-----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, N/lnHlCYQ6A7rOUj0rkx63rNnHam0rlvzv748Zg1ki6b3ujPszafj5V5AztrnYFw Bp//eGhAc4PfhWyURUAagQ== 0000052466-99-000004.txt : 19990402 0000052466-99-000004.hdr.sgml : 19990402 ACCESSION NUMBER: 0000052466-99-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: SEC FILE NUMBER: 001-07211 FILM NUMBER: 99579426 BUSINESS ADDRESS: STREET 1: 65 GROVE ST CITY: WATERTOWN STATE: MA ZIP: 02172 BUSINESS PHONE: 6179262500 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-7211 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 02472 (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 and non-voting common equity held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days prior to the date of filing. The aggregate market value of the Common Stock of the registrant held by non-affiliates as of March 19, 1999 was $440,651,315 (15,772,754 shares at $27 15/16 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 19, 1999, 16,129,804 shares of Common Stock, $1 par value, were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1998 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 6, 1999. Part III /2 PART I Statements in this Annual Report on Form 10-K which are not historical facts, so-called "forward looking statements," are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the Company's filings with the Securities and Exchange Commission. Item 1. BUSINESS Ionics, Incorporated ("Ionics," or the "Company") 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 other governmental entities, and utilities. Unless the context indicates otherwise, the terms "Ionics" and "Company" as used herein includes Ionics, Incorporated and all its subsidiaries. The Company's business activities are now reported in four business group segments. This segmentation reflects a change from three reportable segments which the Company provided in prior periods. The current reporting reflects the business group structure which the Company put into place in the latter part of 1998. The business group structure is based upon defined areas of management responsibility with respect to markets, applications and products. These business group segments are: the Equipment Business Group; Ultrapure Water Group; Consumer Water Group; and Instrument Business Group. In 1998, these segments accounted for approximately 37%, 32%, 23% and 8%, respectively, of the Company's total revenues. Approximately 47% of the Company's 1998 revenues were derived from foreign sales or operations. Fifty 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 ToolboxR." 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. /3 I-1 The Company was incorporated in Massachusetts in 1948. The Company's principal executive offices are located at 65 Grove Street, Watertown, Massachusetts 02472. Financial Information About Business Segments The information contained in Note 15 of Notes to Consolidated Financial Statements contained in the Company's Annual Report to Stockholders for the year ended December 31, 1998 is incorporated herein by reference. Equipment Business Group The Equipment Business Group accounted for approximately 37% of revenues in 1998. This segment provides technologies, treatment systems and services for seawater desalination, brackish water desalination, wastewater reuse and recycle, potable water and high purity water. In addition this segment includes the Company's custom fabrication activities and food and chemical processing activities. 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 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 EDR, ion exchange, EDI, RO, UF, ozonation 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. In 1997, the Company introduced the new Ionics EDR 2020TM system, a third-generation brackish water desalination system incorporating several new, patented improvements at reduced cost. /4 I-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 management, 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. 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 which separates contaminated sludges, sediments and soils into oil, water and solids. This technology 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. 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. /5 I-3 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 Ionics Aqua Design subsidiaries, the Company owns and operates more than 30 desalination plants on a number of Caribbean islands, which provide drinking water to hotels, resorts and governmental entities. Drinking water on these islands is usually supplied pursuant to water supply contracts with terms ranging from five to ten years. In 1998, the Company signed long-term, build-own-operate municipal desalination contracts with the governments of Bonaire, Anguilla and Barbados. The Barbados facility will be the largest brackish water desalination facility in the Caribbean, and the Company will supply water under a 15-year contract. Chemical Supply 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. (Elite), 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. Elite has recently expanded its distribution of bleach products to the Sydney area. Food Processing Under an agreement with a major U.S. dairy cooperative, the Company oversees whey processing activities at two plants owned by the cooperative, and receives a processing fee based on the production of demineralized whey for its services. Included in the equipment being utilized by the Company at these plants are its ElectromatR electrodialysis systems. Custom Fabricated Products At its Bridgeville, Pennsylvania facility, the Company fabricates specially designed products for industrial and defense-related applications. The Company's experience and expertise in design, welding, machining and assembly to meet exceptionally fine tolerances have been utilized to fabricate /6 I-4 products ranging from intricate small parts to large multi-ton assemblies. Ultrapure Water Group The Ultrapure Water Group accounted for approximately 32% of the Company's 1998 revenues. This segment provides equipment and services for specialized industrial users of ultrapure water. Ultrapure water is water that has been purified by a series of processes to the degree that remaining impurities are measured in parts per billion or trillion. Ultrapure Water Equipment 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. The Company supplies sophisticated ultrapure water systems which utilize a combination of ion-exchange, EDI, RO and UF 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. In 1998, the Company was awarded an order for an ultrapure water system utilizing the Company's EDI technology to be located in Beijing, the first such installation in China. Included in the equipment sold by the Ultrapure Water Group is the Company's OzgenR ozone-generation equipment, which is being utilized by semiconductor plants as well as for swimming pool and aquarium disinfection. The Company established the Ionics Life Sciences division at the beginning of 1999 to expand its delivery of ultrapure water equipment and services to the pharmaceutical industry. 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. /7 I-5 Ionics has also commercially implemented its 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 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 1998, Company-owned or operated equipment for the production of ultrapure water and other purified process water under contract with companies in various industries had a total capacity of approximately 24,000 gallons per minute. 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. In November 1997, the Company acquired a majority interest in a Malaysian company now called Ionics Enersave Engineering Sdn Bhd, which provides ultrapure water services and systems to the southeast Asian market. One of the Company's important ultrapure water service activities is ion-exchange regeneration services, which are provided at four U.S. and four overseas locations. In 1998, the Company commissioned a state-of-the-art resin regeneration facility in Singapore, and has just completed a 66,000 square foot facility in San Jose, California which contains resin regeneration, manufacturing and service facilities. The Company also provides system sanitization and high-flow deionization services at customer sites. Consumer Water Group This business group segment accounted for approximately 23% of the Company's 1998 revenues. The Company's consumer water products serve the bottled water, home water purification, and consumer bleach-based product market areas. 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 reproduced with uniform consistency and high quality at numerous locations around the world. Distribution operations have been established at seven Company-owned locations throughout England; at 18 Company- owned locations serving 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- /8 I-6 gallon bottles to a variety of commercial and residential customers. The Company has recently expanded its product-line to include office coffee service and other services complementary to bottled water distribution. At the end of 1998, there were a total of 29 Aqua Cool distribution centers in the United States and overseas, supplied with Aqua Cool by nine regional water purification and bottling facilities, supplying a customer base of approximately 135,000. Early in 1999, the Company acquired Aquarelle, a French bottled water distributor, with the intent of expanding the Company's bottled water operations into continental Europe. 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 sale of reverse osmosis and activated carbon-based filtering devices, and through the manufacture and sale of HYgeneR, a proprietary, EPA- registered, silver-impregnated activated carbon filtering medium. 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. In 1998, the Company introduced a new line of bacteriostatic water conditioning systems, and began to market water conditioning systems in Ireland. 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. /9 I-7 Instrument Business Group The Company's Instrument Business Group accounted for approximately 8% of the Company's 1998 revenues. This business segment comprises the Ionics Instrument Group located in Watertown, Massachusetts and Ionics Sievers Instruments, located in Boulder, Colorado. The Company has become a leading manufacturer of instruments that measure total organic carbon across the water "spectrum" from ultrapure water to wastewater. The Sievers Model 400 TOC analyzer is the only on-line TOC analyzer designed specifically to comply with new United States Pharmacopoeia (USP) requirements for determining water quality in the pharmaceutical industry. Ionics Sievers recently introduced TOC analyzers sensitive to the parts-per-trillion range, used primarily for ultrapure water measurement in the semiconductor and pharmaceutical industries. Sievers TOC monitors complement the Company's TOC monitor line for process water and wastewater applications. The Company's other instrument products, which are used both in the laboratory and on-line, measure and detect, among other things, total carbon, sulfur, nitric oxide, chemical oxygen demand and total oxygen demand. The Company also sells instruments for the measurement of dissolved metals and specific chemical analyzers for ammonia, phosphates, nitrates and chlorine. In 1998, the Company began to market a line of instruments for the detection of thin layers of oil on water. One line of such instruments is designed and manufactured by Agar Technologies Process and Environmental Control Ltd., an Israeli corporation acquired by the Company early in 1999. Other Information Concerning the Business of the Company 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. In 1997, the Company started to produce RO membranes. Membranes used for the RO process are also purchased from outside suppliers, and are normally available from multiple sources. /10 I-8 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 approximately 90 outstanding U.S. patents held by the Company, a substantial portion involves membranes, membrane technology and related separations processes such as ED and EDR, RO, UF and EDI. 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. 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 $189,917,000 at December 31, 1998 and $153,679,000 at December 31, 1997. 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. The Company expects to fill approximately 77% of its December 31, 1998 backlog during 1999. The Company does not believe that there are any seasonal aspects to its backlog figures. /11 I-9 Government Contracts The Company does not believe that any of its sales under U.S. Government contracts or subcontracts during 1998 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 The Company is actively engaged in 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 $6,635,000 in 1998, $5,410,000 in 1997, and $5,108,000 in 1996. 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. With respect to the Company's Equipment Business Group, 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 1998, 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 31, 1997, with a capacity to produce 100 cubic meters (approximately 25,000 gallons) or more of fresh water daily, the Company ranked first in terms of the cumulative number of such plants sold, having sold 1,742 plants of such capacity, more than the next three manufacturers combined. In addition, the Company ranked first in the total capacity of such plants sold. /12 I-10 With respect to the Ultrapure Water Group business segment, the Company competes with suppliers of ultrapure water services on a national and regional basis, and with other manufacturers of membrane-related equipment. With respect to the Company's Consumer Water Group 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. 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. In May 1998, a wholly owned California subsidiary of the Company was notified by the U.S. Environmental Protection Agency ("EPA") that it was a potentially responsible party (PRP)in connection with the Operating Industries, Inc. Superfund Site in Monterey Park, California. Because of its relatively small volumetric contribution of waste to the site,the subsidiary was eligible to participate in a de minimis settlement, and in January 1999 made full and timely payment of $13,685 in settlement. The Company is one of approximately 1,000 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 /13 I-11 treatment of the most heavily contaminated non-bedrock ground water, was completed in 1995. The Company's share of combined assessments to date against all PRPs for non-time critical removal actions and other work totals approximately $60,000. 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 ground water. 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. Certain former operations of a division of the Company are the subject of an investigation into possible violations of environmental regulations by the Office of the Attorney General of the Commonwealth of Massachusetts. See Item 3, Legal Proceedings, page I-15. 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 2,200 full-time persons. None of the Company's employees are represented by unions or have entered into workplace agreements with the Company, 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, ultrapure water systems, /14 I-12 water and wastewater treatment systems, sodium hypochlorite, Cloromat systems, products and services related to these foregoing systems, instruments 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 (losses)/gains included in income before income taxes and minority interest totaled $(28,000) in 1998, $100,000 in 1997, and $548,000 in 1996. The Company 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.; Elite Chemicals Pty. Ltd.; Ionics France S.A.; Resources Conservation Co. International; Ionics (Korea) Inc.; Aqua Design, Inc., including its subsidiaries and affiliates; Ionics Asia-Pacific Pte Ltd.; Ionics Watertec Pty. Ltd.; Ionics Foreign Sales Corporation Limited; Aquarelle S.A. (acquired in early 1999); and Agar Technologies Process and Environmental Control Ltd. (acquired in early 1999). In 1997, the Company acquired a 55% ownership interest in Ionics Enersave Engineering Sdn Bhd, a Malaysian corporation with subsidiary operations in Indonesia and China. The Company also 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. In addition, the Company has a 20% ownership interest in Watlington Waterworks, Limited 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; and, through Ionics Iberica, S.A., 20% interests in Aguas Tratadas de Cadereyta, S.A. de C.V. and Aguas Tratadas de Madero, S.A. de C.V., companies organized to provide water treatment services in Mexico. Through its Italian subsidiary, the Company has a 50% ownership interest in Agrinord S.r.l., an Italian company engaged in waste treatment operations. Further geographical and financial information concerning the Company's foreign operations appears in Notes 1, 5, 8, 13, 14 and 15 to the Company's Consolidated Financial Statements included as part of the Company's 1998 Annual Report to Stockholders, which Notes are incorporated herein by reference. /15 I-13 Financial Information About Geographic Areas The information contained in Note 15 of Notes to Consolidated Financial Statements contained in the Company's Annual Report to Stockholders for the year ended December 31, 1998 is incorporated herein by reference. Item 2. PROPERTIES The Company's executive offices are located in Watertown, Massachusetts. Manufacturing and other operations are carried out in a number of locations. The following table provides certain information as to the Company's principal general offices and manufacturing facilities:
