or related to the foregoing. "Environmental Law" means any applicable Law relating to public health and safety or protection of the environment, including common law nuisance, property damage and similar common law theories. "ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as amended, and the applicable rulings and regulations thereunder. -2- "FASB" means the U.S. Financial Accounting Standards Board or its successor. "Financial Statements" has the meaning given that term in Section 3.07(b). --------------- "FNB" means the First National Bank of Boston. "GAAP" means U.S. generally accepted accounting principles. -3- "Governing Documents" means, with respect to any Person who is not a natural Person, the certificate or articles of incorporation, bylaws, deed of trust, formation or governing agreement and other charter documents or organization or governing documents or instruments of such Person. "Governmental Body" means any court, government (federal, state, local or foreign), department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority or instrumentality. "HSR Act" means the U.S. Hart-Scott-Rodino Antitrust Improvements Act, as amended. "Indemnified Party" has the meaning given that term in Section 7.06. ------------ "Indemnifying Party" has the meaning given that term in Section 7.06. ------------ "Insider Company Debt" means the Company's aggregate outstanding indebtedness (including principal, interest and any other amounts due thereunder) to Seller evidenced by that certain letter agreement dated between Seller and the Company, a copy of which was delivered to Buyer as set forth in Section 3.27 and Section 5.01(b). - ------------ --------------- "Intellectual Property" has the meaning given that term in Section 3.22. ------------ "IRS" means the U.S. Internal Revenue Service. "Law" means any applicable federal, state, municipal, local or foreign statute, law, ordinance, rule, regulation, judgment or order of any kind or nature whatsoever including any public policy, judgment or order of any Governmental Body or principle of common law. "Litigation" has the meaning given that term in Section 3.14. ------------ "Multiemployer Plan" has the meaning given that term in Section 3.23(f). --------------- "NYSE" means the New York Stock Exchange. "Other Agreement" means each other agreement or document contemplated hereby to be executed and delivered in connection with the transactions contemplated by this Agreement on or before Closing. "PBGC" means the U.S. Pension Benefit Guaranty Corporation. "Permit" and "Permits" have the respective meanings given those terms in Section 3.16. - ------------ "Person" means and includes a natural person, a corporation, an association, a partnership, a limited liability company, a trust, a joint venture, an unincorporated organization, a -4- business, any other legal entity, and a Governmental Body. "Purchase Price" has the meaning given that term in Section 2.02. ------------ "Purchase Price USF Shares" has the meaning given that term in Section 2.04. - ------------ "Qualified Plan" has the meaning given that term in Section 3.23(d). --------------- "Real Property" has the meaning given that term in Section 3.17. ------------ "Receivables" has the meaning given that term in Section 3.12. ------------ "Regulated Material" means any hazardous substance as defined by any Environmental Law and any other material regulated by any applicable Environmental Law, including, polychlorinated biphenyls, petroleum, petroleum- related material, crude oil or any fraction thereof. "Related Party" means (i) the Company Stockholders, (ii) any Affiliate of Seller, (iii) any officer or director of any Person identified in clauses (i) or (ii) preceding, and (iv) any spouse, sibling, ancestor or lineal descendant of any natural Person identified in any one of the preceding clauses. "Required Authorizations" means, with respect to any Person, (i) all consents, authorizations, approvals or other orders or actions of, or filings or registrations with, any national, local or foreign governmental authority or agency, including pre-closing or post-closing notifications or deed restrictions required under state law, (ii) board and, if required, stockholder approval, or approval of any other governing Person, group or entity, (iii) all notices, per- mits, approvals, consents, qualifications, waivers or other actions of third parties under any lease, note, mortgage, indenture, loan agreement, other agreement or other instrument or under any other third-party franchise, license or permit, including the consent of institutional lenders, and (iv), to the extent not otherwise addressed above, the consents referred to in Schedule 3.06. ------------- "Security Right" means, with respect to any security, any option, warrant, subscription right, preemptive right, other right, proxy, put, call, demand, plan, commitment, agreement, understanding or arrangement of any kind relating to such security, whether issued or unissued, or any other security convertible into or exchangeable for any such security. "Security Right" includes any right relating to issuance, sale, assignment, transfer, purchase, redemption, conversion, exchange, registration or voting and includes rights conferred by statute, by the issuer's Governing Documents or by agreement. "Seller Damages" has the meaning given that term in Section 7.03. ------------ "Seller Indemnitees" has the meaning given that term in Section 7.03. ------------ "Selling Group" means a member, whether past or present, of Seller's Affiliated group -5- of corporations within the meaning of Code Section 1504(a). "Stock Adjustment Event" has the meaning given that term in Section 2.05. ------------ "Superfund" means the U.S. Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended. "Tax" means any domestic or foreign federal, state, county or local tax, levy, impost or other charge of any kind whatsoever, including any interest or penalty thereon or addition thereto, whether disputed or not. -6- "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to any Tax, including any schedule or attachment thereto, and including any amendment thereof. "Transfer Agreement" means the Option, Transfer and Registration Agreement substantially in the form of Exhibit A. --------- "USF Shares" means Buyer's common stock, par value $.01 per share. "USF Shares Average Value" means the average (rounded to the nearest eighth of a point) of the closing prices for USF Shares as reported by the New York Stock Exchange for the 25 consecutive trading days ending on the sixth to last trading day immediately preceding the Closing Date. "WaterPro" means WaterPro Supplies Corporation, a Massachusetts corporation. 1.02. Construction. As used herein, unless the context otherwise requires: ------------ (i) references to "Article" or "Section" are to an article or section hereof; (ii) all "Exhibits" and "Schedules" referred to herein are to Exhibits and Schedules attached hereto and are incorporated herein by reference and made a part hereof; (iii) "include", "includes" and "including" are deemed to be followed by "without limitation" whether or not they are in fact followed by such words or words of like import and (iv) the headings of the various articles, sections and other subdivisions hereof are for convenience of reference only and shall not modify, define or limit any of the terms or provisions hereof. As used herein, the term "to the best of the Company's "knowledge" or words to terms similar thereto includes the knowledge of Mr. Richard J. Klau and Mr. Christopher Pappo. ARTICLE II THE TRANSACTION --------------- 2.01. Sale and Purchase of Company Shares. Upon the terms and subject to ----------------------------------- the conditions of this Agreement and in consideration of the Purchase Price, Seller, as agent for itself and for the Company Stockholders, shall sell, assign, transfer and deliver the Company Shares to Buyer, and Buyer shall purchase from Seller and take delivery of the Company Shares, at the Closing, free of all Encumbrances. 2.02. Purchase Price. The aggregate purchase price for the Company Shares -------------- shall be $38.6 million (the "Purchase Price"). 2.03. Closing. The consummation of the purchase and sale of the Company ------- Shares and the other transactions contemplated hereby (the "Closing") shall take place on October 25, 1996 or within 10 business days after all of the conditions to Closing under Article VI are satisfied or waived, but in no event after ---------- November 30, 1996, at 10:00 a.m. local time at the offices of Buyer, or at such other time, date or place as the parties agree (the "Closing Date"). -7- 2.04. Payment. Upon the terms and subject to the conditions of this ------- Agreement, at Closing, (i) Buyer shall deliver to Seller as agent for itself and for the Company Stockholders, prorated among each Company Stockholder in accordance with its Company Stockholder Percentage Ownership, certificates representing that number of USF Shares (collectively, the "Purchase Price USF Shares") equal to the quotient obtained by dividing (a) $38.6 million by (b) the USF Shares Average Value; and (ii) Buyer shall deliver to Seller certificates for that number of USF Shares (collectively, the "Debt Repayment USF Shares") equal to the quotient obtained by dividing (y) the aggregate outstanding Insider Company Debt as of the close of business on the date immediately preceding the Closing by (z) the USF Shares Average Value; in each case (i) and (ii) together with cash sufficient to pay for fractional shares. Upon delivery of the Debt Repayment USF Shares, the Insider Company Debt shall be deemed paid in full. 2.05. Anti-Dilution Provisions. If between the date hereof and Closing the ------------------------ issued and outstanding USF Shares shall have been changed into a different number of shares as a result of a stock split, reverse stock split, stock dividend, recapitalization, reclassification or other similar transaction (a "Stock Adjustment Event") with a record or effective date within such period, the Purchase Price USF Shares and the Debt Repayment USF Shares shall be adjusted proportionately. 2.06. Transfer Agreement. The Debt Repayment USF Shares and the Purchase ------------------ Price USF Shares shall be entitled to the benefits of and subject to the restrictions contained in the Transfer Agreement. ARTICLE REPRESENTATIONS AND WARRANTIES OF SELLER --------- As an inducement to Buyer to enter into this Agreement and consummate the transactions contemplated hereby, Seller represents and warrants to Buyer as follows: 3.01. Organization. Each of Seller and the Company is a corporation duly ------------ organized, validly existing and in good standing under the laws of its jurisdiction of organization, and has the corporate power and authority to own or lease its properties, carry on its business as now conducted, enter into this Agreement and the Other Agreements to which it is or is to become a party and perform its obligations hereunder and thereunder. 3.02. Authorization; Enforceability. This Agreement and each Other ----------------------------- Agreement to which Seller or the Company, or both, is a party have been duly executed and delivered by and constitute the legal, valid and binding obligations of such party, enforceable against it in accordance with their respective terms. Each Other Agreement to which either Seller or the Company, or both, is to become a party pursuant to the provisions hereof, when executed and delivered by such party, will constitute the legal, valid and binding obligation of such party, enforceable against such party in accordance with the terms of such Other Agreement. All actions contemplated by this Section have been duly and validly authorized by all necessary proceedings by Seller and the Company. -8- 3.03. Company Shares; Capitalization. The authorized capital stock of the ------------------------------ Company consists solely of 200,000 shares of common stock, $0.01 par value per share, of which 50,000 shares are issued and outstanding and none is held in its treasury. The Company Shares constitute all of the issued and outstanding shares of capital stock of the Company. All of the Company Shares are owned of record, legally, beneficially and exclusively by the Company Stockholders in the amounts identified on Schedule 3.03. The Company Shares are free and clear of any and ------------- all Encumbrances, and upon delivery of the Company Shares hereunder, Buyer will acquire good and valid legal and exclusive title thereto, free and clear of any and all Encumbrances. There are no Security Rights relating to any of the Company Shares. All rights and powers to vote the Company Shares are held exclusively by the Company Stockholders. All -9- of the Company Shares are validly issued, fully paid and nonassessable, were not issued in violation of the terms of any agreement or other understanding, and were issued in material compliance with all applicable federal and state securities or "blue sky" laws and regulations. 3.04. Subsidiaries and Investments. The Company does not own, nor has it ---------------------------- ever owned while under control of Seller, any shares of capital stock of or other equity interest in any corporation, partnership, joint venture or other entity. 3.05. Qualification. To the best of the Company's knowledge, the Company is ------------- duly qualified and in good standing as a foreign corporation and is duly authorized to transact business in each jurisdiction wherein the character of the properties owned or leased by it or the nature of the activities conducted by it makes such qualification and good standing necessary. 