-----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, FMZMhxtOeKxjdLQpzM1daBAGPVtVMm6IJs/cnRwJbPPhnJzKWI1wUcoj85XfEkqv GpmaYY59bT0WGPQJBr1o3A== 0000052466-97-000014.txt : 19970329 0000052466-97-000014.hdr.sgml : 19970329 ACCESSION NUMBER: 0000052466-97-000014 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IONICS INC CENTRAL INDEX KEY: 0000052466 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 042068530 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07211 FILM NUMBER: 97566512 BUSINESS ADDRESS: STREET 1: 65 GROVE ST CITY: WATERTOWN STATE: MA ZIP: 02172 BUSINESS PHONE: 6179262500 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period ended Commission File Number 1-7211 Ionics, Incorporated (Exact name of registrant as specified in its charter) Massachusetts 04-2068530 State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification Number) 65 Grove Street, Watertown, Massachusetts 02172 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 617-926-2500 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $1 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] 1 State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. The aggregate market value of the voting stock held by non- affiliates as of March 21, 1997 was $715,710,320 (15,559,320 shares at $46 per share) (includes shares owned by a trust for the indirect benefit of a non-employee director, and by a trust for the indirect benefit of a spouse of a non-employee director). (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of March 21, 1997, 15,913,621 shares of Common Stock, $1 par value, were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1996 Annual Report to Stockholders. Parts I, II (for Item 201 information) and IV Portions of the Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 8, 1997. Part III 2 PART I Item 1. BUSINESS Ionics, Incorporated ("Ionics," the "Company," or the "Registrant") is a leading water purification company engaged worldwide in the supply of water and of water treatment equipment through the use of proprietary separations technologies and systems. Ionics' products and services are used by the Company or its customers to desalt brackish water and seawater, to purify and supply bottled water, to treat water in the home, to manufacture and supply water treatment chemicals and ultrapure water, to process food products, recycle and reclaim process water and wastewater, and to measure levels of water-borne contaminants and pollutants. The Company's customers include industrial companies, consumers, municipalities and utilities. The Company's business activities are divided into three segments: Membranes and Related Equipment; Water, Food and Chemical Supply; and Consumer Products, which in 1996 accounted for approximately 46%, 34% and 20% of revenues, respectively. Approximately 36% of the Company's 1996 revenues were derived from foreign sales or operations. Since 1985, the Company has pursued a strategy of expanding beyond its traditional focus of selling desalination plants and equipment by owning and operating its own equipment to produce and sell water, food and chemicals. In 1996, the Water, Food and Chemical Supply and Consumer Products business segments accounted for 66% of the Company's earnings before interest and taxes. Currently, the Company's three business segments encompass ten business areas or applications described by the Company as its "Ten-Cylinder EngineSM" strategy. The description of the Company's business segments under this Item is further divided into a description of these business areas. Over forty years ago, the Company pioneered the development of the ion-exchange membrane and the electrodialysis process. Since that time, the Company has expanded its separations technology base to include a number of membrane and non-membrane- based separations processes which the Company refers to as "The Ionics ToolboxSM." These separations processes include electrodialysis reversal (EDR), reverse osmosis (RO), ultrafiltration (UF), microfiltration (MF), electrodeionization (EDI), electrolysis, ion exchange, carbon adsorption, and thermal processes such as evaporation and crystallization, as well as solvent extraction and recovery processes. The Company believes that it is the world's leading manufacturer of ion-exchange membranes and of membrane-based systems for the desalination of water. The Company was incorporated in Massachusetts in 1948. The Company's principal executive offices are located at 65 Grove Street, Watertown, Massachusetts 02172. 3 I-1 Financial Information About Business Segments The information contained in Note 14 of Notes to Consolidated Financial Statements contained in the Company's Annual Report to Stockholders for the year ended December 31, 1996 is incorporated herein by reference. Membranes and Related Equipment The Company's Membranes and Related Equipment business segment, which accounted for approximately 46% of revenues in 1996 and provides membrane-based and other advanced technology systems to the municipal and industrial markets, is divided into four market areas: desalination and related water treatment equipment; wastewater treatment equipment; instruments; and ultrapure water equipment. 1. Desalination and Related Water Treatment Equipment Opportunities for the sale of desalination and related water treatment equipment arise from changes in the needs of people and municipalities, from industrial shifts and growth, and from a need to avert environmental concerns. With less than 1% of the total water on the planet fresh and usable, desalination has played an important role in creating new water sources. The Company sells a wide spectrum of products and systems to serve this market which utilize technologies including electrodialysis reversal, ion exchange, electrodeionization, reverse osmosis, ultrafiltration, and carbon adsorption. Depending on the customers' needs, the Company provides standardized versions of systems utilizing one or more of the technologies mentioned, or can supply complete turnkey plants that may include standardized models as well as peripheral water treatment equipment, complete engineering services, process and equipment design, project engineering, commissioning, operator training and field service. 2. Wastewater Treatment Equipment The market for wastewater treatment, recycle and reuse has shown significant growth as world demand for water of specified quality continues to increase and as regulations limiting waste discharges to the environment continue to mount. The wastewater market is increasingly driven by the concept of Total Water ManagementSM, which involves the recognition that the water streams which enter, leave or become part of a process can be managed to achieve overall economic efficiencies. Ionics services the wastewater market with brine concentrators and crystallizers, traditional wastewater treatment equipment, and special electrodialysis reversal membrane-based concentrators for recycle and reuse. 4 I-2 The Company designs, engineers and constructs brine concentrators, evaporators and crystallizers which are used to clean, recover and recycle wastewater, particularly in zero liquid discharge industrial uses. Such systems may also incorporate electrodialysis reversal membrane systems as preconcentrators. Ionics also holds a license for a patented solvent extraction technology known as B.E.S.T. (Basic Extraction Sludge Technology), which separates contaminated sludges, sediments and soils into oil, water and solids and has potential use for cleanup of toxic organic materials at contaminated sites. Ionics also designs, engineers and constructs customized systems for industrial wastewater customers which may include conventional treatment systems as well as advanced separation technologies such as electrodialysis reversal, reverse osmosis, electrolysis and microfiltration. Typical industrial customers are power stations, chemical and petrochemical plants, metal-working and automobile factories, textile manufacturers and a variety of other industrial applications. The Company also provides custom and packaged sewage treatment systems for municipalities. 3. Instruments The Company sells instruments to measure water quality for industrial and government customers. In 1996, the Company acquired Sievers Instruments, Inc. (Sievers), located in Boulder, CO. Sievers manufactures, among other instruments, total organic carbon (TOC) monitors used primarily in ultrapure water applications in the semiconductor and pharmaceutical industries, which complement the Company's existing TOC monitor line for process water and wastewater applications. The Company's instrument products, which are used both in the laboratory and on-line, measure and detect, among other things, total carbon, TOC, nitric oxide, chemical oxygen demand and total oxygen demand. The Company also sells instruments for the measurement of dissolved metals which are sensitive to the part-per-billion range and specific chemical analyzers for ammonia, phosphates, nitrates and chlorine. 4(a). Ultrapure Water Equipment Ultrapure water, which has been purified by a series of processes to the degree that remaining impurities are measured in parts per billion or trillion, is required for specialized industrial uses. The demand for technologically advanced ultrapure water equipment and systems has increased as the industries which use ultrapure water have become more knowledgeable about their quality requirements. Ultrapure water needs are particularly important in the semiconductor, pharmaceutical, petroleum and power generation industries. The semiconductor industry in particular has increasingly demanded higher purity water as the circuits on silicon wafers have become more densely packed. 5 I-3 The recent increasing worldwide demand for computer chips has sparked a worldwide boom in the construction of fabrication facilities and the associated need for ultrapure water equipment. The Company supplies sophisticated ultrapure water systems to the semiconductor, electronics and power industries which utilize a combination of electrodialysis reversal, ion- exchange, electrodeionization, reverse osmosis and ultrafiltration technologies. These systems are either trailer-mounted or land-based and vary from standardized modules to large multimillion dollar systems, depending on the customer's requirements. Water, Food and Chemical Supply The Water, Food and Chemical Supply business segment accounted in 1996 for approximately 34% of the Company's revenues. The Company's strategy is to sell, where appropriate, water, food products and chemicals produced by its membrane-based equipment, rather than selling the equipment itself. The Water, Food and Chemical Supply business segment can be divided into four market areas: ultrapure water supply; drinking water supply; chemical supply; and food processing. 4(b). Ultrapure Water Supply In industries such as power generation, semiconductors, pharmaceuticals and biotechnology, ultrapure water is critical to product quality and yield. Depending on the composition and quantity of the impurities to be removed or treated, any one of several membrane separations methods can be utilized to provide ultrapure water to the customer. Ionics has pioneered in the application of three membrane technologies (EDR, RO and UF) combined together in a mobile system called the "triple membrane" trailer for use in the commercial processing of ultrapure water. Ionics provides ultrapure water services and the production and sale of ultrapure water from trailer-mounted units at customer sites. Ionics has also commercially implemented its new electrodeionization (EDI) technology in the production of ultrapure water. EDI is a continuous, electrically driven, membrane-based water purification process which produces ultrapure water without the use of strong chemical regenerants, such as sulfuric acid and caustic soda, which are commonly required. The Company's new TMT-II trailers utilize a combination of EDI, RO and UF technologies and represent what the Company believes to be the most advanced technology used in the commercial processing of ultrapure water. At the end of 1996, the Company had a total capacity, installed or under construction, of approximately 13,000 gallons per minute for the production of ultrapure water under long-term contracts with various industries. 6 I-4 In January 1996, the Company acquired Apollo Ultrapure Water Systems, Inc., based near Los Angeles, enabling the Company to provide additional resources to service the growing Southern California ultrapure water market. One of the Company's important ultrapure water service activities is ion exchange regeneration services, which are provided at four U.S. locations. The Company also provides system sanitization and high-flow deionization services at customer sites. 5. Drinking Water Supply Ionics' position as a seller of purified or treated water has evolved from its traditional role as a supplier of water treatment equipment. In certain situations, opportunities are available for the Company to provide a complete service package involving financing, construction, operation and maintenance of water treatment facilities. Ionics, through its wholly owned subsidiary, Ionics Iberica, S.A., owns and operates a 5.5 million gallon per day capacity brackish water EDR facility and a 3.6 million gallon per day RO seawater facility on Grand Canary Island, Spain. Under long-term contracts, the Company is selling the desalted water from both facilities to the local water utility for distribution. The Company's wholly owned subsidiary, Ionics (Bermuda) Ltd., owns and operates a 600,000 gallon per day EDR brackish water desalting plant on the island of Bermuda. This plant supplies fresh water under a long-term contract with Watlington Waterworks Ltd., a Bermuda corporation partially owned by Ionics. Through its acquisition of Aqua Design, Inc. in January 1996, the Company owns and operates approximately 35 desalination plants on a number of Caribbean islands, which provide drinking water to hotels, resorts and governmental entities. 7 I-5 6. Chemical Supply In the chemical supply area, the Company uses its CloromatR electrolytic membrane-based technology to produce sodium hypochlorite and related chlor-alkali chemicals for industrial, commercial and other non-consumer applications. The Company's wholly owned Australian subsidiary, Elite Chemicals Pty. Ltd., utilizes Cloromat systems to produce sodium hypochlorite on-site in Brisbane for the industrial, commercial and janitorial supply of bleach products, and to supply sodium hypochlorite to treat the City of Brisbane's drinking water supply under a five-year contract. The Company's wholly owned English subsidiary, Ionics (U.K.) Limited, engages in sales of bulk bleach produced by Cloromat facilities in Bridgwater and Thetford, England. These facilities supply bleach directly to manufacturers of cellophane and household cleaning products, respectively, and also supply bleach in bulk form to the regional market. 7. Food Processing In 1994, the Company commenced operations under an agreement with a major U.S. dairy cooperative overseeing whey processing activities at two plants owned by the cooperative. Included in the equipment being utilized by the Company at these plants are its ElectromatR electrodialysis systems. The Company receives a processing fee for its services based on the production of demineralized whey. In July 1996, the Company acquired Separation Technology, Inc. (STI), with headquarters in St. Paul, MN. STI is a supplier of membrane-based purification equipment and services to the food industry. Systems built by STI are used primarily for the concentration, clarification or fractionation of fluid food products or food plant effluents. Representative uses include the concentration of cheese whey, milk and juice, the production of whey protein concentrates, and the clarification of brine for reuse and recovery of spent caustic. Consumer Products The Company's Consumer Products business segment accounted for approximately 20% of the Company's revenues in 1996. The Company's consumer products serve the bottled water, home water purification and consumer bleach product market areas. 8. Aqua CoolR Pure Bottled Water Ionics entered the bottled water business in 1984. The Company's strategy is to utilize its proprietary desalination and purification technology to produce a brand of drinking water, named Aqua Cool Pure Bottled Water, which can be 8 I-6 reproduced with uniform consistency and high quality at numerous locations around the world. Distribution operations have been established to serve the areas in and around London, Manchester, Birmingham, Bristol and Leeds, England; a number of metropolitan areas in the eastern, southeastern and central United States; and, through joint ventures, in Bahrain, Kuwait and Saudi Arabia. The Company's business focuses on the sale of Aqua Cool in five-gallon bottles to a variety of commercial and residential customers. At the end of 1996, there were a total of 27 Aqua Cool distribution centers in the United States and overseas, supplied with Aqua Cool by seven regional water purification and bottling facilities, supplying a customer base of approximately 100,000. 9. Home Water Purification Systems Point-of-Use Devices The Company participates in the "point-of-use" market for over- and under-the-sink water purifiers through the manufacture and sale of HYgeneR, a proprietary, EPA-registered, silver-impregnated activated carbon filtering medium, and through the sale of reverse osmosis and activated carbon-based filtering devices. The Company incorporates HYgene, which is designed to prevent bacterial build-up while providing the capability of removing undesirable tastes and odors from the water supply, into its own bacteriostatic water conditioners and also sells HYgene to manufacturers of household point-of- use water filters. Point-of-Entry Devices Ionics' point-of-entry water products include ion exchange water conditioners to "soften" hard water, and chemicals and media for filtration and treatment. The Company sells its products, under the General Ionics and other brand names, through both independent distributorships and wholly owned sales and service dealerships. 10. Bleach-Based Consumer Products The Company's Elite New England division operates a Cloromat facility to produce and distribute bleach-based products for the consumer market, primarily one-gallon bleach products under private label or under the Company's own "EliteR", "Super ValueTM" and "UltraPureTM" brands, and methanol-based automobile windshield wash solution. These operations are conducted in a 129,000 square foot manufacturing facility, located in Ludlow, Massachusetts. A recently purchased facility in Elkton, Maryland will serve as the Mid- Atlantic regional manufacturing and distribution center for bleach-based and related consumer products. 9 I-7 Raw Materials and Sources of Supply All raw materials essential to the business of the Company can normally be obtained from more than one source. In those few instances where raw materials are being supplied by only one source, the current supplier has given the Company a lead time for cancellation, which the Company believes is sufficient to enable it to obtain other suppliers. In addition, the Company maintains inventories of single source items which it believes are adequate under the circumstances. The Company produces the membranes required for its equipment and systems that use the ED, EDR, MF, UF and EDI processes. Membranes used for the RO process are purchased from outside suppliers, and are normally available from multiple sources. Patents and Trademarks The Company believes that its products, know-how, servicing network and marketing skills are more significant to its business than trademarks or patent protection of its technology. Nevertheless, the Company has a policy of applying for patents both in the United States and abroad on inventions made in the course of its research and development work for which a commercial use is considered likely. The Company owns numerous United States and foreign patents and trademarks and has issued licenses thereunder, and currently has additional pending patent applications. Of the 99 outstanding U.S. patents held by the Company, a substantial portion involves membranes, membrane technology and related separations processes such as electrodialysis and electrodialysis reversal, reverse osmosis, ultrafiltration and electrodeionization. The Company does not believe that any of its individual patents or groups of related patents, nor any of its trademarks, is of sufficient importance that its termination or abandonment, or the cancellation of licenses extending rights thereunder, would have a material adverse effect on the Company. Seasonality The activities of the Company's businesses are not of a seasonal nature, other than certain activities of the Consumer Products segment. Bottled water sales and bleach products for swimming pool use tend to increase during the summer months. Also, sales levels for automobile windshield wash solution increase in the winter months. 10 I-8 Customers The nature of the Company's business is such that it frequently has in progress large contracts with one or more customers for specific projects; however, there is no one customer whose purchases account for 10% or more of the Company's consolidated revenues and whose loss would have a material adverse effect on the Company and its subsidiaries taken as a whole. Backlog The Company's backlog of firm orders was $210,505,000 at December 31, 1996 and $175,409,000 at December 31, 1995. For multi-year contracts, the Company includes in reported backlog the revenues associated with the first five years of the contract. For multi-year contracts which are not otherwise included in backlog, the Company includes in backlog up to one year of revenues. Ionics expects to fill approximately 76% of its December 31, 1996 backlog during 1997. The Company does not believe that there are any seasonal aspects to these backlog figures. Government Contracts The Company does not believe that any of its sales under U.S. Government contracts or subcontracts during 1996 are subject to renegotiation. The Company has not had adjustments to its negotiated contract prices, nor are any proceedings pending for such adjustments. Research and Development Since the development of the ion exchange membrane and the EDR process, Ionics has continued its commitment to research and development directed toward products for use in water purification, processing and measurement, and separations technology. The Company's research and development expenses were approximately $5,108,000 in 1996, $4,180,000 in 1995, and $3,372,000 in 1994. Competition The Company experiences competition from a variety of sources with respect to virtually all of its products, systems and services, although the Company knows of no single entity that competes with it across the full range of its products and services. Competition in the markets served by the Company is based on a number of factors, which may include price, technology, applications experience, know-how, availability of financing, reputation, product warranties, reliability, service and distribution. 