-----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, Ib31Ux4Og5r/39SiVnZAo3PM3ndzD/pU7WfFUKQvDXN7ng0BPCmSieHxKtUSVdST sOxapUoGDBrOrHg8ktGL5A== 0000944209-98-000959.txt : 19980513 0000944209-98-000959.hdr.sgml : 19980513 ACCESSION NUMBER: 0000944209-98-000959 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980512 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/A SEC ACT: SEC FILE NUMBER: 000-09534 FILM NUMBER: 98617106 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/A 1 FORM 10-Q/A AMENDMENT NO. 1 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-Q/A (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, 1997 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 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) (760) 340-0098 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares of common stock, $.01 par value, outstanding as of February 13, 1998 was 106,278,587 shares. Total number of pages 22 THERE IS 1 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, 1997 AND DECEMBER 31, 1997 (UNAUDITED)
MARCH 31, DECEMBER 31, 1997 1997 ---------- ------------ (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents............................ $ 135,144 57,821 Short-term investments............................... 2,158 904 Accounts receivable, net............................. 572,940 739,587 Costs and estimated earnings in excess of billings on uncompleted contracts............................... 130,310 205,427 Inventories.......................................... 245,201 350,968 Prepaid expenses..................................... 8,931 19,893 Deferred taxes....................................... 53,152 82,246 Other current assets................................. 17,086 28,257 ---------- --------- Total current assets................................ 1,164,922 1,485,103 ---------- --------- Property, plant and equipment, net.................... 319,687 761,147 Investment in leasehold interests, net................ 23,230 22,424 Costs in excess of net assets of businesses acquired, net.................................................. 788,096 978,271 Other assets.......................................... 101,628 113,837 ---------- --------- $2,397,563 3,360,782 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable..................................... $ 274,653 304,890 Accrued liabilities.................................. 275,537 410,245 Current portion of long-term debt.................... 11,956 25,464 Billings in excess of costs and estimated earnings on uncompleted contracts............................... 61,441 121,831 Other current liabilities............................ 26,183 77,045 ---------- --------- Total current liabilities........................... 649,770 939,475 ---------- --------- Notes payable......................................... 31,464 475,181 Long-term debt, excluding current portion............. 42,646 128,988 Convertible subordinated debentures................... 554,000 554,000 Deferred taxes........................................ 12,198 3,506 Other liabilities..................................... 61,655 66,108 ---------- --------- Total liabilities................................... 1,351,733 2,167,258 ---------- --------- Shareholders' equity: Common stock, par value $.01. Authorized 300,000 shares; 80,334 and 103,957 shares issued and outstanding at March 31, 1997 and December 31, 1997, respectively........................................ 803 1,040 Additional paid-in capital........................... 1,013,734 1,500,786 Currency translation adjustment...................... (19,491) (37,287) Retained earnings (accumulated deficit).............. 50,784 (271,015) ---------- --------- Total shareholders' equity.......................... 1,045,830 1,193,524 ---------- --------- Commitments and contingencies......................... ---------- --------- $2,397,563 3,360,782 ========== =========
See Accompanying Notes to Condensed Consolidated Financial Statements. 2 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------- -------------------- 1996 1997 1996 1997 --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues........................... $ 463,423 829,427 1,094,636 2,346,553 Costs of sales..................... 369,736 621,893 859,754 1,798,595 --------- --------- --------- --------- Gross profit..................... 93,687 207,534 234,882 547,958 Selling, general and administrative expenses.......................... 81,482 148,478 196,752 414,546 Purchased in-process research and development....................... -- 299,505 -- 299,505 Merger, restructuring, acquisition and other related charges......... -- 141,109 5,581 141,109 --------- --------- --------- --------- 81,482 589,092 202,333 855,160 --------- --------- --------- --------- Operating income (loss).......... 12,205 (381,558) 32,549 (307,202) Other income (expense): Interest expense................. (6,484) (13,198) (15,907) (34,374) Other, net....................... 1,818 1,779 2,981 3,002 --------- --------- --------- --------- (4,666) (11,419) (12,926) (31,372) --------- --------- --------- --------- Income (loss) before taxes....... 7,539 (392,977) 19,623 (338,574) Income tax expense (benefit)....... 1,211 (18,882) 3,845 (1,273) --------- --------- --------- --------- Net income (loss)................ $ 6,328 (374,095) 15,778 (337,301) ========= ========= ========= ========= Net income (loss) per common share: Basic............................ $ 0.10 (3.71) 0.27 (3.65) ========= ========= ========= ========= Diluted.......................... $ 0.09 (3.71) 0.26 (3.65) ========= ========= ========= =========
See Accompanying Notes To Condensed Consolidated Financial Statements. 3 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31, ------------------ 1996 1997 -------- -------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES:...................... Net income (loss).......................................... $ 15,778 (337,301) Adjustments to reconcile net income (loss) to net cash provided by............................................... (used in) operating activities:............................ Deferred income taxes...................................... (11,700) (23,606) Provision for doubtful accounts............................ 3,292 6,172 Depreciation............................................... 28,406 47,236 Amortization............................................... 9,338 20,695 Write-off of in-process research and development and goodwill.................................................. -- 352,025 Loss on sale or disposal of assets......................... 3 11,557 Change in operating assets and liabilities:................ (Increase) decrease in accounts receivable............... 7,990 (23,569) Increase in costs and estimated earnings in excess of billings on uncompleted contracts....................... (35,904) (30,158) Increase in inventories.................................. (17,125) (19,590) (Increase) decrease in other assets...................... (20,271) 1,723 Increase (decrease) in accounts payable and accrued expenses................................................ 17,209 (26,450) Increase (decrease) in billings in excess of costs and estimated earnings on uncompleted contracts.............. (3,561) 22,584 Increase (decrease) in other liabilities................. (5,081) 16,796 -------- -------- Net cash provided by (used in) operating activities...... (11,626) 18,114 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Payment for purchase of property, plant & equipment...... (43,283) (77,683) Payment for purchase of acquisitions, net of cash ac- quired.................................................. (404,478) (411,082) Proceeds from disposal of equipment...................... 394 3,860 Sale of short-term investments........................... 152 1,260 -------- -------- Net cash used in investing activities.................... (447,215) (483,645) -------- --------
See Accompanying Notes To Condensed Consolidated Financial Statements. 4 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 (CONTINUED) (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31, ------------------- 1996 1997 --------- -------- (IN THOUSANDS) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock................ 358,441 -- Net proceeds from sale of convertible subordinated debentures............................................... 403,650 -- Proceeds from exercise of common stock options............ 1,487 3,514 Principal payments on debt................................ (7,300) (20,170) Net (payments) proceeds from borrowings on notes payable.. (913) 404,914 Dividends paid............................................ (3,067) (50) --------- -------- Net cash provided by financing activities............... 752,298 388,208 --------- -------- Net increase (decrease) in cash and cash equivalents.... 293,457 (77,323) Cash and cash equivalents at March 31, 1996 and 1997...... 27,730 135,144 --------- -------- Cash and cash equivalents at December 31, 1996 and 1997... $ 321,187 57,821 ========= ======== Supplemental disclosures of cash flow information: Cash paid during the period for interest................ $ 15,602 34,023 ========= ======== Cash paid during the period for income taxes............ $ 10,596 22,212 ========= ========
See Accompanying Notes To Condensed Consolidated Financial Statements. 5 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, 1997. 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. In the current period, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Accordingly, "Basic EPS" and "Diluted EPS" were calculated as follows:
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------- -------------------- 1996 1997 1996 1997 --------- ---------- --------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC Net income (loss) applicable to common shares................... $ 6,328 (374,095) 15,778 (337,301) ======== ========== ======== ========== Weighted average common shares outstanding................... 65,061 100,927 59,016 92,340 ======== ========== ======== ========== Basic income (loss) per common share......................... $ 0.10 (3.71) 0.27 (3.65) ======== ========== ======== ========== DILUTED Net income (loss) applicable to common shares................... $ 6,328 (374,095) 15,778 (337,301) Add: Effect on net income of conversion of convertible subordinated debentures....... -- * -- ** -- * -- ** Adjusted net income (loss) applicable to common shares..... 6,328 (374,095) 15,778 (337,301) ======== ========== ======== ========== Weighted average shares outstanding..................... 65,061 100,927 59,016 92,340 Add: Exercise of options and assumed conversion of subordinated debentures.................... 2,418* -- ** 2,055* -- ** -------- ---------- -------- ---------- Adjusted weighted average shares outstanding..................... 67,479 100,927 61,071 92,340 ======== ========== ======== ========== Diluted income (loss) per common share........................... $ 0.09 (3.71) 0.26 (3.65) ======== ========== ======== ==========
- -------- * The calculation of diluted EPS does not assume conversion of subordinated debentures for the three and nine months ended December 31, 1996 as the effect would be antidilutive to income per share. ** 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 share. 6 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) NOTE 2. INVENTORIES Inventories at March 31, 1997 and December 31, 1997 consist of the following:
MARCH DECEMBER 31, 31, 1997 1997 -------- ------------ (IN THOUSANDS) Raw materials...................................... $ 56,830 116,446 Work-in-progress................................... 58,619 83,136 Finished goods..................................... 129,752 151,386 -------- ------- $245,201 350,968 ======== =======
NOTE 3. PROPERTY, PLANT AND EQUIPMENT On September 17, 1997, the Company acquired more than 47,000 acres of agricultural land in Imperial County, California and other parts of the Southwestern United States in exchange for 8.0 million shares and warrants to acquire 1.2 million shares of common stock, par value $0.01 per share, of the Company. These shares and warrants are subject to certain restrictions and limitations more fully described in agreements among the Company and the holders of such securities. The recorded value of the acquired land is approximately $210.0 million. NOTE 4. NOTES PAYABLE As of December 31, 1997, the Company had a Senior Credit Facility which provides credit facilities to the Company of up to $750.0 million, of which there were outstanding borrowings of $419.1 million and outstanding letters of credit of $40.5 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 is subject to customary and usual terms. In connection with the acquisition of The Kinetics Group, Inc. ("Kinetics") (see note 5) the Company has an additional loan agreement with a bank that provides a revolving line-of-credit under which a subsidiary of the Company may borrow up to $100.0 million of which there were outstanding borrowings of $33.8 million at December 31, 1997. Borrowings under this agreement bear interest at the bank's reference rate or other interest rate options that the subsidiary may select. In connection with the acquisition of Memtec Limited ("Memtec") (see note 5), the Company has a Multi-Option, Multi-Currency Master Facility Agreement with a bank that provides for borrowings of up to $60.0 million, of which there were outstanding borrowings of $22.3 million as of December 31, 1997. Borrowings under this agreement bear interest at LIBOR plus 0.75%. NOTE 5. ACQUISITIONS On December 31, 1997, a wholly-owned subsidiary of the Company and Kinetics effectively consummated a merger and acquisition in a tax-free reorganization (the "Merger") contemplated under and pursuant to a definitive Merger Agreement among the Company, Kinetics and substantially all of the shareholders of Kinetics. In connection with this merger, the Company issued 5,803,803 shares of the Company's common stock for all of the outstanding common stock of Kinetics (0.5824 share of the Company's common stock for each outstanding share and each outstanding option or other right to acquire a share of Kinetics common stock). In addition, the Company assumed approximately $50.0 million of third party institutional debt. 7 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) Kinetics, based in Santa Clara, California, is a provider and manufacturer of sophisticated high purity process piping systems and is also a leading integrator in the United States of high purity water, fluid and gas handling systems that are critical to the pharmaceutical, biotechnology and micro electronics industries. This transaction has been accounted for as a pooling of interests and, accordingly, the consolidated financial statements and notes thereto for all periods presented have been restated to include the accounts of Kinetics. In restating the Company's historical financial statements for the pooling of interests with Kinetics, the Company's balance sheet as of March 31, 1997 was combined with Kinetics audited balance sheet as of September 30, 1997. Additionally, results of the Company for the fiscal year ended March 31, 1997 were combined with the results of Kinetics for the fiscal year ended September 30, 1997; historical results of the Company for the three and nine months ended December 31, 1996 were combined with historical results of Kinetics for the three and nine months ended June 30, 1997, respectively. Concurrent with the Company's merger, Kinetics year end was recast to March 31. Accordingly, results of Kinetics for the six month period ended September 30, 1997 (including revenue of $227.4 million and a net loss of $8.5 million) are included in both the restated historical results for the fiscal year ended March 31, 1997 and the results for the nine months ended December 31, 1997. Separate results of operations of the combined entities for the three and nine months ended December 31, 1996 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1996 ----------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Company (as previously reported).......... $368,124 838,936 Kinetics.................................. 95,299 255,700 -------- --------- Combined.................................. $463,423 1,094,636 ======== ========= Net income (loss): Company (as previously reported).......... $ 14,351 29,014 Kinetics.................................. (8,023) (13,236) -------- --------- Combined.................................. $ 6,328 15,778 ======== ========= Income per common share: Basic: As previously reported.................... $ 0.24 0.54 ======== ========= As restated............................... $ 0.10 0.27 ======== ========= Diluted: As previously reported.................... $ 0.23 0.52 ======== ========= As restated............................... $ 0.09 0.26 ======== =========
Merger expenses incurred to consummate the Kinetics transaction totaled $4.3 million consisting of investment banking fees, printing fees, stock transfer fees, legal fees, accounting fees, governmental filing fees and certain other transaction costs and are included in merger, restructuring, acquisition and other related charges in the accompanying December 31, 1997 Condensed Consolidated Statements of Operations. 8 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) On December 9, 1997, the Company, through a wholly-owned subsidiary, completed its tender offer ("Offer") to purchase all of the outstanding ordinary shares (including American Depository Shares) of Memtec. The purchase price was $36.00 per share. The Company acquired certain shares in privately negotiated and open market purchases prior to the Offer resulting in a total cash purchase price of approximately $397.2 million (including estimated transaction costs of $10.6 million). The purchase price was allocated to the assets and liabilities of Memtec based on their estimated respective fair values. The excess of fair value of net assets acquired was approximately $66.1 million, and is being amortized on a straight-line basis over 40 years. The value of other intangible assets including patents, trademarks, license and distribution fees was approximately $7.3 million, and is being amortized over periods ranging from 5 to 12 years. The Company also acquired from Memtec certain in-process research and development projects that had not reached technological feasibility and that had no alternative future use. Such projects were valued by an independent appraiser using a risk adjusted cash flow model under which expected future cash flows were discounted, taking into account risks related to existing and future markets and assessments of the life expectancy of such projects. The estimated market value of such in- process research and development projects was $299.5 million and was expensed at the acquisition date. Memtec is incorporated under the law of the State of New South Wales, Australia and has worldwide operations. Memtec is a leader in the designing, engineering, manufacturing and marketing of an extensive range of filtration products and systems, focusing on two principal areas of the filtration market: industrial filtration and water filtration. Memtec had revenues of approximately $243.6 million and net income of approximately $7.5 million for the year ended June 30, 1997. The acquisition of Memtec has been accounted for as a purchase and, accordingly, the results of Memtec's operations have been included in the consolidated financial statements of the Company from the date of acquisition. Summarized below are the unaudited pro forma results of operations of the Company as though Memtec had been acquired at the beginning of the nine month periods ended December 31, 1996 and 1997.
