-----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, KHAUSMYUagcuoM7WkNORYXsKOK16P1vm2AztChy1HVgvLQbA3NStbuQX+AYgmW09 LemBxjkkWT6ZwxClfBgkiA== 0000950132-96-000767.txt : 19961212 0000950132-96-000767.hdr.sgml : 19961212 ACCESSION NUMBER: 0000950132-96-000767 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19961210 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED STATES FILTER CORP CENTRAL INDEX KEY: 0000318025 STANDARD INDUSTRIAL CLASSIFICATION: REFRIGERATION & SERVICE INDUSTRY MACHINERY [3580] IRS NUMBER: 330266015 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-14281 FILM NUMBER: 96678818 BUSINESS ADDRESS: STREET 1: 73 710 FRED WARING DR STE 222 CITY: PALM DESERT STATE: CA ZIP: 92260 BUSINESS PHONE: 6193400098 MAIL ADDRESS: STREET 1: 73 710 FRED WARING DRIVE SUITE 222 CITY: PALM DESERT STATE: CA ZIP: 92260 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TOXXIC CONTROL INC DATE OF NAME CHANGE: 19910401 FORMER COMPANY: FORMER CONFORMED NAME: NOVAN ENERGY INC DATE OF NAME CHANGE: 19871227 S-3/A 1 AMENDMENT #3 TO FORM S-3 REGISTRATION NO. 333-14281 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 3 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- UNITED STATES FILTER CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0266015 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 40-004 COOK STREET PALM DESERT, CALIFORNIA 92211 (619) 340-0098 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- DAMIAN C. GEORGINO VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY UNITED STATES FILTER CORPORATION 40-004 COOK STREET PALM DESERT, CALIFORNIA 92211 (619) 340-0098 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- Copies to: JANICE C. HARTMAN NICHOLAS P. SAGGESE KIRKPATRICK & LOCKHART LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 1500 OLIVER BUILDING 300 SOUTH GRAND AVENUE, SUITE 3400 PITTSBURGH, PENNSYLVANIA 15222 LOS ANGELES, CALIFORNIA 90071 (412) 355-6500 (213) 687-5000 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED MAXIMUM TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF REGISTERED REGISTERED(1)(2) PER UNIT(3) PRICE(3) REGISTRATION FEE(4) - ------------------------------------------------------------------------------------------------- Convertible Subordinated Notes due 2001......... $345,000,000 100% $345,000,000 $104,546 - ------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share......... 8,491,263 shares -- -- --
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Includes $45,000,000 principal amount of Convertible Subordinated Notes due 2001 which may be issued upon exercise of an over-allotment option. (2) The number of shares of Common Stock indicated is based on an assumed initial conversion price of $40.63 per share. There are also registered hereunder such additional indeterminate number of shares of Common Stock, par value $.01 per share, of United States Filter Corporation as may become issuable upon conversion of the Convertible Subordinated Notes due 2001 by reason of adjustments in the conversion rate. (3) Estimated solely for the purpose of calculating the registration fee. (4) Of such amount, $69,697 was previously paid. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED DECEMBER , 1996 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS , 1996 $300,000,000 LOGO UNITED STATES FILTER CORPORATION % CONVERTIBLE SUBORDINATED NOTES DUE 2001 The % Convertible Subordinated Notes due 2001 (the "Notes") will be convertible at the option of the holder into shares of common stock, par value $.01 per share, of the Company (the "Common Stock"), at any time at or prior to maturity, unless previously redeemed, at a conversion price (the "Conversion Price") of $ per share (equivalent to a conversion rate of shares per $1,000 principal amount of Notes), subject to adjustment in certain events. Interest on the Notes is payable semi-annually on and of each year, commencing on . On December 6, 1996, the closing sale price of the Common Stock of the Company as reported on the New York Stock Exchange Composite Tape (where it is traded under the symbol "USF") was $32.50 per share. The Notes are redeemable, in whole or in part, at the option of the Company, at any time on or after , 1999, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. The Company will be required to offer to purchase the Notes upon a Change of Control (as defined), at 100% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The Notes are unsecured general obligations of the Company, subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company, and are subordinated by operation of law to all liabilities (including trade payables) of the Company's subsidiaries. The Indenture will not restrict the incurrence of Senior Indebtedness or other indebtedness by the Company or its subsidiaries. At September 30, 1996, as adjusted to give effect to the issuance and sale of the Notes and the application of estimated net proceeds therefrom and consummation of the acquisition transactions described herein, the Company would have had approximately $40.6 million of Senior Indebtedness, and the Company's subsidiaries would have had approximately $473.0 million of trade payables and accrued liabilities. See "Description of the Notes." Application has been made to list the Notes on the New York Stock Exchange. Concurrently with this offering (the "Notes Offering"), the Company is undertaking, pursuant to a separate Prospectus, domestic and international offerings of shares of Common Stock (the "Common Stock Offerings"). The net proceeds of the Notes Offering and the Common Stock Offerings are expected to be used to repay indebtedness incurred to fund the acquisition by the Company of certain businesses and assets (collectively referred to as the Water Systems and Manufacturing Group and referred to herein as "WSMG") of Wheelabrator Technologies Inc. ("WTI") and to fund the cash portion of the consideration for the pending acquisition by the Company of the businesses of the Process Equipment Division ("PED") of United Utilities Plc; the balance, if any, will be used to reduce revolving credit borrowings or for working capital, capital expenditures and general corporate purposes, including possible future acquisitions. See "Recent and Pending Acquisitions" and "Use of Proceeds." SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS TO THE DISCOUNTS AND TO THE PUBLIC(1) COMMISSIONS(2) COMPANY(3) - -------------------------------------------------------------------------------- Per Note................................. % % % Total(4)................................. $ $ $
- -------------------------------------------------------------------------------- (1) Plus accrued interest, if any, from the date of issuance. (2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) Before deducting expenses payable by the Company estimated at $700,000. (4) The Company has granted to the Underwriters an option exercisable within 30 days after the date of this Prospectus to purchase up to an additional $45,000,000 aggregate principal amount of the Notes on the same terms as set forth above, at the Price to the Public, less the Underwriting Discounts and Commissions, solely for the purpose of covering over- allotments, if any. If such option were exercised in full, the total Price to the Public, total Underwriting Discounts and Commissions and total Proceeds to the Company would be $ , $ and $ , respectively. See "Underwriting." The Notes are offered by the several Underwriters when, as and if delivered to and accepted by them, subject to certain conditions, including their rights to withdraw, cancel or reject orders in whole or in part. It is expected that delivery of the Notes will be made in New York, New York on or about , 1996. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SALOMON BROTHERS INC DEUTSCHE MORGAN GRENFELL NATWEST SECURITIES LIMITED SMITH BARNEY INC. [Map depicting sales and service facilities located in North America, Europe and the Pacific Rim.] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AND THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE- COUNTER MARKET, ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including the Selected Consolidated Financial Data, the Company's Consolidated Financial Statements and Notes thereto and the Unaudited Pro Forma Combined Financial Information, included or incorporated by reference in this Prospectus. Except as otherwise specified, all information in this Prospectus has been adjusted to reflect a 3-for-2 split of the Common Stock effected July 15, 1996 and a 3-for-2 split of the Common Stock effected December 5, 1994, and does not give effect to the over-allotment option described under the caption "Underwriting." THE COMPANY The Company is a leading global provider of industrial and municipal water and wastewater treatment systems, products and services, with an installed base of systems that the Company believes is one of the largest worldwide. The Company offers a single-source solution to industrial and municipal customers through what the Company believes is the industry's broadest range of cost- effective systems, products, services and proven technologies. In addition, the Company has one of the industry's largest networks of sales and service facilities. The Company capitalizes on its large installed base, extensive distribution network and manufacturing capabilities to provide customers with ongoing local service and maintenance. The Company is also a leading provider of service deionization ("SDI") and outsourced water services, including the operation of water and wastewater treatment systems at customer sites. The Company has grown internally and through the strategic acquisition and successful integration of more than 45 United States based and international water and wastewater treatment companies since 1991. On a previously reported basis, the Company's revenues increased to $472.5 million for the fiscal year ended March 31, 1996 from $41.2 million for the fiscal year ended March 31, 1992, representing a compound annual growth rate of approximately 84%. The Company's revenues for the fiscal year ended March 31, 1996 would have been approximately $1.8 billion after giving effect to the completed acquisitions of Zimpro Environmental, Inc. ("Zimpro") and Davis Water & Waste Industries, Inc. ("Davis") and including, on a pro forma basis, the pending acquisition of PED and the recent acquisitions of WSMG, WaterPro Supplies Corporation ("WaterPro") and The Utility Supply Group, Inc. ("USG") as if such acquisitions were completed at the beginning of such year. Global population growth, economic expansion, scarcity of available water resources, heightened public concern about water quality and growing regulatory requirements have resulted in: (i) continued growth of the multibillion dollar water and wastewater treatment industry; and (ii) heightened demand for increasingly complex water and wastewater treatment systems. The water treatment industry is highly fragmented, with numerous regional participants who provide customers with a limited range of water and wastewater treatment solutions. The Company differentiates itself from competitors by serving as a single-source water and wastewater treatment provider capable of designing, manufacturing, operating, financing and maintaining water and wastewater systems on a local basis for industrial and municipal customers. The Company's customer base includes a broad range of major industrial customers, which require treated water as a necessary component of many products and industrial processes, and municipalities, which treat water and wastewater for their communities. Industrial customers include Chinese Petroleum, Coca-Cola, Dow Chemical, General Motors, Hyundai, Intel, Johnson & Johnson, Merck, Procter & Gamble and Samsung. Municipal customers include the Cities of Los Angeles, Minneapolis-St. Paul and St. Louis. 3 In order to achieve earnings growth and expand its operations to enhance its position as a leading global single-source provider of water and wastewater treatment systems and services, the Company has developed the following strategy: .Provide single-source water and wastewater treatment solutions to industrial and municipal customers .Pursue acquisitions that provide a strategic fit and contribute to revenue and earnings growth .Realize synergies and economies of scale from acquisitions .Expand global market presence, especially in the Pacific Rim region .Expand penetration of the municipal market .Capitalize on distribution strength to enhance local sales and service capabilities .Capitalize on outsourcing and privatization opportunities RECENT AND PENDING ACQUISITIONS The Company has become a leading single-source provider of cost-effective water and wastewater treatment systems primarily through acquisitions of businesses that have expanded the Company's geographic presence, industries served, installed base and range of products and technologies. The Company's acquisition strategy has also recently focused on establishing the Company as a leading distributor of water and wastewater distribution products and services to the industrial and municipal markets. The Company has acquired WSMG for $369.6 million in cash, subject to possible adjustment. The Company has also entered into a definitive agreement to acquire PED from United Utilities Plc for (Pounds)125.5 million in cash and stock, subject to possible adjustment. Additionally, the Company has acquired Davis in exchange for 4,187,349 shares of Common Stock, WaterPro in exchange for 3,201,507 shares of Common Stock and USG in exchange for 771,157 shares of Common Stock. WATER SYSTEMS AND MANUFACTURING GROUP WSMG provides a broad range of water and wastewater treatment products and technologies, as well as other environmental products, worldwide. For the fiscal year ended December 31, 1995, WSMG generated approximately $452.1 million of revenues, of which approximately 56% were attributable to sales in North America, with the remainder generated principally in Europe, the Pacific Rim and the Middle East. The Company believes that the acquisition of WSMG significantly broadens the Company's product offerings, technological capabilities and municipal market penetration. WSMG is also expected to provide the Company with cross-selling opportunities as well as opportunities to rationalize operations and increase asset utilization. In addition, the Company believes that WSMG provides it with the infrastructure required to capitalize on opportunities in the Pacific Rim and further strengthens the Company's presence in European markets. PROCESS EQUIPMENT DIVISION PED is a leading manufacturer and distributor of a broad range of water and wastewater treatment equipment sold primarily to the municipal market. For the fiscal year ended March 31, 1996, PED generated approximately $267.4 million of revenues, of which approximately 60% were attributable to sales in North America, with the remainder generated principally in Europe, Latin America and the Pacific Rim. For the fiscal year ended March 31, 1996, a majority of PED's revenues were attributable to sales in the municipal market. 4 The Company believes that the acquisition of PED will significantly strengthen the Company's municipal water and wastewater treatment capabilities and provide the Company with opportunities to rationalize operations and increase asset utilization. Additionally, the Company believes that opportunities exist to expand PED's industrial sales by distributing PED's products through the Company's extensive network of sales and service facilities. DISTRIBUTION ACQUISITIONS The Company believes that the recent acquisitions of Davis, WaterPro and USG establish the Company as a leading distributor of water and wastewater distribution products and services to the industrial and municipal markets. Through the addition of 105 distribution facilities, these recent acquisitions provide the Company with a strategically important local sales and service presence in the markets being served. Additionally, each of Davis, WaterPro and USG benefits from established relationships with municipalities. The Company believes that these relationships will provide it with an effective means of penetrating the municipal market and permit the Company to capitalize on opportunities to retrofit, replace and repair aging water infrastructure in the United States. The Company intends to utilize its distribution channels, local presence and single-source capabilities to sell its extensive product line, including capital equipment, replacement parts, and services, to customers in both the industrial and municipal markets. As a result, the Company believes that its distribution infrastructure will provide a mechanism to leverage its manufacturing capabilities and technology base. The Company also believes that the distribution acquisitions will provide cost-saving opportunities through rationalization of overhead expenses and realization of economies of scale and operating efficiencies. ---------------- The Company's principal executive offices are located at 40-004 Cook Street, Palm Desert, California 92211, and its telephone number is (619) 340-0098. References herein to the Company refer to United States Filter Corporation and its subsidiaries, unless the context requires otherwise. 5 THE OFFERING Securities Offered............... $300,000,000 principal amount of % Convertible Subordinated Notes due , 2001. Maturity......................... , 2001, unless earlier redeemed or converted. Interest Payment Dates........... and commencing , 1997. Conversion Rights................ The Notes are convertible into shares of Common Stock at any time prior to the close of business on the second business day prior to maturity, unless previously redeemed, at a conversion price of $ per share, subject to adjustment under certain circumstances as described herein. Accordingly, each $1,000 principal amount of Notes is convertible into shares of Common Stock, subject to adjustment, initially for an aggregate of shares. See "Capitalization." Optional Redemption.............. The Notes are redeemable, in whole or in part, at the option of the Company at any time on or after , 1999, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. Change of Control................ Upon a Change of Control, the Company will be required to offer to purchase the Notes at 100% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. Subordination.................... The Notes will be general, unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Indebtedness of the Company and will be structurally subordinated to all liabilities (including trade payables) of the Company's Subsidiaries. At September 30, 1996, as adjusted to give effect to the issuance and sale of the Notes and the application of the estimated net proceeds therefrom and consummation of the acquisition transactions described herein, the Company would have aggregate Senior Indebtedness of approximately $40.6 million and the Company's Subsidiaries would have had approximately $473.0 million of trade payables and accrued liabilities. The Indenture will not restrict the incurrence of Senior Indebtedness or other indebtedness by the Company or any of its Subsidiaries. Use of Proceeds.................. The net proceeds from the Notes Offering, together with the net proceeds from the Common Stock Offerings, will be used to repay indebtedness incurred to fund the acquisition by the Company of WSMG and to fund the cash portion of the consideration for the pending acquisition by the Company of PED; the balance, if any, will be used for working capital, capital expenditures and general corporate purposes, including possible future acquisitions. If the net proceeds from the Notes Offering and the Common Stock Offerings are not available, the Company expects to fund the acquisition of PED from borrowings under bank credit facilities. See "Recent and Pending Acquisitions" and "Use of Proceeds." Listing.......................... Application has been made to list the Notes on the New York Stock Exchange.
6 Common Stock Traded.............. The Common Stock is traded on the New York Stock Exchange under the symbol "USF." Concurrent Offering.............. The Company is offering concurrently, pursuant to a separate Prospectus, 10,000,000 shares of Common Stock (10,654,206 shares if the U.S. underwriters' over-allotment option is exercised in full). Consummation of the Notes Offering is not a condition to consummation of the Common Stock Offerings, and consummation of the Common Stock Offerings is not a condition to consummation of the Notes Offering.
For a description of the terms of the Notes, see "Description of the Notes." For a description of the Common Stock, see "Description of Capital Stock." 7 SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following data present selected historical consolidated financial data of the Company (restated to reflect the acquisitions of Zimpro and Davis, which were accounted for as poolings of interests) as of the date and for the periods presented, and As Adjusted to give effect to: (i) the recent acquisitions of WSMG, WaterPro and USG and the pending acquisition of PED as if they had been consummated as of the beginning of the respective periods presented (in the case of Statement of Operations Data and Other Data) and as of September 30, 1996 (in the case of Balance Sheet Data); and (ii) the assumed borrowings under bank credit facilities of approximately $541.0 million to fund the cash portion of the consideration for such acquisitions and estimated transaction costs. The As Further Adjusted column gives effect to: (i) the sale by the Company of 10,000,000 shares of Common Stock in the Offerings at an assumed public offering price of $32.50 per share and the anticipated application of the net proceeds therefrom; (ii) the sale by the Company of the Notes and the anticipated application of the net proceeds therefrom; and (iii) the conversion of the Company's $60.0 million aggregate principal amount of 5% Convertible Subordinated Debentures due 2000 into 4,390,000 shares of Common Stock. The pro forma data is derived from the historical financial statements of the Company, WSMG, PED, WaterPro and USG giving effect to such acquisitions under the purchase method of accounting and based on assumptions and adjustments described under the caption "Unaudited Pro Forma Combined Financial Information." The pro forma adjustments are estimated and may differ from the actual adjustments when they become known. The pro forma data does not reflect certain cost savings that management believes may be realized following the acquisitions, through rationalization of operations and economies of scale. See "Unaudited Pro Forma Combined Financial Information."
FISCAL YEAR ENDED SIX MONTHS ENDED MARCH 31, 1996 SEPTEMBER 30, 1996(1) -------------------------------- ----------------------------------- AS AS FURTHER AS FURTHER ACTUAL ADJUSTED(2) ADJUSTED(2) ACTUAL AS ADJUSTED(2) ADJUSTED(2) -------- ----------- ----------- -------- -------------- ----------- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues................ $727,903 $1,838,624 $1,838,624 $433,719 $1,054,197 $1,054,197 Gross profit............ 189,330 423,370 423,370 118,321 253,149 253,149 Operating income........ 40,647 69,211 69,211 26,600 52,751 52,751 Interest expense........ 14,419 57,223 28,645 7,972 29,192 14,903 Net income.............. 19,307 13,618 31,336 14,228 15,977 24,837 Net income per common share.................. $ 0.45 $ 0.28 $ 0.50 $ 0.28 $ 0.29 $ 0.35 Weighted average number of common shares outstanding............ 42,159 47,398 61,788 50,629 55,868 70,258
AS OF SEPTEMBER 30, 1996 ------------------------------- AS FURTHER ACTUAL AS ADJUSTED ADJUSTED -------- ----------- ---------- (in thousands) BALANCE SHEET DATA: Working capital................................ $168,606 $ 402,433 $ 402,433 Total assets................................... 936,659 2,006,590 2,014,415 Notes payable and long-term debt, including current portion............................... 90,159 650,657 46,420 Convertible subordinated debt.................. 193,565 193,565 440,000 Shareholders' equity........................... 400,003 560,407 926,034
- ------------------- (1) The six months ended September 30, 1996 includes merger expenses of $5,581,000 related to the acquisition of Davis. (2) The fiscal year ended March 31, 1996 and the six months ended September 30, 1996 include restructuring charges of $9,260,000 and $1,992,000, respectively, related to the plant closure and relocation of the operations of Wallace & Tiernan, Inc., a subsidiary of PED. 8 RISK FACTORS Prospective investors should consider carefully the following factors relating to the businesses of the Company, WSMG, PED, WaterPro and USG and the sale of the Notes, together with the other information and financial data included or incorporated by reference in this Prospectus, before acquiring Notes offered hereby. Information contained or incorporated by reference in this Prospectus contains "forward-looking statements" which can be identified by the use of forward-looking terminology such as "believes," "contemplates," "expects," "may," "will," "should," "would" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. No assurance can be given that the future results covered by the forward-looking statements will be achieved. The following matters constitute cautionary statements identifying important factors with respect to such forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results covered in such forward-looking statements. Other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. ACQUISITION STRATEGY In pursuit of its strategic objective of becoming the leading global single- source provider of water and wastewater treatment systems and services, the Company has, since 1991, acquired and successfully integrated more than 45 United States based and international businesses with strong market positions and substantial water and wastewater treatment expertise. The Company plans to continue to pursue acquisitions that complement its technologies, products and services, broaden its customer base and expand its global distribution network. The Company's acquisition strategy entails the potential risks inherent in assessing the value, strengths, weaknesses, contingent or other liabilities and potential profitability of acquisition candidates and in integrating the operations of acquired companies. Although the Company generally has been successful in pursuing these acquisitions, there can be no assurance that acquisition opportunities will continue to be available, that the Company will have access to the capital required to finance potential acquisitions, that the Company will continue to acquire businesses or that any business acquired will be integrated successfully or prove profitable. Consummation of the pending acquisition of PED is subject to the satisfaction of certain conditions. There can be no assurance as to whether or when the Company's pending acquisition of PED will be completed. The net proceeds to the Company of the Offerings and the Notes Offering are expected to be used to repay indebtedness incurred to fund the acquisition of WSMG and to fund the cash portion of the consideration for the pending acquisition of PED; the balance will be used to reduce revolving credit borrowings or for working capital, capital expenditures and general corporate purposes, including possible future acquisitions. If the pending acquisition of PED is not completed, the net proceeds of the Offerings and the Notes Offering not used for such acquisition will be added to working capital. See "Recent and Pending Acquisitions" and "Use of Proceeds." INTERNATIONAL TRANSACTIONS The Company has made and expects it will continue to make acquisitions and expects to obtain contracts in markets outside the United States. While these activities may provide important opportunities for the Company to offer its products and services internationally, they also entail the risks associated with conducting business internationally, including the risk of currency fluctuations, slower payment of invoices, nationalization and possible social, political and economic instability. In particular, the purchase price for the pending acquisition by the Company of PED is (Pounds)125.5 million, comprised of approximately (Pounds)100.5 million in cash and (Pounds)25.0 million in shares of Common Stock. The Company has entered into a forward contract pursuant to which it is obligated to purchase 100.0 million British pounds sterling for approximately $159.3 million at any time between December 16, 1996 and February 14, 1997, for the purpose of hedging the cash portion of the purchase price of 9 its acquisition of PED. With respect to the remaining (Pounds)0.5 million cash portion of the consideration and the (Pounds)25.0 million in shares of Common Stock, to the extent the value of the United States dollar declines relative to pounds sterling prior to the closing of the acquisition, the cost to the Company of acquiring PED would increase. In addition, if the acquisition of PED is not consummated, or the acquisition is consummated after February 14, 1997, the Company would be at risk with respect to the (Pounds)100.0 million it purchased pursuant to such forward contract to the extent that the value of the pound sterling decreases relative to the value of other currencies. RELIANCE ON KEY PERSONNEL The Company's operations are, and will, after consummation of the Company's pending acquisitions, be dependent on the continued efforts of senior management, in particular Richard J. Heckmann, the Company's Chairman of the Board, President and Chief Executive Officer. There are no employment agreements between the Company and the members of its senior management, except Thierry Reyners, the Company's Executive Vice President-European Group. Should any of the senior managers be unable to continue in their present roles, the Company's prospects could be adversely affected. PROFITABILITY OF FIXED PRICE CONTRACTS A significant portion of the Company's revenues are, and will, after consummation of the Company's pending acquisitions, be generated under fixed price contracts. To the extent that original cost estimates are inaccurate, costs to complete increase, delivery schedules are delayed or progress under a contract is otherwise impeded, revenue recognition and profitability from a particular contract may be adversely affected. The Company routinely records upward or downward adjustments with respect to fixed price contracts due to changes in estimates of costs to complete such contracts. There can be no assurance that future downward adjustments will not be material. CYCLICALITY AND SEASONALITY The sale of capital equipment within the water treatment industry is cyclical and influenced by various economic factors including interest rates and general fluctuations of the business cycle. A significant portion of the Company's revenues are, and will, after consummation of the Company's pending acquisitions, be derived from capital equipment sales. While the Company sells capital equipment to customers in diverse industries and in global markets, cyclicality of capital equipment sales and instability of general economic conditions could have an adverse effect on the Company's revenues and profitability. The sale of water and wastewater distribution equipment and supplies is also cyclical and influenced by various economic factors including interest rates, land development and housing construction industry cycles. Sales of such equipment and supplies are also subject to seasonal fluctuation in northern climates. As a result of the acquisitions of Davis, WaterPro and USG, the sale of water and wastewater distribution equipment and supplies is a significant component of the Company's business. See "Recent and Pending Acquisitions." Cyclicality and seasonality of water and wastewater distribution equipment and supplies sales could have an adverse effect on the Company's revenues and profitability. POTENTIAL ENVIRONMENTAL RISKS The Company's business and products may be significantly influenced by the constantly changing body of environmental laws and regulations, which require that certain environmental standards be met and impose liability for the failure to comply with such standards. The Company is also subject to inherent risks associated with environmental conditions at facilities owned, and the state of compliance with environmental laws, by businesses acquired by the Company. While the Company endeavors at each of its facilities to assure compliance with environmental laws and regulations, there can be no assurance that the Company's operations or activities, or historical operations by others at the Company's locations, will not result in cleanup obligations, civil or 10 criminal enforcement actions or private actions that could have a material adverse effect on the Company. In that regard, federal and state environmental regulatory authorities have commenced civil enforcement actions related to alleged multiple violations of applicable wastewater pretreatment standards by a wholly owned subsidiary of the Company at a Connecticut ion exchange regeneration facility acquired by the Company in October 1995 from Anjou International Company ("Anjou"). A grand jury investigation is pending which is believed to relate to the same conditions that were the subject of the civil actions. The Company has certain rights of indemnification from Anjou which may be available with respect to these matters. In addition, the Company's activities as owner and operator of certain hazardous waste treatment and recovery facilities are subject to stringent laws and regulations and compliance reviews. Failure of these facilities to comply with those regulations could result in substantial fines and the suspension or revocation of the facility's hazardous waste permit. In other matters, the Company has been notified by the United States Environmental Protection Agency that it is a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") 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 or financial position. COMPETITION The water and wastewater treatment industry is fragmented and highly competitive. The Company competes with many United States based and international companies in its global markets. The principal methods of competition in the markets in which the Company competes are technology, prompt availability of local service capability, price, product specifications, customized design, product knowledge and reputation, ability to obtain sufficient performance bonds, timely delivery, the relative ease of system operation and maintenance, and the prompt availability of replacement parts. In the municipal contract bid process, pricing and ability to meet bid specifications are the primary considerations. While no competitor is considered dominant, there are competitors which have significantly greater resources than the Company, which, among other things, could be a competitive disadvantage to the Company in securing certain projects. TECHNOLOGICAL AND REGULATORY CHANGE The water and wastewater treatment business is characterized by changing technology, competitively imposed process standards and regulatory requirements, each of which influences the demand for the Company's products and services. Changes in regulatory or industrial requirements may render certain of the Company's treatment products and processes obsolete. Acceptance of new products may also be affected by the adoption of new government regulations requiring stricter standards. The Company's ability to anticipate changes in technology and regulatory standards and to develop successfully and introduce new and enhanced products on a timely basis will be a significant factor in the Company's ability to grow and to remain competitive. There can be no assurance that the Company will be able to achieve the technological advances that may be necessary for it to remain competitive or that certain of its products will not become obsolete. In addition, the Company is subject to the risks generally associated with new product introductions and applications, including lack of market acceptance, delays in development or failure of products to operate properly. MUNICIPAL AND WASTEWATER MARKET Completion of the Company's recent and pending acquisitions will increase significantly the percentage of the Company's revenues derived from municipal customers. While municipalities represent an important market in the water and wastewater treatment industry, contractor selection processes and funding for projects in the municipal sector entail certain additional risks not typically encountered with industrial customers. Competition 11 for selection of a municipal contractor typically occurs through a formal bidding process which can require the commitment of significant resources and greater lead times than industrial projects. In addition, demand in the municipal market is dependent upon the availability of funding at the local level, which may be the subject of increasing pressure as local governments are expected to bear a greater share of the cost of public services. See "Recent and Pending Acquisitions" and "Business." Zimpro is party to certain agreements (entered into in 1990 at the time Zimpro was acquired from unrelated third parties by the entities from which it was later acquired by the Company), pursuant to which Zimpro agreed, among other things, to pay the original sellers a royalty of 3.0% of its annual consolidated net sales of certain products in excess of $35.0 million through October 25, 2000. Under certain interpretations of such agreements, with which the Company disagrees, Zimpro could be liable for such royalties with respect to the net sales attributable to products, systems and services of certain defined wastewater treatment businesses acquired by Zimpro or the Company or the Company's other subsidiaries after May 31, 1996. The defined businesses include, among others, manufacturing machinery and equipment, and engineering, installation, operation and maintenance services related thereto, for the treatment and disposal of waste liquids, toxic waste and sludge. One of the prior sellers has revealed in a letter to the Company an interpretation contrary to that of the Company. The Company believes that it would have meritorious defenses to any claim based upon any such interpretation and would vigorously pursue the elimination of any threat to expand what it believes to be its obligations pursuant to such agreements. SHARES ELIGIBLE FOR FUTURE SALE The market price of the Common Stock could be adversely affected by the availability for public sale of shares held on November 10, 1996 by security holders of the Company, including: (i) up to 3,750,093 shares which may be delivered by Laidlaw Inc. or its affiliates ("Laidlaw"), at Laidlaw's option in lieu of cash, at maturity pursuant to the terms of 5 3/4% Exchangeable Notes due 2000 of Laidlaw (the amount of shares or cash delivered or paid to be dependent within certain limits upon the value of the Common Stock at maturity); (ii) 7,636,363 shares issuable upon conversion of the Company's 6% Convertible Subordinated Notes due 2005 at a conversion price of $18.33 per share of Common Stock; (iii) shares issuable upon conversion of the Notes at a conversion price of $ per share of Common Stock; (iv) 2,908,171 outstanding shares that are currently registered for sale under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to two shelf registration statements; and (v) 7,036,939 shares which are subject to agreements pursuant to which the holders have certain rights to request the Company to register the sale of such holders' Common Stock under the Securities Act and/or, subject to certain conditions, to include certain percentages of such shares in other registration statements filed by the Company (1,980,000 of which shares also may be sold from time to time by the holder thereof pursuant to Rule 144 under the Securities Act). The shares referred to in clause (v) include up to 845,794 shares that may be sold by Selling Stockholders upon exercise of the U.S. Underwriters' over-allotment option. In addition, the Company has registered for sale under the Securities Act 5,777,380 shares which may be issuable by the Company from time to time in connection with acquisitions of businesses from third parties. SUBORDINATION The Notes will be subordinated in right of payment to all existing and future Senior Indebtedness and will be structurally subordinated to all liabilities (including trade payables) of the Company's subsidiaries. The Indenture will not restrict the incurrence of Senior Indebtedness or other indebtedness by the Company or its subsidiaries. At September 30, 1996, the Company would have had approximately $40.6 million of Senior Indebtedness outstanding after giving effect to: (i) the acquisitions of WSMG, PED, USG and WaterPro; (ii) the sale of the Notes and the anticipated application of the net proceeds therefrom; (iii) the sale by the Company in the Common Stock Offerings of 10,000,000 shares of Common Stock at an assumed public offering price of $32.50 per share (based on the closing sale price per share of Common Stock on November 20, 1996 as reported on the New York Stock Exchange Composite Tape) and the anticipated application of the net proceeds 12 therefrom; and (iv) the conversion of the Company's 5% Convertible Subordinated Debentures due 2000 into 4,390,000 shares of Common Stock. By reason of such subordination of the Notes, in the event of the insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up of the business of the Company or upon a default in payment with respect to any indebtedness of the Company or an event of default with respect to such indebtedness resulting in the acceleration thereof, the assets of the Company will be available to pay the amounts due on the Notes only after all Senior Indebtedness has been paid in full. The Notes will rank pari passu with other unsecured, subordinated obligations of the Company, including the Company's 6% Convertible Subordinated Notes due 2005. See "Description of the Notes--Subordination." The Company conducts its operations through its subsidiaries. Accordingly, the Company's ability to meet its cash obligations is dependent in part upon the ability of its subsidiaries to make cash distributions to the Company. The ability of its subsidiaries to make distributions to the Company is and will continue to be restricted by, among other limitations, applicable provisions of the laws of national or state governments and contractual provisions. The Indenture will not limit the ability of the Company's subsidiaries to agree to be bound by such contractual restrictions in the future. Although the jurisdictions in which the Company's subsidiaries now conduct substantially all of their business generally do not restrict the removal or conversion of local or foreign currency, such restrictions, if enacted, could create substantial barriers to the conversion or repatriation of funds, and such restrictions could adversely affect the Company's ability to meet its debt service and other liquidity requirements. In addition, various jurisdictions place limits on the amount and source of dividends that may be paid by companies under certain circumstances. The right of the Company to participate in the assets of any subsidiary (and thus the ability of holders of the Notes to benefit indirectly from such assets) are generally subject to the prior claims of creditors, including trade creditors, of that subsidiary except to the extent that the Company is recognized as a creditor of such subsidiary, in which case the Company's claims would still be subject to any security interest of other creditors of such subsidiary. The Notes, therefore, will be subordinated by operation of law to creditors, including trade creditors, of subsidiaries of the Company with respect to the assets of the subsidiaries against which such creditors have a claim. At September 30, 1996, as adjusted to give effect to the acquisitions of WSMG, PED, WaterPro and USG, the Company's subsidiaries would have had approximately $473.0 million of trade payables and accrued liabilities. ABSENCE OF EXISTING MARKET FOR NOTES The Notes will constitute a new issue of securities with no established trading market. Application has been made to list the Notes on the New York Stock Exchange. The Company has been advised by the Underwriters that, following completion of the offering of the Notes, they presently intend to make a market in the Notes. However, the Underwriters are not obligated to do so and any marketmaking activities may be discontinued at any time without notice. In addition, such marketmaking activities will be subject to the limits imposed by the Exchange Act. No assurance can be given that an active trading market for the Notes will develop or, if such market develops, as to the liquidity or sustainability of such market. If a trading market does not develop or is not maintained, holders of the Notes may experience difficulty in reselling the Notes or may be unable to sell them at all. If a market for the Notes develops, any such market may be discontinued at any time. If a public trading market develops for the Notes, future trading prices of the Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities. Depending on prevailing interest rates, the market for similar securities and other factors, including the financial condition of the Company, the Notes may trade at a discount from their principal amount. 13 RECENT AND PENDING ACQUISITIONS The Company has become a leading single-source provider of cost-effective water and wastewater treatment systems primarily through acquisitions of businesses that have expanded the Company's geographic presence, industries served, installed base, and range of products and technologies. The Company's acquisition of WSMG and pending acquisition of PED are expected to provide the Company with important products and technologies which enhance the Company's single-source provider capabilities. The Company believes that these acquisitions will also significantly expand the Company's municipal and wastewater treatment capabilities and international presence, particularly in the Pacific Rim and Europe. The Company is negotiating the possible formation of a joint venture with WTI (the "Joint Venture") to, among other things, develop, finance, own and operate water and wastewater treatment facilities for both industrial and municipal customers in North America. See "--Possible Joint Venture." The Company's acquisition strategy has also recently focused on establishing the Company as one of the industry's leading distributors of water and wastewater distribution products and services to both the industrial and municipal markets. The recent acquisitions of Davis, WaterPro and USG are expected to provide the Company with a platform to: (i) enhance the Company's local sales and service infrastructure; (ii) penetrate the municipal segment of the water and wastewater treatment market by capitalizing on each distribution company's long-term municipal relationships; (iii) leverage the Company's manufacturing capabilities and technology base; and (iv) capitalize on efficiencies from consolidation of operations and economies of scale. In addition, the Company believes that these distribution acquisitions will permit the Company to capitalize on opportunities to retrofit, replace and repair aging water infrastructure in the United States. Together, these recent and pending acquisitions are expected to distinguish further the Company as a leading single-source provider capable of designing, manufacturing, operating, financing and maintaining water and wastewater treatment systems on a local basis for industrial and municipal customers worldwide. WATER SYSTEMS AND MANUFACTURING GROUP On December 2, 1996, the Company acquired WSMG from WTI for $369.6 million in cash, subject to possible post-closing adjustment. WSMG provides a broad range of water and wastewater treatment products and technologies, as well as other environmental products, worldwide. As of October 4, 1996, WSMG had 1,993 employees and 57 facilities located in 17 countries. For the fiscal year ended December 31, 1995, WSMG generated approximately $452.1 million of revenues, of which approximately 56% were attributable to sales in North America, with the remainder generated principally in Europe, the Pacific Rim and the Middle East. The Company believes that the acquisition of WSMG significantly broadens the Company's product offerings, technological capabilities and municipal market penetration, WSMG is also expected to provide the Company with cross-selling opportunities as well as opportunities to rationalize operations and increase asset utilization. In addition, the Company believes that the acquisition of WSMG provides it with the infrastructure required to capitalize on increasing opportunities in the Pacific Rim and further strengthens the Company's presence in European markets. A description of certain of the WSMG business units follows. NEW PRODUCTS AND TECHNOLOGIES Johnson Screens. Johnson Screens is recognized as a leader in well screen design and development and screen installation. Johnson Screens' welded continuous-slot products are widely used in groundwater 14 applications, oil and gas wells, and other industrial filtration applications worldwide. Johnson Screens is expected to provide the Company with an opportunity to sell additional products through the Company's extensive distribution channel of sales and service facilities. HPD. HPD's primary water treatment technologies include evaporation and crystallization serving the pulp and paper, chemical, petrochemical, mining and power industries. These technologies are expected to enhance the Company's zero-discharge and product recovery techniques, thereby providing what the Company believes to be an important addition to its single-source provider capabilities. CPC Engineering. CPC designs water and wastewater treatment systems for municipalities on a standard or custom-engineered basis under the "Microfloc" brand name. CPC also produces solids screening, dewatering, conveying and grinding equipment used in municipal wastewater treatment, municipal storm water collection, and industrial wastewater treatment in the meat and poultry, food processing, pulp and paper, mining, petrochemical and power utility markets. Westates Carbon. Westates Carbon is a full-service granular activated carbon company. Westates Carbon offers systems, service and support, including a carbon reactivation facility. Westates Carbon is expected to provide the Company with the ability to recycle and reuse spent carbon utilized for both water and wastewater treatment applications. Memtek. Memtek products remove inorganic solids and heavy metals from contaminated wastewater for the microelectronics, metal finishing and industrial laundry marketplace. Sophisticated cross-flow membrane microfiltration products are expected to be an important addition to the Company's product offerings. Memtek products are sold under the brand names IX/ER(R), TOTALTREAT(TM), MEMCLEAN(TM), EVAP(TM), RMS(TM) and ACMS(TM). The Wheelabrator Corporation. The Wheelabrator Corporation ("WTC") designs and manufactures environmentally sound surface cleaning and preparation equipment and supplies. WTC also manufactures metal screening and grating used in wastewater separation and organic and inorganic waste handling. EXPANDED GLOBAL MARKET PRESENCE Darchet Engineering. Darchet serves the water and wastewater needs of the microelectronics, metal finishing and other industries in the Pacific Rim, with specific market presence in Singapore, Malaysia, Indonesia, Thailand and the Philippines. Darchet specializes in ion-exchange, reverse osmosis, ultrafiltration and conventional technologies. The Company believes Darchet will enhance the Company's growing market presence in the Pacific Rim. Sun Chi. Sun Chi, based in Taiwan, designs and installs wastewater treatment systems primarily for municipal applications. Sun Chi offers a wide range of biological treatment technologies, including dissolved air floatation, aerobic and anaerobic fluidized beds, ion exchange, oxidation, sequential biological reactors and denitrification. Sun Chi's installed base of systems in Taiwan, Malaysia, Indonesia, Thailand, the Philippines and China is also expected to enhance the Company's growing market presence in the Pacific Rim. Rossmark. Rossmark is an industry leader in northern Europe serving the industrial and municipal water and wastewater treatment markets. Rossmark's services include process engineering, systems design, turnkey water and wastewater treatment systems and equipment manufacturing. Rossmark has operations in the Netherlands, Belgium, the United Kingdom and Germany. PSS. PSS, based in Spain, uses evaporation, crystallization and membrane separation technologies, primarily in the chemical and pulp and paper industries. PSS is expected to expand the Company's zero-discharge capabilities in Europe and the Middle East. 15 POSSIBLE JOINT VENTURE The Company and WTI are negotiating the possible formation of the Joint Venture to, among other things, develop, finance, own and operate water and wastewater treatment facilities for both industrial and municipal customers in North America. It is expected that the operating strategy for the Joint Venture, if formed, would be to offer customers: (i) turnkey operation, including system design, manufacture, operation and maintenance on a local basis; (ii) warrantied performance; (iii) potential cost savings; and (iv) customized financing options. There can be no assurance as to whether or when or on what specific terms the Joint Venture will actually be formed. The Company is currently a 50% owner of Treated Water Outsourcing, a Nalco/U.S. Filter Joint Venture ("TWO"), which focuses on the outsourcing of industrial customers' water treatment needs. PROCESS EQUIPMENT DIVISION On October 7, 1996, the Company entered into a definitive agreement to acquire PED from United Utilities Plc for (Pounds)125.5 million, comprised of approximately (Pounds)100.5 million in cash and (Pounds)25.0 million in shares of Common Stock, subject to possible post-closing adjustment. PED is a leading manufacturer and distributor of water and wastewater treatment equipment primarily to the municipal market. As of June 30, 1996, PED had approximately 1,935 employees and 17 facilities located in seven countries. For the fiscal year ended March 31, 1996, PED generated approximately $267.4 million of revenues, of which approximately 60% were attributable to sales in North America, with the remainder generated principally in Europe, Latin America and the Pacific Rim. For the fiscal year ended March 31, 1996, a majority of PED's revenues were attributable to sales in the municipal market. The Company believes that the acquisition of PED will significantly strengthen the Company's municipal water and wastewater treatment capabilities and provide the Company with opportunities to rationalize operations and increase asset utilization. Additionally, the Company believes that opportunities exist to expand PED's industrial sales by distributing PED's products through the Company's sales, service and distribution facilities. A description of certain PED business units follows. Envirex. Envirex manufactures wastewater treatment equipment, including screening, grit removal, biological treatment and solids collection equipment. The Company believes that Envirex has one of the largest number of wastewater treatment units installed worldwide as well as one of the broadest product lines in the wastewater equipment market. The Company believes that by integrating and rationalizing Envirex's product lines with the Company's existing wastewater products, it will enhance its municipal wastewater product lines, which in turn will enable the Company to establish more effective municipal sales channels. The Company also believes that it may be able to increase Envirex's sales to industrial markets through the Company's industrial distribution channels. Wallace & Tiernan. Wallace & Tiernan is one of the world leaders in the manufacture of water and wastewater disinfection systems and components. The Company believes that significant opportunities exist to use Wallace & Tiernan's global presence and large installed base to cross-sell certain of the Company's other products and services. Additionally, Wallace & Tiernan's large installed base is expected to continue to generate revenue from the sale of replacement parts and services. Edwards & Jones/Asdor. Edwards & Jones designs, manufactures and installs biosolids handling equipment primarily for the municipal markets in Europe and the Pacific Rim, while Asdor performs the same functions in North America. The Company believes that the acquisition of Edwards & Jones will provide the Company with a critical mass of wastewater expertise in the European market and a channel to integrate further the Company's existing wastewater expertise into its European operations. General Filter/Acumem. General Filter is a leading provider of pre-treatment equipment, granular media filtration systems and microfiltration systems primarily to the municipal water markets in North America. 16 Acumem sells microfiltration systems for the treatment of surface and groundwater to potable water standards for industrial and municipal users in the United States, the United Kingdom and Australia. It also offers a range of cross-flow microfiltration and ultrafiltration membrane systems for municipal tertiary wastewater treatment. Consolidated Electric. Consolidated Electric is a leading supplier of automation and control systems for municipal water and wastewater treatment equipment using liquid level pressure and flow sensors, automatic pump controllers/alternators, and remote control technology capabilities. The Company believes that these control systems will complement its existing design-build capabilities in both industrial and municipal markets. The Company anticipates that the acquisition of PED will be completed during January 1997, although there can be no assurance that the acquisition will be consummated at such time or at all. DISTRIBUTION ACQUISITIONS The Company believes that the recent acquisitions of Davis, WaterPro and USG establish the Company as a leading distributor of water and wastewater distribution products and services to the industrial and municipal markets. Through the addition of 105 distribution facilities, these recent acquisitions provide the Company with a strategically important local sales and service presence in the markets being served. Additionally, each of Davis, WaterPro and USG benefits from established relationships with municipalities. The Company believes that these relationships will provide it with an effective means of penetrating the municipal market and permit the Company to capitalize on opportunities to retrofit, replace and repair aging water infrastructure in the United States. The Company intends to utilize its distribution channels, local presence and single-source capabilities to sell its extensive product line, including capital equipment, replacement parts, and services to both the industrial and municipal markets. As a result, the Company believes that its distribution infrastructure will provide a mechanism to leverage its manufacturing capabilities and technology base. The Company also believes that the distribution acquisitions will provide cost-saving opportunities through rationalization of overhead expenses and realization of economies of scale and operating efficiencies. Davis Water and Waste Industries, Inc. In August 1996, the Company completed the acquisition of Davis, a leading distributor of water and wastewater distribution products and services to the industrial and municipal markets. Davis also designs, engineers, manufactures and installs water and wastewater treatment and pumping equipment. Davis has 32 distribution facilities located primarily in the southeastern United States which service more than 25,000 customers. For the fiscal year ended April 30, 1996, Davis generated approximately $226.5 million of revenues, of which approximately $178.2 million, or 79%, were attributable to the sale of distribution products and services, and approximately $48.3 million, or 21%, were attributable to manufacturing, installing, processing and servicing water and wastewater treatment and pumping equipment. The acquisition of Davis provides the Company with a significant distribution channel in the southeastern United States to market its line of products and services. WaterPro Supplies Corporation. In October 1996, the Company completed the acquisiton of WaterPro, a leading distributor of water and wastewater distribution products and services to the industrial and municipal markets, in exchange for 3,201,507 shares of Common Stock (including the repayment of approximately $67.9 million in outstanding WaterPro debt with shares of Common Stock). WaterPro serves approximately 18,000 customers through its 43 distribution facilities in 18 states, located primarily in the midwestern and mid-Atlantic United States. For the period April 7, 1995 to December 31, 1995, WaterPro generated approximately $187.5 million of revenues. The acquisition of WaterPro increases the Company's distribution presence in the midwestern and mid-Atlantic United States and expands the Company's presence in the municipal market. The Utility Supply Group, Inc. In October 1996, the Company completed the acquisition of USG, a leading distributor of water and wastewater distribution products and services to the municipal market, in exchange for 771,157 shares of Common Stock, subject to adjustment. USG serves approximately 6,000 customers through 30 distribution and sales facilities, located primarily in Texas, Florida and California. For the fiscal year ended December 31, 1995, USG generated revenues of approximately $156.8 million. The acquisition of USG increases the Company's distribution presence in the western, southern and southeastern United States and expands the Company's municipal customer base. 17 USE OF PROCEEDS The net proceeds to the Company from the sale of the Notes are estimated to be $292.2 million ($336.1 million if the Underwriters' over-allotment option were exercised in full), after deducting estimated underwriting discounts and commissions and estimated offering expenses. The net proceeds to the Company from the Common Stock Offerings are estimated to be $312.1 million ($332.5 million if the underwriters' over-allotment option were exercised in full) based on the closing sale price per share of Common Stock on December 6, 1996 as reported on the New York Stock Exchange Composite Tape and after deducting estimated underwriting discounts and commissions and estimated offering expenses. The aggregate net proceeds of the Notes Offering and the Common Stock Offerings are expected to be used to repay indebtedness incurred to fund the acquisition by the Company of WSMG and to fund the cash portion of the consideration for the pending acquisition by the Company of PED. The purchase price for WSMG was $369.6 million in cash, subject to possible adjustment, and the cash portion of the purchase price for PED is approximately (Pounds)100.5 million, subject to possible adjustment. In connection with the pending acquisition of PED, the Company has entered into a forward contract pursuant to which it is obligated to purchase (Pounds)100.0 million for approximately $159.3 million at any time between December 16, 1996 and February 14, 1997. The balance of the net proceeds from the Notes Offering and the Common Stock Offerings will be used to reduce revolving credit borrowings under the Credit Agreement described below or for working capital, capital expenditures and general corporate purposes, including possible future acquisitions. If the PED acquisition is not completed, the net proceeds from the Notes Offering and the Common Stock Offerings not used for such acquisition will be added to working capital. See "Recent and Pending Acquisitions." Consummation of the Notes Offering is not a condition to consummation of the Common Stock Offerings, and consummation of the Common Stock Offerings is not a condition to consummation of the Notes Offering. To the extent that net proceeds from the Notes Offering and the Common Stock Offerings are not available, the Company expects to obtain all or part of the funds necessary to complete the PED acquisition from borrowings under bank credit facilities. The Company has entered into an Amended and Restated Multicurrency Credit Agreement, dated as of December 2, 1996 (the "Credit Agreement"), with lenders for whom The First National Bank of Boston is acting as Managing Agent, pursuant to which credit facilities of up to $700.0 million have been made available to the Company to finance acquisitions (including the WSMG acquisition and the pending PED acquisition), to refinance any borrowings under the Company's previous credit agreement, and for working capital and other general corporate purposes. Borrowings under the Credit Agreement bear interest at variable rates of up to 2.25% above certain Eurocurrency rates or 0.50% above The First National Bank of Boston's base rate and have a five year maturity. The Company anticipates that, following completion of the Notes Offering and the Common Stock Offerings, its bank credit facilities will be reduced to a level that the Company considers appropriate for its working capital and other needs. Pending utilization as described above, the net proceeds from the Notes Offering and the Common Stock Offerings will be invested in short-term, interest-bearing obligations. 18 CAPITALIZATION The following table sets forth the historical consolidated capitalization of the Company at September 30, 1996 and As Adjusted to give effect to: (i) the acquisitions of WSMG, PED, WaterPro and USG; and (ii) the assumed borrowing under the Credit Agreement of approximately $541.0 million to fund the cash portion of the consideration for such acquisitions and estimated transaction costs. The As Further Adjusted column gives effect to: (i) the sale by the Company of 10,000,000 shares of Common Stock in the Offerings at an assumed public offering price of $32.50 per share and the anticipated application of the net proceeds therefrom; (ii) the sale by the Company of the Notes and the anticipated application of the net proceeds therefrom; and (iii) the conversion of the Company's $60.0 million aggregate principal amount of 5% Convertible Subordinated Debentures due 2000 into 4,390,000 shares of Common Stock. This table should be read in conjunction with and is qualified by reference to the Company's Consolidated Financial Statements and related Notes thereto and the Unaudited Combined Pro Forma Financial Information included elsewhere herein. See "Recent and Pending Acquisitions" and "Use of Proceeds."