3.06. No Violation of Laws or Agreements; Consents. Except as set forth on -------------------------------------------- Schedule 3.06 and to the best of the Company's knowledge, neither the execution - -------------------------------------------------------- and delivery of this Agreement or any Other Agreement to which Seller or the Company, or both, is or is to become a party, the consummation of the transactions contemplated hereby or thereby nor the compliance with or fulfillment of the terms, conditions or provisions hereof or thereof by Seller or the Company, or both, will: (i) contravene any provision of the Governing Documents of Seller or the Company, (ii) conflict with, result in a breach of, constitute a material default or an event of default (or an event that might, with the passage of time or the giving of notice or both, constitute a material default or event of default) under any of the terms of, result in the termination of, result in the loss of any right under, or give to any other Person the right to cause such a termination of or loss under, any material asset of Seller or the Company, including any Permit, Intellectual Property, license, franchise, indenture, mortgage or any other contract, agreement or instrument to which either Seller or the Company is a party or by which any of their assets may be bound or affected, (iii) result in the creation, maturation or acceleration of any material liability or obligation of Seller or the Company (or give to any other Person the right to cause such a creation, maturation or acceleration), (iv) violate any Law or violate any judgment or order of any Governmental Body to which Seller or the Company is subject or by which any of their respective assets may be bound or affected, or (v) result in the creation or imposition of any Encumbrance upon any of the Company Shares or any asset of Seller or the Company or give to any other Person any interest or right therein. Subject to the expiration of the waiting period under the HSR Act, no consent, approval or authorization of, or registration or filing with, any Person is required in connection with the execution or delivery by Seller or the Company, or both, of this Agreement or any of the Other Agreements to which either, or both, is or is to become a party pursuant to the provisions hereof or the consummation by Seller or the Company, or both, of the transactions contemplated hereby or thereby. 3.07. Financial Information. --------------------- (a) Records. The books of account and related records of the Company ------- reflect accurately and in detail its assets, liabilities, revenues, expenses and other transactions. (b) Financial Statements. Attached as Schedule 3.07(b) are the audited -------------------- ---------------- balance sheet, -10- income statement and statement of cash flows for the Company as of the Balance Sheet Date and for the period then ended, and attached hereto as Schedule -------- 3.07(b) are the unaudited interim balance sheet and income statement for the - ------- Company at July 26, 1996 and for the period then ended (collectively, the "Financial Statements"). Except as disclosed on Schedule 3.07(b), the Financial ---------------- Statements (i) are accurate, correct and complete in all material respects in accordance with the books of account and records of the Company, (ii) have been prepared in all material respects in accordance with GAAP on a consistent basis throughout the indicated periods, except that the interim financial statements contain no statement of cash flows, footnotes or year-end adjustments, and (iii) present fairly in all material respects the financial condition, assets and liabilities and results of operations of the Company at the Balance Sheet Date and for the period then ended in accordance with GAAP on a consistent basis throughout the indicated periods. 3.08. Undisclosed Liabilities. The Company has no material debt, obligation ----------------------- or liability, absolute, fixed, contingent or otherwise, of any nature whatsoever, whether due or to become due, including any unasserted claim, whether incurred directly or by any predecessor thereto, and whether arising out of any act, omission, transaction, circumstance, sale of goods or services, state of facts or other condition, except: (i) those reflected or reserved against on the Financial Statements; (ii) those not required under GAAP to be reflected or reserved against in the Financial Statements that are expressly quantified and set forth in the Contracts identified pursuant to Section 3.15; ------------ (iii) those disclosed on Schedule 3.08; and (iv) those of the same nature as ------------- those set forth on the Financial Statements that have arisen in the ordinary course of business of the Company after the Balance Sheet Date through the date hereof, all of which have been consistent in amount and character with past practice and experience, and none of which, individually or in the aggregate, has had or will have, to the best of the Company's knowledge, a material adverse effect on the business, financial condition or prospects of the Company and none of which, to the best of the Company's knowledge, is a liability for breach of contract or warranty or has arisen out of tort, infringement of any intellectual property rights, or violation of Law or is claimed in any pending or threatened legal proceeding. The representations and warranties contained in this Section ------- 3.09 do not apply to the consequences of events occurring prior to April 7, - ---- 1995, except in instances as to which the Company had knowledge of such events. 3.09. No Changes. Since July 26, 1996, the Company has conducted its ---------- business only in the ordinary course. Without limiting the generality of the foregoing sentence, since July 26, 1996, there has not been any: (i) material adverse change in the financial condition, assets, liabilities, net worth, earning power, business or prospects of the Company; (ii) material damage or destruction to any asset of the Company, whether or not covered by insurance; (iii) strike or other labor trouble at the Company; (iv) creation of any Encumbrance on any asset of the Company; (v) declaration or payment of any dividend or other distribution on or with respect to or redemption or purchase by the Company of any shares of capital stock of the Company, including any of the Company Shares; (vi) increase in the salary, wage or bonus of any employee of the Company, other than normal or routine increases; (vii) asset acquisition or expenditure, including capital expenditure, in excess of $250,000 in the aggregate, other than the purchase of inventory in the ordinary course of business; (viii) change in any Company Plan; (ix) change in any method of accounting; (x) payment to or transaction with any Related Party, which payment -11- or transaction is not specifically disclosed on Schedule 3.l8; (xi) ------------- disposition of any asset (other than inventory in the ordinary course of business) for more than $250,000 in the aggregate or for less than fair market value; (xii) payment, prepayment or discharge of any material liability other than in the ordinary course of business or any failure to pay any liability when due, other than in accordance with past practice; (xiii) write-offs or write- downs of any assets of the Company in excess of $250,000 in the aggregate; (xiv) creation, termination or amendment of, or waiver of any right under, any material agreement of the Company; or (xv) agreement or commitment to do any of the foregoing. -12- 3.10. Taxes. ----- (a) Tax Returns; Payment. Since April 7, 1995, except as disclosed on -------------------- Schedule 3.10(a), the Company has filed or caused to be filed on a timely basis, - ---------------- or will file or cause to be filed on a timely basis, all Tax Returns that are required to be filed by it prior to or on the Closing Date, pursuant to the Law of each governmental authority with taxing power over it. All such Tax Returns were or will be, as the case may be, materially correct and complete. The Company has paid all Taxes, to the best of the Company's knowledge, that have become due as shown on such Tax Returns or pursuant to any assessment received as an adjustment to such Tax Returns, except (i) such Taxes, if any, as are being contested in good faith and disclosed on Schedule 3.10, (ii) such Taxes ------------- that are reserved, in material respects, against on the Financial Statements, and (iii) Taxes accruing after the Balance Sheet Date that are not yet due. Other than as set forth on Schedule 3.10(a), the Company is not currently the ---------------- beneficiary of any extension of time within which to file any Tax Return. To the best of the Company's knowledge, no claim has been made by a taxing authority of a jurisdiction where the Company does not file Tax Returns that it is or may be subject to taxation in that jurisdiction. Without limiting the foregoing and to the best of the Company's knowledge, the Company has no material liability for any Tax except (x) Taxes disclosed on Schedule 3.10,(y) Taxes fully reserved on ----------------- the Financial Statements, and (z) Taxes accrued after the Balance Sheet Date. (b) Withholding. To the best of the Company's knowledge, since April 7, ----------- 1995, the Company has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party. (c) Assessments. Except as disclosed on Schedule 3.10(c), there is no ----------- ---------------- pending, or, to the knowledge of Seller or the Company, threatened or anticipated, assessment of any additional Tax relating to any period subsequent to April 7, 1995 against the Company. The Company has not waived any statute of limitations in respect of any Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency for any taxable period subsequent to April 7, 1995. Except as set forth on Schedule 3.10, no Tax audit or examination ------------- is now pending or currently in progress with respect to the Company. (d) Other Matters. Since April 7, 1995, the Company has been a party to an ------------- income tax sharing agreement as disclosed on Schedule 3.10 and none other. The ---------------------------- Company has not filed a consent under Code Section 341(f) concerning collapsible corporations. The Company has not made any payment, nor is it obligated to make any payment, nor is it a party to any agreement that under certain circumstances could obligate it to make any payment, that will not be deductible under Code Sections 280G or 162(m). 3.11. Inventory. All of the inventory owned by the Company is valued on the --------- books and records of the Company and in the Financial Statements at lower of cost or market, the cost thereof being determined on a weighted average cost basis in accordance with GAAP. To the best of the Company's knowledge and subject to reserves for inventory contained in the Financial Statements, (i) none of the Company's inventory is obsolete, slow-moving, has been -13- consigned to others or is on consignment from others and (ii) all inventory of the Company is in good, merchantable and usable condition and is saleable in the ordinary course of business within a reasonable time. 3.12. Receivables. The Company's books and records disclose all trade and ----------- other accounts receivable of the Company ("Receivables") outstanding as of July 26, 1996 presented on an aged basis and separately identifies the name of each account debtor and the total amount of each related Receivable. All Receivables, whether reflected on the Financial Statements or created after the July 26, 1996, arose from bona fide sale transactions of the Company. 3.13. Condition of Assets; Title; Business. The Company is engaged in the ------------------------------------ Business and no other business. To the best of the Company's knowledge, the buildings, fixtures, improvements, machinery, equipment, tools, furniture, improvements and tangible Personal property of the Company, including those reflected on the Financial Statements, are in good operating condition and repair, normal wear and tear excepted, and are suitable for the purposes for which they are used in the Business. The Company has good, marketable and exclusive title to all of such assets shown on the Financial Statements and its other assets which it uses and does not lease; all of such assets are reflected on the Financial Statements or, under GAAP, are not required to be reflected thereon; such owned assets include all assets that are necessary for use in and operation of the Business; and, except as disclosed on Schedule 3.13, none of ------------- such assets is subject to any Encumbrance or impairment, whether due to its condition, utility, collectability or otherwise. 3.14. No Pending Litigation or Proceedings. Except as set forth in Schedule ------------------------------------ -------- 3.14, no action, suit, investigation, claim or proceeding of any nature or kind - ---- whatsoever, whether civil, criminal or administrative, by or before any Governmental Body or arbitrator ("Litigation") is pending or, to the knowledge of Seller and the Company, threatened against or affecting the Company, the Business, any of the Company's assets, any of the Company Shares, or any of the transactions contemplated by this Agreement or any Other Agreement, and there is no basis for any Litigation. Except for credit and collection matters in which the Company is plaintiff and except as disclosed on Schedule 3.14, the Company ------------- has not been a party to any other Litigation since April 7, 1995. There is presently no outstanding judgment, decree or order of any Governmental Body against or affecting the Company, the Business, any of the Company's assets, any of the Company Shares, or any of the transactions contemplated by this Agreement or any Other Agreement. Except for credit and collection matters, the Company does not have pending any Litigation against any third party. 3.15. Contracts; Compliance. Disclosed on Schedule 3.15. 3.17. 3.21. 