NINE MONTHS ENDED DECEMBER 31, -------------------- 1996 1997 ---------- --------- (IN THOUSANDS, EXCEPT PER COMMON SHARE) Revenues................................................. $1,269,263 2,515,056 ========== ========= Net income (loss)........................................ $ 23,454 (336,394) ========== ========= Net income (loss) per common share: Basic.................................................... $ 0.40 (3.64) ========== ========= Diluted.................................................. $ 0.38 (3.64) ========== =========
Concurrent with the merger with and into Kinetics and the acquisition of Memtec, the Company designed and implemented a restructuring plan to streamline its manufacturing and production base, improve efficiency and enhance its competitiveness. The restructuring plan resulted in a pre-tax charge of $141.1 million. The plan identifies certain products and technologies acquired in conjunction with the Memtec transaction that supersede products and technologies acquired in earlier acquisitions of membrane related businesses. As a result certain carrying amounts of goodwill and other intangible assets were determined to be impaired by approximately $55.0 million in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate 9 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) that the carrying amount of the assets may not be recoverable. In determining the amount of the impairment of these assets, the Company valued the assets using the present value of estimated expected future cash flows using discount rates commensurate with the risks involved. The restructuring plan also included closing or reconfiguring of certain facilities and reducing the work force by approximately 350 employees, most of whom work in the facilities to be closed. Included in merger, restructuring, acquisition and other related charges are the following:
(IN THOUSANDS) Write-down of goodwill and other intangible assets............... $ 54,950 Asset write-offs, including equipment and facilities............. 47,887 Merger, integration and other acquisition costs.................. 21,135 Severance and related costs...................................... 17,137 -------- Total merger, restructuring, acquisition and other related charges..................................................... $141,109 ======== Cash charges..................................................... $ 36,431 Non-cash charges................................................. 104,678 -------- $141,109 ========
Approximately $30.3 million of merger and restructuring related charges are included in accrued liabilities at December 31, 1997. Additional costs to complete the restructuring plan are not expected to be material. After an income tax benefit of $34.5 million, the charges detailed above totaling $440.6 million reduced earnings by $406.1 million. NOTE 6. SUBSEQUENT EVENT On February 9, 1998, the Company announced it had entered into an Agreement and Plan of Merger (the "Merger Agreement") dated as of February 9, 1998, among the Company, Palm Water Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the Company ("Merger Sub"), and Culligan Water Technologies, Inc. ("Culligan"), Delaware corporation. Pursuant to the Merger Agreement, Merger Sub will be merged with and into Culligan (the "Merger"). In connection with the Merger, the Company will issue in exchange for each issued and outstanding share (other than treasury shares and shares owned by the Company) of Culligan common stock, par value $.01 per share, 1.714 shares of common stock, par value $.01 per share, of the Company pursuant to formula. The Merger will be accounted for as a pooling of interests and is intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. Consummation of the Merger is subject to customary regulatory approvals and the approval of the stockholders of each of the Company and Culligan. The Merger is expected to be consummated in the first half of fiscal 1999. 10 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, 1997 were $829.4 million, an increase of $366.0 million or 79.0% from the $463.4 million for the three months ended December 31, 1996. Revenues for the nine months ended December 31, 1997 were $2.3 billion, an increase of $1.2 billion or 114.4% from the $1.1 billion for the nine months ended December 31, 1996. These increases were due primarily to acquisitions completed by the Company subsequent to December 31, 1996. For the nine months ended December 31, 1997, revenues from capital equipment sales represented 45.3% of total revenues. Revenues from services, operations, replacement parts and consumables represented 23.9% of total revenues, while revenues from distribution represented 29.1% of total revenues and revenues from consumer products represented 1.7% of total revenues. Gross profit. Gross profit as a percentage of revenue ("gross margin") was 25.0% for the three months ended December 31, 1997 compared to 20.2% in the corresponding period in the prior year. Gross margin was 23.4% for the nine months ended December 31, 1997 compared to 21.5% in the corresponding period in the prior year. These increases in gross margin for the three and nine month periods ended December 31, 1997 were due primarily to the incurrence of certain unreimbursed project costs at The Kinetics Group, Inc. ("Kinetics") during the three and nine months ended December 31, 1996 after restatement for the acquisition of Kinetics in the current period accounted for as a pooling of interests transaction (see below). Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended December 31, 1997 were $148.5 million before purchased in-process research and development and merger, restructuring, acquisition and other related charges described below ("non-recurring charges"), an increase of $67.0 million or 82.2% from the $81.5 million for the three months ended December 31, 1996. During this period, selling, general and administrative expenses (before non-recurring charges) were 17.9% of revenues compared to 17.6% for the comparable period in the prior year. For the nine months ended December 31, 1997, selling, general and administrative expenses (before non-recurring charges) increased $217.7 million to $414.5 as compared to the $196.8 million, before merger expenses described below, in the comparable period in the prior year. During this period, selling, general and administrative expenses (before non- recurring charges) were 17.7% of revenues compared to 18.0% (before merger expenses) for the comparable period in the prior year. Purchased In-Process a Research and Development. On December 9, 1997, the Company, through a wholly-owned subsidiary, completed its tender offer ("Offer") to purchase all of the outstanding ordinary shares (including American Depository Shares) of Memtec. The purchase price was $36.00 per share. The Company acquired certain shares in privately negotiated and open market purchases prior to the Offer resulting in a total cash purchase price of approximately $397.2 million (including estimated transaction costs of $10.6 million). The purchase price was allocated to the assets and liabilities of Memtec based on their estimated respective fair values. The Company also acquired from Memtec certain in-process research and development projects that had not reached technological feasibility and that had no alternative future use. Such projects were valued by an independent appraiser using a risk adjusted cash flow model under which expected future cash flows were discounted, taking into account risks related to existing and future markets and assessments of the life expectancy of such projects. The estimated market value of such in-process research and development (R&D) projects was $299.5 million and was expensed at the acquisition date. In addition, the Company also acquired from Memtec and its subsidiaries (consisting of Memcor, Fluid Dynamics, Filterite, and Seitz) developed technologies including large volume purification product lines; membrane systems for water purification and waste treatment; metal fiber product lines for industrial applications involving elevated pressures, temperatures and corrosive environments; disposable product lines for industrial applications; and depth media product lines for the pharmaceutical and food and beverage industries. 