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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q/A
(MARK ONE)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 AND 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997 OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 1-10728
----------------
UNITED STATES FILTER CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0266015
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
40-004 COOK STREET, PALM DESERT, CA 92211
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(760) 340-0098
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of common stock, $.01 par value, outstanding as of
February 13, 1998 was 106,278,587 shares.
Total number of pages 22
THERE IS 1 EXHIBITARE NO EXHIBITS FILED WITH THIS REPORT
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1997
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1997
---------- ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 135,144 57,821
Short-term investments............................... 2,158 904
Accounts receivable, net............................. 572,940 739,587
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... 130,310 205,427
Inventories.......................................... 245,201 350,968
Prepaid expenses..................................... 8,931 19,893
Deferred taxes....................................... 53,152 82,246
Other current assets................................. 17,086 28,257
---------- ---------
Total current assets................................ 1,164,922 1,485,103
---------- ---------
Property, plant and equipment, net.................... 319,687 761,147
Investment in leasehold interests, net................ 23,230 22,424
Costs in excess of net assets of businesses acquired,
net.................................................. 788,096 978,271913,793
Other assets.......................................... 101,628 113,837178,315
---------- ---------
$2,397,563 3,360,782
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 274,653 304,890
Accrued liabilities.................................. 275,537 410,245
Current portion of long-term debt.................... 11,956 25,464
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... 61,441 121,831
Other current liabilities............................ 26,183 77,045
---------- ---------
Total current liabilities........................... 649,770 939,475
---------- ---------
Notes payable......................................... 31,464 475,181
Long-term debt, excluding current portion............. 42,646 128,988
Convertible subordinated debentures................... 554,000 554,000
Deferred taxes........................................ 12,198 3,506
Other liabilities..................................... 61,655 66,108
---------- ---------
Total liabilities................................... 1,351,733 2,167,258
---------- ---------
Shareholders' equity:
Common stock, par value $.01. Authorized 300,000
shares; 80,334 and 103,957 shares issued and
outstanding at March 31, 1997 and December 31, 1997,
respectively........................................ 803 1,040
Additional paid-in capital........................... 1,013,734 1,500,786
Currency translation adjustment...................... (19,491) (37,287)
Retained earnings (accumulated deficit).............. 50,784 (271,015)
---------- ---------
Total shareholders' equity.......................... 1,045,830 1,193,524
---------- ---------
Commitments and contingencies.........................
---------- ---------
$2,397,563 3,360,782
========== =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues........................... $ 463,423 829,427 1,094,636 2,346,553
Costs of sales..................... 369,736 621,893 859,754 1,798,595
--------- --------- --------- ---------
Gross profit..................... 93,687 207,534 234,882 547,958
Selling, general and administrative
expenses.......................... 81,482 148,478 196,752 414,546
Purchased in-process research and
development....................... -- 299,505 -- 299,505
Merger, restructuring, acquisition
and other related charges......... -- 141,109 5,581 141,109
--------- --------- --------- ---------
81,482 589,092 202,333 855,160
--------- --------- --------- ---------
Operating income (loss).......... 12,205 (381,558) 32,549 (307,202)
Other income (expense):
Interest expense................. (6,484) (13,198) (15,907) (34,374)
Other, net....................... 1,818 1,779 2,981 3,002
--------- --------- --------- ---------
(4,666) (11,419) (12,926) (31,372)
--------- --------- --------- ---------
Income (loss) before taxes....... 7,539 (392,977) 19,623 (338,574)
Income tax expense (benefit)....... 1,211 (18,882) 3,845 (1,273)
--------- --------- --------- ---------
Net income (loss)................ $ 6,328 (374,095) 15,778 (337,301)
========= ========= ========= =========
Net income (loss) per common share:
Basic............................ $ 0.10 (3.71) 0.27 (3.65)
========= ========= ========= =========
Diluted.......................... $ 0.09 (3.71) 0.26 (3.65)
========= ========= ========= =========
See Accompanying Notes To Condensed Consolidated Financial Statements.
3
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
------------------
1996 1997
-------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:......................
Net income (loss).......................................... $ 15,778 (337,301)
Adjustments to reconcile net income (loss) to net cash
provided by...............................................
(used in) operating activities:............................
Deferred income taxes...................................... (11,700) (23,606)
Provision for doubtful accounts............................ 3,292 6,172
Depreciation............................................... 28,406 47,236
Amortization............................................... 9,338 20,695
Write-off of in-process research and development and
goodwill.................................................. -- 352,025
Loss on sale or disposal of assets......................... 3 11,557
Change in operating assets and liabilities:................
