-----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, ImLutizW3t7X9pDIJ3gRuR+4JBduOhAxq8eFYzKb6ZWOWeJbo7O8sX2L/HFv5ZuV oox/TKZBUGBDH/ymMjc6HA== 0000944209-99-000150.txt : 19990215 0000944209-99-000150.hdr.sgml : 19990215 ACCESSION NUMBER: 0000944209-99-000150 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 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: 001-04097 FILM NUMBER: 99537274 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 FORM 10-Q 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 December 31, 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 February 11, 1998 was 179,908,015 shares. Total number of pages 24 ------ There are two exhibits 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 DECEMBER 31, 1998 (Unaudited)
March 31, 1998 December 31, 1998 --------------- ----------------- (in thousands) ASSETS Current assets: Cash and cash equivalents $ 66,917 38,032 Short-term investments 241 377 Accounts receivable, net 873,890 1,116,629 Costs and estimated earnings in excess of billings on uncompleted contracts 217,935 224,352 Inventories 473,698 534,823 Prepaid expenses 16,471 34,512 Deferred taxes 151,107 185,915 Other current assets 51,377 59,544 ---------- --------- Total current assets 1,851,636 2,194,184 ---------- --------- Property, plant and equipment, net 960,019 1,063,408 Investment in leasehold interests, net 21,699 19,960 Costs in excess of net assets of businesses acquired, net 1,312,776 1,500,976 Other assets 319,315 347,817 ---------- --------- $4,465,445 5,126,345 ========== =========
See accompanying notes to condensed consolidated financial statements. 2 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND DECEMBER 31, 1998 (Continued) (Unaudited)
March 31, 1998 December 31, 1998 -------------- ----------------- (in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 357,260 424,823 Accrued liabilities 535,329 596,066 Current portion of long-term debt 118,849 21,602 Billings in excess of costs and estimated earnings on uncompleted contracts 90,073 87,380 Other current liabilities 45,702 132,326 ---------- --------- Total current liabilities 1,147,213 1,262,197 ---------- --------- Notes payable 574,806 546,800 Long-term debt, excluding current portion 404,416 66,117 Convertible subordinated debentures 554,000 414,000 Redeemable or remarketable securities - 900,000 Deferred taxes 82,910 63,881 Other liabilities 110,662 140,383 ---------- --------- Total liabilities 2,874,007 3,393,378 ---------- --------- Shareholders' equity: Preferred stock, authorized 3,000 shares - - Common stock, par value $.01. Authorized 300,000 shares; 155,825 and 176,584 shares issued and outstanding at March 31, 1998 and December 31, 1998, respectively 1,558 1,766 Additional paid-in capital 1,945,223 2,160,786 Currency translation adjustment (57,282) (71,465) Accumulated deficit (298,061) (358,120) ---------- --------- Total shareholders' equity 1,591,438 1,732,967 ---------- --------- Commitments and contingencies ---------- --------- $4,465,445 5,126,345 ========== =========
See accompanying notes to condensed consolidated financial statements. 3 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1997 AND 1998 (Unaudited)
Three Months Nine Months Ended Ended December 31, December 31, ----------------------- ----------------------- 1997 1998 1997 1998 ---------- ---------- ---------- ---------- (in thousands, except per share data) Revenues $ 969,513 1,225,109 2,700,807 3,570,322 Costs of sales 700,740 861,690 1,996,804 2,511,304 --------- --------- --------- --------- Gross profit 268,773 363,419 704,003 1,059,018 Selling, general and administrative expenses 189,419 241,652 520,085 709,231 Purchased in-process research and development 319,675 - 319,675 3,558 Merger, restructuring, acquisition and other related charges 150,582 - 150,582 257,920 --------- --------- --------- --------- 659,676 241,652 990,342 970,709 --------- --------- --------- --------- Operating income (loss) (390,903) 121,767 (286,339) 88,309 Other income (expense): Interest expense (15,773) (29,999) (39,651) (85,180) Gain on disposition of affiliate - - 31,098 - Interest and other income, net 1,532 7,497 4,314 15,227 --------- --------- --------- --------- (14,241) (22,502) (4,239) (69,953) --------- --------- --------- --------- Income (loss) before income taxes (405,144) 99,265 (290,578) 18,356 Income tax expense (benefit) (15,889) 35,774 25,819 50,051 --------- --------- --------- --------- Net income (loss) $(389,255) 63,491 (316,397) (31,695) ========= ========= ========= ========= Net income (loss) per common share: Basic $ (2.63) 0.37 (2.32) (0.19) ========= ========= ========= ========= Diluted $ (2.63) 0.36 (2.32) (0.19) ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements. 4 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND 1998 (Unaudited)
1997 1998 ---------- --------- (in thousands) Cash flows from operating activities: Net loss $(316,397) (31,695) Adjustments to reconcile net loss to net cash provided by operating activities: Deferred income taxes (23,536) (53,883) Provision for doubtful accounts 6,172 12,387 Depreciation 57,856 81,216 Amortization 23,893 38,095 Merger, restructuring, acquisition and other related cash charges - 155,396 Write-off of in-process research and development and goodwill 372,195 40,818 Gain on disposition of investment in affiliate (31,098) - Loss on sale or disposal of property, plant and equipment 11,220 26,383 Change in operating assets and liabilities: Increase in accounts receivable (35,109) (156,154) (Increase) decrease in costs and estimated earnings in excess of billings on uncompleted contracts (30,158) 1,397 Increase in inventories (26,961) (5,245) (Increase) decrease in other assets 1,188 (15,106) Decrease in accounts payable and accrued expenses (32,455) (29,841) Increase (decrease) in billings in excess of costs and estimated earnings on uncompleted contracts 22,584 (17,587) Increase (decrease) in other liabilities 11,846 (14,375) --------- -------- Net cash provided by operating activities 11,240 31,806 --------- -------- Cash flows from investing activities: Payment for purchase of property, plant and equipment (104,465) (147,347) Payment for purchase of acquisitions, including certain merger and restructuring charges, net of cash acquired (548,581) (324,215) Proceeds from disposal of equipment 7,655 16,747 Proceeds from disposition of investment in affiliate 50,897 - Sale (purchase) of short-term investments 1,260 (136) Restricted cash held in escrow for acquisition (143,968) - --------- -------- Net cash used in investing activities (737,202) (454,951) --------- --------
See accompanying notes to condensed consolidated financial statements. 5 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 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 Proceeds from exercise of common stock options 4,189 2,607 Redemption of convertible subordinated debentures - (81,527) Principal payments on long-term debt (23,228) (476,947) Net proceeds from borrowings on notes payable 667,736 36,490 Dividends paid (50) - ------- -------- Net cash provided by financing activities 648,647 394,260 ------- -------- Net decrease in cash and cash equivalents (77,315) (28,885) Cash and cash equivalents at March 31, 1997 and 1998 144,128 66,917 ------- -------- Cash and cash equivalents at December 31, 1997 and 1998 $66,813 38,032 ======= ======== Supplemental disclosures of cash flow information: Cash paid during the period for interest $40,006 63,868 ======= ====== Cash paid during the period for income taxes $53,491 58,111 ======= ======
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 for the fiscal year ended March 31, 1998 that are contained in the Company's Current Report on Form 8-K/A dated June 15, 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 Nine Months Ended December 31, December 31, ------------------- -------------------- 1997 1998 1997 1998 --------- ------- --------- -------- (in thousands, except per share data) Basic Net income (loss) applicable to common shares $(389,255) 63,491 (316,397) (31,695) ========= ======= ======== ======= Weighted average common shares outstanding 147,763 171,207 136,171 164,761 ========= ======= ======== ======= Basic income (loss) per common share $ (2.63) 0.37 (2.32) (0.19) ========= ======= ======== =======
7
Three Months Ended Nine Months Ended December 31, December 31, ---------------------- ------------------- 1997 1998 1997 1998 --------- ------- -------- ------- (in thousands, except per share data) Diluted Net income (loss) applicable to common shares $(389,255) 63,491 (316,397) (31,695) Add: Effect on net income of conversion of convertible subordinated debentures - * 3,312 - * - ** --------- ------- -------- ------- Adjusted net income (loss) applicable to common shares $(389,255) 66,803 (316,397) (31,695) ========= ======= ======== ======= Weighted average shares outstanding 147,763 171,207 136,171 164,761 Add: Assumed conversion of subordinated debentures - * 10,481 - * - ** Exercise of options - * 5,368 - * - ** --------- ------- -------- ------- Adjusted weighted average shares outstanding 147,763 187,056 136,171 164,761 ========= ======= ======== ======= Diluted income (loss) per common share $ (2.63) 0.36 (2.32) (0.19) ========= ======= ======== =======