11 I-9 With respect to the Company's Membranes and Related Equipment business segment, there are a number of companies, including several sizable chemical companies, that manufacture membranes, but not equipment. There are numerous smaller companies, primarily fabricators, that build water treatment and desalination equipment, but which generally do not have their own proprietary membrane technology. A limited number of companies manufacture both membranes and equipment. The Company has numerous competitors in its conventional water treatment, instruments and fabricated products business lines. In 1996, the International Desalination Association released a report providing data regarding the manufacturers of desalination equipment. According to the report, which covered land-based water desalination plants delivered or under construction as of December 1995, with a capacity to produce 100 cubic meters (approximately 25,000 gallons) or more of fresh water daily, Ionics ranked first in terms of the cumulative number of such plants sold, having sold 1,414 plants of such capacity, more than the next three manufacturers combined. When compared only to manufacturers of membrane-type desalination equipment, Ionics ranked first in both number of units sold and the total capacity of units sold. With respect to the Water, Food and Chemical Supply business segment, the Company competes with regional suppliers of ultrapure water services, and with other manufacturers of membrane-related equipment. In the chemical supply activity, the Company competes with manufacturers and distributors of sodium hypochlorite and water treatment chemicals. With respect to the Company's Consumer Products business segment, there are numerous bottled water companies which compete with the Company, including several which are much larger than the Company. Most of the Company's competitors in point-of-entry and point-of-use products for the home are small assemblers, serving local or regional markets. However, there are also several large companies competing nationally in these markets. In the case of its silver-impregnated activated carbon product lines, the Company knows of two competitors with which it competes on a national basis. The Company competes with many suppliers of bleach and bleach-based cleaning products and automobile windshield wash for the consumer market, a number of which are much larger than the Company. The Company is unable to state with certainty its relative market position in all aspects of its business. Many of its competitors have financial and other resources greater than those of the Company. 12 I-10 Environmental Matters Continued compliance by the Company and its subsidiaries with federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment is expected to have no material effect upon capital expenditures, earnings or the competitive position of the Company or any of its subsidiaries. The Company is one of approximately 1,000 potentially responsible parties (PRPs) at a Superfund site at Solvent Recovery Services of New England in Southington, Connecticut (the "SRS Site"). The Company's volumetric ranking in comparison to the total volume of wastes treated at the SRS Site is approximately 0.5%. A non-time critical removal action, consisting of containment, pumping, and treatment of the most heavily contaminated non-bedrock groundwater, was completed in 1995. Combined assessments to date against all PRPs for non-time critical removal actions and other work total $9.73 million. The Company's share of these assessments is approximately $51,000. The ultimate site cleanup cost is currently not expected to exceed $59 million, of which the Company's share would not exceed $308,000 including the amounts already assessed against the Company. While it is too soon to predict the scope and cost of the final clean-up remedy that the EPA will select, based on the Company's small volumetric ranking and the identities of the larger PRPs, which include many substantial companies, the Company believes that its liability in this matter will not have a material effect on the Company or its financial position. During 1995, the Company acquired certain real property in Maryland to accommodate expansion of the Elite bleach-based consumer chemicals business. Prior to its acquisition by the Company, the property had been determined to have some contamination of soil and groundwater. In conjunction with the purchase, the Company worked closely with the Maryland Department of the Environment and, based upon an environmental study completed by a third party consultant, reached a preliminary agreement regarding treatment. Based upon the costs of treatment identified by the consultant, the Company has provided a conservative accrual, recorded as part of the cost of the property. The Company believes that additional liability associated with treatment of the property, if any, will not have a material effect on the Company or its financial condition. 13 I-11 The Company has never had a product liability claim grounded in environmental liability, and believes that the nature of its products and business makes such a claim unlikely. Employees The Company and its consolidated subsidiaries employ approximately 1,850 full-time persons, none of whom are represented by unions except for the employees of the Company's Australian subsidiary and certain employees of the Company's Spanish subsidiary. The Company considers its relations with its employees to be good. Foreign Operations The Company's sales to customers in foreign countries primarily involve desalination systems, water and wastewater treatment systems, sodium hypochlorite, Cloromat systems, related products and services related to the foregoing systems, and bottled water. The Company seeks to minimize financial risks relating to its international operations. Wherever possible, the Company obtains letters of credit or similar payment assurances denominated in U.S. dollars. If U.S. dollar payments cannot be secured, the Company, where appropriate, enters into foreign currency hedging transactions. The Company also uses foreign sources for equipment parts and may borrow funds in local (foreign) currencies to offset the asset risk of foreign currency devaluation. Net foreign currency transaction gains included in income before taxes totalled $548,000 in 1996, $58,000 in 1995 and $23,000 in 1994. Ionics engages in certain foreign operations both directly and through the following wholly owned subsidiaries: Ionics (Bermuda) Ltd.; Ionics Iberica, S.A.; Ionics (U.K.) Limited; Ionics Italba, S.p.A.; Ionics Nederland B.V.; Global Water Services, S.A.; Elite Chemicals Pty. Ltd.; Eau et Industrie; Resources Conservation Co. International; Ionics (Korea) Ltd.; and Ionics Foreign Sales Corporation Limited. In January 1996, Ionics acquired Aqua Design, Inc., which has a number of subsidiaries and affiliates incorporated in various Caribbean jurisdictions which are engaged in seawater desalination operations. The Company engages in various foreign operations through investments in affiliated companies and joint venture relationships. The activities include the production, sale and distribution of bottled water through a 40% owned affiliate in Bahrain, a 40% owned affiliate in Saudi Arabia, and a 49% owned affiliate in Kuwait. 14 I-12 In addition, the Company has a 19% ownership interest in Watlington Waterworks Ltd. in Bermuda. Watlington collects, treats and distributes water throughout Bermuda for both potable and non-potable uses. The Company also has a 50% ownership interest in Yuasa-Ionics Co., Ltd., Tokyo, Japan, which among its activities serves as a distributor of certain of the Company's products in Japan; a 49% ownership interest in Ionics-Mega s.r.o., a limited liability company of the Czech Republic established to pursue water treatment opportunities in that country; and a 20% interest in Aguas Tratadas de Cadereyta, S.A. de C.V., a company organized to provide water treatment services in Mexico. Further geographical and financial information concerning the Company's foreign operations appears in Notes 1, 5, 8, 9, 12, 13 and 14 to the Company's Consolidated Financial Statements included as part of the Company's 1996 Annual Report to Stockholders, which Notes are incorporated herein by reference. Financial Information About Foreign and Domestic Operations and Export Sales The information contained in Note 14 of Notes to Consolidated Financial Statements contained in the Company's Annual Report to Stockholders for the year ended December 31, 1996 is incorporated herein by reference. Item 2. PROPERTIES The Company owns or leases and occupies various manufacturing and office facilities in the United States and abroad. The principal facilities owned by the Company include two buildings in Watertown, Massachusetts, containing approximately 250,000 square feet and housing executive offices, laboratories and manufacturing and assembly operations; a 234,000 square foot facility in Elkton, Maryland which will be utilized primarily for consumer bleach and automobile windshield wash product packaging and distribution; a 129,000 square foot facility in Ludlow, Massachusetts which is utilized primarily for packaging and distribution of consumer bleach and windshield wash products; two buildings in Bridgeville, Pennsylvania containing approximately 77,000 square feet and housing manufacturing operations for home water treatment equipment and fabricated products; and other facilities in the U.S. and overseas for various operations relating to the business of the Company. The Company makes use primarily of leased facilities for its Aqua Cool bottled water distribution centers at 27 locations in the U.S. and overseas. The Company considers the business facilities that it utilizes to be adequate for the uses to which they are being put. 15 I-13 Item 3. LEGAL PROCEEDINGS The Company is involved in the normal course of its business in various litigation matters. Although the Company's counsel is unable to determine at the present time whether the Company will have any liability in any of the pending matters, some of which are in the early stages of pre-trial discovery, the Company believes generally that it has meritorious defenses and that none of the pending matters will have an outcome material to the financial condition or business of the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 16 I-14 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Reference is made to the Company's Annual Report to Stockholders for the year ended December 31, 1996. The information set forth on page 32 entitled "Common Stock Price Range" and on the inside back cover of such Annual Report is hereby incorporated by reference. During 1996, the Company issued a total of 1,062,277 shares of Common Stock to the stockholders of four closely held corporations that were acquired by the Company during the year, and to the principal of a proprietorship, the assets of which were acquired by a subsidiary of the Company during the year. The details of these transactions are as follows: Agreed 1933 Act Shares Value Exemption Acquisition Date Issued Per Share Relied Upon Aqua Design, Inc. and 1/3/96 222,977 $44.29 Section 4(2) related companies (stock) Apollo Ultrapure Water 1/10/96 331,567 $42.00 Section 4(2) Systems, Inc. and related companies (stock) and real estate Sievers Instruments, Inc. 5/31/96 447,258 $47.06 Rule 506 (stock) Separation Technology, Inc. 7/25/96 58,000 $42.00 Section 4(2) (stock) Mark Keenan (assets) 12/6/96 2,475 $48.48 Section 4(2) In each case, the Company's Common Stock was offered to the stockholders of the company being acquired or to the seller of the assets being purchased. The Common Stock was valued in each case as an average of the last sales prices of the Common Stock as reported on the New York Stock Exchange over a stated number of days preceding either the closing date or the date of the purchase agreement. 17 II-1 With respect to the Sievers acquisition, the Company met all the requirements for compliance with a Rule 506 offering. The other acquisitions all involved either small numbers of sophisticated investors and/or non-U.S. residents, the shares issued were legended and made the subject of "stop transfer" instructions, and the only permitted sales to date have been made pursuant to resale registration statements prepared and filed pursuant to the exercise of certain registration rights granted to such stockholders. Item 6. SELECTED FINANCIAL DATA Reference is made to the Company's Annual Report to Stockholders for the year ended December 31, 1996. The information set forth on page 32 of such Annual Report entitled "Selected Quarterly Financial Data (UNAUDITED)" is hereby incorporated by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reference is made to the Company's Annual Report to Stockholders for the year ended December 31, 1996. The information set forth on pages 16 through 18 of such Annual Report entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" is hereby incorporated by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Company's Annual Report to Stockholders for the year ended December 31, 1996. The consolidated balance sheets of the Registrant as of December 31, 1996 and 1995, the related consolidated statements of operations, cash flows and stockholders' equity for the years ended December 31, 1996, 1995 and 1994, and the related notes with the opinion thereon of Coopers & Lybrand L.L.P., independent accountants, on pages 18 through 31, and Selected Quarterly Financial Data (unaudited) on page 32, are hereby incorporated by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE This item is not applicable to the Company. 18 II-2 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 with respect to directors is hereby incorporated by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held May 8, 1997 to be filed with the Securities and Exchange Commission on or about March 28, 1997. The information regarding executive officers is as follows:
Age as of Positions Name March 1, 1997 Presently Held Arthur L. Goldstein* 61 President, Chief Executive Officer and Director since 1971; Chairman of the Board since 1990 William E. Katz 72 Executive Vice President since 1983; Director since 1961 Robert J. Halliday 42 Vice President, Finance and Accounting since December 1990; Chief Financial Officer since August 1992 Stephen Korn 51 Vice President, General Counsel and Clerk since September 1989 Theodore G. Papastavros 63 Vice President since 1975 (currently Vice President, Strategic Planning) and Treasurer since February 1990 ___________________ * Member of Executive Committee
There are no family relationships between any of the officers or directors. Officers of the Company are elected each year at the annual meeting of Directors. All of the above executive officers have been employed by the Company in various capacities for more than five years. Item 11. EXECUTIVE COMPENSATION The information required by Item 11 is hereby incorporated by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held May 8, 1997 to be filed with the Securities and Exchange Commission on or about March 28, 1997. 19 III-1 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is hereby incorporated by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held May 8, 1997 to be filed with the Securities and Exchange Commission on or about March 28, 1997. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is hereby incorporated by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held May 8, 1997 to be filed with the Securities and Exchange Commission on or about March 28, 1997. 20 III-2 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements See Index to Financial Statements and Financial Statement Schedules on page IV-7. The Financial Statement Schedules are filed as part of this Annual Report on Form 10-K. 2. Financial Statement Schedules See Index to Financial Statements and Financial Statement Schedules on page IV-7. 3. Exhibits
Exhibit No. Description 3.0 Articles of Organization and By-Laws 3.1 Restated Articles of Organization (filed * as Exhibit 3(a) to Form 10-K for year ended December 31, 1986). 3.1(a) Amendment to the Restated Articles of * Organization (filed as Exhibit 3(b) to Form 10-K for year ended December 31, 1987). 3.1(b) Amendment to Restated Articles of * Organization (filed as Exhibit 3.1(b) to Registration Statement No. 33-38290 on Form S-2 effective January 24, 1991). 3.1(c) Amendment to Restated Articles of * Organization (filed as Exhibit 3.1 to Form 10-Q for quarterly period ending June 30, 1996). 3.2 By-Laws, as amended (filed as Exhibit 19 to * Form 10-Q for the quarter ended September 30, 1989). 4.0 Instruments defining the rights of security holders, including indentures 4.1 Rights Agreement, dated as of December 22, 1987, * as amended and restated as of August 15, 1989, between Registrant and The First National Bank of Boston (filed as Exhibit 1 to Registrant's Current Report on Form 8-K dated August 30, 1989). 21 IV-1 4.2 Indenture, dated as of December 22, 1987, between * Registrant and The First National Bank of Boston, relating to Rights Agreement (filed as Exhibit 2 to Registrant's Current Report on Form 8-K dated December 22, 1987). 4.3 Form of Common Stock Certificate (filed as Exhibit * 4.10 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). 10. Material Contracts 10.1 1979 Stock Option Plan, as amended through * February 22, 1996. 10.2 1986 Stock Option Plan for Non-Employee Directors, 33 as amended through February 19, 1997. 10.3 Amended and Restated Credit Agreement between * Registrant and the First National Bank of Boston dated as of December 31, 1992 (filed as Exhibit 10.3 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 10.3(1) Amendment Agreement No. 1, dated as of * December 31, 1996, to Amended and Restated Credit Agreement between Registrant and The First National Bank of Boston (filed as Exhibit 10.3(1) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). 10.4 Operating Agreement dated as of September 27, * 1989 between Registrant and Aqua Cool Enterprises, Inc. (filed as Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 10.5 Term Lease Master Agreement dated as of * September 27, 1989 between Registrant and Aqua Cool Enterprises, Inc. (filed as Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 10.6 Option Agreement dated as of September 27, 1989 * among Registrant, Aqua Cool Enterprises, Inc. and the other parties named therein (filed as Exhibit 10.6 to Registrant's registration statement on Form S-2, No. 33-38290, effective January 24, 1991). 22 IV-2 10.7 Agreement for Privatization of Water Supplies * dated as of September 18, 1990 between the Company and the City of Santa Barbara, California (filed as Exhibit 10.7 to Registrant's registration statement on Form S-2, No. 33-38290, effective January 24, 1991). 10.8 Amendment No. 1, dated as of January 3, 1992, to * Agreement for Privatization of Water Supplies dated as of September 18, 1990 between the Company and the City of Santa Barbara, California (filed as Exhibit 10.8 to Registrant's annual report on Form 10-K for the year ended December 31, 1991). 10.9 Amendment No. 2, dated as of January 19, 1993, * to Agreement for Privatization of Water Supplies dated as of September 18, 1990 between the Company and the City of Santa Barbara, California (filed as Exhibit 10.9 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992). 10.10 Amendment No. 3, dated June 28, 1994, to Agreement * for Privatization of Water Supplies dated as of September 18, 1990, between the Company and the City of Santa Barbara, California (filed as Exhibit 10.1 to the Registrant's Form 10-Q for the period ending June 30, 1994). 10.11 1994 Restricted Stock Plan (filed as Exhibit 10.12 * to Registrant's Annual Report on Form 10-K dated March 30, 1995). 10.12 1997 Stock Incentive Plan. 43 11. Statement re: Computation of Earnings Per Share. 59 13. Annual Report to Stockholders of the Registrant for 60 the year ended December 31, 1996 (only pages 16 through 32 and the inside back cover constitute an exhibit to this report). 21. Subsidiaries of the Registrant. 95 23. Consents 23.1 Consent of Coopers & Lybrand L.L.P. to incorporation 96 by reference of that firm's report dated February 18, 1997, which is included on page 18 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1996. 24. Power of Attorney. 97 27. Financial Data Schedule. ** ________________________________ * incorporated herein by reference ** for electronic purposes only
23 IV-3 (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the last quarter of fiscal 1996. Undertaking For purposes of complying with the amendments to the rules governing Form S-8 effective July 13, 1990 under the Securities Act of 1933, the undersigned hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's registration statements on Form S-8 Nos. 33-14194, 33-5814, 33-2092, 2-72936, 2-82780, 2- 64255, 33-41598, 33-54293, 33-59051, 333-05225 and 33-54400. 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. 24 IV-4 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IONICS, INCORPORATED (Registrant) By/s/Arthur L. Goldstein Arthur L. Goldstein, Chairman of the Board, President and Chief Executive Officer Date: March 27, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 27, 1997 By/s/Arthur L. Goldstein Arthur L. Goldstein, Chairman of the Board, President and Chief Executive Officer (principal executive officer) and Director Date: March 27, 1997 By/s/Robert J. Halliday Robert J. Halliday, Vice President, Finance and Chief Financial Officer (principal financial and principal accounting officer) 25 IV-5 Date: March 27, 1997 By/s/Douglas R. Brown Douglas R. Brown, Director Date: March 27, 1997 By/s/William L. Brown William L. Brown, Director Date: March 27, 1997 By/s/Arnaud de Vitry d'Avaucourt Arnaud de Vitry d'Avaucourt, Director Date: March 27, 1997 By/s/William E. Katz William E. Katz, Director Date: March 27, 1997 By/s/Robert B. Luick______________ Robert B. Luick, Director Date: March 27, 1997 By/s/John J. Shields John J. Shields, Director Date: March 27, 1997 By/s/Carl S. Sloane Carl S. Sloane, Director DATE: March 27, 1997 By/s/Mark S. Wrighton Mark S. Wrighton, Director Date: March 27, 1997 By/s/Allen S. Wyett Allen S. Wyett, Director 26 IV-6 IONICS, INCORPORATED INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES PAGES Report of Independent Accountants 18* Financial Statements: Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 19* Consolidated Balance Sheets as of December 31, 1996 and 1995 20* Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 21* Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 22* Notes to Consolidated Financial Statements 23-31* Supporting Financial Statement Schedules for the years Ended December 31, 1996, 1995 and 1994: Schedule II - Valuation and Qualifying Accounts IV-8 Report of Independent Accountants on Financial Statement Schedule IV-9 __________________ All other schedules are omitted because the amounts are immaterial, the schedules are not applicable, or the required information is shown in the financial statements or the notes thereto. * Page references are to the Annual Report to Stockholders of the Company for the year ended December 31, 1996, which pages are incorporated herein by reference. 27 IV-7 IONICS, INCORPORATED SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Additions Balance at Charged to Due to End of Costs and Acquired Balance at Description Prior Year Expenses Businesses Deductions(A) End of Year Allowance for doubtful accounts and uncollectible notes receivable: Years ended: December 31, 1996 $2,410,000 $1,011,000 $ 286,000 $ 849,000 $2,858,000 December 31, 1995 $2,197,000 $ 579,000 $ 21,000 $ 387,000 $2,410,000 December 31, 1994 $2,022,000 $ 535,000 $ 0 $ 360,000 $2,197,000 (A) Deductions result primarily from the write-off of accounts.