11 As a result of the degree of competition in the filtration industry and the use of technological change as a competitive tool, a significant proportion of Memtec's technology will be superseded, although the rate of change varies significantly across the markets addressed. Memtec's R&D initiatives are therefore targeted at superseding current products. Memtec has a range of ongoing R&D projects in each of its product lines. Certain of these projects are directed at next generation products for existing market applications while others are directed at new market opportunities where Memtec's technological base may be applicable. Memcor R&D projects are primarily directed at enhanced microfiltration products capable of cost effectively addressing larger scale applications or more chemically aggressive environments. These R&D projects are at the laboratory to pilot stage of development and require a number of years further work before full introduction to the market of a product is likely. Other Memcor R&D projects seek to utilize Memtec's knowledge of electrochemical processes to enter new markets ranging from high quality water production to environmental sensors. These R&D projects are also at the laboratory to pilot stage and similarly require a number of years further R&D before a product is available for launching. Fluid Dynamics R&D projects are directed at developing new applications for Memtec's proprietary metallic media. The media enables precise fine filtration in a range of hostile environments as well as having unique conductive properties. These R&D projects are at the laboratory stage of development and require additional research ranging from twelve months to several years depending upon the particular product before any market launch is possible. Filterite R&D project center around its two proprietary technologies--the unique Filterite highly assymetric membrane and the CoLD melt spinning technology. R&D projects are examining expansion of product offerings from these core technologies. These projects require further materials science laboratory work followed by manufacturing prototyping and tailoring to market applications--a process which will range from eighteen months to several years. Seitz R&D is directed at next generation filtration technologies for the food and beverage and chemicals industries drawing on the core technologies of Seitz. These R&D projects are predominantly at the pilot stage, requiring extensive trialing evaluation and development based on the trialing before market launches are possible. Failure to complete these R&D projects successfully and on time would open the way for competitors to introduce alternate technologies, with consequent implications for Memtec's revenues. To be successful in most cases the R&D projects must be developed from laboratory or pilot scale models to full scale products capable of production within a quality accredited manufacturing process. The existing R&D projects are expected to be completed within the historical expenditure levels of Memtec--approximately 3% of net sales, and within historical levels of capital expenditure. The valuation process distinguished between R&D projects with no alternate use or value and those with alternate use. Predominantly all R&D projects are at a stage of development where the progress to date is not applicable to any other use within Memtec nor is it saleable to any third party known to management. Merger, Restructuring, Acquisition and Other Related Charges. On December 31, 1997, the Company merged with and into Kinetics in a tax-free reorganization, which was accounted for as a pooling of interests. Concurrent with the merger with and into Kinetics and the acquisition of Memtec, the Company designed and implemented a restructuring plan to streamline its manufacturing and production base, improve efficiency and enhance its competitiveness. The restructuring plan resulted in a pre-tax charge of $141.1 million. The plan identifies certain products and technologies acquired in conjunction with the Memtec transaction that supersede products and technologies acquired in earlier acquisitions of membrane related businesses. As a result certain carrying amounts of goodwill and other intangible assets were determined to be impaired by approximately $55.0 million in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate 12 that the carrying amount of the assets may not be recoverable. In determining the amount of the impairment of these assets, the Company valued the assets using the present value of estimated expected future cash flows using discount rates commensurate with the risks involved. The restructuring plan also included closing or reconfiguring of certain facilities and reducing the work force by approximately 350 employees, most of whom work in the facilities to be closed. Included in merger, restructuring, acquisition and other related charges are the following:
(IN THOUSANDS) Write-down of goodwill and other intangible assets................ $ 54,950 Asset write-offs, including equipment and facilities.............. 47,887 Merger, integration and other acquisition costs................... 21,135 Severance and related costs....................................... 17,137 -------- Total......................................................... $141,109 ======== Cash charges...................................................... $ 36,431 Non-cash charges.................................................. 104,678 -------- $141,109 ========
Approximately $30.3 million of merger and restructuring related charges are included in accrued liabilities at December 31, 1997. Additional costs to complete the restructuring plan are not expected to be material. After an income tax benefit of $34.5 million, the charges detailed above totaling $440.6 million reduced earnings by $406.1 million. The write-down of assets as a result of the restructuring plan (including assets of business' whose products were superseded by Memtec's products) will not have a material affect on the Company's consolidated results of operations in the future. Merger expenses incurred during the nine months ended December 31, 1996 relate to the Company's acquisition of Davis Water & Waste Industries, Inc. ("Davis") which was accounted for as a pooling of interests. These merger expenses, which totaled $5.6 million, consisted primarily of investment banking fees, printing fees, stock transfer fees, accounting fees, legal fees, governmental filing fees and certain other costs related to certain Davis pension plans and change of control payments. Interest expense. Interest expense increased to $13.2 million for the three months ended December 31, 1997 from $6.5 million for the corresponding period in the prior year. Interest expense increased to $34.4 million for the nine months ended December 31, 1997 from $15.9 million for the corresponding period in the prior year. Interest expense for the three and nine months ended December 31, 1997 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) borrowings under Kinetics' long-term line-of- credit, (iv) 8.0% Senior Subordinated Notes issued by Kinetics, (v) borrowings under Memtec's long-term line-of- credit, (vi) Senior Guaranteed Notes issued by Memtec bearing interest at rates ranging from 7.7% to 8.0%, (vii) other long-term debt bearing interest at rates ranging from 2.0% to 9.2% and (viii) borrowings under the Company's Senior Credit Facility. At December 31, 1997, the Company had cash and short-term investments of $58.7 million. Income taxes. The Company recorded an income tax benefit of $18.9 million for the three months ended December 31, 1997 as compared to income tax expense of $1.2 million in the comparable period in the prior year. Before non- recurring charges, income tax expense was $15.6 million, or an effective tax rate of 32.8% for the three months ended December 31, 1997 as compared to 16.1% for the comparable period in the prior year. 13 Net income. Net income before non-recurring charges for the three months ended December 31, 1997 was $32.0 million, an increase of $25.7 million from the $6.3 million for the three months ended December 31, 1996. Net income before non-recurring charges for the nine months ended December 31, 1997 was $68.8 million, an increase of $49.0 million from the $19.8 million for the nine months ended December 31, 1996. After non-recurring charges, net loss in the three months ended December 31, 1997 was $374.1 million as compared to net income of $6.3 million in the corresponding period in the prior year. Net loss for the nine months ended December 31, 1997 (after the non-recurring charges) was $337.3 million as compared to net income of $15.8 million in the corresponding period in the prior year. Net income (loss) per common share for the three and nine months ended December 31, 1997 and 1996 were as follows:
THREE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, ------------- ------------ 1996 1997 1996 1997 ------ ------ ------------ Basic........................................... $ 0.10 (3.71) 0.27 (3.65) ====== ====== ===== ====== Diluted......................................... $ 0.09 (3.71) 0.26 (3.65) ====== ====== ===== ======
LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of funds are cash and other working capital, cash flow generated from operations and borrowings under the Company's bank line-of-credit. At December 31, 1997, the Company had working capital of $545.6 million including cash and short-term investments of $58.7 million. The Company's long-term debt at December 31, 1997, was $554.0 million consisting of $140.0 million of 6.0% Convertible Subordinated Notes due 2005 and $414.0 million of 4.5% Convertible Subordinated Notes due 2001. The Company also had other long-term debt totaling $154.5 million consisting of (i) $18.3 million of 8.0% Senior Subordinated Notes issued by Kinetics, (ii) $60.0 million of Senior Guaranteed Notes issued by Memtec bearing interest at rates ranging from 7.7% to 8.0% and (iii) other long-term debt of $76.2 million bearing interest at rates ranging from 2.0% to 9.2%. Subsequent to December 31, 1997 substantially all of Kinetics' debt (including borrowings on their revolving line-of-credit described below) was repaid with borrowings under the Company's Senior Credit Facility. As of December 31, 1997, the Company had a Senior Credit Facility which provides credit facilities to the Company of up to $750.0 million, of which there were outstanding borrowings of $419.1 million and outstanding letters of credit of $40.5 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 is subject to customary and usual terms. In connection with the acquisitions of Kinetics and Memtec, the Company assumed through its subsidiaries two additional loan agreements with banks. One agreement provides a revolving line-of-credit with borrowings of up to $100.0 million, of which $33.8 million was outstanding at December 31, 1997. Borrowings under this agreement bear interest at the bank's reference rate or other interest rate options that the subsidiary may select. The other agreement is a Multi-Option, Multi-Currency Master Facility that provides borrowings of up to $60.0 million, of which $22.3 million was outstanding as of December 31, 1997. Borrowings under this agreement bear interest at LIBOR plus 0.75%. The Company believes its current cash position, cash flow from operations, and available borrowings under the Company's line-of-credit will be adequate to meet its anticipated cash needs 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 14 Exchange Commission and in its reports to stockholders. In connection with the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward- 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 125 United States based and international businesses. The Company plans to continue to pursue acquisitions that expand the segments of the water and wastewater treatment and water-related industries in which it participates, complement its technologies, 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 approximately 96% of the outstanding ordinary shares of Memtec was accomplished through a tender offer, and the Company could make other acquisitions in the future by means of a tender offer. The level of risk associated with such acquisitions is greater because frequently they are accomplished, as was the case with the acquisition of Memtec, without the customary representations or due diligence typical of negotiated transactions. Although the Company generally has been successful in pursuing acquisitions, there can be no assurance that acquisition opportunities will continue to be available, that the Company will have access to the capital required to finance potential acquisitions, that the Company will continue to acquire businesses or that any business acquired will be integrated successfully or prove profitable. International Transactions The Company has made and expects it will continue to make acquisitions and expects to obtain contracts in markets outside the United States. While these activities may provide important opportunities for the Company to offer its products and services internationally, they also entail the risks associated with conducting business internationally, including the risk of currency fluctuations, slower payment of invoices, the lack in some jurisdictions of well-developed legal systems, nationalization and possible social, political and economic instability. In particular, the Company has significant operations in Asia, which will be adversely affected by current economic conditions in that region. While the full impact of this economic instability cannot be predicted, it could have a material adverse effect on the Company's revenues and profitability. Reliance On Key Personnel The Company's operations are dependent on the continued efforts of senior management, in particular Richard J. Heckmann, the Company's Chairman of the Board, President and Chief Executive Officer. The Company does not presently have employment agreements with most members of senior management, including Mr. Heckmann. Should any of the Company's senior managers be unable or choose not to continue in their present roles, the Company's prospects could be adversely affected. Profitability Of Fixed Price Contracts A significant portion of the Company's revenues are generated under fixed price contracts. To the extent that original cost estimates are inaccurate, costs to complete increase, delivery schedules are delayed or progress under a contract is otherwise impeded, revenue recognition and profitability from a particular contract may be adversely affected. The Company routinely records upward or downward adjustments with respect to fixed price 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 15 those currently unfolding in Asian markets, could have a material adverse effect on the Company's revenues and profitability. The sale of water and wastewater distribution equipment and supplies is also cyclical and influenced by various economic factors including interest rates, land development and housing construction industry cycles. Sales of such equipment and supplies are also subject to seasonal fluctuation in northern climates. The sale of water and wastewater distribution equipment and supplies is a significant component of the Company's business. Cyclicality and seasonality of water and wastewater distribution equipment and supplies sales could have a material adverse effect on the Company's revenues and profitability. The Company's high-purity process piping systems have been sold principally to companies in the semiconductor and, to a lesser extent, pharmaceutical and biotechnology industries, and sales of those systems are critically dependent on these industries. The success of customers and potential customers for high-purity process piping systems is linked to economic conditions in these respective industries, which in turn are each subject to intense competitive pressure and are affected by overall economic conditions. The semiconductor industry in particular has historically been, and will likely continue to be, cyclical in nature and vulnerable to general 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. Operating results from the sale of high-purity process piping systems also can be expected to fluctuate significantly as a result of the limited pool of existing and potential customers for these systems, the timing of new contracts, possible deferrals or cancellations of existing contracts and the evolving and unpredictable nature of the markets for high-purity process piping systems. As a result of these and other factors, the Company's operating results may be subject to quarterly or annual fluctuations. There can be no assurance that at any given time the Company's operating results will meet or exceed stock market analysts' expectations, in which event the market price of the Common Stock could be adversely affected. Potential Environmental Risks The Company's business and products may be significantly influenced by the constantly changing body of environmental laws and regulations, which require that certain environmental standards be met and impose liability for the failure to comply with such standards. The Company is also subject to inherent risks associated with environmental conditions at facilities owned, and the state of compliance with environmental laws, by businesses acquired by the Company. While the Company endeavors at each of its facilities to assure compliance with environmental laws and regulations, there can be no assurance that the Company's operations or activities, or historical operations by others at the Company's locations, will not result