SEPTEMBER 30, 1996 ------------------------------- AS FURTHER ACTUAL AS ADJUSTED ADJUSTED -------- ----------- ---------- (in thousands) Current portion of long-term debt(1)........... $ 1,386 $ 1,386 $ 1,386 ======== ========== ========== Long-term debt: Notes payable and long-term debt, excluding current portion(1)............................ $ 88,773 $ 649,271 $ 45,034 5% Convertible Subordinated Debentures due 2000.......................................... 53,565 53,565 -- 6% Convertible Subordinated Notes due 2005..... 140,000 140,000 140,000 % Convertible Subordinated Notes due 2001(2).. -- -- 300,000 -------- ---------- ---------- Total long-term debt, excluding current portion..................................... 282,338 842,836 485,034 -------- ---------- ---------- Shareholders' equity: Common Stock, 150,000,000 shares authorized, 49,280,734 shares (Actual), 54,518,783 shares (As Adjusted) and 68,908,783 shares (As Further Adjusted) issued and outstanding(3).............................. 493 545 689 Additional paid-in capital................... 370,625 530,977 896,460 Currency translation adjustment.............. 2,691 2,691 2,691 Retained earnings............................ 26,194 26,194 26,194 -------- ---------- ---------- Total shareholders' equity................. 400,003 560,407 926,034 -------- ---------- ---------- Total capitalization..................... $682,341 $1,403,243 $1,411,068 ======== ========== ==========
- --------------------- (1) See Note 11 of Notes to Consolidated Financial Statements included elsewhere herein for additional information regarding the Company's long- term obligations. (2) Assumes no exercise of the underwriters' over-allotment option. (3) The number of authorized shares of Common Stock was increased from 75,000,000 to 150,000,000 effective September 11, 1996. The 49,280,734 shares issued and outstanding on an Actual basis do not include: (i) 4,390,000 shares issued upon conversion of the Company's 5% Convertible Subordinated Debentures due 2000 (fully converted into shares of Common Stock as of October 25, 1996); (ii) 7,636,363 shares issuable upon conversion of the Company's 6% Convertible Subordinated Notes due 2005; (iii) shares issuable upon conversion of the Notes; and (iv) 4,396,594 shares issuable upon exercise of stock options either outstanding or available for future grant under the Company's stock option plans. The 54,518,783 shares issued and outstanding on an As Adjusted basis includes 3,972,664 shares issued in connection with the acquisitions of WaterPro and USG and an estimated 1,265,385 shares issuable in connection with the acquisition of PED. The 68,908,783 shares issued and outstanding on an As Further Adjusted basis includes the 10,000,000 shares to be issued in the Offerings and the 4,390,000 shares issued upon conversion of the Company's 5% Convertible Subordinated Debentures due 2000. Assumes no exercise of the Underwriters' over-allotment option. 19 PRICE RANGE OF COMMON STOCK The Common Stock of the Company is listed on the New York Stock Exchange and traded under the symbol "USF." The following table sets forth for the fiscal periods indicated the range of high and low sales prices of the Common Stock as reported on the New York Stock Exchange Composite Tape.
HIGH LOW ------ ------ Fiscal year ended March 31, 1995: First Quarter................................................... $ 9.67 $ 8.11 Second Quarter.................................................. 9.78 8.17 Third Quarter................................................... 10.75 8.78 Fourth Quarter.................................................. 11.25 10.00 Fiscal year ended March 31, 1996: First Quarter................................................... 13.08 9.92 Second Quarter.................................................. 16.08 12.50 Third Quarter................................................... 18.00 13.42 Fourth Quarter.................................................. 19.33 16.42 Fiscal year ended March 31, 1997: First Quarter................................................... 23.75 18.42 Second Quarter.................................................. 34.75 18.50 Third Quarter (through December 6, 1996)........................ 36.25 31.13
On December 6, 1996, the closing sale price of the Common Stock as reported on the New York Stock Exchange Composite Tape was $32.50 per share. DIVIDEND POLICY The Company currently intends to retain earnings to provide funds for the operation and expansion of its business and accordingly does not anticipate paying cash dividends on the Common Stock in the foreseeable future. Any payment of cash dividends on the Common Stock in the future will depend upon the Company's financial condition, earnings, capital requirements and such other factors as the Board of Directors deems relevant. Under the Credit Agreement, no dividends may be paid on the Common Stock without the consent of the lenders whose lending commitments constitute a majority of the lending commitments thereunder. 20 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following Unaudited Pro Forma Combined Financial Information presents the Pro Forma Combined Balance Sheet at September 30, 1996, giving effect to the acquisitions of WSMG, WaterPro and USG and the pending acquisition of PED as if they had been consummated on that date. Also presented are the Pro Forma Combined Statements of Operations for the fiscal year ended March 31, 1996 and the six months ended September 30, 1996, after giving effect to the recent acquisitions of WSMG, WaterPro and USG and the pending acquisition of PED as if they had been consummated as of the beginning of the respective periods presented. The Company's and PED's fiscal years end on March 31 and WSMG's, WaterPro's and USG's fiscal years end on December 31. The Pro Forma Balance Sheet combines the respective balance sheets of the Company, WSMG, PED, WaterPro and USG as of September 30, 1996. The Pro Forma Statement of Operations for the year ended March 31, 1996 combines the results of the Company and PED for such year with the results of WSMG, WaterPro and USG for the year ended December 31, 1995, and the Pro Forma Statement of Operations for the six months ended September 30, 1996 combines the results of each of the Company, WSMG, PED, WaterPro and USG for such six month period. All Company historical consolidated financial data has been restated to reflect the acquisitions in May 1996 and August 1996 of Zimpro and Davis, respectively, which acquisitions have been accounted for as poolings of interests. The As Adjusted column gives effect to: (i) the recent acquisitions of WSMG, WaterPro and USG and the pending acquisition of PED; and (ii) the assumed borrowings under the Credit Agreement of approximately $541.0 million to fund the cash portion of the consideration for such acquisitions and estimated transaction costs. The As Further Adjusted column gives effect to: (i) the sale by the Company of the Notes and the anticipated application of the net proceeds therefrom to the reduction of amounts outstanding under the Credit Agreement; (ii) the sale by the Company of 10,000,000 shares of Common Stock in the Offerings at an assumed public offering price of $32.50 per share and the anticipated application of the net proceeds therefrom to the reduction of amounts outstanding under the Credit Agreement; and (iii) the conversion of the Company's $60.0 million aggregate principal amount of 5% Convertible Subordinated Debentures due 2000 into 4,390,000 shares of Common Stock. The pro forma data is based on the historical combined statements of the Company, WSMG, PED, WaterPro and USG giving effect to such acquisitions under the purchase method of accounting and the assumptions and adjustments (which the Company believes to be reasonable) described in the accompanying Notes to Unaudited Pro Forma Combined Financial Information. Under the purchase method of accounting, assets acquired and liabilities assumed will be recorded at their estimated fair value at the date of acquisition. The pro forma adjustments set forth in the following Unaudited Pro Forma Combined Financial Information are estimated and may differ from the actual adjustments when they become known, however, no material differences are anticipated. The historical financial statements of PED were prepared in accordance with UK GAAP, which differs in certain respects from US GAAP. The historical PED financial statements included in the following Unaudited Pro Forma Combined Financial Information have been restated to reflect PED's financial position and results of operations in accordance with US GAAP. The following Unaudited Pro Forma Combined Financial Information does not reflect certain cost savings that management believes may be realized following the acquisitions. These savings are expected to be realized primarily through rationalization of operations and implementation of strict cost controls and standardized operating procedures. Additionally, the Company believes the acquisitions will enable it to continue to achieve economies of scale, such as enhanced purchasing power and increased asset utilization. There can be no assurance that the acquisition of PED will be consummated. The pro forma data is provided for comparative purposes only. It does not purport to be indicative of the results that actually would have occurred if the acquisitions of WSMG, PED, WaterPro and USG had been consummated on the dates indicated or that may be obtained in the future. The Unaudited Pro Forma Combined Financial Information should be read in conjunction with the notes thereto, the audited financial statements of WSMG, PED and WaterPro and the notes thereto, included elsewhere herein, and the Company's Consolidated Financial Statements and Notes thereto, included elsewhere herein. 21 UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1996 ---------------------------------------------------------------------------------------------- HISTORICAL PRO FORMA -------------------------------------------- ------------------------------------------------ ADJUSTMENTS INCREASE AS AS FURTHER COMPANY USG WATERPRO WSMG PED (DECREASE) NOTES ADJUSTED ADJUSTED NOTES -------- ------- -------- -------- --------- ----------- ------ ---------- ---------- ------- (IN THOUSANDS) ASSETS Current assets: Cash.............. $ 19,488 $ 280 $ -- $ 12,619 $ 2,055 $ 34,442 $ 34,442 Short-term investments...... 816 -- -- -- 1,275 2,091 2,091 Accounts receivable, net.. 213,594 25,622 70,751 93,325 166,042 569,334 569,334 Cost and estimated earnings in excess of billings on uncompleted contracts........ 52,802 -- -- 19,785 -- 72,587 72,587 Inventories....... 88,230 15,812 26,448 41,622 51,127 223,239 223,239 Prepaid expenses.. 11,981 -- 292 -- -- 12,273 12,273 Deferred taxes.... 7,771 -- -- -- -- 7,771 7,771 Other current assets........... 9,614 417 -- 3,790 -- 13,821 13,821 -------- ------- -------- -------- --------- ---------- ---------- Total current assets......... 404,296 42,131 97,491 171,141 220,499 935,558 935,558 -------- ------- -------- -------- --------- ---------- ---------- Property, plant and equipment, net.... 178,362 2,686 5,062 55,752 31,420 273,282 273,282 Investment in leasehold interests, net.... 27,057 -- -- -- -- 27,057 27,057 Costs in excess of net assets of businesses acquired, net..... 276,627 -- 13,968 155,578 -- $ 262,199 a(ii) 708,372 708,372 Other assets....... 50,317 736 -- 4,044 1,974 5,250 a(i) 62,321 70,146 a(v) -------- ------- -------- -------- --------- ---------- ---------- Total assets.... $936,659 $45,553 $116,521 $386,515 $ 253,893 $2,006,590 $2,014,415 ======== ======= ======== ======== ========= ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.. $101,329 $16,113 $ 35,439 $ 53,338 $ 82,467 $ 288,686 $ 288,686 Accrued liabilities...... 102,000 3,491 11,341 43,822 31,375 192,029 192,029 Current portion of long-term debt... 1,386 -- -- -- 91,276 $ (91,276) a(iii) 1,386 1,386 Revolving credit line with parent. -- -- 58,679 -- -- (58,679) a(iii) -- -- Billings in excess of costs and estimated earnings on uncompleted contracts........ 19,631 -- -- 18,911 -- 38,542 38,542 Other current liabilities...... 11,344 332 -- -- 806 12,482 12,482 -------- ------- -------- -------- --------- ---------- ---------- Total current liabilities.... 235,690 19,936 105,459 116,071 205,924 533,125 533,125 -------- ------- -------- -------- --------- ---------- ---------- Notes payable...... 81,156 16,025 -- -- -- 541,023 a(i) 638,204 33,967 a(vi) Long-term debt, excluding current portion........... 7,617 3,450 -- -- -- 11,067 11,067 Convertible subordinated debt. 193,565 -- -- -- -- 193,565 440,000 a(vii) Loan payable- parent............ -- -- -- -- 225,704 (225,704) a(iii) -- -- Deferred taxes..... 1,223 -- 151 -- -- 1,374 1,374 Other liabilities.. 17,405 -- -- 13,962 37,481 68,848 68,848 -------- ------- -------- -------- --------- ---------- ---------- Total liabilities.... 536,656 39,411 105,610 130,033 469,109 1,446,183 1,088,381 -------- ------- -------- -------- --------- ---------- ---------- Shareholders' equity: Common stock...... 493 2,553 1 -- -- (2,502) a(iv) 545 689 a(viii) Additional paid-in capital.......... 370,625 149 4,999 254,400 17,168 (116,364) a(iv) 530,977 896,460 a(viii) Translation adjustment....... 2,691 -- -- 2,082 -- (2,082) a(iv) 2,691 2,691 Retained earnings (accumulated deficit)......... 26,194 3,440 5,911 -- (232,384) 223,033 a(iv) 26,194 26,194 -------- ------- -------- -------- --------- ---------- ---------- Total shareholders' equity......... 400,003 6,142 10,911 256,482 (215,216) 560,407 926,034 -------- ------- -------- -------- --------- ---------- ---------- $936,659 $45,553 $116,521 $386,515 $ 253,893 $2,006,590 $2,014,415 ======== ======= ======== ======== ========= ========== ==========
The accompanying notes are an integral part of this pro forma combined financial information. 22 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 1996 ------------------------------------------------------------------------------------------------- HISTORICAL PRO FORMA ----------------------------------------------- ------------------------------------------------ ADJUSTMENTS INCREASE AS AS FURTHER COMPANY USG WATERPRO WSMG PED (DECREASE) NOTES ADJUSTED ADJUSTED NOTES -------- -------- -------- -------- -------- ----------- ----- ---------- ---------- ----- (in thousands, except per share data) Revenues................ $727,903 $156,838 $234,391 $452,134 $267,358 $1,838,624 $1,838,624 Cost of sales........... 538,573 130,432 195,258 361,462 189,529 1,415,254 1,415,254 -------- -------- -------- -------- -------- ---------- ---------- Gross profit........... 189,330 26,406 39,133 90,672 77,829 423,370 423,370 Selling, general and administrative expenses............... 148,683 21,821 32,767 68,170 66,903 $ 6,555 b(i) 344,921 344,921 Restructuring expense... -- -- -- -- 9,260 9,260 9,260 -------- -------- -------- -------- -------- ---------- ---------- Operating income....... 40,647 4,585 6,366 22,502 1,666 69,211 69,211 -------- -------- -------- -------- -------- ---------- ---------- Other income (expense): Interest expense....... (14,419) (2,227) (3,593) -- (19,865) (17,119) b(ii) (57,224) (28,645) b(iii) Other.................. 5,134 (582) 657 4,767 -- 9,976 9,976 -------- -------- -------- -------- -------- ---------- ---------- (9,285) (2,809) (2,936) 4,767 (19,865) (47,247) (18,669) -------- -------- -------- -------- -------- ---------- ---------- Income (loss) before income taxes.......... 31,362 1,776 3,430 27,269 (18,199) 21,964 50,542 Provision (benefit) for income taxes........... 12,055 727 1,477 10,908 2,165 (18,986) b(iv) 8,346 19,206 b(v) -------- -------- -------- -------- -------- ---------- ---------- Net income (loss)...... $ 19,307 $ 1,049 $ 1,953 $ 16,361 $(20,364) $ 13,618 $ 31,336 c ======== ======== ======== ======== ======== ========== ========== Net income per common share................. $ 0.45 $ 0.28 $ 0.50 c ======== ========== ========== Weighted average number of common shares outstanding............ 42,159 47,398 61,788 ======== ========== ==========
The accompanying notes are an integral part of this pro forma combined financial information. 23 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 ------------------------------------------------------------------------------------------------ HISTORICAL PRO FORMA ---------------------------------------------- ------------------------------------------------ ADJUSTMENTS INCREASE AS AS FURTHER COMPANY USG WATERPRO WSMG PED (DECREASE) NOTES ADJUSTED ADJUSTED NOTES -------- ------- -------- -------- -------- ----------- ----- ---------- ---------- ------ (in thousands, except per share data) Revenues................ $433,719 $85,899 $185,199 $218,973 $130,407 $1,054,197 $1,054,197 Cost of sales........... 315,398 70,011 151,238 171,673 92,728 801,048 801,048 -------- ------- -------- -------- -------- ---------- ---------- Gross profit........... 118,321 15,888 33,961 47,300 37,679 253,149 253,149 Selling, general and administrative expenses............... 86,140 13,595 24,689 32,854 32,270 $ 3,277 b(i) 192,825 192,837 Merger and restructuring expenses................ 5,581 -- -- -- 1,992 7,573 7,573 -------- ------- -------- -------- -------- ---------- ---------- Operating income....... 26,600 2,293 9,272 14,446 3,417 52,751 52,739 -------- ------- -------- -------- -------- ---------- ---------- Other income (expense): Interest expense....... (7,972) (932) (2,433) -- (9,469) (8,386) b(ii) (29,192) (14,903) b(iii) Other.................. 1,004 411 358 439 -- 2,212 2,212 -------- ------- -------- -------- -------- ---------- ---------- (6,968) (521) (2,075) 439 (9,469) (26,980) (12,691) -------- ------- -------- -------- -------- ---------- ---------- Income (loss) before income taxes.......... 19,632 1,772 7,197 14,885 (6,052) 25,770 40,059 Provision (benefit) for income taxes........... 5,404 711 2,829 5,954 (310) (4,795) b(iv) 9,793 15,222 b(v) -------- ------- -------- -------- -------- ---------- ---------- Net income (loss)...... $ 14,228 $ 1,061 $ 4,368 $ 8,931 $ (5,742) $ 15,977 $ 24,837 c ======== ======= ======== ======== ======== ========== ========== Net income per common share................. $ 0.28 $ 0.29 $ 0.35 c ======== ========== ========== Weighted average number of common shares outstanding........... 50,629 55,868 70,258 ======== ========== ==========
The accompanying notes are an integral part of this pro forma combined financial information. 24 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION a. The Pro Forma Combined Balance Sheet has been prepared to reflect the acquisitions by the Company of WSMG, USG and WaterPro and the pending acquisition of PED for aggregate estimated equity purchase prices comprised of the following:
FORM OF EQUITY COMPANY CONSIDERATION PURCHASE PRICE ------- ------------- -------------- (in thousands) USG.................................... Common Stock $ 22,000 WaterPro............................... Common Stock 38,600 WSMG................................... Cash 369,600 PED.................................... Cash $160,073 ..................................... Common Stock 41,125 201,198 -------- Estimated transaction costs............ 6,100 -------- $637,498 ========
In addition to the purchase prices described above, the Company assumed long- term indebtedness of approximately $22,000,000 ($19,475,000 at September 30, 1996) and $67,935,000 ($58,679,000 at September 30, 1996) in connection with the acquisitions of USG and WaterPro, respectively. The $67,935,000 of indebtedness related to WaterPro was repaid with shares of Common Stock concurrently with the closing of such acquisition. The cash portion of the purchase price for PED is approximately (Pounds)100,500,000. The Company has entered into a forward contract pursuant to which it has the obligation to purchase (Pounds)100,000,000 for approximately $159,250,000 at any time between December 16, 1996 and February 14, 1997, for the purpose of hedging the cash portion of the purchase price of the acquisition of PED. No gain or loss is anticipated from this transaction. The remaining (Pounds)500,000 cash portion of the consideration and the (Pounds)25,000,000 in shares of Common Stock are based on exchange rates for British pounds sterling as of December 6, 1996. The estimated shares of Common Stock to be issued is also based on an assumed price per share of $32.50, the closing price of the Common Stock on the New York Stock Exchange on December 6, 1996. The estimated net book value, as adjusted, of USG, WaterPro, WSMG and PED and the estimated fair value of their net assets as of the closing date are assumed to be $6,142,000, $10,911,000, $256,482,000 and $101,764,000, respectively. PED's estimated fair value of net assets excludes the net loan payable of PED to its parent company of $316,980,000, which will be contributed to PED's shareholders' equity (negative $215,216,000 at September 30, 1996) by such parent company. The aggregate difference between the estimated equity purchase prices and the estimated fair values of the identified net assets of USG, WaterPro, WSMG and PED is approximately $262,199,000, which has been recorded as costs in excess of net assets of businesses acquired attributable to such acquisitions in the accompanying Pro Forma Combined Balance Sheet. The Pro Forma Combined Balance Sheet has been adjusted to reflect the above as follows: (i) To record the assumed incurrence of $541,023,000 of indebtedness under the Credit Agreement with an assumed effective interest rate of 7.50%. The incurrence of such additional indebtedness includes: (i) the cash consideration for the acquisition of WSMG of $369,600,000; (ii) the cash portion of the consideration for the acquisition of PED of $160,073,000; (iii) estimated transaction costs of $6,100,000; and (iv) estimated bank commitment fees of $5,250,000. The Company intends to retire a portion of such debt with the net proceeds of the Offerings and the Notes Offering or, if completion of the Offerings and the Notes Offering occurs prior to the completion of the acquisition of PED, to use such proceeds directly to acquire PED. See "Use of Proceeds." 25 (ii) To adjust goodwill for the difference between the estimated equity purchase prices and the estimated fair values of the identified net assets acquired. The adjustment is calculated as follows: (in thousands) Aggregate estimated equity purchase prices..................... $637,498 Aggregate estimated fair value of identified net assets acquired...................................................... 375,299 -------- Adjustment................................................. $262,199 ========
(iii) To eliminate: (i) the net loan payable of WaterPro of $58,679,000 to its parent company, which will be repaid by the Company with Common Stock; and (ii) the net loan payable of PED of $316,980,000 to its parent company, which will be contributed to PED's equity by such parent company. (iv) To eliminate the equity of USG, WaterPro, WSMG and PED and record the issuance of Common Stock for the stock portion of the consideration for the acquisitions of USG (771,157 shares), WaterPro (3,201,507 shares) and PED (1,265,385 shares).
ELIMINATE ISSUANCE EQUITY OF EQUITY ADJUSTMENT --------- --------- ---------- (IN THOUSANDS) Common Stock............................ $ (2,554) $ 52 $ (2,502) Additional paid-in capital.............. (276,716) 160,352 (116,364) Translation adjustment.................. (2,082) -- (2,082) Retained earnings (accumulated deficit). 223,033 -- 223,033
(v) To record the incurrence of approximately $7,125,000 of capitalized costs related to the Notes Offering. (vi) To record the assumed reduction of $604,238,000 of indebtedness with the estimated net proceeds of $312,063,000 from the Offerings and $292,175,000 from the Notes Offering. See "Use of Proceeds." (vii) To record: (i) the issuance of $300,000,000 of convertible subordinated debt in the Notes Offering; and (ii) the conversion of $60,000,000 aggregate principal amount of 5% Convertible Subordinated Debt due 2000 into 4,390,000 shares of Common Stock. (viii) To record: (i) the conversion of the Company's $60,000,000 aggregate principal amount of 5% Convertible Subordinated Debentures due 2000 into 4,390,000 shares of Common Stock and; (ii) the assumed issuance of 10,000,000 shares of Common Stock in the Offerings. Adjustments are calculated as follows:
CONVERSION OF 5% CONVERTIBLE SUBORDINATED DEBENTURES OFFERINGS ADJUSTMENT -------------- --------- ---------- (IN THOUSANDS) Common Stock......................... $ 44 $ 100 $ 144 Additional paid-in capital........... 53,521 311,962 365,483
26 b. For the fiscal year ended March 31, 1996, the historical results of operations of USG, WaterPro and WSMG reflect their results of operations for the twelve months ended December 31, 1995 and reflect the results of operations of PED and the Company for the year ended March 31, 1996. The historical results of operations for the six months ended September 30, 1996 combines the results of each of the Company, WSMG, PED, WaterPro and USG for such six-month period. The Pro Forma Combined Statements of Operations gives effect to the following adjustments:
FISCAL YEAR SIX MONTHS ENDED ENDED MARCH 31, 1996 SEPTEMBER 30, 1996 -------------- ------------------ (IN THOUSANDS) (i) To adjust selling, general and administrative expenses to reflect the goodwill amortization from the acquisitions of WSMG, PED, WaterPro and USG, with such goodwill of approximately $262,199,000 amortized over 40 years. $ 6,555 $ 3,277 ======== ======= (ii) To adjust interest expense related to the indebtedness of approximately $541,023,000 incurred or to be incurred to finance the acquisitions of WSMG and PED, net of historical interest expense recorded by WaterPro and PED on parent company debt. WaterPro and PED incurred interest on such parent company debt at the prime rate and approximately 11%, respectively, and incurred interest expense of $3,593,000 and $19,865,000, respectively, for the fiscal year ended March 31, 1996, and $2,433,000 and $9,469,000, respectively, for the six months ended September 30, 1996, which interest expense has been eliminated because such debt would not have been in existence at the beginning of such periods. Interest on the indebtedness under the Credit Agreement is assumed to be at an effective rate of 7.50% per annum. The Company, however, intends to retire a portion of such debt with the net proceeds of the Offerings and the Notes Offering or, if completion of the Offerings and the Notes Offering occurs prior to the completion of the acquisition of PED, to use such net proceeds directly to acquire PED. See "Use of Proceeds." The assumed effective interest rate of 7.50% on borrowings under the Credit Agreement is subject to variability. A 0.125% increase/decrease in the assumed effective interest rate incrementally decreases/increases As Adjusted net income by $419,000 and $209,000 for the year ended March 31, 1996 and six months ended September 30, 1996, respectively, and As Further Adjusted net income is unaffected as a result of repayment of the acquisition indebtedness with the net proceeds of the Offerings and the Notes Offering. $(17,119) $(8,386) ======== ======= (iii) The As Further Adjusted column presented gives effect to the Offerings and the Notes Offering and the anticipated application of the net proceeds therefrom, which results in a reduction in interest expense of $25,578,000 and $12,789,000 for the fiscal year ended March 31, 1996 and the six months ended September 30, 1996, respectively. See "Use of Proceeds." The As Further Adjusted column also gives effect to the conversion of $60,000,000 aggregate principal amount 5% Convertible Subordinated Debentures due 2000 to Common Stock which results in a reduction in interest expense of $3,000,000 and $1,500,000 for the fiscal year ended March 31, 1996 and the six months ended September 30, 1996, respectively, and a resulting increase of 4,390,000 in shares of Common Stock outstanding. $ 28,578 $14,289 ======== =======
27
FISCAL YEAR SIX MONTHS ENDED ENDED MARCH 31, 1996 SEPTEMBER 30, 1996 -------------- ------------------ (IN THOUSANDS) (iv) To adjust the provision for income taxes to reflect the combined results of operations assuming a combined tax rate of 38%. $(18,986) $4,795 ======== ====== (v) To adjust the provision for income taxes to reflect the combined results of operations assuming a combined tax rate of 38%. $ 10,860 $5,429 ======== ======
c. During the fiscal year ended March 31, 1996 and the six months ended September 30, 1996, PED incurred significant restructuring charges relating to the plant closure and relocation of the operations of Wallace & Tiernan, Inc., a subsidiary, from Belleville, N.J., to Vineland, N.J. These restructuring charges totaled $9,260,000 and $1,992,000 for the fiscal year ended March 31, 1996 and the six months ended September 30, 1996, respectively. The Company believes that the restructuring and relocation will be completed prior to the acquisition of PED by the Company. The terms of the Stock Purchase Agreement between the Company and the United Utilities Plc provides that the Company will assume no ownership interest in and no liability associated with the Belleville, N.J. facility. Excluding the effects of these charges, net income and net income per common share for the fiscal year ended March 31, 1996 and the six months ended September 30, 1996 would have been:
AS AS FURTHER ADJUSTED ADJUSTED -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Fiscal Year Ended March 31, 1996: Net income............................................. $19,359 $37,077 Net income per common share............................ $ 0.40 $ 0.59 Six Months Ended September 30, 1996: Net income............................................. $17,213 $26,072 Net income per common share............................ $ 0.31 $ 0.37
28 SELECTED CONSOLIDATED FINANCIAL DATA The Selected Consolidated Financial Data as of and for the fiscal years ended March 31, 1992, 1993, 1994, 1995 and 1996 are derived from the Consolidated Financial Statements and Notes thereto of the Company, which are included elsewhere herein. The financial data as of and for the six months ended September 30, 1995 and 1996 are derived from unaudited consolidated financial statements of the Company, which, in the opinion of the Company, reflect all adjustments (consisting principally of normal, recurring accruals) necessary for the fair statement of the financial position and results of operations for the periods presented and are not necessarily indicative of the results for any other interim period or for the full fiscal year. Historical consolidated financial data for the fiscal years ended March 31, 1992, 1993, 1994, 1995 and 1996 and the six months ended September 30, 1995 have been restated to reflect the acquisitions in May 1996 and August 1996 of Zimpro and Davis, respectively, which acquisitions have been accounted for as poolings of interests. The data presented below are qualified in their entirety by and should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included elsewhere herein.