3.22 --------------------- ------------------------------- or 3.23 is a brief description of each contract, lease, indenture, mortgage, - ------- instrument, commitment or other agreement, arrangement or understanding, oral or written, formal or informal, to which the Company is a party or by which it or its assets may be affected and that (i) is material to the Business or the Company's assets or operations, individually or in the aggregate, (ii) involves the purchase, sale or lease of any asset, materials, supplies, inventory or services in excess of $250,000 per year, (iii) has an unexpired term of more than six months from the date hereof, taking into account the effect of any renewal options, (iv) relates to the borrowing or lending of -14- any money or guarantee of any obligation in excess of $250,000, (v) limits the right of the Company to compete in any line of business or otherwise restricts any right the Company may have, (vi) is an employment or consulting contract involving payment of compensation and benefits in excess of $40,000 per year, or (vii) was not entered into in the ordinary course (each, a "Contract" and collectively, the "Contracts"). Each Contract is a legal, valid and binding obligation of the Company and is in full force and effect. The Company and each other party to each Contract has substantially performed all obligations required to be performed by it thereunder and is not in material breach or default, and is not alleged to be in material breach or default, in any respect thereunder, and no event has occurred and no condition or state of facts exists (or would exist upon the giving of notice or the lapse of time or both) that would become or cause a material breach, default or event of default thereunder, would give to any Person the right to cause such a termination or would cause an acceleration of any obligation thereunder. 3.16. Permits; Compliance With Law. To the best of the Company's knowledge ---------------------------- and except as disclosed on Schedule 3.16: (a) the Company holds all permits, ------------- certificates, licenses, franchises, privileges, approvals, registrations and authorizations required under any applicable Law or otherwise advisable in connection with the operation of its assets and Business (each, a "Permit" and collectively, "Permits"); (b) each Permit is valid, subsisting and in full force and effect; (c) the Company is in material compliance with and has fulfilled and performed its obligations under each Permit, and no event or condition or state of facts exists (or would exist upon the giving of notice or lapse of time or both) that could constitute a material breach or default under any Permit; (d) the Company has not been since April 7, 1995 nor is it currently in violation of any Law and has received no notice of any violation of Law, and no event has occurred or condition or state of facts exists that could give rise to any such violation which would have a material adverse effect; and (e) the Company has not received any notice of non-renewal of any Permit. 3.17. Real Property. Schedule 3.17 discloses and summarizes all real ---------------------------- properties currently owned, used or leased by the Company or in which the Company has an interest (collectively, the "Real Property") and identifies the record title holder or lessor of all of the Real Property. The Company has good and marketable fee simple title to all Real Property shown as owned by it on Schedule 3.17, free and clear of all Encumbrances, other than (i) easements, - ------------- covenants, rights-of-way and other encumbrances or restrictions of record, (ii) zoning restrictions, (iii) liens for current taxes not yet due and (iv) such other Encumbrances as do not either adversely affect the value of the Real Estate or prohibit or materially interfere with the operations of the Business. To the best of the Company's knowledge, the Company has the right to quiet enjoyment of all Real Property in which it holds a leasehold interest for the full term, including all renewal rights, of the lease or similar agreement relating thereto. Copies of all title insurance policies written in favor of the Company and all surveys relating to the Real Property owned by the Company have been delivered to Buyer. Except as shown on such surveys and to the best of the Company's knowledge, all structures and other improvements on all Real Property owned by the Company are within the lot lines and do not encroach on the properties of any other Person. The Company has not received any written notice that its use and operation of any Real Property does not conform to all applicable building, zoning, safety and subdivision Laws, Environmental Laws and other Laws, and any restrictive covenants and restrictions and -15- conditions affecting title. Except as shown on such surveys and in Schedule -------- 3.17, the Company has not received any written or oral notice of assessments for - ---- public improvements or condemnation against any Real Property. 3.18. Transactions With Related Parties. No Related Party is or has been --------------------------------- since April 7, 1995 a party to any transaction, agreement or understanding with the Company except pursuant to arrangements disclosed on Schedule 3.18 and ------------- except for dividends properly reflected as such in the Financial Statements. Except as disclosed on Schedule 3.18, no Related Party uses any assets of the ------------- Company except directly in connection with the Business, and no Related Party owns any asset used in the Business. Except as disclosed on Schedule 3.18, no ------------- Related Party has any claim of any nature, including any inchoate claim, against the Company, and the Company has no claim of any nature, including any inchoate claim, against any Related Party. Except as disclosed on Schedule 3.18, as ------------- otherwise expressly provided hereby or by any Other Agreement or as otherwise may be mutually agreed after Closing, (i) no Related Party will at any time after Closing for any reason, directly or indirectly, be or become entitled to receive any payment or transfer of money or other property of any kind from the Company, and (ii) the Company will not at any time after Closing for any reason, directly or indirectly, be or become subject to any obligation to any Related Party. 3.19. Labor Relations. To the best of the Company's knowledge, the --------------- relations of the Company with its employees are good. Except as disclosed on Schedule 3.19, no employee of the Company is represented by any union or other - ------------- labor organization. No representation election, arbitration proceeding, grievance, labor strike, dispute, slowdown, stoppage or other labor trouble is pending or, to the knowledge of the Company, threatened against, involving, affecting or potentially affecting the Company. No complaint against the Company is pending or, to the knowledge of the Company, threatened before the National Labor Relations Board, the Equal Employment Opportunity Commission or any similar state or local agency, by or on behalf of any employee of the Company. The Company has no contingent liability for sick leave, vacation time, severance pay or any similar item not fully reserved on the Financial Statements, unless under GAAP any such item is not required to be reserved. To the best of the Company's knowledge, the Company has no contingent liability for any occupational disease of any of its employees, former employees or others. To the best of the Company's knowledge, neither the execution and delivery of this Agreement, the performance of the provisions hereof nor the consummation of the transactions contemplated hereby will trigger any severance pay obligation under any contract or under any Law. 3.20. Intentionally left blank 3.21. Insurance. Schedule 3.21 discloses all insurance policies with --------- ------------- respect to which the Company is the owner, insured or beneficiary. Such policies are reasonable, in both scope and amount, in light of the risks attendant to the Business and are substantially comparable in coverage to policies customarily maintained by others engaged in similar lines of business. To the best of the Company's knowledge, except as disclosed in Schedule 3.21, the Company will not ------------- have any liability after the Closing for retrospective or retroactive premium adjustments. Since April 7, 1995, all insurance policies covering products liability and general liability -16- maintained by or for the benefit of the Company are "occurrence" policies and not "claims made" policies. Schedule 3.21 discloses the manner in which the ------------- Company provides coverage for workers' compensation claims. 3.22. Intellectual Property Rights. Schedule 3.22 discloses all of the ---------------------------- ------------- trademark and service mark rights, applications and registrations, trade names, fictitious names, service marks, logos and brand names, copyrights, copyright applications, letters patent, patent applications and licenses of any of the foregoing owned or used by the Company in or applicable to the Business. To the best of the Company's knowledge and in its opinion, the Company has the entire right, title and interest in and to, or has the exclusive perpetual royalty-free right to use, the intellectual property rights disclosed on Schedule 3.22 and ------------- all other processes, know-how, show-how, formulae, trade secrets, inventions, discoveries, improvements, blueprints, specifications, drawings, designs, and other proprietary rights necessary or applicable to or advisable for use in the Business ("Intellectual Property"), free and clear of all Encumbrances. Schedule -------- 3.22 separately discloses all Intellectual Property under license. To the best - ---- of the Company's knowledge and in its opinion, the Intellectual Property is valid and not the subject of any interference, opposition, reexamination or cancellation. To the best of the Company's knowledge, no Person is infringing upon nor has any Person misappropriated any Intellectual Property. To the best of the Company's knowledge and in its opinion, except as disclosed on Schedule -------- 3.22, the Company is not infringing upon the intellectual property rights of any - ---- other Person. -17- 3.23. Employee Benefits. ----------------- (a) Benefit Plans; Company Plans. Schedule 3.23 discloses all written and ---------------------------- ------------- unwritten "employee benefit plans" within the meaning of Section 3(3) of ERISA, and any other written and unwritten profit sharing, pension, savings, deferred compensation, fringe benefit, insurance, medical, medical reimbursement, life, disability, accident, post-retirement health or welfare benefit, stock option, stock purchase, sick pay, vacation, employment, severance, termination or other plan, agreement, contract, policy, trust fund or arrangement (each, a "Benefit Plan"), whether or not funded and whether or not terminated, (i) maintained or sponsored by the Company since April 7, 1995, or (ii) with respect to which the Company (or Seller with respect to the Company) has or may have liability or is obligated to contribute, or (iii) that otherwise covers any of the current or former employees of the Company or their beneficiaries, or (iv) as to which any such current or former employees or their beneficiaries participated or were entitled to participate or accrue or have accrued any rights thereunder (each, a "Company Plan"). To the best of the Company's knowledge, the Company has no liability for any Benefit Plan covering its employees based on the consequence of events occurring after April 7, 1995. (b) Company Group Matters; Funding. No member of the Company Group has any ------------------------------ obligation to contribute to or any direct or indirect liability under or with respect to any Benefit Plan of the type described in Sections 4063 and 4064 of ERISA or Section 413(c) of the Code. The Company does not have any liability, and after the Closing the Company will not have any liability, with respect to any Benefit Plan of any other member of the Company Group, whether as a result of delinquent contributions, distress terminations, fraudulent transfers, failure to pay premiums to the PBGC or otherwise, and based on circumstances existing from and after April 7, 1995 up to and including the date hereof and the Closing Date, the Company does not have any withdrawal liability. No accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code) exists nor has any funding waiver from the IRS been received or requested with respect to any Company Plan or any Benefit Plan of any member of the Company Group and no excise or other Tax is due or owing because of any failure to comply with the minimum funding standards of the Code or ERISA with respect to any of such plans. (c) Compliance. Each of the Company Plans and all related trusts, insurance ---------- contracts and funds have been created, maintained, funded and administered in all respects in compliance, in all material respects, with all applicable Laws and in compliance, in all material respects, with the plan document, trust agreement, insurance policy or other writing creating the same or applicable thereto. No Company Plan is or is proposed to be under audit or investigation, and no completed audit of any Company Plan has resulted in the imposition of any Tax, fine or penalty. (d) Qualified Plans. Schedule 3.23 discloses each Company Plan that --------------- ------------- purports to be a qualified plan under Section 401(a) of the Code and exempt from United States federal income tax under Section 501(a) of the Code (a "Qualified Plan"). With respect to each Qualified Plan, a determination letter (or opinion or notification letter, if applicable) has been received or is pending from the IRS that such plan is qualified under Section 401(a) of the Code and exempt from federal income tax under Section 501(a) of the Code. No Qualified Plan has been amended since the date of the most recent such letter. To the best of the Company's knowledge, no -18- member of the Company Group, nor any fiduciary of any Qualified Plan, nor any agent of any of the foregoing, has done anything that would adversely affect the qualified status of a Qualified Plan or the qualified status of any related trust. (e) Defined Benefit Plans. Schedule 3.23 also discloses each Company Plan ------------------------------------ that is a defined benefit plan as defined in