_________________ * The calculation of Diluted EPS does not assume conversion of subordinated debentures or exercise of stock options for the three and nine months ended December 31, 1997 as the effect would be antidilutive to loss per common share. ** The calculation of Diluted EPS does not assume conversion of subordinated debentures or exercise of stock options for the nine months ended December 31, 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 5.1 million for the nine months ended December 31, 1998. Note 2. Inventories ----------- Inventories at March 31, 1998 and December 31, 1998 consist of the following:
March 31, 1998 December 31, 1998 -------------- ----------------- (in thousands) Raw materials $130,501 137,847 Work-in-progress 102,198 134,862 Finished goods 240,999 262,114 -------- ------- $473,698 534,823 ======== =======
8 Note 3. Debt ---- Notes Payable. As of December 31, 1998, the Company had a Senior Credit Facility which provides certain credit facilities to the Company of up to $750.0 million, of which there were outstanding borrowings of $546.8 million and outstanding letters of credit of $51.2 million. Borrowings under the Senior Credit Facility bear interest at variable rates of up to 0.70% above certain Eurocurrency rates or BankBoston's base rate. The Senior Credit Facility expires October 2002 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 Limited, and a portion of the indebtedness assumed in the acquisition of Culligan Water Technologies, Inc. ("Culligan"). Convertible Subordinated Debt. As of December 31, 1998, the Company had outstanding $414.0 million aggregate principal amount of 4.5% Convertible Subordinated Debentures due December 15, 2001 (the "Debentures"). The Debentures are convertible into common stock at any time prior to maturity, redemption or repurchase at a conversion price of $39.50 per share. On September 23, 1998, the Company redeemed approximately $81.5 million of the $140.0 million aggregate principal amount of 6% Convertible Subordinated Notes due September 15, 2005 (the "Notes"). The redemption was financed with borrowings under the Senior Credit Facility. The remaining notes were converted into approximately 3.2 million shares of the Company's common stock. Note 4. Acquisition ----------- On June 15, 1998, a wholly owned subsidiary of the Company consummated the acquisition of Culligan in a tax free reorganization. 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 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 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 acquisition has been accounted for as a pooling of interests and, accordingly, the condensed consolidated financial statements and notes thereto for all periods presented have been restated to include the accounts of Culligan. Reconciliation of results of operations of the combined entities for the three and nine months ended December 31, 1997 are as follows: 9
Three Months Nine Months Ended Ended December 31, 1997 December 31, 1997 ------------------ ------------------ (in thousands, except per share data) Revenues: Company (as previously reported) $ 829,427 2,346,553 Culligan 140,086 354,254 --------- --------- Combined $ 969,513 2,700,807 ========= ========= Net income (loss): Company (as previously reported) $(374,095) (337,301) Culligan (15,160) 20,904 --------- --------- Combined $(389,255) (316,397) ========= ========= Loss per common share: Basic: As previously reported $ (3.71) (3.65) ========= ========= As restated $ (2.63) (2.32) ========= ========= Diluted: As previously reported $ (3.71) (3.65) ========= ========= As restated $ (2.63) (2.32) ========= =========
Concurrent with the acquisition of Culligan, the Company designed and implemented a restructuring plan to streamline its manufacturing and production base, redesign its distribution network, improve efficiency and enhance its competitiveness. The restructuring plan resulted in a pre-tax charge of $257.9 million in the nine months ended December 31, 1998. Included in the charge is approximately $49.2 million of merger-related expenses incurred to consummate the Culligan transaction, including investment banking fees, printing fees, stock transfer fees, legal fees, accounting fees, governmental filing fees and certain other transaction costs. Integration and other acquisition costs of approximately $40.6 million were incurred to combine the operations of Culligan and the Company and consisted of travel, training, payroll and benefit plan conversions, legal and consulting fees and other one-time charges related to the transaction. The plan identified certain manufacturing facilities, distribution sites, sales and administrative offices, retail outlets and certain related assets that became redundant upon consummation of the Culligan transaction. As a result, and in accordance with SFAS 121, an impairment loss was recognized and idle assets were written down to the lower of their carrying cost or net realizable value. These assets will not be depreciated while they are held for disposal. Assets with remaining service lives were written down to the extent that carrying amounts exceeded future discounted cash flows and estimated proceeds from disposal. Had the Company not recognized the impairment losses, the resulting depreciation expense for the period beginning with the plan's implementation and ending December 31, 1998 would not have been material to reported results. These assets have a carrying value of approximately $48.3 million as of December 31, 1998 and are expected to be disposed of during the Company's current fiscal year. The restructuring plan also resulted in the reduction of the combined workforce by 950 employees consisting of 123 management personnel, 295 administrative personnel, 444 manufacturing personnel and 88 sales personnel. In addition, the plan impaired certain carrying amounts of goodwill and other intangible assets in accordance with SFAS 121, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In determining the amount of impairment of these assets, the Company valued the assets based on the present value of estimated expected future cash flows using discount rates commensurate with the risks involved. The components of the merger, restructuring, acquisition and other related charges are as follows: 10
(in thousands) Merger, integration and other acquisition 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 $19.3 million of merger and restructuring related charges are included in accrued liabilities at December 31, 1998. Additional costs to complete the restructuring plan are not expected to be material. Prior to the Company's acquisition of Culligan, Culligan acquired Protean plc, including Protean's Analytical and Thermal Division ("A&T"). In connection with Culligan's acquisition of A&T, the Company recorded a charge of $3.6 million in the nine months ended December 31, 1998 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. 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 Nine Months Ended December 31, December 31, -------------------- -------------------- 1997 1998 1997 1998 ---------- ------- --------- -------- (in thousands) Net income (loss) $(389,255) 63,491 (316,397) (31,695) Foreign currency translation adjustments (3,270) (161) (22,858) (14,183) --------- ------ -------- ------- Comprehensive income (loss) $(392,525) 63,330 (339,255) (45,878) ========= ====== ======== =======
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 December 31, 1998 were $1.2 billion, an increase of $255.6 million or 26.4% from the $969.5 million for the three months ended December 31, 1997. Revenues for the nine months ended December 31, 1998 were $3.6 billion, an increase of $0.9 billion or 32.2% from the $2.7 billion for the nine months ended December 31, 1997. These increases were due primarily to acquisitions completed by the Company subsequent to December 31, 1997. For the nine months ended December 31, 1998, revenues from capital equipment sales represented 47.4% of total revenues. Revenues from services, operations, replacement parts and consumables represented 23.6% of total revenues, while revenues from distribution represented 21.3% of total revenues and revenues from consumer products represented 7.7% of total revenues. Gross Profit. Gross profit as a percentage of revenue ("gross margin") was 29.7% for the three months ended December 31, 1998 compared to 27.7% in the corresponding period in the prior year. Gross margin was 29.7% for the nine months ended December 31, 1998 compared to 26.1% in the corresponding period in the prior year. These increases in gross margin for the three and nine month periods ended December 31, 1998 were due primarily to (i) efficiencies realized as a result of the Company's reorganization plans implemented in the third quarter of the prior year and the first quarter of the current year; (ii) certain economies of scale related to the Company's significant growth, including enhanced purchasing power; (iii) favorable product mix in the current periods resulting from the Company's emphasis on selling higher margin value added products and services; and (iv) the incurrence of certain unreimbursed project costs during the nine months ended December 31, 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 December 31, 1998 were $241.7 million, an increase of $52.3 million or 27.6% from the $189.4 million for the three months ended December 31, 1997. During this period, selling, general and administrative expenses were 19.7% of revenues which was nominally higher than the 19.5% for the comparable period in the prior year. For the nine months ended December 31, 1998 selling, general and administrative expenses, before purchased in-process research and development and