SIX MONTHS ENDED YEARS ENDED MARCH 31,(1) SEPTEMBER 30,(1) -------------------------------------------------- ------------------ 1992(2) 1993(3) 1994(4) 1995(5) 1996(6)(7) 1995 1996(11) -------- -------- -------- -------- ---------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues................ $289,994 $358,041 $412,512 $519,359 $727,903 $332,099 $433,719 Cost of sales........... 234,714 280,671 326,848 398,755 538,573 247,093 315,398 -------- -------- -------- -------- -------- -------- -------- Gross profit............ 55,280 77,370 85,664 120,604 189,330 85,006 118,321 Selling, general and administrative expenses............... 59,111 73,709 90,719 97,481 148,683 64,368 86,140 Merger expenses......... -- -- -- -- -- -- 5,581 -------- -------- -------- -------- -------- -------- -------- Operating income (loss). (3,831) 3,661 (5,055) 23,123 40,647 20,638 26,600 Interest expense........ (3,862) (3,582) (4,044) (7,514) (14,419) (6,548) (7,972) Other income (expense).. 1,472 895 (7,382) 1,442 5,134 1,363 1,004 -------- -------- -------- -------- -------- -------- -------- Income (loss) before taxes.................. (6,221) (974) (16,481) 17,051 31,362 15,453 19,632 Provision (benefit) for income taxes........... 245 647 (7,087) 4,812 12,055 4,743 5,404 -------- -------- -------- -------- -------- -------- -------- Net income (loss)....... $ (6,466) $ 1,191 $ (9,394) $ 12,239 $ 19,307 $ 10,710 $ 14,228 ======== ======== ======== ======== ======== ======== ======== Net income (loss) per common share(8)........ $ (0.39) $ -- $ (0.42) $ 0.41 $ 0.45 $ 0.27 $ 0.28 ======== ======== ======== ======== ======== ======== ======== Weighted average number of common shares outstanding............ 17,465 20,838 23,934 28,235 42,159 37,911 50,629 BALANCE SHEET DATA (AT PERIOD END): Working capital......... $ 56,125 $ 60,238 $ 97,855 $113,972 $123,757 $223,856 $168,606 Total assets............ 196,121 222,120 357,354 482,723 876,505 729,551 936,659 Notes payable and long- term debt, including current portion........ 46,858 32,220 29,758 57,116 53,436 29,545 90,159 Convertible subordinated debt................... -- -- 60,000 105,000 200,000 200,000 193,565 Shareholders' equity.... 73,773 113,041 152,021 166,878 368,501 325,552 400,003 OTHER DATA: EBITDA(9)............... $ 2,628 $ 12,710 $ 6,237 $ 39,777 $ 67,227 $ 32,238 $ 47,109 Cash provided by (used in) Operating activities.. 6,230 3,274 (6,523) 3,269 (342) (13,014) (1,972) Investing activities.. (8,574) (14,460) (40,176) (12,857) (225,731) (123,392) (37,822) Financing activities.. 11,870 2,895 59,384 9,391 224,458 206,787 40,877 Ratio of earnings to fixed charges(10)...... -- 1.01x -- 2.5x 2.5x 2.8x 3.0x Net income (loss) before Davis and Zimpro acquisitions........... $ (6,587) $ 67 $ (2,541) $ 8,331 $ 20,290 $ 7,868 $ 14,228 Net income (loss) per common share before Davis and Zimpro acquisitions(8)........ $ (0.59) $ (0.08) $ (0.17) $ 0.34 $ 0.54 $ 0.23 --
29 The historical consolidated financial data for the fiscal years ended March 31, 1992, 1993, 1994, 1995 and 1996 and for the six months ended September 30, 1995 have been restated to include the accounts and operations of Zimpro and Davis, which were merged with the Company in May 1996 and August 1996, respectively, and accounted for as poolings of interests. Separate results of operations for each of the Company, Davis and Zimpro for the years ended March 31, 1992, 1993, 1994, 1995 and 1996 and the six months ended September 30, 1995 are presented below.
SIX MONTHS ENDED YEARS ENDED MARCH 31,(1) SEPTEMBER 30,(1) ------------------------------------------------- ----------------- 1992(2) 1993(3) 1994(4) 1995(5) 1996(6)(7) 1995 1996(11) -------- -------- -------- -------- ---------- -------- -------- (UNAUDITED) (UNAUDITED) REVENUES: (IN THOUSANDS, EXCEPT PER SHARE DATA) Company (as previously reported).............. $ 62,840 $128,376 $180,421 $272,032 $472,537 $199,847 $433,719 Davis................... 186,719 190,990 202,621 215,649 226,489 118,550 -- Zimpro.................. 40,435 38,675 29,470 31,678 28,877 13,702 -- -------- -------- -------- -------- -------- -------- -------- Combined.............. $289,994 $358,041 $412,512 $519,359 $727,903 $332,099 $433,719 ======== ======== ======== ======== ======== ======== ======== OPERATING INCOME (LOSS): Company (as previously reported).............. $ (6,290) $ 648 $ (4,874) $ 14,585 $ 34,955 $ 14,760 $ 26,600 Davis................... 189 1,559 1,506 7,512 10,892 5,497 -- Zimpro.................. 2,270 1,454 (1,687) 1,026 (5,200) 381 -- -------- -------- -------- -------- -------- -------- -------- Combined.............. $ (3,831) $ 3,661 $ (5,055) $ 23,123 $ 40,647 $ 20,638 $ 26,600 ======== ======== ======== ======== ======== ======== ======== NET INCOME (LOSS): Company (as previously reported).............. $ (6,587) $ 67 $ (2,541) $ 8,331 $ 20,290 $ 7,868 $ 14,228 Davis................... (844) 653 (5,340) 3,448 5,749 2,978 -- Zimpro.................. 965 471 (1,513) 460 (6,732) (136) -- -------- -------- -------- -------- -------- -------- -------- Combined.............. $ (6,466) $ 1,191 $ (9,394) $ 12,239 $ 19,307 $ 10,710 $ 14,228 ======== ======== ======== ======== ======== ======== ======== NET INCOME (LOSS) PER COMMON SHARE:(8) As previously reported.. $ (0.59) $ (0.08) $ (0.17) $ 0.34 $ 0.54 $ 0.23 $ -- As restated............. (0.39) -- (0.42) 0.41 0.45 0.27 0.28
- ------------------- (1) The historical consolidated financial data for the fiscal years ended March 31, 1992, 1993, 1994, 1995 and 1996 and for the six months ended September 30, 1995 have been restated to include the accounts and operations of Zimpro and Davis, which were merged with the Company in May 1996 and August 1996, respectively, and accounted for as poolings of interests. The historical consolidated financial data for the six months ended September 30, 1996 include the operations of Zimpro and have been restated to include the accounts and operations of Davis. (2) The fiscal year ended March 31, 1992 includes three months of results of Aluminum Company of America ("Alcoa") Separations Technologies, Inc. ("ASTI"), acquired from Alcoa on January 6, 1992. The acquisition was accounted for as a purchase. Losses from ASTI (which had operated at a loss in each of the prior three years) since its acquisition and the effect of the acquisition on the Company's existing operations contributed significantly to the Company's loss for the fiscal year ended March 31, 1992. As a result of such losses incurred by ASTI and certain purchase accounting adjustments, and pursuant to the terms of the ASTI acquisition agreement, an acquisition note payable to Alcoa was reduced by $5,000,000. Such reduction in the note was treated as a purchase price adjustment and as such did not affect the Company's results of operations. (3) The fiscal year ended March 31, 1993 includes twelve months of results of SCT acquired April 1, 1992 and three months of The Permutit Company, Inc., a United States company acquired January 5, 1993, accounted for as purchases. (4) The fiscal year ended March 31, 1994 includes four months of results of Ionpure Technologies Corporation and IP Holding Company ("Ionpure"), acquired December 1, 1993 and accounted for as a purchase. Selling, general and administrative expenses for the year ended March 31, 1994 reflect four months of integration of Ionpure, certain charges totalling $2,359,000 related to the rationalization of certain wastewater operations and write- off of certain intangibles in the Company's Continental Penfield subsidiary totalling $3,738,000. In addition, the year ended March 31, 1994 includes a charge of $8,895,000 to reflect a plan to shutdown and reorganize certain operations of Davis. (5) The fiscal year ended March 31, 1995 includes the results of operations of Smogless S.p.A., Crouzat S.A., Sation S.A., Seral Erich Alhauser GmbH and the Ceraflo ceramic product line from the dates of their respective acquisitions, accounted for as purchases. See Note 9 of Notes to Consolidated Financial Statements. (6) The fiscal year ended March 31, 1996 includes the results of operations of The Permutit Company Limited and The Permutit Company Pty Ltd., Interlake Water Systems, Arrowhead Industrial Water, Inc. and Polymetrics, Inc. from the dates of their respective acquisitions, accounted for as purchases. See Note 9 of Notes to Consolidated Financial Statements. (7) Selling, general and administrative expenses for the year ended March 31, 1996 includes charges totalling $3,193,000 related to the write-down of certain patents and equipment of Zimpro. (8) Net income (loss) per common share amounts are after (i) dividends on the Series A Preferred Stock of $165,000 for the fiscal March 31, 1992, $660,000 for the fiscal year ended March 31, 1993, $701,000 for the fiscal year ended March 31, 1994, $715,000 for the fiscal year ended March 31, 1995 and $537,000 for the fiscal year ended March 31, 1996, and (ii) accretion on the Series A Preferred Stock, a noncash accounting adjustment required by Securities and Exchange Commission Staff Accounting Bulletin No. 68 ("SAB 68"), in the amounts of $154,000 for the fiscal year ended March 31, 1992 and $617,000 for the fiscal year ended March 31, 1993. As of April 1, 1993 the Company and the holder of the Series A Preferred Stock agreed to a fixed dividend of $715,000 per year on the Series A Preferred Stock, thus eliminating the increasing rate and, therefore, the accretion of dividends pursuant to SAB 68. The Series A Preferred Stock was converted into shares of Common Stock in March 1996. 30 (9) "EBITDA" consists of operating income plus depreciation and amortization. EBITDA data is presented because such data is used by certain investors to determine the Company's ability to meet debt service requirements. The Company considers EBITDA to be an indicative measure of the Company's operating performance. However, such information should not be considered as an alternative to net income, operating profit, cash flows from operations, or any other operating or liquidity performance measure prescribed by generally accepted accounting principles. The EBITDA measure presented by the Company may not be comparable to similarly titled measures by other companies. (10) The ratio of earnings to fixed charges has been computed by dividing earnings available for fixed charges (income before provision for income taxes, plus fixed charges) by fixed charges. Fixed charges consist of interest expense (including amortization of deferred financing costs) and the portion of rental expense that is representative of the interest factor (deemed by the Company to be one-third). Fixed charges exceeded earnings before fixed charges by $7,693,000 and $9,099,000 for the years ended March 31, 1992 and March 31, 1994, respectively. (11) The six months ended September 30, 1996 includes merger expenses of $5,581,000, related to the acquisition of Davis, which was accounted for as a pooling of interests. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. GENERAL The Company's strategy is to offer a single-source solution to industrial and municipal customers through what the Company believes is the industry's broadest range of cost-effective systems, products, services and proven technologies. Accordingly, since July 1991, the Company has acquired and integrated more than 45 businesses with substantial expertise in the design and manufacture of systems for the filtration and treatment of water and wastewater. Due to the magnitude of these acquisitions and the integration of the acquired operations with the Company's existing businesses, results of operations for prior periods are not necessarily comparable to or indicative of results of operations for current or future periods. RESULTS OF OPERATIONS In May and August 1996, the Company merged with Zimpro and Davis, respectively, in transactions accounted for as poolings of interests. Historical consolidated financial data for the fiscal years ended March 31, 1994 through March 31, 1996 and the six months ended September 30, 1995 have been restated to reflect the acquisitions in May 1996 and August 1996 of Zimpro and Davis, respectively, which acquisitions have been accounted for as poolings of interests. Historical financial data for the six months ended September 30, 1996 have been restated to reflect the operations of Davis. The following table sets forth for the periods indicated certain Selected Consolidated Financial Data as a percentage of total revenues.
SIX MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER MARCH 31, 30, ------------------- ------------ 1994 1995 1996 1995 1996 ----- ----- ----- ----- ----- Revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales............................... 79.2 76.8 74.0 74.4 72.7 ----- ----- ----- ----- ----- Gross profit................................ 20.8 23.2 26.0 25.6 27.3 Selling, general and administrative expenses................................... 22.0 18.8 20.4 19.4 19.9 Merger expense.............................. -- -- -- -- 1.3 ----- ----- ----- ----- ----- Operating income (loss)..................... (1.2) 4.5 5.6 6.2 6.1 Interest expense............................ 1.0 1.4 2.0 2.0 1.8 Net income (loss)........................... (2.3) 2.4 2.7 3.2 3.3
The following table sets forth, as a percentage of the Company's total revenues, each of the Company's product categories by revenue for the periods indicated:
SIX MONTHS FISCAL YEAR ENDED ENDED MARCH 31, SEPTEMBER 30, --------------------- --------------- 1994 1995 1996 1995 1996 ----- ----- ----- ------ ------ Revenues by product category: Capital equipment.................. 41% 42% 39% 39% 39% Services and operations............ 9 9 20 22 22 Distribution....................... 37 33 25 21 21 Replacement parts, consumables and other............................. 13 16 16 17 18
32 SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH SIX MONTHS ENDED SEPTEMBER 30, 1995 REVENUES Revenues for the six months ended September 30, 1996 were $433,719,000, an increase of $101,620,000 from $332,099,000 for the comparable period of the prior fiscal year. This 30.6% increase was due primarily to acquisitions completed by the Company after September 30, 1995. For the six months ended September 30, 1996, revenues from capital equipment sales represented 39% of total revenues, while revenues from services and operations represented 22% of total revenues, revenues from distribution represented 21% of total revenues and revenues from replacement parts and consumables represented 18% of total revenues. GROSS PROFIT Gross profit increased 39.2% to $118,321,000 for the six months ended September 30, 1996 from $85,006,000 for the comparable period of the prior fiscal year. Total gross profit as a percentage of revenue ("gross margin") increased to 27.3% for the six months ended September 30, 1996, compared to 25.6% for the comparable period of the prior fiscal year. The increase in gross margin for the six months ended September 30, 1996 was due to: (i) a continued strengthening of gross margin in the recurring and higher margin service-based revenue business and (ii) rationalization of operations and increased economies of scale from the integration of acquisitions. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES For the six months ended September 30, 1996, selling, general and administrative expenses, excluding merger expenses, increased $21,772,000 to $86,140,000 as compared to the $64,368,000 in the comparable period in the prior year. During this period, selling, general and administrative expenses, excluding merger expenses, were 19.9% of revenues compared to 19.4% for the comparable period in the prior year.This increase was primarily due to the addition of sales and administrative personnel accompanying the Company's recent acquisitions. Excluding merger expenses, operating income as a percentage of revenues increased to 7.4% for the six months ended September 30, 1996 from 6.2% for the corresponding period in fiscal 1995 due primarily to improvement in gross margin. MERGER EXPENSES Merger expenses were incurred during the six months ended September 30, 1996 relating to the Company's acquisition of Davis which was accounted for as a pooling of interests. These merger expenses, which totaled $5,581,000, consisted primarily of investment banking fees, printing, stock transfer fees, legal fees, accounting fees, governmental filing fees and certain other costs related to existing Davis pension plans and change of control payments. INTEREST EXPENSE Interest expense increased to $7,972,000 for the six months ended September 30, 1996 from $6,548,000 for the corresponding period in the prior year. Interest expense for the six months ended September 30, 1996 consisted primarily of interest on the Company's: (i) 5% Convertible Subordinated Debentures due 2000 (all of which have been, as of October 25, 1996, converted into shares of Common Stock); (ii) 6% Convertible Subordinated Notes issued on September 18, 1995 due 2005; and (iii) borrowings under the Company's bank line of credit. At September 30, 1996, the Company had cash and short-term investments of $20,304,000. INCOME TAX EXPENSE Income tax expense increased to $5,404,000 in the six months ended September 30, 1996, from $4,743,000 in the corresponding period in the prior year. The Company's effective tax rate for the three and six months ended September 30, 1996 was 27.5% as compared to 30.7% in the corresponding period in the prior year. 33 NET INCOME For the six months ended September 30, 1996, net income increased $3,518,000 to $14,228,000 from $10,710,000 for the same period in the prior year. Excluding Davis merger expenses, net income for the six months ended September 30, 1996 totaled $18,279,000, an increase of 70.6% over the same period in the prior year. Net income per common share for the six months ended September 30, 1996 and 1995 were as follows:
SIX MONTHS ENDED SEPTEMBER 30, ----------------- 1996 1995 -------- -------- Before merger expenses................................. $ 0.36 $ 0.27 After merger expenses.................................. $ 0.28 $ 0.27
TWELVE MONTHS ENDED MARCH 31, 1996 COMPARED WITH TWELVE MONTHS ENDED MARCH 31, 1995 REVENUES Revenues for fiscal 1996 were $727,903,000, an increase of $208,544,000 from $519,359,000 for fiscal 1995. This 40.2% increase was due primarily to acquisitions completed by the Company in fiscal 1995 and 1996. See Note 9 of Notes to Consolidated Financial Statements related to acquisitions. GROSS PROFIT Gross profit increased 57.0% to $189,330,000 for fiscal 1996 from $120,604,000 for fiscal 1995. Gross margin increased to 26.0% for fiscal 1996 as compared to 23.2% for fiscal 1995. The increase in gross margin through fiscal 1996 was due to: (i) a continued strengthening of gross margin in the recurring and higher margin service-based revenue business; (ii) rationalization of operations and economies of scale from the integration of acquisitions; and (iii) a focus on products with higher gross margins in Davis' distribution business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $148,683,000 for fiscal 1996 from $97,481,000 for fiscal 1995. This increase was primarily due to the addition of sales and administrative personnel accompanying the Company's recent acquisitions. As a percentage of revenues, selling, general and administrative expenses were 20.4% for fiscal 1996, as compared to 18.8% for fiscal 1995. This increase was due primarily to a write-down of certain patents and equipment totalling $3,193,000 at the Company's Zimpro subsidiary and, to a lesser extent, increased levels of incentive compensation earned by management and employees of Davis as compared to fiscal 1995. Notwithstanding the increase in selling, general and administrative expenses as a percentage of revenues, operating income as a percentage of revenues increased from 4.5% for fiscal 1995 to 5.6% for fiscal 1996 due primarily to improvement in gross margin. INTEREST EXPENSE Interest expense increased to $14,419,000 for fiscal 1996 from $7,514,000 for fiscal 1995. Interest expense for fiscal 1996 consisted primarily of interest on the Company's 5% Convertible Subordinated Debentures due 2000 issued October 20, 1993 and approximately seven months of interest on the Company's 6% Convertible Subordinated Notes due 2005 issued September 18, 1995, respectively, and interest on increased borrowings under the Company's bank line of credit, which was used to finance the Company's revenue expansion and recent acquisitions. 34 OTHER INCOME (EXPENSE) Other income (expense) increased to $5,134,000 of income for fiscal 1996 from $1,442,000 of income for fiscal 1995. Other income consisted primarily of interest income on short-term investments, which increased during fiscal 1996 primarily as a result of the Company's sale of $140,000,000 aggregate principal amount of 6% Convertible Subordinated Notes on September 18, 1995 and the Company's issuance of 10,350,000 shares of Common Stock on May 3, 1995 with net proceeds of approximately $98,118,000. INCOME TAX EXPENSE Income tax expense increased to $12,055,000 for fiscal 1996 from $4,812,000 for fiscal 1995. This increase was attributable to increased income. The Company's effective tax rate for fiscal 1996 was 38.4% and for fiscal 1995 was 28.2%. This increase in effective rate in fiscal 1996 is due primarily to a net loss before income taxes of $6,086,000 incurred at Zimpro (see "Selling, General and Administrative Expenses") for which no income tax benefit was recognized because its realization was not assured and because of the nondeductibility of certain items. As of March 31, 1996, the Company had net operating loss carryforwards in France of approximately $19,952,000 and other European countries of approximately $7,338,000 for which no financial statement benefit has been recognized. In addition, the Company had net operating loss carryforwards generated from its Liquipure subsidiary of approximately $14,362,000 for which financial statement benefit was recognized in fiscal 1996. The Company also had net operating loss carryforwards generated from Zimpro of approximately $2,905,000 for which financial statement benefit has not been recognized. In addition, the benefit of the French loss carryforwards must be shared equally between the Company and Aluminum Corporation of America until March 31, 1997. See Note 14 of Notes to Consolidated Financial Statements related to income taxes. NET INCOME Net income increased to $19,307,000 for fiscal 1996 from $12,239,000 for fiscal 1995. Net income per common share increased to $0.45 per share (based upon 42,159,000 weighted average common shares outstanding) for fiscal 1996 from $0.41 per common share (based upon 28,235,000 weighted average common shares outstanding) for fiscal 1995, after deducting $536,000 and $715,000 for dividends on the Company's preferred shares for fiscal 1996 and 1995, respectively. TWELVE MONTHS ENDED MARCH 31, 1995 COMPARED WITH TWELVE MONTHS ENDED MARCH 31, 1994 REVENUES Revenues for fiscal 1995 were $519,359,000, an increase of $106,847,000 from $412,512,000 for fiscal 1994. This 25.9% increase was due primarily to acquisitions completed by the Company in fiscal 1994 and 1995. See Note 9 of Notes to Consolidated Financial Statements related to acquisitions. GROSS PROFIT Gross profit increased 40.8% to $120,604,000 for fiscal 1995 from $85,664,000 for fiscal 1994. Gross margin increased to 23.2% for fiscal 1995 as compared to 20.8% for fiscal 1994. The increase in gross margin through fiscal 1995 was due to: (i) a continued strengthening of gross margin in the recurring and higher margin service-based revenue business; and (ii) rationalization of operations and economies of scale from the Company's acquisitions. Gross margin in the Company's distribution business remained unchanged in fiscal 1995 as compared to fiscal 1994. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $97,481,000 for fiscal 1995 from $90,719,000 for fiscal 1994. This increase was primarily due to the addition of sales and administrative personnel accompanying the Company's recent acquisitions. As a percentage of revenues, selling, general and administrative expenses 35 were 18.8% during fiscal 1995, as compared to 22.0% for fiscal 1994. This decrease in selling, general and administrative expenses as a percentage of revenues for fiscal 1995 as compared to fiscal 1994 was due primarily to (i) the Company's emphasis on cost reductions and administrative efficiencies gained through economies of scale, (ii) the write-off of certain intangibles in the Company's Continental Penfield subsidiary totalling $3,738,000 in fiscal 1994, (iii) the exclusion from operating results in fiscal 1995 of a division of Davis which was shut down in fiscal 1994, and (iv) certain charges totalling $2,359,000 related to the rationalization of certain wastewater operations. See Note 8 of Notes to Consolidated Financial Statements related to such shutdown. Due primarily to the decrease in selling, general and administrative expenses as a percentage of revenues and the improvement in gross margin, operating income as a percentage of revenues increased from a loss of 1.2% for fiscal 1994 to 4.5% for fiscal 1995. INTEREST EXPENSE Interest expense increased to $7,514,000 for fiscal 1995 from $4,044,000 for fiscal 1994. Interest expense for fiscal 1995 consisted primarily of interest on the Company's 5% Convertible Subordinated Debentures due 2000 issued October 20, 1993 and interest on increased borrowings under the Company's bank line of credit, which was used to finance the Company's revenue expansion and recent acquisitions. OTHER INCOME (EXPENSE) Other income (expense) increased $8,824,000 in fiscal 1995 from an expense of $7,382,000 in fiscal 1994 to income of $1,442,000 in fiscal 1995. During the fourth quarter of fiscal 1994, the Company's Davis subsidiary adopted a plan to shutdown or reorganize the operations of its wholly owned subsidiary, The Taulman Company ("Taulman"). The pre-tax loss provision for these actions was recorded in fiscal 1994 and included the write-off of intangible assets totaling $2,908,000 associated with Taulman and the accrual of $5,987,000 to provide for anticipated losses during the shutdown. INCOME TAX EXPENSE Income tax expense increased to $4,812,000 for fiscal 1995 from a tax benefit of $7,087,000 for fiscal 1994. This increase was attributable to increased income and the Company's partial recognition during fiscal 1994 of the future income tax benefit related to federal net operating loss carryforwards. As of March 31, 1995, the Company had net operating loss carryforwards in France of approximately $20,351,000 and other European countries of approximately $6,400,000 for which no financial statement benefit had been recognized. In addition, the Company had net operating loss carryforwards generated from its Liquipure subsidiary of approximately $13,500,000 for which no financial statement benefit was recognized. Future recognition of these carryforwards will be reflected if the above operations generate sufficient earnings before the expiration periods of the loss carryforwards. In addition, the benefit of the French loss carryforwards must be shared equally between the Company and Aluminum Corporation of America until March 31, 1997. See Note 14 of Notes to Consolidated Financial Statements related to income taxes. NET INCOME Net income increased to $12,239,000 for fiscal 1995 from a net loss of $9,394,000 for fiscal 1994. Net income per common share increased to $0.41 per share (based upon 28,235,000 weighted average common shares outstanding) for fiscal 1995 from a net loss of $0.42 per common share (based upon 23,934,000 weighted average common shares outstanding) for fiscal 1994, after deducting $715,000 and $701,000 for dividends on the Company's preferred shares for fiscal 1995 and 1994, respectively. 36 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 September 30, 1996, the Company had working capital of $168,606,000, including cash and short-term investments of $20,304,000. The Company's long-term debt at September 30, 1996 included $53,565,000 aggregate principal amount of 5% Convertible Subordinated Debentures due 2000 (all of which were converted into 4,390,000 shares of Common Stock on October 25, 1996), $140,000,000 of 6% Convertible Subordinated Notes due 2005 and other long-term debt totalling $9,003,000 and bearing interest at rates ranging from 2.0% to 11.5%. Capital expenditures totaled $8,050,000, $18,304,000 and $28,392,000 for fiscal years ended March 31, 1994, 1995, and 1996, respectively. Although the Company has no material firm commitments for capital expenditures, capital expenditure requirements are expected to increase as a result of the Company's anticipated growth, including from the acquisitions of WSMG, USG and WaterPro and the pending acquisition of PED. The Company has no plans for further investments in leasehold interests. As of September 30, 1996, the Company had a multicurrency bank line of credit of $135,000,000, of which there were outstanding borrowings of $81,156,000 and outstanding letters of credit of $14,446,000. Pursuant to the Credit Agreement, credit facilities of up to $700,000,000 have been made available to the Company to finance acquisitions (including the WSMG acquisition and the pending PED acquisition), to refinance any borrowings under the Company's previous bank line of credit, and for working capital and other general corporate purposes. Borrowings under the Credit Agreement are secured by the stock of certain of the Company's United States subsidiaries. Borrowings under the Credit Agreement bear interest at variable rates of up to 2.25% above certain Eurocurrency rates or 0.50% above The First National Bank of Boston's base rate and have a five year maturity. The Company anticipates that, following completion of the Notes Offering and/or the Common Stock Offerings, the Company's bank credit facilities will be reduced to a level that the Company considers appropriate for its working capital and other needs. As of March 31, 1996, the Company had net operating loss carryforwards generated from Societe des Ceramiques Techniques S.A. ("SCT") of approximately $19,952,000, for which no financial statement benefit has been recognized. Approximately $1,946,000 of net operating loss carryforwards will expire in fiscal years 1997 and 1998, while the remainder have an indefinite carryforward period. The Company also has net operating loss carryforwards in other European countries of approximately $7,338,000 which expire from fiscal 1997 to 2002 for which no financial statement benefit has been recognized. The Company also has net operating loss carryforwards generated from Zimpro of approximately $2,905,000 for which no financial statement benefit has been recognized. No benefit has been given to these net operating loss carryfowards because of the limited carryforward periods or the uncertain business conditions relating to the operations giving rise to such carryforwards. Future recognition of these net operating carryforwards will occur if the operations of SCT and Zimpro generate sufficient earnings before the expiration of the respective net operating loss carryforwards. In addition, in the case of SCT, until March 31, 1997, the benefit, if any, of such carryforwards is to be shared equally between the Company and Aluminum Company of America. The Company also has available at March 31, 1996, other net operating loss carryforwards for Federal income tax purposes of approximately $13,552,000 which expire from fiscal 2007 to 2010. Pursuant to an agreement entered into in conjunction with the acquisition of WaterPro, all former WaterPro stockholders and former WaterPro debtholders, who together hold an aggregate of 3,201,507 shares of the Common Stock, have the right, exercisable during the 90-day period commencing on December 27, 1996, to require the Company to purchase all or any portion of such shares of Common Stock at a purchase price equal to $33.24 per share. 37 Pursuant to an agreement to be entered into in conjunction with the pending acquisition of PED, the Company has agreed to pay in cash the portion of the purchase price otherwise payable in shares of Common Stock if such shares are not at the time of issuance immediately saleable pursuant to the Company's shelf Registration Statement on Form S-4. In addition, the Agreement provides that if such shares are issued and any or all of them are sold within a specified number of days after consummation of the acquisition for net proceeds per share of less than an amount determined by dividing (Pounds)25,000,000 by the number of shares issued, the Company will pay the aggregate deficiency to PED in cash, and if the net proceeds per share exceed such amount, PED will pay the aggregate excess to the Company in cash. The Company believes its current cash position, cash flow from operations, and available borrowings under the Credit Agreement will be adequate to meet its anticipated cash needs for working capital, revenue growth, scheduled debt repayment and capital investment objectives for at least the next twelve months. 38 THE WATER TREATMENT INDUSTRY Global population growth, economic expansion, scarcity of available water resources, heightened public concern about water quality and growing regulatory and legislative requirements have resulted in the continued growth in demand for water and wastewater treatment. In addition to the need for potable water, industrial companies require treated water for most manufactured products, whether as an ingredient in the finished product or as part of the manufacturing process. Accordingly, most manufacturers utilize water treatment systems to purify their incoming water ("influent"). Public water departments, responsible for providing potable water, employ water treatment technology to purify their water supply. Furthermore, government regulations require most industrial companies and municipalities to treat their outgoing wastewater ("effluent"). Growing demand for treated water combined with the limited supply of usable water has created a significant need for cost-effective, sophisticated water and wastewater treatment solutions. Water and wastewater treatment has developed into a multi-billion dollar global industry. The global water and wastewater treatment industry is highly fragmented, with numerous regional participants who are limited in their geographic scope. This fragmentation is primarily due to local differences in water quality and supply, different levels of demand for water resulting from varying concentrations of industry and population, and local government regulation. Most participants in the water and wastewater treatment industry provide a limited number of treatment technologies, a limited number of products or services, or focus on a particular industry. While the number of industry participants ranges from several large companies to thousands of small local companies, there are few competitors in the industry that offer a full range of water and wastewater treatment equipment, technologies and services. Customers of the water and wastewater treatment industry can be classified into three broad categories: (i) industrial businesses, which include companies in such markets as power generation, chemical process, oil, pharmaceutical, microelectronics, automotive and steel; (ii) municipal and private suppliers of public water and wastewater services; and (iii) individual consumers of bottled water and household point-of-use products, such as domestic filtration systems and parts. INDUSTRIAL USERS Industrial users have a significant need for treated water because it is a necessary component in many products and industrial processes. The quality of water varies dramatically across geographic regions, and water contains impurities that, if untreated, can render it effectively useless for most industrial purposes. The use of untreated water in manufacturing processes can result not only in inconsistent product quality, but also in substantial equipment degradation, which can lead to costly maintenance or replacement costs. Consequently, most manufacturers treat their influent in order to maintain a consistently acceptable degree of purity. For example, treated water is an integral component of many consumer goods and is used in the manufacture of pharmaceutical products, microelectronics and chemicals. Food and beverage manufacturers require water with consistent quality to preserve uniformity of taste and appearance in their products. As a result of these process specifications, industrial customers often require a broad range of treatment technologies to treat their influent. In addition to treating their influent to ensure product quality, industrial users are often required to treat their effluent. Government regulations regarding the disposal of aqueous industrial waste, combined with public concern regarding industrial pollution, have led to increased awareness on the part of businesses and public utilities as to the benefits of wastewater treatment and waste minimization. In response to higher water prices and rising wastewater discharge fees, industrial manufacturers have also become aware of the cost-effectiveness of recycling their effluent. As a result of these factors, industrial companies increasingly require complex systems and equipment to treat and recycle process water and wastewater. Industrialization worldwide, manufacturers' desire to enhance productivity, rising water prices, increased regulation and emphasis on water recycling and reuse affect demand for industrial water and wastewater treatment and have resulted in the need for increasingly sophisticated industrial water and wastewater treatment 39 systems. Rather than committing the significant resources required to operate complex in-house systems, industrial customers are increasingly outsourcing their water and wastewater treatment needs to water and wastewater treatment companies to build, own and/or operate the customer's facilities or to provide treated water under contract. MUNICIPAL USERS Public awareness and governmental concern regarding the increasing scarcity of water, the quality of drinking water, and the potential health hazards associated with waste products discharged into the environment, have resulted in legislation, regulation and enforcement requiring strict standards for potable water and restrictions on the discharge of pollutants in wastewater. As a result, municipalities are experiencing increasing costs for water and wastewater treatment. The Company believes that, in many areas of the United States aged municipal water and wastewater treatment infrastructure is operating at or near capacity, is in need of substantial capital expenditures and is not well- equipped to satisfy increasing regulatory and legislative requirements. In addition, many municipalities are experiencing reduced economic resources. The Company believes that, as a result, many such customers are seeking innovative solutions to their water treatment needs, such as improved technologies and equipment, and various outsourcing and service options, such as contract operations and privatization. Privatization involves the transfer of ownership and operation of water and wastewater treatment facilities to companies capable of providing such services on a long-term basis. INDIVIDUAL USERS The market for individual users consists of bottled water and point-of-use products, such as residential filtration systems and parts. Consumers' needs vary by geographic location as a result of differing water qualities and level of economic development. This segment of the industry is highly fragmented, and the Company believes there are thousands of participants in the potable water and point-of-use products markets. 40 BUSINESS The Company is a leading global provider of industrial and municipal water and wastewater treatment systems, products and services, with an installed base of systems that the Company believes is one of the largest worldwide. The Company offers a single-source solution to industrial and municipal customers through what the Company believes is the industry's broadest range of cost- effective systems, products, services and proven technologies. In addition, the Company has one of the industry's largest global networks of sales and service facilities. The Company capitalizes on its large installed base, extensive distribution network and manufacturing capabilities to provide customers with ongoing local service and maintenance. The Company is also a leading provider of SDI and outsourced water services, including the operation of water and wastewater treatment systems at customer sites. The Company has grown internally and through the strategic acquisition and successful integration of more than 45 domestic and international water and wastewater treatment companies since 1991. On a previously reported basis, the Company's revenues have grown to $472.5 million for the fiscal year ended March 31, 1996 from $41.2 million for the fiscal year ended March 31, 1992, representing a compound annual growth rate of approximately 84%. The Company's revenues for the fiscal year ended March 31, 1996 would have been approximately $1.8 billion after giving effect to the acquisitions of Zimpro and Davis (accounted for as poolings of interests) and including, on a pro forma basis, the pending acquisition of PED and the recent acquisitions of WSMG, WaterPro and USG as if such acquisitions were completed at the beginning of such year. Global population growth, economic expansion, scarcity of available water resources, heightened public concern about water quality and growing regulatory requirements have resulted in: (i) continued growth of the multibillion dollar water and wastewater treatment industry; and (ii) heightened demand for increasingly complex water and wastewater treatment systems. The water and wastewater treatment industry is highly fragmented, with numerous regional participants who provide customers with a limited range of water and wastewater treatment solutions. The Company differentiates itself from competitors by serving as a single-source water and wastewater treatment provider capable of designing, manufacturing, operating, financing and maintaining water and wastewater systems on a local basis for industrial and municipal customers. The Company's customer base includes a broad range of major industrial customers, which require treated water as a necessary component of many products and industrial processes, and municipalities, which treat water and wastewater for their communities. Industrial customers include Chinese Petroleum, Coca-Cola, Dow Chemical, General Motors, Hyundai, Intel, Johnson & Johnson, Merck, Procter & Gamble, and Samsung. Municipal customers include the Cities of Los Angeles, Minneapolis-St. Paul, and St. Louis. STRATEGY In order to achieve earnings growth and expand its operations to enhance its position as a leading global single-source provider of water and wastewater treatment systems and services, the Company has developed the following strategy: PROVIDE SINGLE-SOURCE WATER AND WASTEWATER TREATMENT SOLUTIONS TO INDUSTRIAL AND MUNICIPAL CUSTOMERS. The Company believes that industrial and municipal users of water and wastewater treatment systems, products and services increasingly desire to obtain from a single source a broad range of systems, technologies and services. The Company addresses the full scope of its customers' water and wastewater treatment needs through what the Company believes is the industry's broadest line of cost-effective treatment systems, services and proven technologies. In addition, the Company has an extensive global distribution network through which it offers customers convenient local service and support. The Company also meets the diverse demands of its customers through its ability to sell systems outright, to sell systems and operate them for its customers, or to build, own, operate and finance such systems. PURSUE ACQUISITIONS THAT PROVIDE A STRATEGIC FIT AND CONTRIBUTE TO REVENUE AND EARNINGS GROWTH. In addition to growing internally, the Company has grown significantly since 1991 through the strategic 41 acquisition of more than 45 United States-based and international businesses with strong market positions and substantial water and wastewater treatment expertise. These acquisitions have enabled the Company to expand its geographic presence, industries served, installed base, range of products and technologies offered and network of sales and distribution facilities. The Company plans to continue to pursue acquisitions that complement its technologies, products and services, broaden its customer base and expand its global distribution network. REALIZE SYNERGIES AND ECONOMIES OF SCALE FROM ACQUISITIONS. The Company operates its business through an organizational structure which provides low overhead, minimizes redundancy and creates opportunities to achieve cost savings and synergies in its acquisitions. The Company has significant experience in integrating acquired businesses. The Company believes that the acquisitions of WSMG, Davis, WaterPro and USG and the pending acquisition of PED will provide cost savings through rationalization of operations and economies of scale, including increased asset utilization. The Company also believes that the integration of these recent and pending acquisitions will provide synergies, such as cross-selling of product lines to a broader customer base, expanded distribution and service capabilities and exchange of experience and technology. EXPAND GLOBAL MARKET PRESENCE, ESPECIALLY IN THE PACIFIC RIM REGION. The Company expects that population growth, economic expansion and continued degradation of water quality in both industrialized and less-developed countries will result in strong growth in international markets. The Company intends to further increase its international market presence by expanding its international operations and by acquiring additional international businesses. The Company believes that the acquisition of WSMG and pending acquisition of PED will significantly strengthen the Company's capabilities in the Pacific Rim and Europe. EXPAND PENETRATION OF THE MUNICIPAL MARKET. The Company believes that the recent acquisitions of WSMG, Davis, WaterPro and USG and the pending acquisition of PED will significantly expand its presence in the municipal market. The Company intends to strengthen its municipal presence by utilizing WSMG's and PED's strong technologies, product offerings and reputation in the municipal market to capitalize on cross-selling opportunities and improve its municipal sales channels. Additionally, the Company intends to use its extensive distribution network, including the long-term municipal relationships and local service capabilities of Davis, WaterPro and USG, as a channel to expand its penetration of the municipal market. The Company believes that its combination of single-source provider capabilities, local service capabilities and long-term municipal relationships will provide a significant competitive advantage in penetrating the municipal market. CAPITALIZE ON DISTRIBUTION STRENGTH TO ENHANCE LOCAL SALES AND SERVICE CAPABILITIES. The Company believes that the acquisitions of Davis, WaterPro and USG establish the Company as a leading distributor of water and wastewater distribution products and services to both the industrial and municipal markets. These acquisitions are expected to provide the Company with a platform to: (i) enhance the Company's local sales and service infrastructure; (ii) penetrate the municipal segment of the water and wastewater treatment market by capitalizing on each distribution company's long-term municipal relationships; (iii) leverage the Company's leading manufacturing capabilities and technology base; and (iv) capitalize upon efficiencies from consolidation of operations and economies of scale. In addition, the Company believes that these distribution acquisitions will allow the Company to capitalize on opportunities to retrofit, replace and repair aging water infrastructure in the United States. CAPITALIZE ON OUTSOURCING AND PRIVATIZATION OPPORTUNITIES. The Company is currently a 50% owner of TWO, which focuses on the outsourcing of industrial customers' water treatment needs. The operating strategy for TWO, or, if formed, the Joint Venture, is or would be to offer customers: (i) turnkey operation, including system design, manufacture, operation, and maintenance on a local basis; (ii) warrantied performance; (iii) potential cost savings; and (iv) customized financing options. 42 PRINCIPAL PRODUCTS AND SERVICES The Company's principal products and services can be divided into the following four groups: capital equipment, services, replacement parts and consumables, and distribution. CAPITAL EQUIPMENT. The Company manufactures both standard and customized water and wastewater treatment equipment. The Company believes that its systems utilize the industry's broadest range of proven physical, biological and chemical treatment technologies including, among others, continuous deionization, reverse osmosis, electrodialysis, adsorption and ion exchange, that can be combined and configured to meet wide-ranging customer needs. The Company designs, engineers, manufactures and assembles its systems at its manufacturing facilities located in the United States and internationally. Components that are not manufactured by the Company are purchased from vendors in the United States and internationally. The Company utilizes its distribution network including its global sales and service force, as well as manufacturers' representatives, to provide direct contact and service to its customers. SERVICES. The Company's service business consists of the following: SDI, outsourcing of water and wastewater treatment under long-term contracts, mobile water treatment and, following the transfer of certain permits in connection with the acquisition of WSMG, carbon regeneration. SDI is a term given to portable water deionization treatment equipment that uses ion exchange resins as a filtration medium and is designed to connect easily to a local water supply. Resin is retrieved and transported by a Company service representative to a Company regeneration plant for chemical recharging when it is exhausted. Service-based revenues have been generally recurring in nature, and have historically generated higher profit margins than capital equipment sales. TWO, which is 50% owned by a subsidiary of Nalco Chemical Company ("Nalco") and 50% owned by a subsidiary of the Company, was formed to finance, build, own and operate water treatment systems at customer sites under long-term contracts and to focus on the outsourcing of industrial customers' water treatment needs. The Company and Nalco have entered into long-term supply and service agreements with TWO in order to support TWO's performance under such contracts. REPLACEMENT PARTS AND CONSUMABLES. The Company manufactures and sells replacement parts and consumables, such as membranes, ion exchange resin and carbon, manufactured by both the Company and other suppliers that are required to support water treatment systems. DISTRIBUTION. The Company believes that the acquisitions of Davis, of WaterPro and USG establish the Company as a leading distributor of water and wastewater distribution products and services. The Company emphasizes convenient customer support, with each distribution office servicing customers within approximately a 50 mile to 150 mile radius, depending on population density in the area. CUSTOMER MARKETS AND PRODUCT APPLICATIONS The markets for the Company's services and products span many industries and many geographic locations, including the United States, Europe, Pacific Rim and Latin America. Information regarding the amount of revenue, operating income and assets attributable to United States and international sales for each of the past three fiscal years appears in Note 17 of Notes to Consolidated Financial Statements, included elsewhere herein. The following are industries that the Company serves and some of the products used therein: PHARMACEUTICAL AND BIOTECHNOLOGY. Process water used in the pharmaceutical and biotechnology industries must meet the highest standards of purity. Reverse osmosis in conjunction with CDI ("RO/CDI") technology provides high-purity water that meets the strictest quality specifications. The Company's ceramic membranes, in combination with other membrane or ion exchange equipment, meet these requirements by achieving nearly 100% contaminant removal. This equipment is used in fermentation, purification and recovery processes. Ion exchange technologies are also used to purify process streams, as well as to purify and recover antibiotics, vitamins and chemical elements. In addition, ion exchange is employed in industrial fermentation to process substrates. 43 MICROELECTRONICS. Microelectronics manufacturing processes require ultra- high purity water to avoid contamination from even the smallest microscopic particles. The Company's ceramic membrane filters are advanced inorganic, multilayered filter media that provide superior contaminant removal in the most demanding environments. In addition, the Company's membrane and ion exchange technology is used by electronic components manufacturers to produce ultra-high purity water and to reduce the level of microcontamination in rinse waters. AUTOMOTIVE. The Company designs, manufactures, sells, services and operates, on a global basis, a broad portfolio of technologies for the automotive industry. The specific manufacturing processes include metal processing, metal finishing, assembly and non-metal processing. Each of these processes operates under the strictest of quality, process control and regulatory requirements. The Company offers all of the technologies necessary to meet these requirements including physical, chemical and biological methods. The Company can deliver these technologies as bid-to- specification equipment, full turnkey, service, build-own-operate or any combination of the above. Of particular importance are the Company's capabilities in the areas of water reuse and resource recovery. CHEMICAL AND PETROCHEMICAL. Incoming water supplies for chemical and petrochemical manufacturers require filtration and treatment to remove solid particles and dissolved impurities. The Company manufactures demineralizers, water softeners, clarifiers, multimedia filters and reverse osmosis systems to deliver water of controlled quality and content. Additionally, the Company's Membralox(R) and Ceraflo ceramic membranes are used to accomplish the separation of chemical and petrochemical streams in very harsh environments. FOOD AND BEVERAGE. The food and beverage industries require high-quality yet cost-effective water treatment systems. The Company offers physical and chemical filtration and treatment technologies to purify incoming water and refine and concentrate process fluids. Its ion exchange and ADSEP systems are advanced technologies for the separation of sugars and corn syrups. In the beverage industry, ceramic membrane filters achieve a high level of fluid purity using nonchemical processing techniques. METAL FINISHING. The Company's metal treatment and recovery systems facilitate regulatory compliance of effluent and reduce the level of heavy metals and solids generated from metal finishing operations such as printed circuit board manufacturing, electroplating, galvanizing and anodizing. The Company's key technology offerings include ion exchange, reverse osmosis, electrolytic recovery, adsorption filtration, ceramic membrane ultrafiltration, as well as a full complement of conventional precipitation settling and filtration technologies. POWER GENERATION. Nuclear and fossil-fueled electric power plants are subject to steam generator and boiler corrosion and turbine fouling if damaging contaminants are not removed from the incoming and recirculating feedwater supplies. The Company's filtration membrane and ion exchange systems provide power plants with high-quality, demineralized boiler feedwater. The Company's tube filter and deep bed condensate polishing systems employ advanced resin separation and regeneration technologies to improve the quality of the condensate returned to the boiler. Sand and other media filters are used in cogeneration and other power plant applications. Nuclear-grade resins are available to meet the more stringent water quality requirements of nuclear power plants. OIL FIELD AND REFINERY. The petroleum industry uses large quantities of water for steam and water flooding of oil fields for the secondary recovery of oil. The Company's systems remove oil contaminants and suspended solids from the resurfaced water for reuse for down-hole water and steam injection. Refineries use the Company's oil/water separators to remove oil and suspended solids from process water and refinery effluents, as well as a full range of water purification equipment to remove dissolved solids. MEDICAL/DIALYSIS. RO/CDI systems produce a continuous stream of ultra-high purity water by removing organics, minerals and other contaminants while providing the necessary bacteria and endotoxin control for high-flux dialysis machines and other high-quality, high-capacity water requirements in the medical field. 44 LABORATORY/RESEARCH AND DEVELOPMENT/QUALITY CONTROL/CHEMICAL ANALYSIS. Cartridge-type reverse osmosis filters, deionization systems, electrodialysis modules, ultrafiltration units, particle filters and activated carbon filters remove contaminants, bacteria, pyrogens and odor to provide point-of-use water polishing for critical and demanding laboratory applications. PULP AND PAPER. The Company's dissolved air flotation systems remove and recover suspended solids from waste streams for pulp and paper manufacturers and require considerably less floor space than conventional separation units. The Company's boiler feedwater treatment systems are also utilized in this industry. GROUNDWATER REMEDIATION AND LANDFILL LEACHATE TREATMENT. The Company's remediation systems are used to remove organic compounds and soluble metals from contaminated groundwater. Biosystems employ a "pump and treat" technology that incorporates equalization, separation of metals, biological treatment and clarification processes. The Company's leachate systems, combining chemical pre-treatment systems with biological treatment technologies, address the treatment or elimination of wastewater drainage into the groundwater and surrounding waterways. POTABLE WATER. Hotels and other institutions require high-quality yet affordable water treatment systems to meet consumer and regulatory standards. In addition, suppliers of drinking water are seeking alternative purification systems. The Company manufactures filtration, water treatment and clarification systems for the drinking water industry that meet United States Environmental Protection Agency ("EPA") standards under the Safe Drinking Water Act. Pre-assembled systems capable of handling low- and high-volume flows are also available. MUNICIPAL WASTEWATER TREATMENT, RECOVERY AND REUSE. Municipal sewage plants often utilize three stages of treatment (primary, secondary and tertiary) before discharge to the environment. In addition to offering equipment and systems to satisfy these requirements, the Company's membrane, reverse osmosis and ion exchange technologies add a fourth stage by removing remaining contaminants to a purity level that allows water to be recycled and reused in additional industrial applications. These technologies are cost-effective and reduce the adverse impact of industrial growth in communities where water tables are low. BACKLOG The Company had the following backlog as of September 30, 1995 and 1996, which includes capital equipment purchase orders and revenues expected to be generated during the succeeding 12 months under certain long-term contracts. The capital equipment orders are scheduled for delivery and installation during the succeeding 12 months and are believed by the Company to be firm.