(Increase) decrease in accounts receivable............... 7,990 (23,569)
Increase in costs and estimated earnings in excess of
billings on uncompleted contracts....................... (35,904) (30,158)
Increase in inventories.................................. (17,125) (19,590)
(Increase) decrease in other assets...................... (20,271) 1,723
Increase (decrease) in accounts payable and accrued
expenses................................................ 17,209 (26,450)
Increase (decrease) in billings in excess of costs and
estimated earnings on uncompleted contracts.............. (3,561) 22,584
Increase (decrease) in other liabilities................. (5,081) 16,796
-------- --------
Net cash provided by (used in) operating activities...... (11,626) 18,114
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of property, plant & equipment...... (43,283) (77,683)
Payment for purchase of acquisitions, net of cash ac-
quired.................................................. (404,478) (411,082)
Proceeds from disposal of equipment...................... 394 3,860
Sale of short-term investments........................... 152 1,260
-------- --------
Net cash used in investing activities.................... (447,215) (483,645)
-------- --------
See Accompanying Notes To Condensed Consolidated Financial Statements.
4
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
-------------------
1996 1997
--------- --------
(IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................ 358,441 --
Net proceeds from sale of convertible subordinated
debentures............................................... 403,650 --
Proceeds from exercise of common stock options............ 1,487 3,514
Principal payments on debt................................ (7,300) (20,170)
Net (payments) proceeds from borrowings on notes payable.. (913) 404,914
Dividends paid............................................ (3,067) (50)
--------- --------
Net cash provided by financing activities............... 752,298 388,208
--------- --------
Net increase (decrease) in cash and cash equivalents.... 293,457 (77,323)
Cash and cash equivalents at March 31, 1996 and 1997...... 27,730 135,144
--------- --------
Cash and cash equivalents at December 31, 1996 and 1997... $ 321,187 57,821
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest................ $ 15,602 34,023
========= ========
Cash paid during the period for income taxes............ $ 10,596 22,212
========= ========
See Accompanying Notes To Condensed Consolidated Financial Statements.
5
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with U.S. generally accepted accounting principles have been condensed or
omitted pursuant to such regulations. The condensed consolidated financial
statements reflect all adjustments and disclosures which are, in the opinion
of management, necessary for a fair presentation of the information contained
therein. All such adjustments are of a normal recurring nature. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto that are contained in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
The results of operations for the interim periods are not necessarily
indicative of the results of the full fiscal year.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is computed based on the weighted average
number of shares outstanding. In the current period, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
Accordingly, "Basic EPS" and "Diluted EPS" were calculated as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1996 1997 1996 1997
--------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIC
Net income (loss) applicable to
common shares................... $ 6,328 (374,095) 15,778 (337,301)
======== ========== ======== ==========
Weighted average common shares
outstanding................... 65,061 100,927 59,016 92,340
======== ========== ======== ==========
Basic income (loss) per common
share......................... $ 0.10 (3.71) 0.27 (3.65)
======== ========== ======== ==========
DILUTED
Net income (loss) applicable to
common shares................... $ 6,328 (374,095) 15,778 (337,301)
Add:
Effect on net income of
conversion of convertible
subordinated debentures....... -- * -- ** -- * -- **
Adjusted net income (loss)
applicable to common shares..... 6,328 (374,095) 15,778 (337,301)
======== ========== ======== ==========
Weighted average shares
outstanding..................... 65,061 100,927 59,016 92,340
Add:
Exercise of options and assumed
conversion of subordinated
debentures.................... 2,418* -- ** 2,055* -- **
-------- ---------- -------- ----------
Adjusted weighted average shares
outstanding..................... 67,479 100,927 61,071 92,340
======== ========== ======== ==========
Diluted income (loss) per common
share........................... $ 0.09 (3.71) 0.26 (3.65)
======== ========== ======== ==========
- --------
* The calculation of diluted EPS does not assume conversion of subordinated
debentures for the three and nine months ended December 31, 1996 as the
effect would be antidilutive to income per share.
** The calculation of diluted EPS does not assume conversion of subordinated
debentures or exercise of stock options for the three and nine months ended
December 31, 1997 as the effect would be antidilutive to loss per share.
6
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 2. INVENTORIES
Inventories at March 31, 1997 and December 31, 1997 consist of the
following:
MARCH DECEMBER 31,
31, 1997 1997
-------- ------------
(IN THOUSANDS)
Raw materials...................................... $ 56,830 116,446
Work-in-progress................................... 58,619 83,136
Finished goods..................................... 129,752 151,386
-------- -------
$245,201 350,968
======== =======
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
On September 17, 1997, the Company acquired more than 47,000 acres of
agricultural land in Imperial County, California and other parts of the
Southwestern United States in exchange for 8.0 million shares and warrants to
acquire 1.2 million shares of common stock, par value $0.01 per share, of the
Company. These shares and warrants are subject to certain restrictions and
limitations more fully described in agreements among the Company and the
holders of such securities. The recorded value of the acquired land is
approximately $210.0 million.