in cleanup obligations, civil or criminal enforcement actions or private actions that could have a material adverse effect on the Company. In that regard, United States federal and state environmental regulatory authorities have issued certain notices of violation related to alleged multiple violations of applicable wastewater pretreatment standards by a wholly owned subsidiary of the Company (the "Subsidiary") at a Connecticut ion exchange resin regeneration facility (the "South Windsor Facility") acquired by the Company in October 1995 from Anjou International Company ("Anjou"). A grand jury investigation concerning these conditions also is pending. The Subsidiary has reached a tentative agreement with the United States Attorney's Office and the United States Environmental Protection Agency ("USEPA") to plead guilty to a single violation of the United States Clean Air Act, pursuant to which the Subsidiary would pay a fine and the South Windsor Facility would undergo annual environmental compliance audits by the USEPA for five years. The Company believes that this settlement would conclude these matters in their entirety; however, there can be no assurance that this settlement will become final, and it is not expected that it would include a formal release of all liabilities in this regard. As a consequence of such a settlement, the Subsidiary would be debarred from United States government contracts for a period of time that the Company currently expects to be brief. The Company does not believe that the debarment would have a material adverse effect on the Subsidiary or the Company. The Company has certain rights of indemnification from Anjou which may be available with respect to these matters. In addition, the Company's 16 activities as owner and operator of certain hazardous waste treatment and recovery facilities are subject to stringent laws and regulations and compliance reviews. Failure of these facilities to comply with those regulations could result in substantial fines and the suspension or revocation of the facility's hazardous waste permit. The Company serves as contract operator of various municipal and industrial wastewater collection and treatment facilities, which were developed and are owned by governmental or private entities. Under those service contracts and applicable environmental laws, the Company as operator may incur liabilities in the event those facilities experience malfunctions or discharge wastewaters which do not meet applicable permit limits and regulatory requirements. In some cases, the potential for such liabilities depends upon design or operational conditions over which the Company has limited, if any, control. In other matters, the Company has been notified by the United States Environmental Protection Agency that it is a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") at certain sites to which the Company or its predecessors allegedly sent waste in the past. It is possible that the Company could receive other such notices under CERCLA or analogous state laws in the future. The Company does not believe that its liability, if any, relating to such matters will be material. However, there can be no assurance that such matters will not be material. In addition, to some extent, the liabilities and risks imposed by environmental laws on the Company's customers may adversely impact demand for certain of the Company's products or services or impose greater liabilities and risks on the Company, which could also have an adverse effect on the Company's competitive and financial position. Competition All of the markets in which the Company competes are highly competitive, and most are fragmented, with numerous regional and local participants. There are competitors of the Company in certain markets that are divisions or subsidiaries of companies that have significantly greater resources than the Company. The Company's process water treatment business competes in the United States and internationally principally on the basis of product quality and specifications, technology, reliability, price, customized design and technical qualifications, reputation and prompt availability of local service. The Company's wastewater treatment business competes in the United States and internationally largely on the basis of the same factors, except that pricing considerations can be predominant among competitors that have sufficient technical qualifications, particularly in the municipal contract bid process. In connection with the marketing of waterworks distribution equipment and supplies, the Company competes not only with a large number of independent wholesalers and with other distribution chains similar to the Company, but also with manufacturers who sell directly to customers. The principal methods of competition for the Company's waterworks distribution business include prompt local service capability, product knowledge by the sales force and branch management, and price. The Company's consumer products business competes with companies with national distribution networks, businesses with regional scope and local product assemblers or service companies, as well as retail outlets. The Company believes that there are thousands of participants in the residential water market. The consumer products business competes principally on the basis of price, product quality and "taste," service, distribution capabilities, geographic presence and reputation. Competitive pressures, including those described above, and other factors could cause the 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 17 of adverse changes to or interpretations of United States federal, state and local laws, regulations and policies. Transfers of IID Water attributable to water rights appurtenant to the IID Properties (the "IID Water Rights") are subject to additional uncertainties. Allocations of Colorado River water, which is the source of all water deliveries to the IID Properties, are subject to limitations under complex international treaties, interstate compacts, United States federal and state laws and regulations, and contractual arrangements and, in times of drought, water deliveries could be curtailed by the United States government. Further, any transfers of IID Water would require the approval of the United States 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 United States federal law and California constitutional requirements that IID Water must be put to reasonable and beneficial use. A finding that the IID's water use is unreasonable or nonbeneficial could adversely impact title to IID Water Rights and the ability to transfer IID Water. Water transferred by the IID to metropolitan areas of Southern California, such as San Diego, would be transported through aqueducts owned or controlled by the Metropolitan Water District, a quasi-governmental agency (the "MWD"). The transportation cost for any transfer of IID Water and the volume of water which the MWD can be required to transport at any time are subject to California laws of uncertain application, some aspects of which are currently in litigation. The uncertainties associated with water rights could have a material adverse effect on the Company's profitability. Technological And Regulatory Risks The water and wastewater treatment business is characterized by changing technology, competitively imposed process standards and regulatory requirements, each of which influences the demand for the Company's products and services. Changes in regulatory or industrial requirements may render certain of the Company's treatment products and processes obsolete. Acceptance of new products may also be affected by the adoption of new government regulations requiring stricter standards. The Company's ability to anticipate changes in 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. There can be no assurance that the Company's existing or any future trademarks or patents will be enforceable or will provide substantial protection from competition or be of commercial benefit to the Company. In addition, the laws of certain non-United States countries may not protect proprietary rights to the same extent as do the laws of the United States. Successful challenges to certain of the Company's patents or trademarks could materially adversely affect its competitive and financial position. Municipal Market A significant percentage of the Company's revenues is derived from municipal customers. While municipalities represent an important market in the water and wastewater treatment industry, contractor selection processes and funding for projects in the municipal sector entail certain additional risks not typically encountered with industrial customers. Competition for selection of a municipal contractor typically occurs through a formal bidding process which can require the commitment of significant resources and greater lead times than industrial projects. In addition, demand in the municipal market is dependent upon the availability of funding at the local level, which may be the subject of increasing pressure as local governments are expected to bear a greater share of the cost of public services. 