Section 3(35) of ERISA (a "Defined Benefit Plan"). The present value of vested and nonvested accrued benefits under each Defined Benefit Plan does not exceed the present fair market value of the assets of such plan, based on the actuarial assumptions and methodology used for funding purposes (i) as set forth in such plan's most recent actuarial report; (ii) as required by the PBGC on a termination basis; and (iii) as set forth in FASB 87. From and after April 7, 1995, no Defined Benefit Plan sponsored by any member of or covering any employee of the Company has been terminated or partially terminated. To the best of the Company's knowledge, no event has occurred and no condition has existed that could constitute grounds under Section 4042 of ERISA for termination of or appointment of a trustee to administer any Defined Benefit Plan. No member of the Company Group has transferred, in whole or in part, a Defined Benefit Plan to a corporation that was at the time of transfer a member of a different controlled group of corporations (within the meaning of Section 4001(a)(14) of ERISA) than the transferor. To the best of the Company's knowledge, the Company has no liability for any Company Plan that is not accrued on the Financial Statements. (f) Multiemployer Plans. Except as disclosed in Schedule 3.23, no Company ------------------- ------------- Plan is a multiemployer plan within the meaning of Section 3(37) or Section 4001(a)(3) of ERISA (a "Multiemployer Plan"). The Company does not and not have any withdrawal liability to or under any Multiemployer Plan. No Company Plan covers any employees of any member of the Company Group in any foreign country or territory. (g) Prohibited Transactions; Fiduciary Duties; Post-Retirement Benefits. No ------------------------------------------------------------------- prohibited transaction (within the meaning of Section 406 of ERISA and Section 4975 of the Code) with respect to any Company Plan exists or has occurred that could subject the Company to any liability or Tax under Part 5 of Title I of ERISA or Section 4975 of the Code. Neither the Company, nor any administrator or fiduciary of any Company Plan, nor any agent of any of the foregoing, has engaged in any transaction or acted or failed to act in a manner that will subject the Company to any liability for a breach of fiduciary or other duty under ERISA or any other applicable Law. With the exception of the requirements of Section 4980B of the Code, no postretirement benefits are provided under any Company Plan that is a welfare benefit plan as described in ERISA Section 3(1). 3.24. Environmental Matters. Except as disclosed in Schedule 3.24: --------------------- ------------- (a) Compliance; No Liability. To the best of the Company's knowledge, the ------------------------ Company has operated the Business and each parcel of Real Property in compliance, in all material respects, with all applicable Environmental Laws. To the best of the Company's knowledge, the Company is not subject to any liability, penalty or expense (including legal fees) and will not hereafter suffer or incur any loss, liability, penalty or expense (including legal fees) by virtue of any violation of any Environmental Law occurring prior to the Closing, any environmental -19- activity conducted on or with respect to any property at or prior to the Closing or any environmental condition existing on or with respect to any property at or prior to the Closing, in each case whether or not the Company permitted or participated in such act or omission. (b) Treatment; CERCLIS. The Company has not treated, stored, recycled or ------------------ disposed of any Regulated Material on any real property. To the best of the Company's knowledge, there has been no release of and there is not present any Regulated Material at, on or under any Real Property. To the best of the Company's knowledge, the Company has not transported any Regulated Material or arranged for the transportation of any Regulated Material to any location that is listed or proposed for listing on the National Priorities List pursuant to Superfund, on CERCLIS or any other location that is the subject of federal, state or local enforcement action or other investigation that may lead to claims against the Company for cleanup costs, remedial action, damages to natural resources, to other property or for Personal injury including claims under Superfund. To the best of the Company's knowledge, none of the Real Property is listed or, to the knowledge of Seller or the Company, proposed for listing on the National Priorities List pursuant to Superfund, CERCLIS or any state or local list of sites requiring investigation or cleanup. (c) Notices; Existing Claims; Certain Regulated Materials; Storage Tanks. -------------------------------------------------------------------- The Company has not received any request for information, notice of claim, demand or other notification that it is or may be potentially responsible with respect to any investigation, abatement or cleanup of any threatened or actual release of any Regulated Material. The Company is not required to place any notice or restriction relating to the presence of any Regulated Material at any Real Property or in any deed to any Real Property. The Company has provided to Buyer a list of all sites to which the Company has transported any Regulated Material for recycling, treatment, disposal, other handling or otherwise. There has been no past, and there is no pending or contemplated, claim by the Company under any Environmental Law or Laws based on actions of others that may have impacted on the Real Property, and the Company has not entered into any agreement with any Person regarding any Environmental Law, remedial action or other environmental liability or expense. To the best of the Company's knowledge, all storage tanks located on the Real Property, whether underground or aboveground, are disclosed on Schedule 3.24, and all such tanks and ------------- associated piping are in sound condition and are not leaking and have not leaked. 3.25. Customer Relations. There exists no condition or state of facts or ------------------ circumstances involving the Company's customers, suppliers, distributors or sales representatives that the Company can reasonably foresee could materially and adversely affect the Business after the Closing Date. 3.26. Finders' Fees. Neither Seller nor the Company nor any of their ------------- respective officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fee, commission or finders' fee in connection with any of the transactions contemplated hereby or by any Other Agreement. 3.27. Insider Company Debt. The Insider Company Debt outstanding as of -------------------- July 26, -20- 1996 is equal to $63,586,920, consisting of $62,278,895 in principal amount, $361,727 in accrued interest and $946,298 in accrued income taxes, subject to the provisions of Section 5.01(b) hereof permitting amendment to the Revolving --------------- Credit Note evidencing said indebtedness as set forth on Schedule 3.27. ------------- 3.28. Securities Matters. Each of the Company Stockholders is an ------------------ "accredited investor" within the meaning of Rule 501 of the Securities Act. Seller is acquiring the Debt Repayment USF Shares and the Company Stockholders are acquiring the Purchase Price USF Shares not with a view to or in connection with any distribution of such shares. 3.29. Disclosure. To the best knowledge of the Company, none of the ---------- representations or warranties of Seller and the Company contained herein and none of the information contained in the Schedules referred to in Article III is ----------- false or misleading in any material respect or omits to state a fact herein or therein necessary to make the statements herein or therein not misleading in any material respect. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER --------------------------------------- As an inducement to Seller to enter into this Agreement and consummate the transactions contemplated hereby, Buyer represents and warrants to Seller as follows: 4.01. Organization. Buyer is a corporation duly organized, validly ------------ existing and in good standing under the laws of its jurisdiction of organization, and has the corporate power and authority to own or lease its properties, carry on its business, enter into this Agreement and the Other Agreements to which it is or is to become a party and perform its obligations hereunder and thereunder. 4.02. Authorization; Enforceability. This Agreement and each Other ----------------------------- Agreement to which Buyer is a party have been duly executed and delivered by and constitute the legal, valid and binding obligations of Buyer, enforceable against it in accordance with their respective terms. Each Other Agreement to which Buyer is to become a party pursuant to the provisions hereof, when executed and delivered by Buyer, will constitute the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with the terms of such Other Agreement. All actions contemplated by this Section have been duly and validly authorized by all necessary proceedings by Buyer. 4.03. No Violation of Laws; Consents. Neither the execution and delivery ------------------------------ of this Agreement or any Other Agreement to which Buyer is or is to become a party, the consummation of the transactions contemplated hereby or thereby nor the compliance with or fulfillment of the terms, conditions or provisions hereof or thereof by Buyer will: (i) contravene any provision of the Governing Documents of Buyer, or (ii) violate any Law or any judgment or order of any Governmental Body to which Buyer is subject or by which any of its assets may be bound or affected. No consent, approval or authorization of, or registration or filing with, any Person is required in connection with the execution or delivery by Buyer of this Agreement or any of the -21- Other Agreements to which Buyer is or is to become a party pursuant to the provisions hereof or the consummation by Buyer of the transactions contemplated hereby or thereby, except (A) compliance under the HSR Act, (B) the approval, if required, of FNB in connection with Buyer's credit facility with FNB, (C) listing of the Purchase Price USF Shares and Company Debt Repayment USF Shares on the New York Stock Exchange, and (D) registration with the Securities and Exchange Commission as contemplated by the Transfer Agreement. 4.04. No Pending Litigation or Proceedings. No Litigation is pending or, ------------------------------------ to the knowledge of Buyer, threatened against or affecting Buyer in connection with any of the transactions contemplated by this Agreement or any Other Agreement to which Buyer is or is to become a party. There is presently no outstanding judgment, decree or order of any Governmental Body against or affecting Buyer in connection with the transactions contemplated by this Agreement or any Other Agreement to which Buyer is or is to become a party. 4.05. Capitalization. Buyer's authorized capital consists of (i) -------------- 75,000,000 USF Shares, of which 28,118,782 shares were issued and outstanding as of March 31, 1996, and (ii) 3,000,000 shares of Preferred Stock, none of which is issued and outstanding. 4.06. SEC Filings. Buyer has delivered or made available to Seller all ----------- material filings made by USF under the Securities Exchange Act of 1934 since the end of its most recent fiscal year. 4.07. Authorization of USF Shares. The issuance of the Purchase Price USF --------------------------- Shares and the Debt Repayment USF Shares has been duly authorized by Buyer's Board of Directors, and upon issuance and delivery under the terms hereof, all such shares shall be duly authorized by all necessary corporate action, validly issued, fully paid and nonassessable. 4.08. Finders' Fees. Neither Buyer nor any of its officers, directors or ------------- employees has employed any broker or finder or incurred any liability for any brokerage fee, commission or finders' fee in connection with any of the transactions contemplated hereby. ARTICLE V CERTAIN COVENANTS ----------------- 5.01. Conduct of Business Pending Closing. From and after the date hereof ----------------------------------- and until the Closing Date, unless Buyer shall otherwise consent in writing, the Company shall, and Seller shall cause the Company to, conduct its affairs as follows: (a) Ordinary Course; Compliance. The Business shall be conducted only in --------------------------- the ordinary course and consistent with past practice. The Company shall maintain its property, equipment and other assets consistent with past practice and shall comply in a timely fashion with the provisions of all Contracts and Permits and its other agreements and commitments. The Company shall use its best efforts to keep its business organization intact, keep available the services of its present employees and preserve the goodwill of its suppliers, customers and others having business relations with it. The Company shall maintain in full force and effect the -22- policies of insurance disclosed on Schedule 3.21, subject only to variations ------------- required by the ordinary operations of the Business, or else shall obtain, prior to the lapse of any such policy, substantially similar coverage with insurers of recognized standing. (b) Transactions. The Company shall not: (i) amend its Governing ------------ Documents; (ii) change its authorized or issued capital stock or issue any Security Rights with respect to shares of its capital stock; (iii) enter into any contract or commitment the performance of which may extend beyond the Closing, except those made in the ordinary course of business, the terms of which are consistent with past practice; (iv) enter into any employment or consulting contract or arrangement that is not terminable at will and without penalty or continuing obligation; (v) fail to pay any Tax or any other liability or charge when due, other than charges contested in good faith by appropriate proceedings; (vi) make, change or revoke any Tax election or make any agreement or settlement with any taxing authority; (vii) take any action that is reasonably likely to result in the occurrence of any event described in Section ------- 3.09; or (viii) take any action or omit to take any action that will cause a - ---- breach or termination of any Contract, other than termination by fulfillment of the terms thereunder. The foregoing to the contrary notwithstanding, the Company shall be permitted to amend the terms of the Insider Company Debt with the prior consent of Buyer and on terms mutually acceptable to the parties. (c) Access, Information and Documents. Seller and the Company shall give --------------------------------- to Buyer and to Buyer's employees and representatives (including accountants, actuaries, attorneys, environmental consultants and engineers) access during normal business hours to all of the properties, books, Tax Returns, contracts, commitments, records, officers, Personnel and accountants (including independent public accountants and their audit workpapers concerning the Company) of the Company and shall furnish to Buyer all such documents and copies of documents and all information with respect to the properties, liabilities and affairs of the Company as Buyer may reasonably request. 