Business Approximate Segment Utilizing Property Square Feet Location the Location Interest of Floor Space Watertown, MA (headquarters) Equipment Business Group Owned 134,000 Instrument Business Group Consumer Water Group Watertown, MA Equipment Business Group Owned 127,000 Consumer Water Group Bridgeville, PA Equipment Business Group Owned 77,000 Consumer Water Group Elkton, MD Consumer Water Group Owned 234,000 Ludlow, MA Consumer Water Group Owned 129,000 San Jose, CA Ultrapure Water Group Owned 66,000 Boulder, CO Instrument Business Group Leased 74,000 London, England Consumer Water Group Owned 36,000
The Company also owns or leases smaller facilities in which its business segments conduct business. The Company makes use primarily of leased facilities for its Aqua Cool bottled water distribution centers. The majority of these facilities contain less than 10,000 square feet. The Company considers the business facilities that it utilizes to be adequate for the uses to which they are being put. /16 I-14 Item 3. LEGAL PROCEEDINGS The Company is involved in the normal course of its business in various litigation matters. Although the Company is unable to determine at the present time whether it 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. The Attorney General of the Commonwealth of Massachusetts is conducting an investigation into certain former operations of a division of the Company during portions of the years 1991 through 1995. The Company is cooperating with this investigation of possible violations of environmental statutes and regulations that relate to one facility that ceased operations in 1995. The Company cannot predict the outcome of this matter, but it may result in administrative, civil or criminal charges and/or monetary payments. On March 27, 1998, the Company was served with a summons and complaint in connection with a lawsuit now captioned United States Filter Corporation, U.S. Filter/Ionpure, Inc., IP Holding Company, Millipore Corporation and Millipore Investment Holdings Limited v. Ionics, Incorporated, filed in the U.S. District Court, District of Massachusetts (Boston). Plaintiffs allege that the Company is infringing a certain reissue patent, which issued on March 10, 1998, by making, selling, offering to sell and using the Company's electrodeionization (EDI) systems within the United States. The Company was recently notified that plaintiffs are seeking to add to their complaint claims of infringement of certain earlier-issued patents. The Company, which pioneered the development of the EDI process over 30 years ago and holds a number of patents related to EDI technology, believes that it has valid defenses to plaintiffs' infringement claims and intends vigorously to defend itself in this litigation, which is in the early discovery stages. 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. /17 I-15 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, 1998. The information set forth on page 37 entitled "Common Stock Price Range" and on the inside back cover of such Annual Report is hereby incorporated by reference. Item 6. SELECTED FINANCIAL DATA Reference is made to the Company's Annual Report to Stockholders for the year ended December 31, 1998. The information set forth on page 37 of such Annual Report entitled "Statement of Operations Data" and "Balance Sheet Data" 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, 1998. The information set forth on pages 17 through 21 of such Annual Report entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" is hereby incorporated by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Derivative Instruments The Company had $318,000 of foreign exchange contracts outstanding at December 31, 1998. These contracts are immaterial to the Company and as they were used to hedge foreign currency denominated transactions, any change in the fair value of the contracts would be offset by changes in the underlying value of the transactions. The Company has no other derivative financial instruments, or other financial and commodity instruments for which fair value disclosure would be required under SFAS No. 119. The Company holds no investment securities which would require disclosure of market risk. Market Risk The Company's primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. The Company's investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments. At December 31, 1998, the Company had $6.9 million of short-term debt and $1.5 million of long-term debt outstanding. The short-term debt was issued under various working capital lines and due to its short- /18 II-1 term maturities, a hypothetical 10% decrease in the Company's weighted average short-term borrowing rate at December 31, 1998 would not have materially affected the year-end carrying value of the debt. The Company's exposure to currency exchange rate fluctuations has been and is expected to remain modest due to the fact that the operations of its international subsidiaries are primarily conducted in their respective local currencies. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Company's Annual Report to Stockholders for the year ended December 31, 1998. The consolidated balance sheets of the Registrant as of December 31, 1998 and 1997, the related consolidated statements of operations, cash flows and stockholders' equity for the years ended December 31, 1998, 1997 and 1996, and the related notes with the opinion thereon of PricewaterhouseCoopers LLP, independent accountants, on pages 21 through 36, and Selected Quarterly Financial Data (unaudited) on page 37, 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. /19 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 6, 1999, filed with the Securities and Exchange Commission on March 24, 1999. The information regarding executive officers is as follows: Age as of Positions Name March 1, 1999 Presently Held Arthur L. Goldstein* 63 President, Chief Executive Officer and Director since 1971; Chairman of the Board since 1990 William E. Katz 74 Executive Vice President since 1983; Director since 1961 John P. Bergeron 47 Vice President since February 23, 1999; Treasurer since November 1997 Edward J. Cichon 44 Vice President, Equipment Business Group since July 1998 Robert J. Halliday 44 Vice President, Finance since December 1990; Chief Financial Officer since August 1992 Stephen Korn 53 Vice President, General Counsel and Clerk since September 1989 Theodore G. Papastavros 65 Vice President since 1975; Vice President, Strategic Planning since February 1990 ___________________ * Member of Executive Committee There are no family relationships between any of the officers or directors. Officers of the Company are appointed each year at the annual meeting of Directors. Except for Mr. Cichon, all of the above executive officers have been employed by the Company in various capacities for more than five years. Prior to joining the Company in July 1998, Mr. Cichon served as a Senior Vice President of Metcalf & Eddy, Inc., a water and wastewater engineering and services firm, where he was employed for 18 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 6, 1999, filed with the Securities and Exchange Commission on March 24, 1999. /20 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 6, 1999, filed with the Securities and Exchange Commission on March 24, 1999. 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 6, 1999, filed with the Securities and Exchange Commission on March 24, 1999. /21 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-8. 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-8. 3. Exhibits
Exhibit No. Description 3.0 Articles of Organization and By-Laws 3.1 Restated Articles of Organization filed * April 16, 1986 (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 3.1(a) Amendment to the Restated Articles of * Organization filed June 19, 1987 (filed as Exhibit 3.1(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 3.1(b) Amendment to Restated Articles of * Organization filed May 13, 1988 (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 May 8, 1992 (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 1996). 3.1(d) Amendment to Restated Articles of * Organization filed May 8, 1998 (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1998). /22 IV-1 3.2 By-Laws, as amended through November 14, 1997 * (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 4.0 Instruments defining the rights of security holders, including indentures 4.1 Renewed Rights Agreement, dated as of * August 19, 1997 between Registrant and BankBoston N.A. (filed as Exhibit 1 to the Company's Current Report on Form 8-K dated August 27, 1997). 4.2 Form of Common Stock Certificate (filed as * Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.0 Material Contracts 10.1 1979 Stock Option Plan, as amended through * February 22, 1996 (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.2 1986 Stock Option Plan for Non-Employee Directors, * as amended through February 19, 1997 (filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.3 Amended and Restated Credit Agreement between * the Company and the First National Bank of Boston dated as of December 31, 1992 (filed as Exhibit 10.3 to the Company's Annual Report for the year ended December 31, 1997). 10.3(1)Amendment Agreement No. 1, dated as of * December 31, 1995, to Amended and Restated Credit Agreement between the Company and The First National Bank of Boston (filed as Exhibit 10.3(1) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.3(2)Amendment Agreement No. 2, dated as of December 31, 1998, to Amended and Restated Credit Agreement between the Company and BankBoston N.A. 10.4 Operating Agreement dated as of September 27, * 1989 between the Company and Aqua Cool Enterprises, Inc. (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). /23 IV-2 10.5 Term Lease Master Agreement dated as of * September 27, 1989 between the Company and Aqua Cool Enterprises, Inc. (filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.6 Option Agreement dated as of September 27, 1989 * among the Company, Aqua Cool Enterprises, Inc. and the other parties named therein (filed as Exhibit 10.6 to the Company's registration statement on Form S-2, No. 33-38290, effective January 24, 1991). 10.7 1994 Restricted Stock Plan (filed as Exhibit 10.12 * to the Company's Annual Report on Form 10-K dated March 30, 1995). 10.8 1997 Stock Incentive Plan (filed as Exhibit 10.12 * to the Company's Annual Report on Form 10-K dated December 31, 1996). 10.9 Ionics, Incorporated Supplemental Executive * Retirement Plan effective as of January 1, 1996 (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K dated December 31, 1997). 10.10 Form of Employee Retention Agreement dated * February 24, 1998 between the Company and certain officers of the Company and its subsidiaries (filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K dated December 31, 1997). 10.11 1998 Non-Employee Directors Fee Plan (filed * as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending September 30, 1998). 13.0 Annual Report to Stockholders of the Company for the year ended December 31, 1998 (constituting the following sections: Management's Discussion and Analysis of Results of Operations and Financial Condition; Report of Independent Accountants; Consolidated Statements of Operations; Consolidated Balance Sheets; Consolidated Statements of Cash Flow; Consolidated Statements of Stockholders' Equity; Notes to Consolidated Financial Statements; Selected Financial Data; Board of Directors; Corporate Officers; Principal U.S. Offices, Affiliates & Subsidiaries; Corporate Headquarters; Principal Overseas Offices, Affiliates & Subsidiaries; Investor Information; Transfer Agent & Registrar; and Auditors). /24 IV-3 21.0 Subsidiaries of the Registrant. 23.0 Consents 23.1 Consent of PricewaterhouseCoopers LLP to incorporation by reference of that firm's report dated February 19, 1999, which is included on page 21 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1998. 24.0 Power of Attorney. 27.0 Financial Data Schedule. ** ________________________________ * incorporated herein by reference ** for electronic purposes only
/25 IV-4 (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the last quarter of fiscal 1998. 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, 333-29135, 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. /26 IV-5 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 29, 1999 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 29, 1999 By: /s/Arthur L. Goldstein Arthur L. Goldstein, Chairman of the Board, President and Chief Executive Officer (principal executive officer) and Director Date: March 29, 1999 By: /s/Robert J. Halliday Robert J. Halliday, Vice President, Finance and Chief Financial Officer (principal financial officer and principal accounting officer) /27 IV-6 Date: March 29, 1999 By/s/Douglas R. Brown Douglas R. Brown, Director Date: March 29, 1999 By/s/William L. Brown William L. Brown, Director Date: March 29, 1999 By/s/Arnaud de Vitry d'Avaucourt Arnaud de Vitry d'Avaucourt, Director Date: March 29, 1999 By/s/Kathleen F. Feldstein Kathleen F. Feldstein, Director Date: March 29, 1999 By/s/William E. Katz William E. Katz, Director Date: March 29, 1999 By/s/John J. Shields John J. Shields, Director Date: March 29, 1999 By/s/Carl S. Sloane Carl S. Sloane, Director Date: March 29, 1999 By/s/Daniel I.C. Wang Daniel I.C. Wang, Director Date: March 29, 1999 By/s/Mark S. Wrighton Mark S. Wrighton, Director Date: March 29, 1999 By/s/Allen S. Wyett Allen S. Wyett, Director /28 IV-7 IONICS, INCORPORATED INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES PAGES Report of Independent Accountants 21* Financial Statements: Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 22* Consolidated Balance Sheets as of December 31, 1998 and 1997 23* Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 24* Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 25* Notes to Consolidated Financial Statements 26-36* Supporting Financial Statement Schedules for the years ended December 31, 1998, 1997 and 1996: Schedule II - Valuation and Qualifying Accounts IV-9 Report of Independent Accountants on Financial Statement Schedule IV-10 __________________ 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, 1998, which pages are incorporated herein by reference. /29 IV-8 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, 1998 $2,289,000 $1,319,000 $ 0 $ 717,000 $2,891,000 December 31, 1997 $2,858,000 $1,408,000 $ 40,000 $2,017,000 $2,289,000 December 31, 1996 $2,410,000 $1,011,000 $ 286,000 $ 849,000 $2,858,000 (A) Deductions result primarily from the write-off of accounts.
