-----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, Bpm2iQJ6qpm62tt95jJ2mMuEFV3shME+W0NPC408hUHXZjYb2n87tvNSXuaHvoIV l+hR+lxLqHtzBjmQUo2Ldw== 0000944209-98-001489.txt : 19980814 0000944209-98-001489.hdr.sgml : 19980814 ACCESSION NUMBER: 0000944209-98-001489 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-09534 FILM NUMBER: 98686635 BUSINESS ADDRESS: STREET 1: 40-004 COOK ST CITY: PALM DESERT STATE: CA ZIP: 92211 BUSINESS PHONE: 7603400098 MAIL ADDRESS: STREET 1: 40-004 COOK STREET CITY: PALM DESERT STATE: CA ZIP: 92211 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 10-Q 1 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 and 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended JUNE 30, 1998 ------------- or [_] Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission file number 1-10728 ------- UNITED STATES FILTER CORPORATION -------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 33-0266015 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 40-004 COOK STREET, PALM DESERT, CA 92211 ------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (760) 340-0098 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- The number of shares of common stock, $.01 par value, outstanding as of August 12, 1998 was 163,575,176 shares. Total number of pages 23 -- THERE IS ONE EXHIBIT FILED WITH THIS REPORT PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND JUNE 30, 1998 (UNAUDITED)
March 31, 1998 June 30, 1998 --------------- ------------- (in thousands) ASSETS Current assets: Cash and cash equivalents $ 66,917 58,847 Short-term investments 241 417 Accounts receivable, net 873,890 993,063 Costs and estimated earnings in excess of billings on uncompleted contracts 217,935 209,386 Inventories 473,698 492,051 Prepaid expenses 16,471 33,228 Deferred taxes 151,107 186,228 Other current assets 51,377 54,572 ---------- --------- Total current assets 1,851,636 2,027,792 ---------- --------- Property, plant and equipment, net 960,019 996,608 Investment in leasehold interests, net 21,699 21,049 Costs in excess of net assets of businesses acquired, net 1,312,776 1,367,756 Other assets 319,315 275,050 ---------- --------- $4,465,445 4,688,255 ========== =========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 2 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND JUNE 30, 1998 (CONTINUED) (UNAUDITED)
March 31, 1998 June 30, 1998 -------------- ------------- (in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 357,260 369,983 Accrued liabilities 535,329 593,427 Current portion of long-term debt 118,849 20,554 Billings in excess of costs and estimated earnings on uncompleted contracts 90,073 72,006 Other current liabilities 45,702 101,545 ---------- --------- Total current liabilities 1,147,213 1,157,515 ---------- --------- Notes payable 574,806 329,810 Long-term debt, excluding current portion 404,416 74,364 Convertible subordinated debentures 554,000 554,000 Redeemable or remarketable securities - 900,000 Deferred taxes 82,910 67,390 Other liabilities 110,662 147,000 ---------- --------- Total liabilities 2,874,007 3,230,079 ---------- --------- Shareholders' equity: Preferred stock, authorized 3,000 shares - - Common stock, par value $.01. Authorized 300,000 shares; 155,825 and 161,811 shares issued and outstanding at March 31, 1998 and June 30, 1998, respectively 1,558 1,618 Additional paid-in capital 1,945,223 1,990,004 Currency translation adjustment (57,282) (64,189) Accumulated deficit (298,061) (469,257) ---------- --------- Total shareholders' equity 1,591,438 1,458,176 ---------- --------- Commitments and contingencies $4,465,445 4,688,255 ========== =========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
1997 1998 ------------- -------------- (in thousands, except per share data) Revenues $792,936 1,119,331 Costs of sales 597,573 788,169 -------- --------- Gross profit 195,363 331,162 -------- --------- Selling, general and administrative expenses 154,250 223,164 Purchased in-process research and development - 3,558 Merger, restructuring, acquisition and other related charges - 257,920 -------- --------- 154,250 484,642 -------- --------- Operating income (loss) 41,113 (153,480) -------- --------- Other income (expense): Interest expense (10,995) (25,648) Gain on disposition of investment in affiliate 31,098 - Interest and other income, net 1,917 4,127 -------- --------- 22,020 (21,521) -------- --------- Income (loss) before income taxes and extraordinary item 63,133 (175,001) Income tax expense (benefit) 23,416 (19,604) -------- --------- Income (loss) before extraordinary item 39,717 (155,397) Extraordinary item (422) - -------- --------- Net income (loss) $ 39,295 (155,397) ======== ========= Net income (loss) per common share: Basic $ 0.31 (0.98) ======== ========= Diluted $ 0.30 (0.98) ======== =========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
1997 1998 --------- --------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 39,295 (155,397) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Deferred income taxes (5,265) (50,650) Provision for doubtful accounts 2,364 6,120 Depreciation 19,464 25,696 Amortization 7,581 12,769 Merger, restructuring, acquisition and other related cash charges - 155,396 Write-off of in-process research and development and goodwill - 40,818 Gain on disposition of investment in affiliate (31,098) - (Gain) loss on sale or disposal of property, plant and equipment (27) 29,937 Change in operating assets and liabilities: Increase in accounts receivable (55,341) (75,304) (Increase) decrease in costs and estimated earnings in excess of billings on uncompleted contracts (15,192) 13,287 Increase in inventories (22,533) (4,727) Increase in other assets (3,688) (16,857) Increase in accounts payable and accrued expenses 61,356 24,166 Increase (decrease) in billings in excess of costs and estimated earnings on uncompleted contracts 3,928 (30,470) Increase (decrease) in other liabilities (18,257) 37,377 -------- -------- Net cash provided by (used in) operating activities (17,413) 12,161 -------- -------- Cash flows from investing activities: Payment for purchase of property, plant and equipment (30,075) (43,206) Payment for purchase of acquisitions, including certain merger and restructuring charges, net of cash acquired (73,816) (237,251) Proceeds from disposal of equipment 400 2,837 Proceeds from disposition of investment in affiliate 50,897 - Sale (purchase) of short-term investments 1,571 (176) -------- -------- Net cash used in investing activities (51,023) (277,796) -------- --------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1998 (CONTINUED) (UNAUDITED)