NOTE 4. NOTES PAYABLE
As of December 31, 1997, the Company had a Senior Credit Facility which
provides credit facilities to the Company of up to $750.0 million, of which
there were outstanding borrowings of $419.1 million and outstanding letters of
credit of $40.5 million. Borrowings under the Senior Credit Facility bear
interest at variable rates of up to 0.45% above certain Eurocurrency rates or
0.15% above BankBoston's base rate. The Senior Credit Facility is subject to
customary and usual terms.
In connection with the acquisition of The Kinetics Group, Inc. ("Kinetics")
(see note 5) the Company has an additional loan agreement with a bank that
provides a revolving line-of-credit under which a subsidiary of the Company
may borrow up to $100.0 million of which there were outstanding borrowings of
$33.8 million at December 31, 1997. Borrowings under this agreement bear
interest at the bank's reference rate or other interest rate options that the
subsidiary may select.
In connection with the acquisition of Memtec Limited ("Memtec") (see note
5), the Company has a Multi-Option, Multi-Currency Master Facility Agreement
with a bank that provides for borrowings of up to $60.0 million, of which
there were outstanding borrowings of $22.3 million as of December 31, 1997.
Borrowings under this agreement bear interest at LIBOR plus 0.75%.
NOTE 5. ACQUISITIONS
On December 31, 1997, a wholly-owned subsidiary of the Company and Kinetics
effectively consummated a merger and acquisition in a tax-free reorganization
(the "Merger") contemplated under and pursuant to a definitive Merger
Agreement among the Company, Kinetics and substantially all of the
shareholders of Kinetics. In connection with this merger, the Company issued
5,803,803 shares of the Company's common stock for all of the outstanding
common stock of Kinetics (0.5824 share of the Company's common stock for each
outstanding share and each outstanding option or other right to acquire a
share of Kinetics common stock). In addition, the Company assumed
approximately $50.0 million of third party institutional debt.
7
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Kinetics, based in Santa Clara, California, is a provider and manufacturer
of sophisticated high purity process piping systems and is also a leading
integrator in the United States of high purity water, fluid and gas handling
systems that are critical to the pharmaceutical, biotechnology and micro
electronics industries.
This transaction has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements and notes thereto for all
periods presented have been restated to include the accounts of Kinetics. In
restating the Company's historical financial statements for the pooling of
interests with Kinetics, the Company's balance sheet as of March 31, 1997 was
combined with Kinetics audited balance sheet as of September 30, 1997.
Additionally, results of the Company for the fiscal year ended March 31, 1997
were combined with the results of Kinetics for the fiscal year ended September
30, 1997; historical results of the Company for the three and nine months
ended December 31, 1996 were combined with historical results of Kinetics for
the three and nine months ended June 30, 1997, respectively. Concurrent with
the Company's merger, Kinetics year end was recast to March 31. Accordingly,
results of Kinetics for the six month period ended September 30, 1997
(including revenue of $227.4 million and a net loss of $8.5 million) are
included in both the restated historical results for the fiscal year ended
March 31, 1997 and the results for the nine months ended December 31, 1997.
Separate results of operations of the combined entities for the three and nine
months ended December 31, 1996 are as follows:
THREE MONTHS
ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996
----------------- -----------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues:
Company (as previously reported).......... $368,124 838,936
Kinetics.................................. 95,299 255,700
-------- ---------
Combined.................................. $463,423 1,094,636
======== =========
Net income (loss):
Company (as previously reported).......... $ 14,351 29,014
Kinetics.................................. (8,023) (13,236)
-------- ---------
Combined.................................. $ 6,328 15,778
======== =========
Income per common share:
Basic:
As previously reported.................... $ 0.24 0.54
======== =========
As restated............................... $ 0.10 0.27
======== =========
Diluted:
As previously reported.................... $ 0.23 0.52
======== =========
As restated............................... $ 0.09 0.26
======== =========
Merger expenses incurred to consummate the Kinetics transaction totaled $4.3
million consisting of investment banking fees, printing fees, stock transfer
fees, legal fees, accounting fees, governmental filing fees and certain other
transaction costs and are included in merger, restructuring, acquisition and
other related charges in the accompanying December 31, 1997 Condensed
Consolidated Statements of Operations.
8
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
On December 9, 1997, the Company, through a wholly-owned subsidiary,
completed its tender offer ("Offer") to purchase all of the outstanding
ordinary shares (including American Depository Shares) of Memtec. The purchase
price was $36.00 per share. The Company acquired certain shares in privately
negotiated and open market purchases prior to the Offer resulting in a total
cash purchase price of approximately $397.2 million (including estimated
transaction costs of $10.6 million). The purchase price was allocated to the
assets and liabilities of Memtec based on their estimated respective fair
values. The excess of fair value of net assets acquireddeveloped technology was approximately $66.1$64.4 million, and
is being amortized on a straight-line basis over 4025 years. The value of other
intangible assets including patents, trademarks, license and distribution fees
was approximately $7.3 million, and is being amortized over periods ranging from
5 to 12 years.