/30 IV-9 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, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 has been incorporated by reference in this Form 10-K from page 21 of the 1998 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 for each of the three years in the period ending December 31, 1998, listed in the Index on page IV-8 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, present fairly, in all material respects, the information required to be included therein. /s/PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts February 19, 1999 /31 IV-10 EXHIBIT INDEX
Sequentially Exhibit Numbered No. Description Page 3.0 Articles of Organization and By-Laws 3.1 Restated Articles of Organization filed * April 16, 1986 (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 3.1(a) Amendment to the Restated Articles of * Organization filed June 19, 1987 (filed as Exhibit 3.1(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 3.1(b) Amendment to Restated Articles of * Organization filed May 13, 1988 (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 May 8, 1992 (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 1996). 3.1(d) Amendment to Restated Articles of * Organization filed May 8, 1998 (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1998). 3.2 By-Laws, as amended through November 14, 1997 * (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 4.0 Instruments defining the rights of security holders, including indentures 4.1 Renewed Rights Agreement, dated as of * August 19, 1997 between Registrant and BankBoston N.A. (filed as Exhibit 1 to the Company's Current Report on Form 8-K dated August 27, 1997). /32 4.2 Form of Common Stock Certificate (filed as * Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.0 Material Contracts 10.1 1979 Stock Option Plan, as amended through * February 22, 1996 (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.2 1986 Stock Option Plan for Non-Employee Directors, * as amended through February 19, 1997 (filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.3 Amended and Restated Credit Agreement between * the Company and the First National Bank of Boston dated as of December 31, 1992 (filed as Exhibit 10.3 to the Company's Annual Report for the year ended December 31, 1997). 10.3(1) Amendment Agreement No. 1, dated as of * December 31, 1995, to Amended and Restated Credit Agreement between the Company and The First National Bank of Boston (filed as Exhibit 10.3(1) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.3(2) Amendment Agreement No. 2, dated as of 35 December 31, 1998, to Amended and Restated Credit Agreement between the Company and BankBoston N.A. 10.4 Operating Agreement dated as of September 27, * 1989 between the Company and Aqua Cool Enterprises, Inc. (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.5 Term Lease Master Agreement dated as of * September 27, 1989 between the Company and Aqua Cool Enterprises, Inc. (filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.6 Option Agreement dated as of September 27, 1989 * among the Company, Aqua Cool Enterprises, Inc. and the other parties named therein (filed as Exhibit 10.6 to the Company's registration statement on Form S-2, No. 33-38290, effective January 24, 1991). /33 10.7 1994 Restricted Stock Plan (filed as Exhibit 10.12 * to the Company's Annual Report on Form 10-K dated March 30, 1995). 10.8 1997 Stock Incentive Plan (filed as Exhibit 10.12 * to the Company's Annual Report on Form 10-K dated December 31, 1996). 10.9 Ionics, Incorporated Supplemental Executive * Retirement Plan effective as of January 1, 1996 (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K dated December 31, 1997). 10.10 Form of Employee Retention Agreement dated * February 24, 1998 between the Company and certain officers of the Company and its subsidiaries (filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K dated December 31, 1997). 10.11 1998 Non-Employee Directors Fee Plan (filed * as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending September 30, 1998). 13.0 Annual Report to Stockholders of the Company for the 40 year ended December 31, 1998 (constituting the following sections: Management's Discussion and Analysis of Results of Operations and Financial Condition; Report of Independent Accountants; Consolidated Statements of Operations; Consolidated Balance Sheets; Consolidated Statements of Cash Flow; Consolidated Statements of Stockholders' Equity; Notes to Consolidated Financial Statements; Selected Financial Data; Board of Directors; Corporate Officers; Principal U.S. Offices, Affiliates & Subsidiaries; Corporate Headquarters; Principal Overseas Offices, Affiliates & Subsidiaries; Investor Information; Transfer Agent & Registrar, and Auditors). 21.0 Subsidiaries of the Registrant. 75 23.0 Consents 23.1 Consent of PricewaterhouseCoopers LLP 76 to incorporation by reference of that firm's report dated February 19, 1999, which is included on page 21 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1998. 24.0 Power of Attorney. 77 27.0 Financial Data Schedule. ** ________________________________ * incorporated herein by reference ** for electronic purposes only
/34 EX-10 2 EX-10.3(2) Exhibit 10.3(2) AMENDMENT AGREEMENT NO. 2 to that certain AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT Dated as of December 31, 1992 This AMENDMENT AGREEMENT NO. 2 (the "Amendment"), is made as of December 31, 1998, by and among IONICS, INCORPORATED (the "Company" or the "Borrower"), a Massachusetts corporation having its principal place of business at 65 Grove Street, Watertown, Massachusetts 02472, BANKBOSTON,N.A. (f/k/a The First National Bank of Boston and referred to herein as "BKB"), 100 Federal Street, Boston, Massachusetts 02110, and such other banks that are or may become parties to this Agreement from time to time in accordance with the provisions hereof (BKB and such other banks being collectively referred to herein as the "Banks" and each a "Bank") and BKB as agent for the Banks (the "Agent"). WHEREAS, the Borrower, the Banks and the Agent are parties to that certain Amended and Restated Credit Agreement, dated as of December 31, 1992 (as amended by Amendment Agreement No. 1 thereto dated as of December 31, 1995 and as further amended and in effect from time to time, the "Credit Agreement"), pursuant to which the Banks, upon certain terms and conditions, have made loans to the Borrower; and WHEREAS, the Borrower has requested and the banks and the Agent have agreed, on the terms and subject to the conditions set forth herein, to amend the Credit Agreement to (a) extend the maturity of the Loans and (b) modify certain covenants and provisions; NOW, THEREFORE, the parties hereto hereby agree as follows: Section 1. Defined Terms. Capitalized terms which are used herein without definition and which are defined in the Credit Agreement shall have the same meanings herein as in the Credit Agreement. Section 2. Amendment of Credit Agreement. (a) Section 1.1 of the Credit Agreement is hereby amended by deleting the reference to the date "December 31, 1998" therein and substituting therefor the date "December 31, 2001". (b) Section 1.2 of the Credit Agreement is hereby amended as follows: /35 (i) by deleting each reference to the date "December 31, 1998" therein and substituting for each reference therefor the date "December 31, 2001"; (ii) by deleting the reference to the date "April 1, 1999" therein and substituting therefor the date "April 1, 2002"; and (iii) by deleting the reference to the date "December 31, 1999" therein and substituting therefor the date "December 31, 2002". (c) Section 1.2.2 of the Credit Agreement is hereby amended as follows: (i) by deleting the reference to the date "December 31, 1998" from the fourth sentence thereof and substituting therefor the date "December 31, 2001"; and (ii) by deleting the date "December 31, 2001" from the fourth sentence thereof and substituting therefor the date "December 31, 2004". (d) Section 3 of the Credit Agreement is hereby amended by adding the following new Section 3.9 after Section 3.8 therein: Section 3.9 Year 2000 Problem. The Company and its Consolidated Subsidiaries have (i) reviewed the areas within their businesses and operations which could be adversely affected by failure to become "Year 2000 Compliant" (i.e. that computer applications, imbedded microchips and other systems used by the Borrower or any of its Consolidated Subsidiaries,will be able properly to recognize and perform properly date- sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a detailed plan and timetable to become Year 2000 Compliant in a timely manner,and (iii) committed adequate resources to support the Year 2000 plan of the Borrower and its consolidated Subsidiaries. Based upon such review, the Borrower reasonably believes that the Borrower and its Consolidated Subsidiaries will become "Year 2000 Compliant"in a timely manner except to the extent that failure to do so will not have any materially adverse effect on the business or financial condition of the Borrower or any of its Consolidated Subsidiaries. (e) Section 5.6 of the Credit Agreement is hereby amended as follows: (i) by deleting the number $163,000,000" and substituting therefor the number $231,000,000"; and (ii) by deleting the reference to the date "September 30, 1995" and substituting therefor the date "December 31, 1998". (f) Exhibit A to the Credit Agreement is hereby amended by deleting the reference to the date "December 31, 1998" and substituting therefor the date /36 "December 31, 2001" and by deleting each reference to "The First National Bank of Boston therein and substituting therefor a reference to "The First National Bank of Boston therein and substituting therefor a reference to "BankBoston, N.A. (f/k/a The First National Bank of Boston)". Section 3. Effectiveness. The effectiveness of this Amendment shall be subject to the satisfaction of the following conditions: (a) Delivery. The Borrower, the Banks and the Agent shall have executed and delivered this Amendment. (b) Loan Note. The Borrower shall have executed and delivered an amended and restated Loan Note in substantially the form of Exhibit A to the Credit Agreement, dated as of December 31, 1998 and completed with the appropriate insertions. (c) Proceedings and Documents. All proceedings in connection with the transactions contemplated by this Amendment and all documents incident thereto shall be reasonably satisfactory in substance and form to the Banks and the Agent, and the Agent shall have received all information and such counterpart originals or certified or other copies of such documents as the Agent may reasonably request. Section 4. Representations and Warranties. The Borrower represents and warrants to the Banks and the Agent as follows: (a) Representations and Warranties in Credit Agreement. The representations and warranties of the Borrower contained in the Credit Agreement, (i) were true and correct in all material respects when made, and (ii) except to the extent such representations and warranties by their terms are made solely as of a prior date,continue to be true and correct in all material respects on the date hereof. (b) Authority, Etc. The execution and delivery by the Borrower of this Amendment and the performance by the Borrower of all of its agreements and obligations under this Amendment (i) are within the corporate authority of the Borrower, (ii) have been duly authorized by all necessary corporate proceedings by the Borrower, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which the Borrower is subject or any judgment, order, writ, injunction,license or permit applicable to the Borrower, and (iv) do not conflict with any provision of the corporate charter or by-laws of, or any agreement or other instrument binding upon, the Borrower. /37 (c) Enforceability of Obligations. This Amendment, and the Credit Agreement as amended hereby, constitute the legal, valid and binding obligations of the Borrower enforceable against in accordance with their respective terms. Immediately prior to and after giving effect to this Amendment, no Default or Event or Default exists under the Credit Agreement or any other Loan Document. Section 5. No Waiver. Except as otherwise expressly provided for in this Amendment, nothing in this Amendment shall extend to or affect in any way any of the Borrower's obligations or any of the rights and remedies of the Banks or the Agent in respect of the Credit Agreement arising on account of the occurrence of any Event of Default, all of which are expressly preserved. Section 6. Miscellaneous Provisions. (a) Except as otherwise expressly provided by this Amendment, all of the terms, conditions and provisions of the Credit Agreement shall remain the same. It is declared and agreed by each of the parties hereto that the Credit Agreement, as amended hereby, shall continue in full force and effect, and that this Amendment and the Credit Agreement shall be read and construed as one instrument. (b) THIS AMENDMENT IS INTENDED TO TAKE EFFECT AS AN AGREEMENT UNDER SEAL AND SHALL BE CONSTRUED ACCORDING TO AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. (c) This Amendment may be executed in any number of counterparts, but all such counterparts shall together constitute but one instrument. In making proof of this Amendment it shall not be necessary to produce or account for more than one counterpart signed by each party hereto by and against which enforcement thereof is sought. (d) The Borrower hereby agrees to pay to the Agent, on demand by the Agent, all reasonable out-of-pocket costs and expenses incurred or sustained in connection with the preparation of this Amendment (including reasonable legal fees). [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] /38 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as an agreement under seal of the date first written above. IONICS, INCORPORATED By:/s/Robert J. Halliday Title: CFO BANKBOSTON, N.A., individually and as Agent By: /s/Henry L. Petrillo Title: Director /39 EX-13 3 EXHIBIT 13 IONICS, INCORPORATED ANNUAL REPORT TO STOCKHOLDERS OF IONICS, INCORPORATED FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 (The following sections constitute an Exhibit to Form 10-K: Management's Discussion and Analysis of Results of Operations and Financial Condition; Report of Independent Accountants; Consolidated Statements of Operations; Consolidated Balance Sheets; Consolidated Statements of Cash Flow; Consolidated Statements of Stockholders' Equity; Notes to Consolidated Financial Statements; Selected Financial Data; Board of Directors; Corporate Officers; Principal U.S. Offices, Affiliates & Subsidiaries; Corporate Headquarters; Principal Overseas Offices, Affiliates & Subsidiaries; Investor Information; Transfer Agent & Registrar; and Auditors). _____________________________________ /40 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The results of operations described below refer to the activities of the Company's four business groups which now comprise the reportable segments of the Company. See Note 15 to the financial statements for a more detailed description of the Company's four business group segments. 1998 Compared to 1997 The financial performance of the Company reflected a 0.3% decrease in revenues and a 24.5% decline in net income in 1998. The decline in net income was primarily due to reductions in earnings before interest, taxes and minority interest (EBIT) of 37.4% and 43.4% in the Equipment Business Group and the Ultrapure Water Group, respectively. These reductions were primarily due to tightness in the capital equipment markets, particularly in the demand for ultrapure water equipment by the microelectronics industry. Partially mitigating these declines were increases in EBIT of 18.3% and 17.0% in the Instrument Business Group and the Consumer Water Group, respectively. The Instrument Business Group benefited from increased instrument sales, with the strongest demand coming from the pharmaceutical industry. The increased earnings of the Consumer Water Group were largely driven by the continuing strength of the Company's home and office bottled water business. Total revenues were $351.3 million in 1998, compared with $352.5 million in 1997. Revenues were higher in the Consumer Water Group, the Instrument Business Group and the Ultrapure Water Group while revenues declined in the Equipment Business Group. The Equipment Business Group's revenues declined by $16.1 million in 1998 as compared to 1997 because of reduced capital equipment sales; the expiration of the Santa Barbara water supply contract in early 1997; the sale of bleach manufacturing equipment in the U.K. in the fourth quarter of 1997; and the consolidation of the Company's food processing business in early 1998. The Ultrapure Water Group's revenues increased by 2.5% in 1998. The businesses in the Ultrapure Water Group primarily serve the microelectronics industry, and, to a lesser extent, the power and pharmaceutical industries. Revenues in 1998 from the microelectronics industry were down significantly from 1997 revenues, primarily due to a slowdown in capital spending by that industry. This decline was offset by additional revenues in 1998 resulting from the acquisition of a majority interest in Enersave Engineering Systems Sdn Bhd, a Malaysian corporation (now Ionics Enersave), in the third quarter of 1997. The decline in profits relating to the reduction of revenues from the microelectronics industry was greater than the profits contributed by Ionics Enersave. The revenues of the Instrument Business Group increased by 17.5% in 1998 compared to 1997, largely driven by the pharmaceutical industry's increased purchases of the Company's instruments for measuring total organic carbon (TOC) levels as a standard for measuring water purity under the United States Pharmacopoeial Convention's USP 23, adopted in 1998. /41 The 10.7% increase in revenues in 1998 compared to 1997 of the Consumer Water Group was due to growth in the Company's bottled water business. The bottled water business expanded its customer base in both the United States and the United Kingdom, while also pursuing product line expansions and realizing a higher average price per bottle for its primary product. 