1997 1998 -------- --------- (in thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of remarketable or redeemable securities - 913,637 Net proceeds from issuance of common stock 683 - Proceeds from exercise of common stock options 465 723 Principal payments on debt (8,156) (440,765) Net (payments) proceeds from borrowings on notes payable 10,462 (216,030) Dividends paid (50) - -------- -------- Net cash provided by financing activities 3,404 257,565 -------- -------- Net decrease in cash and cash equivalents (65,032) (8,070) Cash and cash equivalents at March 31, 1997 and 1998 144,128 66,917 -------- -------- Cash and cash equivalents at June 30, 1997 and 1998 $ 79,096 58,847 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 12,806 28,989 ======== ======== Cash paid during the period for income taxes $ 2,964 13,469 ======== ========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. Operations and Significant Accounting Policies ---------------------------------------------- The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such regulations. The condensed consolidated financial statements reflect all adjustments and disclosures which are, in the opinion of management, necessary for a fair presentation of the information contained therein. All such adjustments are of a normal recurring nature. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto that are contained in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. The results of operations for the interim periods are not necessarily indicative of the results of the full fiscal year. Income (Loss) per Common Share - ------------------------------ Income (loss) per common share is computed based on the weighted average number of shares outstanding and in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". Dilutive securities consisting of convertible preferred stock, convertible subordinated debt and common stock options are included in the computation of income (loss) per dilutive share when their effect is dilutive. Accordingly, "Basic EPS" and "Diluted EPS" were calculated as follows:
Three Months Ended June 30, ----------------------------- 1997 1998 ------------ -------------- (in thousands, except per share data) BASIC Net income (loss) applicable to common shares $ 39,295 (155,397) ======== ======== Weighted average common shares outstanding 126,087 158,524 ======== ======== Basic income (loss) per common share $ 0.31 (0.98) ======== ========
7
Three Months Ended June 30, ------------------------- 1997 1998 ---------- ------------ (in thousands, except per share data) DILUTED Net income (loss) applicable to common shares $ 39,295 (155,397) Add: Effect on net income of conversion of convertible subordinated debentures 5,066 - * -------- ------- Adjusted net income (loss) applicable to common shares 44,361 (155,397) ======== ======== Weighted average shares outstanding 126,087 158,524 Add: Assumed conversion of subordinated debentures 18,119 - * Exercise of options and assumed conversion of subordinated debentures 2,266 - * -------- -------- Adjusted weighted average shares outstanding 146,472 158,524 ======== ======== Diluted income (loss) per common share $ 0.30 (0.98) ======== ======== - -----------------
* The calculation of Diluted EPS does not assume conversion of subordinated debentures or exercise of stock options for the three months ended June 30, 1998 as the effect would be antidilutive to loss per share. Under the treasury stock method, the exercise of all outstanding options would have increased the weighted average number of shares by 3.0 million for the three months ended June 30, 1998. Note 2. Inventories ----------- Inventories at March 31, 1998 and June 30, 1998 consist of the following:
March 31, 1998 June 30, 1998 -------------- ------------- (in thousands) Raw materials $130,501 139,703 Work-in-progress 102,198 94,520 Finished goods 240,999 257,828 -------- ------- $473,698 492,051 ======== =======
8 Note 3. Debt ---- Notes Payable. As of June 30, 1998, the Company had a Senior Credit Facility which provides credit facilities to the Company of up to $750.0 million, of which there were outstanding borrowings of $329.8 million and outstanding letters of credit of $50.4 million. Borrowings under the Senior Credit Facility bear interest at variable rates of up to 0.45% above certain Eurocurrency rates or 0.15% above BankBoston's base rate. The Senior Credit Facility expires December 2001 and is subject to customary and usual terms. Remarketable or Redeemable Securities Issuance. On May 15, 1998, the Company issued $500.0 million 6.375% Remarketable or Redeemable Securities due 2011 (remarketing date May 15, 2001) and $400.0 million 6.50% Remarketable or Redeemable Securities due 2013 (remarketing date May 15, 2003) (collectively, the "ROARS"). The net proceeds from the sale of the ROARS, including a premium payment to the Company by Nationsbanc Montgomery Securities LLC, were $913.6 million. The net proceeds were used to repay indebtedness under the Senior Credit Facility, indebtedness assumed in the acquisition of Memtec, and a portion of the indebtedness assumed in the acquisition of Culligan Water Technologies, Inc. ("Culligan"). Note 4. Acquisition ----------- On June 15, 1998, a wholly owned subsidiary of the Company and Culligan consummated a merger and acquisition in a tax-free reorganization pursuant to a definitive Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Palm Water Acquisition Corp. ("Merger Sub"), a wholly owned subsidiary of the Company, and Culligan. Pursuant to the Merger Agreement, Merger Sub has been merged with and into Culligan (the "Merger"). The Company issued 48.6 million shares of the Company's common stock for all of the outstanding common stock of Culligan (1.875 shares of the Company's common stock for each outstanding share and each