The Company also acquired from Memtec certain in-process research and
development projects that had not reached technological feasibility and that had
no alternative future use. Such projects were valued by an independent appraiser
using a risk adjusted cash flow model under which expected future cash flows
were discounted taking into
account risks relatedusing rates ranging from 31.9% to existing45.9%. The discount rates were
determined by various internal and external factors including general economic
and industry economic conditions, cost and availability of capital, product
completion and technology risk, competition and market acceptance. The future
marketscash flows were based on significant estimates of revenues, cost of goods sold,
operating expenses, research and assessmentsdevelopment expenses, capital expenditures,
depreciation and interest charges on financed capital expenditures over the next
ten years. The estimates of these items included significant assumptions
regarding (i) revenue growth, which was assumed to grow from no revenue in the
current period for the projects currently in-process to substantially all of the
life expectancyrevenue for the Memtec subsidiary over the ten year period as the projects in-
process supplant or supersede the current Memtec product offerings; (ii) gross
margin, which is projected to improve approximately 5% by the end of such projects.the ten
year period as the new projects with higher gross margins supplant or supersede
the current Memtec product offerings; (iii) operating expenses as a percentage
of sales, which were projected to be 20%. The estimated market value of such in-
process research and development projects was $299.5 million and was expensed at
the acquisition date. The allocation of the purchase price of Memtec is final
and is not expected to change materially subsequent to December 31, 1997.
Memtec is incorporated under the law of the State of New South Wales,
Australia and has worldwide operations. Memtec is a leader in the designing,
engineering, manufacturing and marketing of an extensive range of filtration
products and systems, focusing on two principal areas of the filtration
market: industrial filtration and water filtration. Memtec had revenues of
approximately $243.6 million and net income of approximately $7.5 million for
the year ended June 30, 1997.
The acquisition of Memtec has been accounted for as a purchase and,
accordingly, the results of Memtec's operations have been included in the
consolidated financial statements of the Company from the date of acquisition.
Summarized below are the unaudited pro forma results of operations of the
Company as though Memtec had been acquired at the beginning of the nine month
periods ended December 31, 1996 and 1997.
NINE MONTHS ENDED
DECEMBER 31,
--------------------
1996 1997
---------- ---------
(IN THOUSANDS,
EXCEPT PER COMMON
SHARE)
Revenues................................................. $1,269,263 2,515,056
========== =========
Net income (loss)........................................ $ 23,454 (336,394)
========== =========
Net income (loss) per common share:
Basic.................................................... $ 0.40 (3.64)
========== =========
Diluted.................................................. $ 0.38 (3.64)
========== =========
Concurrent with the merger with and into Kinetics and the acquisition of
Memtec, the Company designed and implemented a restructuring plan to
streamline its manufacturing and production base, improve efficiency and
enhance its competitiveness. The restructuring plan resulted in a pre-tax
charge of $141.1 million. The plan identifies certain products and
technologies acquired in conjunction with the Memtec transaction that
supersede products and technologies acquired in earlier acquisitions of
membrane related businesses. As a result certain carrying amounts of goodwill
and other intangible assets were determined to be impaired by approximately
$55.0 million in accordance with Statement of Financial Accounting Standards
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate
9
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
that the carrying amount of the assets may not be recoverable. In determining
the amount of the impairment of these assets, the Company valued the assets
using the present value of estimated expected future cash flows using discount
rates commensurate with the risks involved. The restructuring plan also
included closing or reconfiguring of certain facilities and reducing the work
force by approximately 350 employees, most of whom work in the facilities to
be closed.
Included in merger, restructuring, acquisition and other related charges are
the following:
(IN THOUSANDS)
Write-down of goodwill and other intangible assets............... $ 54,950
Asset write-offs, including equipment and facilities............. 47,887
Merger, integration and other acquisition costs.................. 21,135
Severance and related costs...................................... 17,137
--------
Total merger, restructuring, acquisition and other related
charges..................................................... $141,109
========
Cash charges..................................................... $ 36,431
Non-cash charges................................................. 104,678
--------
$141,109
========
Approximately $30.3 million of merger and restructuring related charges are
included in accrued liabilities at December 31, 1997. Additional costs to
complete the restructuring plan are not expected to be material.
After an income tax benefit of $34.5 million, the charges detailed above
totaling $440.6 million reduced earnings by $406.1 million.
NOTE 6. SUBSEQUENT EVENT
On February 9, 1998, the Company announced it had entered into an Agreement
and Plan of Merger (the "Merger Agreement") dated as of February 9, 1998,
among the Company, Palm Water Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Company ("Merger Sub"), and Culligan Water
Technologies, Inc. ("Culligan"), Delaware corporation. Pursuant to the Merger
Agreement, Merger Sub will be merged with and into Culligan (the "Merger"). In
connection with the Merger, the Company will issue in exchange for each issued
and outstanding share (other than treasury shares and shares owned by the
Company) of Culligan common stock, par value $.01 per share, 1.714 shares of
common stock, par value $.01 per share, of the Company pursuant to formula.