merger, restructuring, acquisition and other related charges described below ("certain charges"), increased $189.1 million to $709.2 million as compared to $520.1 million in the comparable period in the prior year. During this period, selling, general and administrative expenses before certain charges were 19.9% of revenues compared to 19.3% for the comparable period in the prior year. The increase in selling, general and administrative expenses before certain charges in the three and nine months ended December 31, 1998 can be attributed primarily to acquisitions completed subsequent to December 31, 1997. Merger, Restructuring, Acquisition and Other Related Charges. Concurrent with the acquisition of Culligan, the Company designed and implemented a restructuring plan to streamline its manufacturing and production base, redesign its distribution network, improve efficiency and enhance its competitiveness. The restructuring plan resulted in a pre-tax charge of $257.9 million in the nine months ended December 31, 1998. Included in the charge is approximately $49.2 million of merger-related expenses incurred to consummate the Culligan transaction, including investment banking fees, printing fees, stock transfer fees, legal fees, accounting fees, governmental filing fees and certain other transaction costs. Integration and other acquisition costs of approximately $40.6 million were incurred to combine the operations of Culligan and the Company, and consisted of travel, training, payroll and benefit plan conversions, legal and consulting fees and other one-time charges related to the transaction. The plan identified certain manufacturing facilities, distribution sites, sales and administrative offices, retail outlets and certain related assets that became redundant upon consummation of the Culligan transaction. As a result, and in accordance with SFAS 121, an impairment loss was recognized and idle assets were written down to the lower of their carrying cost or net realizable value. These assets will not be depreciated while they are held for disposal. Assets with remaining service lives were written down to 12 the extent that carrying amounts exceeded future discounted cash flows and estimated proceeds from disposal. Had the Company not recognized the impairment losses, the resulting depreciation expense for the period beginning with the plan's implementation and ending December 31, 1998 would not have been material to reported results. These assets have a carrying value of approximately $48.3 million as of December 31, 1998 and are expected to be disposed of during the Company's current fiscal year. The restructuring plan also resulted in the reduction of the combined workforce by 950 employees consisting of 123 management personnel, 295 administrative personnel, 444 manufacturing personnel and 88 sales personnel. In addition, the plan impaired certain carrying amounts of goodwill and other intangible assets in accordance with SFAS 121, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In determining the amount of impairment of these assets, the Company valued the assets based on the present value of estimated expected future cash flows using discount rates commensurate with the risks involved. The components of the merger, restructuring, acquisition and other related charges are as follows:
(in thousands) Merger, integration and other acquisition 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 $19.3 million of merger and restructuring related charges are included in accrued liabilities at December 31, 1998. Additional costs to complete the restructuring plan are not expected to be material. Prior to the Company's acquisition of Culligan, Culligan acquired Protean plc, including Protean's Analytical and Thermal Division ("A&T"). In connection with Culligan's acquisition of A&T, the Company recorded a charge of $3.6 million in the nine months ended December 31, 1998 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 for the nine months ended December 31, 1998. Interest Expense. Interest expense increased to $30.0 million for the three months ended December 31, 1998 from $15.8 million for the corresponding period in the prior year. Interest expense increased to $85.2 million for the nine months ended December 31, 1998 from $39.7 million for the corresponding period in the prior year. Interest expense for the nine months ended December 31, 1998 consisted primarily of interest on the Company's (i) 6.0% Convertible Subordinated Notes issued on September 18, 1995 due 2005, (which were redeemed or converted during the current period as discussed below) (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 December 31, 1998, the Company had cash and short-term investments of $38.4 million. Income Taxes. Income tax expense for the three months ended December 31, 1998 increased to $35.8 million from a benefit of $15.9 million in the corresponding period in the prior year. The Company's effective tax rate for the current period was 36.0% which was higher than the effective tax rate of 34.2% for the third quarter in the prior year (excluding the impact of certain charges). The Company recorded income tax expense of $50.1 million for the nine months ended December 31, 1998, an increase of $24.3 million from income tax 13 expense of $25.8 million in the comparable period in the prior year. Before certain charges, income tax expense was $100.6 million or an effective tax rate of 35.9% for the nine months ended December 31, 1998 as compared to 35.6% for the comparable period in the prior year. Net Income. Net income for the three months ended December 31, 1998 was $63.5 million, an increase from the net loss of $389.3 million for the three months ended December 31, 1997. Income before certain charges for the three months ended December 31, 1997 was $42.8 million. Income before certain charges for the nine months ended December 31, 1998 was $179.3 million, an increase of $63.6 million from the $115.7 million for the nine months ended December 31, 1997. Net loss in the nine months ended December 31, 1997 included a one-time after tax gain of $18.8 million or $0.15 per diluted share on Culligan's disposition of an investment in an affiliate. After non-recurring charges, net loss in the nine months ended December 31, 1998 was $31.7 million. Net income (loss) per common share for the three and nine months ended December 31, 1997 and 1998 were as follows:
Three Months Ended Nine Months Ended December 31, December 31, ------------------- ------------------- 1997 1998 1997 1998 --------- ------- -------- -------- Basic $(2.63) 0.37 (2.32) (0.19) ====== ==== ===== ===== Diluted $(2.63) 0.36 (2.32) (0.19) ====== ==== ===== =====
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 December 31, 1998, the Company had working capital of $932.0 million including cash and short-term investments of $38.4 million. On May 15, 1998, the Company issued $500.0 million 6.375% Remarketable or Redeemable Securities due 2011 (remarketing date May 15, 2001) and $400.0 million 6.50% Remarketable or Redeemable Securities due 2013 (remarketing date May 15, 2003) (collectively, the "ROARS"). The net proceeds from the sale of the ROARS, including a premium payment to the Company by NationsBanc Montgomery Securities LLC, were $913.6 million. The net proceeds were used to repay indebtedness under the Senior Credit Facility, indebtedness assumed in the acquisition of Memtec, and a portion of the indebtedness assumed in the acquisition of Culligan. The Company's long-term debt at December 31, 1998 consisted of (i) $414.0 million of 4.5% Convertible Subordinated Notes due 2001; (ii) $500.0 million of ROARS due 2011 (remarketing date May 15, 2001); (iii) $400.0 million of ROARS due 2013 (remarketing date May 15, 2003); and (iv) other long-term debt of $87.7 million bearing interest at rates ranging from 2.0% to 10.1%. As of December 31, 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 $546.8 million and outstanding letters of credit of $51.2 million. Borrowings under the Senior Credit Facility bear interest at variable rates of up to 0.70% above certain Eurocurrency rates or BankBoston's base rate. The Senior Credit Facility expires October 2002 and is subject to customary and usual terms. On September 23, 1998, the Company redeemed approximately $81.5 million of the $140.0 million aggregate principal amount of 6% Convertible Subordinated Notes due September 15, 2005 (the "Notes"). The redemption was financed with borrowings under the Senior Credit Facility. The remaining Notes were converted into approximately 3.2 million shares of the Company's common stock. 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. 14 Certain Trends and Uncertainties The Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the United States Securities and 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. Earnings Variation Due to Business Cycles and Seasonal Factors. Our operating results can experience quarterly or annual variations due to business cycles, seasonality and other factors. The market price for our common stock may decrease if our operating results do not meet the expectations of stock market analysts. About 45% of our sales are of capital equipment. Sales of capital equipment are affected by general fluctuations in the business cycles in the United States and worldwide, instability of economic conditions (such as the current conditions in the Asia Pacific region and Latin America) and interest rates, as well as other factors. In addition, operating results of some of our business segments are significantly influenced, along with other factors such as interest rates, by particular business cycles and seasonality, including:
Business Cycles and Seasons Segment Affecting Results - -------------------------------------------------------- Waterworks . Real estate development Distribution . Housing starts . Winter months in temperate regions . Industrial capital spending Consumer and . Consumer spending Commercial . Housing starts Industrial . Microelectronics Products and . Pharmaceutical Services . Biotechnology . Municipal spending
Profit Uncertainty in Fixed-Price Contracts. Contracts with fixed prices make up a significant portion of our revenues. If our original cost estimates are incorrect, there are delays in scheduled deliveries or we otherwise do not progress under a fixed-price contract as we expected, the profits under that contract could decrease, or we could lose money on that contract. When our cost estimates change for fixed-price contracts, we record adjustments in our financial statements, and any future downward adjustments could be material. Competition. We compete against many companies in fragmented, highly competitive markets and we have fewer resources than some of those companies. Our businesses compete within and outside the United States principally on the basis of the following factors:
Business Factors - --------------------------------------------------------- Water and . Product quality and Wastewater specifications Treatment . Technology . Reliability . Price (can predominate among competitors in the wastewater treatment business that have sufficient technical qualifications, particularly in the municipal contract bid process) . Customize design and technical qualifications . Reputation . Prompt local service Filtration and . Price Separation . Technical expertise . Product quality . Responsiveness to customer needs . Service . Technical support Industrial . Quality Products and . Service Services . Price
15
Business Factors - --------------------------------------------------------- Waterworks . Prompt local service capability Distribution . Product knowledge by sales force and service branch management . Price Consumer and . Price Commercial . Product Quality products . "Taste" . Service . Distribution capabilities . Geographic presence . Reputation
The waterworks distribution business competes against independent wholesalers, distribution chains similar to ours and manufacturers who sell directly to customers. The consumer products business competes with thousands of companies, including those with national, regional or local distribution networks, as well as retail outlets. Competitive pressures, including those described above, and other factors could cause us to lose market share or could result in decreases in prices, either of which could have a material adverse effect on our financial position and results of operations. Risks Related to Acquisitions. We have made a large number of acquisitions since 1991 and we plan to continue to pursue acquisitions. Candidates for acquisition include businesses that allow us to: . expand the segments of the water and wastewater treatment and water- related industries in which we participate; . complement our technologies, products or services; . broaden our customer base and geographic areas served; . expand our global distribution network; or . use our "one-stop-shop" approach in terms of technology, distribution or service. If we are not correct when we assess the value, strengths, weaknesses, liabilities and potential profitability of acquisition candidates or we are not successful in integrating the operations of acquired companies, our results of operation or financial position could be adversely affected and we could lose money. In addition, if we acquire other businesses by making so-called "hostile" tender offers, as we did with Memtec Limited, we may encounter added risks. When we negotiate to acquire a company, that company generally makes legally binding statements (known as "representations") to us and provides us with access to internal documents and other data that we rely upon in deciding whether to acquire the company and if we decide to acquire the company, on what terms. We would not get such representations or internal information in a "hostile" tender offer. We will continue to look for acquisition opportunities, although we may not continue to easily find desirable acquisition candidates or complete acquisitions. Risks of Doing Business in Other Countries. We have acquired businesses and we conduct business in markets outside the United States, and we expect to continue to do so. In addition to the risk of currency fluctuations, the risks associated with conducting business outside the United States include: . slower payment of invoices; . underdeveloped legal systems; . nationalization; and . social, political and economic instability. Current economic conditions in the Asia Pacific region and Latin America have adversely affected our operations and sales there. We cannot predict the full impact of this economic instability, but it could have a material adverse effect on our revenues and profits. Importance of Certain Employees. Our senior officers, particularly Richard J. Heckmann, who is our Chief Executive Officer, are very important to the success of our operations. We have various 16 compensation and benefit arrangements with our senior officers, including Mr. Heckmann, that are designed to encourage them to continue their employment with us. However, if any of our senior officers do not continue in their present roles, our prospects may be adversely affected. 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 six digits (such as 12/31/99), rather than eight (such as 12/31/1999), to define the applicable date of business transactions. Many products and systems could experience malfunctions when attempting to process certain dates, such as January 1, 2000 or September 9, 1999 (a date programmers sometimes used as a default date). Our Year 2000 compliance program consists of three phases: identification and assessment; remediation; and testing. For any given system, the phases occur in sequential order, from identification and assessment of Year 2000 problems, to remediation, and, finally, to testing our solutions. We have completed the identification assessment and remediation of most of our information technology ("IT") systems. We have commenced identification and assessment of our non-IT systems, which include, among other things, components found in water and wastewater treatment plants and process water treatment systems owned and/or operated under contract by us and in our hazardous water treatment facilities, as well as components of equipment in our manufacturing facilities. Identification and assessment with respect to non-IT systems is projected to continue until September 1999 for currently owned businesses. However, as we acquire additional businesses, each IT and non-IT system of the acquired businesses must be independently identified and assessed. As a result, all three phases of our Year 2000 compliance program may be occurring simultaneously as they relate to different systems. Each phase may have a varying timetable to completion, depending upon the system and the date when a particular business was acquired by us. With the possible exception of the remediation and testing phases for certain of our non-IT systems, all phases of our Year 2000 compliance program are expected to be completed by September 1999, although we cannot assure you that all phases for all businesses will be completed by that date. In particular, we cannot assure you that recently or newly acquired businesses will be Year 2000 compliant, although we currently have a policy that requires an acquisition candidate to represent that its business is Year 2000 compliant. To the extent feasible, we also review the Year 2000 status of acquisition candidates before we complete an acquisition. In addition to our internal systems, we have begun to assess the level of Year 2000 problems associated with our various suppliers, customers and creditors. To test the Year 2000 compliance status of our suppliers, we plan to submit hypothetical orders to our suppliers dated after December 31, 1999 requesting confirmation that the orders have been correctly processed. Our costs to date for our Year 2000 compliance program, excluding employee salaries, have not been material. Although we have not completed our assessment, we do not currently believe that the future costs associated with our Year 2000 compliance program will be material. We are currently unable to determine our most reasonably likely worst-case Year 2000 scenario, as we have not identified and assessed all our systems, particularly our non-IT systems. As we complete our identification and assessment of internal and third-party systems, we expect to develop contingency plans for various worst case scenarios. We expect to have such contingency plans in place by September 1999. A failure to address Year 2000 issues successfully could have a material adverse effect on our business, financial condition or results of operations. Potential Environmental Risks. Environmental laws and regulations require us to meet certain standards and impose liability if we do not meet them. Environmental laws and regulations and their interpretations change. We must comply with 17 any new standards and requirements, even when they require us to clean up