outstanding option or other right to acquire a share of Culligan common stock, par value $.01). In addition, the Company assumed approximately $491.7 million of third party institutional debt. Culligan is a leading manufacturer and distributor of water purification and treatment products and services for household, consumer and commercial applications. Products and services offered by Culligan range from those designed to solve residential water problems, such as filters for tap water and household softeners, to equipment and services, such as ultrafiltration and microfiltration products. Culligan also offers desalination systems and portable deionization services ("PDS"), designed for commercial and industrial applications. In addition, Culligan sells and licenses its dealers to sell under the Culligan trademark five-gallon bottled water. The Merger has been accounted for as a pooling of interests and, accordingly, the condensed consolidated financial statements and notes thereto for all periods presented have been restated to include the accounts of Culligan. Reconciliation of results of operations of the combined entities for the three months ended June 30, 1997 are as follows:
Three Months Ended June 30, 1997 -------------- (in thousands) Revenues: Company (as previously reported) $693,533 Culligan 99,403 -------- Combined $792,936 ======== Net income: Company (as previously reported) $ 12,703 Culligan 26,592 -------- Combined $ 39,295 ========
9
Three Months Ended June 30, 1997 ------------- Income per common share: Basic: As previously reported $0.15 ===== As restated $0.31 ===== Diluted: As previously reported $0.15 ===== As restated $0.30 =====
Concurrent with the merger with and into Culligan, the Company designed and implemented a restructuring plan to streamline its manufacturing and production base, redesign its distribution network, improve efficiency and enhance its competitiveness. The restructuring plan resulted in a pre-tax charge of $257.9 million. Included in the charge is approximately $49.2 million of merger expenses incurred to consummate the Culligan transaction including investment banking fees, printing fees, stock transfer fees, legal fees, accounting fees, governmental filing fees and certain other transaction costs. The plan identifies certain manufacturing facilities, distribution sites, sales and administrative offices, retail outlets and certain related assets that became redundant upon consummation of the Culligan transaction. As a result, the restructuring plan included the closing or reconfiguring of certain facilities and the reduction of the combined work force by approximately 950 employees. In addition, the plan impaired certain carrying amounts of goodwill and other intangible assets in accordance with SFAS 121, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In determining the amount of impairment of these assets, the Company valued the assets using the present value of estimated expected future cash flows using discount rates commensurate with the risks involved. The components of the merger, restructuring, acquisition and other related charges are as follows:
(in thousands) Merger, integration and other acquisitions costs $ 89,773 Write-off of duplicative assets and lease terminations 79,982 Severance, relocation and related costs 50,649 Write-off of goodwill and other intangible assets 37,516 -------- Total merger, restructuring, acquisition and other related charges $257,920 ======== Cash charges $155,396 Non-cash charges 102,524 -------- $257,920 ========
Approximately $86.2 million of merger and restructuring related charges are included in accrued liabilities at June 30, 1998. Additional costs to complete the restructuring plan are not expected to be material. Prior to the Company's acquisition of Culligan, Culligan acquired Protean plc, including Protean's Analytical and Thermal Division ("A&T"). In connection with the acquisition of A&T, the Company recorded a charge of $3.6 million for purchased in-process research and development projects that had not reached technological feasibility and that had no alternative future use. After an income tax benefit of $50.5 million, the charges detailed above totaling $261.5 million reduced earnings by $211.0 million. 10 Note 5. Comprehensive Income -------------------- In the current period, the Company adopted SFAS 130 "Reporting Comprehensive Income", which establishes standards for disclosing comprehensive income in both annual and interim financial statements. Accordingly, the Company's comprehensive income was as follows:
Three Months Ended June 30, -------------------- 1997 1998 -------- --------- Net income (loss) $39,295 (155,397) Foreign currency translation adjustments (8,178) (6,907) ------- -------- Comprehensive income (loss) $31,117 (162,304) ======= ========
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Revenues. Revenues for the three months ended June 30, 1998 were $1.1 billion, an increase of $326.4 million or 41.2% from the $792.9 million for the three months ended June 30, 1997. This increase was due primarily to acquisitions completed by the Company subsequent to June 30, 1997. For the three months ended June 30, 1998, revenues from capital equipment sales represented 44.6% of total revenues. Revenues from services, operations, replacement parts and consumables represented 22.5% of total revenues, while revenues from distribution represented 21.4% of total revenues and revenues from consumer products represented 11.5% of total revenues. Gross Profit. Gross profit as a percentage of revenue ("gross margin") was 29.6% for the three months ended June 30, 1998 compared to 24.6% in the corresponding period in the prior year. These increases in gross margin for the three months ended June 30, 1998 were due primarily to (i) efficiencies realized as a result of the Company's reorganization plan implemented in the third quarter of the prior year; (ii) certain economies of scale related to the Company's significant growth including enhanced purchasing power; (iii) favorable product mix in the current quarter resulting from the Company's emphasis on selling higher margin value added products and services in the current quarter; and (iv) the incurrence of certain unreimbursed project costs during the quarter ended June 30, 1997 recorded by Kinetics, which was acquired as of December 31, 1997 and accounted for as a pooling of interests. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended June 30, 1998 were $223.2 million before purchased in-process research and development and merger, restructuring, acquisition and other related charges described below ("certain charges"), an increase of $68.9 million or 44.7% from the $154.3 million for the three months ended June 30, 1997. The increase in these expenses can be attributed primarily to the addition of sales and administrative personnel accompanying the Company's acquisitions completed subsequent to June 30, 1997. During the current period, selling, general and administrative expenses (before certain charges) were 19.9% of revenues compared to 19.5% for the comparable period in the prior year. Merger, Restructuring, Acquisition and Other Related Charges. Concurrent with the merger with and into Culligan, the Company designed and implemented a restructuring plan to streamline its manufacturing and production base, redesign its distribution network, improve efficiency and enhance its competitiveness. This restructuring plan resulted in a pre-tax charge of $257.9 million. Included in the charge is approximately $49.2 million of merger expenses incurred to consummate the Culligan transaction including investment banking fees, printing fees, stock transfer fees, legal fees, accounting fees, governmental filing fees and certain other transaction costs. The plan identifies certain manufacturing facilities, distribution sites, sales and administrative offices, retail outlets and certain related assets that became redundant upon consummation of the Culligan transaction. As a result, the restructuring plan included the closing or reconfiguring of certain facilities and the reduction of the combined work force by approximately 950 employees. In addition, the plan impaired certain carrying amounts of goodwill and other intangible assets in accordance with SFAS 121, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In determining the amount of impairment of these assets, the Company valued the assets using the present value of estimated expected future cash flows using discount rates commensurate with the risks involved. The components of the merger, restructuring, acquisition and other related charges are as follows: 12
(in thousands) Merger, integration and other acquisitions costs $ 89,773 Write-off of duplicative assets and lease terminations 79,982 Severance, relocation and related costs 50,649 Write-off of goodwill and other intangible assets 37,516 -------- Total merger, restructuring, acquisition and other related charges $257,920 ======== Cash charges $155,396 Non-cash charges 102,524 -------- $257,920 ========
Approximately $86.2 million of merger and restructuring related charges are included in accrued liabilities at June 30, 1998. Additional costs to complete the restructuring plan are not expected to be material. Prior to the Company's acquisition of Culligan, Culligan acquired Protean plc, including Protean's Analytical and Thermal Division ("A&T"). In connection with the acquisition of A&T, the Company recorded a charge of $3.6 million for purchased in-process research and development projects that had not reached technological feasibility and that had no alternative future use. After an income tax benefit of $50.5 million, the charges detailed above totaling $261.5 million reduced earnings by $211.0 million. Interest Expense. Interest expense increased to $25.6 million for the three months ended June 30, 1998 from $11.0 million for the corresponding period in the prior year. Interest expense for the three months ended June 30, 1998 consisted primarily of interest on the Company's (i) 6.0% Convertible Subordinated Notes issued on September 18, 1995 due 2005, (ii) 4.5% Convertible Subordinated Notes issued on December 11, 1996 due 2001, (iii) 6.375% Remarketable or Redeemable Securities issued May 15, 1998 due 2011 (Remarketing Date May 15, 2001), (iv) 6.5% Remarketable or Redeemable Securities due 2013 (Remarketing date May 15, 2003), (v) other long-term debt bearing interest at rates ranging from 2.0% to 10.1% and (vi) borrowings under the Company's Senior Credit Facility. At June 30, 1998, the Company had cash and short-term investments of $59.3 million. Income Taxes. The Company recorded an income tax benefit of $19.6 million for the three months ended June 30, 1998 as compared to income tax expense of $23.4 million in the comparable period in the prior year. Before non-recurring charges, income tax expense was $30.9 million or an effective tax rate of 35.7% for the three months ended June 30, 1998 as compared to 37.1% for the comparable period in the prior year. Net Income. Income before non-recurring charges for the three months ended June 30, 1998 was $55.6 million, an increase of $15.9 million from the $39.7 million for the three months ended June 30, 1997. After non-recurring charges, net loss in the three months ended June 30, 1998 was $155.4 million as compared to net income of $39.3 million in the corresponding period in the prior year. (Net income in quarter ended June 30, 1997 included a one-time after tax gain of $18.8 million or $0.15 per diluted share on Culligan's disposition of an investment in an affiliate.) Net income (loss) per common share for the three months ended June 30, 1997 and 1998 were as follows:
Three Months Ended June 30, ------------------- 1997 1998 -------- -------- Basic $0.31 (0.98) ===== ===== Diluted $0.30 (0.98) ===== =====