28 IV-8 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Ionics, Incorporated: Our report on the consolidated financial statements of Ionics, Incorporated as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 has been incorporated by reference in this Form 10-K from page 18 of the 1996 Annual Report to Stockholders of Ionics, Incorporated. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the Index on page IV-7 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/COOPERS & LYBRAND L.L.P. Boston, Massachusetts February 18, 1997 29 IV-9 EXHIBIT INDEX
Sequentially Exhibit Numbered No. Description Page No. 3.0 Articles of Organization and By-Laws 3.1 Restated Articles of Organization (filed * as Exhibit 3(a) to Form 10-K for year ended December 31, 1986). 3.1(a) Amendment to the Restated Articles of * Organization (filed as Exhibit 3(b) to Form 10-K for year ended December 31, 1987). 3.1(b) Amendment to Restated Articles of * Organization (filed as Exhibit 3.1(b) to Registration Statement No. 33-38290 on Form S-2 effective January 24, 1991). 3.1(c) Amendment to Restated Articles of * Organization (filed as Exhibit 3.1 to Form 10-Q for quarterly period ending June 30, 1996). 3.2 By-Laws, as amended (filed as Exhibit 19 to * Form 10-Q for the quarter ended September 30, 1989). 4.0 Instruments defining the rights of security holders, including indentures 4.1 Rights Agreement, dated as of December 22, 1987, * as amended and restated as of August 15, 1989, between Registrant and The First National Bank of Boston (filed as Exhibit 1 to Registrant's current Report on Form 8-K dated August 30, 1989). 4.2 Indenture, dated as of December 22, 1987, between * Registrant and The First National Bank of Boston, relating to Rights Agreement (filed as Exhibit 2 to Registrant's Current Report on Form 8-K dated December 22, 1987). 4.3 Form of Common Stock Certificate (filed as Exhibit * 4.10 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). 10. Material Contracts 10.1 1979 Stock Option Plan, as amended through * February 22, 1996. 10.2 1986 Stock Option Plan for Non-Employee Directors, 33 as amended through February 19, 1997. 30 10.3 Amended and Restated Credit Agreement between * Registrant and The First National Bank of Boston dated as of December 31, 1992 (filed as Exhibit 10.3 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 10.3(1) Amendment Agreement No. 1, dated as of * December 31, 1996, to Amended and Restated Credit Agreement between Registrant and The First National Bank of Boston (filed as Exhibit 10.3(1) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). 10.4 Operating Agreement dated as of September 27, * 1989 between Registrant and Aqua Cool Enterprises, Inc. (filed as Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 10.5 Term Lease Master Agreement dated as of * September 27, 1989 between Registrant and Aqua Cool Enterprises, Inc. (filed as Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 10.6 Option Agreement dated as of September 27, 1989 * among Registrant, Aqua Cool Enterprises, Inc. and the other parties named therein (filed as Exhibit 10.6 to Registrant's registration statement on Form S-2, No. 33-38290, effective January 24, 1991). 10.7 Agreement for Privatization of Water Supplies * dated as of September 18, 1990 between the Company and the City of Santa Barbara, California (filed as Exhibit 10.7 to Registrant's registration statement on Form S-2, No. 33-38290, effective January 24, 1991). 10.8 Amendment No. 1, dated as of January 3, 1992, to * Agreement for Privatization of Water Supplies dated as of September 18, 1990 between the Company and the City of Santa Barbara, California (filed as Exhibit 10.8 to Registrant's annual report on Form 10-K for the year ended December 31, 1991). 10.9 Amendment No. 2, dated as of January 19, 1993, * to Agreement for Privatization of Water Supplies dated as of September 18, 1990 between the Company and the City of Santa Barbara, California (filed as Exhibit 10.9 to the Registrant's annual report on Form 10-K for the year ended December 31, 1992). 31 10.10 Amendment No. 3, dated June 28, 1994, to Agreement * for Privatization of Water Supplies dated as of September 18, 1990 between the Company and the City of Santa Barbara, California (filed as Exhibit 10.1 to the Registrant's Form 10-Q for the period ended June 30, 1994). 10.11 1994 Restricted Stock Plan (filed as Exhibit * 10.12 to Registrant's Annual Report on Form 10-K dated March 30, 1995). 10.12 1997 Stock Incentive Plan. 43 11. Statement re: Computation of Earnings Per Share. 59 13. Annual Report to Stockholders of the Registrant for 60 the year ended December 31, 1996 (only pages 18 through 31 and the inside back cover constitute an exhibit to this report). 21. Subsidiaries of the Registrant. 95 23. Consents 23.1 Consent of Coopers & Lybrand L.L.P. to 96 incorporation by reference of that firm's report dated Februry 18, 1997, which is included on page 18 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1996. 24. Power of Attorney. 97 27. Financial Data Schedule. (for electronic purposes only) * incorporated herein by reference
32 EX-10 2 Exhibit 10.2 IONICS, INCORPORATED 1986 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS (As amended through February 19, 1997) 1. Purpose of Plan. This 1986 Stock Option Plan for Non-Employee Directors (hereinafter called the "Plan") of Ionics, Incorporated (hereinafter called the "Company") is intended to advance the interests of the Company by providing a means of attracting capable and qualified persons to serve as independent Directors, and encouraging such persons to continue to serve as Directors, through ownership of Common Stock of the Company. 2. Definitions. 2.1 "Optionee" shall mean a person to whom a stock option has been granted under the Plan. 2.2 "Subsidiary" shall mean a corporation, partnership or other entity whose controlling stock or other ownership interest is owned directly or indirectly by the Company. 3. Effective Date. The Plan will become effective immediately upon its adoption by the Board of Directors of the Company, subject, however, to approval by the holders of a majority of the outstanding shares of its capital stock having voting rights and present at the meeting when the matter is acted upon. 4. Stock Subject to the Plan. Subject to adjustment as provided hereinbelow, the total number of shares of Common Stock, one dollar ($1.00) per share par value (hereinafter "Common Stock"), of the Company for which 33 -2- options may be granted pursuant to the Plan (hereinafter called the "Options" and each singly an "Option") shall not exceed 200,000 shares in the aggregate. Such shares may either be authorized and unissued shares of Common Stock or issued shares of Common Stock which have been reacquired by the Company and held as treasury shares. In the event that any Options granted under the Plan shall be surrendered to the Company or shall terminate, lapse or expire for any reason without having been exercised in full, the shares not purchased under such Options shall be available again for the purpose of issuance pursuant to the Plan. Each eligible Director shall be granted an Option to acquire 2,000 shares of Common Stock as provided in Section 6, subject to adjustment as provided hereinbelow, for each year of service as a Director of the Company. In the event that the outstanding shares of the Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares, or other securities of the Company or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, or dividends payable in stock, corresponding adjustments (as determined by the Board of Directors in their sole discretion to be appropriate) shall be made in the number and kind of shares as to which outstanding Options (or portions thereof then unexercised) and Options to be issued in the future pursuant to the terms of this Plan shall be exercisable, such that the proportionate interest of each Optionee shall be maintained as before the occurrence of such event. Such adjustments in outstanding Options shall be made without change in the aggregate total option price of Option then outstanding and unexercised, but with a corresponding adjustment in the option price per share. 34 -3- 5. Administration of the Plan. The Plan shall be administered by the Board of Directors of the Company or such committee composed of its Directors as may be delegated this duty and function by resolution of the Board of Directors (said Board or said Committee, as the case may be, being hereinafter referred to as the "Administrators"). A majority of the Administrators acting upon a particular matter shall have no personal interest in the Option or matter with which they are concerned. Subject to the express provisions of the Plan, the Administrators may (1) construe the respective stock option agreements and the Plan, prescribe, amend, and rescind rules and regulations relating to the Plan and make all other determinations necessary or advisable for administering the Plan, and (2) correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any stock option agreement in the manner and to the extent they shall deem expedient to carry it into effect and (3) constitute and appoint a person or persons selected by them to execute and deliver in the name and on behalf of the Administrators all such agreements, instruments and other documents. 6. Eligibility; Grant of Options. Only persons who hold office as Directors of the Company and who are not otherwise employees of the Company or of any of its Subsidiaries may be granted an Option under this Plan. Each Director of the Company who is not otherwise an employee of the Company or any Subsidiary shall be granted an Option to acquire 2,000 shares under the Plan with respect to his election to office, and to each year that he continues to serve as a Director of the Company. Each such Director shall be entitled to receive an Option to acquire 2,000 shares under the Plan immediately 35 -4- after the annual meeting of the stockholders at which he is first elected, and an additional Option to acquire 2,000 shares immediately upon completion of each next successive year in office. A Director who assumes office at a time other than an annual meeting of stockholders shall be entitled to receive his initial Option to acquire 2,000 shares under the Plan immediately after the annual meeting of stockholders next following his assumption of office. For purposes of the Plan, a Director shall be considered to have completed a "year in office" on the date of each annual meeting of stockholders while he continues in office; provided, however, that if the interval between any two such annual meetings is greater than 395 days, a Director shall be considered to have completed a "year in office" for purposes of the Plan on the 395th day after the preceding year's annual meeting of stockholders, rather than on the date of the second of the two such annual meetings. 7. The Option Price. The price payable upon exercise of an Option granted hereunder shall be the fair market value at the date of grant of the shares covered by the Option. For purposes of the Plan, if the Common Stock of the Company is listed for trading on the New York Stock Exchange (or any other registered stock exchange), the fair market value of the shares shall be equal to the last sale price for the Common Stock on such exchange on the trading day next preceding the date of grant of an Option. The Option exercise price shall be paid (1) in cash, (2) in shares of the Common Stock of the Company already owned by the person exercising the Option, or (3) in any combination of cash and of such shares. In the event that such shares are delivered to pay for all or a portion of the Option exercise price, they shall be valued at the last sale price for the Common Stock on the New York Stock Exchange (or other registered stock exchange) 36 -5- as reported on the date of delivery of the shares in exercise of the Option, and any shares delivered in payment of the Option exercise price shall be free and clear from all restrictions on transfer, claims or purchase rights, except as the Administrators may affirmatively allow. 8. Nontransferability of Options. Except as otherwise provided in this Section, no Option granted under the Plan shall be encumbered, assigned or otherwise transferred, otherwise than by will or the laws of descent and distribution, and an Option may be exercised during the lifetime of an Optionee only by him. The Administrators may, in their discretion, authorize all or a portion of the Options granted or to be granted to an Optionee to be on terms which permit transfer by such Optionee to (i) the spouse, children or grandchildren of the Optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that (x) the stock option agreement pursuant to which such Options are granted must be approved by the Committee, and must expressly provide for transferability in as manner consistent with this Section, and (y) subsequent transfers of transferred Options shall be prohibited otherwise than by will or the laws of descent and distribution. Following transfer, any such Options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of Section 2.1 hereof, the term "Optionee" shall be deemed to refer to the transferee. The provisions regarding duration of Options in Section 9 hereof shall continue to apply with respect to the original Optionee as to all Options granted to such Optionee, whether or not transferred pursuant to this Section. 37 -6- 9. Duration of Options. Each Option shall expire not more than ten (10) years from its date of grant, but shall be subject to earlier termination: (a) in the event that the Optionee ceases to be a Director of the Company, an Option may thereafter be exercised by him only to the extent that under Section 10, the right to exercise the Option has accrued and is in effect, and only within the period of thirty (30) days after the Optionee ceases to be a Director; or (b) in the event that the Optionee dies while holding office as a Director or within the 30-day period described in paragraph (a), an Option granted to him may thereafter be exercised by his estate or by any person or persons who acquired the right to exercise the Option by bequest or by inheritance or by reason of the death of the Optionee, to the extent of the full number of shares covered by the Option, regardless of whether the Optionee at the time of this death was entitled to exercise the Option in full, but only within the period of ninety (90) days after his death. 10. Time and Manner of Exercise. Options granted under the Plan shall not be exercisable for a period of six (6) months after their date of grant, but shall be immediately exercisable in full thereafter; provided, however, that (i) options may be exercised only during the periods beginning on the third business day following the date on which the Company releases for publication its annual or quarterly financial reports and ending on the twelfth business day following such date and (ii) no Option shall be exercisable after ten (10) years from the date on which it was granted. To the extent that the right to exercise an Option has accrued and is in effect, the Option may be exercised in full at one time or in part from time to time by giving written notice, signed by the person or persons exercising the Option, to the Company, stating the number of shares with respect to which the 38 -7- Option is being exercised, and accompanied by payment in full for such shares in accordance with Section 7. There shall be no such exercise at any one time as to fewer than two hundred (200) shares or all of the remaining shares then purchaseable by the person or persons exercising the Option, if fewer than two hundred (200) shares. Upon such exercise, delivery of a certificate for paid-up non-assessable shares shall be made at the principal Massachusetts office of the Company to the person or persons exercising the Option at such time, during ordinary business hours, after fifteen (15) days but not more than thirty (30) days from the date of receipt of the notice by the Company, as shall be designated in such notice, or at such time, place or manner as may be agreed upon by the Company and the person or persons exercising the Option. Notwithstanding the foregoing, the Company may delay issuance of shares pursuant to an Option until the person exercising the Option has complied with all of the terms and conditions of the Plan and the applicable stock option agreement. 11. Stock Option Agreement Required. Each Option granted under the Plan shall be evidenced by a written option agreement (the "Agreement") between the Company and the Optionee, in such form as the Administrators shall determine, which Agreements may but need not be identical, and which shall (i) comply with and be subject to the terms and conditions of the Plan and (ii) provide that the Optionee agrees to continue to serve as a Director of the Company during the term for which he was elected, and that during such term he will not, without the written consent of the Company, directly or indirectly, accept employment from, or engage in any work or activities as an employee, officer, director, agent, consultant, partner, proprietor or principal stockholder for any other corporation, person or entity having business substantially competitive to the business in which the Company or its Subsidiaries are then engaged. Any Agreement may contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrators. No Option shall be granted within the meaning of the Plan, and no purported grant of any Option shall be effective, until such an Agreement shall have been duly executed on behalf of the Company and the Director to whom the Option is to be granted. 39 -8- 12. Purchase for Investment; Rights of Holder of Subsequent Registration. Unless the shares to be issued upon exercise of an Option have been effectively registered under the Securities Act of 1933 as now in force or hereafter amended, the Company shall be under no obligation to issue any shares covered by any Option unless the person who exercises such Option, in whole or in part, shall give a written representation and undertaking to the Company which is satisfactory in form and scope to counsel to the Company and upon which, in the opinion of such counsel, the Company may reasonably rely, that he is acquiring the shares issued to him pursuant to such exercise of the Option for his own account as an investment and not with a view to, or for sale in connection with, the distribution of any such shares, and that he will make no transfer of the same except in compliance with any rules and regulations in force at the time of such transfer under the Securities Act of 1933, or any other applicable law, and that if shares are issued without such registration, a legend to this effect may be endorsed upon the securities so issued. In the event that the Company shall, nevertheless, deem it necessary or desirable to register under the Securities Act of 1933 or other applicable statutes any shares with respect to which an Option shall have been exercised, or to qualify any such shares for exemption from the Securities Act of 1933 or other applicable statutes, then the Company shall take such action at its own expense and may require reasonable indemnity to the Company and its officers and Directors from such holder against all losses, claims, damages and liabilities arising from such use of the information so furnished and caused by any untrue statement of any material fact therein, or caused by omission to state a material fact required to be stated therein or necessary to make the statement therein not misleading in light of the circumstances under which they were made. 13. Listing of Option Stock. So long as the Common Stock of the Company is listed on the New York Stock Exchange or any other stock exchange, the Company shall take necessary steps so that the shares to be issued upon exercise of an Option are listed by such exchange, or will be so listed, upon notice of issuance. 40 -9- 14. Effect of Option. The grant of an Option shall not entitle the Optionee to have or claim any rights of a stockholder of the Company, whether as to dividends, voting rights or otherwise. Neither the grant of an Option nor the making of any Agreement under the Plan shall confirm upon the Optionee any right with respect to continuation of his Directorship, nor shall it affect or restrict the right of the Company or any assuming or succeeding Company to terminate such Directorship at any time. 15. Termination, Suspension, Amendment or Modification of the Plan. Unless sooner terminated as hereinafter provided, the Plan will terminate at the close of business on May 7, 2002. The Board may at any time terminate or suspend the Plan or make such modification or amendment thereof as it deems advisable, provided, however, that the Board may not, without approval by the affirmative vote of the holders of a majority of the securities of the Company present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the Commonwealth of Massachusetts, (i) materially increase the benefits accruing to participants under the Plan; (ii) materially increase the number of shares for which Options may be granted under the Plan; or (iii) materially modify the requirements as to eligibility for participation in the Plan. In no event, however, may any provision of this Plan specified in Rule 16b-3(c)(2)(ii)(A) (or any successor or amended provision thereof) of the Securities Exchange Act of 1934 (including without limitation, provisions as to eligibility and who may participate in the Plan, the amount and price of shares for which Options may be granted or the timing of awards), be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. Termination or any modification or amendment of the Plan shall not, without consent of a participant, affect his rights under an Option previously granted to him. 41 -10- 16. Merger, Consolidation or Sale of the Entire Business of the Company. If before the expiration of the Plan, the Company shall merge with, consolidate in or with, or sell all or substantially all of its assets and business to another corporation or entity (other than a company or entity which continues under the control of the same persons who were the stockholders or owners of the Company immediately prior to the event), all Options then outstanding shall become subject to exercise in full as of the effective date of said transaction. 17. Compliance with Applicable Laws and Regulations. Upon exercise of any Option granted hereunder, the person exercising the Option shall file any and all reports required of him under the Securities Exchange Act of 1934, as amended, or otherwise. 