1997 Compared to 1996 The Company's revenues totaled $352.5 million in 1997, up from $326.7 million in 1996. Revenues were higher in all four business groups with the largest growth occurring in the Ultrapure Water Group. The Equipment Business Group had a slight increase in revenues in 1997 from 1996. Overall, capital equipment sales for this Group were up in 1997, driven by strength in demand for desalination equipment which more than offset reduced revenues from wastewater equipment sales. This Group's revenues from supply contracts were down in 1997, primarily as a result of the City of Santa Barbara's buy-out of the desalination plant constructed and maintained by the Company. Sales for the Ultrapure Water Group increased 14.5% in 1997 compared to 1996 as a result of the Company's acquisition in September 1997 of Ionics Enersave and from revenue recognized on ultrapure water contracts booked in late 1996 and early 1997. Revenues for the Instrument Business Group and the Consumer Water Group increased 18.8% and 10.4%, respectively, in 1997 compared to 1996. Instrument Business Group sales were up primarily due to sales to the pharmaceutical industry, while Consumer Water Group sales grew as a result of strong performance by the bottled water business. The bottled water business was particularly strong in the U.K., where the Company benefited from its market leadership position and warm summer temperatures. Cost of Sales and Operating Expense Comparisons Cost of sales as a percentage of revenues was 67.4%, 67.2% and 67.3% in 1998, 1997 and 1996, respectively. Cost of sales as a percentage of revenues decreased during 1998 compared to 1997 for the Equipment Business Group and Consumer Water Group and increased for the Ultrapure Water Group and Instrument Business Group. The decrease in the Equipment Business Group primarily reflected an improvement in its product mix. The Consumer Water Group decrease reflected an overall improvement in prices in the home water business. The increase in the Ultrapure Water Group resulted from the continued competitive environment in the microelectronics industry for ultrapure water capital equipment. The Instrument Business Group increase reflected increased spending associated with manufacturing and service department operations. Cost of sales as a percentage of revenues increased during 1997 compared to 1996 for the Equipment Business Group and decreased for the Ultrapure Water Group, the Instrument Business Group, and the Consumer Water Group. The /42 increase in the Equipment Business Group primarily reflected more competitive market conditions in the equipment and supply businesses. The decrease in the Ultrapure Water Group primarily reflected a more favorable mix of ultrapure water supply contracts. The decrease in the Instrument Business Group reflected lower material costs due to a change in the mix of instruments sold. The decrease in the Consumer Water Group reflected modest bottled water price increases and the improved absorption of fixed overhead costs resulting from continued expansion of the bottled water consumer base. Operating expenses as a percentage of revenues were 23.6% in 1998, an increase from 20.7% in 1997 and 20.9% in 1996. The increase in operating expenses as a percentage of revenues in 1998 compared to 1997 was primarily due to a decrease in Equipment Business Group revenues which historically have disproportionately lower selling expenses as a percentage of such revenues than do revenues from some of the other business groups. Additionally, the Company experienced revenue growth in the Instrument Business Group and Consumer Water Group which historically have disproportionately higher selling costs as a percentage of revenues than do some of the other business groups. Operating expenses also increased in 1998 due to expenses associated with the Company's Y2K program, increased legal expenses, and expanded marketing initiatives, as well as the Company's continued commitment to investment in its research and development programs. Operating expenses as a percentage of revenues in 1997 of 20.7% were substantially consistent with the 20.9% experienced in 1996. Interest and Taxes Interest income was $1.1 million, $1.2 million and $1.4 million in 1998, 1997 and 1996, respectively. Interest expense was $0.3 million, $0.9 million and $0.9 million in 1998, 1997 and 1996, respectively. The Company's effective tax rate was 32.5% in 1998, 33.0% in 1997 and 33.0% in 1996. The reduction of the rate in 1998 compared to 1997 was due to the Company's foreign sales corporation providing a proportionately larger benefit than in prior years. While the effective tax rate for 1997 was unchanged from 1996, the underlying changes in 1997 reflected improvement in the mix of earnings and tax rates among the different tax jurisdictions, and a lower state tax rate, resulting from a change in the composition of domestic income by state. These reductions were offset by the loss of benefit from tax-exempt interest and a smaller benefit from the Company's foreign sales corporation. Net income decreased 24.5% to $21.4 million in 1998 compared to $28.3 million in 1997. Net income in 1997 was 6.9% higher than 1996 net income of $26.5 million. FINANCIAL CONDITION At December 31, 1998, the Company had total assets of $452.1 million compared to total assets of $406.7 million at December 31, 1997 and $378.6 million at December 31, 1996. The increase in 1998 reflected an increase in /43 property, plant and equipment which included expansion of the Company's bottled water operations, manufacturing and "own and operate" facilities. The increase in 1997 reflected an increase in total cash and cash equivalents and in other assets, primarily reflecting goodwill arising from the acquisitions of a majority interest in Ionics Enersave and the business of Watertec Engineering Pty. Ltd. and related companies in Australia (now Ionics Watertec). In addition, during both 1998 and 1997, accounts receivable increased, reflecting higher revenues from capital equipment projects in the latter parts of those years. Working capital in 1998 increased by $1.3 million over 1997, and the Company's current ratio decreased to 2.2 from 2.5 in 1997. Capital expenditures totaled $42.2 million, $33.5 million, and $46.9 million in 1998, 1997 and 1996, respectively. In 1997, the Company spent approximately $11.0 million to acquire Ionics Watertec and a majority interest in Ionics Enersave. Funds for these expenditures were provided in each year by cash from operations, issuance of current debt and proceeds from stock option exercises. In 1997, funds were also provided through the sale of certain fixed assets, including bleach manufacturing equipment in the U.K. Net cash provided by operating activities decreased by $1.9 million in 1998 compared to 1997, due primarily to lower net income and an increase in accounts receivable partially offset by an increase in accounts payable. Net cash provided by operating activities increased by $6.3 million in 1997 over 1996, due primarily to higher net income and depreciation, a smaller increase in accounts receivable and inventories, and a smaller decrease in accounts payable and accrued expenses. Net cash used by investing activities increased by $5.8 million in 1998 over 1997 after having decreased by $11.6 million in 1997 from 1996. In 1998, net cash used by financing activities totaled $2.8 million, a change of $4.1 million from the $1.4 million that was provided by financing activities in 1997. In 1997, net cash provided by financing activities decreased by $6.0 million as compared to 1996. The change in both 1998 and 1997 was primarily due to a reduction in cash obtained from short-term borrowings. Significant expenditures in 1999 are anticipated to include investments in additional "own and operate" facilities and in the continued expansion of bottled water operations. 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 $28.8 million at the beginning of 1999, cash from operations, lines of credit and foreign exchange facilities are adequate to meet its currently anticipated needs. /44 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. YEAR 2000 READINESS DISCLOSURE AND RELATED INFORMATION The Company's State of Readiness The Company has undertaken a program to assure that its computer software and systems (including information technology (IT) and manufacturing systems), facilities and products will be able to distinguish 21st century dates from 20th century dates (so-called "Year 2000 (Y2K) Compliance or Compliant"). The Company's program is divided into the following three phases: Phase One - Inventory and Planning The Company completed this phase in July 1998. In this phase, the Company inventoried all hardware and software that potentially is susceptible to Y2K problems, prepared plans for assessing compliance and completing remediation, and prepared vendor compliance letters. Phase Two - Assessment In this phase, the Company is assessing which of its systems and products are Y2K Compliant. The Company has requested compliance statements from hardware and software vendors, supply manufacturers and service trading partners and has received responses from many vendors and has not discovered any significant compliance problems. This phase also includes the planning for remediation of non-compliant systems. The Company anticipates the completion of this phase by the end of the first quarter of 1999. Phase Three - Remediation and Testing In this phase, the Company will deploy plans for elimination, upgrade, replacement or modification of non-compliant systems and products and test compliance. The Company has scheduled completion of this phase by the third quarter of 1999. The Company's core operating (IT and manufacturing) system for its headquarters operations is not yet Y2K Compliant. The Company is currently pursuing a remediation plan for this system, has made significant progress, and expects to have it completed by mid-1999. The Company's bottled water accounting system in the United States is not yet fully Y2K Compliant. The Company has purchased a new integrated distribution and accounting system, which management believes will significantly enhance its bottled water operations. This new system is Y2K Compliant and implementation is scheduled for completion by the third quarter of 1999. Individual bottled water business locations are running this new system as it is implemented, which the Company believes may reduce the risks associated with potential Y2K non-compliance should implementation not be fully completed by the end of 1999. /45 The Company's other IT systems are not uniform across all operations and locations. The systems for all non-headquarters operations have been reviewed. The Company is currently implementing new Y2K Compliant IT systems at two major locations in the U.S. Completion of implementation of these systems is expected by mid-1999. The Company has either completed remediation or implemented new IT systems which are Y2K Compliant at its other significant non-headquarters operations. Remediation or replacement of IT systems at other locations is under way and is expected to be completed by mid-1999. The Company believes that failure of these systems to become Y2K Compliant would be unlikely to have a material impact on the Company due to the relatively small size of these operations and the opportunity to perform relevant tasks manually. The Company's assessment plan includes assessment of Y2K Compliance of non- information technology (non-IT) components including the Company's membrane-related equipment, "own and operate" equipment, other products, manufacturing equipment and facilities. Substantial progress has been made in these areas and completion of such assessment is expected in the first quarter of 1999. The Company is obtaining compliance statements from vendors of both IT and non-IT systems and is revising its vendors' status on an on-going basis based upon information it is receiving. The Company is working with its most important vendors to resolve remediation and compliance problems as they are identified. Costs to Address Y2K Issues The Company's assessment and remediation of Y2K Compliance issues is anticipated to cost approximately $1.5 million, excluding the cost of new systems implementation. Expenses to date of approximately $750,000 are consistent with such expectations. The Company does not currently expect that actual Y2K expenses finally incurred will materially exceed its estimate. Risk of the Company's Y2K Issues If the Company fails to achieve Y2K Compliance in all its systems, the Company could lose the ability to process certain of its customers' orders, manufacture products or provide services to customers until compliance is achieved or a means to work around the failure is implemented. However, most of the Company's businesses process a small number of relatively large transactions, mitigating the short-term dependence on information systems. Also, because the Company's systems are not uniform across the Company, it is anticipated that any failure would not be system-wide. Furthermore, a failure to fill an order may not necessarily result in complete loss of the order. Some orders could be filled through alternative methods within a relatively short period. Nevertheless, any disruption in order fulfillment, manufacturing or the provision of services to customers could result in some loss of revenue or claims against the Company. Moreover, there is uncertainty as to whether the Company may experience any disruption in these areas as a result of uncertainty concerning the Y2K readiness of third-party vendors. If disruption in any of these areas resulting from Y2K non-compliance is greater than anticipated, the loss of revenue could be material. /46 Contingency Plans The Company plans to complete contingency plans by mid-1999 to deal with possible failures in systems which it determines may not achieve Y2K Compliance on a timely basis. FORWARD-LOOKING INFORMATION Derivative Instruments The Company had $318,000 of foreign exchange contracts outstanding at December 31, 1998. These contracts are immaterial to the Company and as they were used to hedge foreign currency denominated transactions, any change in the fair value of the contracts would be offset by changes in the underlying value of the transactions. The Company has no other derivative financial instruments, or other financial and commodity instruments for which fair value disclosure would be required under SFAS No. 119. The Company holds no investment securities which would require disclosure of market risk. Market Risk The Company's primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. The Company's investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments. At December 31, 1998, the Company had $6.9 million of short-term debt and $1.5 million of long-term debt outstanding. The short-term debt was issued under various working capital lines and due to its short-term maturities, a hypothetical 10% decrease in the Company's weighted average short-term borrowing rate at December 31, 1998 would not have materially affected the year-end carrying value of the debt. The Company's exposure to currency exchange rate fluctuations has been and is expected to remain modest due to the fact that the operations of its international subsidiaries are primarily conducted in their respective local currencies. Safe Harbor Statement under Private Securities Litigation Reform Act of 1996 The Company's future results of operations and certain statements contained in this report, including, without limitation, "Management's Discussion and Analysis of Results of Operations and Financial Condition," constitute forward-looking statements. Such statements are based on management's current views and assumptions and involve risks, uncertainties and other 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; the ability of the Company to achieve Y2K Compliance in accordance with its current program including the ability of the Company to ascertain and plan for compliance issues of third-party vendors; risks involved in litigation; regulations and laws affecting business in each of the Company's markets; market risk factors, as described above under "Derivative Instruments" and "Market Risk;" and other risks and uncertainties described from time to time in the Company's filings with the Securities and Exchange Commission. /47 Report of Independent Accountants To the Board of Directors and Stockholders of Ionics, Incorporated: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, consolidated statements of stockholders' equity, and consolidated statements of cash flows, present fairly, in all material respects, the financial position of Ionics, Incorporated (the "Company") at December 31, 1998 and December 31, 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/PricewaterhouseCoopers LLP Boston, Massachusetts February 19, 1999 /48 Consolidated Statements of Operations _____________________________________ For the years ended December 31 _______________________________
Amounts in Thousands, Except Per Share Amounts 1998 1997 1996 ____ ____ ____ Revenues: Equipment Business Group $129,751 $145,844 $144,652 Ultrapure Water Group 111,349 108,601 94,846 Consumer Water Group 80,884 73,046 66,144 Instrument Business Group 29,342 24,978 21,020 ________ ________ ________ 351,326 352,469 326,662 ________ ________ ________ Costs and expenses: Cost of sales of Equipment Business Group 92,826 104,638 100,889 Cost of sales of Ultrapure Water Group 87,039 80,964 71,981 Cost of sales of Consumer Water Group 45,261 41,510 37,956 Cost of sales of Instrument Business Group 11,716 9,908 9,022 Research and development 6,635 5,410 5,108 Selling, general and administrative 76,299 67,593 63,118 ________ ________ ________ 319,776 310,023 288,074 ________ ________ ________ Income from operations 31,550 42,446 38,588 Interest income 1,058 1,197 1,396 Interest expense (331) (947) (869) Equity income 606 526 441 ________ ________ ________ Income before income taxes and minority interest 32,883 43,222 39,556 Provision for income taxes 10,680 14,280 13,053 ________ ________ ________ Income before minority interest 22,203 28,942 26,503 Minority interest expense 817 613 - ________ ________ ________ Net income $ 21,386 $ 28,329 $ 26,503 ======== ======== ======== Earnings per basic share $ 1.33 $ 1.78 $ 1.71 ======== ======== ======== Earnings per diluted share $ 1.31 $ 1.73 $ 1.65 ======== ======== ======== Shares used in basic earnings per share calculations 16,077 15,936 15,542 Shares used in diluted earnings per share calculations 16,357 16,409 16,106 The accompanying notes are an integral part of these financial statements.