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 to assure that its other internal operating systems with Year 2000 issues are modified on a timely basis. Suppliers, customers and creditors of 18 the Company also face similar Year 2000 issues. A failure to successfully address the Year 2000 issue could have a material adverse effect on the Company's business or results of operations. Impact of Recently Issued Accounting Standards. In June 1997, the Financial Accounting Standards Board issued a new statement titled "Reporting Comprehensive Income." The new statement is effective for fiscal years beginning after December 15, 1997. The Company is currently evaluating its options for disclosure under this new standard and will implement the statement during its fiscal year ending March 31, 1999. In June 1997, The Financial Accounting Standards Board 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 evaluating its options for disclosure under this standard and will implement the statement during its fiscal year ending March 31, 1999. 19 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS N/A ITEM 2. CHANGES IN SECURITIES Privately Placed Securities Effective December 31, 1997, the Company issued 5,803,803 shares (the "Shares") of its common stock, par value $.01 per share (the "Common Stock"), to: The Bianco Family 1991 Trust, dated February 1, 1991; David J. Shimmon; BT Capital Partners Inc.; Churchill ESOP Capital Partners; D&S Partners; Silicon Valley Bancshares; L.H. Fine, Weinress, Franskson & Presson, Inc.; Gregory Presson; in a tax-free merger pursuant to which the Company acquired all of the outstanding capital stock of The Kinetics Group, Inc., a Delaware Corporation. Such shares were issued in a transaction exempt from registration pursuant to Section 4(2) of the United States Securities Act of 1933, as amended. Pursuant to an agreement between the parties, such shares were subsequently filed for registration for resale pursuant to a Registration Statement on Form S-3 (Registration No. 333-45981). ITEM 3. DEFAULTS UPON SENIOR SECURITIES N/A ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS N/A ITEM 5. OTHER INFORMATION On February 9, 1998, the Company announced it had entered into an Agreement and Plan of Merger (the "Merger Agreement") dated as of February 9, 1998, among the Company, Palm Water Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the Company ("Merger Sub"), and Culligan Water Technologies, Inc., a Delaware corporation. Pursuant to the Merger Agreement, Merger Sub will be merged with and into Culligan (the "Merger"). In connection with the Merger, the Company will issue in exchange for each issued and outstanding share (other than treasury shares and shares owned by the Company) of Culligan common stock, par value $.01 per share 1.714 shares of common stock, par value $.01 per share of the Company pursuant to formula. The Merger will be accounted for as a pooling of interests and is intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. Consummation of the Merger is subject to customary regulatory approvals and the approval of the stockholders of each of the Company and Culligan. The Merger is expected to be consummated in the first half of fiscal 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits The following exhibits are filed herewith or incorporated herein by reference: 10.1 Employment Agreement between Thierry Reyners and USF Euroholding, S.A., a wholly-owned subsidiary of the Company 27.0 Financial Data Schedule
Reports on Form 8-K The Company filed one Current Report on Form 8-K during the quarter ended December 31, 1997, dated December 9, 1997, reporting the consummation of the Company's tender offer to purchase all of the outstanding ordinary shares (including American Depository Shares, each representing one ordinary share) of Memtec Limited. 20 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 /s/ Kevin L. Spence By: _________________________________ Kevin L. Spence Executive Vice President, Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) Dated: May 12, 1998 21 EXHIBIT INDEX
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ---------- 10.1 Employment Agreement between Thierry Reyners and USF Euroholding, S.A., a wholly-owned subsidiary of the Company..................................................
22 EX-10.1 2 EMPLOYMENT AGREEMENT EXHIBIT 10.1 In Madrid, on the 19 day of September, 1997. BY AND BETWEEN: THE FIRST PARTY: MR. JOSE LUIS DE LA GUARDIA, of legal age, holding Spanish nationality whose marital status is married, and profession is Lawyer, with professional address in 28036 Madrid, Avda. Burgos, n/degrees/ 12, and National Identification Number 1397768; and, THE SECOND PARTY: MR. THIERRY REYNERS, of legal age, holding French nationality, whose marital status is married, and profession is Executive, with professional address in 28036 Madrid, Avenida Burgos, n/degrees/ 12, and Residence Permit Number X-339491-B. ACTING: The first party in the name and on behalf of USF EUROHOLDING, S.A., with registered offices in 28036 Madrid, Avenida Burgos, 12 (hereinafter "the COMPANY"). The second party (hereinafter "the HIREE"), on his own behalf and right, who expressly admits that the contents of this document are an integral part of his employment contract with the COMPANY and undertakes, based on the principle of contractual trust, to loyally respect all that is determined below. WHEREAS: It is the wish of both parties to regulate the terms and conditions by which the position of General Manager carried out by the HIREE is governed. Therefore, by virtue of the above, the parties, hereby mutually acknowledging the legal capacity necessary for engaging and entering into agreements and especially for conferring this deed, agree to regulate their reciprocal benefits, pursuant to the provisions of Royal Decree 1382/1985 and the following: STIPULATIONS: ONE--APPOINTMENT AND DURATION The HIREE is an employee of the COMPANY in the capacity of General Manager, a position he has held since 1 January 1981. This employment contract is for an indefinite period. Should the HIREE wish to terminate it at any moment in the duration thereof, he is obliged to give notice to the COMPANY a minimum of six months in advance, being held answerable to any damages brought about by non-fulfilment of this covenant. TWO--OBLIGATIONS AND DUTIES The HIREE exercise the powers and faculties corresponding to the position he holds, and in accordance with the rules and regulations in force for said entity. For the duration of this contract, and without prejudice to the obligations and responsibilities inherent to the office of General Manager of the COMPANY that the HIREE holds, the latter must: a) Spend the time and attention necessary for his duties to the COMPANY, serving it loyally to the best of his expertise and experience, and make the best effort possible to foster the interests and appropriate development of the COMPANY. b) Attend to and fulfil all reasonable demands of the COMPANY's administrative bodies. In this respect he is obliged to furnish adequate explanations, information and assistance whenever requested as relates to his duties and activities with the COMPANY. c) Not commit to other activities that may be detrimental or damaging to the adequate execution of the obligations contracted hereby. d) Not carry out any work other than the object of this contract nor work as the Manager or Executive of any firm other than the COMPANY, without the express authorization of the COMPANY's Board of Directors. e) Inform the COMPANY's Board of Directors of any remuneration he receives directly or indirectly as a result of any commitment or opportunity arising by virtue of the position he holds in the COMPANY. f) The holding of any position or office in any subsidiaries or companies in which the COMPANY has a stake shall be exempted from the prohibitions covered under paragraphs d) and e) above. g) With the purposes envisaged in Spanish Legislation, he expressly accepts his full, exclusive commitment to the COMPANY for the period that his employment contract with said COMPANY is in force. The remuneration he receives from the COMPANY offsets the obligation provided for in the above paragraph, since it is hereby expressly agreed that any compensation to which he is entitled is covered by said remuneration. THREE--REMUNERATION AND REIMBURSEMENT FOR EXPENSES 1. As remuneration for his services, the HIREE shall receive, by means of monthly payments on the last day of each month, an annual salary of 13,218,866 pesetas, subject to revision on the 1st day of April of each year. This remuneration shall be paid in 14 monthly payments per year, corresponding to the 12 calendar months plus two extraordinary payments. 