5.02. Monthly Financial Statements. The Company shall promptly deliver to ---------------------------- Buyer copies of any monthly, balance sheet, income statement and statement of cash flow of the Company for each such period after July 26, 1996 through the Closing Date. Such financial statements shall be in conformity with GAAP, consistently applied, and shall fairly present, in all material respects, the financial position and results of operations of the Company as at the dates and for the periods indicated. The delivery to Buyer of such financial statements shall constitute Seller's representation and warranty to Buyer that such financial statements present fairly in all material respects the financial position, assets and liabilities of the Company as of their respective dates and the results of their operations and changes in financial position for the periods covered thereby in accordance with GAAP, consistently applied (excepting period-end accruals and footnotes). Such representation and warranty shall be deemed to have been made under Article III. ----------- 5.03. Acquisition Proposals. Neither Seller nor the Company shall (nor --------------------- shall Seller permit any of their Affiliates to) directly or indirectly, solicit, initiate or encourage any inquiries or the making of any proposals from, engage or participate in any negotiations or discussions with, provide any confidential information or data to, or enter into (or authorize) any agreement -23- or agreement in principle with any Person or announce any intention to do any of the foregoing, with respect to any offer or proposal to acquire all or any substantial part of the assets, properties, or the Business of the Company or the Company Shares, whether by merger, purchase of capital stock or assets or otherwise. 5.04. Notification of Certain Matters. Each party shall give prompt notice ------------------------------- to the other parties hereto of: (i) any event or circumstance with regard to such party that has resulted or may result in any representation or warranty of such party made herein being untrue in any material respect or in the failure of such party to satisfy any of its conditions specified in Article VI, or (ii) any ---------- event which, so far as reasonably can be foreseen at the time of its occurrence, is reasonably likely to result in any material adverse effect on such party. Each party hereto shall give prompt notice to the other parties hereto of any notice or other communication from any third party alleging that the consent of such third party not disclosed herein is or may be required in connection with the transactions contemplated by this Agreement. 5.05. Publicity. Seller and Buyer shall not issue any press release or --------- otherwise make any announcements to the public or the employees of the Company with respect to this Agreement without the prior written consent of the other, except as required by Law. In each instance, all such public announcements shall be mutually acceptable to the parties. This Section shall expire on the 10th day after the Closing Date. 5.06. Fulfillment of Agreements. Each party hereto shall use its best ------------------------- efforts to cause all of those conditions to the obligations of the other under Article VI that are not beyond its reasonable control to be satisfied on or - ---------- prior to the Closing and shall use its best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement. Without limiting the effect of the foregoing, each party hereto shall, and Seller shall cause the Company to, use its best efforts to give or obtain, as promptly as practicable, all Required Authorizations required to be given or obtained by it, respectively, to permit the consummation of the transactions contemplated by this Agreement and to realize the respective benefits to each party contemplated hereby. Without limiting the generality of the foregoing, Seller shall cause the Company to use its best efforts to obtain all approvals or consents of any Person needed in order that the Contracts continue in full force and effect under the same terms and conditions currently in effect following the consummation of the transactions contemplated by the Agreement. 5.07. The HSR Act. Without limiting the effect of Section 5.06, the parties ----------- ------------ hereto shall file promptly with the Federal Trade Commission notifications required under the HSR Act. The parties hereto shall not intentionally or negligently delay submission of information requested by the Federal Trade Commission or the Antitrust Division of the Department of Justice under the HSR Act and shall use their respective best efforts promptly to supply, or cause to be supplied, such information and shall use their respective best efforts to obtain early termination of the applicable waiting period. 5.08. Covenant Not to Compete. ----------------------- -24- (a) Covenant. Except as hereinafter provided, for a period of thirty months -------- from and after the Closing Date, Seller shall not, directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be connected as an officer, employee, stockholder, partner or otherwise with, (i) any business conducting business under any name similar to the name of Company or Buyer, or (ii) any business which directly or indirectly competes with the Business of the Company in the United States; provided, however, that the foregoing covenant shall not apply to (Y) ownership interests of Seller or any of its Affiliates in the common stock of Buyer or in the common stock or assets of any other entity whose common stock was or is publicly traded and whose business may be deemed competitive with the Company, and (Z) conduct of business in the usual and ordinary course as presently conducted by Seller and its Affiliates (other than the Company), including the making of acquisitions and other growth of such business on a consistent basis (i.e., not including with respect to any acquired entity more than 33% of its revenue from any activity in which the Business is engaged) which may be deemed competitive with the Company. (b) Enforcement. The restrictive covenant contained in this Section is a ----------- covenant independent of any other provision of this Agreement and the existence of any claim that Seller may allege against any other party to this Agreement, whether based on this Agreement or otherwise, shall not prevent the enforcement of this covenant. Seller agrees that Buyer's remedies at law for any breach or threat of breach by Seller of the provisions of this Section will be inadequate, and that Buyer shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Section and to enforce specifically the terms and provisions hereof, in addition to any other remedy to which Buyer may be entitled at law or equity. In the event of litigation regarding the covenant not to compete, the prevailing party in such litigation shall, in addition to any other remedies the prevailing party may obtain in such litigation, be entitled to recover from the other party its legal fees and out of pocket costs incurred by such party in enforcing or defending its rights hereunder. The length of time for which this covenant not to compete shall be in force shall not include any period of violation or any other period required for litigation during which Buyer seeks to enforce this covenant. Should any provision of this Section be adjudged to any extent invalid by any competent tribunal, such provision will be deemed modified to the extent necessary to make it enforceable. 5.09 Income Tax Returns; Section 338(h)(10) Election; Liability for Income --------------------------------------------------------------------- Taxes. For purposes of this section (i) "Income Taxes" shall mean all Federal, - ----- state, and local income or franchise taxes and assessments, including all interest, penalties and additions imposed with respect to such amounts, (ii) "Seller Consolidated Returns" shall mean all income or franchise tax returns, forms and reports required to be filed for periods ending on or before the Closing Date in which the Company is included as a member of Seller's consolidated group, and (iii) "Separate Company Returns" is defined in section 5.09(c). -25- (a) Buyer intends to make an election pursuant to Section 338(g) of the Code with respect to the Company Shares purchased hereunder (the "Section 338 Election"). Seller shall join with Buyer in the timely filing of a joint election pursuant to Section 338(h)(10) of the Code under which, for federal (and for certain states) income tax purposes, the sale of the Company Shares is treated as if it were a sale of all of the assets of such Company in a single transaction on the Closing Date, with the Company being treated as a member of Seller's consolidated group with respect to such sale. Seller and Buyer agree to cooperate fully in order to make such election pursuant to Section 338(h)(10) valid, including, but not limited to, the filing of Form 8023-A and any accompanying statements or schedules that may be required on a timely basis. The allocation of Buyer's "adjusted grossed-up basis" (within the meaning of Treas. Reg. Sec. 1.338(b)-l(c)) among the tangible and intangible assets of the Company shall be mutually determined by the parties within 30 days after the Closing Date. Such allocation shall be used by Seller, Buyer, and the Company for purposes of allocating the "deemed sale price" (as described in Treas. Reg. Sec. 1.338(h)(10)-1(f)(2)(ii)), and Seller, Buyer, and the Company shall not file any tax return or schedule that is inconsistent with such allocation. (b) Seller shall timely prepare and file with the appropriate authorities all Seller Consolidated Returns or amendments thereof (including, without limitation, Federal change reports filed with states). Seller shall promptly pay all Income Taxes due with respect to Seller Consolidated Returns, including the tax liability occasioned by a Section 338 Election. Seller hereby indemnifies Buyer against all liability for Income Taxes due on Seller Consolidated Returns, including without limitation, any Income Taxes due as a result of examination adjustments made by the Internal Revenue Service or by the applicable state or local taxing authorities. (c) With respect to all jurisdictions with which Company is required to file income or franchise tax returns, forms and reports on a separate company basis, Buyer and Seller agree to file all such returns on the basis that the relevant taxable period ended as of the close of business on the Closing Date. Seller shall timely prepare and file all such separate company income or franchise tax returns, forms and reports for periods beginning before and ending on or before the Closing Date (such returns hereinafter referred to as "Company Separate Returns"). Buyer shall file all such separate company income or franchise returns, forms and reports for all other periods (such returns hereinafter referred to as "Buyer Separate Returns"). Income, gains, deductions and losses attributable to a Section 338 Election and reportable to separate company jurisdictions shall be included in Buyer Separate Returns, and Buyer shall be solely responsible for the resulting tax liability. Seller shall promptly pay all Income Taxes due with respect to Company Separate Returns, other than the tax liability occasioned by a Section 338 Election. Seller hereby indemnifies Buyer against all liability for Income Taxes due on Company Separate Returns, including without limitation, any Income Taxes due as a result of examination adjustments made by the applicable state or local taxing authorities, other than the tax liability occasioned by a Section 338 Election. (d) Seller shall have full responsibility for and control over (including the power to settle or litigate) any audit or other proceeding relating to a Seller Consolidated Return or Company Separate Return. If Buyer or the Company receives notice of the commencement of any such -26- audit or proceeding, it shall promptly inform Seller thereof in writing. Any failure to promptly give such notice will relieve Seller of liability hereunder to the extent that such failure adversely affects the ability of Seller to defend its interests with respect thereto. If Sellers receive notice of the commencement of an audit or proceeding involving an income or franchise tax return for a period which includes the Company, other than a Seller Consolidated Return or Company Separate Return, it shall promptly inform Buyer or the Company thereof in writing. (e) With respect to any Seller Consolidated Return or Company Separate Return, any refunds of income Taxes, other than a refund attributable solely to a loss carryback from a taxable period beginning on or after and ending