/49 Consolidated Balance Sheets ___________________________ December 31 ___________
Dollars in Thousands, Except Share Amounts 1998 1997 __________________________________________ ____ ____ Assets Current assets: Cash and cash equivalents $ 28,770 $ 25,787 Short-term investments 359 107 Notes receivable, current 4,144 3,856 Accounts receivable 111,844 98,275 Receivables from affiliated companies 2,329 2,624 Inventories 31,549 28,910 Other current assets 8,098 6,291 ________ ________ Total current assets 187,093 165,850 Notes receivable, long-term 8,824 8,349 Investments in affiliated companies 7,057 3,983 Property, plant and equipment, net 195,683 179,957 Other assets 53,466 48,597 ________ ________ Total assets $452,123 $406,736 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Notes payable and current portion of long-term debt $ 6,873 $ 12,084 Accounts payable 37,361 27,099 Other current liabilities 38,052 26,227 Taxes on income 3,648 602 ________ ________ Total current liabilities 85,934 66,012 Long-term debt and notes payable 1,519 804 Deferred income taxes 17,036 17,783 Other liabilities 2,036 2,478 Commitments - - Stockholders' equity: Common stock, par value $1, authorized shares: 55,000,000 in 1998 and 30,000,000 in 1997; issued and outstanding: 16,116,649 in 1998 and 16,001,285 in 1997 16,117 16,001 Additional paid-in capital 157,571 154,479 Retained earnings 179,943 158,557 Accumulated other comprehensive income (7,889) (9,126) Unearned compensation (144) (252) ________ ________ Total stockholders' equity 345,598 319,659 ________ ________ Total liabilities and stockholders' equity $452,123 $406,736 ======== ======== The accompanying notes are an integral part of these financial statements.
/50 Consolidated Statements of Cash Flows _____________________________________
For the years ended December 31 Dollars in Thousands 1998 1997 1996 ________ ________ ________ Operating activities: Net income $ 21,386 $ 28,329 $ 26,503 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 27,214 27,047 26,162 Provision for losses on accounts and notes receivable 1,319 1,408 1,011 Deferred income tax provision 2,478 5,571 4,085 Compensation expense on restricted stock awards 108 108 108 Changes in assets and liabilities, net of effects of businesses acquired: Notes receivable (168) (2,264) (1,557) Accounts receivable (14,695) (7,865) (10,863) Inventories (2,773) (2,395) (3,259) Other current assets (1,461) 2,594 449 Investments in affiliates (2,815) (1,106) 758 Accounts payable and accrued expenses 20,267 (5,219) (7,011) Income taxes (218) 2,470 4,678 Other (4,851) (988) 296 ________ ________ ________ Net cash provided by operating activities 45,791 47,690 41,360 ________ ________ ________ Investing activities: Additions to property, plant and equipment (42,196) (33,510) (46,890) Disposals of property, plant and equipment 1,882 10,114 887 Sale and maturity of short-term investments 137 - - Acquisitions, net of cash acquired - (11,016) - ________ ________ ________ Net cash used by investing activities (40,177) (34,412) (46,003) ________ ________ ________ Financing activities: Principal payments on current debt (15,339) (17,077) (22,259) Proceeds from issuance of current debt 9,716 14,937 27,149 Principal payments on long-term debt (8) (31) (3,236) Proceeds from issuance of long-term debt 419 363 - Proceeds from stock option plans 2,447 3,188 5,731 ________ ________ ________ Net cash (used)/ provided by financing activities (2,765) 1,380 7,385 ________ ________ ________ Effect of exchange rate changes on cash 134 (1,140) 48 ________ ________ ________ Net change in cash and cash equivalents 2,983 13,518 2,790 Cash and cash equivalents at end of prior year 25,787 12,269 9,479 ________ ________ ________ Cash and cash equivalents at end of current year $ 28,770 $ 25,787 $ 12,269 ======== ======== ======== The accompanying notes are an integral part of these financial statements.
/51
Consolidated Statements of Stockholders' Equity _______________________________________________ Accumulated Common Stock Additional Other Total Par Paid-in Retained Comprehensive Unearned Stockholders' Dollars in Thousands Shares Value Capital Earnings Income Compensation Equity ______ _____ __________ ________ _____________ ____________ ____________ 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 15,356 137,127 103,725 (3,671) (468) 252,069 Comprehensive income: Net income - - - 26,503 - - 26,503 Translation adjustments, net of tax of $(93) - - - - 860 - 860 ________ Total comprehensive income 27,363 ________ Stock options exercised 406,956 407 5,324 - - - 5,731 Tax benefit of stock option activity - - 4,390 - - - 4,390 Issuance for acquisitions 60,475 60 2,496 - - - 2,556 Amortization of unearned compensation - - - - - 108 108 __________ _______ ________ ________ _______ _____ ________ Balance December 31, 1996 15,823,205 15,823 149,337 130,228 (2,811) (360) 292,217 Comprehensive income: Net income - - - 28,329 - - 28,329 Translation adjustments, net of tax of $2,690 - - - - (6,315) - (6,315) ________ Total comprehensive income 22,014 ________ Stock options exercised 163,214 163 3,025 - - - 3,188 Tax benefit of stock option activity - - 1,421 - - - 1,421 Other activity 14,866 15 696 - - - 711 Amortization of unearned compensation - - - - - 108 108 __________ _______ ________ ________ _______ _____ ________ Balance December 31, 1997 16,001,285 16,001 154,479 158,557 (9,126) (252) 319,659 Comprehensive income: Net income - - - 21,386 - - 21,386 Translation adjustments, net of tax of $(619) - - - - 1,237 - 1,237 ________ Total comprehensive income 22,623 ________ Stock options exercised 115,364 116 2,331 - - - 2,447 Tax benefit of stock option activity - - 761 - - - 761 Amortization of unearned compensation - - - - - 108 108 __________ _______ ________ ________ _______ _____ ________ Balance December 31, 1998 16,116,649 $16,117 $157,571 $179,943 $(7,889) $(144) $345,598 ========== ======= ======== ======== ======= ===== ======== The accompanying notes are an integral part of these financial statements.