42 EX-10 3 A-13 IONICS, INCORPORATED 1997 STOCK INCENTIVE PLAN 1. Purpose. The purpose of this Plan is to enable officers and other key employees of, and consultants to, Ionics, Incorporated (the "Company") and any present or future parent or subsidiary of the Company (collectively, "Related Corporations") to (i) own shares of Stock in the Company, (ii) participate in the shareholder value which has been created, (iii) have a mutuality of interest with other shareholders and (iv) enable the Company to attract, retain and motivate key employees and consultants of particular merit. As used herein, the terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation," respectively, as those terms are defined in Section 424 of the Code. 2. Definitions. For the purposes of the Plan, the following terms shall have the meanings set forth below: (a) Award means the grant or sale pursuant to the Plan of any Stock Options and Long-Term Performance Awards. (b) Board means the Board of Directors of the Company. (c) Code means the Internal Revenue Code of 1986, as amended from time to time, or any statute successor thereto, and any regulations issued from time to time thereunder. (d) Company means Ionics, Incorporated, a corporation organized under the laws of the Commonwealth of Massachusetts (or any successor corporation). (e) Disability means "permanent and total disability" as defined under Section 22(e)(3) of the Code or any successor statute. (f) Effective Date means the date that the Plan is approved by both the Board of Directors of the Company and the stockholders of the Company, and if not approved on the same day, the date of the last approval. (g) Fair Market Value means, as of any given date, the last reported sales price of the Stock as reported in The Wall Street Journal for such date, or if no such sale is reported on the last preceding trade date to the sales date, or if the Stock is not publicly traded on or as of such date, the fair market value of the Stock as determined by the Committee in good faith based on the available facts and circumstances at the time. (i) Incentive Stock Option means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. (j) Long-Term Performance Award means an Award made pursuant to Section 7 below that is payable in cash and/or Stock in accordance with the terms of the grant, based on Company, business unit and/or individual performance over a period of at least one year. (k) Non-Qualified Stock Option means any Stock Option that is not an Incentive Stock Option. (l) Participant means an employee or consultant to whom an Award is granted pursuant to the Plan. (m) Plan means the Ionics, Incorporated 1997 Stock Incentive Plan, as set forth herein and as it may be amended from time to time. (n) Retirement means a termination of employment, for reasons other than death, which satisfies the requirements for normal, early, late or disability retirement in accordance with the Ionics, Incorporated Retirement Plan or any successor plan. (o) Stock means the common stock, $1.00 par value per share, of the Company. (p) Stock Option or Option means any option to purchase shares of Stock granted pursuant to Section 6 below. In addition the term Change in Control shall have meaning set forth in Section 8.2. 3. Administration (a) Board or Committee Administration. The Plan shall be administered by the Board or, subject to paragraph 3(d) (relating to compliance with Section 162(m) of the Code), by a committee appointed by the Board (the "Committee"), which shall initially be the Compensation Committee of the Board. Hereinafter, all references in this Plan to the "Committee" shall mean the Board if no Committee has been appointed. Subject to ratification of the grant or authorization of each Award by the Board (if so required by applicable state law), and subject to the terms of the Plan, the Committee shall have the authority to (i) determine to whom (from among the class of employees eligible under Section 5 to receive Incentive Stock Options) Incentive Stock Options shall be granted, and to whom (from among the class of individuals and entities eligible under Section 5 to receive Non-Qualified Stock Options and Long-Term Performance Awards) Non-Qualified Stock Options and Long-Term Performance Awards may be granted, (ii) determine the time or times at which Awards shall be granted; (iii) determine the purchase price of shares subject to each Option, which prices shall not be less than the minimum price specified in Section 6.2(a); (iv) determine whether each Option granted shall be an Incentive Stock Option or a Non-Qualified Stock Option; (v) determine (subject to Sections 6.2(b) and 6.2(c)) the time or times when each Option shall become exercisable and the duration of the exercise period; (vi) extend the period during which outstanding Options may be exercised; (vii) determine whether restrictions such as repurchase options are to be imposed on shares subject to Awards and the nature of such restrictions, if any; and (viii) interpret the Plan and prescribe and rescind rules and regulations relating to it. If the Committee determines to issue a Non-Qualified Stock Option, it shall take whatever actions it deems necessary, under Section 422 of the Code and the regulations promulgated thereunder, to ensure that such Non-Qualified Stock Option is not treated as an Incentive Stock Option. The interpretation and construction by the Committee of any provisions of the Plan or of any Award granted under it shall be final unless otherwise determined by the Board. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem advisable. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award granted under it. (b) Committee Actions. The Committee may select one of its members as its chairman, and shall hold meetings at such time and places as it may determine. A majority of the Committee shall constitute a quorum and acts of a majority of the members of the Committee at a meeting at which a quorum is present, or acts reduced to or approved in writing by all the members of the Committee (if consistent with applicable state law), shall be the valid acts of the Committee. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. (c) Grant of Awards to Board Members. Awards may be granted to members of the Board who are otherwise eligible to receive Awards under the Plan. All grants of Awards to members of the Board shall in all respects be made in accordance with the provisions of this Plan applicable to other eligible persons. Members of the Board who either (i) are eligible to receive grants of Awards pursuant to the Plan or (ii) have been granted Awards may vote on any matters affecting the administration of the Plan or the grant of any Awards pursuant to the Plan, except that no such member shall act upon the granting to himself or herself of Awards, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting to such member of Awards. (d) Performance-Based Compensation. The Board, in its discretion, may take such action as may be necessary to ensure that Stock Options granted under the Plan qualify as "qualified performance-based compensation" within the meaning of Section 162(m) of the Code and applicable regulations promulgated thereunder ("Performance-Based Compensation"). Such action may include, in the Board's discretion, some or all of the following: (i) if the Board determines that Stock Options granted under the Plan generally shall constitute Performance-Based Compensation, the Plan shall be administered, to the extent required for such Stock Options to constitute Performance-Based Compensation, by a Committee consisting solely of two or more "outside directors" (as defined in applicable regulations promulgated under Section 162(m) of the Code); and (ii) Stock Options and Stock Grants granted under the Plan may be subject to such other terms and conditions as are necessary for compensation recognized in connection with the exercise or disposition of such Stock Option or the disposition of Stock acquired pursuant to such Stock Option to constitute Performance-Based Compensation. 4. Shares of Stock Subject to the Plan. (a) Stock. The Stock subject to Awards shall be authorized but unissued shares of Stock or shares of Stock reacquired by the Company in any manner. Subject to adjustment as provided in subsection (c) of this Section 4, the aggregate number of shares of Stock that may be issued pursuant to the Plan shall be (i) 750,000 (which number includes the aggregate number of shares with respect to which no options have been granted under the 1979 Stock Option Plan on the Effective Date), plus (ii) such number of shares as to which options granted under the 1979 Stock Option Plan terminate or expire without being fully exercised, plus (iii) effective as of January 1, 1998 and each of the three successive years thereafter, a number of shares of Stock equal to two percent (2%) of the total number of shares of Stock issued and outstanding as of the close of business on December 31 of the preceding year. Subject to adjustment as provided in subsection (c) of this Section 4, no more than an aggregate of 750,000 shares of Stock may be issued pursuant to the exercise of Incentive Stock Options granted under the Plan (including shares issued pursuant to the exercise of Incentive Stock Options granted under the Plan that are the subject of disqualifying dispositions within the meaning of Sections 421, 422 and 424 of the Code and the regulations thereunder); and no more than an aggregate of 150,000 shares of Stock may be issued in connection with Long-Term Performance Awards granted under this Plan. If any Award granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject to such Award shall again be available for grants of Awards under the Plan. No employee of the Company or any Related Corporation may be granted Options (or any other Award) to acquire, in the aggregate, more than 200,000 shares of Stock during any 12- month period under the Plan. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject to such Option shall be included in the determination of the aggregate number of shares of Stock deemed to have been granted to such employee under the Plan. (b) Computation of Available Shares. For the purpose of computing the total number of shares of Stock available for Plan purposes at any time during which the Plan is in effect, there shall be debited against the total number of shares determined to be available pursuant to paragraphs (a) and (c) of this Section 4 the maximum number of shares of Stock subject to issuance upon exercise of Options or upon settlement of other Awards theretofore made under the Plan. In addition, however, shares related to the unexercised or undistributed portion of any terminated, expired or forfeited Award for which no material benefit was received by a Participant (e.g. dividends, but not including voting rights), or to the portion of any Award settled in cash, shall be recredited to the number remaining upon such termination, expiration or forfeiture and thereafter again be available for distribution in connection with future Awards under the Plan. (c) Other Adjustment. In the event of any merger, reorganization, consolidation, recapitalization, Stock dividend, or other change in corporate structure affecting the Stock, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, and in the number and option price of shares subject to outstanding Options and other Stock- based Awards granted under the Plan, as may be determined to be appropriate by the Committee in its sole discretion provided that the number of shares subject to any Award shall always be a whole number. 5. Eligibility. Incentive Stock Options may be granted only to employees of the Company and any Related Corporation. Officers and other key employees of or consultants to the Company, who are responsible for or contribute to, as determined by the Committee in its sole discretion, the management, growth and/or profitability of the business of the Company and/or any Related Corporation are eligible for Awards under the Plan. 6. Stock Options. 6.1 Provision for Grant. Stock Options may be granted alone, in addition to or in tandem with other Awards under the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Committee shall have the authority to grant any optionee who is an employee of the Company, or of any Related Corporation, Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options. To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. In the case of any other person eligible for an Award under the Plan, any Stock Option granted under the Plan shall be a Non-Qualified Stock Option. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the optionee(s) affected, to disqualify any Incentive Stock Option under such Section 422. 6.2 Terms and Conditions. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem appropriate: (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 100% of the Fair Market Value of the Stock at the time of grant. However, any Incentive Stock Option granted to any optionee who, at the time the option is granted, owns more than 10% of the voting power of all classes of stock of the Company or of a parent or subsidiary corporation (in each case as defined in Section 424 of the Code) shall have an exercise price no less than 110% of Fair Market Value per share on date of the grant. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than ten years after the date on which the Option is granted. However, any Incentive Stock Option granted to any optionee who, at the time the Option is granted, owns more than 10% of the voting power of all classes of stock of the Company or of a parent or subsidiary corporation (in each case as defined in Section 424 of the Code) may not have a term of more than five years. No Stock Option may be exercised by any person after expiration of the term of the Option. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant, provided, however, that, except as provided in Sections 6.2(f), 6.2(g) and 8, unless otherwise determined by the Committee at or after grant, no Stock Option shall be exercisable during the six months following the date of the granting of the Option. If the Committee provides, in its discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee shall determine, in its sole discretion. (d) Method of Exercise. Subject to whatever installment exercise provisions apply pursuant to Section 6.2(c), Stock Options may be exercised in whole or in part at any time and from time to time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or such other instrument as the Committee may accept. As determined by the Committee, in its sole discretion, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee); provided, however, that, in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares may be authorized only at the time the Option is granted. If payment of the Option exercise price of a Stock Option is made in whole or in part in the form of unrestricted Stock already owned by the Participant, the Company may require that the Stock has been owned by the Participant for a specified minimum period of time, for the purpose of avoiding any charge to the Company's earnings, limiting the pyramiding of Stock Option exercises, or such other purposes as the Company deems appropriate. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends or other rights of a shareholder with respect to shares subject to the Option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in Section 11.1. (e) Transferability. No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee, provided, however, the Committee may grant Non- Qualified Stock Options that are transferable, without payment of consideration, to immediate family members of the optionee or to trusts for such family members, or to partnerships in which such immediate family members are the only parties, subject to such limits as the Committee may establish, and the transferee shall remain subject to all of the terms and conditions applicable to such Non-Qualified Stock Options prior to such transfer. (f) Termination by Reason of Death. If an optionee's employment by or association with the Company or any Related Corporation terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent then exercisable at the time of death, or on such accelerated basis as the Committee may determine at or after grant, by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of 90 days (or such shorter period as the Committee may specify at grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (g) Termination by Reason of Disability or Retirement. If an optionee's employment by or association with the Company or any Related Corporation terminates by reason of Disability or Retirement, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination, or on such accelerated basis as the Committee may determine at or after grant, for a period of 90 days (or such shorter period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the optionee dies within such 90-day period (or such shorter period as the Committee shall specify at grant), any unexercised Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of 90 days from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (h) Other Termination. Unless otherwise determined by the Committee at grant, if an optionee's employment by or association with the Company or any Related Corporation terminates for any reason other than death, Disability or Retirement, the Stock Option shall thereupon terminate, except that in the Committee's sole discretion, based upon such factors as the Committee may deem appropriate, the Committee may specify that such Stock Option may be exercised, to the extent exercisable at termination, or on such accelerated basis as the Committee may determine at or after grant, for a period of 90 days (or such shorter period as the Committee shall specify at grant) from the date of such termination or until the expiration of the stated term of such Stock Option, whichever period is shorter. (i) Incentive Stock Option Limitations. To the extent required for "incentive stock option" status under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the Stock with respect to which Incentive Stock Options granted are exercisable for the first time by the optionee during any calendar year under the Plan and/or any other stock option plan of the Company and any parent or subsidiary corporation (within the meaning of Section 424 of the Code) shall not exceed $100,000. The Company intends to designate any Options granted in excess of the $100,000 limitation as Non-Qualified Stock Options, and the Company shall issue certificates to the optionee with respect to the Options that are Non-Qualified Options and Options that are Incentive Stock Options. (j) Cashless Exercise; Satisfaction of Tax Withholdings. To the extent permitted under applicable laws and regulations, at the request of a Participant, the Company agrees to cooperate in a "cashless exercise" of an Option. The cashless exercise shall be effected by the Participant delivering to a registered securities broker acceptable to the Company instructions to sell a sufficient number of shares of Stock for which such Option is then exercisable to cover the costs and expenses associated with such exercise and sale. Under any Option, the Committee may permit a Participant to pay any applicable withholding taxes by delivering a sufficient number of previously owned shares of Common Stock to the Company to satisfy such taxes. 7. Long-Term Performance Awards 7.1 Provision for Grant. Long-Term Performance Awards may be awarded either alone or in addition to other Awards granted under the Plan. The Committee shall determine the nature, length and starting date of the performance period (the "Performance Period") for each Long-Term Performance Award, which subject to Section 8 below shall be a period of at least one year, and shall determine the performance objectives to be used in valuing Long-Term Performance Awards and determining the extent to which such Long-Term Performance Awards have been earned. Performance objectives may vary from Participant to Participant and between groups of Participants and shall be based upon such Company, business unit and/or individual performance factors and criteria as the Committee may deem appropriate, including, but not limited to, earnings per share or return on equity. Performance Periods may overlap and Participants may participate simultaneously with respect to Long-Term Performance Awards that are subject to different Performance Periods and/or different performance factors and criteria. 7.2 Periodical Determination of Performance. At the beginning of each Performance Period, the Committee shall determine for each Long-Term Performance Award subject to such Performance Period the range of dollar values or number of shares of Stock to be awarded to the Participant at the end of the Performance Period if and to the extent that the relevant measure(s) of performance for such Long- Term Performance Award is (are) met. Such dollar values or number of shares of Stock may be fixed or may vary in accordance with such performance and/or other criteria as may be specified by the Committee, in its sole discretion. 7.3 Adjustment of Awards. In the event of special or unusual events or circumstances affecting the application of one or more performance objectives to a Long-Term Performance Award, the Committee may revise the performance objectives and/or underlying factors and criteria applicable to the Long-Term Performance Awards affected, to the extent deemed appropriate by the Committee, in its sole discretion, to avoid unintended windfalls or hardship. 7.4 Termination of Employment. Subject to Section 8 below and unless otherwise provided in the applicable Award agreement(s), if a Participant terminates employment or other association with the Company or any Related Corporation during a Performance Period because of death, Disability or Retirement, such Participant shall be entitled to a payment with respect to each outstanding Long-Term Performance Award at the end of the applicable Performance Period (i) based, to the extent relevant under the terms of the award, upon the Participant's performance for the portion of such Performance Period ending on the date of termination and the performance of the applicable business unit(s) for the entire Performance Period, and (ii) prorated, where deemed appropriate by the Committee, for the portion of the Performance Period during which the Participant was employed by or associated with the Company and any Related Corporation, all as determined by the Committee, in its sole discretion. However, the Committee may provide for an earlier payment in settlement of such award in such amount and under such terms and conditions as the Committee deems appropriate. Subject to Section 8 below, if a Participant terminates employment by or association with the Company and any Related Corporation during a Performance Period for any other reason, then such Participant shall not be entitled to any payment with respect to Long-Term Performance Awards subject to such Performance Period, unless the Committee shall otherwise determine, in its sole discretion. 