environmental conditions that were not illegal when the conditions were created. We can be held responsible for failures to meet environmental standards by businesses we acquired that happened before we acquired them. All of these requirements can cost us money. Environmental costs can result from cleanup obligations, civil or criminal enforcement actions or private actions. Costs of environmental compliance and fines or penalties for environmental violations could have a material adverse effect on us in the future. Environmental risks that we have in our businesses and some of the specific environmental liabilities that we know about and that could result in significant future costs to us are discussed below. . Cleanup Liabilities. The United States Environmental Protection Agency has notified us that we are a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) at certain sites to which we (or companies we have acquired) have allegedly sent waste in the past. We may receive additional notices under CERCLA or state law. You should be aware that in 1995, Culligan, one of our subsidiaries, bought part of Anvil Holdings, Inc. and assumed certain environmental liabilities associated with soil and ground water contamination at Anvil Knitwear's Asheville Dyeing and Finishing Plant in Swannanoa, North Carolina. Since 1990, Culligan has monitored the contamination pursuant to an Administrative Consent Order entered into with the North Carolina Department of Environment, Health and Natural Resources related to the closure of an underground storage tank at the site. Groundwater testing at this plant and at two adjoining properties showed levels of a cleaning solvent that Culligan believed to be from the plant that exceed applicable state standards. We have begun cleanup of the contamination and estimate that the costs of future site cleanup will range from $1.0 million to $1.8 million. We have a reserve for financial accounting purposes for cleanup of this site. We anticipate that the potential costs of further monitoring and corrective measures to address the groundwater problem will not have a material adverse effect on our financial position or results of operations. However, because the full extent of the required cleanup has not been determined, we cannot assure you of this result. Also, we do not believe that our liability relating to all of the sites we know to require cleanup, including the Anvil site, will be material to us. However, we cannot assure you that such sites and/or other sites that we do not know about will not have a material adverse effect on our financial position or results of operations. . Hazardous Waste Treatment and Recovery Facilities. We own and operate several hazardous waste treatment and recovery facilities, which are subject to very strict environmental laws and regulations and compliance reviews. If we do not comply with these regulations, we could be fined significant amounts of money and/or the facilities' hazardous waste permits could be suspended or revoked. . Liability for Wastewater Treatment Facilities and Wastewater Discharges. By contract, we operate various wastewater collection and treatment facilities that were developed and are owned by governmental or industrial entities. Under certain service contracts and applicable environmental laws we may be held responsible as an operator of such facilities. We also operate facilities owned by us, including service deionization centers and manufacturing facilities, that discharge wastewater in connection with routine operations. Potential responsibilities relating to these facilities include paying the fines or penalties if the facilities malfunction or discharge wastewater which fall below certain regulatory thresholds. In some cases, such possible malfunctions or discharges depend upon design or operational conditions over which we have limited, if any, control. . Underground Storage Tanks and Potential for Soil and Groundwater Contamination. Some of our facilities contain (or in the past contained) underground storage tanks which may 18 have caused soil or groundwater contamination. At one site formerly owned by Culligan, we are investigating, and have taken certain actions to correct, contamination that may have resulted from a former underground storage tank. Based on the amount of contamination believed to have been present when the tank was removed, and the probability that some of the contamination may have originated from nearby properties, we believe, although there can be no assurance, that this matter will not have a material adverse effect on our financial position or results of operations. . Impact of Environmental Laws on Our Product Sales. The liabilities and risks imposed on our customers by environmental laws may adversely impact demand for some of our products or services or impose greater liabilities and risks on us, which could also have an adverse effect on our competitive and financial position. Risks Related to Municipal Water and Wastewater Business. Sales to municipal customers make up a significant percentage of our revenues. We encounter some additional risks with municipalities that we do not have with industrial customers. Competition for selection of a municipal contractor usually requires a formal bidding process. By requiring formal bids, municipal projects entail longer lead times than industrial projects and force us to commit more resources. In addition, the municipal business depends upon the availability of funding at the local level, which may be subject to increasing pressure as local governments are expected to bear a greater share of the cost of public services. Technological and Regulatory Risks. Changes in technology, competitively imposed process standards and regulatory requirements influence the demand for many of our products and services. To grow and remain competitive, we need to anticipate changes in technological and regulatory standards. We need to introduce new and enhanced products on a timely basis. We may not achieve these goals and some of our products may become obsolete. New products often face lack of market acceptance, development delays or operational failure. Stricter governmental regulations also may affect acceptance of new products. The market growth potential of in-process research and development that we have acquired with some businesses we bought is subject to significant risks, including high development, production and sales costs, introduction of competing technologies and the possible lack of market acceptance of the developed products and technologies. Our trademarks or patents may not provide substantial protection from competition or be of commercial benefit to us. We may not be able to enforce our rights under trademarks or patents against third parties. Some international jurisdictions may not protect these kinds of rights to the same extent that they are protected under U.S. law. If a third party successfully challenges our trademarks or patents, it may affect our competitive and financial position. Risks Related to Water Rights and Transfers of Water. We own more than 47,000 acres of agricultural land in the southwestern United States, most of which is located within the Imperial Irrigation District (IID) in Imperial County, California. We lease substantially all of the 47,000 acres to agricultural tenants. We acquired the land with water rights, and we are seeking to acquire additional properties with water rights, primarily in the southwestern and western United States. In the future, we may want to transfer water attributable to such water rights, particularly from the land located in the IID. Our ability to transfer water and the profitability of any such transfers are subject to various uncertainties, including: . Hydrologic risks of variable water supplies; . Unavailable or inadequate transportation facilities; . Allocations of water under existing and prospective priorities; . Risks of adverse changes to or interpretations of U.S. federal and state laws, regulations and policies; and 19 . Compliance with all U.S. federal and state environmental laws and regulations. Transfers of IID water are subject to additional uncertainties, including: . Control by the IID of the timing and terms of any transfers of our IID water (the IID holds title to all of the water rights within the IID in trust for the landowners); . Limitations of Colorado River water allocations (the source of all water deliveries to IID properties) under . international treaties; . interstate compacts; . U.S. federal and state laws and regulations; and . contractual arrangements; . Curtailment of water deliveries by the U.S. government in times of drought; . Required approval of the U.S. Secretary of the Interior; . If a transfer of IID water were approved, possible assertion by other California water districts and users of claims adverse to our 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 our IID water rights and the ability to transfer IID water); and . Uncertainty of California laws relating to the cost of transportation and volume of water which could be required to be transported via the Colorado River owned by the Metropolitan Water District, a quasi-governmental agency (any IID water transferred to Metropolitan areas of Southern California such as San Diego would be transported through this aqueduct). The uncertainties associated with water rights could have a material adverse effect on our future profitability. Euro Conversion. On January 1, 1999, eleven of fifteen member countries of the European Union established fixed conversion rates between their existing currencies (legacy currencies) and one common currency - the euro. The euro is now trading on currency exchanges and may be used as a non-cash transitional currency. The conversion to the euro eliminates currency exchange rate risk between the participating member countries. Beginning in January 2002, new euro-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation. We are assessing the issues raised by the euro currency conversion. These issues include, among others, the need to adapt computer and financial systems to accommodate euro-denominated transactions, the competitive impact of increased price transparency in the participating countries and the impact on our existing contracts. Since financial systems and processes currently accommodate multiple currencies, we contemplate systems conversion by mid-2001 if not already addressed in conjunction with Year 2000 remediation. We do not expect system conversion costs to be material. Due to numerous uncertainties, we cannot reasonably estimate at this time the effects a common currency will have on pricing within the European Union and the resulting impact, if any, on our financial condition or results of operations. 