DATE AMOUNT ------------------ ------------ September 30, 1995 $199,500,000 September 30, 1996 254,000,000
The rate of booking new orders varies from month to month. In addition, the orders have varying delivery schedules, and the Company's backlog as of any particular date may not be representative of actual revenues for any succeeding period. Certain of the Company's contracts for engineered products and services provide for progress payments during the engineering and manufacturing period. The balance is due upon acceptance or start-up or, in the case of most municipal and governmental purchasers, 90 to 180 days after delivery and installation. 45 MANAGEMENT The following table sets forth certain information regarding the directors and executive officers of the Company.
NAME AGE POSITION ---- --- -------- Richard J. 52 Chairman of the Board of Directors, Chief Executive Officer Heckmann and President Michael J. 42 Director and Executive Vice President Reardon Nicholas C. 35 Executive Vice President-Process Water Group Memmo Thierry 52 Executive Vice President-European Group Reyners Andrew D. 34 Executive Vice President-Wastewater Group Seidel Kevin L. 40 Vice President and Chief Financial Officer Spence Damian C. 36 Vice President, General Counsel and Secretary Georgino Tim L. Traff 38 Director and Senior Vice President John S. 58 Senior Vice President-Corporate Development Swartley James W. 34 Vice President, Controller and Treasurer Dierker Michael E. 35 Assistant General Counsel and Assistant Secretary Hulme, Jr. James E. 67 Director Clark John L. 59 Director Diederich Robert S. 48 Director Hillas Arthur B. 56 Director Laffer Alfred E. 51 Director Osborne, Jr. J. Danforth 49 Director Quayle C. Howard 58 Director Wilkins, Jr.
Richard J. Heckmann was elected Chairman of the Board of Directors, Chief Executive Officer and President of the Company on July 16, 1990. Mr. Heckmann was a Senior Vice President at Prudential-Bache Securities in Rancho Mirage, California from January 1982 to August 1990. He joined the U.S. Small Business Administration in 1977 and served as Associate Administrator for Finance and Investment from 1978 to 1979. Prior thereto he was founder and Chairman of the Board of Tower Scientific Corporation, a manufacturer of custom prosthetic devices, which was sold to Hexcel Corporation in 1977. Mr. Heckmann is a member of the management board of TWO. He is also a director of USA Waste Services, Inc. Michael J. Reardon was appointed Executive Vice President of the Company in June of 1995, having previously served as Executive Vice President and Chief Operating Officer, and prior to that as the Chief Financial Officer and Secretary of the Company. From May 1995 to April 1996, Mr. Reardon served as President of Arrowhead Industrial Water, Inc. He became President and General Manager of Illinois Water Treatment, Inc., a subsidiary of the Company, in March 1992. From 1981 to July 1990 he was Chief Financial Officer of The C&C Organization, a company engaged in restaurant ownership, management and construction. Mr. Reardon is a certified public accountant and was a senior auditor with Arthur Andersen & Co. from 1978 to 1981. Mr. Reardon is a member of the management board of TWO. In June 1978, Mr. Reardon received a B.S. in Business Administration from California State Polytechnic University, and in 1995 attended the Kellogg Management Institute, Northwestern University. Nicholas C. Memmo was appointed Executive Vice President-Process Water Group on July 1, 1995, having previously served as Senior Vice President and General Manager of Ionpure since March 7, 1994. He had previously been Senior Vice President-Sales & Marketing since December 8, 1992. Mr. Memmo had also been the senior operating officer of U.S. Filter/Whittier, Inc. since January 1992, having previously been Marketing Manager of that company since January 1991. He was appointed General Manager in April 1992. Mr. Memmo was employed from July 1984 to September 1988 with Hercules Incorporated, a New York Stock Exchange specialty chemical and aerospace company, in sales, marketing and distribution positions. Mr. Memmo received a B.S. degree in chemical engineering from Drexel University. Between his employment with Hercules and the Company, he completed an M.B.A. program at the John E. Anderson Graduate School of Management at UCLA. 46 Thierry Reyners was appointed Executive Vice President-European Group on July 1, 1995, having previously served as Senior Vice President-Europe since March 7, 1994. He had previously been Senior Vice President-European Sales since December 1, 1993, the date the Company acquired Ionpure. Mr. Reyners served as Vice President and General Manager-Europe of Ionpure Technologies Corporation from 1990 to December 1993, and from 1981 through 1989 he was employed by Millipore Corporation, including as European Area Manager from 1987 through 1989. Mr. Reyners has a Ph.D. in Organic Chemistry from the Research Institute in Natural Substances, University of Orsay, France and an M.B.A. from INSEAD, Fontainebleau, France. Andrew D. Seidel was appointed Executive Vice President-Wastewater Group on July 1, 1995, having previously served as Senior Vice President-Wastewater Group and General Manager of U.S. Filter, Inc., Warrendale, Pennsylvania, since September 28, 1993. He had previously served as Vice President-Membralox Group since December 8, 1992, and had been General Manager of Membralox since March 1992. From October 1991 to March 1992, Mr. Seidel was Marketing Manager for U.S. Filter/Marlboro, Inc. From October 1990 until his employment by the Company, he was a senior consultant with Deloitte & Touche Management Consulting. Mr. Seidel had various responsibilities with Hercules Incorporated from 1984 through 1988, including technical marketing and product management at Hercules Specialty Chemical Company and Quality Control/Process Engineering in Hercules Aerospace Company. Mr. Seidel received a B.S. degree in chemical engineering from the University of Pennsylvania. Between his employment with Hercules and Deloitte & Touche, he completed an M.B.A. program at the Wharton School, the University of Pennsylvania. Kevin L. Spence was appointed Vice President of the Company on December 8, 1991 and has been Chief Financial Officer of the Company since January 6, 1992 and was Treasurer from February 17, 1992 until June 9, 1995. From October 1989 through 1991 he was Chief Financial Officer, first with Cal-Star Financial, a mortgage banker, and then with American National Corporation, a manufacturer of bedding materials. Mr. Spence is a certified public accountant and was with KPMG Peat Marwick LLP from 1978 to September 1989 and a partner with that firm from July 1988. Damian C. Georgino was appointed Vice President, General Counsel and Secretary of the Company on August 4, 1995. From September 1992 through July 31, 1995, he served as a General Attorney with Aluminum Company of America ("Alcoa"), where his primary responsibilities included mergers and acquisitions and serving as chief legal counsel for several growing international manufacturing and service businesses. From June 1988 through August 1992, Mr. Georgino was an Attorney with Alcoa, where his primary responsibilities included securities, mergers and acquisitions and corporate finance. From June 1986 through May 1988, he was an associate with Houston Harbaugh P.C. Mr. Georgino received a B.S. degree in economics and political science from Dickinson College in 1982 and a received a JD/MBA joint degree from Emory University in 1986. Tim L. Traff was appointed Senior Vice President of the Company on December 8, 1992, having previously been Vice President-Corporate Development since March 1992. He had been President of Traff Capital Management, a money management company, since 1989. From 1985 to 1988 he was an analyst at SIT Investment, a money management company. Mr. Traff received a B.S. degree in business economics from the University of Minnesota. John S. Swartley was appointed Senior Vice President-Corporate Development on July 1, 1995, having previously served as a Vice President since July 1994, when the Company acquired Liquipure Technologies, Inc. Mr. Swartley had started a new business in 1988 with venture capital backing from Warburg, Pincus Capital Company, L.P., and made a series of water treatment company acquisitions that ultimately became Liquipure. From 1982 through 1987 he was at Olin Corporation as president of its consumer products group, which dealt mainly with pool chemicals. From 1965 through 1982 he was with General Foods in various marketing, development and management positions. He received a degree in chemical engineering from Lehigh University and an M.B.A. degree from Harvard Business School. James W. Dierker was appointed Vice President, Controller and Treasurer on June 9, 1995. From July 1985 to June 1995 he was with KPMG Peat Marwick LLP, and was a senior manager with that firm at the time of his 47 departure. Mr. Dierker is a certified public accountant, and received a B.S. degree in business administration with an emphasis in accounting from California State Polytechnic University. Michael E. Hulme, Jr. was appointed Assistant General Counsel and Assistant Secretary on February 13, 1996. From December 1994 through January 1996, he served as Vice President/Corporate Counsel of Forte Hotels, Inc., formerly a wholly owned subsidiary of Forte Plc, and from October 1992 through December 1994 as Corporate Counsel of Forte Hotels, Inc. His primary responsibilities included hotel and real estate development, acquisition and sale transactions. From 1989 through 1992 he was a business associate with the law firm of Duckor & Spradling, and from 1986 through 1989 he was an associate with the law firm of Best, Best & Krieger. Mr. Hulme received an B.A. degree in economics from the University of California at Davis in 1983 and received a JD from the University of Southern California in 1986. James E. Clark was President of Western Operations for Prudential Insurance from 1978 to June 1990. Since June 1990, he has been a consultant and a private investor. Mr. Clark is also Chairman of Asian-American Communication Company, Inc., and a director of Asian American Association, Inc., a joint venture with Sprint, and Durotest Corporation. He is also a trustee of the Yul Brynner Foundation. John L. Diederich has been Executive Vice President-Chairman's Counsel for Aluminum Company of America since August 1991. Prior to assuming his present position, he had been Group Vice President-Alcoa Metals and Chemicals since 1986 and a Vice President of Aluminum Company of America since 1982. Mr. Diederich is a trustee of Shadyside Hospital and a director of Alcoa Foundation. Robert S. Hillas has served as a Managing Director of E.M. Warburg, Pincus & Co., Inc., a private investment firm, since 1993. Previously, Mr. Hillas was a partner of DSV Management Ltd., a venture capital investment firm, and its affiliated venture capital partnerships. Mr. Hillas is currently a director of Advanced Technology Materials, Inc., Transition Systems, Inc. and several privately-held companies. Mr. Hillas was previously associated with Warburg, Pincus from 1972 until he joined DSV Management Ltd. in 1981. Mr. Hillas was graduated from Dartmouth College in 1970 with a Bachelor of Arts degree in Mathematics, and was graduated from Stanford University with an M.B.A. degree in 1972. Dr. Arthur B. Laffer has been Chairman and Chief Executive Officer of A.B. Laffer, V.A. Canto & Associates, an economic research and financial firm (and its predecessor, A.B. Laffer Associates), since founding the firm in 1979. He is also Chairman of Calport Asset Management, Inc., a money management firm. Dr. Laffer has been Chief Executive Officer of Laffer Advisors, Inc., a registered broker-dealer and investment advisor, since 1981. He was the Charles B. Thornton Professor of Business Economics at the University of Southern California from 1976 through 1984, Distinguished University Professor at Pepperdine University from October 1984 to September 1987, and was a member of President Reagan's economic policy advisory board. Dr. Laffer received a B.A. degree in economics from Yale University and later received an M.B.A. degree and a Ph.D. in economics from Stanford University. He is a director of Coinmach Laundry Corporation, Mastec, Inc., Nicholas Applegate Mutual and Growth Equity Funds and Value Vision, Inc. Dr. Alfred E. Osborne, Jr. is Director of the Harold Price Center for Entrepreneurial Studies and Associate Professor of Business Economics at the John E. Anderson Graduate School of Management at UCLA. He has been on the UCLA faculty since 1972. Dr. Osborne was educated at Stanford University, where he earned a B.S. degree in electrical engineering, an M.B.A. in finance, a master's degree in economics and a Ph.D. in business-economics. He is a director of Greyhound Lines, Inc., Nordstrom, Inc., ReadiCare, Inc., SEDA Specialty Packaging Corporation and The Times Mirror Company. J. Danforth Quayle was the forty-fourth Vice President of the United States. He was graduated from DePaul University in 1969 with a B.A. degree in political science and from Indiana University in 1974 with a law degree. In 1976, Mr. Quayle was elected to Congress and in 1980 to the United States Senate, being reelected in 1986 48 and serving until 1989. As Vice President, he headed the Competitiveness and Space Councils for the President. Since leaving office in January 1993, Mr. Quayle served as Chairman of Circle Investors, Inc. (a private financial services and insurance holding company), and BTC, Inc. (a private company through which he operates certain of his personal business interests). He is a director of Amtran, Inc., Central Newspapers, Inc. and American Standard Companies, Inc. and is a member of the Board of Trustees of The Hudson Institute. C. Howard Wilkins, Jr. served as the United States Ambassador to the Netherlands from June 1989 to July 10, 1992. Prior to being Ambassador and thereafter, Mr. Wilkins has been Chairman of the Board of Maverick Restaurant Corp., which owns and operates restaurants under franchise agreements, and Maverick Development Corp. He was Vice Chairman of Pizza Hut, Inc. until 1975. From 1981 to 1983 Mr. Wilkins served as a director of U.S. Synthetic Fuels Corporation. Mr. Wilkins received a B.A. degree from Yale University in 1960. 49 SECURITY OWNERSHIP Set forth below is information as of September 30, 1996 concerning the ownership of Common Stock by all persons or entities known to the Company to be beneficial owners of more than five percent of the outstanding Common Stock, each director of the Company, certain executive officers and all directors and executive officers of the Company as a group. Unless otherwise indicated, the holders of all shares shown in the table have sole voting and investment power with respect to such shares.
NUMBER OF SHARES NAME(1) BENEFICIALLY OWNED(2) PERCENT OF CLASS(3) ------- --------------------- ------------------- Laidlaw, Inc.(4).................. 4,054,093 8.1% Warburg, Pincus Capital Company, L.P.(5).......................... 2,719,618 5.4 The TCW Group, Inc.(6)............ 2,508,900 5.0 Richard J. Heckmann(7)............ 1,134,182 2.3 Michael J. Reardon(8)............. 213,705 * Tim L. Traff...................... 247,081 * Nicholas C. Memmo(9).............. 91,892 * Thierry Reyners(10)............... 45,000 * Kevin L. Spence................... 90,000 * James E. Clark.................... 126,000 * John L. Diederich................. 65,250 * Robert S. Hillas(11).............. 2,719,618 5.4 Arthur B. Laffer(12).............. 106,875 * Alfred E. Osborne, Jr............. 108,525 * J. Danforth Quayle................ 27,000 * C. Howard Wilkins, Jr............. 103,500 * All Directors and Executive Offi- cers as a Group (18 persons)..... 5,270,763 10.5
- ------------------- (1) The address of each person listed, except as otherwise indicated, is c/o United States Filter Corporation, 40-004 Cook Street, Palm Desert, California 92211. (2) The number of shares shown includes shares that may be acquired upon the exercise of options exercisable within 60 days of September 30, 1996 as follows: Mr. Heckmann--440,325; Mr. Reardon--175,319; Mr. Traff--81,561; Mr. Memmo--91,874; Mr. Reyners--45,000; Mr. Spence--90,000; Mr. Clark-- 72,000; Mr. Diederich--63,000; Dr. Laffer--72,000; Dr. Osborne--72,000; Mr. Quayle--27,000; Mr. Wilkins--72,000; all Directors and Executive Officers as a Group--1,442,704. All options were granted pursuant to the Company's 1991 Employee Stock Option Plan or the Company's 1991 Directors Stock Option Plan. (3) An asterisk (*) indicates ownership of less than 1% of the Common Stock. (4) The address of Laidlaw, Inc. is 3221 North Service Road, Burlington, Ontario, Canada L7R 3Y8. The Company believes that Laidlaw, Inc. beneficially owns 3,750,093 shares as of October 31, 1996. (5) The address of Warburg, Pincus Capital Company, L.P. is 466 Lexington Avenue, New York, New York 10017. (6) The address of The TCW Group, Inc. is 865 South Figueroa Street, Los Angeles, California 90017. As reported in a Schedule 13G/A dated February 12, 1996, The TCW Group, Inc. had sole voting and dispositive power with respect to the shares and Robert Day, an individual whose address is 200 Park Avenue, Suite 2200, New York, New York 10166, may be deemed to control The TCW Group, Inc. (7) Includes 19,050 shares held by Mr. Heckmann's wife and by Mr. Heckmann as custodian for his children as to which Mr. Heckmann may be deemed to have indirect beneficial ownership. (8) Includes 2,700 shares held in a trust for the benefit of Mr. Reardon's father-in-law. As the trustee, Mr. Reardon has voting and investment power with respect to the shares held by the trust and may be deemed to have indirect beneficial ownership of them. Mr. Reardon disclaims beneficial ownership of such shares. (9) Includes 18 shares held by Mr. Memmo's wife as custodian for his minor children. (10) Includes 1,050 shares held by Mr. Reyners' wife. (11) Constitutes shares owned by Warburg, Pincus Capital Company, L.P. ("Warburg"). The sole general partner of Warburg is Warburg, Pincus & Co., a New York general partnership ("WP"). E.M. Warburg, Pincus & Co., Inc. ("EMW"), through a wholly owned subsidiary, manages Warburg. WP owns all of the outstanding stock of EMW and, as the sole general partner of Warburg, has a 20% interest in the profits of Warburg. EMW owns 0.9% of the limited partnership interests in Warburg. Lionel I. Pincus is the managing partner of WP and may be deemed to control it. Mr. Hillas, a director of the Company, is a Managing Director of EMW and a general partner of WP. As such, Mr. Hillas may be deemed to have an indirect pecuniary interest in an indeterminate portion of the shares beneficially owned by Warburg. All of the shares indicated as owned by Mr. Hillas are owned directly by Warburg and are included herein because of Mr. Hillas' affiliation with Warburg. Mr. Hillas disclaims "beneficial ownership" of these shares within the meaning of Rule 13d-3 under the Exchange Act. (12) Includes 30,000 shares held by A.B. Laffer, V.A. Canto & Associates, a company controlled by Dr. Laffer. 50 DESCRIPTION OF THE NOTES Set forth below is a summary of certain provisions of the Notes. The Notes will be issued pursuant to an indenture (the "Indenture") to be dated as of , 1996, by and between the Company and State Street Bank and Trust Company of California, N.A., as trustee (the "Trustee"), a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The terms of the Indenture are also governed by certain provisions contained in the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following summary of the Notes and the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by, reference to all of the provisions of the Indenture, including the definitions therein of certain terms which are not otherwise defined in this Prospectus and those terms made a part of the Indenture by reference to the Trust Indenture Act as in effect on the date of the Indenture. Capitalized terms used herein without definition have the meanings ascribed to them in the Indenture. As used in this section "Description of the Notes," the "Company" refers to United States Filter Corporation, exclusive of its subsidiaries. Wherever particular provisions of the Indenture are referred to in this summary, such provisions are incorporated by reference as a part of the statements made and such statements are qualified in their entirety by such reference. GENERAL The Notes will be unsecured, subordinated, general obligations of the Company, limited in aggregate principal amount to $300,000,000 ($345,000,000 if the Underwriters' over-allotment option is exercised in full). The Notes will be subordinated in right of payment to all Senior Indebtedness of the Company, as described under "Subordination" below. The Notes will be issued only in fully registered form, without coupons, in denominations of $1,000 and integral multiples thereof. The Notes will mature on , 2001. The Notes will bear interest at the rate per annum stated on the cover page of this Prospectus from the date of issuance or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semiannually on and of each year, commencing , 1997 to the persons in whose names such Notes are registered at the close of business on or immediately preceding such Interest Payment Date. Principal of, premium, if any, and interest on, the Notes will be payable, the Notes will be convertible and the Notes may be presented for registration of transfer or exchange, at the office or agency of the Company maintained for such purpose, which office or agency shall be maintained in the Borough of Manhattan, The City of New York. Interest will be calculated on the basis of a 360-day year consisting of twelve 30-day months. At the option of the Company, payment of interest may be made by check mailed to the Holders of the Notes at the addresses set forth upon the registry books of the Registrar. No service charge will be made for any registration of transfer or exchange of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Until otherwise designated by the Company, the Company's office or agency will be the corporate trust office of the Trustee presently located at 725 South Figueroa Street, Suite 3100, Los Angeles, California 90017. CONVERSION RIGHTS The Holder of any Notes will have the right, at the Holder's option, to convert any portion of the principal amount thereof that is an integral multiple of $1,000 into shares of Common Stock, at any time prior to the close of business on the second Business Day prior to the Stated Maturity of the Notes (unless earlier redeemed or repurchased) at the Conversion Price set forth on the cover page of this Prospectus (subject to adjustment as described below). The right to convert a Note called for redemption or delivered for repurchase will terminate at the close of business on the Business Day prior to the Redemption Date or Repurchase Date for such Note, unless the Company subsequently fails to pay the applicable Redemption Price or Repurchase Price, as the case may be. In the case of any Note that has been converted after any Record Date, but on or before the next Interest Payment Date, interest the stated due date of which is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest shall be paid to the Holder of such 51 Note who is a Holder on such Record Date. Any Note so converted must be accompanied by payment to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of Notes being surrendered for conversion (unless such Note shall have been called for redemption, in which case no such payment shall be required). In all cases, Holders as of the Record Date immediately preceding , 1999 will receive the interest payment due on , 1999, even if such Holder surrenders a Note for conversion after such Record Date as a result of the Company's exercise of its right to redeem the Notes on or after , 1999. No fractional shares will be issued upon conversion but, in lieu thereof, an appropriate amount will be paid in cash by the Company based on the market price of Common Stock (as determined in accordance with the Indenture) at the close of business on the Date of Conversion. The Conversion Price will be subject to adjustment upon the occurrence of certain events, including: (a) any payment of a dividend (or other distribution) payable in Common Stock on any class of Capital Stock of the Company, (b) any issuance to all holders of Common Stock of rights, options or warrants entitling them to subscribe for or purchase Common Stock at less than the then current market price (as determined in accordance with the Indenture) of Common Stock; provided, however, that if such options or warrants are only exercisable upon the occurrence of certain triggering events, then the Conversion Price will not be adjusted until such triggering events occur, (c) any subdivision, combination or reclassification of Common Stock, (d) any distribution to all holders of Common Stock of evidences of indebtedness, shares of Capital Stock other than Common Stock, cash or other assets (including securities, but excluding those dividends, rights, options, warrants and distributions referred to above and excluding regular dividends and distributions paid exclusively in cash), (e) any distribution consisting exclusively of cash (excluding any cash portion of distributions referred to in (d) above, or cash distributed upon a merger or consolidation to which the second succeeding paragraph applies) to all holders of Common Stock in an aggregate amount that, combined together with (i) all other such all-cash distributions made within the then preceding 12 months in respect of which no adjustment has been made and (ii) any cash and the fair market value of other consideration paid or payable in respect of any tender offer by the Company or any of its Subsidiaries for Common Stock concluded within the preceding 12 months in respect of which no adjustment has been made, exceeds 15% of the Company's market capitalization (defined as being the product of the then current market price of the Common Stock times the number of shares of Common Stock then outstanding) on the record date of such distribution, and (f) the completion of a tender or exchange offer made by the Company or any of its Subsidiaries for Common Stock that involves an aggregate consideration that, together with (i) any cash and other consideration payable in a tender or exchange offer by the Company or any of its Subsidiaries for Common Stock expiring within the 12 months preceding the expiration of such tender or exchange offer in respect of which no adjustment has been made and (ii) the aggregate amount of any such all-cash distributions referred to in (e) above to all holders of Common Stock within the 12 months preceding the expiration of such tender or exchange offer in respect of which no adjustments have been made, exceeds 15% of the Company's market capitalization on the expiration of such tender offer. No adjustment of the Conversion Price will be required to be made until the cumulative adjustments amount to 1.0% or more of the Conversion Price as last adjusted. The Company reserves the right to make such reductions in the Conversion Price in addition to those required in the foregoing provisions as it considers to be advisable in order that any event treated for federal income tax purposes as a dividend of stock or stock rights will not be taxable to the recipients. In the event the Company elects to make such a reduction in the conversion price, the Company will comply with the requirements of Rule 14e-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any other securities laws and regulations thereunder if and to the extent that such laws and regulations are applicable in connection with the reduction of the Conversion Price. In the event that the Company distributes rights or warrants (other than those referred to in (b) in the preceding paragraph) pro rata to holders of Common Stock, so long as any such rights or warrants have not expired or been redeemed by the Company, the Holder of any Note surrendered for conversion will be entitled to receive upon such conversion, in addition to the shares of Common Stock issuable upon such conversion (the "Conversion Shares"), a number of rights or warrants to be determined as follows: (i) if such conversion occurs on or prior to the date for the distribution to the holders of rights or warrants of separate certificates evidencing such rights or warrants (the "Distribution Date"), the same number of rights or warrants to which a holder of a 52 number of shares of Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the rights or warrants, and (ii) if such conversion occurs after such Distribution Date, the same number of rights or warrants to which a holder of the number of shares of Common Stock into which such Note was convertible immediately prior to such Distribution Date would have been entitled on such Distribution Date in accordance with the terms and provisions of and applicable to the rights or warrants. The conversion price of the Notes will not be subject to adjustment on account of any declaration, distribution or exercise of such rights or warrants. In case of any reclassification, consolidation or merger of the Company with or into another person or any merger of another person with or into the Company (with certain exceptions), or in case of any sale, transfer or conveyance of all or substantially all of the assets of the Company (computed on a consolidated basis), each Note then outstanding will, without the consent of any Holder of Notes, become convertible only into the kind and amount of securities, cash and other property receivable upon such reclassification, consolidation, merger, sale, transfer or conveyance by a holder of the number of shares of Common Stock into which such Note was convertible immediately prior thereto, after giving effect to any adjustment event, who failed to exercise any rights of election and received per share the kind and amount received per share by a plurality of non-electing shares. SUBORDINATION The Notes will be general, unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Indebtedness of the Company. At September 30, 1996, as adjusted to give effect to the issuance and sale of the Notes and the application of the net proceeds therefrom, the Company would have had approximately $40.6 million of Senior Indebtedness outstanding. The Notes are subordinated by operation of law in right of payment to all liabilities (including trade payables) of the Company's Subsidiaries. The Company's Subsidiaries had approximately $473.0 million of trade payables and accrued liabilities outstanding at September 30, 1996. The Indenture will not restrict the incurrence of Senior Indebtedness or other indebtedness by the Company or its Subsidiaries. The Notes will effectively rank pari passu with the Company's 6% Convertible Subordinated Notes due 2005. The Indenture will provide that no payment may be made by the Company on account of the principal of, premium, if any, and interest on the Notes, or to acquire any of the Notes (including repurchases of Notes at the option of the Holder) for cash or property (other than Junior Securities), or on account of the redemption provisions of the Notes, (i) upon the maturity of any Senior Indebtedness of the Company by lapse of time, acceleration (unless waived) or otherwise, unless and until all principal of, premium, if any, and interest on such Senior Indebtedness are first paid in full (or such payment is duly provided for), or (ii) in the event of default in the payment of any principal of, premium, if any, or interest on any Senior Indebtedness of the Company when it becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise (a "Payment Default"), unless and until such Payment Default has been cured or waived or otherwise has ceased to exist. Upon (i) the happening of an event of default (other than a Payment Default) that permits the holders of Senior Indebtedness or their representative immediately to accelerate its maturity and (ii) written notice of such event of default given to the Company and the Trustee by the holders of at least 25% in the aggregate principal amount outstanding of such Senior Indebtedness or their representative (a "Payment Notice"), then, unless and until such event of default has been cured or waived or otherwise has ceased to exist, no payment (by setoff or otherwise) may be made by or on behalf of the Company on account of the principal of, premium, if any, interest on the Notes, or to acquire or repurchase any of the Notes for cash or property, or on account of the redemption provisions of the Notes, in any such case other than payments made with Junior Securities of the Company. Notwithstanding the foregoing, unless (i) the Senior Indebtedness in respect of which such Event of Default exists has been declared due and payable in its entirety within 179 days after the Payment Notice is delivered as set forth above (the "Payment Blockage Period"), and (ii) such declaration has not been rescinded or waived, at the end of the Payment Blockage Period, the Company shall be required to pay all sums not paid to the Holders 53 of the Notes during the Payment Blockage Period due to the foregoing prohibitions and to resume all other payments as and when due on the Notes. Any number of Payment Notices may be given; provided, however, that (i) not more than one Payment Notice shall be given within a period of any 360 consecutive days, and (ii) no event of default that existed upon the date of such Payment Notice or the commencement of such Payment Blockage Period (whether or not such event of default is on the same issue of Senior Indebtedness) shall be made the basis for the commencement of any other Payment Blockage Period. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company (other than Junior Securities) shall be received by the Trustee or the Holders at a time when such payment or distribution is prohibited by the foregoing provisions, such payment or distribution shall be held in trust for the benefit of the holders of Senior Indebtedness of the Company, and shall be paid or delivered by the Trustee or such Holders, as the case may be, to the holders of the Senior Indebtedness of the Company remaining unpaid or unprovided for or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any of such Senior Indebtedness of the Company may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness of the Company held or represented by each, for application to the payment of all Senior Indebtedness of the Company remaining unpaid, to the extent necessary to pay or to provide for the payment of all such Senior Indebtedness in full after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness. Upon any distribution of assets of the Company upon any dissolution, winding up, total or partial liquidation or reorganization of the Company, whether voluntary or involuntary, in bankruptcy, insolvency, receivership or a similar proceeding or upon assignment for the benefit of creditors or any marshalling of assets or liabilities, (i) the holders of all Senior Indebtedness of the Company will first be entitled to receive payment in full (or have such payment duly provided for) before the Holders are entitled to receive any payment on account of the principal of, premium, if any, or interest on, the Notes (other than Junior Securities) and (ii) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than Junior Securities) to which the Holders or the Trustee on behalf of the Holders would be entitled (by setoff or otherwise), except for the subordination provisions contained in the Indenture, will be paid by the liquidating trustee or agent or other person making such a payment or distribution directly to the holders of Senior Indebtedness of the Company or their representative to the extent necessary to make payment in full of all such Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness. No provision contained in the Indenture or the Notes will affect the obligation of the Company, which is absolute and unconditional, to pay, when due, principal of, premium, if any, and interest on the Notes. The subordination provisions of the Indenture and the Notes will not prevent the occurrence of any Default or Event of Default under the Indenture or limit the rights of the Trustee or any Holder, subject to the two preceding paragraphs, to pursue any other rights or remedies with respect to the Notes. The Company conducts certain of its operations through its Subsidiaries. Accordingly, the Company's ability to meet its cash obligations is dependent upon the ability of its Subsidiaries to make cash distributions to the Company. The ability of its Subsidiaries to make distributions to the Company is and will continue to be restricted by, among other limitations, applicable provisions of the laws of national and state governments and contractual provisions. The Indenture will not limit the ability of the Company's Subsidiaries to incur such restrictions in the future. The right of the Company to participate in the assets of any Subsidiary (and thus the ability of Holders of the Notes to benefit indirectly from such assets) is generally subject to the prior claims of creditors, including trade creditors, of that Subsidiary, except to the extent that the Company is recognized as a creditor of such Subsidiary, in which case the Company's claims would still be subject to any security interest of other creditors of such Subsidiary. The Notes, therefore, will be subordinated by operation of law to creditors, including trade creditors, of Subsidiaries of the Company with respect to the assets of the Subsidiaries against which such creditors have a more direct claim. 54 As a result of these subordination provisions, in the event of the liquidation, bankruptcy, reorganization, insolvency, receivership or similar proceeding or an assignment for the benefit of the creditors of the Company or any of its Subsidiaries or a marshalling of assets or liabilities of the Company and its Subsidiaries, Holders of the Notes may receive ratably less than other creditors. REDEMPTION AT THE COMPANY'S OPTION The Notes will not be subject to redemption prior to , 1999. On and after such date, the Notes will be redeemable at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days notice to each Holder of Notes, at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the 12-month period commencing of the years indicated below:
YEAR PERCENTAGE 1999.......................................................... % 2000 and thereafter........................................... %
in each case (subject to the right of Holders of record on a Record Date to receive interest due on an Interest Payment Date that is on or prior to such Redemption Date) together with accrued and unpaid interest, if any, to the Redemption Date. In the case of a partial redemption, the Trustee shall select the Notes or portions thereof for redemption on a pro rata basis, by lot or in such other manner it deems appropriate and fair. The Notes may be redeemed in part in multiples of $1,000 only. The Notes will not have the benefit of any sinking fund. Notice of any redemption will be sent, by first-class mail, at least 30 days and not more than 60 days prior to the date fixed for redemption, to the Holder of each Note to be redeemed to such Holder's last address as then shown upon the registry books of the Registrar. The notice of redemption must state the Redemption Date, the Redemption Price and the amount of accrued interest to be paid. Any notice that relates to a Note to be redeemed in part only must state the portion of the principal amount to be redeemed and must state that on and after the Redemption Date, upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion thereof will be issued. On and after the Redemption Date, interest will cease to accrue on the Notes or portions thereof called for redemption, unless the Company defaults in its obligations with respect thereto. REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL The Indenture will provide that in the event that a Change of Control (as defined) has occurred, each Holder of Notes will have the right, at such Holder's option, pursuant to an irrevocable and unconditional offer by the Company (the "Repurchase Offer"), to require the Company to repurchase all or any part of such Holder's Notes (provided that the principal amount of such Notes must be $1,000 or an integral multiple thereof) on the date (the "Repurchase Date") that is no later than 45 Business Days after the occurrence of such Change of Control at a cash price (the "Repurchase Price") equal to 100% of the principal amount thereof, together with accrued and unpaid interest to the Repurchase Date. The Repurchase Offer shall be made within 25 Business Days following a Change of Control and shall remain open for 20 Business Days following its commencement (the "Repurchase Offer Period"). Upon expiration of the Repurchase Offer Period, the Company shall purchase all Notes tendered in response to the Repurchase Offer. If required by applicable law, the Repurchase Date and the Repurchase Offer Period may be extended as so required; however, if so extended, it shall nevertheless constitute an Event of Default if the Repurchase Date does not occur within 60 Business Days of the Change of Control. The Indenture will provide that a "Change of Control" occurs upon any of the following events: (i) upon any merger or consolidation of the Company with or into any person or any sale, transfer or other conveyance, whether direct or indirect, of all or substantially all of the assets of the Company, on a consolidated basis, in one transaction or a series of related transactions, if, immediately after giving effect to such transaction, any 55 "person" or "group" is or becomes the "beneficial owner," directly or indirectly, of more than 50% of the total voting power in the aggregate normally entitled to vote in the election of directors, managers, or trustees, as applicable, of the transferee or surviving entity, (ii) when any "person" or "group" is or becomes the "beneficial owner," directly or indirectly, of more than 50% of the total voting power in the aggregate normally entitled to vote in the election of directors of the Company, (iii) when, during any period of 12 consecutive months after the Issue Date, individuals who at the beginning of any such 12-month period constituted the Board of Directors of the Company (together with any new directors whose election by such Board or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office, (iv) a sale or disposition, whether directly or indirectly, by the Company of all or substantially all of its assets, or (v) the pro rata distribution by the Company to its stockholders of substantially all of its assets. For purposes of this definition of "Change of Control," (i) the terms "person" and "group" shall have the meaning used for purposes of Rules 13d-3 and 13d-5 of the Exchange Act as in effect on the Issue Date, whether or not applicable; and (ii) the term "beneficial owner" shall have the meaning used in Rules 13d-3 and 13d-5 under the Exchange Act as in effect on the Issue Date, whether or not applicable, except that a "person" shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time or upon the occurrence of certain events. The phrase "all or substantially all" of the assets of the Company is likely to be interpreted by reference to applicable state law at the relevant time, and will be dependent on the facts and circumstances existing at such time. As a result, there may be a degree of uncertainty in ascertaining whether a sale or transfer is of "all or substantially all" of the assets of the Company. On or before the Repurchase Date, the Company will (i) accept for payment Notes or portions thereof properly tendered pursuant to the Repurchase Offer, (ii) deposit with the Paying Agent cash sufficient to pay the Repurchase Price (together with accrued and unpaid interest) of all Notes so tendered and (iii) deliver to the Trustee Notes so accepted, together with an Officers' Certificate listing the Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to the Holders of Notes so accepted payment in an amount equal to the Repurchase Price (plus accrued and unpaid interest), and the Trustee will promptly authenticate and mail or deliver to such Holders a new Note or Notes equal in principal amount to any unpurchased portion of the Notes surrendered. Any Notes not so accepted will be promptly mailed or delivered by the Company to the Holder thereof. The Company will publicly announce the results of the Repurchase Offer on or as soon as practicable after the Repurchase Date. The Change of Control purchase feature of the Notes may make more difficult or discourage a takeover of the Company, and, thus, the removal of incumbent management. The Change of Control purchase feature resulted from negotiations between the Company and the Underwriters. The provisions of the Indenture relating to a Change of Control may not afford the Holders protection in the event of a highly leveraged transaction, reorganization, restructuring, merger, spin-off or similar transaction that may adversely affect Holders, if such transaction does not constitute a Change of Control, as set forth above. In addition, the Company may not have sufficient financial resources available to fulfill its obligation to repurchase the Notes upon a Change of Control or to repurchase other debt securities of the Company or its Subsidiaries providing similar rights to the Holders thereof. To the extent applicable, the Company will comply with Section 14 of the Exchange Act and the provisions of Regulation 14E and any other tender offer rules under the Exchange Act and any other securities laws, rules and regulations that may then be applicable to any offer by the Company to purchase the Notes at the option of Holders upon a Change of Control. 