7.5 Form of Payment. The earned portion of a Long-Term Performance Award may be paid currently or on a deferred basis with such interest or earnings equivalent as may be determined by the Committee, in its sole discretion. Payment shall be made in the form of cash or whole shares of Stock, either in a lump sum payment or in annual installments commencing as soon as practicable after the end of the relevant Performance Period, all as the Committee shall determine at or after grant. 8. Change in Control Provisions. 8.1 Consequences of Event. In the event of a Change in Control, in addition to the adjustment provided for in Section 4(c), the Committee may in its discretion determine whether, with respect to all Stock Options granted and Awards made before the Change in Control, the following acceleration and valuation provisions shall apply: (a) Any Stock Options awarded under the Plan not previously exercisable shall thereupon become fully exercisable. (b) Any outstanding Long-Term Performance Awards shall be paid out in cash within thirty days following the Change in Control based on prorated target results for the Performance Periods in question. In case of any reorganization, merger or consolidation of the Company into or with another company or in the case of any sale or conveyance to another company or entity of the property of the Company as a whole or substantially as a whole, each Stock Option shall be automatically converted into a stock option or other award which covers shares of stock or other securities equivalent in kind and value to the shares or other securities the optionee or holder would have held if the Stock Option or other Award had been exercised or received in full prior to such reorganization, merger, consolidation, sale or conveyance and no disposition thereof had subsequently been made, and the option price under each Stock Option shall be proportionately adjusted. 8.2 Change in Control. For purposes of this Plan, a "Change in Control" means the happening of any of the following: (a) The acquisition, other than from the Company, by any individual, entity or group (within the meaning of Section 12(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Company Voting Securities"); provided, however, that any acquisition by (x) any noncorporate shareholder of the Company as of the effective date of the initial registration of an offering of Stock under the Securities Act of 1933, (y) the Company or any of its subsidiaries, or any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries, or (z) any corporation with respect to which, following such acquisition, more than 60% of, respectively, the then outstanding shares of common stock of such corporation and combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Company Voting Securities immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior to such acquisition, of the Outstanding Company Common Stock and Company Voting Securities, as the case may be, shall not constitute a Change in Control of the Company; or (b) Continuing Directors constitute less than a majority of the Board, where a Continuing Director is (i) each person who was a director of the Company on January 2, 1997, and (ii) each person who subsequently becomes a director of the Company and whose election or nomination was approved by a vote of at least a majority of the Continuing Directors in office at the time of the election or nomination unless that person became a director in connection with an actual or threatened election contest; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation (a "Business Combination"), in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Company Common Stock and Company Voting Securities immediately prior to such Business Combination do not own beneficially, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination in substantially the same proportion as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and Company Voting Securities, as the case may be; or (d) a complete liquidation or dissolution of the Company or a sale or other disposition of all or substantially all of the assets of the Company other than to a corporation with respect to which, following such sale or disposition, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors is then owned beneficially, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Company Voting Securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of the Outstanding Company Common Stock and Company Voting Securities, as the case may be, immediately prior to such sale or disposition. 9. Amendment and Termination. The Board may terminate or amend the Plan at any time and from time to time; provided, however, that the Board may not, without approval of the shareholders of the Company, increase the maximum number of shares of Stock issuable under the Plan or change the description of the individuals eligible to receive Awards. No termination of or amendment to the Plan may adversely affect the rights of a Participant with respect to any Award theretofore granted under the Plan without such Participant's consent. The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but, subject to Section 4 above, no such amendment shall (i) decrease the exercise price of an outstanding Stock Option, or (ii) effect the simultaneous cancellation of an outstanding Stock Option and new grant of a replacement Stock Option, or (iii) without the Participant's consent, impair the rights of any Participant. 10. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of any other general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to Awards hereunder; provided, however, unless the Committee otherwise determines with the consent of the affected Participant, the existence of such trusts or other arrangements shall be consistent with the "unfunded" status of the Plan. 11. General Provisions. 11.1 Investment Representation. The Committee may require each person acquiring shares pursuant to an Award under the Plan to represent to and agree with the Company in writing that the Participant is acquiring the shares for investment without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 11.2 Adoption of Other Plans. Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. 11.3 No Employment Rights. Neither the establishment or continuation of the Plan, nor the grant of any Award hereunder, shall confer upon any employee or consultant of the Company or any Related Corporation any right to continued employment or association with the Company and any Related Corporation, nor shall it interfere in any way with the right of the Company and any Related Corporation to terminate the employment or association of any of its employees or consultants at any time. 11.4 Participant Not to Compete. In consideration of the Company's grant of an Award, a Participant shall agree in the agreement setting forth the terms of such Award that during the period of his employment by or other service with the Company or any Related Corporation, and for a period of at least two (2) years after the date such employment or service terminates, he will not without the consent of the Board accept or perform work for any entity whose business is competitive with the business carried on by the Company and any Related Corporation, or engage in activities which are significantly competitive with the business of the Company and any Related Corporation. In the event a Participant breaches such agreement, the Participant shall forfeit all rights to any unexercised Options or unearned Awards held as of the date of such breach. 11.5 Tax Withholding. No later than the date as of which an amount first becomes includible in the gross income of the Participant for Federal income tax purposes with respect to any Award, the Participant shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, the minimum required withholding obligations may be settled with Stock. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant. 11.6 Payments on Death. The Committee shall establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant's death are to be paid. 11.7 Governing Law. The Plan and all Awards and actions taken thereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without regard to the conflict of laws principles thereof. 12. Term of Plan. The Plan shall become effective upon the approval of the Plan by the shareholders of the Company. No Award shall be granted pursuant to the Plan on or after the tenth anniversary of the Plan's approval by shareholders, but Awards theretofore granted may extend beyond that date. EX-11 4 EXHIBIT 11 IONICS, INCORPORATED COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
YEARS ENDED DECEMBER 31 1996 1995 1994 Net Income $26,503,000 $21,025,000 $15,448,000 Calculation of primary earnings per common and common equivalent share: Weighted average common shares outstanding 15,542,000 14,545,000 13,926,000 Increase from assumed exercise of stock options and investment of pro- ceeds in treasury stock, based upon average market prices 564,000 540,000 272,000 Weighted average number of common and common equivalent shares outstanding 16,106,000 15,085,000 14,198,000 Earnings per common and common equivalent share $1.65 $1.39 $1.09 Calculation of fully diluted earnings per common and common equivalent share: Weighted average common and common equivalent shares outstanding used in calculation of primary earnings per common and common equivalent share 16,106,000 15,085,000 14,198,000 Increase from assumed exercise of stock options and investment of proceeds in treasury stock, based upon year-end market price 19,000 67,000 42,000 Weighted average number of common and common equivalent shares used to calculate fully diluted earnings per common and common equivalent share 16,125,000 15,152,000 14,240,000 Earnings per common and common equivalent share assuming full dilution $1.64 $1.39 $1.08
59 EX-13 5 EXHIBIT 13 IONICS, INCORPORATED ANNUAL REPORT TO STOCKHOLDERS OF IONICS, INCORPORATED FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 (Only pages 16 through 32 and the inside back cover constitute an Exhibit to Form 10-K) 60 Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations The financial performance of Ionics in 1996 showed a 27% growth in revenues and a 26% improvement in net income. The profit growth reflected increases in earnings before interest and taxes of 20%, 27% and 28% in the Membranes and Related Equipment; Water, Food and Chemical Supply; and Consumer Products segments, respectively. Particular strength was shown by the ultrapure water supply business within the Water, Food and Chemical Supply segment. Total revenues were $326.7 million in 1996, compared with $257.3 million in 1995. Revenues were higher in all three business segments, with the largest growth occurring in Water, Food and Chemical Supply. Membranes and Related Equipment revenues in 1996 grew due to continuing strength in the sale of ultrapure water systems to the semiconductor market. Growth also resulted from additional sales of instrumentation to the pharmaceutical and semiconductor markets, but was partially offset by a reduction in revenues from the sale of wastewater systems, particularly related to zero liquid discharge applications. Growth in the Water, Food and Chemical Supply segment was primarily due to increased revenues related to ownership and operation of ultrapure water systems. This growth included revenues from the acquisitions of Ahlfinger Water Company in November 1995 and Apollo Ultrapure Water Systems, Inc. in January 1996. Revenue growth also occurred in the municipal water supply and food processing businesses due primarily to the acquisitions of Aqua Design, Inc. in January 1996 and Separation Technology, Inc. (STI) in July 1996. Consumer Products revenues increased through the sale of higher volumes of bottled water by existing Aqua Cool locations and through new distribution facilities near Cleveland, Ohio and Providence, Rhode Island. Revenues also increased in the consumer chemicals business due to increased sales of automobile windshield wash solution and bleach products. Home water product sales also increased in 1996. Total revenues were $257.3 million in 1995, compared with $222.4 million in 1994. Revenues were higher in all three business segments, with the largest increase occurring in Membranes and Related Equipment. Revenues in 1995 in this segment grew due to increased sales of capital equipment, including equipment for water desalination and treatment and wastewater treatment, and related spare parts. The acquisition of Sievers Instruments, Inc. also contributed to growth in this segment. 61 Growth in the Water, Food and Chemical Supply segment was primarily due to increased revenues related to ownership and operation of ultrapure water systems. Growth also resulted from increased sales of municipal water and increased demand for chemical supply products produced by the Elite Chemicals businesses in Australia and the United Kingdom. Revenue increases also were generated by our cheese whey processing facilities for Mid- America Dairymen, Inc. Consumer Products revenues increased primarily through the sale of higher volumes of bottled water by existing Aqua Cool locations and through new distribution facilities. Home water product sales increased as the Company shipped additional water conditioning units through its independent dealer network and through Company-owned sales offices. These increases were partially offset by softness in sales of other consumer products, particularly automobile windshield wash solution due to limited snowfall in the northeastern U.S. during the winter season ending in March 1995. Cost of sales as a percentage of revenues was 67.3%, 67.2% and 69.3% in 1996, 1995 and 1994, respectively. Cost of sales as a percentage of revenues declined during 1996 for the Membranes and Related Equipment segment and Consumer Products segment, and increased for the Water, Food and Chemical Supply segment. The decrease in the Membranes and Related Equipment segment reflected an improvement in the mix of wastewater treatment contracts and instrumentation sales, partially offset by a change in the mix of ultrapure water equipment contracts. The Consumer Products segment decrease resulted primarily from the achievement of certain product cost reductions and an improvement in product mix. In the Water, Food and Chemical Supply segment, cost of sales increased as a percentage of revenues during 1996. This increase reflected the acquisition of STI, whose manufacturing costs do not yet reflect the synergies we believe will be available through continued integration with the other businesses in this segment. This increase also reflected increased competitive pressure within the industrial bleach market in the United Kingdom. Cost of sales as a percentage of revenues declined during 1995 from 1994 for the Membranes and Related Equipment segment and increased for the Water, Food and Chemical Supply and Consumer Products segments. The decrease in the Membranes and Related Equipment segment was due to a more favorable mix between capital equipment and spare parts revenues and to a decrease in manufacturing overhead costs as a percentage of revenues. This decrease resulted from increased sales of traditional capital equipment and spares, and the achievement of certain operating efficiencies. 62 The increase in cost of sales as a percentage of revenues in the Water, Food and Chemical Supply segment primarily reflected a different mix of "own and operate" contracts. The increase in cost of sales as a percentage of revenues in the Consumer Products segment resulted from variability in certain product costs (particularly methanol), competitive market conditions related to certain products and a change in the mix of products sold. Operating expenses as a percentage of revenues were 20.9% in 1996, down from 21.1% in 1995 and 21.2% in 1994. The decrease in operating expenses as a percentage of revenues in 1996 and in 1995 reflects the absorption of relatively fixed operating expenses by increased sales volume and the continued emphasis on expense controls. Interest income in 1996 was $0.5 million compared to $1.0 million in 1995 and $1.1 million in 1994. The decrease in 1996 was due primarily to lower average invested cash balances. The decrease in 1995 was due to increased capital spending, partially offset by higher average interest rates. The Company's effective tax rate was 33.0% in 1996, 33.5% in 1995 and 32.0% in 1994. The decrease in the effective tax rate for 1996 was due primarily to an improvement in the mix of earnings and effective tax rates among the different tax jurisdictions in which the Company operates. This was partially offset by a decrease in the benefit from tax-exempt interest income, a higher state tax rate resulting from a change in the composition of domestic income by state and a proportionately smaller benefit from the Company's foreign sales corporation. The increase in the effective tax rate for 1995 was due to a reduction in the benefit from tax-exempt interest income and to changes in the mix of earnings and effective tax rates among the different jurisdictions in which the Company operates. This increase was partially offset by a lower effective state tax rate resulting from state tax incentive credits, as well as a proportionately greater benefit from the Company's foreign sales corporation. Net income increased 26.1% to $26.5 million in 1996 compared to $21.0 million in 1995. Net income in 1995 was 36.1% higher than 1994 net income of $15.4 million. Legal Proceedings The Company is involved in the normal course of its business in various litigation matters. Although the Company's counsel is unable to determine at the present time whether the Company will have any liability in any of these pending matters, some of which are in the early stages of pre-trial discovery, the Company believes generally that it has meritorious defenses and that none of the pending matters will have an outcome material to the financial condition or business of the Company. 63 Financial Condition At December 31, 1996 the Company had total assets of $378.6 million compared to total assets of $322.0 million at December 31, 1995 and $277.2 million at December 31, 1994. The major components of the increase in 1996 and in 1995 were property, plant and equipment related to the Company's bottled water operations, bleach production and distribution facilities, trailers and other "own and operate" facilities. In addition, during both 1996 and 1995, accounts receivable increased, reflecting higher revenues from capital equipment projects and related retainage amounts. Working capital in 1996 increased by $14.1 million and the Company's current ratio increased to 2.1 from 2.0 in 1995. Capital expenditures totaled $46.0 million, $49.6 million, and $38.2 million in 1996, 1995 and 1994, respectively. Also, $10.5 million of cash was paid in 1994 to settle the payment obligation arising from the acquisition of Ionics RCC in late 1993. Funds for these expenditures were provided in both years through cash from operations, proceeds from stock option exercises and the issuance of current debt. In 1995, funds were also provided through the sale of short-term investments. Net cash provided by operating activities increased by $10.4 million in 1996, with higher net income, depreciation, and income taxes partially offset by a decrease in accounts payable and accrued expenses. The decrease in 1995 of $6.7 million compared to 1994 resulted as higher net income, depreciation, and deferred taxes were more than offset by an increase in accounts receivable. Net cash used for investing activities increased by $2.1 million in 1996 after having decreased by $1.5 million in 1995 from 1994. In 1996, net cash provided by financing activities remained substantially consistent with 1995. In 1995, net cash provided by financing activities increased by $6.6 million, primarily from increases in debt and proceeds from stock option exercises. Significant expenditures in 1997 are anticipated to include the expansion of bottled water operations, own and operate facilities and improvements to manufacturing equipment. The Company maintains several lines of credit, including domestic lines totaling $35 million, which are available to meet working capital needs. In addition, the Company has several facilities to accommodate its foreign trade and exchange requirements. The Company believes that its cash of $12.3 million at the beginning of 1997, cash from operations, lines of credit and foreign exchange facilities are adequate to meet its currently anticipated needs. 64 Inflationary increases in material and labor costs remained moderate during the last three years. The Company has worked to offset such cost increases by redesigning its equipment to reduce costs. To the extent permitted by the competitive environment, the Company has raised prices where appropriate. Forward-Looking Information The Company's future results of operations, as well as statements contained in this Management's Discussion and Analysis which are forward-looking statements, depend upon a number of factors that could cause actual results to differ materially from management's current expectations. Among these factors are business conditions and the general economy; competitive factors, such as acceptance of new products and price pressures; risk of nonpayment of accounts receivable; risks associated with foreign operations; and regulations and laws affecting business in each of the Company's markets. 65 Report of Independent Accountants To the Board of Directors and Stockholders of Ionics, Incorporated: We have audited the consolidated balance sheets of Ionics, Incorporated at December 31, 1996 and 1995 and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1996. 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 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ionics, Incorporated as of December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/COOPERS & LYBRAND L.L.P. Boston, Massachusetts February 18, 1997 66 CONSOLIDATED STATEMENTS OF OPERATIONS Ionics, Incorporated
For the years ended December 31 Amounts in thousands, except per share amounts 1996 1995 1994 Net revenue: Membranes and related equipment $148,213 $132,673 $113,928 Water, food and chemical supply 112,305 69,321 58,268 Consumer products 66,144 55,299 50,180 326,662 257,293 222,376 Costs and expenses: Cost of membranes and related equipment 105,037 94,991 87,255 Cost of water, food and chemical supply 76,855 45,924 38,274 Cost of consumer products 37,956 32,085 28,664 Research and development 5,108 4,180 3,372 Selling, general and administrative 63,118 50,123 43,770 288,074 227,303 201,335 Income from operations 38,588 29,990 21,041 Interest income 527 977 1,057 Equity income 441 642 619 Income before income taxes 39,556 31,609 22,717 Provision for income taxes 13,053 10,584 7,269 Net income $ 26,503 $ 21,025 $ 15,448 Earnings per share $ 1.65 $ 1.39 $ 1.09 Shares used in earnings per share calculations 16,106 15,085 14,198 The accompanying notes are an integral part of these financial statements.