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 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. 20 PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS N/A Item 2. CHANGES IN SECURITIES On December 11, 1998, the Company issued to the shareholders of Insync Systems, Inc. 526,759 shares (the "Shares") of its common stock, par value $.01 per share. The Shares were issued in a transaction exempt from registration pursuant to Section 4(2) of the United States Securities Act of 1933, as amended. On December 30, 1998, the Company issued to the shareholders of The Reinhold Faeth Group of Companies 769,231 shares (the "Shares") of its common stock, par value $.01 per share. The Shares were issued in a transaction exempt from registration pursuant to Section 4(2) of the United States Securities Act of 1933, as amended. Item 3. DEFAULTS UPON SENIOR SECURITIES N/A Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None Item 5. OTHER INFORMATION N/A 21 Item 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits The following exhibits are filed herewith: 10.1 Employment Agreement between Calvin R. Hendrix and the Company 27.0 Financial Data Schedule The Company filed four Current Reports on Forms 8-K during the quarter ended December 31, 1998, as follows: November 9, 1998 reporting earnings for the three and six month periods ended September 30, 1998. November 10, 1998 reporting certain financial information reflecting the pro forma results of operation for the fiscal year ended Marsh 31, 1998 as if the Company's acquisitions of Culligan Water Technologies ("Culligan") and Memtec Limited as well as Culligan's acquisitions of The Water Filtration Business of Ametek, Inc. and Protean plc had occurred at the beginning so such fiscal year. December 3, 1998 reporting certain Year 2000 readiness disclosures. December 3, 1997 reporting the adoptions of a Stockholder Rights Plan. 22 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: February 12, 1999 Kevin L. Spence Executive Vice President, Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) 23 EXHIBIT INDEX
Exhibit Number Description ------ ----------- 10.1 Employment Agreement between Calvin R. Hendrix and the Company 27.0 Financial Data Schedule
24 EX-10.1 2 EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of August 26, 1998, by and between UNITED STATES FILTER CORPORATION, a Delaware corporation (the "Company"), and CALVIN R. HENDRIX ("Executive"). W I T N E S S E T H : WHEREAS, the Company and Executive desire to enter into this Agreement to assure the Company of the continuing and exclusive service of Executive and to set forth the terms and conditions of Executive's employment with the Company; NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties agree as follows: 1. Employment. ---------- 1.1 Title and Duties. The Company hereby employs Executive as President ---------------- and Chief Operating Officer -- Consumer and Commercial Group of the Company. Executive's duties, responsibilities and authority shall be consistent with Executive's position and shall include such other duties, responsibilities and authority as may be assigned to Executive by the Board of Directors of the Company (the "Board") or the Chief Executive Officer of the Company (the "CEO"). 1.2 Services and Exclusivity of Services. The Company and Executive ------------------------------------ recognize that the services to be rendered by Executive are of such nature as to be peculiarly rendered by Executive, encompass the individual ability, managerial skills and business experience of Executive and cannot be measured exclusively in terms of hours or services rendered in any particular period. Executive agrees to devote Executive's full business time and to use 1 Executive's best efforts, energy and ability exclusively toward advancing the business, affairs and interests of the Company, and matters related thereto. 1.3 Noncompetition and Nonsolicitation. Executive agrees that during ---------------------------------- the Term (as defined in Section 2 below) of this Agreement (and in the case of termination pursuant to Section 5 below for a period of one year thereafter), Executive will neither directly nor indirectly engage in a business competing with any of the businesses conducted by the Company or any of its subsidiaries or affiliates, nor without the prior written consent of the Board directly or indirectly have any interest in, own, manage, operate, control, be connected with as a stockholder, joint venturer, officer, employee, partner or consultant, or otherwise engage, invest or participate in any business that is competitive with any of the businesses conducted by the Company or by any subsidiary or affiliate of the Company; provided, however, that nothing contained in this section 1.3 shall prevent Executive from investing or trading in stocks, bonds, commodities, securities, real estate or other forms of investment for Executive's own account and benefit (directly or indirectly), so long as such investment activities do not significantly interfere with Executive's services to be rendered hereunder and are consistent with the conflict of interest policies maintained by the Company from time to time. Executive further agrees that during the Term of this Agreement (and in the case of termination pursuant to Section 5 below for a period of one year thereafter) Executive will not, in any manner, directly or indirectly induce or attempt to induce any employee of the Company to terminate or abandon his or her employment for any purpose whatsoever (other than for poor performance of any employee employed by the Company at such time). 2. Term. The period of employment under this Agreement (the "Term") ---- shall commence as of the date first set forth above, (the "Effective Date") and shall continue for a period of twenty-four (24) full calendar months thereafter, as herein provided. Unless the Company or the Executive gives written notice to the other party to the contrary at least 60 days prior to the end of the Term (including any extension), on the first day of the month following the Effective Date, and on the first day of each month thereafter, the Term shall be automatically extended by one full calendar month. The Term shall continue until the expiration of all 2 automatic extensions affected as aforesaid unless and until it ceases or is terminated sooner as provided in this Agreement. 3. Compensation. ------------ 3.1 Base Salary. During the Term, the Company will pay to Executive ----------- a base salary at the rate of US $247,000.00 per year, payable in accordance with the Company practices in effect from time to time ("Base Salary"). Amounts payable shall be reduced by standard withholding and other authorized deductions. Such Base Salary shall be reviewed for increase (but not decrease) in the sole discretion of the Compensation Committee of the Board of Directors of the Company not less frequently than annually during the Term. In conducting any such review, the Compensation Committee shall consider and take into account, among other things, any change in Executive's responsibilities, performance of Executive, and compensation of other similarly situated executives of the Company and other comparable companies and other pertinent factors. Executive's Base Salary shall not be decreased except upon mutual agreement between the parties. 3.2 Bonuses, Incentive, Savings and Retirement Plans, Welfare Benefit ----------------------------------------------------------------- Plans. Executive shall be entitled to participate in all annual and long-term - ----- bonuses and incentive, savings and retirement plans generally available to other similarly situated executive employees of the Company. Executive, and Executive's family as the case may be, shall be eligible to participate in and receive all benefits under welfare benefit plans, practices, programs and policies provided to other similarly situated executive employees of the Company, including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs. The Company reserves the right to modify, suspend or discontinue any and all of its benefits referred to in this Section 3.2 at any time without recourse by Executive so long as such action is taken generally with respect to other similarly situated peer executives and does not single out Executive. 