13 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 Senior Credit Facility. At June 30, 1998, the Company had working capital of $870.3 million including cash and short-term investments of $59.3 million. On May 15, 1998, the Company issued $500.0 million 6.375% Remarketable or Redeemable Securities due 2011 (remarketing date May 15, 2001) and $400.0 million 6.50% Remarketable or Redeemable Securities due 2013 (remarketing date May 15, 2003) (collectively, the "ROARS"). The net proceeds from the sale of the ROARS, including a premium payment to the Company by Nationsbanc Montgomery Securities LLC, were $913.6 million. The net proceeds were used to repay indebtedness under the Senior Credit Facility, indebtedness assumed in the acquisition of Memtec, and a portion of the indebtedness assumed in the acquisition of Culligan. The Company's long-term debt at June 30, 1998 consisted of (i) $140.0 million of 6.0% Convertible Subordinated Notes due 2005; (ii) $414.0 million of 4.5% Convertible Subordinated Notes due 2001; (iii) $500.0 million of ROARS due 2011 (remarketing date May 15, 2001); (iv) $400.0 million of ROARS due 2013 (remarketing date May 15, 2003); (v) other long-term debt of $94.9 million bearing interest at rates ranging from 2.0% to 10.1%. As of June 30, 1998, the Company had a Senior Credit Facility which provides credit facilities to the Company of up to $750.0 million, of which there were outstanding borrowings of $329.8 million and outstanding letters of credit of $50.4 million. Borrowings under the Senior Credit Facility bear interest at variable rates of up to 0.45% above certain Eurocurrency rates or 0.15% above BankBoston's base rate. The Senior Credit Facility expires December 2001 and is subject to customary and usual terms. The Company believes its current cash position, cash flow from operations, and available borrowings under the Company's Senior Credit Facility will be adequate to meet its anticipated cash needs from working capital, revenue growth, scheduled debt repayment and capital investment objectives for at least the next twelve months. CERTAIN TRENDS AND UNCERTAINTIES The Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the United States Securities and Exchange Commission and in its reports to stockholders. In connection with the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company; any such statement is qualified by reference to the following cautionary statements. Acquisition Strategy. In pursuit of its strategic objective of becoming the leading global single-source provider of water and wastewater treatment systems and services, the Company has, since 1991, acquired more than 150 United States based and international businesses. The Company plans to continue to pursue acquisitions that expand the segments of the water and wastewater treatment and water-related industries in which it participates, complement its technologies, products or services, broaden its customer base and geographic areas served and/or expand its global distribution network, as well as acquisitions which provide opportunities to further and implement the Company's one-stop-shop approach in terms of technology, distribution or service. The Company's acquisition strategy entails the potential risks inherent in assessing the value, strengths, weaknesses, contingent or other liabilities and potential profitability of acquisition candidates and in integrating the operations of acquired companies. In addition, the Company's acquisition of Memtec was accomplished through an unsolicited tender offer, and the Company could make other such acquisitions. The level of risk associated with such acquisitions is generally greater because frequently they are accomplished, as was the case with the acquisition of Memtec, without the customary representations or due diligence typical of negotiated transactions. Although the Company generally has been successful in pursuing acquisitions, there can be no assurance that acquisition opportunities will continue to be available, that the 14 Company will have access to the capital required to finance potential acquisitions, that the Company will continue to acquire businesses or that any business acquired will be integrated successfully or prove profitable. International Transactions. The Company has made and expects it will continue to make acquisitions and expects to obtain contracts in markets outside the United States. In addition, a substantial portion of the business of a wholly owned subsidiary of the Company includes non-U.S. sales. While these activities may provide important opportunities for the Company to offer its products and services internationally, they also entail the risks associated with conducting business internationally, including the risk of currency fluctuations, slower payment of invoices, the lack in some jurisdictions of well-developed legal systems, nationalization and possible social, political and economic instability. In particular, the Company has significant operations in Asia which have been and may in the future be adversely affected by current economic conditions in that region. While the full impact of this economic instability cannot be predicted, it could have a material adverse effect on the Company's revenues and profitability. Reliance on Key Personnel. The operations of the Company are dependent on the continued efforts of senior management, in particular Richard J. Heckmann, the Company's Chairman of the Board, President and Chief Executive Officer. The Company has entered into an employment agreement with Mr. Heckmann, and the Company is considering employment agreements for other members of senior management, most of whom do not currently have such agreements, although the names of such members have yet to be determined. There can be no assurance that the Company will enter into employment agreements with members of senior management. Should any of the Company's senior managers be unable or choose not to continue in their present roles, the Company's prospects could be adversely affected. Profitability of Fixed Price Contracts. A significant portion of the Company's revenues are generated under fixed price contracts. To the extent that original cost estimates are inaccurate, scheduled deliveries 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, Seasonality and Possible Earnings Fluctuations. 