67 CONSOLIDATED BALANCE SHEETS Ionics, Incorporated
December 31 Dollars in thousands, except share amounts 1996 1995 Assets Current assets: Cash and cash equivalents $ 12,269 $ 9,479 Notes receivable, current 3,496 4,529 Accounts receivable 91,392 78,376 Receivables from affiliated companies 2,999 1,421 Inventories 26,000 20,564 Other current assets 8,266 8,018 Total current assets 144,422 122,387 Notes receivable, long-term 7,737 5,813 Investments in affiliated companies 2,908 4,874 Property, plant and equipment, net 185,817 155,886 Other assets 37,705 33,084 Total assets $378,589 $322,044 Liabilities and Stockholders' Equity Current liabilities: Notes payable and current portion of long-term debt $ 11,513 $ 4,884 Accounts payable 28,988 28,089 Other current liabilities 27,672 25,699 Taxes on income - 1,607 Total current liabilities 68,173 60,279 Long-term debt and notes payable 2,132 182 Deferred income taxes 14,422 7,780 Other liabilities 1,645 759 Commitments - - Stockholders' equity: Common stock, par value $1, authorized shares: 30,000,000 in 1996 and 1995; issued and outstanding: 15,823,205 in 1996 and 14,801,230 in 1995 15,823 14,801 Additional paid-in capital 149,337 137,587 Retained earnings 130,228 104,795 Cumulative translation adjustments (2,811) (3,671) Unearned compensation (360) (468) Total stockholders' equity 292,217 253,044 Total liabilities and stockholders' equity $378,589 $322,044 The accompanying notes are an integral part of these financial statements.
68 CONSOLIDATED STATEMENTS OF CASH FLOWS Ionics, Incorporated
For the years ended December 31 Dollars in thousands _____________________________________ 1996 1995 1994 Operating activities: Net income $ 26,503 $ 21,025 $ 15,448 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,162 20,717 18,092 Provision for losses on accounts and notes receivable 1,011 579 535 Deferred income tax provision 4,085 4,263 2,051 Compensation expense on restricted stock awards 108 72 - Changes in assets and liabilities, net of effects of businesses acquired: Notes receivable (1,557) (1,636) (889) Accounts receivable (10,863) (14,474) (3,634) Inventories (3,259) (300) (5,296) Other current assets 449 (1,425) (3,199) Investments in affiliates 758 545 (386) Accounts payable and accrued expenses (7,011) (290) 16,998 Income taxes 4,678 1,816 (1,343) Other 296 28 (738) Net cash provided by operating activities 41,360 30,920 37,639 Investing activities: Additions to property, plant and equipment (46,003) (49,565) (38,220) Sale and maturity of short-term investments - 8,617 3,222 Purchase of long-term investments - (3,000) - Acquisitions, net of cash acquired - - (10,488) Net cash used by investing activities (46,003) (43,948) (45,486) Financing activities: Principal payments on current debt (22,259) (11,524) (325) Proceeds from issuance of current debt 27,149 15,533 347 Principal payments on long-term debt (3,236) - - Proceeds from stock option plans 5,731 3,529 945 Net cash provided by financing activities 7,385 7,538 967 Effect of exchange rate changes on cash 48 3 312 Net change in cash and cash equivalents 2,790 (5,487) (6,568) Cash and cash equivalents at end of prior year 9,479 14,966 21,534 Cash and cash equivalents at end of current year $ 12,269 $ 9,479 $ 14,966 The accompanying notes are an integral part of these financial statements.
69 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Ionics, Incorporated
Common Stock Additional Cumulative Total Par Paid-in Retained Translation Unearned Stockholders' Dollars in thousands Shares Value Capital Earnings Adjustments Compensation Equity Balance December 31, 1993 13,891,610 $ 13,892 $124,189 $ 68,628 $ (6,628) $ - $200,081 Stock options exercised 98,286 98 896 (49) - - 945 Tax benefit of stock option activity - - 444 - - - 444 Translation adjustments, net of income taxes of $(872) - - - - 1,692 - 1,692 Net income - - - 15,448 - - 15,448 Balance December 31, 1994 13,989,896 13,990 125,529 84,027 (4,936) - 218,610 Restatement for pooling 447,258 447 1,151 (257) - - 1,341 Balance January 1, 1995 14,437,154 14,437 126,680 83,770 (4,936) - 219,951 Stock options exercised 199,575 199 3,330 - - - 3,529 Tax benefit of stock option activity - - 1,309 - - - 1,309 Translation adjustments, net of income taxes of $180 - - - - 1,265 - 1,265 Issuance for acquisition 144,679 145 5,748 - - - 5,893 Shares issued under restricted stock plan 19,822 20 520 - - (540) - Amortization of unearned compensation - - - - - 72 72 Net income - - - 21,025 - - 21,025 Balance December 31, 1995 14,801,230 14,801 137,587 104,795 (3,671) (468) 253,044 Restatement for poolings 554,544 555 (460) (1,070) - - (975) Balance January 1, 1996 15,355,774 15,356 137,l27 103,725 (3,671) (468) 252,069 Stock options exercised 406,956 407 5,324 - - - 5,731 Tax benefit of stock option activity - - 4,390 - - - 4,390 Translation adjustments, net of income taxes of $(93) - - - - 860 - 860 Issuance for acquisitions 60,475 60 2,496 - - - 2,556 Amortization of unearned compensation - - - - - 108 108 Net income - - - 26,503 - - 26,503 Balance December 31, 1996 15,823,205 $15,823 $149,337 $130,228 $ (2,811) $ (360) $292,217 The accompanying notes are an integral part of these financial statements.
70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company is involved worldwide in the manufacture and sale of membranes and related equipment for the purification, concentration, treatment and analysis of water and wastewater, in the supply of purified water, food and chemical products, and in the sale of bottled water and home water purifiers. Principal markets include the United States and Europe as well as other international markets. BASIS OF PRESENTATION Certain prior year amounts have been restated to conform to the current year presentation with no impact on net income. Consolidated results have been restated to include the pooling of Sievers Instruments, Inc. (NOTE 13). PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company, its wholly and majority owned subsidiaries and Aqua Cool Enterprises, Inc., a controlled affiliate. All significant intercompany accounts and transactions have been eliminated. Investments in affiliated companies, representing non-majority ownership interests, are accounted for under the equity method. REVENUE RECOGNITION Product revenues are recorded upon shipment, and service revenues are recorded as the services are performed. Interest revenues on consumer water equipment loans are recognized over the life of the loans. Interest earned on customer notes receivable, totaling $1,181,000, $1,076,000 and $989,000 in 1996, 1995 and 1994, respectively, is included in revenues. Most equipment leases to customers are accounted for as operating leases wherein rental revenues are recognized over the life of the lease and the cost of the equipment is depreciated over its useful life. Some leases are accounted for as sales-type leases wherein the present value of the lease revenues and costs are recognized at the time of shipment of the product. Revenues from large contracts are recognized using the percentage completion method of accounting in the proportion that costs incurred bear to total estimated costs at completion. Losses, if any, are provided for in the period in which the loss is determined. CASH EQUIVALENTS Short-term investments with a maturity of 90 days or less from the date of acquisition are classified as cash equivalents. INVESTMENTS Management determines the appropriate classification of its investment in debt securities at the time of purchase. Debt securities which the Company has the ability and positive intent to hold to maturity are 71 classified accordingly and carried at cost. All other investments are classified as available for sale and carried at fair value with unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. The Company is not involved in activities classified as the trading of investments. NOTES RECEIVABLE Notes receivable have been reported at their estimated realizable value. The allowance for uncollectible notes receivable totaled $591,000 and $685,000 at December 31, 1996 and 1995, respectively. INVENTORIES Inventories are carried at the lower of cost or market, principally on the first-in, first-out basis. The Company had no deferred production costs which exceeded the aggregate estimated cost of long-term sales contracts. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost. When an asset is retired or sold, any resulting gain or loss is included in the results of operations. Interest capitalized as property, plant and equipment amounted to $1,169,000, $268,000 and $104,000 in 1996, 1995 and 1994, respectively. Depreciation is computed on a straight-line basis over the expected lives of the assets, as follows: Classification Depreciation Lives Buildings and improvements 10 - 40 years Machinery and equipment, including supply equipment 3 - 25 years Other 3 - 12 years The Company's policy is to depreciate processing plants, other than leased equipment, over the shorter of their useful lives or the term of the corresponding supply contracts. The Company has adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in 1996. This Statement requires recognition of impairment losses pertaining to long-term assets based upon the excess of the carrying amount of such assets over their fair values. The adoption of this statement has had no material effect on the financial statements of the Company. GOODWILL Goodwill is included in other assets and represents the unamortized difference between acquisition cost and the fair value of net assets acquired in the purchase of various entities. Goodwill is amortized on a straight-line basis over its estimated useful life but not in excess of 40 years. The Company continually evaluates the realizability of goodwill based upon expectations of non-discounted cash flows and operating income for each subsidiary having a material goodwill balance. 72 FOREIGN EXCHANGE Assets and liabilities of foreign affiliates and subsidiaries are translated at year-end exchange rates, and the related statements of operations are translated at average exchange rates during the year. Translation gains and losses are accumulated net of income tax as a separate component of stockholders' equity. Some transactions of the Company and its subsidiaries are made in currencies different from their own. Gains and losses from these transactions are included in income as they occur. Net foreign currency transaction gains included in income before taxes totaled $548,000, $58,000 and $23,000 for 1996, 1995 and 1994, respectively. INCOME TAXES Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts using enacted rates in effect for the year in which the differences are expected to reverse. EARNINGS PER SHARE Earnings per share is computed based on the weighted average number of common and common equivalent shares outstanding after giving retroactive effect to a 2-for-1 stock split in 1995 for all periods presented. Common equivalent shares result from the assumed exercise of dilutive stock options. Fully diluted earnings per share is substantially the same as earnings per share. 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. 73 NOTE 2. CONSOLIDATED BALANCE SHEET DETAILS
Dollars in thousands 1996 1995 Raw materials $ 15,028 $ 12,640 Work in process 8,120 5,411 Finished goods 2,852 2,513 Inventories $ 26,000 $ 20,564 Land $ 3,602 $ 3,270 Buildings 33,157 26,018 Machinery and equipment 233,077 191,195 Other, including furniture, fixtures and vehicles 36,834 26,772 306,670 247,255 Accumulated depreciation (120,853) (91,369) Property, plant and equipment, net $185,817 $155,886 Goodwill $ 35,067 $ 30,632 Accumulated amortization (3,922) (2,966) Other______________________________________________ 6,560 5,418 Other assets $ 37,705 $ 33,084 Customer deposits $ 7,147 $ 3,131 Accrued commissions 2,402 2,184 Accrued expenses 18,123 20,384 Other current liabilities $ 27,672 $ 25,699
74 NOTE 3. SUPPLEMENTAL SCHEDULE OF CASH AND NON-CASH FLOW INFORMATION
Dollars in thousands __________________________ 1996 1995 1994 Cash payments for interest and income taxes: Interest $ 1,338 $ 360 $ 159 Taxes $ 4,264 $ 7,150 $ 6,628 Restricted stock compensation credited to paid-in capital $ - $ (540) $ - Liabilities assumed in conjunction with acquisitions: Fair value of assets purchased $ 8,452 $ 6,196 Book value of assets pooled 8,592 2,632 Retained deficit pooled 1,070 257 Net cash received 89 207 Value of common stock issued (2,530) (7,491) Liabilities assumed $15,673 $ 1,801
NOTE 4. ACCOUNTS RECEIVABLE
Dollars in thousands 1996 1995 Billed receivables $68,775 $54,226 Unbilled receivables 24,884 25,875 Allowance for doubtful accounts (2,267) (1,725) Accounts receivable $91,392 $78,376
Unbilled receivables represent the excess of revenues recognized on percentage completion contracts over amounts billed. These amounts will become billable as the Company achieves contractual milestones. Substantially all of the unbilled amounts at December 31, 1996 are expected to be billed during 1997. Billed receivables include retainage amounts of $4,378,000 and $1,609,000 at December 31, 1996 and 1995, respectively. Substantially all retainage amounts are collectible within one year. 75 NOTE 5. INVESTMENTS IN AFFILIATED COMPANIES The Company's investments in the following foreign affiliates are accounted for under the equity method. The principal business activities of these foreign affiliates involve the production, sale and distribution of bottled and treated water and the sale of equipment and replacement parts.