56 LIMITATION ON MERGER, SALE OR CONSOLIDATION The Indenture will provide that the Company may not, directly or indirectly, consolidate with or merge with or into another person or sell, lease, convey or transfer all or substantially all of its assets (computed on a consolidated basis), whether in a single transaction or a series of related transactions, to another person or group of affiliated persons, unless (i) either (a) in the case of a merger or consolidation, the Company is the surviving entity or (b) the resulting, surviving or transferee entity is a corporation organized under the laws of the United States, any state thereof or the District of Columbia and expressly assumes by supplemental indenture all of the obligations of the Company in connection with the Notes and the Indenture; (ii) no Default or Event of Default shall exist or shall occur immediately after giving effect on a pro forma basis to such transaction; and (iii) the resulting, surviving or transferee entity immediately thereafter has a Consolidated Net Worth no less than that of the Company immediately prior thereto. Upon any consolidation or merger or any transfer of all or substantially all of the assets of the Company in accordance with the foregoing, the successor corporation formed by such consolidation or into which the Company is merged or to which such transfer is made, shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture with the same effect as if such successor corporation had been named therein as the Company, and the Company will be released from its obligations under the Indenture and the Notes, except as to any obligations that arise from or as a result of such transaction. REPORTS Whether or not the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall deliver to the Trustee and to each Holder, within 15 days after it is or would have been required to file such with the Securities and Exchange Commission (the "Commission"), annual and quarterly consolidated financial statements substantially equivalent to financial statements that would have been included in reports filed with the Commission if the Company was subject to the requirements of Section 13 or 15(d) of the Exchange Act, including, with respect to annual information only, a report thereon by the Company's certified independent public accountants as such would be required in such reports to the Commission and, in each case, together with a management's discussion and analysis of results of operations and financial condition as such would be so required. EVENTS OF DEFAULT AND REMEDIES The Indenture will define an Event of Default as (i) the failure by the Company to pay any installment of interest on the Notes as and when due and payable and the continuance of any such failure for 30 days, (ii) the failure by the Company to pay all or any part of the principal of, or premium, if any, on the Notes when and as the same become due and payable at maturity, redemption, by acceleration or otherwise, including, without limitation, pursuant to any Repurchase Offer, (iii) the failure of the Company to perform any conversion of Notes required under the Indenture and the continuance of any such failure for 30 days, (iv) the failure by the Company to observe or perform any other covenant or agreement contained in the Notes or the Indenture and, subject to certain exceptions, the continuance of such failure for a period of 60 days after written notice is given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Notes outstanding, (v) certain events of bankruptcy, insolvency or reorganization in respect of the Company or any of its Significant Subsidiaries, (vi) a default in the payment of principal, premium or interest when due that extends beyond any stated period of grace applicable thereto or an acceleration for any other reason of the maturity of any Indebtedness of the Company or any of its Subsidiaries with an aggregate principal amount in excess of $25 million, and (vii) final unsatisfied judgments not covered by insurance aggregating in excess of $25 million, at any one time rendered against the Company or any of its Subsidiaries and not stayed, bonded or discharged within 75 days. The Indenture will provide that if a Default occurs and is continuing, the Trustee must, within 90 days after the occurrence of such default, give to the Holders notice of such default. The Indenture will provide that if an Event of Default occurs and is continuing (other than an Event of Default specified in clause (v) above), then in every such case, unless the principal of all of the Notes shall have already become due and payable, either the Trustee or the Holders of 25% in aggregate principal amount of the 57 Notes then outstanding, by notice in writing to the Company (and to the Trustee if given by Holders) (an "Acceleration Notice"), may declare all principal and accrued interest thereon to be due and payable immediately. If an Event of Default specified in clause (v) above occurs, all principal and accrued interest thereon will be immediately due and payable on all outstanding Notes without any declaration or other act on the part of the Trustee or the Holders. The Holders of no less than a majority in aggregate principal amount of Notes generally are authorized to rescind such acceleration if all existing Events of Default, other than the nonpayment of the principal of, premium, if any, and interest on, the Notes that have become due solely by such acceleration, have been cured or waived. Prior to the declaration of acceleration of the maturity of the Notes, the Holders of a majority in aggregate principal amount of the Notes at the time outstanding may waive on behalf of all the Holders any default, except a default in the payment of principal of, premium, if any, or interest on any Note not yet cured, or a default with respect to any covenant or provision that cannot be modified or amended without the consent of the Holder of each outstanding Note affected. Subject to the provisions of the Indenture relating to the duties of the Trustee, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request, order or direction of any of the Holders, unless such Holders have offered to the Trustee reasonable security or indemnity. Subject to all provisions of the Indenture and applicable law, the Holders of a majority in aggregate principal amount of the Notes at the time outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee. AMENDMENTS AND SUPPLEMENTS The Indenture will contain provisions permiting the Company and the Trustee to enter into a supplemental indenture for certain limited purposes without the consent of the Holders. With the consent of the Holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding, the Company and the Trustee are permitted to amend or supplement the Indenture or any supplemental indenture or modify the rights of the Holders; provided, further, that no such modification may, without the consent of each Holder affected thereby: (i) change the Stated Maturity of any Note or reduce the principal amount thereof or the rate (or extend the time for payment) of interest thereon or any premium payable upon the redemption thereof, or change the place of payment where, or the coin or currency in which, any Note or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment or the conversion of any Note on or after the due date thereof (including, in the case of redemption, on or after the Redemption Date), or reduce the Repurchase Price, or alter the change of control provisions or redemption provisions in a manner adverse to the Holders, (ii) reduce the percentage in principal amount of the outstanding Notes, the consent of whose Holders is required for any such amendment, supplemental indenture or waiver provided for in the Indenture, (iii) adversely affect the right of such Holder to convert Notes, or (iv) modify any of the waiver provisions, except to increase any required percentage or to provide that certain other provisions of the Indenture cannot be modified or waived without the consent of the Holder of each outstanding Note affected thereby. NO PERSONAL LIABILITY OF STOCKHOLDERS, OFFICERS, DIRECTORS AND EMPLOYEES The Indenture will provide that no past, present or future stockholder, employee, officer or director, as such, of the Company or any successor corporation shall have any personal liability in respect of the obligations of the Company under the Indenture or the Notes by reason of his, her or its status as such stockholder, employee, officer or director. TRANSFER AND EXCHANGE A Holder may transfer or exchange the Notes in accordance with the Indenture. The Company may require a Holder, among other things, to furnish appropriate endorsements and transfer documents, and to pay any taxes and fees required by law or permitted by the Indenture. The Company is not required to transfer or exchange any Notes selected for redemption. Also, the Company is not required to transfer or exchange any Notes for a period of 15 days before a selection of Notes to be redeemed. The registered Holder of a Note may be treated as the owner of it for all purposes. 58 BOOK-ENTRY, DELIVERY AND FORM Except as set forth below, the Notes will initially be issued in the form of one or more registered Notes in global form (the "Global Notes"). Each Global Note will be deposited on the date of the closing of the sale of the Notes (the "Closing Date") with, or on behalf of, The Depository Trust Company (the "Depositary") and registered in the name of Cede & Co., as nominee of the Depositary. The Company has been advised that the Depositary is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. The Depositary holds securities that its participants ("Participants") deposit with it. The Depositary also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations ("Direct Participants"). The Depositary is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to the Depository Trust Company system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). The rules applicable to the Depositary and its Participants are on file with the Commission. The Company expects that pursuant to procedures established by the Depositary (i) upon deposit of the Global Notes, the Depositary will credit the accounts of Participants designated by the Underwriters with an interest in the Global Note and (ii) ownership of the Notes evidenced by the Global Notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by the Depositary (with respect to the interests of Participants), the Participants and the Indirect Participants. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own and that security interests in negotiable instruments can only be perfected by delivery of certificates representing the instruments. Consequently, the ability to transfer Notes evidenced by the Global Note will be limited to such extent. So long as the Depositary or its nominee is the registered owner of a Note, the Depositary or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by the Global Note for all purposes under the Indenture. Except as provided below, owners of beneficial interests in a Global Note will not be entitled to have Notes represented by such Global Note registered in their names, will not receive or be entitled to receive physical delivery of Certificated Notes, and will not be considered the owners or holders thereof under the Indenture for any purpose, including with respect to the giving of any directions, instructions or approvals to the Trustee thereunder. As a result, the ability of a person having a beneficial interest in Notes represented by a Global Note to pledge such interest to persons or entities that do not participate in the Depositary's system, or to otherwise take actions with respect to such interest, may be affected by the lack of a physical certificate evidencing such interest. Neither the Company nor the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of Notes by the Depositary, or for maintaining, supervising or reviewing any records of the Depositary relating to such Notes. Payments with respect to the principal of, premium, if any, and interest on, any Note represented by a Global Note registered in the name of the Depositary or its nominee on the applicable record date will be payable by the Trustee to or at the direction of the Depositary or its nominee in its capacity as the registered Holder of the Global Note representing such Notes under the Indenture. Under the terms of the Indenture, the Company 59 and the Trustee may treat the persons in whose names the Notes, including the Global Notes, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither the Company nor the Trustee has or will have any responsibility or liability for the payment of such amounts to beneficial owners of Notes (including principal, premium, if any, or interest), or to immediately credit the accounts of the relevant Participants with such payment, in amounts proportionate to their respective holdings in principal amount of beneficial interests in the Global Note as shown on the records of the Depositary. Payments by the Participants and the Indirect Participants to the beneficial owners of Notes will be governed by standing instructions and customary practice and will be the sole responsibility of the Participants or the Indirect Participants. Certificated Notes If (i) the Company notifies the Trustee in writing that the Depositary is no longer willing or able to act as a depositary and the Company is unable to locate a qualified successor within 90 days or (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of Notes in definitive form under the Indenture, then, upon surrender by the Depositary of the Global Notes, Certificated Notes will be issued to each person that the Depositary identifies as the beneficial owner of the Notes represented by Global Notes. In addition, subject to certain conditions, any person having a beneficial interest in a Global Note may, upon request to the Trustee, exchange such beneficial interest for Notes in the form of Certificated Notes. Upon any such issuance, the Trustee is required to register such Certificated Notes in the name of such person or persons (or the nominee of any thereof), and cause the same to be delivered thereto. Neither the Company nor the Trustee shall be liable for any delay by the Depositary or any Participant or Indirect Participant in identifying the beneficial owners of the Notes, and the Company and the Trustee may conclusively rely on, and shall be protected in relying on, instructions from the Depositary for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of the Notes to be issued). The information in this section concerning the Depositary and the Depositary's book-entry system has been obtained from sources that the Company believes to be reliable. The Company will have no responsibility for the performance by the Depositary or its Participants of their respective obligations as described hereunder or under the rules and procedures governing their respective operations. SAME-DAY FUNDS SETTLEMENT AND PAYMENT The Indenture will require that payments in respect of the Notes represented by the Global Notes (including principal, premium, if any, and interest) be made by wire transfer of immediately available funds to the accounts specified by the Depositary. With respect to Notes represented by Certificated Notes, the Company will make all payments of principal, premium, if any, and interest, by mailing a check to each such Holder's registered address. The Notes will trade in the Depositary's Same-Day Funds Settlement System until maturity, or until the Notes are issued in certificated form, and secondary market trading activity in the Notes will therefore be required by the Depositary to settle in immediately available funds. No assurance can be given as to the effect, if any, of settlement in immediately available funds on trading activity in the Notes. CERTAIN DEFINITIONS "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to close. "Capital Stock" means, with respect to any corporation, any and all shares, interests, rights to purchase (other than convertible or exchangeable Indebtedness), warrants, options, participations or other equivalents of or interests (however designated) in stock issued by that corporation. 60 "Consolidated Net Worth" of any person at any date means the aggregate consolidated stockholders' equity of such person (plus amounts of equity attributable to preferred stock) and its consolidated Subsidiaries, as would be shown on the consolidated balance sheet of such person prepared in accordance with GAAP, adjusted to exclude (to the extent included in calculating such consolidated stockholders' equity), (a) the amount of any such stockholders' equity attributable to Disqualified Capital Stock or treasury stock of such person and its consolidated Subsidiaries and (b) all upward revaluations and other write-ups in the book value of any asset of such person or a consolidated Subsidiary of such person subsequent to the Issue Date. "Disqualified Capital Stock" means (a) except as set forth in (b), with respect to any person, Capital Stock of such person that, by its terms or by the terms of any security into which it is convertible, exercisable or exchangeable, is, or upon the happening of an event or the passage of time would be, required to be redeemed or repurchased (including at the option of the holder thereof) by such person or any of its Subsidiaries, in whole or in part, on or prior to the Stated Maturity of the Securities and (b) with respect to any Subsidiary of such person (including with respect to any Subsidiary of the Company), any Capital Stock other than any common stock with no preference, privileges, or redemption or repayment provisions. "Indebtedness" of any person means, without duplication, (a) all liabilities and obligations, contingent or otherwise, of any such person, (i) in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), (ii) evidenced by bonds, notes, debentures or similar instruments, (iii) representing the balance deferred and unpaid of the purchase price of any property or services, except such as would constitute trade payables to trade creditors in the ordinary course of business, (iv) evidenced by bankers' acceptances or similar instruments issued or accepted by banks, (v) for the payment of money relating to a Capitalized Lease Obligation, or (vi) evidenced by a letter of credit or a reimbursement obligation of such person with respect to any letter of credit; (b) all net obligations of such person under Interest Swap and Hedging Obligations; (c) all liabilities of others of the kind described in the preceding clauses (a) or (b) that such person has guaranteed or that is otherwise its legal liability and all obligations to purchase, redeem or acquire any Capital Stock; and (d) any and all deferrals, renewals, extensions, refinancings and refundings (whether direct or indirect) of any liability of the kind described in any of the preceding clauses (a), (b) or (c), or this clause (d), whether or not between or among the same parties. "Issue Date" means the date of first issuance of the Notes under the Indenture. "Junior Securities" of any person means any Qualified Capital Stock and any Indebtedness of such person that is subordinated in right of payment to the Notes and has no scheduled installment of principal due, by redemption, sinking fund payment or otherwise, on or prior to the Stated Maturity of the Notes. "Qualified Capital Stock" means any Capital Stock of the Company that is not Disqualified Capital Stock. "Senior Indebtedness" means any Indebtedness of the Company, whether outstanding on the date of the Indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the Company, unless the instrument creating or evidencing such Indebtedness provides that such Indebtedness is not senior or superior in right of payment to the Notes or to other Indebtedness which is pari passu with, or subordinated to, the Notes; provided that in no event shall Senior Indebtedness include (a) Indebtedness of the Company owed or owing to any Subsidiary of the Company or any officer, director or employee of the Company or any Subsidiary of the Company, (b) Indebtedness to trade creditors, (c) the Company's 6% Convertible Subordinated Notes due 2005 or (d) any liability for taxes owed or owing by the Company. "Significant Subsidiary" means any Subsidiary which is a "significant subsidiary" of the Company within the meaning of Rule 1.02(w) of Regulation S- X promulgated by the Commission as in effect as of the date of the Indenture. "Stated Maturity" when used with respect to any Note means , 2001. 61 "Subsidiary" with respect to any person, means (i) a corporation a majority of whose Capital Stock with voting power normally entitled to vote in the election of directors is at the time. directly or indirectly. owned by such person, by such person and one or more Subsidiaries of such person or by one or more Subsidiaries of such person, (ii) a partnership in which such person or a Subsidiary of such person is, at the time, a general partner and owns alone or together with one or more Subsidiaries of such person a majority of the partnership interests, or (iii) any other person (other than a corporation) in which such person, one or more Subsidiaries of such person, or such person and one or more Subsidiaries of such person, directly or indirectly, at the date of determination thereof, has at least a majority ownership interest. 62 DESCRIPTION OF CAPITAL STOCK GENERAL As of September 30, 1996, the Company was authorized to issue 150,000,000 shares of Common Stock, of which 49,280,734 shares were issued and outstanding, and 3,000,000 shares of preferred stock, par value $.10 per share, of which none were issued and outstanding. Of the unissued shares of Common Stock as of such date, 4,390,000 shares were reserved for issuance upon conversion of the Company's 5% Convertible Subordinated Debentures due 2000 (all of which were issued on October 25, 1996 in connection with a redemption call), 7,636,363 shares were reserved for issuance upon conversion of the Company's 6% Convertible Subordinated Notes due 2005 and an aggregate of 4,396,594 shares were reserved for issuance upon exercise of options either outstanding or available for future grant under the Company's stock option plans for employees and directors. COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record by them on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors; thus, the holders of shares having more than 50% of the Company's voting power (including both common and voting preferred shares) voting for the election of directors can elect all of the directors. The holders of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefor, subject to the prior rights of preferred stockholders. In the event of liquidation, dissolution or winding up of the Company's affairs, the holders of Common Stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, including any preferred stock, that has preference over the Common Stock. Except as described below under "Stock Purchase Rights," holders of shares of Common Stock, as such, have no conversion, preemptive or other subscription rights, and there are no redemption or sinking fund provisions applicable to the Common Stock. PREFERRED STOCK Shares of preferred stock may be issued without stockholder approval. The Board of Directors is authorized to issue such shares in one or more series and to fix the rights, preferences, privileges, qualifications, limitations and restrictions thereof, including dividend rights and rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without any vote or action by the stockholders. The Company has no current plans for the issuance of any shares of preferred stock. Any preferred stock to be issued could rank prior to the Common Stock with respect to dividend rights and rights of liquidation. The Board of Directors, without stockholder approval, may issue preferred stock with voting and conversion rights that could adversely affect the voting power of holders of Common Stock or create impediments to persons seeking to gain control of the Company. STOCK PURCHASE RIGHTS Laidlaw, which, as of October 31, 1996, held 3,750,093 shares of Common Stock, has certain rights to purchase voting securities of the Company in order to maintain its percentage voting interest. Except in connection with mergers or other acquisitions or in the ordinary course under an employee stock option or stock bonus plan, in the event the Company proposes to sell or issue shares of voting securities, Laidlaw has the right to purchase, on the same terms as the proposed sale or issuance, that number of shares or rights as will maintain its percentage interest in the voting securities of the Company, assuming the conversion of all convertible securities and the exercise of all options and warrants then outstanding. In addition, Laidlaw has other purchase rights with respect to sales or issuances of securities by the Company at prices below 85% of current market price at the time of sale or issuance or the prevailing customary price for such securities or their equivalent. CERTAIN VOTING ARRANGEMENTS Pursuant to the agreements whereby the Company acquired Smogless S.p.A. in September 1994, Laidlaw has agreed to vote all shares owned by it for the nominees of the Company's Board for election to the Board, 63 and on all other matters in the same proportion as the votes cast by other holders of voting securities, other than those that relate to any business combination or similar transaction involving the Company or any amendment to the Company's Certificate of Incorporation or Bylaws. CERTAIN CHARTER AND BYLAW PROVISIONS The Company's Certificate of Incorporation (the "Certificate") places certain restrictions on the voting rights of a "Related Person," defined therein as any person who directly or indirectly owns 5% or more of the outstanding voting stock of the Company. The founders and the original directors of the Company are excluded from the definition of "Related Persons," as are seven named individuals including Richard J. Heckmann, the Chairman of the Board, President and Chief Executive Officer of the Company. These voting restrictions apply in two situations. First, the vote of a director who is also a Related Person is not counted in the vote of the Board of Directors to call a meeting of stockholders where that meeting will consider a proposal made by the Related Person director. Second, any amendments to the Certificate that relate to specified Articles therein (those dealing with corporate governance, limitation of director liability or amendments to the Certificate), in addition to being approved by the Board of Directors and a majority of the Company's outstanding voting stock, must also be approved by either (i) a majority of directors who are not Related Persons, or (ii) the holders of at least 80% of the Company's outstanding voting stock, provided that if the change was proposed by or on behalf of a Related Person, then approval by the holders of a majority of the outstanding voting stock not held by Related Persons is also required. In addition, any amendment to the Company's Bylaws must be approved by one of the methods specified in clauses (i) and (ii) in the preceding sentence. The Certificate and the Company's Bylaws provide that the Board of Directors shall fix the number of directors and that the Board shall be divided into three classes, each consisting of one-third of the total number of directors (or as nearly as may be possible). Stockholders may not take action by written consent. Meetings of stockholders may be called only by the Board of Directors (or by a majority of its members). Stockholder proposals, including director nominations, may be considered at a meeting only if written notice of that proposal is delivered to the Company from 30 to 60 days in advance of the meeting, or within ten days after notice of the meeting is first given to stockholders. DELAWARE ANTI-TAKEOVER LAW Section 203 of the Delaware General Corporation Law ("Section 203") provides, in general, that a stockholder acquiring more than 15% of the outstanding voting shares of a corporation subject to the statute (an "Interested Stockholder"), but less than 85% of such shares, may not engage in certain "Business Combinations" with the corporation for a period of three years subsequent to the date on which the stockholder became an Interested Stockholder unless (i) prior to such date the corporation's board of directors has approved either the Business Combination or the transaction in which the stockholder became an Interested Stockholder or (ii) the Business Combination is approved by the corporation's board of directors and authorized by a vote of at least two-thirds of the outstanding voting stock of the corporation not owned by the Interested Stockholder. Section 203 defines the term "Business Combination" to encompass a wide variety of transactions with or caused by an Interested Stockholder in which the Interested Stockholder receives or could receive a benefit on other than a pro rata basis with other stockholders, including mergers, certain asset sales, certain issuances of additional shares to the Interested Stockholder, transactions with the corporation that increase the proportionate interest of the Interested Stockholder or transactions in which the Interested Stockholder receives certain other benefits. These provisions could have the effect of delaying, deferring or preventing a change of control of the Company. The Company's stockholders, by adopting an amendment to the Certificate or Bylaws of the Company, may elect not to be governed by Section 203, effective twelve months after adoption. Neither the Certificate nor the Bylaws of the Company currently excludes the Company from the restrictions imposed by Section 203. 64 CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following is a summary of certain Federal income tax considerations for original purchasers of the Notes and is based on the Company's review and analysis of the Federal income tax law now in effect, which is subject to change, possibly retroactively. This summary does not discuss all aspects of Federal income taxation that may be relevant to particular holders of Notes in light of their individual investment circumstances or to certain types of investors subject to special tax rules (e.g., financial institutions, insurance companies, tax-exempt organizations, and foreign taxpayers), nor does it discuss any aspects of state, local or foreign tax law consequences. This summary assumes that investors will hold their Notes as "capital assets" (generally, property held for investment) under the Internal Revenue Code of 1986, as amended. Prospective purchasers are urged to consult their tax advisors regarding the specific Federal, state, local, and foreign income and other tax consequences of purchasing, holding, converting, and disposing of the Notes. SALE OR EXCHANGE A holder will recognize capital gain or loss upon the sale or other disposition of a Note in an amount equal to the difference between the amount realized from such disposition and his tax basis in the Note. Such gain or loss will be long-term if the Note has been held for more than one year. CONVERSION A holder's conversion of a Note into Common Stock is generally not a taxable event (except with respect to cash received in lieu of a fractional share). The holder's tax basis in the Common Stock received on conversion of a Note will be the same as the holder's tax basis in the Note at the time of conversion (exclusive of any tax basis allocable to a fractional share), and the holding period for the Common Stock received on conversion will include the holding period of the Note converted. CONSTRUCTIVE DIVIDEND If at any time the Company makes a distribution of property to shareholders that would be taxable to such shareholders as a dividend for Federal income tax purposes and, in accordance with the antidilution provisions of the Notes, the Conversion Price of the Notes is decreased, the amount of such decrease may be deemed to be the payment of a taxable dividend to holders. For example, a decrease in the Conversion Price in the event of distributions of evidence of indebtedness or assets of the Company will generally result in deemed dividend treatment to holders, but generally a decrease in the event of stock dividends or the distribution of rights to subscribe for shares will not. See "Description of the Notes--Conversion Rights." 65 UNDERWRITING Subject to the terms and conditions contained in the Underwriting Agreement (the "Underwriting Agreement"), each of the several Underwriters named below has severally agreed to purchase from the Company the principal amount of Notes set forth opposite its name below, at the public offering price set forth on the cover page of this Prospectus, less the underwriting discount:
PRINCIPAL AMOUNT OF UNDERWRITERS NOTES ------------ ------------ Donaldson, Lufkin & Jenrette Securities Corporation............ $ Salomon Brothers Inc........................................... Deutsche Morgan Grenfell Inc................................... NatWest Securities Limited..................................... Smith Barney Inc. ............................................. ------------ Total........................................................ $300,000,000 ============
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the Notes offered hereby are subject to approval of certain legal matters by counsel and to certain other conditions. If any of the Notes are purchased by the Underwriters pursuant to the Underwriting Agreement, all such Notes (other than those covered by the over-allotment option described below) must be purchased. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Representatives have advised the Company that the Underwriters propose to offer the Notes to the public initially at the price set forth on the cover page of this Prospectus and to certain dealers (who may include the Underwriters) at such price, less a concession not in excess of % of the principal amount of the Notes. The Underwriters may allow, and such dealers may re-allow, discounts not in excess of % of the principal amount of the Notes to any other Underwriter and certain other dealers. After the Offerings, the offering price and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option to purchase up to an additional $45,000,000 aggregate principal amount of the Notes, at the initial public offering price less underwriting discounts and commissions, solely to cover over-allotments. Such option may be exercised at any time until 30 days after the date of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase an amount of Notes proportionate to such Underwriter's initial commitment as indicated in the preceding table. The Company and its executive officers and directors, and certain other stockholders, who collectively are the beneficial owners of an aggregate of 12,680,874 shares of Common Stock, have agreed, subject to certain exceptions, with the Underwriters not to, directly or indirectly, offer, sell, contract to sell, grant any option to purchase or otherwise dispose of, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), any shares of Common Stock or any securities convertible into or exercisable or exchangeable for, or warrants, options or rights to purchase or acquire, Common Stock or in any other manner transfer all or a portion of the economic consequences associated with the ownership of any Common Stock, or enter into any agreement to do any of the foregoing, for a period of 90 days after the date of this Prospectus. The Notes will constitute a new issue of securities with no established trading market. The Underwriters presently intend to make a market in the Notes. However, the Underwriters are not obligated to do so and any market- making activities may be discontinued at any time without notice. Application will be made to list the Notes on the New York Stock Exchange. However, no assurance can be given that an active trading market for the Notes will develop or, if such market develops, as to the liquidity or sustainability of such market. 66 DLJ has in the past provided, and may in the future provide, investment banking services for the Company. Affiliates of DLJ and Deutsche Morgan Grenfell Inc. are certain of the lenders party to the Credit Agreement. Additionally, certain of the Underwriters are participating as underwriters in the Common Stock Offerings. LEGAL MATTERS The valid issuance of the Notes offered hereby will be passed upon for the Company by Damian C. Georgino, Vice President, General Counsel and Secretary of the Company. Certain legal matters will be passed upon for the Company by Kirkpatrick & Lockhart LLP, Pittsburgh, Pennsylvania, and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California. INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The consolidated financial statements of United States Filter Corporation and its subsidiaries as of March 31, 1995 and 1996 and for each of the three years in the period ended March 31, 1996, except for the consolidated financial statements of Davis Water & Waste Industries, Inc. and its subsidiaries as of April 30, 1996 and 1995 and for each of the three years in the period ended April 30, 1996, have been audited by KPMG Peat Marwick LLP, independent certified public accountants, as stated in their report appearing herein and in the Registration Statement. The consolidated financial statements of Davis Water & Waste Industries, Inc. and its subsidiaries, which have been consolidated with those of the Company, have been audited by Price Waterhouse LLP as stated in their report included herein. Such financial statements of the Company and its consolidated subsidiaries are included herein in reliance upon the report of such firms. Both of the foregoing accounting firms are independent auditors. The combined financial statements of the Systems and Manufacturing Group of Wheelabrator Technologies Inc. as of December 31, 1994 and 1995 and for each of the years in the three year period ended December 31, 1995 have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, which report is included herein, and upon the authority of said firm as experts in accounting and auditing. The aggregated financial statements of the United Utilities Plc Process Equipment Division as of March 31, 1996 and 1995 and for each of the years in the two year period ended March 31, 1996 have been included herein and in the Registration Statement in reliance upon the report of KPMG Audit Plc, independent chartered accountants, which report is included herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Davis Water & Waste Industries, Inc. incorporated in this Prospectus by reference to the audited historical financial statements included in United States Filter Corporation's Form 8-K dated June 27, 1996 have been so incorporated in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of Zimpro Environmental, Inc. as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 incorporated herein by reference, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon incorporated by reference elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The audited financial statements of WaterPro Supplies Corporation as of December 31, 1995 and for the period from April 7, 1995 to December 31, 1995 incorporated by reference in this prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants as indicated in their report with respect thereto, and are incorporated by reference herein in reliance upon the authority of said firm as experts in giving said report. 67 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act, and in accordance therewith files periodic reports, proxy solicitation materials and other information with the Commission. Such reports, proxy solicitation materials and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Seven World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can also be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Such reports, proxy and information statements and other information may be found at the Commission's Web site address, http://www.sec.gov. The Common Stock is listed on the New York Stock Exchange. Such reports, proxy solicitation materials and other information can also be inspected and copied at the New York Stock Exchange at 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a registration statement on Form S-3 (herein, together with all amendments and exhibits thereto, referred to as the "Registration Statement") under the Securities Act, with respect to the offering made hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which are omitted in accordance with the rules and regulations of the Commission. Such additional information may be obtained from the Commission's principal office in Washington, D.C. as set forth above. For further information, reference is hereby made to the Registration Statement, including the exhibits filed as a part thereof or incorporated by reference therein. Statements made in this Prospectus as to the contents of any documents referred to are not necessarily complete, and in each instance reference is made to such exhibit for a more complete description and each such statement is modified in its entirety by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission (File No. 1-10728) pursuant to the Exchange Act are incorporated herein by reference: the Company's Annual Report on Form 10-K for the year ended March 31, 1996; the Company's Quarterly Reports on Form 10-Q for the quarters ended June 30, 1996 and September 30, 1996; the Company's Current Reports on Form 8-K dated May 31, 1996 (as amended on Form 8-K/A dated June 28, 1996), June 10, 1996, June 27, 1996, July 15, 1996 (two such Current Reports), August 23, 1996, September 6, 1996, October 28, 1996, November 6, 1996 and December 2, 1996; and the description of the Common Stock contained in the Company's Registration Statement on Form 8-A, as the same may be amended. All reports and other documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering made by this Prospectus shall be deemed to be incorporated by reference herein. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is incorporated or deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, a copy of any or all of the documents that are incorporated herein by reference, other than exhibits to such information (unless such exhibits are specifically incorporated by reference into such documents). Requests should be directed to the Vice President, General Counsel and Secretary of United States Filter Corporation at 40-004 Cook Street, Palm Desert, California 92211 (telephone (619) 340-0098). 68 INDEX TO FINANCIAL STATEMENTS
PAGE ---- UNITED STATES FILTER CORPORATION Independent Auditors' Report--KPMG Peat Marwick LLP....................... F-2 Report of Independent Accountants--Price Waterhouse LLP................... F-3 Financial Statements: Consolidated Balance Sheets as of March 31, 1995 and 1996 and September 30, 1996 (unaudited)................................................... F-4 Consolidated Statements of Operations for the Years Ended March 31, 1994, 1995 and 1996 and the six months ended September 30, 1995 and 1996 (unaudited)....................................................... F-6 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1994, 1995 and 1996 and the six months ended September 30, 1996 (unaudited)....................................................... F-7 Consolidated Statements of Cash Flows for the Years Ended March 31, 1994, 1995 and 1996 and the six months ended September 30, 1995 and 1996 (unaudited)....................................................... F-9 Notes to Consolidated Financial Statements.............................. F-11 WHEELABRATOR TECHNOLOGIES INC.--SYSTEMS AND MANUFACTURING GROUP Independent Auditors' Report--KPMG Peat Marwick LLP....................... F-30 Financial Statements: Combined Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996 (unaudited)................................................... F-31 Combined Income Statements for the years ended December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1995 and 1996 (unaudited)............................................................ F-32 Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1995 and 1996 (unaudited)............................................................ F-33 Notes to Combined Financial Statements.................................. F-34 UNITED UTILITIES PLC--PROCESS DIVISION Statement of United Utilities Plc directors' responsibilities............. F-40 Auditors' Report to the Board of Directors of United Utilities Plc--KPMG Audit Plc ............................................................... F-41 Financial Statements: Profit and Loss Account for the years ended March 31, 1996 and 1995 and the six months ended September 30, 1995 and 1996 (unaudited)........... F-42 Balance Sheets as of March 31, 1996 and 1995 and September 30, 1996 (unaudited)............................................................ F-43 Cash Flow Statement for the year ended March 31, 1996................... F-44 Notes to Financial Statements .......................................... F-45
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders United States Filter Corporation: We have audited the accompanying consolidated balance sheets of United States Filter Corporation and subsidiaries as of March 31, 1995 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the consolidated financial statements of Davis Water & Waste Industries, Inc., which statements reflect total assets constituting 17 percent and 9 percent in 1995 and 1996, respectively, and total revenues constituting 49 percent, 42 percent and 31 percent in 1994, 1995 and 1996, respectively, of the related consolidated totals. Those consolidated financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Davis Water & Waste Industries, Inc., is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United States Filter Corporation and subsidiaries as of March 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Orange County, California June 7, 1996, except as to the acquisitions of Davis Water & Waste Industries, Inc. and Zimpro Environmental Inc., which are as of August 23, 1996 and May 31, 1996, respectively, the common stock split, which is as of July 15, 1996, and note 20 which is as of October 28, 1996. F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of DAVIS WATER & WASTE INDUSTRIES, Inc. In our opinion, the consolidated balance sheet and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows of Davis Water & Waste Industries, Inc. and its subsidiaries (not presented seperately herein) present fairly, in all material respects, their financial position at April 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Davis Water & Waste Industries, Inc. and its subsidiaries for any period subsequent to April 30, 1996. Price Waterhouse LLP Atlanta, Georgia June 13, 1996 F-3 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, ------------------------- SEPTEMBER 30, 1995 1996 1996 ------------ ------------ ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents (note 2).... $ 20,020,000 $ 18,405,000 $ 19,488,000 Short-term investments (note 3)....... 2,418,000 65,000 816,000 Accounts receivable, less allowance for doubtful accounts of $4,643,000 at March 31, 1995, $9,857,000 at March 31, 1996 and $9,797,000 at September 30, 1996 (unaudited) (note 10)............................ 138,891,000 218,855,000 213,594,000 Costs and estimated earnings in excess of billings on uncompleted contracts (note 10)............................ 21,808,000 33,575,000 52,802,000 Inventories (note 4).................. 55,328,000 75,313,000 88,230,000 Prepaid expenses...................... 3,489,000 7,922,000 11,981,000 Deferred taxes (note 14).............. 9,746,000 7,771,000 7,771,000 Other current assets.................. 6,882,000 10,073,000 9,614,000 ------------ ------------ ------------ Total current assets............... 258,582,000 371,979,000 404,296,000 ------------ ------------ ------------ Property, plant and equipment, net (notes 5 and 11)...................... 79,495,000 165,989,000 178,362,000 Investment in leasehold interests, net (note 6).............................. 20,390,000 27,688,000 27,057,000 Cost in excess of net assets of busi- nesses acquired, net (notes 7 and 9).. 99,162,000 271,891,000 276,627,000 Other assets (note 8).................. 25,094,000 38,958,000 50,317,000 ------------ ------------ ------------ $482,723,000 $876,505,000 $936,659,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--(CONTINUED)