3.3 Fringe Benefits. Executive shall be entitled to receive --------------- fringe benefits consistent with Executive's duties and position, and in accordance with the benefits provided to other similarly situated executive employees of the Company. The Company reserves the right 3 to modify, suspend or discontinue any and all of its fringe benefits referred to in this Section 3.3 at any time without recourse by Executive so long as such action is taken generally with respect to other similarly situated peer executives and does not single out Executive. 3.4 Expenses. Executive shall be entitled to reimbursement for expenses -------- incurred in the furtherance of the business of the Company in accordance with the Company's practices and procedures, as they may exist from time to time. Executive shall keep complete and accurate records of all expenditures such that Executive may fully account according to the Company's practices and procedures. 3.5 Vacation. Executive shall be entitled to paid vacations and other -------- absences from work that are reasonably consistent with the performance of Executive's duties as provided in this Agreement. Such vacations and absences shall be in accordance with those generally provided to other similarly situated executive employees. 3.6 Additional Benefits Upon a Change of Control. -------------------------------------------- (a) In the event a Change of Control occurs during the Term, the Executive shall be entitled to receive, within thirty (30) days after the Change of Control, a cash lump sum amount equal to: (i) Executive's Base Salary for the balance of the Term, plus the target annual incentive bonus scheduled for the year in which there is a Change of Control and each year thereafter for the balance of the Term (determined without regard to any performance goals); plus (ii) the present value (as determined by a nationally recognized employee benefits consulting firm agreed to by Executive and the Company) of the health, life insurance, disability and accident insurance plans or programs covering Executive for the balance of the Term. (b) "Change of Control" shall mean the occurrence of any of the following: 4 (i) the acquisition by any person (including any syndicate or group deemed to be a "person" under Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision to either of the foregoing, of "beneficial ownership" directly or indirectly, of shares of capital stock of the Company entitling such person to exercise 50% or more of the total voting power of all "Voting Shares" of the Company; (ii) during any year or any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this definition) whose election by the Board or nomination for election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (hereinafter referred to as "Continuing Directors"), cease for any reason to constitute at least a majority thereof; (iii) any consolidation of the Company with, or merger of the Company into, any other person, any merger of another person into the Company, or any sale or transfer of all or substantially all of the assets of the Company to another person (other than (x) a consolidation or merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of capital stock other than shares of capital stock owned by any of the parties to the consolidation or merger or (y) a merger which is effected solely to change the jurisdiction of incorporation of the Company or (z) any consolidation with or merger of the Company into a wholly owned subsidiary, or any sale or transfer by the Company of all of substantially all of its assets to one or more of its wholly owned subsidiaries in any one transaction or a series of transactions; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company. 5 Notwithstanding the foregoing, unless otherwise determined by the Board of Directors, no change in control of the Company shall be deemed to have occurred if (x) the Executive is a member of a group which first announces a proposal which, if successful, would result in a Change of Control, which proposal (including any modifications thereof) is ultimately successful, or (y) the Executive acquires a two percent or more equity interest in the entity which ultimately acquires the Company pursuant to the transaction described in (x) of this paragraph. "Beneficial Ownership" shall be determined in accordance with Rule 13d-3 promulgated under the Exchange Act, except that a person shall be deemed to be the "beneficial owner" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time. "Voting Share" means all outstanding shares of any class or classes (however designated) of capital stock of the Company entitled to vote generally in the election of the Board of Directors of the Company. 4. Confidential Information. 4.1 General. Executive acknowledges that during employment by and as a ------- result of a relationship with the Company, Executive will obtain knowledge of and gain access to information regarding the Company's business, operations, products, proposed products, production methods, processes, customer lists, advertising, marketing and promotional plans and materials, price lists, pricing policies, financial information and other trade secrets, confidential information and material proprietary to the Company or designated as being confidential by the Company which is not generally known to non-Company personnel, including information and material originated, discovered or developed in whole or in part by Executive (collectively referred to herein as "Confidential Information"). Executive agrees that during the Term of this Agreement and, to the fullest extent permitted by law, thereafter, Executive will, in a fiduciary 6 capacity for the benefit of the Company, hold all Confidential Information strictly in confidence and will not directly or indirectly reveal, report, disclose, publish or transfer any of such Confidential Information to any person, firm or other entity, or utilize any of the Confidential Information for any purpose, except in furtherance of Executive's employment under this Agreement. 4.2 Proprietary Interest. All inventions, designs, improvements, -------------------- patents, copyrights and discoveries conceived by Executive during the Term of this Agreement that are useful in or directly or indirectly related to the business of the Company or to any experimental work carried on by the Company, shall be the property of the Company. Executive will promptly and fully disclose to the Company all such inventions, designs, improvements, patents, copyrights and discoveries (whether developed individually or with other persons) and shall take all steps necessary and reasonably required to assure the Company's ownership thereof and to assist the Company in protecting or defending the Company's proprietary rights therein. 4.3 Return of Materials. Executive expressly acknowledges that all ------------------- lists, books, records and other Confidential Information of the Company obtained in connection with the Company's business is the exclusive property of the Company and that upon the expiration or earlier termination of this Agreement, Executive will immediately surrender and return to the Company all such items and all other property belonging to the Company then in the possession of Executive, and Executive shall not make or retain any copies thereof. 5. Termination Prior to Expiration of Term. Executive's employment, and --------------------------------------- his rights under this Agreement, may be terminated prior to the expiration of the Term of this Agreement only as provided in this section 5. 5.1 Death or Disability. ------------------- (a) The Company may terminate the Executive's employment hereunder due to death or Disability (as defined below). If Executive's employment is terminated as a result of death or Disability, Executive (or Executive's estate or personal representative in the event of death) shall be entitled to receive Executive's full Base Salary until the expiration of six 7 months from the date on which Executive was first unable to substantially perform his duties hereunder. Executive and/or Executive's dependents shall be entitled to continue to participate in the Company's welfare benefit plans and programs on the same terms as similarly situated active employees for a period of six months from the date Executive was first unable to substantially perform Executive's duties hereunder. Executive and/or Executive's dependents shall thereafter be entitled to any continuation of such benefits provided under such benefit plans or by applicable law. (b) "Disability" shall mean a total and permanent physical or mental impairment that substantially limits a major life activity of Executive and that renders Executive unable to perform the essential functions of Executive's position, even with reasonable accommodation that does not impose an undue hardship on the Company. Executive's Disability shall be determined by the Company, in good faith, based upon information supplied by Executive and/or Executive's medical personnel or others selected by the Company or its insurers. 