on or after the Closing Date, shall be for the account of Seller. (f) Buyer and Seller recognize that each of them may need access from time to time, after the Closing Date, to certain tax records and information held by Seller and the Company to the extent such records and information pertain to events occurring prior to the Closing Date; therefore, Buyer, Seller and the Company agree to use their best efforts to properly retain and maintain such records for a reasonable period of time and, upon written request, to provide records to the other party that such other party deems necessary or appropriate. (g) The tax-sharing agreement, as set forth in Schedule 3.10 shall remain in full force and effect until the Closing Date, at which date such agreement shall be terminated, null and void and of no effect. Prior to the termination of such agreement and in accordance with its terms, the Company shall be charged or receive credits for income tax liabilities in the same manner and to the same extent as the Company would have been charged or received credits for income tax liabilities if the sale of its stock were not being contemplated or effectuated pursuant to this Agreement. Except to the extent provided in Section 5.09(h), the Company shall not receive a charge or credit for income tax liabilities attributable to a Section 338 Election. (h) Immediately prior to the Closing Date, Seller shall estimate, with respect to each jurisdiction in which a Seller Consolidated Return is filed, the amount of Federal, state or local income or franchise taxes (1) that arise from Seller's joining with Buyer in the timely filing of a joint election pursuant to Section 338(h)(10) of the Code, and (2) for which Seller would have been liable had it not joined in the making of an election pursuant to Section 338(h)(10) of the Code, i.e., the tax liability associated with a sale of the Company stock (the amount of the excess of (1) over (2), if any, shall be hereinafter referred to as the "Excess Section 338(h)(10) Tax Liability", and the amount of the excess of (2) over (1), if any, shall be hereinafter referred to as the "Section 338(h)(10) Tax Credit"). Immediately prior to the Closing Date, Seller shall charge the Company for an amount equal to the Excess Section 338(h)(10) Tax Liability or credit the Company for an amount equal to the Section 338(h)(10) Tax Credit, as the case may be. As soon as practical after the Closing Date, Seller shall finally determine the amount of the excess Section 338(h)(10) Tax Liability or Section 338(h)(10) Tax Credit. Seller shall promptly reimburse Buyer or Buyer shall promptly reimburse Seller, as the case may be, to the extent the Excess Section 338(h)(10) Tax Liability or Section 338(h)(10) Tax Credit, as finally determined, differs from the original estimate of such amounts. For purposes of determining the tax liability associated with a sale of the Company stock (for purposes of the first sentence of this section -27- 5.09(h)), any reduction in the basis of the Company stock held by Seller at the Closing Date as required under Treas. Reg. Sec. 1.1502-32(b) and which is attributable to compensation deductions taken by the Company pursuant to Section 421(b) of the Code during the taxable period ending on the closing date, shall be disregarded. 5.9. Certain Benefit and Employee Matters. As of the Closing Date, the ------------------------------------ Company's financial records will reflect an accrued liability for payments to eligible employees of the Company who have earned profit sharing under its Performance Pays Profit Sharing Plan ("PPPSP") and who are listed and disclosed in Schedule 5.10(a) (to be prepared and delivered within 21 days from the date of this Agreement) pursuant to the terms of PPPSP. Any employee of the Company whose employment with the Company is terminated on the Closing Date or whose employment with the Company is terminated after the Closing Date but prior to December 31, 1996 will be entitled to receive payment under the PPPSP within five business days after Closing Date or termination of employment, as the case may be, to the extent accrued on the Financial Statements. Payments to all other employees pursuant to PPPSP who are listed and disclosed on Schedule 5.10(a) ---------------- shall be made by the Company on or about January 10, 1997. Seller hereby represents to Buyer that the accrued liability on the Financial Statements accurately reflects the liability of the Company under the PPPSP as of the dates thereof. At the Closing Date, all employees of the Company shall at Buyer's option remain employees of the Company and shall be allowed to participate as of the Closing Date in the medical and dental benefit plans and life and disability insurance plans and 401(k) plan paid by for the Company as employees of the Company with a waiver of any waiting period and of any pre-existing condition limitations. To the extent permitted by applicable law and their terms of such plans, their period of service with the Company of all such retained employees shall be recognized for eligibility purposes under the Company Benefit Plans according to established eligibility requirements. In addition, if the Closing Date falls within an annual period of coverage under any group health plan or group dental plan of the Company, each such retained employee shall be given credit for covered expenses paid by that employee under the comparable benefit plans, other than benefit plans the cost of which are paid entirely by the employee, during the applicable coverage period through the Closing Date towards satisfaction of any deductible limitation and out-of-pocket maximum that may apply under the group health plan or group dental plan of the company excluding any and all plan co-payments. Attached as Schedule 5.10(c) is a list of key ---------------- executives of the Company that currently have employment agreements with the Company. Except for payments accrued and payable under the PPPSP, Seller will be responsible for and shall hold Buyer harmless for any and all payments, obligations, liabilities thereunder. At the Closing, Buyer shall cause the Company to offer employment to those employees listed on Schedule 5.10 in the -------------------- form of a letter agreement attached hereto as Schedule 5.10(d). - --------------------------------------------- 5.11. Benefits Under Stock Purchase Agreement. Seller hereby assigns to --------------------------------------- Buyer any and all benefits of that certain written Stock Purchase Agreement dated March 2, 1995 by and among Seller, Consolidated Electrical Distribution, Inc., Eastern Enterprises and Water Products Group, Inc. ARTICLE VI CONDITIONS TO CLOSING; TERMINATION ---------------------------------- -28- 6.01. Conditions Precedent to Obligation of Buyer. The obligation of Buyer ------------------------------------------- to proceed with the Closing under this Agreement is subject to the fulfillment prior to or at Closing of the following conditions, any one or more of which may be waived in whole or in part by Buyer at Buyer's sole option: (c) Bringdown of Representations and Warranties; Covenants. Each of the ------------------------------------------------------ representations and warranties of Seller and the Company contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date, with the same force and effect as though such representations and warranties had been made on, as of and with reference to the Closing Date. Each of Seller and the Company shall have performed in all respects all of the covenants and complied with all of the provisions required by this Agreement to be performed or complied with by it at or before the Closing. (d) Litigation. No statute, regulation or order of any Governmental Body ---------- shall be in effect that restrains or prohibits the transactions contemplated hereby or that would limit or adversely affect Buyer's ownership of the Company Shares or control of the Company, and there shall not have been threatened, nor shall there be pending, any action or proceeding by or before any Governmental Body challenging the lawfulness of or seeking to prevent or delay any of the transactions contemplated by this Agreement or any of the Other Agreements or seeking monetary or other relief by reason of the consummation of any of such transactions. (e) No Material Adverse Change. Between the date hereof and the Closing -------------------------- Date, there shall have been no material adverse change, regardless of insurance coverage therefor, in the Business or any of the assets, results of operations, liabilities, prospects or condition, financial or otherwise, of the Company. (f) Closing Certificate. Seller shall have delivered a certificate, dated ------------------- the Closing Date, in such detail as Buyer shall request, certifying to the fulfillment of the conditions set forth in subparagraphs (a), (b) and (c) of this Section 6.01. Such certificate shall constitute a representation and ------------ warranty of Seller with regard to the matters therein for purposes of this Agreement. (g) Required Authorizations. All Required Authorizations necessary for the ----------------------- consummation of the transactions contemplated by this Agreement and the Other Agreements shall have been obtained; provided, however, that the consent of FNB ----------------- shall not be a condition to the obligation of Buyer to proceed with the transactions contemplated hereby. Without limiting the foregoing, (i) any applicable waiting period (and any extension thereof) required under any law to consummate the transactions contemplated by this Agreement and the Other Agreements shall have expired or been terminated without any indication by the relevant governmental body, such as the Federal Trade Commission or the Justice Department, that it intends to take any further action, (ii) the Company shall have complied in all respects with any applicable state notification laws, and (iii) neither Buyer nor the Company shall have any continuing liability or obligation with respect to the matters contained in clauses (i) or (ii) immediately preceding as a result of the consummation of the transactions contemplated hereby. -29- (h) Resignation of Officers and Directors. Each director and officer of the ------------------------------------- Company shall have tendered his or her written resignation from such position with the Company effective as of the Closing. (i) Closing Documents. Buyer shall have received the other documents ----------------- referred to in Section 6.03(a). All agreements, certificates, opinions and other --------------- documents delivered by Seller or the Company to Buyer hereunder shall be in form and substance satisfactory to counsel for Buyer, in the exercise of such counsel's reasonable professional judgment. (j) Private Placement. Buyer shall be satisfied that there shall be a valid ----------------- private placement of the USF Shares to be delivered pursuant hereto under the Securities Act and under any applicable state securities laws, including representations or questionnaires or both from each Company Stockholder to the effect that each has such knowledge and experience in financial and business matters that would permit him to be capable of evaluating the merits and risks of an investment in the USF Shares. (k) Transfer Agreement. The Transfer Agreement shall have been executed and ------------------ delivered by Seller. (l) Listing on NYSE. The USF Shares to be issued pursuant hereto shall have --------------- been authorized for listing on the NYSE, subject to official notice of issuance. (m) Consents. The Company shall have received the consents, approvals and -------- actions of the Persons referred to in Section 3.06 and Schedule 3.06. ------------ ------------- (n) Estoppel Certificates. Seller shall have used its best efforts to --------------------- obtain received estoppel certificates in form and substance satisfactory to Buyer from each of the lessors of the leases identified in Schedule 3.17. ------------- (o) USF Shares Average Value. The USF Shares Average Value shall equal or ------------------------ exceed $21.375. (p) New Jersey ISRA. The Company shall have obtained a letter of non- --------------- applicability under the New Jersey Industrial Site Recovery Act (PL 1993, Ch. 39) with respect to the Company's operations in New Jersey. 