MARCH 31, -------------------------- SEPTEMBER 30, 1995 1996 1996 ------------ ------------ ------------- (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable..................... $ 64,478,000 $100,224,000 $101,329,000 Accrued liabilities (note 13)........ 50,684,000 102,415,000 102,000,000 Current portion of long-term debt (note 11)........................... 4,336,000 7,892,000 1,386,000 Billings in excess of costs and estimated earnings on uncompleted contracts (note 10)................. 19,263,000 15,797,000 19,631,000 Other current liabilities............ 5,849,000 21,894,000 11,344,000 ------------ ------------ ------------ Total current liabilities......... 144,610,000 248,222,000 235,690,000 ------------ ------------ ------------ Notes payable (note 11)............... 37,648,000 35,756,000 81,156,000 Long-term debt, excluding current por- tion (note 11)....................... 15,132,000 9,788,000 7,617,000 Convertible subordinated debentures (note 12)............................ 105,000,000 200,000,000 193,565,000 Deferred taxes (note 14).............. 8,293,000 1,223,000 1,223,000 Other liabilities..................... 5,162,000 13,015,000 17,405,000 ------------ ------------ ------------ Total liabilities................. 315,845,000 508,004,000 536,656,000 ------------ ------------ ------------ Shareholders' equity (notes 9 and 15): Series A voting cumulative convertible preferred stock, $.10 par value, $25 liquidation preference. Authorized and issued 880,000 shares at March 31, 1995.... 22,071,000 -- -- Series B voting convertible preferred stock, $.10 par value, $27 liquidation preference. Authorized 250,000 shares; outstanding 185,185 shares at March 31, 1995............................ 3,506,000 -- -- Common stock, par value $.01. Authorized 150,000,000 shares; issued and outstanding 28,524,965 and 47,873,133 and 49,280,734 at March 31, 1995 and 1996, and September 30, 1996 (unaudited), respectively........................ 209,000 338,000 493,000 Additional paid-in capital........... 145,224,000 351,254,000 370,625,000 Currency translation adjustment...... (2,026,000) 1,836,000 2,691,000 Retained earnings (accumulated defi- cit)................................ (2,106,000) 15,073,000 26,194,000 ------------ ------------ ------------ Total shareholders' equity........ 166,878,000 368,501,000 400,003,000 Commitments and contingencies (notes 11, 15, 16 and 18) Subsequent events (notes 9 and 20).... ------------ ------------ ------------ $482,723,000 $876,505,000 $936,659,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-5 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEARS ENDED MARCH 31, SEPTEMBER 30, ---------------------------------------- -------------------------- 1994 1995 1996 1995 1996 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Revenues................ $412,512,000 $519,359,000 $727,903,000 $332,099,000 $433,719,000 Costs of sales.......... 326,848,000 398,755,000 538,573,000 247,093,000 315,398,000 ------------ ------------ ------------ ------------ ------------ Gross profit.......... 85,664,000 120,604,000 189,330,000 85,006,000 118,321,000 Selling, general and administrative expenses............... 90,719,000 97,481,000 148,683,000 64,368,000 86,140,000 Merger expenses......... -- -- -- -- 5,581,000 ------------ ------------ ------------ ------------ ------------ Operating income (loss)............... (5,055,000) 23,123,000 40,647,000 20,638,000 26,600,000 Other income (expense): Interest expense....... (4,044,000) (7,514,000) (14,419,000) (6,548,000) (7,972,000) Interest income and other................. (7,382,000) 1,442,000 5,134,000 1,363,000 1,004,000 ------------ ------------ ------------ ------------ ------------ (11,426,000) (6,072,000) (9,285,000) (5,185,000) (6,968,000) ------------ ------------ ------------ ------------ ------------ Income (loss) before income tax expense (benefit)............ (16,481,000) 17,051,000 31,362,000 15,453,000 19,632,000 Income tax expense (benefit) (note 14).... (7,087,000) 4,812,000 12,055,000 4,743,000 5,404,000 ------------ ------------ ------------ ------------ ------------ Net income (loss)..... $ (9,394,000) $ 12,239,000 $ 19,307,000 $ 10,710,000 $ 14,228,000 ============ ============ ============ ============ ============ Net income (loss) per common share (primary and fully diluted) (notes 1 and 15) after reduction for dividends on preferred stock of $.03, $.02 and $.01 for the years ended March 31, 1994, 1995 and 1996, respectively..... $ (0.42) $ 0.41 $ 0.45 $ 0.27 $ 0.28 ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. F-6 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 1994, 1995 AND 1996, AND SIX MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
CONVERTIBLE PREFERRED STOCK COMMON STOCK RETAINED --------------------- ------------------- ADDITIONAL CURRENCY EARNINGS NUMBER OF NUMBER OF PAID-IN TRANSLATION (ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) TOTAL --------- ----------- ---------- -------- ----------- ----------- ------------ ----------- Balance at March 31, 1993, as previously reported............... 880,000 $22,071,000 16,622,261 $ 74,000 79,456,000 304,000 (22,274,000) 79,631,000 Restatement for acquisitions of Zimpro and Davis, acquired through pooling of interests (note 9)..... -- -- 5,694,960 57,000 13,656,000 -- 19,697,000 33,410,000 --------- ----------- ---------- -------- ----------- ---------- ----------- ----------- Balance at March 31, 1993, restated......... 880,000 22,071,000 22,317,221 131,000 93,112,000 304,000 (2,577,000) 113,041,000 Compensation related to excess of fair value of director stock options over exercise price (note 15).............. -- -- -- -- 80,000 -- -- 80,000 Exercise of common stock options (note 15)...... -- -- 236,931 1,000 1,254,000 -- -- 1,255,000 Issuance of common stock in connection with acquisitions (note 9).. -- -- 4,585,122 20,000 48,469,000 -- -- 48,489,000 Dividends paid on preferred stock (note 15).............. -- -- -- -- -- -- (701,000) (701,000) Shareholders' equity transactions of Liquipure, Zimpro and Davis prior to merger.. -- -- -- -- 14,000 -- (203,000) (189,000) Currency translation adjustment............. -- -- -- -- -- (560,000) -- (560,000) Net loss................ -- -- -- -- -- -- (9,394,000) (9,394,000) --------- ----------- ---------- -------- ----------- ---------- ----------- ----------- Balance at March 31, 1994................... 880,000 22,071,000 27,139,274 152,000 142,929,000 (256,000) (12,875,000) 152,021,000 Net loss of Liquipure for the three months ended March 31, 1994 (note 9)............... -- -- -- -- -- -- (313,000) (313,000) Compensation related to excess of fair value of director stock options over exercise price (note 15).............. -- -- -- -- 122,000 -- -- 122,000 Exercise of common stock options (note 15)...... -- -- 241,040 2,000 1,420,000 -- -- 1,422,000 Issuance of common stock in connection with acquisitions (note 9).. -- -- 1,056,151 5,000 8,982,000 -- -- 8,987,000 Dividends paid on preferred stock (note 15).............. -- -- -- -- -- -- (715,000) (715,000) Reduction in valuation of common stock issued in connection with Ionpure acquisition (note 9)............... -- -- -- -- (9,123,000) -- -- (9,123,000) Preferred stock issued in connection with acquisition of Smogless (note 9)............... 185,185 3,506,000 -- -- -- -- -- 3,506,000 Issuance of common stock to pay off indebtedness (note 9)............... -- -- 88,500 -- 700,000 -- -- 700,000 Par value of shares issued in connection with three-for-two stock split (note 15).. -- -- -- 50,000 (50,000) -- -- -- Income tax benefit from exercise of stock options................ -- -- -- -- 387,000 -- -- 387,000 Shareholders' equity transactions of Zimpro and Davis prior to merger................. -- -- -- -- (143,000) -- (442,000) (585,000) Currency translation adjustment............. -- -- -- -- -- (1,770,000) -- (1,770,000) Net income.............. -- -- -- -- -- -- 12,239,000 12,239,000 --------- ----------- ---------- -------- ----------- ---------- ----------- ----------- Balance at March 31, 1995................... 1,065,185 $25,577,000 28,524,965 209,000 145,224,000 (2,026,000) (2,106,000) 166,878,000
See accompanying notes to consolidated financial statements. F-7 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--(CONTINUED)
CONVERTIBLE PREFERRED STOCK COMMON STOCK RETAINED ----------------------- ------------------- ADDITIONAL CURRENCY EARNINGS NUMBER NUMBER OF PAID-IN TRANSLATION (ACCUMULATED OF SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) TOTAL --------- ------------ ---------- -------- ----------- ----------- ------------ ----------- Compensation related to excess of fair value of director stock options over exercise price (note 15).............. -- $ -- -- $ -- 112,000 -- -- 112,000 Conversion of preferred shares to common shares (note 15).............. (925,667) (22,936,000) 2,082,750 14,000 22,922,000 -- -- -- Redemption of Series B convertible preferred stock (note 15)........ (139,518) (2,641,000) -- -- (2,068,000) -- -- (4,709,000) Issuance of common stock in connection with acquisitions (note 9).. -- -- 2,453,411 16,000 36,284,000 -- -- 36,300,000 Shares issued through public offering, net of offering costs of $6,106,000 (note 15)... -- -- 10,350,000 69,000 97,325,000 -- -- 97,394,000 Conversion of subordinated debentures to common stock (note 12).................... -- -- 3,750,000 25,000 44,975,000 -- -- 45,000,000 Dividends paid on preferred stock (note 15).................... -- -- -- -- -- -- (715,000) (715,000) Exercise of common stock options (note 15)...... -- -- 487,885 3,000 3,678,000 -- -- 3,681,000 Issuance of common stock to acquire assets (note 15).................... -- -- 224,122 2,000 2,974,000 -- -- 2,976,000 Shareholders' equity transactions of Zimpro and Davis prior to merger................. -- -- -- -- (172,000) -- (1,413,000) (1,585,000) Currency translation adjustment............. -- -- -- -- -- 3,862,000 -- 3,862,000 Net income.............. -- -- -- -- -- -- 19,307,000 19,307,000 -------- ------------ ---------- -------- ----------- --------- ---------- ----------- Balance at March 31, 1996 .................. -- -- 47,873,133 338,000 351,254,000 1,836,000 15,073,000 368,501,000 Net loss of Zimpro for the three months ended March 31, 1996 (note 9) (unaudited) ........... -- -- -- -- -- -- (606,000) (606,000) Exercise of common stock options (unaudited) ... -- -- 252,635 2,000 1,214,000 -- -- 1,216,000 Issuance of common stock in connection with acquisitions (unaudited) ........... -- -- 511,412 4,000 8,404,000 -- -- 8,408,000 Shareholders' equity transactions of Zimpro and Davis prior to merger (unaudited) .... -- -- -- -- 132,000 -- (2,501,000) (2,369,000) Issuance of common stock to pay off indebtedness (unaudited) ........... -- -- 172,491 1,000 3,334,000 -- -- 3,335,000 Conversion of subordinated debentures to common stock (unaudited) ........... -- -- 471,063 5,000 6,430,000 -- -- 6,435,000 Par value of shares issued in connection with three-for-two stock split (note 15) (unaudited)............ -- -- -- 143,000 (143,000) -- -- 0 Currency translation adjustment (unaudited) ....................... -- -- -- -- -- 855,000 -- 855,000 Net income (unaudited) . -- -- -- -- -- -- 14,228,000 14,228,000 -------- ------------ ---------- -------- ----------- --------- ---------- ----------- Balance at September 30, 1996 (unaudited)....... -- $ -- 49,280,734 $493,000 370,625,000 2,691,000 26,194,000 400,003,000 ======== ============ ========== ======== =========== ========= ========== ===========
See accompanying notes to consolidated financial statements. F-8 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS YEARS ENDED MARCH 31, ENDED SEPTEMBER 30, ----------------------------------------- -------------------------- 1994 1995 1996 1995 1996 ------------ ------------ ------------- ------------ ------------ (UNAUDITED) Cash flows from operating activities: Net income (loss)..... $ (9,394,000) $ 12,239,000 $ 19,307,000 $ 10,710,000 $ 14,228,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Deferred income taxes. (9,281,000) 713,000 (4,479,000) 194,000 -- Depreciation and amortization......... 11,292,000 16,654,000 26,580,000 11,439,000 20,509,000 Provision for doubtful accounts............. 1,326,000 2,030,000 5,929,000 1,320,000 1,049,000 (Gain) loss on sale of property and equipment............ 81,000 388,000 (243,000) 128,000 (5,000) Stock and stock option compensation......... 80,000 122,000 112,000 56,000 -- (Decrease) increase in closure reserves and write off of intangible assets.... 12,633,000 (1,480,000) 768,000 (1,175,000) -- Change in operating assets and liabilities: (Increase) decrease in accounts receivable.......... (13,737,000) (6,966,000) (25,900,000) (2,446,000) 9,016,000 (Increase) decrease in costs and estimated earnings in excess of billings on uncompleted contracts........... (11,820,000) 2,046,000 (4,599,000) (12,409,000) (19,227,000) Increase in inventories......... (4,510,000) (5,016,000) (4,215,000) (11,361,000) (12,859,000) (Increase) decrease in prepaid expenses and other assets.... 608,000 (3,763,000) (7,055,000) (752,000) (15,684,000) Increase (decrease) in accounts payable and accrued expenses............ 15,283,000 (14,110,000) (1,726,000) (3,477,000) 3,726,000 Increase (decrease) in billings in excess of costs and estimated earnings on uncompleted contracts........... 866,000 2,529,000 (4,096,000) (3,968,000) 3,834,000 Increase (decrease) in other liabilities......... 50,000 (2,117,000) (725,000) (1,273,000) (6,559,000) ------------ ------------ ------------- ------------ ------------ Net cash provided by (used in) operating activities......... (6,523,000) 3,269,000 (342,000) (13,014,000) (1,972,000) ------------ ------------ ------------- ------------ ------------ Cash flows from investing activities: Investment in leasehold interests.. (15,766,000) (6,397,000) (8,347,000) -- -- Purchase of property, plant and equipment.. (8,050,000) (18,304,000) (28,392,000) (13,520,000) (29,905,000) Proceeds from disposal of equipment......... 252,000 877,000 7,670,000 1,287,000 203,000 Purchase of short-term investments.......... (58,411,000) (605,000) (2,591,000) (2,578,000) (755,000) Proceeds upon maturity of short-term investments.......... 42,786,000 13,812,000 12,529,000 2,461,000 4,000 Payment for purchase of acquisitions, net of cash acquired..... (987,000) (2,240,000) (206,600,000) (111,042,000) (7,369,000) ------------ ------------ ------------- ------------ ------------ Net cash used in investing activities......... (40,176,000) (12,857,000) (225,731,000) (123,392,000) (37,822,000) ------------ ------------ ------------- ------------ ------------ Cash flows from financing activities: Net proceeds from sale (purchase) of common stock................ 14,000 (164,000) 97,232,000 97,510,000 -- Net proceeds from sale of convertible subordinated debentures........... 57,923,000 -- 136,249,000 136,249,000 -- Proceeds from exercise of common stock options.............. 1,242,000 1,422,000 3,681,000 799,000 1,215,000 Principal payments of debt................. (56,572,000) (65,409,000) (72,347,000) (54,690,000) (5,342,000) Dividends paid........ (861,000) (1,136,000) (2,138,000) (891,000) (396,000) Payment to repurchase Series B preferred stock................ -- -- (4,709,000) (4,709,000) -- Net proceeds from borrowings on note payable.............. 57,638,000 74,678,000 66,490,000 32,519,000 45,400,000 ------------ ------------ ------------- ------------ ------------ Net cash provided by financing activities......... 59,384,000 9,391,000 224,458,000 206,787,000 40,877,000 ------------ ------------ ------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents........ 12,685,000 (197,000) (1,615,000) 70,381,000 1,083,000 Cash and cash equivalents at beginning of period... 7,532,000 20,217,000 20,020,000 20,020,000 18,405,000 ------------ ------------ ------------- ------------ ------------ Cash and cash equivalents at end of period................ $ 20,217,000 $ 20,020,000 $ 18,405,000 $ 90,401,000 $ 19,488,000 ============ ============ ============= ============ ============
See accompanying notes to consolidated financial statements. F-9 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
SIX MONTHS YEARS ENDED MARCH 31, ENDED SEPTEMBER 30, --------------------------------- --------------------- 1994 1995 1996 1995 1996 ---------- ---------- ----------- ---------- ---------- (UNAUDITED) Supplemental disclosures of cash flow information: Cash paid during the period for interest... $2,786,000 $7,603,000 $14,615,000 $5,087,000 $8,654,000 ========== ========== =========== ========== ========== Cash paid during the period for income taxes................. $1,709,000 $2,626,000 $ 6,807,000 $2,519,000 $4,553,000 ========== ========== =========== ========== ========== Noncash investing and financing activities consisted of the fol- lowing: Common stock issued: Satisfaction of debt.. $ -- $ 700,000 $ -- $ -- $ -- Conversion of debentures........... -- -- 45,000,000 -- -- Purchase of property.. -- -- 2,976,000 -- -- Property, plant and equipment exchanged for receivables....... -- -- 5,318,000 -- -- ---------- ---------- ----------- ---------- ---------- $ -- $ 700,000 $53,294,000 $ -- $ -- ========== ========== =========== ========== ==========
See accompanying notes to consolidated financial statements. F-10 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of United States Filter Corporation and its wholly owned subsidiaries (the "Company") (see note 9). All significant intercompany accounts and transactions have been eliminated in consolidation. REVENUE RECOGNITION Method of Accounting for Contracts The accounting records of the Company are maintained and income is reported for financial reporting and income tax purposes for long-term contracts principally under the percentage-of-completion method of accounting. Under this method, an estimated percentage for each contract, based on the cost of work performed to date that has contributed to contract performance compared to the total estimated cost, is applied to total estimated revenue. Provision is made for the entire amount of future estimated losses on contracts in progress in the period in which such losses are determined. Claims for additional contract compensation due the Company are not reflected in the accounts until the year in which such claims are allowed, except where contract terms specifically provide for certain claims. Contract costs include all direct material and labor and those indirect costs related to contract performance. General and administrative expenses are charged to expense as incurred. Products and Services Sales of other products and services are recorded as products are shipped or services rendered. INCOME TAXES The Company follows Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. United States income taxes are not provided on the undistributed earnings of its foreign subsidiaries as such earnings are intended to be indefinitely reinvested in those operations. FOREIGN CURRENCY TRANSLATION In accordance with Statement of Financial Accounting Standard No. 52, "Foreign Currency Translation," the assets and liabilities denominated in foreign currency are translated into U.S. dollars at the current rate of exchange existing at period-end and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are included as a separate component of shareholders' equity. The transaction gains and losses included in net income (loss) are immaterial. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. F-11 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the respective assets which range from 3 to 25 years. Leasehold improvements are amortized on the straight-line method over the lesser of their estimated useful lives or the related lease term. COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED Cost in excess of net assets of businesses acquired is amortized on the straight-line method principally over 40 years. The Company evaluates the recoverability of these costs based upon expectations of nondiscounted cash flows and operating income of each subsidiary. Based upon its most recent analysis, the Company believes that no material impairment exists at March 31, 1996. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES Investments in unconsolidated joint ventures are accounted for using the equity method, under which the Company's share of earnings or losses from these joint ventures is reflected in income as earned and dividends are credited against the investment when received. UNAMORTIZED DEBT ISSUANCE COSTS Unamortized debt issuance costs, aggregating $1,735,000 and $5,450,000 at March 31, 1995 and 1996, respectively, have been deferred and are being amortized over the term of the related convertible subordinated debentures (note 12). WARRANTIES The Company's products are generally under warranty against defects in material and workmanship for a period of one year. The Company has accrued for estimated future warranty costs. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short maturity of these instruments. The carrying amount of the Company's revolving credit facility approximates its fair value because the interest rate on the instrument changes with market interest rates. The fair value of the Company's long-term debt (including current portion) is estimated to be equal to the carrying amounts based on quoted market prices for similar issues or on the current rates offered to the Company for debt of the same remaining securities. RECLASSIFICATIONS Certain amounts in the 1995 consolidated financial statements have been reclassified to conform with the 1996 presentation. F-12 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements for the three months ended June 30, 1995 and 1996 are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring items, considered necessary for a fair presentation have been included. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted from the interim consolidated financial statements. The results of operations for the six months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending March 31, 1997. INCOME (LOSS) PER COMMON SHARE Income (loss) per common share is computed based on the weighted average number of shares outstanding. Common stock equivalents consisting of convertible preferred stock and options are included in the computation of income (loss) per share when their effect is dilutive. Primary and fully diluted income (loss) per common share were calculated as follows:
SIX MONTHS ENDED YEARS ENDED MARCH 31, SEPTEMBER 30, -------------------------------------- ------------------------ 1994 1995 1996 1995 1996 ------------ ----------- ----------- ----------- ----------- (UNAUDITED) Net income (loss)....... $ (9,394,000) $12,239,000 $19,307,000 $10,710,000 $14,228,000 Dividends on preferred stock.................. (701,000) (715,000) (536,000) (358,000) -- ------------ ----------- ----------- ----------- ----------- Adjusted net income (loss) applicable to common shares.......... $(10,095,000) $11,524,000 $18,771,000 $10,352,000 $14,228,000 ============ =========== =========== =========== =========== Weighted average shares outstanding............ 23,934,000 27,866,000 41,036,000 37,019,000 48,671,000 Add: Exercise of options reduced by the number of shares purchased with proceeds......... -- 369,000 1,123,000 892,000 1,958,000 ------------ ----------- ----------- ----------- ----------- Adjusted weighted average shares outstanding............ 23,934,000 28,235,000 42,159,000 37,911,000 50,629,000 ============ =========== =========== =========== =========== Income (loss) per common share: Net income (loss)..... $ (0.38) $ 0.43 $ 0.46 $ 0.28 $ 0.28 Dividends on preferred stock................ (0.03) (0.02) (0.01) (0.01) (0.00) ------------ ----------- ----------- ----------- ----------- Adjusted income (loss) per common share....... $ (0.42) $ 0.41 $ 0.45 $ 0.27 $ 0.28 ============ =========== =========== =========== ===========
On March 4, 1996, the preferred shareholder tendered its Series A Preferred stock for conversion into Company common stock thus eliminating further dividends (see note 15). (2) CASH AND CASH EQUIVALENTS Cash equivalents consist of demand deposits and certificates of deposit with original maturities of 90 days or less. (3) SHORT-TERM INVESTMENTS Short-term investments consist of highly liquid municipal issues with original maturities of more than 90 days when purchased, and are carried at amortized cost, which approximates market value. F-13 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (4) INVENTORIES Inventories at March 31, 1995 and 1996 and September 30, 1996 (unaudited) consist of:
MARCH 31, ----------------------- SEPTEMBER 30, 1995 1996 1996 ----------- ----------- ------------- (UNAUDITED) Raw materials.......................... $15,298,000 $21,578,000 $25,525,000 Work-in-process........................ 13,436,000 17,997,000 25,906,000 Finished goods......................... 26,594,000 35,738,000 36,799,000 ----------- ----------- ----------- $55,328,000 $75,313,000 $88,230,000 =========== =========== ===========
(5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at March 31, 1995 and 1996 consist of:
1995 1996 ------------ ------------ Land............................................. $ 4,352,000 $ 8,988,000 Buildings and improvements....................... 32,879,000 41,338,000 Equipment........................................ 55,068,000 129,903,000 Furniture and fixtures........................... 13,456,000 24,812,000 Vehicles......................................... 1,185,000 2,719,000 Construction in progress......................... 5,370,000 17,191,000 ------------ ------------ 112,310,000 224,951,000 Less accumulated depreciation.................... (32,815,000) (58,962,000) ------------ ------------ $ 79,495,000 $165,989,000 ============ ============
During fiscal 1996, the Company's Zimpro subsidiary (note 9) evaluated the ongoing value of equipment in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and Long- Lived Assets to be Disposed Of ("FAS 121"). Based upon this evaluation, it was determined that certain equipment with a carrying value of $768,000 was impaired and was written down by $689,000 to its estimated fair value. (6) INVESTMENT IN LEASEHOLD INTERESTS The Company has concession agreements to build and operate wastewater treatment plants in Mexico. The terms of the concessions are approximately 15 to 18 years, as amended, and include monthly payments to be received by the Company at various prices per cubic meter of sewage treated at the facilities based upon the Company's initial investments, fixed operating expenses and variable operating expenses. The Company is amortizing the investments on a straight-line basis over the terms of the concessions. Accumulated amortization at March 31, 1995 and 1996 totaled $955,000 and $2,026,000, respectively. The investments are stated at cost which does not exceed market based on projected non-discounted future cash flows. (7) COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED Cost in excess of net assets of businesses acquired and accumulated amortization at March 31, 1995 and 1996 consists of the following:
1995 1996 ------------ ------------ Cost in excess of net assets of businesses acquired...................................... $104,831,000 $283,275,000 Less accumulated amortization.................. (5,669,000) (11,384,000) ------------ ------------ $ 99,162,000 $271,891,000 ============ ============
F-14 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (8) OTHER ASSETS Other assets at March 31, 1995 and 1996 consist of:
1995 1996 ----------- ----------- Investment in unconsolidated joint ventures......... $ 7,592,000 $12,419,000 Long-term receivables and advances.................. 3,508,000 6,415,000 Other assets at amortized cost: Operating permits and development costs........... 1,819,000 1,212,000 Deferred debt costs............................... 1,735,000 5,450,000 Patents........................................... 4,355,000 2,469,000 Other............................................... 6,085,000 10,993,000 ----------- ----------- $25,094,000 $38,958,000 =========== ===========
The above amounts reflect accumulated amortization of $4,600,000 and $1,982,000 at March 31, 1995 and 1996, respectively. The carrying amount of these other assets approximate their fair value. During fiscal 1996, the Company's Zimpro subsidiary evaluated the ongoing value of certain patents in accordance with FAS 121. Based upon this evaluation, it was determined that patents with a carrying value of $3,556,000 were impaired and were written down by $2,648,000 to their estimated fair value. During the fourth quarter of fiscal 1994, the Company's Davis subsidiary (note 9) adopted a plan to shutdown or reorganize the operations of its wholly- owned subsidiary, The Taulman Company ("Taulman"). The pre-tax loss provision for these actions recorded in fiscal 1994 includes the write-off of intangible assets totaling $2,908,000 associated with Taulman and the accrual of $5,987,000 to provide for anticipated losses during the shutdown period. During fiscal 1995, an additional $678,000 was added to the accrual for future anticipated losses. The Taulman shutdown represents the discontinuation of a product line. Therefore, Taulman's results of operations through the fourth quarter of fiscal 1994 were included as components of continuing operations in the consolidated statement of operations for fiscal 1994. Taulman's results of operations during fiscal 1995, 1996 and in future periods have been or will be charged against the reserve for anticipated losses during the shutdown period. As of March 31, 1996 the balance in the reserve was $2,082,000. Certain income, expense, asset and liability information with respect to Taulman for the three most recent fiscal years is as follows:
AS OF OR FOR THE YEAR ENDED MARCH 31, ------------------------------- 1994 1995 1996 ---------- ---------- --------- Net sales............... 15,871,000 11,252,000 4,843,000 Cost of products sold... 14,465,000 9,791,000 5,370,000 Selling, general and administrative expense. 4,302,000 3,445,000 1,913,000 Assets.................. 12,523,000 5,252,000 3,626,000 Liabilities............. 10,111,000 2,614,000 2,730,000
(9) ACQUISITIONS On May 31, 1996, a wholly owned subsidiary of the Company merged with and into Zimpro Environmental, Inc. ("Zimpro"), in a tax free reorganization. In connection with this acquisition, the Company issued 877,611 shares of the Company's common stock for all of the outstanding common and preferred shares of Zimpro pursuant to an Agreement and Plan of Merger among the Company, Landegger Environmental Holdings, Inc., The Black Clawson Company, a trust, and two limited partnerships in the John Hancock Capital Growth Fund F-15 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ("The Hancock Funds") (collectively the "Stockholders"). In addition, the Company liquidated existing indebtedness to The Hancock Funds in exchange for 172,491 shares of Company common stock and $1,000,000 in cash. Zimpro, based in Wisconsin, manufactures wastewater treatment equipment with proprietary technologies in wet air oxidation, landfill leachate treatment systems, ground water remediation, filtration and sludge treatment systems. This transaction has been accounted for as a pooling of interests and, accordingly, the consolidated financial statements and notes thereto for all periods presented have been restated to include the accounts and operations of Zimpro. On August 23, 1996, the businesses of the Company and Davis Water & Waste Industries, Inc. ("Davis"), were merged upon the exchange of 4,817,349 shares of the Company's common stock for all of the outstanding common and shares of Davis pursuant to an Agreement and Plan of Merger between the Company and Davis. Davis manufactures and markets products relating to the distribution of water and wastewater. Davis also designs, engineers, manufactures, sells and installs water and wastewater treatment equipment to comply with applicable health and water quality standards. This transaction has been accounted for as a pooling of interests and, accordingly, the consolidated financial statements and notes thereto for all periods presented have been restated to include the accounts and operations of Davis. Separate results of operations of the combined entities for the years ended March 31, 1994, 1995 and 1996 and the six months ended September 30, 1995 and 1996 (unaudited) are as follows:
SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, --------------------------------------- -------------------------- 1994 1995 1996 1995 1996 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Revenues: U.S. Filter (as previously reported).. $180,421,000 $272,032,000 $472,537,000 $199,847,000 $433,719,000 Zimpro................. 29,470,000 31,678,000 28,877,000 13,702,000 -- Davis.................. 202,621,000 215,649,000 226,489,000 118,550,000 -- ------------ ------------ ------------ ------------ ------------ Combined............ $412,512,000 $519,359,000 $727,903,000 $332,099,000 $433,719,000 ============ ============ ============ ============ ============ Net income (loss) U.S. Filter (as previously reported).. $ (2,541,000) $ 8,331,000 $ 20,290,000 $ 7,868,000 $ 14,228,000 Zimpro................. (1,513,000) 460,000 (6,732,000) (136,000) -- Davis.................. (5,340,000) 3,448,000 5,749,000 2,978,000 -- ------------ ------------ ------------ ------------ ------------ Combined............ $ (9,394,000) $ 12,239,000 $ 19,307,000 $ 10,710,000 $ 14,228,000 ============ ============ ============ ============ ============ Net income (loss) per common share and common equivalent share: As previously reported. $ (0.17) $ 0.34 $ 0.54 $ 0.23 $ 0.28 ============ ============ ============ ============ ============ As restated............ $ (0.41) $ 0.41 $ 0.45 $ 0.27 $ 0.28 ============ ============ ============ ============ ============
F-16 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On October 2, 1995, the Company completed the acquisition of all of the outstanding capital stock of Polymetrics, Inc., and subsidiaries, a California corporation ("Polymetrics"), pursuant to a Stock Purchase Agreement dated as of August 30, 1995, as amended, between the Company and Anjou International Company, a U.S. subsidiary of Compagnie Generale des Eaux of France. The total purchase price for the acquisition of Polymetrics including acquisition costs, was approximately $60,200,000 consisting of $51,700,000 in cash and the delivery of 586,844 shares of Company common stock. The transaction was effective as of October 1, 1995. Polymetrics designs, manufactures, installs and services water treatment systems for the electronics, pharmaceutical, laboratory, power generation and cogeneration industries. Polymetrics also provides water treatment services, including service deionization ("SDI"). The acquisition of Polymetrics has been accounted for as a purchase and, accordingly, the results of operations of Polymetrics are included in the Company's consolidated statement of operations from the date of acquisition. The excess of fair value of net assets acquired was approximately $47,600,000 and is being amortized on a straight-line basis over 40 years. On August 11, 1995, the Company purchased substantially all of the assets and assumed certain liabilities of Continental H/2/O Services, Inc., d/b/a Interlake Water Systems, an Illinois corporation ("Interlake"), pursuant to an Asset Purchase Agreement among the Company, Interlake and the Stockholders of Interlake. The acquisition was effective as of August 1, 1995. The purchase price for the acquisition of Interlake, including acquisition costs, was approximately $27,100,000 consisting of $20,100,000 in cash and the delivery of 498,054 shares of Company common stock. Interlake provides water treatment services, including SDI, in Illinois and Michigan. In addition, Interlake sells and services a broad range of complex water treatment systems and was the largest distributor of the Company's Continental product line in the United States. The acquisition of Interlake has been accounted for as a purchase and, accordingly, the results of operations of Interlake are included in the Company's consolidated statements of operations from the date of acquisition. The excess of fair value of net assets acquired was approximately $19,000,000, and is being amortized on a straight-line basis over 40 years. On April 3, 1995, the Company acquired all of the outstanding capital stock of The Permutit Company Limited, a U.K. corporation, and The Permutit Company Pty. Ltd., an Australian corporation (collectively "The Permutit Group"), pursuant to a Share Purchase Agreement between the Company and Thames Water Plc, a U.K. corporation. The aggregate purchase price was approximately $10,000,000 and was paid entirely in cash. The Permutit Group provides a range of products, including pre-engineered water treatment systems for the pharmaceutical, laboratory and chemical markets and other commercial customers. The acquisition of The Permutit Group has been accounted for as a purchase and, accordingly, the results of operations of The Permutit Group are included in the Company's consolidated statements of operations from the date of acquisition. The excess of cost over fair value of net assets acquired was approximately $7,200,000 and is being amortized on a straight-line basis over 40 years. On May 4, 1995, the Company completed the acquisition of all of the outstanding capital stock of Arrowhead Industrial Water, Inc. ("AIW") from The B.F. Goodrich Company ("Goodrich") pursuant to a Stock Purchase Agreement dated as of February 27, 1995, as amended. The acquisition was effective as of April 30, 1995. The purchase price, as adjusted, was $84,300,000 consisting of $82,000,000 in cash and the delivery of 131,616 shares of Company common stock. AIW, headquartered in Lincolnshire, Illinois, is a supplier of owned and operated on-site industrial water treatment systems in the United States and also provides emergency and temporary mobile water treatment systems. F-17 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The acquisition of AIW has been accounted for as a purchase and, accordingly, the results of operations of AIW are included in the Company's consolidated statements of operations from the date of acquisition. The excess of fair value of net assets acquired was approximately $36,400,000 and is being amortized on a straight-line basis over 40 years. During the year ended March 31, 1996, the Company completed other acquisitions with an aggregate purchase price of approximately $58,900,000, consisting of $40,084,000 in cash and the delivery of 1,232,166 shares of Company Common Stock. The excess of fair value of net assets acquired was approximately $68,200,000, and is being amortized on a straight-line basis over 40 years. Supplementary information related to the acquisitions of Polymetrics, Interlake, The Permutit Group and AIW for the March 31, 1996 consolidated statement of cash flows is as follows: Assets acquired................................................ $230,986,000 Liabilities assumed............................................ (50,911,000) Common stock issued............................................ (17,484,000) ------------ Cash paid...................................................... 162,591,000 Fees and expenses.............................................. 1,514,000 Less cash acquired............................................. (894,000) ------------ Net cash paid................................................ $163,211,000 ============
Summarized below are the unaudited pro forma results of operations of the Company as though Polymetrics, Interlake, The Permutit Group and AIW had been acquired on April 1, 1994:
1995 1996 ------------ ------------- Revenue.......................................... $398,187,000 $ 508,783,000 ============ ============= Net income....................................... $ 7,039,000 $ 21,164,000 ============ ============= Net income per common share...................... $ 0.27 $ 0.55 ============ =============
On August 10, 1994, the Company acquired from Millipore Corporation the Ceraflo(R) ceramic product line. The total price of the product line was approximately $2,500,000 and consisted of 304,094 shares of Company common stock. On July 27, 1994, the Company acquired Seral Erich Alhauser GmbH ("Seral") by means of a purchase of Seral's outstanding capital stock. The total purchase price was $8,100,000 and consisted of $4,250,000 in cash and 450,000 shares of Company common stock. Seral, located in Germany, designs, manufactures, installs and services water purification products and systems. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of Seral are included in the Company's consolidated statement of operations for the period from the date of acquisition to March 31, 1995. The excess cost over the fair value of net assets acquired was approximately $8,222,000 and is being amortized on a straight-line basis over 40 years. On November 30, 1994, the Company completed the acquisition of the Crouzat Group ("Crouzat") by means of a purchase of all of Crouzat's outstanding capital stock. The total purchase price was $5,750,000, of which $4,640,000 was paid in cash at closing, with three annual payments of $370,000 in 1995, 1996 and 1997. Crouzat comprises three sites in France and primarily services ultrapure water purification products and had revenues in 1994 of approximately $6,000,000. The acquisition has been accounted for as a purchase and, F-18 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) accordingly, the results of the operations of Crouzat are included in the consolidated statement of operations for the period from the date of acquisition to March 31, 1995. The excess cost over the fair value of net assets acquired was approximately $3,800,000 and is being amortized on a straight-line basis over 40 years. On May 27, 1994, the Company completed the acquisition of Sation, S.A. ("Sation") by means of a purchase of all of Sation's outstanding capital stock. The total purchase price of $1,546,000 consisted of $755,000 in cash and 84,375 shares of Company stock. Sation, located in Barcelona, Spain, primarily services ultrapure water purification products. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of Sation are included in the Company's consolidated statement of operations for the period from the date of acquisition to March 31, 1995. The excess cost over the fair value of net assets acquired was $1,148,000 and is being amortized on a straight-line basis over 40 years. Effective August 31, 1994, the Company, through two of the Company's subsidiaries, acquired all of the outstanding capital stock of Smogless S.p.A. ("Smogless") from Laidlaw, Inc. The total consideration for the acquisition of Smogless (excluding acquisition costs of $396,000) consists of the following: (i) $45,000,000 in aggregate principal amount of subordinated debt of Ionpure Italy due August 31, 2001 and bearing interest at 6.5% for the period January 1, 1995 through September 30, 1995 and 4.5% thereafter, (ii) common stock purchase warrants exercisable in whole or part at any time on or before August 31, 2001 by the surrender of the subordinated debt at the rate of $12.00 in principal amount of subordinated debt for each share of common stock, (iii) 185,185 shares of a new Series B Voting Convertible Preferred Stock, (iv) 27,000 shares of the Company's common stock, and (v) $700,000 in cash. Smogless is headquartered in Milan, Italy and provides a broad range of services for wastewater treatment, including feasibility studies, process evaluation, plant design, construction and commissioning and design of specialized machinery. The acquisition of Smogless has been accounted for as a purchase and, accordingly, the results of operations of Smogless for the 7 months ended March 31, 1995 are included in the Company's consolidated statement of operations for the year ended March 31, 1995. The excess of cost over fair value of net assets acquired was approximately $39,340,000 and is being amortized on a straight-line basis over 40 years. Supplementary information related to the acquisitions of Seral, Crouzat, Sation and Smogless for the consolidated statement of cash flows for the year ended March 31, 1995 is as follows: Assets acquired............................................... $ 136,327,000 Liabilities assumed........................................... (117,641,000) Preferred stock issued........................................ (3,506,000) Common stock issued........................................... (4,835,000) ------------- Cash paid..................................................... 10,345,000 Fees and expenses............................................. 1,117,000 Less cash acquired............................................ (9,707,000) ------------- Net cash acquired........................................... $ 1,755,000 =============
Summarized below are the unaudited pro forma results of operations of the Company as though Smogless had been acquired on April 1, 1993:
1994 1995 ------------ ------------ Revenues......................................... $230,538,000 $293,104,000 ============ ============ Net income....................................... $ 526,000 $ 10,400,000 ============ ============ Net income (loss) per common share............... $ (0.01) $ 0.43 ============ ============
F-19 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On July 8, 1994, the business of the Company and Liquipure Technologies, Inc. ("Liquipure") were merged upon the exchange of 2,778,332 shares of the Company's common stock for all of the outstanding common and preferred shares of Liquipure. In addition, the Company issued 67,500 shares of its common stock to one of the shareholders of Liquipure in satisfaction of a $700,000 loan, plus accrued interest. Liquipure, based in Connecticut, provides SDI products and services through company operated and franchised dealers, and designs, manufactures, installs and services ultrapure water purification products and systems primarily for the pharmaceutical market and also manufactures standard, ultrapure water products for the laboratory market. This transaction has been accounted for as a pooling of interests and, accordingly, the consolidated financial statements and notes thereto for all periods presented have been restated to include the accounts and operations of Liquipure. Separate results of operations of the combined entities for the year ended March 31, 1994 are as follows:
1994 ------------ Revenues: U.S. Filter (as previously reported)......................... $147,870,000 Liquipure.................................................... 32,551,000 ------------ Combined.................................................. $180,421,000 ============ Net income (loss): U.S. Filter (as previously reported)......................... $ 4,986,000 Liquipure.................................................... (7,527,000) ------------ Combined.................................................. $ (2,541,000) ============
Separate unaudited results of operations of the combined entities for the period April 1, 1994 to the effective date of the merger and included in the consolidated statement of operations for the year ended March 31, 1995 are as follows:
NET INCOME REVENUES (LOSS) ----------- ---------- U.S. Filter.......................................... $47,857,000 $1,414,000 Liquipure............................................ 7,206,000 (307,000) ----------- ---------- Combined......................................... $55,063,000 $1,107,000 =========== ==========
All pro forma information presented above is in response to applicable accounting rules relating to business acquisitions. This pro forma information does not purport to be indicative of the results that actually would have been obtained if the combined operations had been conducted during the periods presented and is not intended to be a projection of future results due to extensive changes being made in the organization, facilities, personnel and other costs of the acquired companies. On December 1, 1993, the Company acquired all of the outstanding capital stock of Ionpure Technologies Corporation and IP Holdings Company. The total purchase price consisted of $100,000 in cash and 4,561,638 shares of Company Common Stock. In fiscal 1995, the Company received an independent appraisal of the value of the Company's Common Stock. As a result of the appraisal, shares issued in connection with this acquisition had a value $9,123,000 less than originally ascribed to the Common Stock at the time of acquisition. Accordingly, additional paid in capital and excess cost over fair value of net assets acquired were reduced in fiscal 1995. F-20 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (10) CONTRACT BILLING STATUS Information with respect to the billing status of contracts in process at March 31, 1995 and 1996 is as follows:
1995 1996 ------------- ------------- Contract costs incurred to date............... $ 143,886,000 $ 243,976,000 Estimated profits............................. 47,904,000 80,700,000 ------------- ------------- Contract revenue earned to date............... 191,790,000 324,676,000 Less billings to date......................... (189,245,000) (306,898,000) ------------- ------------- Cost and estimated earnings in excess of bill- ings, net.................................... $ 2,545,000 $ 17,778,000 ============= ============= The above amounts are included in the accompanying consolidated balance sheets as: 1995 1996 ------------- ------------- Costs and estimated earnings in excess of billings on uncompleted contracts............ $ 21,808,000 $ 33,575,000 Billings in excess of costs and estimated earnings on uncompleted contracts............ (19,263,000) (15,797,000) ------------- ------------- $ 2,545,000 $ 17,778,000 ============= ============= Accounts receivable include retainage which has been billed, but is not due pursuant to retainage provisions in construction contracts until completion of performance and acceptance by the customer. This retainage aggregated $5,729,000 and $4,760,000 at March 31, 1995 and 1996, respectively. Substantially all retained balances are collectible within one year. (11) LONG-TERM DEBT Long-term debt at March 31, 1995 and 1996 consists of the following: 1995 1996 ------------- ------------- Mortgage notes payable, secured by land and buildings, interest rates ranging from 2% to 8.5%, due in 1999 through 2009............... $ 7,396,000 $ 7,180,000 Guaranteed bank notes, interest rates ranging from 6.0% to 9.2%, due in 1997 through 2004.. 1,911,000 1,276,000 Unsecured notes payable, interest rates ranging from 7% to 11.5%, due in 1997 through 1999......................................... 1,353,000 1,007,000 Other......................................... 8,808,000 8,217,000 ------------- ------------- 19,468,000 17,680,000 Less current portion.......................... (4,336,000) (7,892,000) ------------- ------------- $ 15,132,000 $ 9,788,000 ============= =============
The aggregate maturities of long-term debt for each of the five years subsequent to March 31, 1996 are as follows: 1997, $7,892,000; 1998, $1,494,000; 1999, $815,000; 2000, $598,000; 2001, $580,000; and thereafter, $6,301,000. The Company has a long-term, unsecured revolving line of credit with a bank of up to $135,000,000, of which $30,413,000 was outstanding at March 31, 1996. The line of credit expires November 30, 1999 and bears interest at the bank's prime rate plus 0.25% or, in certain circumstances, Eurodollar rate. The line of credit is F-21 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) subject to certain covenants for which the Company was in compliance at March 31, 1996. At March 31, 1996, $14,036,000 of standby letters of credit were issued under this line of credit. The Company's Davis subsidiary had a long-term, secured revolving line of credit with a bank of up to $30,000,000, of which $5,343,000 was outstanding at March 31, 1996. This line of credit bore interest at the bank's prime rate or, in certain circumstances, LIBOR plus or minus various basis points. (12) CONVERTIBLE SUBORDINATED DEBENTURES On October 20, 1993, the Company sold $60,000,000 aggregate principal amount of 5% convertible subordinated debentures due October 15, 2000. The debentures are convertible into common stock at any time prior to maturity, redemption or repurchase at a conversion price of $13.67 per share, subject to adjustment in certain circumstances. The debentures are not redeemable prior to October 25, 1996, at which time the debentures are redeemable at the option of the Company, in whole or in part, at specified redemption prices plus accrued and unpaid interest to the date of redemption. Interest is payable on April 15 and October 15, commencing April 15, 1994. On September 18, 1995 the Company sold $140,000,000 aggregate principal amount of 6% Convertible Subordinated Notes due September 15, 2005. The notes are convertible into common stock at any time prior to maturity, redemption or repurchase at a conversion price of $18.33 per share, subject to adjustment in certain circumstances. The notes are not redeemable prior to September 23, 1998 at which time the notes are redeemable at the option of the Company, in whole or in part, at specified redemption prices plus accrued and unpaid interest to the date of redemption. Interest is payable semi-annually on March 15 and September 15 of each year, commencing on March 15, 1996. Effective August 31, 1994, the Company issued $45,000,000 of subordinated debt with common stock purchase warrants in connection with the acquisition of Smogless (see note 9). On September 18, 1995, these warrants to purchase 3,750,000 shares of Company common stock were exercised in exchange for the delivery of the $45,000,000 principal amount of subordinated debt. (13) ACCRUED LIABILITIES Accrued liabilities at March 31, 1995 and 1996 consist of the following:
1995 1996 ----------- ------------ Accrued job costs, start-up and customer deposits. $10,916,000 $ 26,329,000 Payroll, benefits and related taxes............... 9,008,000 18,450,000 Warranty.......................................... 3,866,000 6,631,000 Sales, property and other taxes................... 5,653,000 5,335,000 Interest.......................................... 1,771,000 3,204,000 Sales commission.................................. 2,949,000 3,674,000 Future remediation, relocation & closure costs.... 4,807,000 21,968,000 Other............................................. 11,714,000 16,824,000 ----------- ------------ $50,684,000 $102,415,000 =========== ============
F-22 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (14) INCOME TAXES Income tax expense (benefit) from continuing operations for the years ended March 31, 1994, 1995 and 1996 consist of:
1994 1995 1996 ----------- ---------- ----------- Federal: Current.............................. $ 1,343,000 $2,274,000 $ 3,484,000 Deferred............................. (7,864,000) 736,000 1,872,000 State: Current.............................. 265,000 682,000 878,000 Deferred............................. (850,000) (454,000) (504,000) Foreign: Current.............................. 19,000 20,000 4,085,000 Deferred............................. -- 1,554,000 2,240,000 ----------- ---------- ----------- $(7,087,000) $4,812,000 $12,055,000 =========== ========== ===========
Total income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal corporate tax rate of 34% for 1994 and 1995 and 35% for 1996 to income from continuing operations before income taxes as a result of the following:
1994 1995 1996 ----------- ---------- ----------- Expected income tax provision (benefit)............................ $(5,603,000) $5,797,000 $10,976,000 Permanent differences................. (300,000) 24,000 1,573,000 State franchise tax, net of Federal tax benefit.......................... (406,000) 346,000 666,000 Change in balance of valuation allowance for deferred tax assets allocated to income tax expense...... (2,930,000) (1,392,000) (2,590,000) Net operating loss carryforward unable to be utilized....................... 2,559,000 -- -- Difference in U.S. tax rate and foreign tax rates.................... -- 511,000 2,032,000 Benefit of foreign net operating loss carryforwards........................ (255,000) (581,000) (761,000) Other................................. (152,000) 107,000 159,000 ----------- ---------- ----------- $(7,087,000) $4,812,000 $12,055,000 =========== ========== ===========
As of March 31, 1996, the Company has net operating loss carryforwards in France of approximately $19,952,000. Approximately $1,946,000 of the operating losses expire in the years 1997-1998, while the remainder have an indefinite carryforward period. Any benefit of the French loss carryforward must be shared equally between the Company and Alcoa until March 31, 1997. As of March 31, 1996, the Company also has net operating loss carryforwards in other European countries of approximately $7,338,000 which expire from 1997 to 2002. As of March 31, 1996, the Company also has net operating loss carryforwards generated from Liquipure of $14,362,000, which has been recognized in fiscal 1996. These loss carryforwards expire from 2002 to 2007. In addition, the Company has net operating loss carryforwards generated from Zimpro of $2,905,000, which have not been recognized due to the uncertainty as to future realizability of these carryforwards. These loss carryforwards expire in 2009. The Company also has available, at March 31, 1996, other net operating loss and foreign tax credit carryforwards for U.S. Federal income tax purposes of approximately $13,552,000 which expire in 1999 to 2010. F-23 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The sources and tax effects of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities are as follows:
1995 1996 ------------ ------------ Deferred tax assets: Operating loss carryforwards.................... $ 17,077,000 $ 27,664,000 Pension......................................... 725,000 832,000 Inventory....................................... 2,288,000 3,540,000 Allowance for doubtful accounts................. 1,196,000 1,776,000 Long-term contracts............................. 1,084,000 175,000 Warranty........................................ 822,000 1,837,000 Vacation........................................ 712,000 1,030,000 Other accruals.................................. 668,000 1,134,000 Tax credits..................................... 258,000 501,000 Closure reserves................................ 2,488,000 1,524,000 Other........................................... 1,677,000 3,936,000 ------------ ------------ 28,995,000 43,949,000 Valuation allowance............................. (10,503,000) (19,946,000) ------------ ------------ Total deferred tax assets.................... 18,492,000 24,003,000 Deferred tax liabilities: Depreciation and amortization................... 7,148,000 12,129,000 Prepaid expenses................................ 243,000 500,000 Long-term contracts............................. -- 4,206,000 Other........................................... 9,648,000 620,000 ------------ ------------ 17,039,000 17,455,000 ------------ ------------ Net deferred tax assets...................... $ 1,453,000 $ 6,548,000 ============ ============
The Company believes that it is more likely than not that the net deferred tax assets, including Federal net operating loss carryforwards, will be realized prior to their expiration. This belief is based on recent and anticipated future earnings and, in part, on the fact that the Company has completed several acquisitions during and including the three years ended March 31, 1996 of companies with strong earnings potential. A valuation allowance of $19,946,000 at March 31, 1996 has been recognized and consists primarily of state and foreign net operating losses which may not be realized prior to their expiration periods. (15) SHAREHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK In January 1992 and September 1994, the Company issued 880,000 shares of a new Series A Cumulative Convertible Preferred Stock and 185,185 shares of a new Series B Convertible Preferred Stock, respectively, in connection with acquisitions. On September 18, 1995, the Company repurchased and canceled 139,518 shares of Series B Preferred stock for $4,709,000, and converted 45,667 shares of Series B Preferred Stock into 102,750 shares of Company common stock. On March 4, 1996, the holder of the Company's Series A Preferred Stock tendered the 880,000 preferred shares for conversion into 1,980,000 shares of Company common stock pursuant to terms of the security. F-24 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) COMMON STOCK On December 5, 1994, the Company paid in the form of a stock dividend a 3- for-2 split of the Company's common stock. The par value of the new shares issued was $50,000 which was transferred from additional paid-in-capital to the common stock account. All references to income (loss) per share and other common stock information in the accompanying consolidated financial statements and notes thereto have been restated to reflect the 3-for-2 split. On May 3, 1995, the Company completed an underwritten public offering of 10,350,000 shares of its common stock at a price equal to $10.00 per share. The net proceeds to the Company, after underwriting discounts and commissions and before other related expenses, were $98,118,000. On July 15, 1996, the Company paid in the form of a stock dividend a 3-for-2 split of the Company's common stock. All references to income (loss) per share and other common stock information in the accompanying consolidated financial statements and notes thereto have been restated to reflect the 3-for-2 split. OPTIONS Under the Company's 1991 Employee Stock Option Plan (the "Plan"), the exercise price of options granted is equal to their fair market value at the date of grant and the maximum term of the option may not exceed 10 years. If the optionee is a holder of more than 10% of the outstanding common stock of the Company, the option price per share is increased to at least 110% of fair market value, and the option term is limited to 5 years. The total number of shares of common stock authorized under the Plan is 3,881,250 shares. Each option granted becomes exercisable on a cumulative basis, 25% six months following the date of grant and 25% on each subsequent anniversary of the grant date. Under the Company's 1991 Director Stock Option Plan (the "Directors Plan"), the exercise price of options granted was equal to the higher of $2.00 below the market price or 60% of the market price on the date of grant. Effective April 1, 1996 the Directors Plan was amended to grant options equal to their fair market value at the date of grant. Under the Plan, each director of the Company who is not a full-time employee of the Company will receive each year an option to purchase 12,000 shares of common stock. The total number of shares available under the Directors Plan is 562,500 shares. Compensation expense of $80,000, $122,000 and $112,000 was recorded in 1994, 1995 and 1996, respectively, related to the Directors Plan. Transactions involving the Plan and Directors Plan are summarized as follows:
NUMBER OF AGGREGATE SHARES EXERCISE PRICE VALUE --------- -------------- ----------- Balance at March 31, 1993............. 1,499,793 $1.35 to 22.67 $10,525,000 Options granted....................... 719,459 1.35 to 10.95 6,904,000 Options exercised..................... (236,931) 2.45 to 9.28 (1,255,000) Options canceled...................... (56,439) 7.33 to 22.67 (532,000) --------- -------------- ----------- Balance at March 31, 1994............. 1,925,882 1.35 to 10.95 15,642,000 Options granted....................... 898,290 1.35 to 10.59 7,650,000 Options exercised..................... (241,040) 2.45 to 9.83 (1,422,000) Options canceled...................... (40,785) 7.33 to 9.83 (375,000) --------- -------------- ----------- Balance at March 31, 1995............. 2,542,347 1.35 to 10.95 21,495,000 Options granted....................... 1,013,250 9.04 to 18.67 12,764,000 Options exercised..................... (487,886) 1.35 to 10.95 (3,678,000) Options canceled...................... (20,626) 8.53 to 10.58 (183,000) --------- -------------- ----------- Balance at March 31, 1996............. 3,047,085 $1.35 to 18.67 $30,398,000 ========= ============== ===========
F-25 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In connection with the warrants, options, convertible debentures and preferred stock, the Company has reserved 13,342,754 shares at March 31, 1995 and 15,474,000 shares at March 31, 1996 for future issuance. (16) RETIREMENT PLANS Pursuant to the terms of a collective bargaining agreement, one of the Company's U.S. subsidiaries has a defined benefit pension plan covering substantially all of its hourly employees. Pension plan benefits are generally based upon years of service and compensation. The Company's funding policy is to contribute at least the minimum amounts required by the Employee Retirement Income Security Act of 1974 or additional amounts to assure that plan assets will be adequate to provide retirement benefits. Plan assets are invested in broadly diversified portfolios of government obligations, mutual funds and fixed income and equity securities. The accumulated benefit obligation under this plan is not material to the consolidated financial statements. The Company has a defined contribution plan (under IRC Section 401(k)) covering substantially all U.S. salaried and hourly participating employees which provide for contributions based primarily upon compensation levels and employee contributions. The Company funds its contributions to these plans as accrued. Defined contribution plan expense to the Company was $519,000, $810,000 and $1,631,000 for the years ended March 31, 1994, 1995 and 1996, respectively. The Company's Davis subsidiary had a defined benefit pension plan covering substantially all of its employees. Upon acquisition of Davis by the Company, the defined benefit pension plan was frozen and all liabilities have been fully accrued. The pension plan expense for prior years was not significant. (17) BUSINESS SEGMENT DATA AND EXPORT SALES The Company's sole business segment is the design, manufacture, operation, distribution and service of equipment and supplies for filtration, water treatment and wastewater treatment for industrial and municipal customers. There were no sales to any individual customers which accounted for 10% or more of revenue in fiscal 1994, 1995 and 1996. Export sales accounted for $28,881,000, $37,940,000 and $58,560,000 in fiscal 1994, 1995 and 1996, respectively. F-26 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Information about the Company's operations in different geographic locations for the years ended March 31, 1994, 1995 and 1996 is as follows:
1994 1995 1996 ------------- ------------ ------------ Revenues from unaffiliated customers: United States................... $ 364,593,000 $406,593,000 $515,036,000 Foreign......................... 47,919,000 112,766,000 212,867,000 ------------- ------------ ------------ $412,512,000 $519,359,000 $727,903,000 ============= ============ ============ Operating income (loss): United States................... $ (6,318,000) $ 16,695,000 $ 23,566,000 Foreign......................... 1,263,000 6,428,000 17,081,000 ------------- ------------ ------------ $ (5,055,000) $ 23,123,000 $ 40,647,000 ============= ============ ============ Income (loss) before income tax expense: United States................... $ (17,226,000) $ 12,273,000 $ 17,733,000 Foreign......................... 745,000 4,778,000 13,629,000 ------------- ------------ ------------ $ (16,481,000) $ 17,051,000 $ 31,362,000 ============= ============ ============ Identifiable assets: United States................... $ 332,700,000 $318,594,000 $574,838,000 Foreign......................... 24,654,000 164,129,000 301,667,000 ------------- ------------ ------------ $ 357,354,000 $482,723,000 $876,505,000 ============= ============ ============
(18) COMMITMENTS AND CONTINGENT LIABILITIES COMMITMENTS The Company and its subsidiaries lease certain facilities and equipment under various noncancelable and month-to-month leases. These leases are accounted for as operating leases. Rent expense aggregated $6,521,000, $8,033,000 and $8,991,000 in 1994, 1995 and 1996, respectively. A summary of the future minimum annual rental commitments as of March 31, 1996, under operating leases follows:
OPERATING LEASES ----------- Fiscal year ending: 1997........................................................... $ 7,481,000 1998........................................................... 5,852,000 1999........................................................... 5,073,000 2000........................................................... 2,591,000 2001........................................................... 1,180,000 Thereafter..................................................... 960,000 ----------- Total minimum lease payments................................... $23,137,000 ===========
F-27 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONTINGENT LIABILITIES In December of 1995, allegations were made by federal and state environmental regulatory authorities of multiple violations in connection with wastewater discharges at a facility owned by the Company. The facility was acquired by the Company as part of its acquisition of Polymetrics on October 2, 1995 (note 9). The Company has rights of indemnity from the seller which could be available if monetary damages and penalties are incurred in connection with any alleged violations occurring prior to the Company's acquisition of Polymetrics. In the opinion of management, the ultimate liability that may result from the above matter will not have a material adverse effect on the Company's consolidated financial position or results of operations. Zimpro is party to certain agreements (entered into in 1990 at the time Zimpro was acquired from unrelated third parties by the entities from which it was later acquired by the Company), pursuant to which Zimpro agreed, among other things, to pay the original sellers a royalty of 3.0% of its annual consolidated net sales of certain products in excess of $35.0 million through October 25, 2000. Under certain interpretations of such agreements, with which the Company disagrees, Zimpro could be liable for such royalties with respect to the net sales attributable to products, systems and services of certain defined wastewater treatment businesses acquired by Zimpro or the Company or the Company's other subsidiaries after May 31, 1996. The defined businesses include, among others, manufacturing machinery and equipment, and engineering, installation, operation and maintenance services related thereto, for the treatment and disposal of waste liquids, toxic waste and sludge. One of the prior sellers has revealed in a letter to the Company an interpretation contrary to that of the Company. The Company believes that it would have meritorious defenses to any claim based upon any such interpretation and would vigorously pursue the elimination of any threat to expand what it believes to be its obligations pursuant to such agreements. Legal proceedings pending against the Company consist of litigation incidental to the Company's business and in the opinion of management, based in part upon the opinion of counsel, the outcome of such litigation will not materially affect the Company's consolidated financial position or results of operations. (19) QUARTERLY FINANCIAL DATA (UNAUDITED)
GROSS NET INCOME REVENUES PROFIT NET INCOME PER SHARE* ------------ ----------- ---------- ---------- 1995 First quarter................ $113,638,000 $24,761,000 $1,801,000 $0.06 Second quarter............... 130,522,000 30,324,000 3,215,000 0.11 Third quarter................ 133,027,000 31,195,000 3,192,000 0.11 Fourth quarter............... 142,172,000 34,324,000 4,031,000 0.13 1996 First quarter................ $158,173,000 $38,850,000 $4,339,000 $0.12 Second quarter............... 173,927,000 46,156,000 6,371,000 0.15 Third quarter................ 186,663,000 49,172,000 7,002,000 0.15 Fourth quarter............... 209,140,000 55,152,000 1,595,000 0.03 1997 First quarter................ $208,509,000 $56,335,000 $8,003,000 $0.16 Second quarter............... 225,210,000 61,986,000 6,225,000 0.12
- --------------------- * Per common and common equivalent share F-28 UNITED STATES FILTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (20) SUBSEQUENT EVENTS On October 25, 1996, the Company acquired all of the outstanding capital stock of The Utility Supply Group, Inc. ("USG") pursuant to an Agreement and Plan of Merger. USG is a provider of water and wastewater related products and services to industrial and municipal customers throughout the United States. The purchase price was approximately $44 million. The transaction was accounted for as a purchase. On October 28, 1996, the Company acquired all of the outstanding capital stock of WaterPro Supplies Corporation ("WaterPro") pursuant to a Stock Purchase Agreement. WaterPro is a national distributor of water and wastewater related products and services for municipal water, sewer authorities and underground contractors, and has locations throughout the United States. The purchase price was approximately $102 million paid in shares of Company Common Stock. The transaction was accounted for as a purchase. In connection with this transaction and subject to certain conditions, the WaterPro shareholders have the right to require the Company to repurchase the shares at $33.24 per share. On September 14, 1996, the Company entered into a Purchase and Sale Agreement with Wheelabrator Technologies Inc. in connection with a proposed acquisition by the Company of Wheelabrator's Water Systems and Manufacturing Group ("WSMG"). Pursuant to the terms of the agreement, the Company will pay approximately $369 million in cash for WSMG, subject to possible adjustment, which provides a broad range of water and wastewater engineering, technology and systems. The proposed transaction is expected to be completed in December 1996, and will be accounted for as a purchase. On October 7, 1996, the Company entered into a Purchase and Sale Agreement with United Utilities Plc ("UU") and certain of its subsidiaries in connection with a proposed acquisition by the Company of UU's Process Equipment Division ("PED"). In accordance with the terms of the definitive agreement, the Company will pay approximately (Pounds)125 million for PED, which provides a broad range of water and wastewater engineering technology and systems. In connection with this proposed transaction, the Company entered into a forward contract to purchase 100 million British pounds sterling for approximately $159.3 million between December 16, 1996 and February 14, 1997. The proposed transaction is expected to be completed in January 1997, and will be accounted for as a purchase. On September 12, 1996, the Company provided notice, pursuant to terms of its Indenture dated October 20, 1993, of its intent to redeem on October 25, 1996 all of its outstanding 5% Convertible Subordinated Debentures due 2000. As of October 25, 1996, all holders of the debentures converted the debentures into a total of approximately 4.4 million shares of Company Common Stock pursuant to the terms of the Debentures. F-29 INDEPENDENT AUDITORS' REPORT The Board of Directors Wheelabrator Technologies Inc.: The Board of Directors United States Filter Corporation: We have audited the accompanying combined balance sheets of the Systems and Manufacturing Group of Wheelabrator Technologies Inc. (the "Businesses") as of December 31, 1994 and 1995, and the related combined statements of income and cash flows for each of the years in the three-year period ended December 31, 1995. These financial statements are the responsibility of the management of the Businesses. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Systems and Manufacturing Group of Wheelabrator Technologies Inc. as of December 31, 1994 and 1995 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP KPMG PEAT MARWICK LLP Chicago, Illinois October 15, 1996 F-30 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ----------------- SEPTEMBER 30, ASSETS 1994 1995 1996 ------ -------- -------- ------------- (UNAUDITED) Current Assets: Cash and cash equivalents........................ $ 25,122 $ 25,092 $ 12,619 Accounts receivable, net......................... 81,490 87,526 93,325 Inventories...................................... 31,527 48,407 41,622 Costs and estimated earnings in excess of billings on uncompleted contracts............... 20,498 22,710 19,785 Other current assets............................. 2,920 2,028 3,790 -------- -------- -------- Total current assets........................... 161,557 185,763 171,141 -------- -------- -------- Property, plant, and equipment, net................ 48,253 47,354 55,752 Goodwill, net...................................... 151,483 158,074 155,578 Other assets....................................... 5,365 3,756 4,044 -------- -------- -------- Total assets................................... $366,658 $394,947 $386,515 ======== ======== ======== LIABILITIES AND GROUP EQUITY ---------------------------- Current Liabilities: Accounts payable................................. $ 56,485 $ 53,163 $ 53,338 Accrued liabilities.............................. 51,615 47,816 43,822 Advance payment on contracts..................... 19,802 19,966 18,911 -------- -------- -------- Total current liabilities...................... 127,902 120,945 116,071 -------- -------- -------- Other long-term liabilities........................ 17,732 16,003 13,962 Commitments and contingencies...................... Group Equity: Group equity..................................... 220,527 255,816 254,400 Cumulative translation adjustment................ 497 2,183 2,082 -------- -------- -------- Total group equity............................... 221,024 257,999 256,482 -------- -------- -------- Total liabilities and group equity............. $366,658 $394,947 $386,515 ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. F-31 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP COMBINED INCOME STATEMENTS (IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ----------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- (UNAUDITED) Revenue.......................... $293,207 $364,335 $452,134 $337,589 $329,527 Operating expenses............... 222,384 281,946 361,462 269,479 257,985 -------- -------- -------- -------- -------- Gross margin................... 70,823 82,389 90,672 68,110 71,542 Selling, general & administrative expenses........................ 47,261 62,224 68,170 50,180 49,371 -------- -------- -------- -------- -------- Operating income............... 23,562 20,165 22,502 17,930 22,171 Gain (loss) on sale of assets.... (5) 955 4,212 15 18 Interest, net.................... 288 168 423 244 487 Other income (expense), net...... (1,421) 755 132 127 96 -------- -------- -------- -------- -------- Income before pro forma income tax provision................. 22,424 22,043 27,269 18,316 22,772 Pro forma income tax provision... 8,970 8,817 10,908 7,326 9,109 -------- -------- -------- -------- -------- Net income..................... $ 13,454 $ 13,226 $ 16,361 $ 10,990 $ 13,663 ======== ======== ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. F-32 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- ------------------ 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- (UNAUDITED) Operating Activities: Net income................. $ 13,454 $ 13,226 $ 16,361 $ 10,990 $ 13,663 Adjustment to reconcile net income to cash flows from operating activities:..... Depreciation and amortization............ 5,581 9,608 11,211 8,492 9,145 Changes in assets and liabilities, net of effects of acquired businesses:............. Accounts receivable.... (2,088) (8,116) (5,292) (8,739) (5,799) Inventories............ 5,254 (6,423) (11,222) (10,313) 6,785 Costs and estimated earnings in excess of billings on uncompleted contracts. (17,182) 3,014 (2,212) 255 2,925 Accounts payable....... 5,865 4,327 (4,143) (8,068) 175 Accrued liabilities.... 3,213 (2,889) (4,182) (2,940) (3,994) Advance payments on contracts............. (982) (239) (6,358) (5,376) (1,055) Other, net................. 4,603 2,310 (2,973) 3,764 293 -------- -------- -------- -------- -------- Net cash provided by (used for) operating activities............ 17,718 14,818 (8,810) (11,935) 22,138 -------- -------- -------- -------- -------- Investing Activities: Capital expenditures....... (4,202) (5,075) (9,817) (5,612) (22,443) Sale of property, plant, and equipment............. 5,805 3,834 8,054 4,259 477 Cash paid for acquisitions, net of acquired cash...... (24,790) (18,848) (5,746) -- (850) Other, net................. -- (1,375) 46 (1,459) -- -------- -------- -------- -------- -------- Net cash provided by (used for) investing activities.............. (23,187) (21,464) (7,463) (2,792) (22,816) -------- -------- -------- -------- -------- Financing Activities: Increase (decrease) in group equity.............. 6,073 20,073 20,614 17,015 (15,180) Other, net................. -- 3,423 (4,371) (2,906) 3,385 -------- -------- -------- -------- -------- Net cash provided by (used for) investing activities.............. 6,073 23,496 16,243 14,109 (11,795) -------- -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents........ 604 16,850 (30) (618) (12,473) Cash and cash equivalents at beginning of period......... 7,668 8,272 25,122 25,122 25,092 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period............... $ 8,272 $ 25,122 $225,092 $ 24,504 $ 12,619 ======== ======== ======== ======== ======== Significant noncash investing activities Liabilities assumed in acquisitions.............. $ 29,883 $ 74,067 $ 8,232 $ -- $ -- ======== ======== ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. F-33 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1 BUSINESS DESCRIPTION AND BASIS OF PRESENTATION The Systems and Manufacturing Group (the "Businesses") of Wheelabrator Technologies Inc. ("WTI") provide products and services to customers in the water, wastewater and general industrial markets, primarily in the United States, Europe and Asia. The majority of the Businesses have been acquired by WTI in the last three years. Certain other Businesses have been owned by WTI or its predecessors since prior to 1993. The Businesses have no separate legal status or existence. The assets and liabilities comprising the majority of the U.S. based Businesses are owned by a wholly owned subsidiary of WTI. In connection with a proposed transaction whereby WTI would sell the Businesses to United States Filter Corporation ("USF"), WTI and USF have entered into a definitive Purchase and Sale Agreement dated September 14, 1996 (the "Agreement"), the terms of which provide for certain assets to be purchased and certain liabilities assumed by USF in connection with Businesses based in the United States. Additionally, the Agreement provides for certain liabilities relating to the Businesses to be retained by WTI and for WTI to indemnify USF in connection with certain other matters (collectively the "Retained Liabilities"). These financial statements reflect the financial condition, results of operations and cash flows for the Businesses on a combined basis, excluding the Retained Liabilities, for all periods presented. NOTE 2 SIGNIFICANT ACCOUNT POLICIES Combined Financial Statements The combined financial statements include the accounts of the Businesses and the majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Investments in affiliates WTI does not control are accounted for using the equity method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, income, expenses and disclosures of contingencies. Future events could alter such estimates. Concentrations The Businesses offer a multitude of products and services to a diverse customer base. Management believes the Businesses have no significant customer, supplier, product line, credit risk, geographic or other concentrations that could expose the Businesses to adverse, near-term severe financial impacts. Revenue Recognition Revenues from certain long-term engineering and equipment supply contracts are recognized on the percentage-of-completion basis, with estimated losses recognized in full when identified. All other revenues are recognized when services are rendered or products are shipped. Foreign Currency Foreign subsidiaries' income statement accounts are translated at the average exchange rates in effect during the period, while assets and liabilities are translated at the rates of exchange at the balance sheet date. The resulting balance sheet translation adjustments are charged or credited directly to group equity. Foreign exchange transaction gains and losses realized during 1993, 1994 and 1995 were not significant. F-34 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Combined Statements of Cash Flows For purposes of the Combined Statements of Cash Flows, all highly liquid instruments purchased with an original maturity of three months or less are considered to be cash equivalents. Derivative Financial Instruments From time to time, the Businesses use derivative instruments to manage currency risk. Immaterial amounts of various currencies were sold forward for delivery at various dates in 1995 to hedge foreign exchange exposure on specifically identified transactions. Gains or losses on these transactions are included in the measurement of the subsequent transaction. Where deemed advantageous, management will enter similar hedges in the future to mitigate foreign exchange exposure. Fair Value of Financial Instruments Financial instruments of the Businesses consist primarily of cash and cash equivalents, receivables and accounts payable. The book values of such instruments are considered to be representative of their respective fair values. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value). Property, Plant and Equipment Property, plant, and equipment (including major improvements) are capitalized and stated at cost. Items of an ordinary maintenance or repair nature are charged directly to operating expense. The cost less estimated salvage value of property, plant, and equipment is generally depreciated on a straight-line basis over estimated useful lives that range from 3 to 35 years. Goodwill The excess of cost over fair value of the net assets of acquired businesses ("goodwill") is amortized on a straight-line basis over 40 years. The accumulated amortization balances as of December 31, 1994 and 1995 were $8.2 million and $12.2 million, respectively. On an ongoing basis, the realizability of goodwill is measured by the ability of the acquired businesses to generate current and undiscounted expected future cash flows in excess of unamortized goodwill. If such realizability were in doubt, an adjustment would be made to reduce the carrying value of the goodwill. No such adjustments have been made with respect to the Businesses. Pro Forma Income Taxes Certain of the assets and liabilities comprising the Businesses are not stand alone, taxable entities (see Note 1). The taxable income from Businesses operating in the United States have been included in the consolidated federal tax returns of WTI for all periods presented. Entities outside the United States are taxable in the jurisdictions in which they are organized or are doing business. For the purposes of the accompanying combined financial statements, a pro forma income tax expense has been provided at 40 percent of reported combined pretax income. F-35 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Contracts in Process Information with respect to contracts in process at December 31, 1994 and 1995 follows. Contracts in process are included in the combined balance sheets under the following captions (in thousands):
YEARS ENDED DECEMBER 31, ---------------- 1994 1995 ------- ------- Costs and earnings in excess of billings................ $20,498 $22,710 Advance payments on contracts........................... (19,802) (19,966) ------- ------- Total contracts in process............................ $ 696 $ 2,744 ======= =======
All contracts in process are expected to be billed and collected within two years. Accounts receivable include retainage that has been billed but is not due until completion pursuant to the terms of the contract. Such retainage at December 31, 1995 was $3.7 million, all of which (except for amounts provided for) is expected to be collected within one year. At December 31, 1994, retainage was $3.0 million. Accounting Pronouncements Effective January 1, 1994, the Businesses adopted Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Postemployment Benefits" ("FAS 112"). This new statement established accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. The adoption of FAS 112 did not have a material impact on the combined financial statements of the Businesses since its accounting prior to adoption of FAS 112 was substantially in compliance with the new standard. Also effective during 1994 was Statement of Financial Accounting Standards No. 115, "Accounting for Certain Debt and Equity Securities" ("FAS 115"). The Businesses do not have significant investments and does not contemplate acquiring significant investments of the type covered in FAS 115. The Businesses are required to adopt Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), beginning in 1996. Management does not believe the adoption of FAS 121 will have a material impact on the combined financial statements of the Businesses. Unaudited Interim Information The combined financial statements as of September 30, 1996 and for the nine months ended September 30, 1995 and 1996 are unaudited. In the opinion of management, the unaudited combined financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted from the interim combined financial statements. The results of operations for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. F-36 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3. GROUP EQUITY, ALLOCATIONS AND OTHER RELATED PARTY TRANSACTIONS Group Equity The group equity account reflects the activity between WTI and the Businesses, a summary of which follows (in thousands):
YEARS ENDED DECEMBER 31, --------------------------- 1993 1994 1995 -------- -------- -------- Beginning balance............................ $168,198 $187,725 $221,024 Net income................................... 13,454 13,226 16,361 Net intercompany transactions................ 6,969 18,680 18,928 Translation adjustment....................... (896) 1,393 1,686 -------- -------- -------- Ending balance............................. $187,725 $221,024 $257,999 ======== ======== ========
Cash Management Certain of the Businesses participate in WTI's centralized cash management system and, as such, their cash funding requirements have been met by WTI and all excess cash has been transferred to WTI. Allocations The combined income statements includes all direct costs of the Businesses as well as certain corporate costs directly identified with the Businesses. WTI has not allocated interest income or expense to the Businesses. In the opinion of management, these allocations have been made on a basis which is believed to be reasonable for a group of businesses operating within the structure of a larger parent organization. However, the allocations are not necessarily indicative of the level of expenses which might have been incurred by the Businesses operating as a stand-alone entity. NOTE 4. ACQUISITIONS The Businesses include three environmental services businesses acquired in 1993, six acquired in 1994 and one acquired in 1996 in exchange for consideration, net of cash acquired and including assumed debt, of approximately $24.8 million, $21.5 million and $5.7 million, respectively. The Businesses utilize the purchase method of accounting, and the purchase price of the acquisitions has been allocated to their respective net assets based upon estimated fair market values. The results of operations of acquired entities have been included in the Businesses' combined financial statements from their respective dates of acquisition. The pro forma effect of the acquisitions made during 1993, 1994 and 1995 was not material. NOTE 5. PRO FORMA INCOME TAXES The Businesses reported income before income tax for each of the years indicated on the accompanying combined statements of income. During such periods, the Businesses operating in the United States were included in WTI's consolidated federal income tax returns. Those Businesses located outside of the United States are taxable in the jurisdictions in which they are organized. For the purposes of the accompanying combined financial statements, a pro forma income tax expense has been provided at 40% of reported combined pretax income. F-37 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 6. BENEFIT PLANS Substantially all employees based in the United States are participants in the Wheelabrator-Rust Savings and Retirement Plan, which is a qualified defined contribution plan consisting of a contributory component and a non- contributory component. Under the terms of the contributory component, eligible employees may elect to contribute a portion of their annual compensation and the Businesses are required to match a minimum of 30 percent of the first six percent of eligible compensation contributed by an employee. Under the terms of the non-contributory component, eligible employees receive an annual contribution equal to a minimum of three percent of their eligible earnings. The Businesses' contributions to such plans during 1993, 1994 and 1995 amounted to approximately $1.7 million, $2.1 million and $2.4 million, respectively. The Businesses based outside the United States have in place various other plans that are not significant that provide pension and welfare benefits to certain active and former employees. NOTE 7. ADDITIONAL FINANCIAL INFORMATION The allowance for doubtful accounts was $3.7 million and $4.3 million as of December 31, 1994 and 1995, respectively. The following is a summary of inventories (in thousands):
DECEMBER 31, --------------- 1994 1995 ------- ------- Raw materials............................................. $ 7,697 $21,429 Work in process........................................... 14,276 15,259 Finished goods............................................ 9,554 11,719 ------- ------- Total inventories....................................... $31,527 $48,407 ======= =======
The following is a summary of property, plant and equipment (in thousands):
DECEMBER 31, ------------------ 1994 1995 -------- -------- Land.................................................. $ 847 $ 743 Machinery and equipment............................... 51,005 53,484 Buildings and improvements............................ 39,174 37,661 Less: accumulated depreciation........................ (42,773) (44,534) -------- -------- Total property, plant, and equipment................ $ 48,253 $ 47,354 ======== ========
Depreciation of property, plant, and equipment for the years ended December 31, 1993, 1994 and 1995 was $4.9 million, $5.9 million, and $7.0 million, respectively. The following is a summary of accrued liabilities (in thousands):
DECEMBER 31, --------------- 1994 1995 ------- ------- Wages, salaries and benefits............................. $ 8,453 $ 8,936 Warranties and contract reserves......................... 9,149 11,100 Other.................................................... 34,013 27,780 ------- ------- Total accrued liabilities.............................. $51,615 $47,816 ======= =======
F-38 WHEELABRATOR TECHNOLOGIES INC. SYSTEMS AND MANUFACTURING GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Noncancelable operating lease payments at December 31, 1995 are due as follows (in thousands):
OPERATING LEASES --------- 1996............................... $ 4,290 1997............................... 3,613 1998............................... 3,172 1999............................... 2,670 2000............................... 2,648 Thereafter......................... 15,290 ------- Total............................ $31,683 =======