The Merger will be accounted for as a pooling of interests and is intended
to qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended. Consummation of the Merger is subject to
customary regulatory approvals and the approval of the stockholders of each of
the Company and Culligan. The Merger is expected to be consummated in the
first half of fiscal 1999.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues. Revenues for the three months ended December 31, 1997 were $829.4
million, an increase of $366.0 million or 79.0% from the $463.4 million for
the three months ended December 31, 1996. Revenues for the nine months ended
December 31, 1997 were $2.3 billion, an increase of $1.2 billion or 114.4%
from the $1.1 billion for the nine months ended December 31, 1996. These
increases were due primarily to acquisitions completed by the Company
subsequent to December 31, 1996. For the nine months ended December 31, 1997,
revenues from capital equipment sales represented 45.3% of total revenues.
Revenues from services, operations, replacement parts and consumables
represented 23.9% of total revenues, while revenues from distribution
represented 29.1% of total revenues and revenues from consumer products
represented 1.7% of total revenues.
Gross profit. Gross profit as a percentage of revenue ("gross margin") was
25.0% for the three months ended December 31, 1997 compared to 20.2% in the
corresponding period in the prior year. Gross margin was 23.4% for the nine
months ended December 31, 1997 compared to 21.5% in the corresponding period
in the prior year. These increases in gross margin for the three and nine
month periods ended December 31, 1997 were due primarily to the incurrence of
certain unreimbursed project costs at The Kinetics Group, Inc. ("Kinetics")
during the three and nine months ended December 31, 1996 after restatement for
the acquisition of Kinetics in the current period accounted for as a pooling
of interests transaction (see below).
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended December 31, 1997 were
$148.5 million before purchased in-process research and development and
merger, restructuring, acquisition and other related charges described below
("non-recurring charges"), an increase of $67.0 million or 82.2% from the
$81.5 million for the three months ended December 31, 1996. During this
period, selling, general and administrative expenses (before non-recurring
charges) were 17.9% of revenues compared to 17.6% for the comparable period in
the prior year. For the nine months ended December 31, 1997, selling, general
and administrative expenses (before non-recurring charges) increased
$217.7 million to $414.5 as compared to the $196.8 million, before merger
expenses described below, in the comparable period in the prior year. During
this period, selling, general and administrative expenses (before non-
recurring charges) were 17.7% of revenues compared to 18.0% (before merger
expenses) for the comparable period in the prior year.
Purchased In-Process a Research and Development. On December 9, 1997, the
Company, through a wholly-owned subsidiary, completed its tender offer
("Offer") to purchase all of the outstanding ordinary shares (including
American Depository Shares) of Memtec. The purchase price was $36.00 per
share. The Company acquired certain shares in privately negotiated and open
market purchases prior to the Offer resulting in a total cash purchase price
of approximately $397.2 million (including estimated transaction costs of
$10.6 million). The purchase price was allocated to the assets and liabilities
of Memtec based on their estimated respective fair values. The Company also
acquired from Memtec certain in-process research and development projects that
had not reached technological feasibility and that had no alternative future
use. Such projects were valued by an independent appraiser using a risk
adjusted cash flow model under which expected future cash flows were
discounted, taking into account risks related to existing and future markets
and assessments of the life expectancy of such projects. The estimated market
value of such in-process research and development (R&D) projects was $299.5
million and was expensed at the acquisition date.
In addition, the Company also acquired from Memtec and its subsidiaries
(consisting of Memcor, Fluid Dynamics, Filterite, and Seitz) developed
technologies including large volume purification product lines; membrane
systems for water purification and waste treatment; metal fiber product lines
for industrial applications involving elevated pressures, temperatures and
corrosive environments; disposable product lines for industrial applications;
and depth media product lines for the pharmaceutical and food and beverage
industries.
11
As a result of the degree of competition in the filtration industry and the
use of technological change as a competitive tool, a significant proportion of
Memtec's technology will be superseded, although the rate of change varies
significantly across the markets addressed. Memtec's R&D initiatives are
therefore targeted at superseding current products. Memtec has a range of
ongoing R&D projects in each of its product lines. Certain of these projects
are directed at next generation products for existing market applications
while others are directed at new market opportunities where Memtec's
technological base may be applicable.
Memcor R&D projects are primarily directed at enhanced microfiltration
products capable of cost effectively addressing larger scale applications or
more chemically aggressive environments. These R&D projects are at the
laboratory to pilot stage of development and require a number of years further
work before full introduction to the market of a product is likely. Other
Memcor R&D projects seek to utilize Memtec's knowledge of electrochemical
processes to enter new markets ranging from high quality water production to
environmental sensors. These R&D projects are also at the laboratory to pilot
stage and similarly require a number of years further R&D before a product is
available for launching.