/52 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 reclassified to conform to the current year presentation with no impact on net income. 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 $1,470,000, $1,380,000 and $1,181,000 in 1998, 1997 and 1996, 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 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. /53 Notes Receivable Notes receivable have been reported at their estimated realizable value. The allowance for uncollectible notes receivable totaled $363,000 and $462,000 at December 31, 1998 and 1997, respectively. Inventories Inventories are carried at the lower of cost or market, principally on the first-in, first-out basis. 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 $616,000, $238,000 and $1,169,000 in 1998, 1997 and 1996, respectively. In general, 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
In certain situations the units of production method is utilized in order to achieve a more appropriate matching of revenues and expenses. 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. Asset Impairment Impairment losses resulting from an excess of carrying value of long-term assets over their fair values are recognized as such losses are identified. 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, which generally is a period ranging from 10 to 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. 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. /54 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 (losses)/gains included in income before income taxes and minority interest totaled $(28,000), $100,000 and $548,000 for 1998, 1997 and 1996, 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 Basic earnings per share is computed based on the weighted-average number of shares outstanding. Diluted earnings per share is computed based on the weighted-average number of common shares outstanding while giving effect to all potentially dilutive common shares that were outstanding during the period. 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. Comprehensive Income In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards, for disclosure purposes only, for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Segment Information In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach utilizes the Company's internal management and reporting structure as the basis for determining the Company's reportable segments. Pensions and Other Post-Retirement Benefits The Company adopted Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures About Pensions and Other Post-Retirement Benefits," in 1998. SFAS No. 132 is for disclosure purposes only and does not change benefit plan accounting. It standardizes the disclosure requirements for pensions and post-retirement benefits to the extent practicable and requires additional information on changes in benefit obligations and the fair value of plan assets. /55 Derivative Instruments and Hedging Activities In 1998, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 standardizes accounting for derivative instruments and for hedging activities. This Statement is effective for fiscal years beginning after June 15, 1999. The Company intends to adopt this Statement for interim periods beginning in the first quarter of 2000. This Statement should not have a material effect on the Company's financial statements. Note 2. Consolidated Balance Sheet Details
Dollars in Thousands 1998 1997 ____ ____ Raw materials $ 19,164 $ 17,183 Work in process 8,523 8,773 Finished goods 3,862 2,954 __________ _________ Inventories $ 31,549 $ 28,910 ========== ========= Land $ 8,194 $ 6,767 Buildings 41,594 34,239 Machinery and equipment 259,885 236,526 Other, including furniture, fixtures and vehicles 44,267 41,397 __________ _________ 353,940 318,929 Accumulated depreciation (158,257) (138,972) __________ _________ Property, plant and equipment, net $ 195,683 $ 179,957 ========== ========= Goodwill $ 53,377 $ 46,565 Accumulated amortization (6,831) (5,136) Other 6,920 7,168 __________ _________ Other assets $ 53,466 $ 48,597 ========== ========= Customer deposits $ 3,965 $ 3,685 Accrued commissions 2,203 2,370 Accrued expenses 31,884 20,172 __________ _________ Other current liabilities $ 38,052 $ 26,227 ========== =========
/56 Note 3. Supplemental Schedule of Cash and Non-Cash Flow Information
Dollars in Thousands 1998 1997 1996 ____ ____ ____ Cash payments for interest and income taxes: Interest $ 685 $ 634 $ 1,338 Taxes $ 8,481 $ 2,860 $ 4,264 Liabilities assumed in conjunction with acquisitions: Fair value of assets purchased $ - $ 19,352 $ 8,452 Book value of assets pooled - - 8,592 Retained deficit pooled - - 1,070 Net cash (paid)/received - (11,016) 89 Value of common stock issued - - (2,530) ________ ________ ________ Liabilities assumed $ - $ 8,336 $ 15,673 ======== ======== ========
Note 4. Accounts Receivable
Dollars in Thousands 1998 1997 _______ _______ Billed receivables $ 74,059 $69,157 Unbilled receivables 40,313 30,945 Allowance for doubtful accounts (2,528) (1,827) ________ _______ Accounts receivable $111,844 $98,275 ======== =======
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, 1998 are expected to be billed during 1999. Billed receivables include retainage amounts of $3,654,000 and $4,233,000 at December 31, 1998 and 1997, respectively. Substantially all of the retainage amounts are collectible within one year. 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 or treated water and the sale of equipment and replacement parts. /57
Ownership Affiliate Percentage _________ __________ Agrinord S.r.l. - Italy 50% Aguas Tratadas de Cadereyta S.A. de C.V. - Mexico 20% Aguas Tratadas de Madero, S.A. de C.V. - Mexico 20% Aqua Cool Kuwait - Kuwait 49% Aqua Cool Saudi Arabia - Saudi Arabia 40% Aqua Design Ltd. - Cayman Islands 39% Jalal-Ionics, Ltd. - Bahrain 40% Watlington Waterworks, Ltd. - Bermuda 20% Yuasa-Ionics Co., Ltd. - Japan 50%
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 1998 1997 1996 _______ _______ ________ Investments at end of prior year $3,983 $2,908 $ 4,874 Equity in earnings 606 526 441 Distributions received (396) (575) (1,254) Cumulative translation adjustments 172 (7) - Reclassification of Watlington Waterworks from/(to) other assets resulting from change in ownership interest 1,208 - (1,208) Additional investments 1,484 1,131 55 ______ ______ _______ Investments at end of current year $7,057 $3,983 $ 2,908 ====== ====== =======
At December 31, 1998, the Company's equity in the total assets and in the total liabilities of its foreign affiliates was $10,133,000 and $3,076,000, respectively. The Company's equity in the 1998 total revenues of these affiliates was $5,570,000. Note 6. Contingent Liabilities The Company is involved in the normal course of its business in various litigation 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"). Ionics' share of assessments to date for site work totals approximately $60,000. The ultimate site clean-up cost is currently not expected to exceed $59 million, of which the /58 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. The Attorney General of the Commonwealth of Massachusetts is conducting an investigation into certain former operations of a division of the Company during portions of the years 1991 through 1995. The Company is cooperating with this investigation of possible violations of environmental statutes and regulations that relate to one facility that ceased operations in 1995. The Company cannot predict the outcome of this matter, but it may result in administrative, civil or criminal charges and/or monetary payments. On March 27, 1998, the Company was served with a summons and complaint in connection with a lawsuit now captioned United States Filter Corporation, U.S. Filter/Ionpure, Inc., IP Holding Company, Millipore Corporation and Millipore Investment Holdings Limited v. Ionics, Incorporated, filed in the U.S. District Court, District of Massachusetts (Boston). Plaintiffs allege that the Company is infringing a certain reissue patent, which issued on March 10, 1998, by making, selling, offering to sell and using the Company's electrodeionization (EDI) systems within the United States. The Company was recently notified that plaintiffs are seeking to add to their complaint claims of infringement of certain earlier-issued patents. The Company, which pioneered the development of the EDI process over 30 years ago and holds a number of patents related to EDI technology, believes that it has valid defenses to the plaintiffs' infringement claims and intends vigorously to defend itself in this litigation, which is in the early discovery stages. Note 7. Long-Term Debt and Notes Payable
Dollars in Thousands 1998 1997 ______ _______ Borrowings outstanding $8,392 $12,888 Less installments due within one year 6,873 12,084 ______ _______ Long-term debt and notes payable $1,519 $ 804 ====== =======
Maturities of borrowings outstanding for the five years ending December 31, 1999 through 2003 are approximately $6,873,000, $659,000, $149,000, $125,000 and $98,000, respectively. 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 (7.75% at December 31, 1998), the money market rate (5.5% at December 31, 1998) or the London Interbank Offered Rate plus 1/2% (5.56% at December 31, 1998), at the Company's option. The Company had no outstanding borrowings against these lines of credit at December 31, 1998 and 1997. 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. /59 The Company utilizes other 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, 1998 and 1997 was approximately 10% and 8%, respectively. Note 8. Income Taxes The components of domestic and foreign income before income taxes and minority interest were as follows:
Dollars in Thousands 1998 1997 1996 _______ _______ _______ U.S. $21,468 $27,450 $29,017 Non-U.S. 11,415 15,772 10,539 _______ _______ ________ Income before income taxes and minority interest $32,883 $43,222 $39,556 ======= ======= =======
The provision for income taxes consisted of the following:
Dollars in Thousands 1998 1997 1996 _______ _______ _______ Federal $ 4,925 $ 5,891 $ 7,919 Foreign 2,386 2,276 793 State 891 542 256 _______ _______ _______ Current provision 8,202 8,709 8,968 _______ _______ _______ Federal 2,317 3,599 1,671 Foreign (116) 996 1,047 State 277 976 1,367 _______ _______ _______ Deferred provision 2,478 5,571 4,085 _______ _______ _______ Provision for income taxes $10,680 $14,280 $13,053 ======= ======= =======
/60 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, 1998, the tax effects of the temporary differences were:
Deferred Deferred Tax Dollars in Thousands Tax Assets Liabilities __________ ____________ Depreciation $ - $14,683 Goodwill amortization - 673 Inventory valuation 1,764 - Bad debt reserves 351 - Accrued commissions 570 - Profit on sales to foreign subsidiaries 870 - Insurance accruals 765 - U.S. tax on unrepatriated earnings - 5,252 Alternative minimum tax 1,526 - Foreign withholding taxes on undistributed earnings - 2,070 Foreign deferred liabilities, net - 3,208 Tax effect of currency translation loss 3,104 - Net operating loss carryforwards 4,845 - Miscellaneous 1,936 1,953 _______ _______ 15,731 27,839 Valuation allowance for deferred tax assets (1,800) - _______ _______ Deferred income taxes $13,931 $27,839 ======= =======
The United States statutory corporate tax rate is reconciled to the Company's effective tax rate as follows:
1998 1997 1996 ______ ______ ______ U.S. Federal statutory rate 35.0% 35.0% 35.0% Foreign Sales Corporation (2.1) (1.5) (1.6) Tax-exempt interest income - - (.5) State income taxes, net of federal tax benefit 2.3 2.3 2.7 Foreign income taxed at different rates (3.0) (3.3) (2.0) Other, net .3 .5 (.6) _____ ______ ______ Effective tax rate 32.5% 33.0% 33.0% ===== ====== ======
At December 31, 1998, the Company had unused tax loss carryforward benefits of $4,845,000 (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, 1998 and 1997. The remaining unreserved portion is considered to be realizable. $3,045,000 of the net unused tax loss carryforward benefit has been included in other assets at December 31, 1998. /61 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 $3,932,000, $2,843,000 and $1,538,000 as of December 31, 1998, 1997 and 1996, respectively. Note 9. Stockholders' Equity During 1996, the Company issued 1,062,277 shares (including shares for Sievers Instruments, Inc.) in conjunction with acquisition-related activity (Note 14). The Company adopted the disclosure-only provision of SFAS 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 1998, 1997 and 1996: expected volatility of 27.3% in 1998, 23.4% in 1997 and 23.1% in 1996; weighted-average risk-free interest rates of 5.41%, 6.33% and 6.69% in 1998, 1997 and 1996, respectively; and expected lives of five years. No dividends are assumed. The weighted-average fair value of options granted during 1998, 1997 and 1996 was $10.43, $15.88 and $15.17, respectively. At December 31, 1998, the Company had the stock-based compensation plans 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 SFAS No. 123, the Company's net income and earnings per share would have been adjusted. On a pro forma basis, net income as reported for 1998 of $21.4 million would have been $19.3 million, 1997 net income of $28.3 million would have been $26.7 million and 1996 net income of $26.5 million would have been $25.9 million. Diluted earnings per share as reported for 1998 of $1.31 would have been $1.18, 1997 diluted earnings per share of $1.73 would have been $1.63 and 1996 diluted earnings per share of $1.65 would have been $1.61. Basic earnings per share as reported for 1998 of $1.33 would have been $1.20, 1997 basic earnings per share of $1.78 would have been $1.67 and 1996 basic earnings per share of $1.71 would have been $1.66. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future awards, which are anticipated. SFAS No. 123 does not apply to awards prior to 1995. Under the 1979 Stock Option Plan (the "1979 Plan"), stock options (only non-qualified stock options after February 1989) were granted to officers and other key employees of the Company. Options granted under the 1979 Plan are immediately exercisable, are subject to repurchase rights that lapse over a five-year period, and have a term of ten years and one day. Effective May 8, 1997, the 1979 Plan was replaced by the 1997 Stock Incentive Plan (the "1997 Plan"), and no additional options will be granted under the 1979 Plan. At December 31, 1998 and 1997, respectively, no shares were reserved for issuance of additional options under the 1979 Plan. /62 Under the 1997 Plan, incentive stock options, non-qualified stock options, and long-term performance awards may be awarded to officers and other key employees as well as to consultants. The 1997 Plan contains an automatic addition provision under which a number of shares equal to two percent (2%) of the Company's outstanding stock will be added to the 1997 Plan at the end of each of the four fiscal year-ends of the Company following adoption of the 1997 Plan, commencing December 31, 1997. At December 31, 1998 and 1997, there were 526,373 and 1,060,276 shares, respectively, reserved for issuance of additional options under the 1997 Plan after giving effect to the automatic addition provision. Options granted under the 1997 Plan vest over a five-year period and have a term of ten years. Under the 1986 Stock Option Plan for Non-Employee Directors (the "1986 Plan"), options are granted automatically at a price not less than the fair market value of the stock at the date of grant. The options become fully exercisable after a six-month period, are exercisable only during certain "window" periods, and have a term of ten years and one day. As of December 31, 1998 and 1997, 62,500 and 82,500 shares, respectively, were reserved for issuance of additional options under the 1986 Plan. 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 1994 Plan in 1998, 1997 or 1996. A total of 280,178 shares remain reserved for issuance. On August 19, 1998, the Company adopted the 1998 Non-Employee Directors' Fee Plan ("Fee Plan"). The Fee Plan permits non-employee directors to elect to receive payment of their annual retainer fee in cash or in common stock. The valuation of the common stock is based on the last reported sales price of the common stock on the New York Stock Exchange on the trading date next preceding the date of the Board meeting at which payment will be made. Annual retainer fees are paid in two equal installments during the year. A summary of the status of the Company's stock option plans as of December 31, 1998, 1997 and 1996 and changes during the years ending on those dates is presented below:
1998 1997 1996 ____________________ ____________________ ____________________ Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options in Thousands Options Price Options Price Options Price _______ _________ _______ _________ _______ _________ Outstanding at end of prior year 2,035 $29.31 2,200 $28.39 1,989 $20.30 Granted 956 29.81 55 45.99 744 42.51 Exercised (115) 21.25 (163) 19.56 (465) 17.15 Canceled (80) 33.48 (57) 37.80 (68) 23.06 _______ _________ _______ _________ _______ _________ Outstanding at end of current year 2,796 $29.70 2,035 $29.31 2,200 $28.39 Options exercisable at year-end 1,814 1,964 2,137
/63 The following table summarizes the information about stock options outstanding at December 31, 1998:
Options in Thousands Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Range of Outstanding Contract Exercise Exercisable Exercise Exercise Prices at 12/31/98 Years Price at 12/31/98 Price ___________ ________ ________ ___________ ________ $ 4.29 3 0.6 $ 4.29 3 $ 4.29 11.88 - 15.25 132 1.5 12.16 114 12.14 19.75 - 29.50 1,932 7.1 25.75 984 22.18 30.38 - 44.38 671 7.8 43.09 655 43.11 45.63 - 48.25 58 8.0 47.65 58 47.65 ________________ _____ ___ ______ _____ ______ $ 4.29 - $48.25 2,796 7.0 $29.70 1,814 $29.89
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, 1998, no shares had been issued under the plan. The Company has adopted a Renewed Stockholder Rights Plan designed to protect stockholders against abusive takeover tactics. Each share of common stock now carries one right. Each right entitles the holder to purchase from the Company one share of common stock (or in certain circumstances, to receive cash, property or other securities of the Company) at a purchase price of $175 subject to adjustment. In certain circumstances, rights become exercisable for common stock (or a combination of cash, property or other securities of the Company) worth twice the exercise price of the right. The rights are not exercisable until the occurrence of certain events as defined in the Renewed Stockholder Rights Plan. 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 August 19, 2007. /64 Note 10. Earnings Per Share Calculations (EPS)
Dollars in Thousands, Except Per Share Amounts For the Year Ended 1998 For the Year Ended 1997 For the Year Ended 1996 _____________________________ _____________________________ _____________________________ Net Per Share Net Per Share Net Per Share Income Shares Amount Income Shares Amount Income Shares Amount _______ ______ _________ _______ ______ _________ _______ ______ _________ Basic EPS Income available to common stockholders $21,386 16,077 $1.33 $28,329 15,936 $1.78 $26,503 15,542 $1.71 Effect of dilutive stock options - 280 - 473 - 564 _______ ______ _____ _______ ______ _____ _______ ______ _____ Diluted EPS $21,386 16,357 $1.31 $28,329 16,409 $1.73 $26,503 16,106 $1.65 ======= ====== ===== ======= ====== ===== ======= ====== =====
The effect of dilutive stock options excludes those stock options for which the impact would have been antidilutive based on the exercise price of the options. The number of options that were antidilutive at December 31, 1998 and 1997 were 729,000 and 743,000, respectively. There were no antidilutive options at December 31, 1996. Note 11. 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 $102,498,000 and $96,048,000 at December 31, 1998 and 1997, respectively. The accumulated depreciation for such equipment was $42,539,000 and $35,195,000 at December 31, 1998 and 1997, respectively. At December 31, 1998, future minimum rentals receivable under noncancelable operating leases in the years 1999 through 2003 and later were approximately $19,555,000, $16,648,000, $14,124,000, $11,574,000, $9,282,000 and $42,005,000, respectively. The Company leases facilities and personal property under various operating leases. Future minimum payments due under lease arrangements are as follows: $3,017,000 in 1999, $2,313,000 in 2000, $1,682,000 in 2001, $1,225,000 in 2002 and $1,168,000 in 2003. Rent expense under these leases was approximately $4,428,000, $3,928,000 and $4,188,000 for 1998, 1997 and 1996, respectively. Note 12. Profit-Sharing and Pension Plans The Company has a contributory profit-sharing plan (defined contribution plan) which covers employees of the Company who are members of the Bridgeville, Pennsylvania Fabricated Products division. 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 $254,000, $253,000 and $249,000 in 1998, 1997 and 1996, respectively. The Company also has a contributory defined benefit pension plan for its other domestic employees. 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. /65 The following table sets forth the defined benefit plan's funded status and amounts recognized in the Company's balance sheets at December 31, 1998 and 1997:
Dollars in Thousands 1998 1997 ____________________ ________ ________ Change in Benefit Obligation Benefit obligation as of prior year-end $ 13,591 $ 10,883 Service cost 1,347 1,172 Interest cost 987 932 Actuarial (gain)/loss (161) 1,449 Expenses paid (117) (114) Benefits paid (351) (731) ________ ________ Projected benefit obligation as of year-end $ 15,296 $ 13,591 ======== ======== Change in Plan Assets Fair value of plan assets as of prior year-end $ 12,731 $ 8,577 Actual return on plan assets 1,132 1,314 Employer contributions 750 3,685 Expenses paid (117) (114) Benefits paid (351) (731) ________ ________ Fair value of plan assets as of year-end $ 14,145 $ 12,731 ======== ======== Funded Status Funded status as of year-end $ (1,151) $ (860) Unrecognized transition asset (256) (309) Unrecognized prior service cost 449 485 Unrecognized net actuarial loss 1,817 1,959 ________ ________ Prepaid benefit cost as of year-end $ 859 $ 1,275 ======== ========
The expense of the defined benefit plan was as follows:
Dollars in Thousands 1998 1997 1996 ________ _________ ________ Components of Net Periodic Benefit Cost Service cost $ 1,347 $ 1,172 $ 1,026 Interest cost 987 932 780 Expected return on plan assets (1,153) (879) (654) Amortization of transition asset (53) (53) (53) Amortization of prior service cost 37 37 37 Recognized net actuarial loss 1 48 27 ________ _________ ________ Net periodic benefit cost $ 1,166 $ 1,257 $ 1,163 ======== ========= ========
/66 The Company determined the defined benefit plan's funded status and amounts recognized in the Company's balance sheet and the expense of the defined benefit plan using the following assumptions: expected return on plan assets of 9.0% in 1998, 1997 and 1996; rate of compensation increase of 4.75% in 1998 and of 5.0% in 1997 and 1996; and discount rate of 6.75% in 1998, 7.0% in 1997 and 7.25% in 1996. The Ionics Section 401(k) Stock Savings Plan is available to substantially all U.S. employees of the Company. 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 $778,000, $749,000 and $655,000 in 1998, 1997 and 1996, 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 13. Financial Instruments Off-Balance-Sheet Risk The Company issues letters of credit as guarantees for various performance and bid obligations. Approximately $30.1 million and $27.9 million of these letters were outstanding at December 31, 1998 and 1997, respectively. Approximately 83% of the letters of credit outstanding at December 31, 1998 are scheduled to expire in 1999. 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 $318,000 of foreign exchange contracts outstanding at December 31, 1998 and no foreign exchange contracts outstanding at December 31, 1997. 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 U.S. money market investments and in Spanish Government securities. 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 1998 and 1997 were not significant. /67 Long-term investments, maturing in 2001 and 2003, which the Company intends to hold to maturity have been recorded at a net cost of $1,640,000 and $603,000 at December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, the Company also had short-term investments of $359,000 and $107,000, respectively, which the Company intends to hold to maturity. The cost of these investments approximates fair value. Note 14. Acquisitions Prior Years' Purchases Enersave Engineering Systems Sdn Bhd In September 1997, the Company acquired a 55% ownership interest in Enersave Engineering Systems Sdn Bhd (now Ionics Enersave) for approximately $9.6 million. An additional payment of up to $2 million may be required depending upon the achievement of certain future operating results. The acquisition was accounted for under the purchase method with the results of Ionics Enersave included from September 1, 1997. Goodwill of approximately $11.8 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. Fiscal 1997 revenues for the period prior to September 1997 were approximately $10 million. Ionics Enersave, a Malaysian company with operations in Malaysia, China and Indonesia, is a supplier of water and wastewater treatment systems and services in Southeast Asia. Watertec Engineering Pty. Ltd. Effective September 1, 1997, the Company acquired 100% of the assets and liabilities of Watertec Engineering Pty. Ltd., as Trustee of Watertec Engineering Unit Trust and two related corporations (together Ionics Watertec) for an initial payment of $1.9 million. An additional payment of $305,000 was made in 1998 based upon the achievement of certain operating results. The acquisition was accounted for under the purchase method with the results of Ionics Watertec included from September 1, 1997. Goodwill of approximately $1.7 million is being amortized 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. Fiscal 1997 revenues for the period prior to September 1, 1997 were approximately $2.3 million. Ionics Watertec is involved in the manufacture and supply of ozonation systems for water disinfection and systems for chemical metering. 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 20 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. /68 Prior Years' Poolings During 1996, the Company completed pooling transactions with Aqua Design, Inc. (Ionics Aqua Design), Apollo Ultrapure Water Systems, Inc. (Ionics Apollo) and Sievers Instruments, Inc. (Ionics Sievers) under which 222,977, 331,567 and 447,258 shares of common stock, respectively, were issued in exchange for more than 90% of the outstanding common stock of each company. Because the operating results from prior years for Ionics Aqua Design and Ionics Apollo were not material, both individually and in the aggregate, compared to those of the Company, these transactions were recorded by restatement of retained earnings as of January 1, 1996 and no restatement of prior-period financial statements was made. Ionics Aqua Design owns and operates membrane-based seawater desalination systems used to produce drinking and process water primarily for hotels and municipalities in the Caribbean. Ionics Apollo sells ultrapure water and related services to a variety of industrial and commercial users primarily in southern California. Ionics Sievers manufactures instruments designed to measure extremely low levels of organic contaminants in ultrapure water. Subsequent Business Combinations In separate transactions subsequent to December 31, 1998, the Company acquired M2 Innovative Solutions, Inc. (M2), Aquarelle SA (Aquarelle), and Agar Technologies Process and Environmental Control, Ltd. (Agar). The Company paid cash for the stock of these companies. The operating results and purchase prices of these companies were not material individually or in the aggregate relative to the assets and operations of the Company. These transactions will be accounted for as purchases. M2, now called Ionics Life Sciences, is a supplier of ultrapure water products and services, including validated pharmaceutical systems, to the life sciences industry. Aquarelle is a French company in the five-gallon bottled water market. Agar is an Israeli company which produces instruments that monitor, detect and measure oil on water surfaces. Note 15. Segment Information In 1998, the Company adopted SFAS No. 131. At the end of 1998, the Company changed from three reportable segments to four reportable "business group" segments corresponding to a "business group" structure, summarized below, which was put into place in the latter part of 1998. Segment information for prior years has been restated to reflect this change. Equipment Business Group - equipment, supply, "own and operate" and related services for seawater desalination, brackish water desalination, water and wastewater treatment and food and chemical processing, for municipalities and communities, and for the petrochemical, nuclear and electric utilities, pulp and paper, chemical processing and related industries. Ultrapure Water Group - equipment, supply, "own and operate" and related services for the production of ultrapure water for the semiconductor, power and pharmaceutical industries. /69 Consumer Water Group - equipment and supply services for the consumer market including 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. Instrument Business Group - instruments for the analysis and on-line monitoring of certain constituents, impurities or contaminants in water for industrial and municipal customers. The accounting policies of the four business group segments are the same as those described in "Significant Accounting Policies." The Company evaluates the performance of each business group segment and considers allocation of resources to it based on earnings before interest, taxes, and minority interest (EBIT), and the evaluation of EBIT with respect to capital employed. The business group structure reflects the segmentation of the product lines, services, and markets within defined areas of management responsibility. Four business group managers, one for each of the reportable segments, are directly accountable to, and maintain regular contact with, the chief operating decision maker, the Chief Executive Officer, to discuss operating activities, financial results, forecasts and plans. The table on the following page summarizes the Company's operations by the four business group segments and "Corporate." Corporate includes research and development expenses not allocated to the business groups and certain corporate administrative and insurance costs. Geographic Areas Revenues are reflected in the country from which the sales are made. Long- lived assets include all long-term assets except for notes receivable. No foreign country's revenues to unaffiliated customers or long-lived assets were material. Included in the United States segment are export sales of approximately 23%, 22% and 18% for 1998, 1997 and 1996, respectively. Including these U.S. export sales, the percentages of total revenues attributable to activities outside the U.S. were 47%, 41% and 36% in 1998,1997 and 1996, respectively. Information about the Company's operations by geographic area follows:
United Dollars in Thousands States International Total _____________________________________________________________________________ 1998 Revenue - unaffiliated customers $242,363 $108,963 $351,326 Long-lived assets 170,528 85,678 256,206 _____________________________________________________________________________ 1997 Revenue - unaffiliated customers $264,604 $ 87,865 $352,469 Long-lived assets 156,020 76,517 232,537 _____________________________________________________________________________ 1996 Revenue - unaffiliated customers $256,486 $ 70,176 $326,662 Long-lived assets 153,420 73,010 226,430 _____________________________________________________________________________
/70
Equipment Ultrapure Consumer Instrument Business Water Water Business Dollars in Thousands Group Group Group Group Corporate Total ______________________________________________________________________________________________________________________________ 1998 Revenue - unaffiliated customers $ 129,751 $ 111,349 $ 80,884 $ 29,342 $ - $ 351,326 Inter-segment transfers 3,916 437 - 1,673 (6,026) - Income from operations 11,129 7,668 10,686 5,408 (3,341) 31,550 Equity income 78 - 528 - - 606 Earnings before interest, taxes and minority interest (EBIT) 11,207 7,668 11,214 5,408 (3,341) 32,156 Interest income - - - - - 1,058 Interest expense - - - - - (331) Income before income taxes and minority interest - - - - - 32,883 Capital employed 158,189 88,715 122,382 26,879 (42,175) 353,990 Identifiable assets 178,197 102,292 135,880 12,587 16,110 445,066 Investments in affiliated companies 4,081 - 2,976 - - 7,057 Depreciation and amortization 12,604 6,117 7,701 524 268 27,214 Capital expenditures 17,685 14,536 8,369 1,310 296 42,196 ============================================================================================================================== 1997 Revenue - unaffiliated customers $ 145,844 $ 108,601 $ 73,046 $ 24,978 $ - $ 352,469 Inter-segment transfers 3,086 804 - 685 (4,575) - Income from operations 17,811 13,649 9,045 4,570 (2,629) 42,446 Equity income (loss) 85 (95) 536 - - 526 Earnings before interest, taxes and minority interest (EBIT) 17,896 13,554 9,581 4,570 (2,629) 42,972 Interest income - - - - - 1,197 Interest expense - - - - - (947) Income before income taxes and minority interest - - - - - 43,222 Capital employed 147,791 89,111 106,617 26,643 (37,615) 332,547 Identifiable assets 157,207 90,649 132,305 12,101 10,491 402,753 Investments in affiliated companies 1,201 - 2,782 - - 3,983 Depreciation and amortization 12,208 5,250 8,960 415 214 27,047 Capital expenditures 11,386 11,532 9,787 563 242 33,510 ============================================================================================================================== 1996 Revenue - unaffiliated customers $ 144,652 $ 94,846 $ 66,144 $ 21,020 $ - $ 326,662 Inter-segment transfers 923 425 - 568 (1,916) - Income from operations 18,135 12,431 6,636 3,527 (2,141) 38,588 Equity income 22 - 419 - - 441 Earnings before interest, taxes and minority interest (EBIT) 18,157 12,431 7,055 3,527 (2,141) 39,029 Interest income - - - - - 1,396 Interest expense - - - - - (869) Income before income taxes and minority interest - - - - - 39,556 Capital employed 157,275 68,569 101,248 26,075 (47,305) 305,862 Identifiable assets 167,906 66,809 119,164 11,849 9,953 375,681 Investments in affiliated companies 87 - 2,821 - - 2,908 Depreciation and amortization 13,945 4,245 6,995 312 665 26,162 Capital expenditures 16,120 7,699 22,316 587 168 46,890 ==============================================================================================================================
/71 SELECTED FINANCIAL DATA _______________________ Statement of Operations Data
Dollars in Thousands, Except Per Share Amounts 1998 % 1997 % 1996 % 1995 % 1994 % _________________________________________________________________________________________________________________________ Revenues $351,326 100.0 $352,469 100.0 $326,662 100.0 $257,293 100.0 $222,376 100.0 Income before income taxes and minority interest 32,883 9.4 43,222 12.3 39,556 12.1 31,609 12.3 22,717 10.2 Net income 21,386 6.1 28,329 8.0 26,503 8.1 21,025 8.2 15,448 6.9 Earnings per basic share 1.33 1.78 1.71 1.45 1.11 Earnings per diluted share 1.31 1.73 1.65 1.39 1.09
Balance Sheet Data
Dollars in Thousands 1998 1997 1996 1995 1994 _____________________________________________________________________________________________________ Current assets $187,093 $165,850 $144,422 $122,387 $113,477 Current liabilities 85,934 66,012 68,173 60,279 54,877 Working capital 101,159 99,838 76,249 62,108 58,600 Total assets 452,123 406,736 378,589 322,044 277,164 Long-term debt and notes payable 1,519 804 2,132 182 99 Stockholders' equity 345,598 319,659 292,217 253,044 218,610
Selected Quarterly Financial Data (Unaudited)
Earnings Earnings Earnings Earnings Dollars in Thousands, Per Per Per Per Except Per Gross Net Basic Diluted Gross Net Basic Diluted Share Amounts Revenues Profit Income Share Share Revenues Profit Income Share Share ________________________________________________________________________________________________________________________________ 1998 1997 First Quarter $ 78,974 $ 28,285 $ 6,008 $ .37 $ .37 First Quarter $ 87,102 $ 28,055 $ 6,972 $ .44 $ .43 Second Quarter 80,267 26,821 4,620 .29 .28 Second Quarter 87,111 28,612 7,269 .46 .44 Third Quarter 88,876 27,999 5,183 .32 .32 Third Quarter 85,113 28,067 7,196 .45 .44 Fourth Quarter 103,209 31,379 5,575 .35 .34 Fourth Quarter 93,143 30,715 6,892 .43 .42 ________________________________________________________________________________________________________________________________ $351,326 $114,484 $21,386 $ 1.33 $ 1.31 $352,469 $115,449 $28,329 $1.78 $1.73 ================================================================================================================================
Common Stock Price Range
1998 High Low 1997 High Low _____________________________________________________________________________________________________ First Quarter $45 13/16 $37 7/8 First Quarter $53 $45 1/4 Second Quarter 45 1/2 34 13/16 Second Quarter 50 1/2 44 5/8 Third Quarter 37 22 1/2 Third Quarter 46 3/8 40 3/4 Fourth Quarter 35 1/8 22 1/2 Fourth Quarter 44 3/4 33 1/2 /72
PRINCIPAL U.S. OFFICES, BOARD OF DIRECTORS CORPORATE OFFICERS AFFILIATES & SUBSIDIARIES ARTHUR L. GOLDSTEIN + ARTHUR L. GOLDSTEIN Aqua Cool Pure Bottled Chairman of the Board, Chairman of the Board, Watertown, Massachusetts President and President and Chief Executive Officer Chief Executive Officer Elite New England Ionics, Incorporated Ludlow, Massachusetts WILLIAM E. KATZ DOUGLAS R. BROWN * Executive Vice President General Ionics President and Chief Cuyahoga Falls, Ohio Executive Officer, John P. Bergeron Advent International Vice President and Ionics Ahlfinger Water Company Corp. Treasurer Dallas, Texas WILLIAM L. BROWN * Edward J. Cichon Ionics Apollo Ultrapure Retired Chairman Vice President, Water Systems, Inc. of the Board Equipment Business Group Pico Rivera, California The First National Bank of Boston ROBERT J. HALLIDAY Ionics Aqua Design, Inc. Vice President, Finance Tampa, Florida ARNAUD DE VITRY and Chief Financial D'AVAUCOURT * Officer Ionics, Incorporated Engineering Consultant Bridgeville, Pennsylvania STEPHEN KORN WILLIAM E. KATZ Vice President, Ionics Life Sciences, Inc. Executive Vice General Counsel and North Wales, Pennsylvania President Clerk Ionics, Incorporated Ionics Pure Solutions THEODORE G. PAPASTAVROS Phoenix, Arizona KATHLEEN F. FELDSTEIN* Vice President, President Strategic Planning Ionics Resources Conservation Company Economic Studies, Inc. Bellevue, Washington JOHN J. SHIELDS #+ Ionics Sievers Instruments, General Partner Boulder, Colorado Boston Capital Ventures Ionics Ultrapure Water Corporation CARL S. SLOANE #+ San Jose, California Ernest L. Arbuckle Professor of Business Administration, Harvard University Graduate School of Business Administration MARK S. WRIGHTON # Chancellor Washington University CORPORATE HEADQUARTERS ALLEN S. WYETT # [LOGO] COVERING THE Ionics, Incorporated President, Wyett WATERFRONT 65 Grove Street Consulting Group, Inc. 50 YEARS Watertown, Massachusetts 02472-2882 IONICS + Member of Executive Committee * Member of Audit Committee # Member of Compensation Committee
/73
PRINCIPAL OVERSEAS OFFICES, AFFILIATES & SUBSIDIARIES Aqua Cool Pure Bottled Water Ionics Asia-Pacific Pte Ltd. Ionics Italba, S.p.A. Ionics Watertec Pty. Ltd. London, England Singapore Milan, Italy Brisbane, Australia Ionics France Ionics (Bermuda) Ltd. Ionics Korea, Inc. Ionics Enersave Engineering Paris, France Hamilton, Bermuda Seoul, Korea Kuala Lumpur, Malaysia Elite Chemicals Pty. Ltd. Ionics Iberica, S.A. Ionics (UK) Ltd. Yuasa-Ionics Co., Ltd. Brisbane, Australia Grand Canary, Spain London, England Tokyo, Japan
INVESTOR INFORMATION TRANSFER AGENT & REGISTRAR The Annual Meeting of Ionics' shareholders will be held State Street Bank and Trust Company Thursday, May 6, 1999 at 9:30 A.M. at BankBoston, Boston, Massachusetts 100 Federal Street, Boston, Massachusetts Ionics' common stock is traded on the New York Stock Exchange under the symbol ION. As of March 19, 1999 there were approximately 1,400 shareholders of record. AUDITORS No cash dividends were paid in either 1998 or 1997 pursuant to Ionics' current policy to retain earnings for PricewaterhouseCoopers L.L.P. use in its business. Boston, Massachusetts For information or assistance regarding individual stock records, transactions or certificates, please call the Transfer Agent's Telephone Response Center: 1-800-426-5523 between 9 A.M. and 5 P.M. Ionics' Annual Report on Form 10-K, which is filed with the Securities and Exchange Commission, will be sent to any shareholder upon request directed to Investor Relations, Ionics, Incorporated. P.O. Box 9131, Watertown, Massachusetts 02471-9131, or by calling (617) 926-2510 ext. 874. The Ionics Toolbox and Ionics Total Water Management are registered service marks; The Ionics Brand is an unregistered service mark; Aqua Cool, Cloromat, HYgene, Ionics, Ozgen, and Sievers are registered trademarks; and Ionics EDR 2020 is an unregistered trademark of Ionics, Incorporated.
/74 EX-21 4 EXHIBIT 21 IONICS, INCORPORATED SUBSIDIARIES OF THE REGISTRANT State or Other Jurisdiction Name of Incorporation Agar Technologies Process and Environmental Control Ltd. Israel Apollo Ultrapure Water Systems, Inc. California Aqua Design, Inc.* California Aquarelle S.A. + France Elite Chemicals Pty. Ltd. Australia Global Water Services, S.A.++ Panama Ionics Asia-Pacific Pte. Ltd. Singapore Ionics (Bermuda) Ltd.* Bermuda Ionics Enersave Engineering Sdn Bhd** Malaysia Ionics Foreign Sales Corporation Limited Jamaica Ionics France S.A. France Ionics Iberica, S.A. Spain Ionics Italba, S.p.A. Italy Ionics (Korea) Ltd. Delaware Ionics Life Sciences, Inc. New Jersey Ionics Nederland B.V. The Netherlands Ionics Ultrapure Water Corporation California Ionics (U.K.) Limited United Kingdom Ionics Watertec Pty. Ltd. Australia Resources Conservation Co. International Delaware Separation Technology, Inc.*** Minnesota Sievers Instruments, Inc. Colorado Springfield Elite Technologies, Inc. Massachusetts * 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. ** Registrant through Ionics Iberica, S.A. owns 55% of this entity. *** Owns a U.K. subsidiary, SeparaTech Limited. + This entity is wholly owned by Ionics France S.A. ++ This entity is wholly owned by Ionics (U.K.) Ltd. E-2 /75 EX-23 5 EX-23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements for the Ionics 1997 Stock Incentive Plan on Form S-8 (registration no. 333-29135); the 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 19, 1999, on our audits of the consolidated financial statements and the financial statement schedule of Ionics, Incorporated as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which are included or incorporated by reference in this Annual Report on Form 10-K. /s/PRICEWATERHOUSECOOPERS, LLP Boston, Massachusetts March 29, 1999 E-3 /76 EX-24 6 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, 1998, 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 29, 1999 Douglas R. Brown /s/William L. Brown Director March 29, 1999 William L. Brown /s/Arnaud de Vitry d'Avaucourt Director March 29, 1999 Arnaud de Vitry d'Avaucourt /s/Kathleen F. Feldstein Director March 29, 1999 Kathleen F. Feldstein /s/Arthur L. Goldstein Chairman of the Board March 29, 1999 Arthur L. Goldstein of Directors, Chief Executive Officer and President (Principal Executive Officer) /s/William E. Katz Director March 29, 1999 William E. Katz /s/John J. Shields Director March 29, 1999 John J. Shields /s/Carl S. Sloane Director March 29, 1999 Carl S. Sloane /s/Daniel I.C. Wang Director March 29, 1999 Daniel I.C. Wang /s/Mark S. Wrighton Director March 29, 1999 Mark S. Wrighton /s/Allen S. Wyett Director March 29, 1999 Allen S. Wyett /77 EX-27 7
5 1,000 YEAR DEC-31-1998 DEC-31-1998 28,770 359 118,848 (2,860) 31,549 187,093 353,940 (158,257) 452,123 85,934 0 16,117 0 0 329,481 452,123 351,326 351,326 236,842 236,842 0 1,319 331 32,277 10,680 21,386 0 0 0 21,386 1.33 1.31
-----END PRIVACY-ENHANCED MESSAGE-----