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 derived from capital equipment sales. While the Company sells capital equipment to customers in diverse industries and in global markets, cyclicality of capital equipment sales and instability of general economic conditions, including those currently unfolding in Asian markets, could have a material adverse effect on the Company's revenues and profitability. The sale of water and wastewater distribution equipment and supplies is also cyclical and influenced by various economic factors including interest rates, land development and housing construction industry cycles. Sales of such equipment and supplies are also subject to seasonal fluctuation in temperate climates. The sale of water and wastewater distribution equipment and supplies is a significant component of the Company's business. Cyclicality and seasonality of water and wastewater distribution equipment and supplies sales could have a material adverse effect on the Company's revenues and profitability. The Company's high-purity process piping systems have been sold principally to companies in the semiconductor and, to a lesser extent, pharmaceutical and biotechnology industries, and sales of those systems are critically dependent on these industries. The success of customers and potential customers for high- purity process piping systems is linked to economic conditions in these respective industries, which in turn are each subject to intense competitive pressure and are affected by overall economic conditions. The semiconductor industry in particular has historically been, and will likely continue to be, cyclical in nature and vulnerable to general downturns in the economy. The semiconductor and pharmaceutical industries also represent significant markets for the Company's water and wastewater treatment systems. Downturns in these industries could have a material adverse effect on the Company's revenues and profitability. 15 Operating results from the sale of high-purity process piping systems also can be expected to fluctuate significantly as a result of the limited pool of existing and potential customers for these systems, the timing of new contracts, possible deferrals or cancellations of existing contracts and the evolving and unpredictable nature of the markets for high-purity process piping systems. As a result of these and other factors, the Company's operating results may be subject to quarterly or annual fluctuations. There can be no assurance that at any given time the Company's operating results will meet or exceed stock market analysts' expectations, in which event the market price of the common stock could be adversely affected. Potential Environmental Risks. The Company's business and products may be significantly influenced by the constantly changing body of environmental laws and regulations, which require that certain environmental standards be met and impose liability for the failure to comply with such standards. The Company is also subject to inherent risks associated with environmental conditions at facilities owned, and the state of compliance with environmental laws, by businesses acquired by the Company. While the Company endeavors at each of its facilities to assure compliance with environmental laws and regulations, there can be no assurance that the Company's operations or activities, or historical operations by others at the Company's locations, will not result in cleanup obligations, civil or criminal enforcement actions or private actions that could have a material adverse effect on the Company. In that regard, at a Connecticut ion exchange resin regeneration facility (the "South Windsor Facility") operated by a wholly owned subsidiary of the Company (the "South Windsor Subsidiary"), acquired by the Company in October 1995 from Anjou International Company ("Anjou"), U.S. federal and state environmental regulatory authorities issued certain notices of violation alleging multiple violations of applicable wastewater pretreatment standards. The South Windsor Subsidiary reached an agreement with the U.S. Attorney's Office and the U.S. Environmental Protection Agency ("USEPA") to settle all agency claims and investigations relating to this matter by entering into a plea agreement pursuant to which the South Windsor Subsidiary would plead guilty to violating the Clean Water Act. The settlement provides for a payment of $1.36 million, which includes a criminal penalty of $1.0 million and annual environmental compliance audits at the South Windsor Facility for five years among other things. On June 10, 1998, the South Windsor Subsidiary pled guilty to a single count information alleging violations of the federal Clean Water Act in the United States District Court for the District of Connecticut. Sentencing in the case has been set for September 1, 1998. The Company believes that this settlement will conclude this matter in its entirety; however, the settlement does not include a formal release of all liabilities in this regard. The Company has certain rights of indemnification from Anjou which may be available with respect to this matter pursuant to the laws of the State of New York or the Stock Purchase Agreement dated as of August 30, 1995 among the Company, Anjou and Polymetrics, Inc. In addition to the foregoing, 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. The Company serves as contract operator of various municipal and industrial wastewater collection and treatment facilities, which were developed and are owned by governmental or private entities. The Company also operates other facilities, including service deionization centers and manufacturing facilities, that discharge wastewater in connection with routine operations. Under certain service contracts and applicable environmental laws, the Company as operator of such facilities may incur certain liabilities in the event those facilities experience malfunctions or discharge wastewater which does not meet applicable permit limits and regulatory requirements. In some cases, the potential for such liabilities depends upon design or operational conditions over which the Company has limited, if any, control. In other matters, the Company has been notified by the USEPA that it is a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") at certain sites to which the Company or its predecessors allegedly sent waste in the past. It is possible that the Company could receive other such notices under CERCLA or analogous state laws in the future. Based on sites which are currently known to the Company that may require remediation, the Company does not believe that its 16 liability, if any, relating to such sites will be