5.2 Termination by the Company for Cause. ------------------------------------ (a) The Company may terminate the Executive's employment hereunder for Cause (as hereinafter defined). If the Company terminates the Executive's employment hereunder for Cause, the Executive shall be entitled to receive (1) all Base Salary due employee as of the date of termination, (2) any previously authorized bonus (if any) for the period of Executive's employment prior to the discharge or resignation, and (3) any previously vested benefits, such as previously vested retirement benefits. Furthermore, the Company shall honor any rights previously vested in Executive under a stock option or similar plan or program. (b) "Cause" shall mean (1) the Executive's conviction of a felony; (2) a material breach of this Agreement by the Executive and/or the Executive's gross neglect of his duties hereunder; or (3) the Executive's addiction to alcohol or to a drug not prescribed by a physician. 5.3 Termination Without Cause or Termination for Good Reason. -------------------------------------------------------- 8 (a) The Company may terminate the Executive's employment hereunder without Cause, and the Executive shall be permitted to terminate his employment hereunder for Good Reason (as hereinafter defined). If the Company terminates the Executive's employment hereunder without Cause, other than due to death or Disability, or if the Employee effects a termination for Good Reason, the Executive shall be entitled to receive all the benefits provided for under Section 3.6 of this Agreement. (b) "Good Reason" means and shall be deemed to exist if, without the prior written consent of the Executive, (1) the Executive suffers a reduction in duties, responsibilities or effective authority associated with his titles and positions as set forth and described in this Agreement or is assigned any duties or responsibilities inconsistent in any material respect therewith; (2) the Company fails to substantially perform any material term or provision of this Agreement; or (3) the Executive's compensation or benefits provided for hereunder is decreased. 6. Arbitration. ----------- 6.1 General. Any dispute, controversy or claim arising out of or ------- relating to this Agreement, the breach hereof or the coverage or enforceability of this arbitration provision shall be settled by arbitration in Riverside County, California (or such other location as the Company and Executive may mutually agree), conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, as such rules are in effect in Riverside on the date of delivery of demand for arbitration. The arbitration of any such issue, including the determination of the amount of any damages suffered by either party hereto by reason of the acts or omissions of the other, shall be to the exclusion of any court of law. Notwithstanding the foregoing, either party hereto may seek any provisional remedy in a court, including but not limited to an action for injunctive relief or attachment, without waiving the right to arbitration. 6.2 Procedure. There shall be three arbitrators, one to be chosen by --------- each party at will within 10 days from the date of delivery of demand for arbitration and the third arbitrator to be selected by the two arbitrators so chosen. If the two arbitrators are unable to select a third arbitrator within 10 days after the last of the two arbitrators is chosen by the parties, the third arbitrator will be designated, on application by either party, by the American Arbitration 9 Association. The decision of a majority of the arbitrators shall be final and binding on both parties and their respective heirs, executors, administrators, personal representatives, successors and assigns. Judgement upon any award of the arbitrators may be entered in any court having jurisdiction, or application may be made to any such court for the judicial acceptance of the award and for an order of enforcement. 6.3 Costs and Expenses. The Company shall pay the fees of all ------------------ arbitrators, witnesses and such other expenses as may be generated by the arbitration, except Executive's attorneys fees, unless a majority of the arbitrators concludes that such arbitration procedure was not instituted in good faith by Executive. In such event the arbitrators shall be empowered to allocate fees and assess costs and other expenses of the arbitrators, except attorneys fees, as they may deem appropriate, bearing in mind the relative financial abilities of the parties and the respective merits of their positions. 7. Non-Assignment. This Agreement shall not be assignable nor the duties -------------- hereunder delegable by Executive. None of the payments hereunder may be encumbered, transferred or in any way anticipated. The Company shall not assign this Agreement nor shall it transfer all or any substantial part of its assets without first obtaining in conjunction with such transfer the express assumption of the obligations hereof by the assignee or transferee. 8. Remedies. Executive acknowledges that the services Executive is to -------- render under this Agreement are of a unique and special nature, the loss of which cannot reasonably or adequately be compensated for in monetary damages, and that irreparable injury and damage will result to the Company in the event of any default or breach of this Agreement by Executive. Because of the unique nature of the Confidential Information, Executive further acknowledges and agrees that the Company will suffer irreparable harm if Executive fails to comply with the obligations in section 4 hereof and that monetary damages would be inadequate to compensate the Company for such breach. Accordingly, Executive agrees that the Company will, in addition to any other remedies available to it at law, in equity or, without limitation, otherwise, be entitled to injunctive relief and/or specific performance to enforce the terms, or prevent or remedy the violation, of any provisions of this Agreement. This provision shall not constitute a waiver by the Company of any rights to damages or other remedies which it may have pursuant to this Agreement or otherwise. 10 9. Survival. The provisions of sections 4, 5, 6 and 8 shall survive the -------- expiration or earlier termination of this Agreement. 10. Notices. Any notices or other communications relating to this Agreement ------- shall be in writing and delivered personally or mailed by certified mail, return receipt requested, to the party concerned at the address set forth below: If to Company: United States Filter Corporation 40-004 Cook Street Palm Desert, California 92211 Attn: General Counsel If to Executive: At Executive's residence address as maintained by the Company in the regular course of its business for payroll purposes. Either party may change the address for the giving of notices at any time by notice given to the other party under the provisions of this section 10. 11. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties and supersedes all prior written and oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof, other than that certain written letter agreement dated as of May 4, 1998 by and among Executive, the Company and Culligan International, Inc. This Agreement may not be changed orally, but only by an agreement in writing signed by both parties. Such letter agreement is attached and is incorporated by reference. 12. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be an original, but all of which together shall constitute one agreement. 13. Construction. This Agreement shall be governed under and construed in ------------ accordance with the laws of the State of California. The paragraph headings and captions contained herein are for reference purposes and convenience only and shall not in any way affect the meaning or 11 interpretation of this Agreement. It is intended by the parties that this Agreement be interpreted in accordance with its fair and simple meaning, not for or against either party, and neither party shall be deemed to be the drafter of this Agreement. 14. Severability. If any portion or provision of this Agreement is ------------ determined by arbitration or by a court of competent jurisdiction to be invalid, illegal or unenforceable, the remaining portions or provisions hereof shall not be affected. The covenants in this Agreement are severable and separate, and the unenforceability of any specific covenant shall not affect the enforceability of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and this Agreement shall thereby be reformed. 15. Binding Effect. The rights and obligations of the parties under this -------------- Agreement shall be binding upon and inure to the benefit of the permitted successors, assigns, heirs, administrators, executors and personal representatives of the parties. 12 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and in the year first written above. UNITED STATES FILTER CORPORATION By: /s/ Alfred E. Osborne, Jr. ----------------------------------- Name: Dr. Alfred E. Osborne, Jr. Title: Chairman, Compensation Committee of the Board of Directors EXECUTIVE CALVIN R. HENDRIX /s/ Calvin R. Hendrix ------------------------------------------ Signature 13 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS OF UNITED STATES FILTER CORPORATION AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 9-MOS MAR-31-1999 MAR-31-1999 OCT-01-1998 APR-01-1998 DEC-31-1998 DEC-31-1998 38,032 0 377 0 1,162,523 0 (45,894) 0 534,823 0 2,194,184 0 1,426,165 0 (362,757) 0 5,126,345 0 1,262,197 0 1,401,719 0 0 0 0 0 1,766 0 1,731,201 0 5,126,345 0 1,225,109 3,570,322 1,225,109 3,570,322 861,690 2,511,304 861,690 2,511,304 0 0 2,123 12,387 29,999 85,180 99,265 18,356 35,774 50,051 63,491 (31,695) 0 0 0 0 0 0 63,491 (31,695) 0.37 (0.19) 0.36 (0.19)
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