Fluid Dynamics R&D projects are directed at developing new applications for
Memtec's proprietary metallic media. The media enables precise fine filtration
in a range of hostile environments as well as having unique conductive
properties. These R&D projects are at the laboratory stage of development and
require additional research ranging from twelve months to several years
depending upon the particular product before any market launch is possible.
Filterite R&D project center around its two proprietary technologies--the
unique Filterite highly assymetric membrane and the CoLD melt spinning
technology. R&D projects are examining expansion of product offerings from
these core technologies. These projects require further materials science
laboratory work followed by manufacturing prototyping and tailoring to market
applications--a process which will range from eighteen months to several
years.
Seitz R&D is directed at next generation filtration technologies for the
food and beverage and chemicals industries drawing on the core technologies of
Seitz. These R&D projects are predominantly at the pilot stage, requiring
extensive trialing evaluation and development based on the trialing before
market launches are possible.
Failure to complete these R&D projects successfully and on time would open
the way for competitors to introduce alternate technologies, with consequent
implications for Memtec's revenues. To be successful in most cases the R&D
projects must be developed from laboratory or pilot scale models to full scale
products capable of production within a quality accredited manufacturing
process. The existing R&D projects are expected to be completed withinand
commercialized over the historical expenditure levelsnext ten years with expected R&D and project related
expenditures of Memtec--approximately 3% of net sales, and
within historical levels of capital expenditure.approximately $275 million over such ten year period. The
expenditures will be expenses or capitalized in accordance with generally
accepted accounting principles.
The valuation process distinguished between R&D projects with no alternate
use or value and those with alternate use. Predominantly all R&D projects are
at a stage of development where the progress to date is not applicable to any
other use within Memtec nor is it saleable to any third party known to
management.
Merger, Restructuring, Acquisition and Other Related Charges. On December 31,
1997, the Company merged with and into Kinetics in a tax-free reorganization,
which was accounted for as a pooling of interests. Concurrent with the merger
with and into Kinetics and the acquisition of Memtec, the Company designed and
implemented a restructuring plan to streamline its manufacturing and
production base, improve efficiency and enhance its competitiveness. The
restructuring plan resulted in a pre-tax charge of $141.1 million. The plan
identifies certain products and technologies acquired in conjunction with the
Memtec transaction that supersede products and technologies acquired in
earlier acquisitions of membrane related businesses. As a result certain
carrying amounts of goodwill and other intangible assets were determined to be
impaired by approximately $55.0 million in accordance with Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS
121 requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate
12
that the carrying amount of the assets may not be recoverable. In determining
the amount of the impairment of these assets, the Company valued the assets
using the present value of estimated expected future cash flows using discount
rates commensurate with the risks involved. The restructuring plan also
included closing or reconfiguring of certain facilities and reducing the work
force by approximately 350 employees, most of whom work in the facilities to
be closed.
Included in merger, restructuring, acquisition and other related charges are
the following:
(IN
THOUSANDS)
Write-down of goodwill and other intangible assets................ $ 54,950
Asset write-offs, including equipment and facilities.............. 47,887
Merger, integration and other acquisition costs................... 21,135
Severance and related costs....................................... 17,137
--------
Total......................................................... $141,109
========
Cash charges...................................................... $ 36,431
Non-cash charges.................................................. 104,678
--------
$141,109
========
Approximately $30.3 million of merger and restructuring related charges are
included in accrued liabilities at December 31, 1997. Additional costs to
complete the restructuring plan are not expected to be material.
After an income tax benefit of $34.5 million, the charges detailed above
totaling $440.6 million reduced earnings by $406.1 million.
The write-down of assets as a result of the restructuring plan (including
assets of business' whose products were superseded by Memtec's products) will
not have a material affect on the Company's consolidated results of operations
in the future.
Merger expenses incurred during the nine months ended December 31, 1996
relate to the Company's acquisition of Davis Water & Waste Industries, Inc.
("Davis") which was accounted for as a pooling of interests. These merger
expenses, which totaled $5.6 million, consisted primarily of investment
banking fees, printing fees, stock transfer fees, accounting fees, legal fees,
governmental filing fees and certain other costs related to certain Davis
pension plans and change of control payments.
Interest expense. Interest expense increased to $13.2 million for the three
months ended December 31, 1997 from $6.5 million for the corresponding period
in the prior year. Interest expense increased to $34.4 million for the nine
months ended December 31, 1997 from $15.9 million for the corresponding period
in the prior year. Interest expense for the three and nine months ended
December 31, 1997 consisted primarily of interest on the Company's (i) 6.0%
Convertible Subordinated Notes issued on September 18, 1995 due 2005, (ii)
4.5% Convertible Subordinated Notes issued on December 11, 1996 due 2001,
(iii) borrowings under Kinetics' long-term line-of- credit, (iv) 8.0% Senior
Subordinated Notes issued by Kinetics, (v) borrowings under Memtec's long-term
line-of- credit, (vi) Senior Guaranteed Notes issued by Memtec bearing
interest at rates ranging from 7.7% to 8.0%, (vii) other long-term debt
bearing interest at rates ranging from 2.0% to 9.2% and (viii) borrowings
under the Company's Senior Credit Facility. At December 31, 1997, the Company
had cash and short-term investments of $58.7 million.