material. However, there can be no assurance that such matters will not be material. In addition, to some extent, the liabilities and risks imposed by environmental laws on the Company's customers may adversely impact demand for certain of the Company's products or services or impose greater liabilities and risks on the Company, which could also have an adverse effect on the Company's competitive and financial position. In 1995, Culligan purchased an equity interest in Anvil Holdings, Inc. As a result of this transaction, Culligan assumed certain environmental liabilities associated with soil and groundwater contamination at Anvil Knitwear's Asheville Dyeing and Finishing Plant (the "Plant") in Swannanoa, North Carolina. Since 1990, Culligan has delineated and monitored the contamination pursuant to an Administrative Consent Order entered into with the North Carolina Department of Environment, Health and Natural Resources related to the closure of an underground storage tank at the site. Groundwater testing at the Plant and at two adjoining properties has shown levels of a cleaning solvent believed to be from the Plant that are above action levels under state guidelines. The Company has begun remediation of the contamination. The Company currently estimates that the costs of future site remediation will range from up to $1.0 million to $1.8 million and that it has sufficient reserves for the site cleanup. The Company anticipates that the potential costs of further monitoring and corrective measures to address the groundwater problem under applicable laws will not have a material adverse effect on the financial position or the results of operations of the Company. However, because the full extent of the required cleanup has not been determined, there can be no assurance that this matter will not have a material adverse effect on the Company's financial position or results of operations. Certain of the Company's facilities contain or in the past contained underground storage tanks which may have caused soil or groundwater contamination. At one site formerly owned by Culligan, the Company is investigating, and has taken certain actions to correct, contamination that may have resulted from a former underground storage tank. Based on the amount of contamination believed to have been present when the tank was removed, and the probability that some of the contamination may have originated from nearby properties, the Company believes, although there can be no assurance, that this matter will not have a material adverse effect on the Company's financial position or results of operations. Competition. All of the markets in which the Company competes are highly competitive, and most are fragmented, with numerous regional and local participants. There are competitors of the Company in certain markets that are divisions or subsidiaries of companies that have significantly greater resources than the Company. Competitive pressures, including those described above, and other factors could cause the Company to lose market share or could result in significant price erosion, either of which could have a material adverse effect upon the Company's financial position, results of operations and cash flows. Potential Risks Related to Water Rights and Water Transfers. The Company recently acquired more than 47,000 acres of agricultural land (the "Properties"), situated in the Southwestern United States, the substantial majority of which are in Imperial County, California (the "IID Properties") located within the Imperial Irrigation District (the "IID"). Substantially all of the Properties are currently leased to third party agricultural tenants, including prior owners of the Properties. The Company acquired the Properties with appurtenant water rights, and is actively seeking to acquire additional properties with water rights, primarily in the Southwestern and Western United States. The Company may seek in the future to transfer water attributable to water rights appurtenant to the Properties, particularly the IID Properties (the "IID Water"). However, since the IID holds title to all of the water rights within the IID in trust for the landowners, the IID would control the timing and terms of any transfers of IID Water by the Company. The circumstances under which transfers of water can be made and the profitability of any transfers are subject to significant uncertainties, including hydrologic risks of variable water supplies, risks presented by allocations of water under existing and prospective priorities, and risks of adverse changes to or interpretations of U.S. federal, state and local laws, regulations and policies. Transfers of IID Water attributable to water rights appurtenant to the IID Properties (the "IID Water Rights") are subject to additional uncertainties. Allocations of Colorado River water, which is the source of all water deliveries to the IID Properties, are subject to limitations under complex international treaties, interstate compacts, U.S. federal and state laws and regulations, and contractual arrangements and, in times of drought, water deliveries could be curtailed by the U.S. government. Further, 17 any transfers of IID Water would require the approval of the U.S. Secretary of the Interior. Even if a transfer were approved, other California water districts and users could assert claims adverse to the IID Water Rights, including but not limited to claims that the IID has failed to satisfy U.S. federal law and California constitutional requirements that IID Water must be put to reasonable and beneficial use. A finding that the IID's water use is unreasonable or nonbeneficial could adversely impact title to the IID Water Rights and the ability to transfer IID Water. Water transferred by the IID to metropolitan areas of Southern California, such as San Diego, currently would be transported through aqueducts owned or controlled by the Metropolitan Water District, a quasi-governmental agency (the "MWD"). The transportation cost for any transfer of IID Water and the volume of water which the MWD can be required to transport at any time are subject to California laws of uncertain application, some aspects of which are currently in litigation. The uncertainties