2. The gross annual salary received at any given moment by the HIREE shall offset and absorb any amounts to which he is entitled by virtue of application of any legal, regulatory or conventional regulations in force, and payment of any taxes, social contributions or similar items required shall be deducted therefrom. 3. Moreover, the HIREE shall be reimbursed for any business or travel expenses arising from the fulfilment of his obligations to the COMPANY. Such expenses must be adequately justified. FOUR--SCHOOLING EXPENSES The COMPANY shall reimburse the HIREE for the schooling expenses of NICOLAS REYNERS up to a maximum amount of 300,000 pesetas per year. FIVE--INSURANCE COVERAGE For reasons of his position, the COMPANY shall provide the HIREE with insurance coverage for accidents, as well as life insurance for an amount equivalent to four times the latest salary earned. In addition, the COMPANY shall provide the HIREE with family medical coverage through a policy taken out with La Estrella insurance company, with the adequate coverage limits. The COMPANY shall take out an insurance policy to cover the risks of the HIREE in any travel he undertakes in carrying out his activities for the COMPANY, without prejudice to the Social Security benefits to which he is entitled. The HIREE has a share in the Personal Pension Plan that the COMPANY has with the company Commercial Union. SIX--HOLIDAYS The HIREE shall be entitled to 30 working days of paid holidays annually, as well as any holidays set by the competent authorities. The HIREE shall take his annual holidays in accordance with the practice of his profession and the service needs of the COMPANY. SEVEN--TRAVEL/COMMUTES The COMPANY shall place at the disposal of the HIREE a company-owned vehicle, the market price and characteristics of which shall be in line with the COMPANY's established internal policy in this regard, which HIREE should use for travel/commuting purposes. EIGHT--CONFIDENTIALITY AND TRADE SECRET For the duration of this contract, the HIREE, except in carrying out his duties or when beneficial to the COMPANY, may not reveal to any other person or company, either in Spain or outside the country, any information concerning any matters, business, finances, trade contracts, clients or other subjects relating to the COMPANY without the express authorization thereof, and must use any means necessary to avoid publicity regarding said secrets, knowledge or information. Both for the duration of his contract with the COMPANY and once said contract has been discharged, he shall keep in strictest confidence the characteristics and peculiarities of the operations and business of the COMPANY in anything relating to confidential information, that is, any information that is not common knowledge outside the COMPANY, whatever the subject matter. The obligation to maintain trade secrets means that he shall not make use of any information concerning the transactions or potential transactions of the COMPANY and shall not reveal to anyone, without COMPANY authorization, any information or trade or confidential secret as regards the COMPANY's activities, nor facilitate any information whatsoever as regards inventions, research, business plans or market research made or undertaken by or for the COMPANY. In any event, he is obliged to leave at the COMPANY's disposal any documentation, samples, material, drawings or plans concerning said COMPANY's activities that he has in his possession at the time of his termination from the COMPANY. Any infringement of the obligation to maintain trade secrets as set out herein shall constitute just cause for dismissal, with the COMPANY being entitled to claims for any damages incurred, if it so deems. NINE--NON-COMPETITION Once the present employment contract has been discharged and for a period of two (2) years, the HIREE may not carry out any activity whatsoever involving competition with the COMPANY which, in compensation, shall pay him on a monthly basis for the duration of said period an amount equivalent to 60% of the latest monthly salary in cash he was earning before termination of the contract. Non-fulfilment of the provisions of the above paragraph of this stipulation on the part of the HIREE shall make him liable under the legislation in force, whether said liability is of a civil, criminal, labour, commercial or any other nature, and above all shall make him answerable to reimbursing to the COMPANY any amounts received as referred to in the above paragraph, as well as to paying any claims for damages. TEN--ALTERATIONS TO CONTRACT Any type of modification that must be made regarding the clauses of this contract shall be formalized in writing. ELEVEN--BREACH He admits that breach of the terms and conditions of this employment contract with the COMPANY involves commitment of a breach of trust and, therefore, is just cause for termination of said contract, without prejudice to any actions the COMPANY may file in claims for damages. TWELVE--DISCHARGE OF CONTRACT AT WORKER'S BEHEST HIREE may discharge the present contract with the right to receive any indemnity payments agreed to in Stipulation Thirteen for cases of discharge due to abandonment of the COMPANY or due to dismissal declared wrongful or null, under the following grounds: a) Substantial changes in working conditions having a negative bearing on the HIREE'S professional training, or that are detrimental to his dignity, or that are made in serious breach of trust on the part of the COMPANY. b) Non-payment or continued delay in payment of the amounts of compensation agreed to. c) Succession of the company or any important change in the ownership of the COMPANY'S shareholders the effect of which would change or replace its governing bodies, or in the content and approach of the COMPANY'S principal activities. If discharge of the employment contract at behest of the HIREE is due exclusively to the reasons covered in this paragraph, the COMPANY must pay HIREE an amount equivalent to 24 monthly payments of the latest cash salary he had been earning as indemnity payment. d) Any other serious breach of contract on the part of the COMPANY. THIRTEEN--DISCHARGE OF CONTRACT AT EMPLOYER'S BEHEST The COMPANY may discharge this contract by abandonment or by means of dismissal based on serious, willful breach of contract by the HIREE, according to the provisions of Article 11 of Royal Decree 1382/1985. With six months' advance notice in such a case. In the cases referred to in the above paragraph, the COMPANY shall pay the HIREE an amount equivalent to 6 months' payment of the latest cash salary the HIREE had been earning as indemnity payment, except in the case of dismissal declared as fitting by the competent jurisdiction. FOURTEEN--RETURN OF COMPANY DOCUMENTS Following discharge of the present contract, the HIREE must return to the COMPANY any correspondence, documents, reports, files or any other property belonging to the COMPANY and any copies thereof that were in his possession or under his control, since, in any event, such material is the exclusive property of the COMPANY and the HIREE renounces any right he may have due to the temporary possession or control of said information or objects. FIFTEEN--APPLICABLE LEGISLATION AND JURISDICTION For any matter not covered herein, the parties shall abide by the provisions of any applicable legal, regulatory or conventional regulations in force, and expressly agree that for any matters arising or actions brought regarding the interpretation, fulfilment or breach of the agreements made hereby, they shall submit to the jurisdiction of the Courts and Tribunals of Madrid, expressly waiving any other jurisdiction to which they may be entitled. In witness whereof, the parties hereby express their agreement and consent and execute, and for the record and purposes set out in law, sign the present contract in triplicate in the place and on the date indicated above. THE COMPANY THE HIREE /s/ Jose Luis De la Guardia /s/ Thierry Reyners --------------------------- --------------------------- Jose Luis De la Guardia Thierry Reyners -----END PRIVACY-ENHANCED MESSAGE-----