Income taxes. The Company recorded an income tax benefit of $18.9 million
for the three months ended December 31, 1997 as compared to income tax expense
of $1.2 million in the comparable period in the prior year. Before non-
recurring charges, income tax expense was $15.6 million, or an effective tax
rate of 32.8% for the three months ended December 31, 1997 as compared to
16.1% for the comparable period in the prior year.
13
Net income. Net income before non-recurring charges for the three months
ended December 31, 1997 was $32.0 million, an increase of $25.7 million from
the $6.3 million for the three months ended December 31, 1996. Net income
before non-recurring charges for the nine months ended December 31, 1997 was
$68.8 million, an increase of $49.0 million from the $19.8 million for the
nine months ended December 31, 1996. After non-recurring charges, net loss in
the three months ended December 31, 1997 was $374.1 million as compared to net
income of $6.3 million in the corresponding period in the prior year. Net loss
for the nine months ended December 31, 1997 (after the non-recurring charges)
was $337.3 million as compared to net income of $15.8 million in the
corresponding period in the prior year. Net income (loss) per common share for
the three and nine months ended December 31, 1997 and 1996 were as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------- ------------
1996 1997 1996 1997
------ ------ ------------
Basic........................................... $ 0.10 (3.71) 0.27 (3.65)
====== ====== ===== ======
Diluted......................................... $ 0.09 (3.71) 0.26 (3.65)
====== ====== ===== ======
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash and other working capital,
cash flow generated from operations and borrowings under the Company's bank
line-of-credit. At December 31, 1997, the Company had working capital of
$545.6 million including cash and short-term investments of $58.7 million. The
Company's long-term debt at December 31, 1997, was $554.0 million consisting
of $140.0 million of 6.0% Convertible Subordinated Notes due 2005 and $414.0
million of 4.5% Convertible Subordinated Notes due 2001. The Company also had
other long-term debt totaling $154.5 million consisting of (i) $18.3 million
of 8.0% Senior Subordinated Notes issued by Kinetics, (ii) $60.0 million of
Senior Guaranteed Notes issued by Memtec bearing interest at rates ranging
from 7.7% to 8.0% and (iii) other long-term debt of $76.2 million bearing
interest at rates ranging from 2.0% to 9.2%. Subsequent to December 31, 1997
substantially all of Kinetics' debt (including borrowings on their revolving
line-of-credit described below) was repaid with borrowings under the Company's
Senior Credit Facility.
As of December 31, 1997, the Company had a Senior Credit Facility which
provides credit facilities to the Company of up to $750.0 million, of which
there were outstanding borrowings of $419.1 million and outstanding letters of
credit of $40.5 million. Borrowings under the Senior Credit Facility bear
interest at variable rates of up to 0.45% above certain Eurocurrency rates or
0.15% above BankBoston's base rate. The Senior Credit Facility is subject to
customary and usual terms.
In connection with the acquisitions of Kinetics and Memtec, the Company
assumed through its subsidiaries two additional loan agreements with banks.
One agreement provides a revolving line-of-credit with borrowings of up to
$100.0 million, of which $33.8 million was outstanding at December 31, 1997.
Borrowings under this agreement bear interest at the bank's reference rate or
other interest rate options that the subsidiary may select. The other
agreement is a Multi-Option, Multi-Currency Master Facility that provides
borrowings of up to $60.0 million, of which $22.3 million was outstanding as
of December 31, 1997. Borrowings under this agreement bear interest at LIBOR
plus 0.75%.
The Company believes its current cash position, cash flow from operations,
and available borrowings under the Company's line-of-credit will be adequate
to meet its anticipated cash needs from working capital, revenue growth,
scheduled debt repayment and capital investment objectives for at least the
next twelve months.
CERTAIN TRENDS AND UNCERTAINTIES
The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the
Company's filings with the United States Securities and
14
Exchange Commission and in its reports to stockholders. In connection with the
"safe harbor" provisions of the U.S. Private Securities Litigation Reform Act
of 1995, the Company is hereby identifying important factors that could cause
actual results to differ materially from those contained in any forward-
looking statement made by or on behalf of the Company; any such statement is
qualified by reference to the following cautionary statements.
Acquisition Strategy In pursuit of its strategic objective of becoming the
leading global single-source provider of water and wastewater treatment
systems and services, the Company has, since 1991, acquired more than 125
United States based and international businesses. The Company plans to
continue to pursue acquisitions that expand the segments of the water and
wastewater treatment and water-related industries in which it participates,
complement its technologies, products or services, broaden its customer base
and geographic areas served and/or expand its global distribution network, as
well as acquisitions which provide opportunities to further and implement the
Company's one-stop-shop approach in terms of technology, distribution or
service. The Company's acquisition strategy entails the potential risks
inherent in assessing the value, strengths, weaknesses, contingent or other
liabilities and potential profitability of acquisition candidates and in
integrating the operations of acquired companies. In addition, the Company's
acquisition of approximately 96% of the outstanding ordinary shares of Memtec
was accomplished through a tender offer, and the Company could make other
acquisitions in the future by means of a tender offer. The level of risk
associated with such acquisitions is greater because frequently they are
accomplished, as was the case with the acquisition of Memtec, without the
customary representations or due diligence typical of negotiated transactions.