6.02. Conditions Precedent to Obligation of Seller. The obligation of -------------------------------------------- Seller to proceed with the Closing under this Agreement is subject to the fulfillment prior to or at Closing of the following conditions, any one or more of which may be waived in whole or in part by Seller at Seller's sole option: (a) Bringdown of Representations and Warranties; Covenants. Each of the ------------------------------------------------------ representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date, with the same force and effect as though such -30- representations and warranties had been made on, as of and with reference to the Closing Date. Buyer shall have performed all of the covenants and complied in all respects with all of the provisions required by this Agreement to be performed or complied with by it at or before the Closing. (b) Litigation. No statute, regulation or order of any Govermnental Body ---------- shall be in effect that restrains or prohibits the transactions contemplated hereby, and there shall not have been threatened, nor shall there be pending, any action or proceeding by or before any Governmental Body challenging the lawfulness of or seeking to prevent or delay any of the transactions contemplated by this Agreement or the Other Agreements or seeking monetary or other relief by reason of the consummation of such transactions. (c) Closing Certificate. Buyer shall have delivered a certificate, dated ------------------- the Closing Date, in such detail as Seller shall request, certifying to the fulfillment of the conditions set forth in subparagraphs (a) and (b) of this Section 6.02. Such certificate shall constitute a representation and warranty of - ------------ Buyer with regard to the matters therein for purposes of this Agreement. (d) Required Authorizations. All Required Authorizations necessary for the ----------------------- consummation of the transactions contemplated by this Agreement and the Other Agreements shall have been obtained; provided, however, that the consents of the ----------------- parties identified on Schedule 3.06 shall not be a condition to the obligation ------------- of Seller to Close state notification or similar laws. Without limiting the foregoing, any applicable waiting period (and any extension thereof) required under any law to consummate the transactions contemplated by this Agreement and the Other Agreements shall have expired or been terminated without any indication by the relevant governmental body, such as the Federal Trade Commission or the Justice Department, that it intends to take any further action. (e) Closing Documents. Seller shall also have received the other documents ----------------- referred to in Section 6.03(b). All agreements, certificates, opinions and other --------------- documents delivered by Buyer to Seller hereunder shall be in form and substance satisfactory to counsel for Seller, in the exercise of such counsel's reasonable professional judgment. (f) Transfer Agreement. Buyer shall have executed and delivered the ------------------ Transfer Agreement. (g) Listing on NYSE. The USF Shares to be issued pursuant hereto shall have --------------- been authorized for listing on the NYSE, subject to official notice of issuance. (h) Bonds. All bid bonds and performance bonds maintained by the Company on ----- the Closing Date shall be replaced with bonds of Buyer. (i) USF Shares Average Value. The USF Shares Average Value shall not exceed ------------------------ $32.125. 6.03. Deliveries and Proceedings at Closing. ------------------------------------- -31- (a) Deliveries by Seller. Seller shall deliver or cause to be delivered to -------------------- Buyer at the Closing: (i) Certificates representing the Company Shares duly endorsed in negotiable form or accompanied by stock powers duly executed in blank, with all transfer taxes, if any, paid in full. (ii) Certificates of the appropriate public officials to the effect that each of Seller, the Company was a validly existing corporation in good standing in its state of incorporation as of a date not more than 10 days prior to the Closing Date. (iii) Incumbency and specimen signature certificates dated the Closing Date, signed by the officers of Seller and the Company and certified by their respective Secretaries. (iv) True and correct copies of (A) the Governing Documents (other than the bylaws) of Seller and the Company as of a date not more than 10 days prior to the Closing Date, certified by the Secretaries of State of their respective states of incorporation and (B) the bylaws of Seller and the Company as of the Closing Date, certified by their respective Secretaries. (v) Certificates of the respective Secretaries of Seller and the Company (A) setting forth all resolutions of the Board of Directors of Seller, the Company and, if necessary, the stockholders of Seller, as the case may be, authorizing the execution and delivery of this Agreement and the performance by Seller or the Company of the transactions contemplated hereby, and (B) to the effect that the Governing Documents of Seller or the Company, as the case may be, delivered pursuant to Section 6.03(a)(iv) were in effect at the date of ------------------- adoption of such resolutions, the date of execution of this Agreement and the Closing Date. (vi) General releases by all directors of the Company and by Seller of all liability of the Company to them and of any claim that they or any of them may have against the Company (exclusive of taxes, salaries and fringe benefits disclosed on Schedule 6.03(a)(vi) or as otherwise disclosed herein), ------------------------------------------------------ and general releases by the Company and Buyer to the Company's directors and Seller of all liability of the Company's directors and Seller to the Company and any claim that the Company may have against them. (vii) The minute books, stock ledgers and corporate seal of the Company. (viii) The opinion of Bernard E. Lyons, legal counsel to Seller and the Company, in form and substance satisfactory to Buyer. (ix) Resignations of the officers and directors of the Company effective at the Closing. (x) Powers of Attorneys or agency agreements, in form and substance satisfactory to Buyer, granting to Seller the right, obligation and power to deliver the Company Shares held -32- by each Company Stockholder. (xi) Such other agreements and documents as Buyer may reasonably request. (b) Deliveries by Buyer. Buyer shall deliver or cause to be delivered to ------------------- Seller at the Closing: (i) Certificates representing the Debt Repayment USF Shares and the Purchase Price USF Shares with applicable legends. (ii) A certificate of the appropriate public official to the effect that Buyer is a validly existing corporation in its state of incorporation as of a date not more than 10 days prior to the Closing Date. (iii) Incumbency and specimen signature certificates signed by the officers of Buyer and certified by the Secretary of Buyer. (iv) True and correct copies of the Governing Documents, certified by the Secretary of Buyer. (v) A certificate of the Secretary of Buyer (A) setting forth all resolutions of the Board of Directors of Buyer authorizing the execution and delivery of this Agreement and the performance by Buyer of the transactions contemplated hereby, certified by the Secretary of Buyer and (B) to the effect that the Governing Documents of Buyer delivered pursuant to Section 6.03(b)(iv) ------------------- were in effect at the date of adoption of such resolutions, the date of execution of this Agreement and the Closing Date. (vi) The opinion of Damian C. Georgino, General Counsel to Buyer, in form and substance satisfactory to Seller; (vii) Such other agreements and documents as Seller may reasonably request. 6.04. Termination. This Agreement may be terminated at any time prior to ----------- Closing by: (i) mutual consent of Buyer, Seller and the Company; (ii) Buyer, if any of the conditions specified in Section 6.01 hereof shall not have been ------------ fulfilled by November 30, 1996 and shall not have been waived by Buyer; or (iii) Seller, if any of the conditions specified in Section 6.02 hereof shall not have ------------ been fulfilled by November 30, 1996 and shall not have been waived by Seller. In the event of termination of this Agreement by either Buyer or Seller pursuant to clause (ii) or (iii) of the immediately preceding sentence, Buyer, on the one hand, and Seller and the Company, on the other hand, shall be liable to the other for any breach hereof by such party, which breach led to such termination, and the rights and obligations of the parties set forth in Sections 7.02, 7.03 ------------------- and 8.01 shall survive such termination. Buyer, on the one hand, and Seller and ---- the Company, on the other hand, shall also be entitled to seek any other remedy to which it may be entitled at law or in equity in the event of such termination, which remedies shall include injunctive relief and specific performance. Notwithstanding the foregoing, in the event that this -33- Agreement is terminated by one party hereto pursuant to clause (ii) or (iii) of the first sentence of this Section solely as a result of a breach by another party hereto of a representation or warranty of such other party as of a date after the date of this Agreement, which breach could not have been reasonably anticipated by such other party and was beyond the reasonable control of such other party, then the remedy of the party terminating this Agreement shall be limited solely to recovery of all of such party's costs and expenses incurred in connection herewith. ARTICLE VII SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION -------------------------------------------- 7.01. Survival of Representations. All representations, warranties and --------------------------- agreements made by any party in this Agreement or pursuant hereto shall survive the Closing, but all claims for damages made by virtue of such representations, warranties and agreements shall be made under, and subject to the limitations set forth in, this Article VII. The representations and warranties set forth in ----------- Articles III and IV are cumulative, and any limitation or qualification set - ------------ -- forth in any one representation and warranty therein shall not limit or qualify any other representation and warranty therein. After Closing, the Company shall have no liability to Seller for any breach of any representation or warranty made by Seller to Buyer in this Agreement, in any certificate or document furnished pursuant hereto by Seller or the Company or any Other Agreement to which Seller or the Company, or both, is or is to become a party. 7.02. Indemnification by Seller. Seller and, if there shall be no Closing, ------------------------- the Company shall indemnify, defend, save and hold Buyer and its officers, directors, employees, agents and Affiliates (including, after the Closing, the Company; collectively, "Buyer Indemnitees") harmless from and against all demands, claims, allegations, assertions, actions or causes of action, assessments, losses, damages, deficiencies, liabilities, costs and expenses (including reasonable legal fees, interest, penalties, and all reasonable amounts paid in investigation, defense or settlement of any of the foregoing, whether or not any such demands, claims, allegations, etc., of third parties are meritorious; collectively, "Buyer Damages") asserted against, imposed upon, resulting to, required to be paid by or incurred by any Buyer Indemnitees, directly or indirectly, in connection with, arising out of, which could result in, or which would not have occurred but for, (i) a breach of any representation or warranty made by Seller in this Agreement, in any certificate or document furnished pursuant hereto by Seller or any Other Agreement to which Seller is or is to become a party, and (ii) a breach or nonfulfillment of any covenant or agreement made by Seller or the Company in or pursuant to this Agreement or in any Other Agreement to which Seller or the Company, or both, is or is to become a party. 7.03. Indemnification by Buyer. Buyer shall indemnify, defend, save and ------------------------ hold Seller and its officers, directors, employees, Affiliates and agents (collectively, "Seller Indemnitees") harmless from and against any and all demands, claims, actions or causes of action, assessments, losses, damages, deficiencies, liabilities, costs and expenses (including reasonable legal fees, interest, penalties, and all reasonable amounts paid in investigation, defense or settlement of any of the foregoing, whether or not any such demands, claims, allegations, etc., of third parties are meritorious; collectively, "Seller Damages") asserted against, imposed upon, resulting to, required to be paid by or incurred by any Seller Indemnitees, directly or indirectly, in connection -34- with, arising out of, which could result in, or which would not have occurred but for, (i) a breach of any representation or warranty made by Buyer in this Agreement or in any certificate or document furnished pursuant hereto by Buyer or any Other Agreement to which Buyer is a party and (ii) a breach or nonfulfillment of any covenant or agreement made by Buyer in or pursuant to this Agreement and in any Other Agreement to which Buyer is a party. 7.04. Limitation of Liability. Notwithstanding the foregoing, Seller's ----------------------- obligations to indemnify Buyer Indemnitees against any Buyer Damages shall be subject to all of the following limitations: (a) Threshold. No indemnification shall be made under either Sections 7.02 --------- ------------- or 7.03 until the aggregate amount of Buyer Damages thereunder exceeds $250,000 ---- if the aggregate amount of Buyer Damages thereunder exceeds $250,000, indemnification shall be made by Seller thereunder to the full extent of Buyer Damages. (b) Ceiling. Subject to Section 7.04(a), no indemnification shall be made ------- --------------- either Sections 7.02 or 7.03 to the extent that Buyer's Damages exceed, in the ------------- ---- aggregate, $3.0 million. (c) Time Period. Seller shall be obligated to indemnify Buyer Indemnitees ----------- by virtue of either Sections 7.02 or 7.03 only for those Buyer Damages as to ------------- ---- which Buyer has given Seller written notice thereof within one year after the Closing Date; provided, however, that, with respect to any claim for Buyer -------- ------- Damages sustained by reason of a breach of any representation and warranty governed by Sections 3.03 and 3.10 Seller's liability hereunder shall survive for 5 years after the Closing Date. (d) Fraud; Intentional Misrepresentation. The limitations set forth in Sections 7.04(a), (b) and (c) shall not apply to Buyer Damages arising out of - ----------------------------- (i) fraud, (ii) the breach of any representation or warranty contained herein or pursuant hereto if such representation or warranty was made with actual knowledge that it contained an untrue statement of a fact or omitted to state a fact necessary to make the statements of facts contained therein not misleading, or (iii) the breach by Seller of the representations and warranties set out in Section 3.18. - ------------ (e) Form of Payment. All Buyer Damages and Seller Damages (collectively --------------- "Damages") payable hereunder at any time shall be paid in cash. 7.05. Intentionally left blank. 