Total rent expense was $2.2 million, $2.6 million and $2.8 million in 1993, 1994 and 1995, respectively. NOTE 8. COMMITMENTS AND CONTINGENCIES There are various lawsuits and claims pending against the Businesses that have arisen in the normal course of business and related mainly to matters of product liability, personal injury, and property damage. The outcomes of these matters are not presently determinable, but in the opinion of management, based on the advice of counsel, the ultimate resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Businesses. The Businesses are self-insured for general liability claims up to $2.0 million per occurrence. Liability insurance in effect during the last several years provides coverage for environmental matters only to a limited extent. In the normal course of business, the Businesses have issued or are parties to bank letters of credit, performance bonds, and other guarantees. Certain of the Businesses operate in the environmental industry and are involved with the protection of the environment. As such, a significant portion of the Businesses' operating costs and capital expenditures could be characterized as costs of environmental protection. While the Businesses are faced, in the normal course of its business, with the need to expend funds for environmental protection, it is not expected that such expenditures will have a material adverse effect on financial condition or results of operations. F-39 UNITED UTILITIES PLC PROCESS DIVISION STATEMENT OF UNITED UTILITIES PLC DIRECTORS' RESPONSIBILITIES The directors have assumed the responsibility to prepare financial statements for each financial year which present fairly the financial position of the division and of the profit or loss of the division for that period. In preparing those financial statements, the directors are required to: . select suitable accounting policies and then apply them consistently; . make judgements and estimates that are reasonable and prudent; . state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; . prepare the financial statements on the going concern basis unless it is inappropriate to presume that the companies within the division will continue in business. The directors are responsible for maintaining proper accounting records which disclose with reasonable accuracy at any time the financial position of the division and to enable them to ensure that the financial statements comply with relevant aspects of the Companies Act 1985. They are also responsible for safeguarding the assets of the division and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. F-40 AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF UNITED UTILITIES PLC We have audited the accompanying aggregated balance sheets of the United Utilities Plc Process Division as at 31 March 1996 and 31 March 1995, the related aggregated profit and loss accounts for each of the years in the two year period ended 31 March 1996 and the cash flow for the year ended 31 March 1996. These aggregated financial statements are the responsibility of the Directors of United Utilities Plc. Our responsibility is to express an opinion on these aggregated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United Kingdom which are substantially the same as auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aggregated financial statements referred to above present fairly, in all material respects, the financial position of the United Utilities Plc Process Division at 31 March 1996 and 31 March 1995, the results of its operations for each of the years in the two year period ended 31 March 1996 and the cash flow for the year ended 31 March 1996 in conformity with generally accepted accounting principles in the United Kingdom. KPMG AUDIT PLC Manchester Chartered Accountants Registered Auditors 16 October 1996 F-41 UNITED UTILITIES PLC PROCESS DIVISION PROFIT AND LOSS ACCOUNT
US $ US $ AUDITED UNAUDITED YEAR ENDED 6 MONTHS ENDED -------------------- ------------------------- 31 MARCH 31 MARCH 30 SEPTEMBER 30 SEPTEMBER NOTE 1996 1995 1996 1995 ---- --------- --------- ------------ ------------ $000 $000 $000 $000 Turnover.................. 2 267,358 254,955 130,407 119,309 Cost of sales............. (189,529) (179,057) (92,728) (85,230) --------- --------- ------- ------- Gross profit.............. 77,829 75,898 37,679 34,079 Net operating costs and administrative expenses.. 3 (63,983) (65,321) (32,460) (32,166) Business restructuring.... 4 (31,312) -- -- -- --------- --------- ------- ------- Operating (loss)/profit... (17,466) 10,577 5,219 1,913 Profit on disposal of fixed assets............. 5 -- 1,833 -- -- --------- --------- ------- ------- (Loss)/profit on ordinary activities............... (17,466) 12,410 5,219 1,913 Net interest.............. 6 (19,865) (19,925) (9,469) (9,788) --------- --------- ------- ------- Loss on ordinary activities before taxation................. (37,331) (7,515) (4,250) (7,875) Taxation on loss on ordinary activities...... 8 (2,165) (6,061) 309 (570) --------- --------- ------- ------- Loss on ordinary activities after taxation................. (39,496) (13,576) (3,941) (8,445) Dividends................. -- -- (18,038) -- --------- --------- ------- ------- Retained loss for the financial year/period.... (39,496) (13,576) (21,979) (8,445) ========= ========= ======= =======
A statement of movements on the profit and loss account is given in note 17. The above results all arise from continuing activities. There is no difference between the loss on ordinary activities before taxation and the retained loss for the period stated above, and their historical cost equivalents. There are no recognised gains or losses other than those included in the results above and therefore no separate statement of total recognised gains and losses has been presented. F-42 UNITED UTILITIES PLC PROCESS DIVISION BALANCE SHEETS
US $ US $ AUDITED UNAUDITED ------------------ ------------ 31 MARCH 31 MARCH 30 SEPTEMBER NOTE 1996 1995 1996 ---- -------- -------- ------------ $000 $000 $000 Fixed assets Tangible assets......................... 9 34,865 35,734 39,114 Investments............................. 10 1,526 1,780 1,557 Intangible assets....................... 11 869 -- 1,242 -------- -------- -------- 37,260 37,514 41,913 -------- -------- -------- Current assets Stocks.................................. 12 55,556 57,729 51,127 Debtors................................. 13 184,249 152,118 166,042 Cash at bank and in hand................ 2,438 7,393 3,329 -------- -------- -------- 242,243 217,240 220,498 Creditors: (amounts falling due within one year)............................... 14 (197,760) (170,055) (205,923) -------- -------- -------- Net current assets....................... 44,483 47,185 14,575 -------- -------- -------- Total assets less current liabilities.... 81,743 84,699 56,488 Creditors: (amounts falling due after more than one year)..................... 14 (231,325) (225,064) (234,454) Provisions for liabilities and charges... 15 (33,178) (2,450) (28,731) -------- -------- -------- Net liabilities.......................... (182,760) (142,815) (206,697) ======== ======== ======== Capital and reserves Aggregated called up share capital...... 16 4,426 4,698 4,309 Share premium account................... 17 12,262 12,262 12,502 Capital redemption reserve.............. 17 350 373 357 Revaluation reserve..................... 17 7,580 9,798 7,729 Profit and loss account................. 17 (207,378) (169,946) (231,594) -------- -------- -------- Shareholders' funds..................... (182,760) (142,815) (206,697) ======== ======== ========
Approved by the Board of directors on 16 October 1996 and signed on its behalf by: R. Ferguson Director F-43 UNITED UTILITIES PLC PROCESS DIVISION CASH FLOW STATEMENT
US $ UNAUDITED US $ SIX MONTHS ENDED AUDITED ------------------------- YEAR ENDED 30 SEPTEMBER 30 SEPTEMBER NOTE 31 MARCH 1996 1996 1995 ---- ------------- ------------ ------------ $000 $000 $000 Net cash (outflow) inflow from operating activities............. 20 (30,320) 16,102 (11,545) ------- ------- ------- Returns on investments and servicing of finance............. Interest received............... 600 422 460 Interest paid................... (2,880) (2,609) (2,132) ------- ------- ------- Net cash outflow from returns on investments and servicing of finance.......................... (2,280) (2,187) (1,672) ------- ------- ------- Taxation.......................... Corporation tax paid............ (1,007) (125) (660) ------- ------- ------- Cash (outflow) inflow from operations after tax............. (33,607) 13,790 (13,877) ------- ------- ------- Investing activities.............. Purchase of tangible fixed assets......................... (6,394) (5,141) (2,515) Expenditure on capitalized development costs.............. (869) (8) (230) Receipts from sales of tangible fixed assets................... 364 12 100 ------- ------- ------- Net cash outflow from investing activities....................... (6,899) (5,137) (2,645) ------- ------- ------- Increase (decrease) in cash and cash equivalents................. 20 (40,506) 8,653 (16,522) ======= ======= =======
F-44 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) 1. ACCOUNTING POLICIES BASIS OF PREPARATION OF FINANCIAL STATEMENTS The aggregated financial statements incorporate the financial statements of each of the entities which constitute the Process Division of United Utilities Plc as detailed in note 21. The financial statements have been prepared under the historical cost convention and in accordance with applicable accounting standards and with UK generally accepted accounting principles. BASIS OF AGGREGATION The Process Division is composed of the entities set out in note 21, all of which are owned by United Utilities Plc. There is no single holding company for the Process Division. The figures presented in these financial statements have been prepared by combining the results of all these entities. All intra group Process Division transactions and balances have been eliminated. As the Process Division is not a statutory entity, directors emoluments have not been disclosed. CASH FLOW STATEMENT As its parent undertaking, United Utilities Plc, publishes a consolidated cash flow statement, the Process Division is exempt, under Financial Reporting Standard 1, from preparing such a statement. Notwithstanding this exemption, a cash flow statement has been provided for the year ended 31 March 1996. Comparative cash flow information, which would have been required had the exemption not been available, has not been provided. UNAUDITED INTERIM AGGREGATED FINANCIAL STATEMENTS The aggregated financial statements for the six months ended 30 September, 1995 and 1996 are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring items, considered necessary for a fair presentation have been included. Certain information and all footnote disclosures normally included in financial statements have been excluded from the interim aggregated financial statements. The results of operations for the six months ended 30 September, 1996 are not necessarily indicative of the results that may be expected for the year ending 31 March, 1997. TURNOVER Turnover represents the income receivable in the ordinary course of business for goods or services provided and excludes VAT and foreign sales tax. RESEARCH AND DEVELOPMENT Expenditure on research and development is written off against profits in the year in which it is incurred. Development expenditure incurred on projects which meet the criteria of SSAP 13 is capitalized and amortized over 5 years. GOODWILL The net assets of companies and businesses acquired are incorporated into the aggregated financial statements at their fair value to the Process Division and after adjustments to bring the accounting policies of the companies and businesses acquired into alignment with those of the Division. Past fair value adjustments include provisions for reorganisation and restructuring costs. In the year ended 31 March 1996, in accordance with F-45 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) Financial Reporting Standard 7, reorganisation and restructuring costs have not been included in fair value adjustments. If the estimates on which these provisions are based prove to be in excess of actual expenditure, the unutilised surplus provisions will not be taken to profit and loss, but will be credited to reserves as a recalculation of goodwill. TANGIBLE FIXED ASSETS Additions are included at cost. Freehold land is not depreciated. Other assets are depreciated evenly over their estimated economic lives which are principally as follows: Buildings........................................................ 30-60 years Fixtures, fittings, tools, equipment and motor vehicles.......... 3-40 years Capitalised computer software costs.............................. 3-10 years
LEASED ASSETS Assets financed by leasing arrangements which transfer substantially all the risks and rewards of ownership to the lessee (finance leases) are capitalised in the balance sheet and the corresponding capital cost is shown as an obligation to the lessor. Leasing repayments comprise both a capital and a finance element. The finance element is written off to the profit and loss account so as to produce an approximately constant periodic rate of charge on the outstanding obligation. Such assets are depreciated over the shorter of their estimated useful lives and the period of the lease. Operating lease rentals are charged to the profit and loss account on a straight line basis over the period of the lease. FIXED ASSET INVESTMENTS Investments held as fixed assets are stated at cost less amounts written off for permanent diminution. STOCKS Stocks are stated at cost less any provision necessary to recognise damage and obsolescence. Long term contract work in progress is stated at cost, net of amounts transferred to cost of sales, after deducting payments received in advance and making provision for foreseeable losses. Finished goods and goods for resale are stated at the lower of cost, including appropriate production overheads, and net realisable value. PENSIONS Approximately half of the Division's employees belong to pension schemes which provide for defined benefits based on final pensionable pay. Pension costs are charged against profits over the estimated remaining service lives of employees. FOREIGN CURRENCY For the convenience of the reader, these financial statements have been stated in US dollars. The balance sheets have been translated into dollars at exchange rates applicable at the year end. The profit and loss accounts are translated into dollars using the average rate. Differences arising from the application of the closing rate to opening net assets, offset by translation differences on foreign currency loans which finance investments in overseas subsidiary undertakings, together with differences between profits and losses translated at average rates and at closing rates, are recorded as a movement in reserves. F-46 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) DEFERRED TAXATION Provision is made for deferred taxation where a liability is considered likely to arise in the foreseeable future. ASSOCIATED UNDERTAKINGS The appropriate share of the results of associated undertakings is recognised in the aggregated profit and loss account where the directors consider that the Division is in a position to exert significant influence over the associated undertakings. REVALUATION RESERVE Surpluses or deficits arising as a result of the incorporation of land and buildings valuations in the accounts are taken to the revaluation reserve unless the deficit exceeds the accumulated surpluses when it would be taken directly to the profit and loss account. 2. TURNOVER, PROFIT AND NET ASSETS BY BUSINESS Turnover, loss or profit before interest and taxation and net assets were all attributable to the same class of business namely Process Equipment. The geographical analysis of these items is shown below: By geographical origin:
PROFIT/(LOSS) BEFORE INTEREST AND NET OPERATING TURNOVER TAX ASSETS --------------- --------------- --------------- 1996 1995 1996 1995 1996 1995 ------- ------- ------- ------ ------- ------- $000 $000 $000 $000 $000 $000 United Kingdom.................. 47,344 45,401 3,763 4,427 29,337 30,539 Europe.......................... 30,117 29,077 2,737 3,368 12,774 11,348 The Americas.................... 181,916 172,525 (24,313) 4,207 84,573 80,888 Rest of the world............... 7,981 7,952 347 408 3,406 2,919 ------- ------- ------- ------ ------- ------- 267,358 254,955 (17,466) 12,410 130,090 125,694 ======= ======= ======= ====== ======= =======
The geographical destination of turnover does not differ materially from the geographical origin analysis above. Net operating assets comprise fixed assets and net current (liabilities)/assets and provisions excluding net borrowings, investments and taxation. F-47 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) 3. NET OPERATING COSTS AND ADMINISTRATIVE EXPENSES
31 MARCH 31 MARCH -------- -------- 1996 1995 -------- -------- $000 $000 Distribution costs......................................... 33,117 29,230 Administrative expenses.................................... 30,866 36,091 ------ ------ 63,983 65,321 ====== ======
31 MARCH 31 MARCH -------- -------- 1996 1995 -------- -------- $000 $000 Net operating costs and administrative expenses include: Operating lease rentals--hire of plant and machinery..... 1,187 1,148 --other........................................ 1,286 1,223 Depreciation............................................. 4,016 3,196 Auditors remuneration --audit................................................ 247 207 --other fees........................................... 48 127 Research and development costs........................... 2,410 481
Additional non-audit fees of $424,000 were charged against provisions for liabilities and charges in 1996. 4. BUSINESS RESTRUCTURING In December 1995, United Utilities Plc announced its plans to relocate a certain obsolete facility of its Wallace & Tiernan, Inc. subsidiary. In connection with this plan, a business restructuring expense totaling $31,312,000 was charged to operations during the year ended 31 March 1996. The charges consist of severance costs, professional fees, relocation of existing employees, inventory and equipment, a provision for impaired property, plant and equipment and other related restructuring costs. 5. PROFIT ON DISPOSAL OF FIXED ASSETS The profit on disposal of fixed assets in the year ended 31 March 1995 relates wholly to the disposal of land and buildings held by Wallace & Tiernan Limited. 6. NET INTEREST
31 MARCH 31 MARCH -------- -------- 1996 1995 -------- -------- $000 $000 Interest payable: To non Process Division Group undertakings............... 23,003 22,662 To external parties...................................... 4,604 3,054 Interest receivable: From non Process Division Group undertakings............. (7,452) (5,267) From external parties.................................... (290) (524) ------ ------ 19,865 19,925 ====== ======
F-48 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) 7. EMPLOYEE COSTS The aggregate remuneration of all employees of the Division comprised:
31 MARCH 31 MARCH -------- -------- 1996 1995 -------- -------- $000 $000 Wages and salaries......................................... 71,477 68,970 Social security costs...................................... 11,389 10,613 Other pension costs & payroll expenses..................... 5,960 6,318 ------ ------ 88,826 85,901 ====== ======
31 MARCH 31 MARCH -------- -------- 1996 1995 -------- -------- Average number of employees during the year were........... 1,976 2,071 ===== =====
8. TAXATION ON LOSS ON ORDINARY ACTIVITIES
31 MARCH 31 MARCH -------- -------- 1996 1995 -------- -------- $000 $000 UK corporation tax at 33% (1995:33%)....................... 1,217 3,279 Overseas corporate taxes................................... 948 2,782 ----- ----- 2,165 6,061 ===== =====
9. TANGIBLE FIXED ASSETS
FIXTURES, LAND FITTINGS, ASSETS IN & TOOLS & COURSE OF BUILDINGS EQUIPMENT VEHICLES CONSTRUCTION TOTAL --------- --------- -------- ------------ ------ $000 $000 $000 $000 $000 Cost or Valuation At 1 April 1995.......... 23,028 32,014 1,175 876 57,093 Revaluations............. (1,775) -- -- -- (1,775) Additions................ 1,357 4,659 378 -- 6,394 Disposals................ -- (756) (101) -- (857) Transfers................ -- 15 -- (287) (272) Foreign exchange......... (941) (1,031) (34) (17) (2,023) ------ ------ ----- ---- ------ At 31 March 1996......... 21,669 34,901 1,418 572 58,560 ------ ------ ----- ---- ------ Depreciation At 1 April 1995.......... 3,167 17,376 816 -- 21,359 Charge for the year...... 321 3,551 144 -- 4,016 Revaluations............. (104) -- -- -- (104) Disposals................ -- (677) (93) -- (770) Foreign exchange......... (192) (587) (27) -- (806) ------ ------ ----- ---- ------ At 31 March 1996......... 3,192 19,663 840 -- 23,695 ------ ------ ----- ---- ------ Net book value At 31 March 1996......... 18,477 15,238 578 572 34,865 ====== ====== ===== ==== ====== At 31 March 1995......... 19,861 14,638 359 876 35,734 ====== ====== ===== ==== ======
F-49 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) A revaluation of the freehold land and buildings at the Tonbridge site of Wallace & Tiernan Limited as at 31 March 1996 was undertaken by King Sturge & Co., an independent firm of qualified chartered surveyors. The valuation was made in accordance with the Royal Institute of Chartered Surveyors Statements of Asset Valuation Practice. The valuation of the operational part of the site was on a depreciated replacement cost basis and the non-operational part on an open market value basis. No capital gains tax is expected to arise in the event of a sale of the site and hence no deferred tax is currently provided in respect of this revaluation. If the land and buildings had not been revalued to $8,700,000 (1995: $10,850,000) they would have been shown at their historical cost net book value of $1,120,000 (1995: $1,052,000). 10. FIXED ASSET INVESTMENTS
31 MARCH 31 MARCH 1996 1995 -------- -------- $000 $000 Investments in associated companies........................ 1,526 1,780 ======= ======= A schedule of the Division's principal operating entities and associated undertakings is given in note 21. 11. INTANGIBLE ASSETS The intangible asset of $869,000 (1995: nil) represents development costs incurred and capitalised by one of the entities in the Process Division during the year. 12. STOCKS 31 MARCH 31 MARCH 1996 1995 -------- -------- $000 $000 Raw materials and consumables.............................. 17,760 18,308 Work in progress........................................... 15,233 16,558 Finished goods and goods for resale........................ 22,563 22,863 ------- ------- 55,556 57,729 ======= ======= 13. DEBTORS 31 MARCH 31 MARCH 1996 1995 -------- -------- $000 $000 Amounts falling due within one year: Trade debtors............................................. 101,615 80,317 Amounts owed by non Process Division Group undertakings... 72,663 61,449 Other debtors............................................. 8,634 9,550 Prepayments and accrued income............................ 1,337 802 ------- ------- 184,249 152,118 ======= =======
F-50 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) 14. CREDITORS
31 MARCH 31 MARCH 1996 1995 -------- -------- $000 $000 Amounts falling due within one year: Bank loans and overdrafts............. 85,489 52,618 Payments received on account................ 4,670 1,223 Trade creditors......... 23,385 22,435 Amounts owed to non- Process Division Group undertakings........... 56,613 50,571 UK Corporation tax...... 156 -- Other taxation and social security........ -- 3,200 Accruals and deferred income................. 27,447 40,008 ------- ------- 197,760 170,055 ======= ======= Amounts falling due after more than one year: Bank loans and overdrafts............. 1,839 2,059 Amounts owed to non- Process Division Group undertakings........... 220,516 213,760 Other creditors......... 8,970 9,245 ------- ------- 231,325 225,064 ======= =======
Bank loans and overdrafts outstanding at 31 March 1996 and 31 March 1995 are all repayable within one year. 15. PROVISIONS FOR LIABILITIES AND CHARGES
DEFERRED RESTRUCTURING TAXATION OTHER TOTAL ------------- -------- ----- ------ $000 $000 $000 $000 Division Balance at 1 April 1995.............. -- 1,846 604 2,450 Applied during the year.............. -- -- (450) (450) Provided in the year................. 31,312 -- -- 31,312 Foreign exchange..................... -- (97) (37) (134) ------ ----- ---- ------ Balance at March 31, 1996.............. 31,312 1,749 117 33,178 ====== ===== ==== ======
16. SHARE CAPITAL The total share capital of the Process Division represents the summation of the share capital of all the Process Division companies not eliminated by sub consolidations. These share capitals are converted to US dollars at the appropriate year end exchange rate.
1996 1995 1996 1995 ---- ---- ---- ---- $000 $000 $000 $000 WALLACE & TIERNAN INC Authorised 100 ordinary shares of $1 each.......................... -- -- -- -- Allotted, called up and fully paid 100 ordinary shares of $1 each.......................... -- -- -- --
F-51 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS)
1996 1995 1996 1995 ----------- ----------- ----- ----- (Pounds)000 (Pounds)000 $000 $000 WALLACE & TIERNAN LTD Authorised 3,000,000 ordinary shares of (Pounds)1 each.................................. 3,000 3,000 ----- ----- Allotted, called up and fully paid 2,588,066 ordinary shares of (Pounds)1 each.................................. 2,588 2,588 3,963 4,215 ----- ----- 1996 1995 ----------- ----------- A$000 A$000 WALLACE & TIERNAN PACIFIC PTY LTD Authorised 75,000 ordinary shares of A$2.......... 150 150 ----- ----- Allotted, called up and fully paid 55,000 ordinary shares of A$2.......... 110 110 86 81 ----- ----- 1996 1995 ----------- ----------- $000 $000 GENERAL FILTER Authorised 1,000 ordinary shares of $0.01......... -- -- ----- ----- Allotted, called up and fully paid 1,000 ordinary shares of $0.01......... -- -- ----- ----- 1996 1995 ----------- ----------- $000 $000 ENVIREX LTD Authorised 100,000 ordinary shares of $0.01....... 1 1 ----- ----- 100,000 preference shares of $1........ 100 100 ----- ----- Allotted, called up and fully paid 100,000 ordinary shares of $0.01....... 1 1 1 1 1996 1995 1996 1995 ----------- ----------- ----- ----- (Pounds)000 (Pounds)000 $000 $000 EDWARDS & JONES HOLDINGS LTD Authorised 157,000 ordinary shares of (Pounds)1... 157 157 ----- ----- 74,000 10.5% cumulative convertible participating preferred ordinary shares of (Pounds)1................... 74 74 ----- ----- Allotted, called up and fully paid 136,000 ordinary shares of (Pounds)1... 136 136 208 222 ----- ----- 1996 1995 ----------- ----------- (Pounds)000 (Pounds)000 EDWARDS & JONES LTD Authorised 110,000 ordinary shares of (Pounds)1... 110 110 ----- ----- Allotted, called up and fully paid 110,000 ordinary shares of (Pounds)1... 110 110 168 179 ----- -----
F-52 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS)
1996 1995 1996 1995 ---- ---- ----- ----- $000 $000 $000 $000 CONSOLIDATED ELECTRIC CO. Authorised 100 ordinary shares of $1............................. -- -- --- --- Allotted, called up and fully paid 100 ordinary shares of $1............................. -- -- -- -- ----- ----- 4,426 4,698 ===== =====
17. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
GROUP SHARE CAPITAL PROFIT SHARE PREMIUM REDEMPTION REVALUATION AND LOSS SHAREHOLDERS' CAPITAL ACCOUNT RESERVE RESERVE ACCOUNT FUNDS ------- ------- ---------- ----------- -------- ------------- $000 $000 $000 $000 $000 $000 Balance at 1 April 1995. 4,698 12,262 373 9,798 (169,946) (142,815) Retained loss for the year................... -- -- -- -- (39,496) (39,496) Revaluation in year..... -- -- -- (1,671) -- (1,671) Foreign exchange........ (272) -- (23) (547) 2,064 1,222 ----- ------ --- ------ -------- -------- Balance at 31 March 1996................... 4,426 12,262 350 7,580 (207,378) (182,760) ===== ====== === ====== ======== ========
The cumulative amount of goodwill written off to reserves at 31 March 1996 was $191,709,000 (1995: $204,239,000). 18. LEASE OBLIGATIONS The following annual obligations under operating leases for plant and machinery vehicle and other equipment expire:
31 MARCH 31 MARCH 1996 1995 -------- -------- $000 $000 Within one year............................................ 597 368 In the second to fifth year inclusive...................... 1,998 2,359 After five years........................................... 323 -- ----- ----- 2,918 2,727 ===== ===== The following annual obligations under operating leases for land and buildings expire: 31 MARCH 31 MARCH 1996 995 -------- -------- $000 $000 Within one year............................................ 17 160 In the second to fifth year inclusive...................... 676 463 ----- ----- 693 623 ===== =====
19. CAPITAL AND OTHER COMMITMENTS Capital investment authorised by the directors of entities within the Process Division but not contracted nor provided for as at 31 March 1996 amounted to $768,000 (1995: $1,019,000). Capital commitments which had been contracted but not provided for as at 31 March 1996 amounted to $412,000 (1995: $1,009,000). F-53 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) 20. NOTES TO THE CASH FLOW STATEMENT Reconciliation of operating profit to net cash inflow from operating activities.
31 MARCH 1996 -------- $000 Operating loss........................................... (17,466) ------- Non cash items Depreciation............................................. 4,016 Profit on sale of fixed assets........................... (5) Increase in provisions................................... 30,728 Foreign exchange adjustment to profit in the year........ (336) ------- 34,403 ======= Movement in working capital Decrease in stocks....................................... 2,173 (Increase) in debtors.................................... (32,131) (Decrease) in creditors.................................. (20,746) Increase in advance payments............................. 3,447 ------- (47,257) ======= Net cash outflow from operating activities............... (30,320) ======= Analysis of cash and cash equivalents 31 MARCH 31 MARCH 1996 1995 -------- -------- $000 $000 Cash at bank and in hand................................. 2,438 7,393 Bank overdraft........................................... (87,328) (54,677) ------- ------- (84,890) (47,284) ======= ======= Analysis of changes in cash and cash equivalents 1996 -------- $000 At 1 April 1995.......................................... (47,284) Net cash outflow for the year............................ (40,506) Exchange adjustments..................................... 2,900 ------- At 31 March 1996......................................... (84,890) =======
F-54 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) 21. PROCESS DIVISION Details of principal operating entities in the Process Division, all of which are unlisted, are detailed below. These undertakings are included within the aggregated Process Division financial statements.
NATURE OF BUSINESS ---------------------------------------- Great Britain: Wallace & Tiernan Limited Manufacture of equipment Edwards and Jones Limited for water and wastewater Acumem UK (unincorporated) treatment processes USA: Envirex Inc Manufacture of equipment General Filter Company Inc for water and wastewater Wallace & Tiernan Inc treatment processes Consolidated Electric Company Asdor Inc. Australia: Wallace & Tiernan Pacific Pty Manufacture of equipment Limited for water and wastewater treatment processes Canada: Asdor Limited Suppliers of equipment Wallace & Tiernan Canada Inc for water and wastewater Filtration Seco Inc. treatment processes Germany: Wallace & Tiernan GmbH Manufacture of equipment Edwards & Jones GmbH for water and wastewater treatment processes Associated undertakings include: Spain: CIDA Hidroquimica SA Design and installation of equipment and systems for water and wastewater treatment
The country under which each undertaking appears is both the country of its incorporation and of its principal operations. All of the Great Britain undertakings are registered in England and Wales. Shares are held indirectly by United Utilities Plc. 22. PENSIONS The Process Division operates a number of pension schemes in the UK, the USA, Europe, Australia and Canada. The major schemes are of the defined benefit type. Edwards & Jones Limited operated two pension schemes in 1993 providing retirement benefits for its employees and directors. The funds of both schemes were transferred into the Water Pension Scheme, a defined benefit scheme, operated by United Utilities Plc, during 1993/94. Contributions are based on the pension costs of all United Kingdom subsidiary undertakings of United Utilities Plc participating in the Water Pension Scheme. The accounts of United Utilities Plc contain particulars of the current actuarial position of the Water Pension Scheme. Since 1 January 1990, Wallace & Tiernan Limited and substantially all its employees have subscribed to the Wallace & Tiernan Pension Scheme, which is a funded defined benefit scheme providing benefits based on F-55 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) final pensionable pay. Contributions to the scheme are charged to the profit and loss account so as to spread the cost of pensions over employees' working lives with the company. The contributions are determined by a qualified actuary. The most recent valuation was undertaken as at 1 July 1994 by the scheme's actuary. The valuation method used for the calculation of normal costs and liabilities was the projected unit method, while that used for the assets was the discounted expected cash flow method. The assumptions which have the most significant effect on the results of the valuation are those relating to the rates of return on investments and salary and pension increases. It was assumed that the investment returns would be 9% per annum, that the rate of salary increase would be 7% per annum, and that pensions would increase at the rate of 3% per annum. The market value of scheme assets at the date of the valuation was (Pounds)9,638,000 and the actuarial value of those assets represented approximately 95% of the benefits that had accrued to members after allowing for expected future increases in earnings. It is intended that this deficit, amounting to (Pounds)543,000 will be eliminated by additional company contributions over a period of 13 years. For the non UK schemes the defined benefit arrangements have been reviewed on consistent assumptions and any balance of surplus spread forward to derive the pension cost. 23. ULTIMATE PARENT COMPANY The ultimate parent undertaking of all the entities in the Process Division is United Utilities Plc, a company registered in England. Copies of the United Utilities Plc accounts are available from the registered office at Dawson House, Great Sankey, Warrington, WA5 3LW, United Kingdom. The accounts of United Utilities Plc represent the largest and smallest consolidation within which all the companies in the Process Division are consolidated. 24. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES These aggregated financial statements have been prepared in accordance with UK GAAP which differs in certain significant respects from US GAAP. The significant differences as they relate to the United Utilities Plc Process Division, are summarised in the following paragraphs. Statement of cash flows: Basis of Preparation United Utilities Plc Process Division's statement of cash flows is prepared in accordance with UK Financial Reporting Standard 1 (FRS 1), the objectives and principles of which are similar to those set out in Statement of Financial Accounting Standards 95 (SFAS 95), "Statement of Cash Flows" under US GAAP. The principal differences between FRS 1 and SFAS 95 relate to classification. Cash flows from taxation and returns on investments and servicing of finance under FRS 1 would be included as operating activities under SFAS 95. Under FRS 1 net cash and cash equivalents include short-term borrowings repayable within three months from the date of their advance. Under SFAS 95 short-term borrowings repayable within three months from the date of their advance and overdraft balances would not be included within cash and cash equivalents and movements on those borrowings and overdraft balances would be included in financing activities. PROVISIONS In the US there are strict rules about the timing of recognition of on-going restructuring costs; whereas in the UK there is at present some flexibility. Given that restructuring provisions can involve very large costs, the differences can be significant. F-56 UNITED UTILITIES PLC PROCESS DIVISION NOTES (FORMING PART OF THE FINANCIAL STATEMENTS) FIXED ASSET REVALUATION In the US fixed assets must be carried at depreciated cost whereas in the UK fixed assets may be revalued. Depreciation would then be booked on the revalued amount. DEVELOPMENT EXPENDITURE In the US the rules prohibit the carrying of development costs as an asset. In the UK they may, at the company's option, be carried as an asset if the following criteria are met: . there is a clearly defined project; . the related costs are separately identifiable; . there is a reasonable certainty that the project is technically feasible and commercially viable; . future revenues are reasonably expected to exceed future development, production, selling and administration costs; . adequate financial resources exist to complete the project. GOODWILL In the US positive goodwill is treated in the same way as any other acquired intangible. Such assets must be capitalised and subsequently amortised over their expected useful lives which may not exceed 40 years. In the UK positive goodwill may be written off directly against reserves which is the policy adopted by the Process Division. F-57 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR- MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO- SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRIT- ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIV- ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICA- TION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSE- QUENT TO ITS DATE. ------------ TABLE OF CONTENTS
PAGE Prospectus Summary........................................................ 3 Risk Factors.............................................................. 9 Recent and Pending Acquisitions........................................... 14 Use of Proceeds........................................................... 18 Capitalization............................................................ 19 Price Range of Common Stock............................................... 20 Dividend Policy........................................................... 20 Unaudited Pro Forma Combined Financial Information........................ 21 Selected Consolidated Financial Data...................................... 29 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 31 The Water Treatment Industry.............................................. 38 Business.................................................................. 40 Management................................................................ 45 Security Ownership........................................................ 49 Description of the Notes.................................................. 50 Description of Capital Stock.............................................. 62 Certain Federal Income Tax Consequences................................... 64 Underwriting.............................................................. 65 Legal Matters............................................................. 66 Independent Certified Public Accountants.................................. 66 Available Information..................................................... 67 Incorporation of Certain Documents by Reference........................... 67 Index to Financial Statements............................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- $300,000,000 [LOGO OF U.S. FILTER] UNITED STATES FILTER CORPORATION % CONVERTIBLE SUBORDINATED NOTES DUE 2001 ---------------- PROSPECTUS ---------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SALOMON BROTHERS INC DEUTSCHE MORGAN GRENFELL NATWEST SECURITIES LIMITED SMITH BARNEY INC. , 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated expenses to be incurred by the Company in connection with the issuance and distribution of the securities being registered, other than underwriting discounts and commissions. Registration fee.................................................... $104,545 NASD fee............................................................ 30,500 Printing............................................................ 200,000 Accounting fees..................................................... 125,000 Legal fees.......................................................... 125,000 Trustee fees........................................................ 12,500 Rating agency fees.................................................. 100,000 Miscellaneous....................................................... 2,455 -------- Total........................................................... $700,000 ========
ITEM 16. EXHIBITS. The following exhibits are filed with or incorporated by reference in this Registration Statement:
EXHIBIT NO. DESCRIPTION 1.1 Form of Underwriting Agreement (previously filed) 2.1 Amended and Restated Purchase and Sale Agreement, dated as of September 14, 1996, between Wheelabrator Technologies Inc. and United States Filter Corporation (previously filed) 2.2 Agreement, dated October 7, 1996, between United Utilities Plc and certain of its subsidiaries and United States Filter Corporation (incorporated by reference to Exhibit 2.2 to Form 8-K dated October 28, 1996 (File No. 1-10728)) 2.3 Stock Purchase Agreement, dated as of September 10, 1996, among Edmundson International, Inc., United States Filter Corporation and WaterPro Supplies Corporation (previously filed) 2.4 Agreement and Amendment, dated December 2, 1996, between Wheelabrator Technologies Inc. and United States Filter Corporation (incorporated by reference to Exhibit 2.2 to Form 8-K dated December 2, 1996 (File No. 1-10728)) 4.1 Indenture, dated as of , 1996, between United States Filter Corporation and State Street Bank and Trust Company of California, N.A., as Trustee (previously filed) 4.2 Form of Convertible Subordinated Note due 2001 (included in Indenture filed as Exhibit 4.1) 4.3 Amended and Restated Multicurrency Credit Agreement, dated as of December 2, 1996, among United States Filter Corporation and certain of its subsidiaries, the Lenders named therein, DLJ Capital Funding, Inc., as Documentation Agent, ABN AMRO Bank, N.V., as Co-Agent, and The First National Bank of Boston, as Managing Agent (incorporated by reference to Exhibit 4.1 to Form 8-K dated December 2, 1996 (File No. 1-10728)) 5.1 Opinion of Damian C. Georgino as to the legality of the securities being registered 12.1 Computation of Ratio of Earnings to Fixed Charges (previously filed) 23.1 Consents of KPMG Peat Marwick LLP and KPMG Audit Plc (previously filed) 23.2 Consent of Price Waterhouse LLP (previously filed) 23.3 Consent of Ernst & Young LLP 23.4 Consent of Arthur Andersen LLP (previously filed)
II-1 23.5 Consent of Damian C. Georgino (included in Exhibit 5.1) 24.1 Power of Attorney (previously filed) 25.1 Statement of Eligibility and Qualification of State Street Bank and Trust Company of California, N.A., as Trustee (previously filed)
ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. Provided, however, that paragraphs (a)(i) and (a)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (b) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-2 The undersigned registrant hereby undertakes that: (1) For the purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palm Desert, State of California, on December 10, 1996. UNITED STATES FILTER CORPORATION By: /s/ Richard J. Heckmann ____________________________ Richard J. Heckmann Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amendment has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE /s/ Richard J. Heckmann Chairman of the Board, December 10, 1996 - ------------------------------------ President and Chief Richard J. Heckmann Executive Officer (Principal Executive Officer) and a Director /s/ Kevin L. Spence Vice President and Chief December 10, 1996 - ------------------------------------ Financial Officer Kevin L. Spence (Principal Financial and Accounting Officer) * Executive Vice President and December 10, 1996 - ------------------------------------ a Director Michael J. Reardon * Senior Vice President and a December 10, 1996 - ------------------------------------ Director Tim L. Traff * Director December 10, 1996 - ------------------------------------ James E. Clark Director December 10, 1996 - ------------------------------------ John L. Diederich * Director December 10, 1996 - ------------------------------------ Robert S. Hillas * Director December 10, 1996 - ------------------------------------ Arthur B. Laffer * Director December 10, 1996 - ------------------------------------ Alfred E. Osborne, Jr. * Director December 10, 1996 - ------------------------------------ J. Danforth Quayle * Director December 10, 1996 - ------------------------------------ C. Howard Wilkins, Jr. /s/ Damian C. Georgino By: ___________________________ December 10, 1996 Damian C. Georgino Attorney-In-Fact
II-4 EXHIBIT INDEX
SEQUENTIAL EXHIBIT NO. DESCRIPTION PAGE NO. 5.1 Opinion of Damian C. Georgino................ 23.3 Consent of Ernst & Young LLP................. 23.5 Consent of Damian C. Georgino (included in Exhibit 5.1).................................
EX-5.1 2 OPINION OF DAMIAN C. GEORGINO Exhibit 5.1 December 10, 1996 United States Filter Corporation 40-004 Cook Street Palm Desert, California 92211 Ladies and Gentlemen: I am Vice President, General Counsel and Secretary of United States Filter Corporation, a Delaware corporation (the "Company"), and have acted as counsel to the Company in connection with the Registration Statement on Form S-3 (No. 333-14281), filed by the Company on October 17, 1996, as amended (the "Registration Statement") with the United States Securities and Exchange Commission pursuant to the United States Securities Act of 1933, as amended (the "Act"), with respect to an aggregate of up to $345,000,000 in Convertible Subordinated Notes due 2001 (the "Notes"), convertible into shares of common stock of the Company, par value $.01 per share (the "Common Stock"). I am familiar with the Registration Statement and have reviewed the Company's Certificate of Incorporation and By-laws, each as amended and restated. I have also examined such other public and corporate documents, certificates, instruments and corporate records, and such other questions of law, as I have deemed necessary for purposes of expressing an opinion on the matters hereinafter set forth. In all examinations of documents, instruments and other papers, I have assumed the genuineness of all signatures on original and certified documents and the conformity to original and certified documents of all copies submitted to me as conformed, photostatic or other copies. On the basis of the foregoing, I am of the opinion that the issuance of the Notes and the shares of Common Stock into which the Notes are convertible has been duly authorized by the Company, and if and when sold by the Company as contemplated by the Prospectus contained in the Registration Statement and, in the case of the shares of Common Stock, upon conversion in accordance with the terms of the Notes, each will be validly issued, fully paid and non-assessable. I hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. I also consent to the reference under the caption "Legal Matters" in the Registration Statement. In giving this consent, I do not thereby admit that I am included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission. Yours truly, /s/ Damian C. Georgino EX-23.3 3 CONSENT OF ERNST & YOUNG EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Independent Certified Public Accountants" in the Registration Statement (Form S-3) and related Prospectus of United States Filter Corporation for the registration of $345,000,000 of convertible subordinated notes and to the incorporation by reference therein of our report dated February 8, 1996, except for Notes 4 and 10, as to which the date is May 10, 1996, with respect to the consolidated financial statements of Zimpro Environmental, Inc. included in the Current Report on Form 8-K of United States Filter Corporation dated May 31, 1996, filed with the Securities and Exchange Commission. /s/Ernst & Young LLP Ernst & Young LLP Minneapolis, Minnesota December 10, 1996 -----END PRIVACY-ENHANCED MESSAGE-----