associated with water rights could have a material adverse effect on the Company's future profitability. Technological and Regulatory Risks. Portions of the water and wastewater treatment business are 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 technological and regulatory standards and to develop successfully and introduce new and enhanced products on a timely basis will be a significant factor in the Company's ability to grow and to remain competitive. There can be no assurance that the Company will be able to achieve the technological advances 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. The market growth potential of acquired in-process research and development is subject to certain risks, including costs to develop and commercialize such products, the cost and feasibility of production of products utilizing the applicable technologies, introduction of competing technologies and market acceptance of the products and technologies involved. There can be no assurance that the Company's existing or any future trademarks or patents will be enforceable or will provide substantial protection from competition or be of commercial benefit to the Company. In addition, the laws of certain non-United States countries may not protect proprietary rights to the same extent as do the laws of the United States. Successful challenges to certain of the Company's patents or trademarks could materially adversely affect its competitive and financial position. Municipal Water and Wastewater Business. A significant percentage of the Company's revenues is derived from municipal customers. While municipalities represent an important part of 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 resources and greater lead times than industrial projects. In addition, this segment 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. Year 2000 Risks. The Year 2000 issue concerns the potential exposures related to the automated generation of business and financial misinformation resulting from the application of computer programs which have been written using two digits, rather than four, to define the applicable year of business transactions. Most of the Company's operating systems with Year 2000 issues have been modified to address those issues; accordingly, management does not anticipate any significant costs, problems or uncertainties associated with becoming Year 2000 compliant. The Company is currently developing a plan intended to assure that its other internal operating systems with Year 2000 issues are modified on a timely basis. Suppliers, customers and creditors of the Company also face similar Year 2000 issues. A failure to successfully address the Year 2000 issue could have a material adverse effect on the Company's business or results of operations. 18 Impact of Recently Issued Accounting Standards. In June 1997, FASB issued a new statement titled "Disclosures about Segments of an Enterprise and Related Information". The new statement is effective for fiscal years beginning after December 15, 1997. The Company is currently determining required disclosure under this new standard and will include the disclosures in its next annual report. In June 1998, FASB issued a new statement titled "Accounting for Derivative Instruments and Hedging Activities". The new statement is effective for fiscal years beginning after June 15, 1999. The Company does not believe that the adoption of this standard will have a material impact on its consolidated financial position or results of operations. 19 PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS N/A Item 2. CHANGES IN SECURITIES N/A Item 3. DEFAULTS UPON SENIOR SECURITIES N/A Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS N/A Item 5. OTHER INFORMATION N/A Item 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits The following exhibits are filed herewith or incorporated herein by reference: 27.0 Financial Data Schedule The Company filed six Current Reports on Forms 8-K and 8-K/A during the quarter ended June 30, 1998, as follows: (1) May 12, 1998, reporting certain financial information relating to Protean plc, a United Kingdom corporation ("Protean"), and The Water Filtration Business ("Ametek") formerly a wholly owned subsidiary of Ametek, Inc., which the Company acquired in its acquisition of Culligan Water Technologies, Inc. (2) June 2, 1998, announcement of the Company's issuance of $900 million of unsecured remarketable or redeemable securities to qualified institutional buyers. (3) June 23, 1998, announcement of the completion of the Company's acquisition of Culligan Water Technologies, Inc. (4) May 12, 1998, amendment to 8-K dated January 16, 1998, restating certain of the Company's financial information as a result of the Company's acquisition of The Kinetics Group, Inc. (5) May 14, 1998, amendment to 8-K dated January 16, 1998, restating the Company's historical financial information as a result of the Company's acquisition of The Kinetics Group, Inc. and disclosing the Company's possible issuance of $750 to $900 million of unsecured redeemable or remarketable securities to qualified institutional buyers. 20 (6) May 14, 1998, amendment to 8-K dated February 9, 1998, disclosing the Company's possible issuance of $750 to $900 million of unsecured redeemable or remarketable securities to qualified institutional buyers. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED STATES FILTER CORPORATION By: /s/ Kevin L. Spence Dated: August 13, 1998 -------------------------------------------------- Kevin L. Spence Executive Vice President, Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) 22 EXHIBIT INDEX
Exhibit Sequential Number Description Page Number - ------- ----------- ----------- 27.0 Financial Data Schedule
23 EX-27 2 FINANCIAL DATA SCHEDULE
5 THE CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS OF UNITED STATES FILTER CORPORATION AND SUBSIDIARIES. 1,000 3-MOS MAR-31-1999 APR-01-1998 JUN-30-1998 58,847 417 1,039,825 (46,762) 492,051 2,027,797 1,289,537 (292,929) 4,688,255 1,157,515 1,548,918 0 0 1,618 1,456,558 4,688,255 1,119,331 1,119,331 788,169 788,169 0 6,120 25,648 (175,001) (19,604) (155,397) 0 0 0 (155,397) (0.98) (0.98)
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