Ownership Affiliate Percentage Aqua Cool Kuwait - Kuwait 49% Aqua Cool Saudi Arabia - Saudi Arabia 40% Ionics-Mega s.r.o. - Czech Republic 49% Jalal-Ionics, Ltd. - Bahrain 40% Yuasa-Ionics Co., Ltd. - Japan 50% Aguas Tratadas de Cadereyta S.A. de C.V. - Mexico 20% Aqua Design Ltd. - Cayman Islands 39%
The Company's percentage ownership interest in a foreign affiliate may vary from its interest in the earnings of such affiliate. Activity in investments in affiliated companies:
Dollars in thousands 1996 1995 1994 Investments at end of prior year $ 4,874 $ 5,419 $ 4,989 Equity in earnings 441 642 619 Distributions received (1,254) (1,187) (233) Cumulative translation adjustments - - 44 Reclassification of Watlington Waterworks, Ltd. to other assets resulting from ownership dilution (1,208) - - Other investment 55 - - Investments at end of current year $ 2,908 $ 4,874 $ 5,419
At December 31, 1996, the Company's equity in the total assets and in the total liabilities of its foreign affiliates was $5,023,000 and $2,115,000, respectively. The Company's equity in the 1996 total revenues of these affiliates was $4,411,000. NOTE 6. CONTINGENT LIABILITIES The Company is involved in the normal course of its business in various litigation matters. Although the Company's counsel is unable to determine 76 at the present time what the Company's ultimate liability will be in any of the pending matters, some of which are in the early stages of pre-trial discovery, the Company believes generally that it has meritorious defenses and that none of the pending matters will have an outcome material to the financial condition or business of the Company. The Company was notified in 1992 that it is a potentially responsible party (PRP) at a Superfund site, Solvent Recovery Services of New England in Southington, Connecticut (the "SRS Site"). Combined assessments to date against all PRPs total $9.73 million. Ionics' share of these assessments totals $51,000. The ultimate site clean-up cost is currently not expected to exceed $59 million, of which the Company's share would not exceed $308,000 including the amounts already assessed against the Company. While it is too soon to predict the scope and cost of the final remedy that the EPA will select, based upon the large number of PRPs identified, the Company's small volumetric ranking (approximately 0.5%) and the identities of the larger PRPs, the Company believes that its liability in this matter will not have a material effect on the Company or its financial position. NOTE 7. LONG-TERM DEBT AND NOTES PAYABLE
Dollars in thousands 1996 1995 Borrowings outstanding $13,645 $5,066 Less installments due within one year 11,513 4,884 Long-term debt and notes payable $ 2,132 $ 182
Maturities of borrowings outstanding for the five years ending December 31, 1997 through 2001 are approximately $11,513,000, $2,063,000, $16,000, $9,000 and $9,000, respectively. 77 The Company has domestic credit arrangements with various banks under which it can borrow up to an aggregate of approximately $35 million, at the prime rate (8.25% at December 31, 1996), the money market rate (7.25% at December 31, 1996) or the London Interbank Offered Rate plus 1/2% (6.25% at December 31, 1996), at the Company's option. The Company had outstanding borrowings of $9,387,000 against these lines of credit at December 31, 1996. Included in the credit lines is a $25 million credit line with a commercial bank which includes a commitment fee of 1/8 of 1% per annum on the unused average daily amount. The Company utilizes short-term bank loans to finance working capital requirements for certain business units. The Company's various loan and note agreements contain certain financial covenants typical to such agreements relating to working capital and to consolidated tangible net worth. The weighted average interest rate on these borrowings at December 31, 1996 and 1995 was approximately 8% and 10%, respectively. NOTE 8. INCOME TAXES The components of domestic and foreign income before income taxes were as follows:
Dollars in thousands 1996 1995 1994 U.S. $29,017 $22,838 $15,022 Non-U.S. 10,539 8,771 7,695 Income before income taxes $39,556 $31,609 $22,717 The provision for income taxes consisted of the following: Dollars in thousands 1996 1995 1994 Federal $ 7,919 $ 5,407 $ 3,575 Foreign 793 437 926 State 256 477 717 Current provision 8,968 6,321 5,218 Federal 1,671 3,164 225 Foreign 1,047 569 1,625 State 1,367 530 201 Deferred provision 4,085 4,263 2,051 Provision for income taxes $13,053 $10,584 $ 7,269
78 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 1996 the tax effects of the temporary differences were:
Deferred Deferred Tax Dollars in thousands Tax Assets Liabilities Depreciation $ - $ 8,463 Goodwill amortization - 365 Inventory valuation 1,332 - Bad debt reserves 372 - Accrued commissions 559 - Profit on sales to foreign subsidiaries 1,217 - Insurance accruals 682 - U.S. tax on unrepatriated earnings - 2,675 Pensions - 416 Royalties 850 - Sale versus lease 293 - Foreign withholding taxes on undistributed earnings - 2,671 Foreign deferred liabilities, net - 3,389 Tax effect of current translation loss 1,033 - Net operating loss carryforwards 5,686 - Miscellaneous 1,522 842 13,546 18,821 Valuation allowance for deferred tax assets (1,800) - Deferred income taxes $11,746 $18,821
The United States statutory corporate tax rate is reconciled to the Company's effective tax rate as follows:
1996 1995 1994 U.S. Federal statutory rate 35.0% 35.0% 35.0% Foreign Sales Corporation (1.6) (2.1) (1.8) Tax exempt interest income (.5) (1.2) (2.4) State income taxes, net of federal tax benefit 2.7 1.9 2.6 Foreign income taxed at different rates (2.0) - (1.1) Other, net (.6) (.1) (.3) Effective tax rate 33.0% 33.5% 32.0% At December 31, 1996, the Company had unused tax loss carryforward benefits of $5,686,000 (expiring in fiscal years 2004 to 2009). Because certain provisions of the tax law may limit the utilization of these benefits, the Company has established $1,800,000 as a valuation allowance at December 31, 1996 and 1995. The remaining unreserved portion is considered to be realizable. $3,886,000 of the net unused tax loss carryforward benefit has been included in other assets at December 31, 1996. The Company has elected not to provide tax on certain undistributed earnings of its foreign subsidiaries which it considers to be permanently reinvested. The cumulative amount of such unprovided taxes was approximately $1,538,000, $682,000 and $627,000 as of December 31, 1996, 1995 and 1994, respectively.
79 NOTE 9. STOCKHOLDERS' EQUITY During 1996 and 1995, the Company issued 1,062,277 shares (including shares for Sievers Instruments, Inc.) and 144,679 shares, respectively, in conjunction with acquisition related activity (NOTE 13). The Company has adopted Statement of Financial Accounting Standards (FAS) No. 123 "Accounting for Stock-Based Compensation" in 1996. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option- pricing model with the following assumptions used for grants in 1996 and 1995: expected volatility of 23.1%, risk-free interest rates ranging from 5.87% to 6.94% and expected lives of 5 years. The weighted average fair value of options granted during 1996 and 1995 was $15.17 and $10.02, respectively. At December 31, 1996, the Company had three stock-based compensation plans which are described below. The Company applies Accounting Principles Board Opinion 25 in accounting for its plans. Accordingly, any difference between the option price and the fair market value of the stock at the date of grant is charged to operations over the expected period of benefit to the Company. Had compensation cost for the Company's plans been determined based on the fair value of the options at the grant dates for awards under those plans consistent with the method of FAS 123, the Company's net income and earnings per share would have been adjusted. On a pro forma basis, net income as reported for 1996 of $26.5 million would have been $25.9 million and 1995 net income of $21.0 million would have been unchanged. Earnings per share as reported for 1996 of $1.65 would have been $1.61 and 1995 earnings per share of $1.39 would have been unchanged. The effects of applying FAS123 in this pro forma disclosure are not indicative of future awards, which are anticipated. FAS123 does not apply to awards prior to 1995. Under its 1979 Stock Option Plan (the "1979 Plan"), options may be granted to officers and other key employees of the Company (only as non-qualified options since February 1989) and are exercisable at a price of not less than $1.00 per share. It has been the general policy of the Compensation Committee of the Board of Directors, which administers the 1979 Plan, to issue non-qualified options with an exercise price equal to the fair market value of the stock. At December 31, 1996 and 1995, 132,519 and 90,758 shares, respectively, were reserved for issuance of additional options under the 1979 Plan. Under the 1986 Stock Option Plan for Non-Employee Directors (the "1986 Plan"), options may be granted at a price not less than the fair market value of the stock at the date of grant. As of December 31, 1996 and 1995, 98,500 and 116,500 shares, respectively, were reserved for issuance of additional options under the 1986 Plan. The Company has reserved 91,200 shares for options granted in 1990 to certain non-employees in exchange for a previously granted option to purchase 50% of the shares of a Spanish subsidiary of the Company which was merged with Ionics Iberica, S.A. in 1992. During 1995, an additional 30,000 options were granted to the same persons in connection with an increase in production capacity and projected increases in the sale of water under a long-term water sale agreement between Ionics Iberica, S.A. and the local water utility. The fair value of these options is being charged to operations over the 10-year vesting period. 80 A summary of the status of the Company's stock option plans as of December 31, 1996, 1995 and 1994 and changes during the years ending on those dates is presented below:
1996 1995 1994 Weighted- Weighted- Weighted- Average Average Average (Options Exercise Exercise Exercise in thousands) Options Price Options Price Options Price Outstanding at end of prior year 1,989 $ 20.30 2,185 $ 19.98 1,666 $ 17.67 Granted 744 42.51 39 27.48 642 24.23 Exercised (465) 17.15 (204) 18.11 (105) 8.99 Canceled (68) 23.06 (31) 21.85 (18) 21.53 Outstanding at end of current year 2,200 $ 28.39 1,989 $ 20.30 2,185 $ 19.98 Options exercisable at year-end 2,137 1,913 2,130
The following table summarizes the information about stock options outstanding at December 31, 1996:
(Options in thousands) Options Outstanding Options Exercisable Weighted- Average Weighted- Number Weighted- Number Remaining Average Exercisable Average Range of Outstanding Contract Exercise at Exercise Exercise Prices at 12/31/96 Years Price 12/31/96 Price $ 4.29 - $ 5.63 20 1.9 $ 4.74 20 $ 4.74 7.38 - 8.82 6 1.3 8.13 6 8.13 11.88 - 12.94 146 3.4 12.12 110 12.08 15.25 - 22.56 703 6.0 20.34 703 20.34 23.13 - 30.38 595 7.6 24.64 568 24.50 43.13 - 47.75 730 9.7 43.26 730 43.26 $ 4.29 - $47.75 2,200 7.4 $28.39 2,137 $28.68
The Company has adopted a restricted stock plan (the "1994 Plan") under which shares of common stock may be granted to officers and other key employees of the Company. Restrictions on the sale of such common stock typically lapse over a five-year vesting period. No shares were issued under the Plan in 1996. During 1995, 19,822 shares were issued under the Plan. 280,178 additional shares have been reserved for issuance. The fair value of $540,000 was recorded as unearned compensation and is being charged to operations over the vesting period. 81 The Company has a Section 401(k) stock savings plan under which 150,000 shares have been registered with the Securities and Exchange Commission for purchase on behalf of employees. Shares are normally acquired for the plan in the open market. Through December 31, 1996, no shares had been issued under the plan. The Company has adopted a Stockholder Rights Plan designed to protect stockholders against abusive takeover tactics. Each share of common stock now carries one-half right. Each right entitles the holder to purchase from the Company one unit, consisting initially of one-fifth share of common stock and one note in principal amount equal to four-fifths of the current market price of the common stock on the date of exercise, at a purchase price of $50 subject to adjustment. In certain circumstances, rights cease to be exercisable for a unit and become exercisable for $100 worth of common stock (or a combination of cash, property or other securities of the Company) for $50. The rights are not exercisable until the occurrence of certain events as defined in the Rights Plan. Subject to possible extension, the rights may be redeemed by the Company at $.01 per right at any time unless certain events occur. Unless redeemed earlier, the rights, which have no voting power, expire on December 31, 1997. In November 1994, the Company's Board of Directors declared a 2-for-1 stock split, effected by a 100% stock dividend which was paid January 6, 1995 to shareholders of record on December 14, 1994. All share and option amounts, related prices and other stockholders' equity information have been adjusted for all periods presented to give retroactive effect to this split. NOTE 10. OPERATING LEASES The Company leases equipment, primarily for industrial water purification and bottled water coolers, to customers through operating leases. The original cost of this equipment was $86,656,000 and $64,125,000 at December 31, 1996 and 1995, respectively. The accumulated depreciation for such equipment was $28,347,000 and $19,242,000 at December 31, 1996 and 1995, respectively. At December 31, 1996, future minimum rentals receivable under noncancelable operating leases in the years 1997 through 2001 and later were approximately $22,273,000, $18,137,000, $14,334,000, $10,437,000, $6,863,000 and $32,024,000, respectively. The Company leases facilities and personal property under various operating leases. Future minimum payments due under lease arrangements are as follows: $2,429,000 in 1997, $1,746,000 in 1998, $913,000 in 1999, $650,000 in 2000, and $309,000 in 2001. Rent expense under these leases was approximately $4,188,000, $3,538,000 and $3,249,000 for 1996, 1995 and 1994, respectively. 82 NOTE 11. PROFIT-SHARING AND PENSION PLANS The Company has a contributory profit-sharing plan (defined contribution plan) which covered substantially all of the employees of its Bridgeville, Pennsylvania operations and certain related operations during 1994. Effective July 1, 1995 all such employees, except those who are members of the Fabricated Products Group, became members of the Company's defined benefit pension plan described below. Company contributions to the defined contribution plan are made from pretax profits, may vary from 8% to 15% of participants' compensation, and are allocated to participants' accounts in proportion to each participant's respective compensation. Company contributions were $249,000, $188,000 and $360,000 in 1996, 1995 and 1994, respectively. The Company also has a contributory defined benefit pension plan (defined benefit plan) for its Watertown-based employees and employees of its other domestic divisions and subsidiaries. Benefits are based on years of service and the employee's average compensation. The Company's funding policy is to contribute annually an amount that can be deducted for federal income tax purposes. 83 The following table sets forth the defined benefit plan's funded status and amounts recognized in the Company's balance sheet at December 31, 1996 and 1995:
Dollars in thousands 1996 1995 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $8,996 and $8,082, respectively $(10,003) $(8,822) Projected benefit obligation for service rendered to date (10,883) (9,696) Plan assets at fair value 8,577 7,103 Projected benefit obligation in excess of plan assets (2,306) (2,593) Unrecognized net loss 993 1,282 Unrecognized prior service cost 523 559 Unrecognized net assets being amortized over approximately 17 years (362) (415) Adjustment for additional minimum liability (273) (552) Accrued pension cost at December 31 $ (1,425) $(1,719)
Net pension cost included the following components: Dollars in thousands 1996 1995 1994 Service cost $ 1,026 $ 706 $ 652 Interest cost 780 658 636 Return on plan assets (908) (1,157) 46 Net amortization and deferral 265 588 (703) Net periodic pension cost $ 1,163 $ 795 $ 631
The discount rate used in determining the projected benefit obligation was 7.25% in 1996 and 1995. The rate of increase in compensation levels used was 5% in 1996 and 6% in 1995. The expected long-term rate of return on assets was 9%. Plan assets consist primarily of money market, equity and fixed-income securities and are administered by an independent trustee. 84 The Ionics Section 401(k) stock savings plan is available to substantially all employees of the Company and its domestic subsidiaries. Employees may contribute from 1% to 12% of compensation subject to certain limits. The Company matches 50% of employee contributions allocated to the Company's common stock up to 6% of their salary. The Company recognized expense of $655,000, $512,000 and $376,000 in 1996, 1995 and 1994, respectively, under this plan. The Company does not provide post-retirement health care to its employees or any other significant post-retirement benefits other than those described above. NOTE 12. FINANCIAL INSTRUMENTS OFF-BALANCE-SHEET RISK The Company issues letters of credit as guarantees for various performance and bid obligations. Approximately $22.0 million and $18.9 million of these letters were outstanding at December 31, 1996 and 1995, respectively. Approximately 51% of the letters of credit outstanding at December 31, 1996 are scheduled to expire in 1997. These instruments were executed with creditworthy institutions. The Company periodically enters into foreign exchange contracts to hedge certain operational and balance sheet exposures against changes in foreign currency exchange rates. Because the impact of movements in currency exchange rates on foreign exchange contracts offsets the related impact on the underlying items being hedged, these instruments do not subject the Company to risk that would not otherwise result from changes in currency exchange rates. The Company had no foreign exchange contracts outstanding at December 31, 1996 and 1995. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, investments, trade accounts receivable and notes receivable. The credit risk of cash equivalents and investments is low as the funds are primarily invested in Spanish Government securities and with major financial institutions. The Company's concentrations of credit risk with respect to trade accounts receivable and notes receivable is considered low. The Company's customer base is spread across many different industries and geographies and the Company obtains guaranteed letters of credit for many of its foreign orders. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash equivalents and investments closely approximate their fair values as these items have relatively short maturities and are highly liquid. Based on market information, the carrying amounts of notes receivable and debt approximate their fair values. INVESTMENTS IN SECURITIES Realized gains and losses from the sale of debt and equity securities during fiscal 1996 and 1995 were not significant. 85 Long-term investments, maturing in 1998 and 2001, which the Company intends to hold to maturity have been recorded at a net cost of $1,144,000 and $1,219,000 at December 31, 1996 and 1995, respectively. These costs approximate fair value. During 1996, the Company's investment in Watlington Waterworks Limited (Watlington) of Bermuda decreased from 23% to 19% as a result of the issuance by Watlington of additional shares. Accordingly, the $1,208,000 carrying value of this investment, previously accounted for under the equity method, has been reclassified to other assets at December 31, 1996 and is accounted for under the cost method. This investment, which approximates the current market value, is considered to be available for sale. NOTE 13. CONSOLIDATION AND ACQUISITION AQUA DESIGN, INC. The Company completed a pooling with Aqua Design, Inc. (Aqua Design) on January 3, 1996 and issued 222,977 shares of common stock in exchange for more than 90% of the outstanding common stock of Aqua Design. Because the operating results from prior years were not material, both individually and in the aggregate, compared to those of the Company, the transaction has been recorded by restatement of retained earnings as of January 1, 1996, and no restatement of prior-period financial statements has been made. Aqua Design owns and operates membrane-based seawater desalination systems to produce drinking and process water primarily for hotels and municipalities in the Caribbean. APOLLO ULTRAPURE WATER SYSTEMS, INC. The Company completed a pooling with Apollo Ultrapure Water Systems, Inc. (Apollo) on January 10, 1996, and issued 331,567 shares of common stock in exchange for 100% of the outstanding common stock of Apollo. Because the operating results from prior years were not material, both individually and in the aggregate, compared to those of the Company, the transaction has been recorded by restatement of retained earnings as of January 1, 1996, and no restatement of prior-period financial statements has been made. Apollo sells ultrapure water and related services to a variety of industrial and commercial users primarily in southern California. SIEVERS INSTRUMENTS On May 31, 1996, the Company completed a pooling with Sievers Instruments, Inc. (Sievers), and issued 447,258 shares of common stock in exchange for 100% of the outstanding common stock of Sievers. The accompanying financial statements have been restated to include the accounts and operations of Sievers for all periods beginning as of January 1, 1995, since results of operations prior to this date are immaterial in relation to the results of the Company as a whole. Intercompany transactions between the combining entities, which were not significant, have been eliminated. Sievers manufactures instruments designed to measure extremely low levels of organic contaminants in ultrapure water for customers in the pharmaceutical, semiconductor and other industries. 86 Separate results of the combining entities prior to the combination, which have been included in the restated results, were as follows: Three Months Twelve Months Dollars in thousands Ended Ended (1996 UNAUDITED) March 31, 1996 December 31, 1995 Net revenue: Ionics $74,157 $248,617 Sievers (Unaudited) 3,686 8,676 $77,843 $257,293 Net income: Ionics $ 5,572 $ 19,682 Sievers (Unaudited) 513 1,343 $ 6,085 $ 21,025 SEPARATION TECHNOLOGY, INC. In July 1996, the Company purchased 100% of the stock of Separation Technology, Inc. (STI) for approximately $2.4 million through the issuance of 58,000 shares of common stock. The results of STI have been included in the Company's financial statements from July 1, 1996. Goodwill of approximately $4.4 million is being amortized on a straight-line basis over twenty years. Pro forma results of operations have not been presented, as the effect of this acquisition on the financial statements was not material. STI is a supplier of membrane-based purification equipment and related services to the food industry with particular emphasis on dairy and beverage applications. AHLFINGER WATER COMPANY On November 2, 1995, the Company acquired substantially all of the assets and liabilities of Ahlfinger Water Company (Ionics Ahlfinger) for $5.9 million through the issuance of 144,679 shares of common stock. Ionics Ahlfinger, based in Dallas, is a water treatment services company specializing in ion-exchange and reverse osmosis solutions to customer needs. The acquisition was accounted for under the purchase method, with the results of Ionics Ahlfinger included from November 2, 1995. Goodwill of $4.7 million is being amortized on a straight-line basis over 30 years. Pro forma results of operations have not been presented, as the effect of this acquisition on the financial statements was not material. NOTE 14. SEGMENT INFORMATION BUSINESS SEGMENTS The Company conducts its business in three business segments: Membranes and Related Equipment - electrodialysis reversal systems, reverse osmosis systems, microfiltration systems, ultrafiltration systems, conventional water and wastewater treatment equipment, other separations technology products, zero liquid discharge systems, instruments for analysis, monitoring and on-line detection of pollution levels, and fabricated products. 87 Water, Food and Chemical Supply - water, food and chemicals produced by the Company's membrane-based equipment, including desalted water for municipal and industrial use; ultrapure water for semiconductor and other industries; reduced mineral whey for food applications; and bleach and related chemicals. Consumer Products - bottled water, over and under-the-sink point of use devices, carbon filtering media, point-of-entry systems for treating the entire home water supply, household bleach and other cleaning products. 88 The following table summarizes the Company's operations by the three business segments and "Corporate and Other." Corporate and Other includes corporate-sponsored research and development programs and certain employee bonuses and insurance costs.