7.06. Notice of Claims. If any Buyer Indemnitee or Seller Indemnitee (an ---------------- "Indemnified Party") believes that it has suffered or incurred or will suffer or incur any Buyer Damages or Seller Damages, as the case may be ("Damages"), for which it is entitled to indemnification under this Article VII, such Indemnified ----------- Party shall so notify the party or parties from whom indemnification is being claimed (the "Indemnifying Party") with reasonable promptness and reasonable particularity in light of the circumstances then existing. If any action at law or suit in equity is instituted by or against a third party with respect to which any Indemnified Party intends to claim any Damages, such Indemnified Party shall promptly notify -35- the Indemnifying Party of such action or suit. The failure of an Indemnified Party to give any notice required by this Section shall not affect any of such party's rights under this Article VII or otherwise except and to the extent that ----------- such failure is actually prejudicial to the rights or obligations of the Indemnified Party. 7.07. Third Party Claims. The Indemnified Party shall have the right to ------------------ conduct and control, through counsel of its choosing, the defense of any third party claim, action or suit, and the Indemnified Party may compromise or settle the same, provided that the Indemnified Party shall give the Indemnifying Party advance notice of any proposed compromise or settlement. The Indemnified Party shall permit the Indemnifying Party to participate in the defense of any such action or suit through counsel chosen by the Indemnifying Party, provided that the fees and expenses of such counsel shall be borne by the Indemnifying Party. If the Indemnified Party permits the Indemnifying Party to undertake, conduct and control the conduct and settlement of such action or suit, (i) the Indemnifying Party shall not thereby permit to exist any Encumbrance upon any asset of the Indemnified Party; (ii) the Indemnifying Party shall not consent to any settlement that does not include as an unconditional term thereof the giving of a complete release from liability with respect to such action or suit to the Indemnified Party; (iii) the Indemnifying Party shall permit the Indemnified Party to participate in such conduct or settlement through counsel chosen by the Indemnified Party; and (iv) the Indemnifying Party shall agree promptly to reimburse the Indemnified Party for the full amount of any Damages including fees and expenses of counsel for the Indemnified Party incurred after giving the foregoing notice to the Indemnifying Party and prior to the assumption of the conduct and control of such action or suit by the Indemnifying Party. 7.08. Good Faith Efforts to Settle Disputes. The parties agree that, prior ------------------------------------- to commencing any litigation against the other concerning any matter with respect to which such party intends to claim a right of indemnification in such proceeding, the chief executive officers of Buyer and Seller shall meet in a timely manner and attempt in good faith to negotiate a settlement of such dispute during which time such individuals shall disclose to the others all relevant information relating to such dispute. If a dispute arises relating to this Agreement which is not settled or resolved by the parties as aforesaid, it will be decided finally by three arbitrators in an arbitration proceeding conforming to the rules of the American Arbitration Association applicable to commercial arbitrations; said arbitrators shall be appointed as follows: one by Seller, one by Buyer and the third by said two arbitrators, or, if they cannot agree, then the third arbitrator shall be appointed by the American Arbitration Association. Said arbitration shall take place in Los Angeles, California, and the decision of a majority of said arbitrators shall be binding and final upon the parties, and their decision shall be enforceable as a judgment in a court of competent jurisdiction. At the request of either party, the American Arbitration Association shall mediate the dispute between the parties prior to commencing arbitration. The cost of such mediation and/or arbitration shall be shared equally between the parties hereto, except that each party shall pay its own attorneys' and witness fees. 7.09 Failure to Close. In the event that Buyer elects not to consummate the ---------------- transactions contemplated hereby as provided in Section 6.01(m), then Buyer --------------------------- shall pay to Seller a lump sum fee equal to $2.0 million. In the event that - --------------------------------------------------------- Seller elects not to consummate the -36- transactions contemplated hereby as provided in Section 6.02(i), then Seller ---------------------------- shall pay to Buyer a lump sum fee equal to $2.0 million. Such payment shall be - -------------------------------------------------------- made within 30 days after receipt of written notice that such party is unwilling to proceed with the transaction as provided in Section 6.01(m) or Section --------------- ------- 6.02(i), respectively. - -------- ARTICLE VIII MISCELLANEOUS ------------- 8.01. Costs and Expenses. Buyer and Seller shall each pay its respective ------------------ expenses, brokers' fees and commissions, and Seller shall pay all of the expenses of the Company incurred in connection with this Agreement and the transactions contemplated hereby, including all accounting, legal and appraisal fees and settlement charges. 8.02. Further Assurances. Seller shall, at any time and from time to time ------------------ on and after the Closing Date, upon request by Buyer and without further consideration, take or cause to be taken such actions and execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such instruments, documents, transfers, conveyances and assurances as may be required or desirable for the better conveying, transferring, assigning, delivering, assuring and confirming the Company Shares to Buyer or any of the assets used in the Business to the Company. 8.03. Notices. All notices and other communications given or made pursuant ------- to this Agreement shall be in writing and shall be deemed to have been duly given or made (i) the second business day after the date of mailing, if delivered by registered or certified mail, postage prepaid, (ii) upon delivery, if sent by hand delivery, (iii) upon delivery, if sent by prepaid courier, with a record of receipt, or (iv) the next day after the date of dispatch, if sent by cable, telegram, facsimile or telecopy (with a copy simultaneously sent by registered or certified mail, postage prepaid, return receipt requested), to the parties at the following addresses: (i) if to Buyer, to: United States Filter Corporation 40-004 Cook Street Palm Desert, CA 92211 Attention: Chief Executive Officer Telecopier: (619)341-9368 with a copy to: Damian C. Georgino, Esq. Vice President, General Counsel and Secretary United States Filter Corporation 40-004 Cook Street Palm Desert, CA 92211 Telecopy: (619) 341-1060 -37- (ii) if to Seller, to: Keith W. Colburn, President Edmundson International, Inc. P.O. Box 1287 Northbrook, lL 60065 Telecopy: (847) 498-7893 with a required copy to: Bernard E. Lyons Attorney at Law 1516 Pontius Avenue Los Angeles, CA 90025 Telecopy: (310) 473-1746 Notices to the Company shall be addressed in care of Seller before Closing and in care of Buyer after Closing. Any party hereto may change the address to which notice to it, or copies thereof, shall be addressed, by giving notice thereof to the other parties hereto in conformity with the foregoing. 8.04. Currency. All currency references herein are to United States -------- dollars. -38- 8.05. Offset; Assignment; Governing Law. Buyer shall be entitled to offset --------------------------------- or recoup from any amounts due to Seller from Buyer hereunder or under any Other Agreement against any obligation of Seller to Buyer hereunder or under any Other Agreement. This Agreement and all the rights and powers granted hereby shall bind and inure to the benefit of the parties hereto and their respective permitted successors and assigns. This Agreement and the rights, interests and obligations hereunder may not be assigned by any party hereto without the prior written consent of the other parties hereto, except that Buyer may make such assignments to any Affiliate of Buyer provided that Buyer remains liable hereunder. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to its conflict of law doctrines. 8.06. Amendment and Waiver; Cumulative Effect. To be effective, any --------------------------------------- amendment or waiver under this Agreement must be in writing and be signed by the party against whom enforcement of the same is sought. Neither the failure of any party hereto to exercise any right, power or remedy provided under this Agreement or to insist upon compliance by any other party with its obligations hereunder, nor any custom or practice of the parties at variance with the terms hereof shall constitute a waiver by such party of its right to exercise any such right, power or remedy or to demand such compliance. The rights and remedies of the parties hereto are cumulative and not exclusive of the rights and remedies that they otherwise might have now or hereafter, at law, in equity, by statute or otherwise. 8.07. Entire Agreement; No Third Party Beneficiaries. This Agreement and ---------------------------------------------- the Schedules and Exhibits set forth all of the promises, covenants, agreements, conditions and undertakings between the parties hereto with respect to the subject matter hereof, and supersede all prior or contemporaneous agreements and understandings, negotiations, inducements or conditions, express or implied, oral or written. This Agreement is not intended to confer upon any Person other than the parties hereto any rights or remedies hereunder, except the provisions of Sections 7.02 and 7.03 relating to Buyer Indemnitees and Seller Indemnitees. 8.08. Severability. If any term or other provision of this Agreement is ------------ held by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced under any rule of Law in any particular respect or under any particular circumstances, such term or provision shall nevertheless remain in full force and effect in all other respects and under all other circumstances, and all other terms, conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible. 8.09. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall be deemed to be one and the same instrument. -39- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. EDMUNDSON INTERNATIONAL, INC. By: /s/ Signature ------------------------------- Title: Vice President -------------------------- UNITED STATES FILTER CORPORATION By: /s/ Signature ------------------------------- Title: Chairman/CEO -------------------------- WATERPRO SUPPLIES CORPORATION By: /s/ Signature ------------------------------- Title: President -------------------------- -40- EX-12.1 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands)
Three Months Ended Fiscal Year Ended March 31, June 30, --------------------------------- ----------------- 1994 1995 1996 1995 1996 ------- ------ ------ ------ ------ Income before interest and income taxes $(5,055) 23,123 40,647 8,617 14,815 Portion of rental expense deemed to represent interest 2,174 2,678 2,997 647 625 ------- ------ ------ ----- ------ Earnings (loss) before fixed charges $(2,881) 25,801 43,644 9,264 15,440 ======= ====== ====== ===== ====== Interest expense $ 4,044 7,514 14,419 3,012 4,390 Portion of rental expense deemed to represent interest 2,174 2,678 2,997 647 625 ------- ------ ------ ----- ------ Fixed charges $(2,881) 25,801 43,644 9,264 15,440 ======= ====== ====== ===== ====== Ratio of earnings to fixed charges n/a 2.5x 2.5x 2.5x 3.1x ======= ====== ====== ===== ====== Deficiency of earnings to fixed charges $(9,099) n/a n/a n/a n/a ======= ====== ====== ===== ======
EX-23.1 5 CONSENTS OF KPMG EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Shareholders United States Filter Corporation We consent to the use of our reports included herein and the reference to our firm under the heading "Independent Certified Public Accountants" in the prospectus. KPMG Peat Marwick LLP Orange County, California October 16, 1996 To the Board of Directors and Shareholders United States Filter Corporation We consent to the use of our reports included herein and the reference to our firm under the heading "Independent Certified Public Accountants" in the prospectus. KPMG Peat Marwick LLP Chicago, Illinois October 16, 1996 To the Board of Directors and Shareholders United Utilities PLC We consent to the use of our report included herein and the reference to our firm under the heading "Independent Certified Public Accountants" in the prospectus. KPMG Audit Plc Manchester, England October 16, 1996 EX-23.2 6 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-3 of United States Filter Corporation of our report dated June 13, 1996 relating to the consolidated financial statements of Davis Water & Waste Industries, Inc., which appears in such Prospectus. We also consent to the reference to us under the heading "Independent Certified Public Accountants" in such Prospectus. Price Waterhouse LLP Atlanta, Georgia October 16, 1996 EX-23.3 7 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Independent Certified Public Accountants" in the Registration Statement (Form S-3) and related Prospectus of United States Filter Corporation for the registration of $201,250,000 of Convertible Subordinated Notes and to the incorporation by reference therein of our report dated February 8, 1996, except for Notes 4 and 10, as to which the date is May 10, 1996, with respect to the consolidated financial statements of Zimpro Environmental, Inc. included in the Current Report on Form 8-K of United States Filter Corporation dated May 31, 1996, filed with the Securities and Exchange Commission. Ernst & Young LLP Minneapolis, Minnesota October 15, 1996 EX-23.4 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report and to all references to our Firm included in or made a part of this registration statement. Arthur Andersen LLP Minneapolis, Minnesota October 16, 1996 -----END PRIVACY-ENHANCED MESSAGE-----