Membranes Water, Food Corporate and Related and Chemical Consumer and Dollars in Thousands Equipment Supply Products Other Total 1996 Revenue - unaffiliated customers $148,213 $112,305 $ 66,144 $ - $326,662 Inter-segment transfers 3,277 761 - (4,038) - Income from operations 15,775 18,437 6,730 (2,354) 38,588 Equity income - 22 419 - 441 Earnings before interest and taxes (EBIT) 15,775 18,459 7,149 (2,354) 39,029 EBIT % of total EBIT, after allocation of Corporate and Other 38% 45% 17% - 100% Identifiable assets 128,200 125,513 117,947 4,021 375,681 Investments in affiliated companies 57 30 2,821 - 2,908 Depreciation and amortization 3,740 15,102 7,075 245 26,162 Capital expenditures 7,280 16,250 22,305 168 46,003 1995 Revenue - unaffiliated customers $132,673 $ 69,321 $ 55,299 $ - $257,293 Inter-segment transfers 6,202 2,422 - (8,624) - Income from operations 13,249 14,486 4,967 (2,712) 29,990 Equity income (loss) (49) 57 634 - 642 Earnings before interest and taxes (EBIT) 13,200 14,543 5,601 (2,712) 30,632 EBIT % of total EBIT, after allocation of Corporate and Other 39% 44% 17% - 100% Identifiable assets 120,699 103,643 95,126 (2,298) 317,170 Investments in affiliated companies - 1,218 3,656 - 4,874 Depreciation and amortization 2,878 11,663 5,973 203 20,717 Capital expenditures 13,088 15,189 21,138 150 49,565 1994 Revenue - unaffiliated customers $113,928 $ 58,268 $ 50,180 $ - $222,376 Inter-segment transfers 1,718 615 - (2,333) - Income from operations 4,996 12,881 6,444 (3,280) 21,041 Equity income (loss) (349) 124 844 - 619 Earnings before interest and taxes (EBIT) 4,647 13,005 7,288 (3,280) 21,660 EBIT % of total EBIT, after allocation of Corporate and Other 19% 52% 29% - 100% Identifiable assets 85,771 85,064 85,885 15,025 271,745 Investments in affiliated companies 34 1,211 4,174 - 5,419 Depreciation and amortization 2,483 10,928 4,570 111 18,092 Capital expenditures 7,897 13,374 16,589 360 38,220
89 GEOGRAPHIC SEGMENTS Revenues are reflected in the segment from which the sales are made. Transfers between areas are generally made at cost plus a markup which approximates prices charged to unaffiliated customers. Certain corporate expenses are included with the elimination of intersegment profit in the "Corporate and Eliminations" segment. Identifiable corporate assets, which are net of eliminations, consist primarily of cash and short-term investments. Included in the United States segment are export sales of approximately 18%, 23% and 19% for 1996, 1995 and 1994, respectively. Including these U.S. export sales, the percentages of total revenues attributable to activities outside the U.S. were 36%, 39% and 37% in 1996, 1995 and 1994, respectively. Information about the Company's operations by geographic segment follows:
Corporate United Other and Dollars in thousands States Europe International Eliminations Total 1996 Revenue - unaffiliated customers $256,486 $ 48,692 $ 21,484 $ - $326,662 Inter-segment transfers 10,255 1,385 3,002 (14,642) - Income from operations 31,529 5,870 3,260 (2,071) 38,588 Identifiable assets 281,624 73,505 20,340 212 375,681 1995 Revenue - unaffiliated customers $206,276 $ 39,824 $ 11,193 $ - $257,293 Inter-segment transfers 8,343 1,655 2,935 (12,933) - Income from operations 23,159 6,424 1,467 (1,060) 29,990 Identifiable assets 235,238 74,161 16,708 (8,937) 317,170 1994 Revenue - unaffiliated customers $172,864 $ 38,948 $ 10,564 $ - $222,376 Inter-segment transfers 11,969 1,606 1,764 (15,339) - Income from operations 16,229 4,679 1,046 (913) 21,041 Identifiable assets 193,832 53,941 14,664 9,308 271,745
90 SELECTED FINANCIAL DATA STATEMENT OF OPERATIONS DATA
Dollars in thousands, except per share amounts 1996 % 1995 % 1994 % 1993 % 1992 % Revenues $326,662 100.0 $257,293 100.0 $222,376 100.0 $175,273 100.0 $155,240 100.0 Income before income taxes 39,556 12.1 31,609 12.3 22,717 10.2 19,724 11.3 18,184 11.7 Net income 26,503 8.1 21,025 8.2 15,448 6.9 13,807 7.9 12,820 8.3 Earnings per share 1.65 1.39 1.09 .98 .93
BALANCE SHEET DATA Dollars in thousands 1996 1995 1994 1993 1992 Current assets $144,422 $122,387 $113,477 $109,957 $108,757 Current liabilities 68,173 60,279 54,877 46,082 30,499 Working capital 76,249 62,108 58,600 63,875 78,258 Total assets 378,589 322,044 277,164 249,562 224,590 Long-term debt and notes payable 2,132 182 99 109 439 Stockholders' equity 292,217 253,044 218,610 200,081 190,340
91 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Dollars in thousands, Earnings Earnings except per Gross Net per Gross Net per share amounts Revenues Profit Income Share Revenues Profit Income Share 1996 1995 First Quarter $ 77,843 $ 25,111 $ 6,085 $ .38 First Quarter $ 58,533 $ 19,207 $ 4,390 $ .30 Second Quarter 74,902 25,972 6,440 .40 Second Quarter 58,611 19,988 4,918 .33 Third Quarter 84,511 27,355 6,853 .43 Third Quarter 65,184 21,083 5,669 .37 Fourth Quarter 89,406 28,376 7,125 .44 Fourth Quarter 74,965 24,015 6,048 .39 $326,662 $106,814 $ 26,503 $ 1.65 $257,293 $ 84,293 $ 21,025 $ 1.39
COMMON STOCK PRICE RANGE
1996 High Low 1995 High Low First Quarter $43 1/2 $38 1/8 First Quarter $30 1/2 $26 1/4 Second Quarter 51 1/4 40 1/2 Second Quarter 34 3/4 26 5/8 Third Quarter 47 7/8 40 Third Quarter 42 33 5/8 Fourth Quarter 50 45 1/2 Fourth Quarter 45 1/2 39 5/8
92
BOARD OF DIRECTORS CORPORATE OFFICERS PRINCIPAL OVERSEAS CORPORATE OFFICES, AFFILIATES HEADQUARTERS & SUBSIDIARIES ARTHUR L. GOLDSTEIN * ARTHUR L. GOLDSTEIN Chairman of the Board, Chairman of the Board, Ionics, Incorporated President and President and Eau et Industrie 65 Grove Street, Chief Executive Officer Chief Executive Officer Paris, France Watertown, Ionics, Incorporated Massachusetts 02172 WILLIAM E. KATZ Elite Chemicals Pty. Ltd. DOUGLAS R. BROWN # Executive Vice President Brisbane, Qld. Australia INVESTOR INFORMATION President and Chief Executive Officer, ROBERT J. HALLIDAY Global Water Services,S.A. The Annual Meeting of Advent International Vice President, Finance Panama City, Panama Ionics' shareholders Corp. and Accounting and will be held Chief Financial Officer Ionics (Bermuda) Ltd. Thursday, May 8, 1997 WILLIAM L. BROWN # Hamilton, Bermuda at 2:00 P.M. at Retired Chairman of the STEPHEN KORN BankBoston, Board, The First Vice President, Ionics Iberica, S.A. 100 Federal Street, National Bank of General Counsel and Grand Canary Spain Boston, Massachusetts Boston Clerk Ionics, Incorporated Ionics' common stock is ARNAUD DE VITRY THEODORE G. PAPASTAVROS Hong Kong traded on the New York D'AVAUCOURT # Vice President, Stock Exchange under the Engineering Consultant Strategic Planning and Ionics Italba, S.p.A. symbol ION. As of and Director of Various Treasurer Milan, Italy March 21, 1997 there Organizations were approximately 1,800 PRINCIPAL U.S. Ionic Nederland, B.V. shareholders of record. WILLIAM E. KATZ OFFICES, AFFILIATES Maastricht the Netherlands No cash dividends were Executive Vice & SUBSIDIARIES paid in either 1996 or President Ionics (UK) Ltd. 1995 pursuant to Ionics' Ionics, Incorporated Aqua Cool Pure Bottled London, England current policy to retain Watertown, Massachusetts earnings for use in its ROBERT B. LUICK business. Of Counsel, Sullivan Elite New England and Worcester, Ludlow, Massachusetts Aqua Cool Kuwait Attorneys Kuwait City, Kuwait For information or General Ionics assistance regarding JOHN J. SHIELDS *+ Cuyahoga Falls, Ohio Aqua Cool Saudi Arabia individual stock President and Chief Dammam, Saudi Arabia records, transactions or Executive Officer, Ionics Ahlfinger Water certificates, please King's Point Holdings Dallas, Texas Ionics-Mega s.r.o. call the Transfer Incorporated Prague, Czech Republic Agent's Telephone Ionics Apollo Ultrapure Response Center: CARL S. SLOANE *+ Pico Rivera, California Jalal-Ionics, Ltd. 1-800-426-5523 between Ernest L. Arbuckle Manama, Bahrain 9 A.M. and 5 P.M. Professor of Business Ionics Aqua Design Administration, Campbell, California Yuasa-Ionics Co., Ltd. Ionics' Annual Report on Harvard University Tokyo, Japan Form 10-K and other Graduate School of Ionics, Incorporated corporate information Business Administration Bridgeville, Pennsylvania may be obtained on 93 Ionics' home page on the MARK S. WRIGHTON + Ionics Pure Solutions Worldwide Web at Chancellor Phoenix, Arizona http://www.ionics.com Washington University Ionics Resources Conservation A copy of Ionics' Annual ALLEN S. WYETT + Bellevue, Washington Report on Form 10-K, President, Wyett which is filed with the Consulting Group, Inc. Securities and Exchange Commission, will be sent Ionics Separation Technology to any shareholder upon St. Paul, Minnesota request directed to Investor Relations, Ionics Sievers Instruments Ionics, Incorporated, Boulder, Colorado P.O. Box 9131, Watertown, Massachusetts Ionics Ultrapure Water 02272-9131, or by Campbell, CA calling (617)926-2510 ext. 874. TRANSFER AGENT & REGISTRAR State Street Bank and Trust Company, Boston, Massachusetts AUDITORS Coopers & Lybrand L.L.P. Boston, Massachusetts * Member of Executive Committee # Member of Audit Committee + Member of Compensation Committee Covering the Waterfront, The Ionics Toolbox, and Ten-Cylinder Engine are service marks; Aqua Cool, Cloromat, Chemomat, Electromat, Elite, and HYgene are registered trademarks; and Ultrapure and SuperValue are trademarks of Ionics, Incorporated.
94 EX-21 6 EXHIBIT 21 IONICS, INCORPORATED SUBSIDIARIES OF THE REGISTRANT State or Other Jurisdiction Name of Incorporation Ionics Foreign Sales Corporation Limited Jamaica Global Water Services, S.A. Panama Ionics Italba, S.p.A. Italy Ionics Iberica, S.A. Spain Ionics Nederland B.V. The Netherlands Ionics Ultrapure Water Corporation California Ionics Securities Corporation Massachusetts Ionics (U.K.) Limited United Kingdom Ionics (Bermuda) Ltd.* Bermuda Elite Chemicals Pty. Ltd. Australia Eau et Industrie France Resources Conservation Co. International Delaware Apollo Ultrapure Water Systems, Inc. California Aqua Design, Inc.* California Separation Technology, Inc.** Minnesota Ionics (Korea) Ltd. Delaware Sievers Instruments, Inc. Colorado * The Registrant, either directly, through Aqua Design, Inc. or through Ionics (Bermuda) Ltd., wholly owns nine subsidiary corporations incorporated in various Caribbean jurisdictions. These subsidiary corporations own and operate, or operate and maintain, desalination plants for the supply of potable water to resorts, hotels and municipalities. ** Owns a U.K. subsidiary, SeparaTech Limited. 95 EX-23 7 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements for the Ionics 1979 Stock Option Plan on Form S-8 (registration nos. 333-05225, 33-54293, 33-41598, 33-5814, 33-14194, 2-64255, 2-72936 and 2-82780); in the registration statement for the Ionics Section 401(k) Stock Savings Plan on Form S-8 (registration no. 33-2092); in the registration statement for the Ionics 1994 Restricted Stock Plan (No. 33- 59051); and in the registration statement for the Ionics 1986 Stock Option Plan for Non-Employee Directors (registration no. 33-54400), of our reports dated February 18, 1997, on our audits of the consolidated financial statements and the financial statement schedule of Ionics, Incorporated as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, which are included or incorporated by reference in this Annual Report on Form 10-K. /s/COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 27, 1997 96 EX-24 8 EXHIBIT 24 POWER OF ATTORNEY We, the undersigned officers and directors of Ionics, Incorporated (the "Company"), hereby severally constitute Arthur L. Goldstein and Stephen Korn, and each of them, to sign for us, and in our names in the capacities indicated below, the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1996, and any and all amendments to such Annual Report, hereby ratifying and confirming our signatures as they may be signed by our attorneys to such Annual Report and any and all amendments thereto. Witness our hands on the respective dates set forth below. Signature Title Date /s/Douglas R. Brown Director March 27, 1997 Douglas R. Brown /s/William L. Brown Director March 27, 1997 William L. Brown /s/Arnaud de Vitry d'Avaucourt Director March 27, 1997 Arnaud de Vitry d'Avaucourt /s/Arthur L. Goldstein Chairman of the Board March 27, 1997 Arthur L. Goldstein of Directors, Chief Executive Officer and President (Principal Executive Officer) /s/William E. Katz Director March 27, 1997 William E. Katz /s/Robert B. Luick Director March 27, 1997 Robert B. Luick /s/John J. Shields Director March 27, 1997 John J. Shields /s/Carl S. Sloane Director March 27, 1997 Carl S. Sloane /s/Mark S. Wrighton Director March 27, 1997 Mark S. Wrighton /s/Allen S. Wyett Director March 27, 1997 Allen S. Wyett 97 EX-27 9
5 1,000 YEAR DEC-31-1996 DEC-31-1996 12,269 0 93,659 (2,267) 26,000 144,422 306,670 (120,853) 378,589 68,173 0 15,823 0 0 276,394 378,589 326,662 326,662 219,848 219,848 0 1,011 0 39,115 13,053 26,503 0 0 0 26,503 1.65 1.64
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