Although the Company generally has been successful in pursuing acquisitions,
there can be no assurance that acquisition opportunities will continue to be
available, that the Company will have access to the capital required to
finance potential acquisitions, that the Company will continue to acquire
businesses or that any business acquired will be integrated successfully or
prove profitable.
International Transactions The Company has made and expects it will continue
to make acquisitions and expects to obtain contracts in markets outside the
United States. While these activities may provide important opportunities for
the Company to offer its products and services internationally, they also
entail the risks associated with conducting business internationally,
including the risk of currency fluctuations, slower payment of invoices, the
lack in some jurisdictions of well-developed legal systems, nationalization
and possible social, political and economic instability. In particular, the
Company has significant operations in Asia, which will be adversely affected
by current economic conditions in that region. While the full impact of this
economic instability cannot be predicted, it could have a material adverse
effect on the Company's revenues and profitability.
Reliance On Key Personnel The Company's operations are dependent on the
continued efforts of senior management, in particular Richard J. Heckmann, the
Company's Chairman of the Board, President and Chief Executive Officer. The
Company does not presently have employment agreements with most members of
senior management, including Mr. Heckmann. Should any of the Company's senior
managers be unable or choose not to continue in their present roles, the
Company's prospects could be adversely affected.
Profitability Of Fixed Price Contracts A significant portion of the
Company's revenues are generated under fixed price contracts. To the extent
that original cost estimates are inaccurate, costs to complete increase,
delivery schedules are delayed or progress under a contract is otherwise
impeded, revenue recognition and profitability from a particular contract may
be adversely affected. The Company routinely records upward or downward
adjustments with respect to fixed price contracts due to changes in estimates
of costs to complete such contracts. There can be no assurance that future
downward adjustments will not be material.
Cyclicality, Seasonality And Possible Earnings Fluctuations The sale of
capital equipment within the water treatment industry is cyclical and
influenced by various economic factors including interest rates and general
fluctuations of the business cycle. A significant portion of the Company's
revenues are derived from capital equipment sales. While the Company sells
capital equipment to customers in diverse industries and in global markets,
cyclicality of capital equipment sales and instability of general economic
conditions, including
15
those currently unfolding in Asian markets, could have a material adverse
effect on the Company's revenues and profitability.
The sale of water and wastewater distribution equipment and supplies is also
cyclical and influenced by various economic factors including interest rates,
land development and housing construction industry cycles. Sales of such
equipment and supplies are also subject to seasonal fluctuation in northern
climates. The sale of water and wastewater distribution equipment and supplies
is a significant component of the Company's business. Cyclicality and
seasonality of water and wastewater distribution equipment and supplies sales
could have a material adverse effect on the Company's revenues and
profitability.
The Company's high-purity process piping systems have been sold principally
to companies in the semiconductor and, to a lesser extent, pharmaceutical and
biotechnology industries, and sales of those systems are critically dependent
on these industries. The success of customers and potential customers for
high-purity process piping systems is linked to economic conditions in these
respective industries, which in turn are each subject to intense competitive
pressure and are affected by overall economic conditions. The semiconductor
industry in particular has historically been, and will likely continue to be,
cyclical in nature and vulnerable to general downturns in the economy. The
semiconductor and pharmaceutical industries also represent significant markets
for the Company's water and wastewater treatment systems. Downturns in these
industries could have a material adverse effect on the Company's revenues and
profitability.
Operating results from the sale of high-purity process piping systems also
can be expected to fluctuate significantly as a result of the limited pool of
existing and potential customers for these systems, the timing of new
contracts, possible deferrals or cancellations of existing contracts and the
evolving and unpredictable nature of the markets for high-purity process
piping systems.
As a result of these and other factors, the Company's operating results may
be subject to quarterly or annual fluctuations. There can be no assurance that
at any given time the Company's operating results will meet or exceed stock
market analysts' expectations, in which event the market price of the Common
Stock could be adversely affected.
Potential Environmental Risks The Company's business and products may be
significantly influenced by the constantly changing body of environmental laws
and regulations, which require that certain environmental standards be met and
impose liability for the failure to comply with such standards. The Company is
also subject to inherent risks associated with environmental conditions at
facilities owned, and the state of compliance with environmental laws, by
businesses acquired by the Company. While the Company endeavors at each of its
facilities to assure compliance with environmental laws and regulations, there
can be no assurance that the Company's operations or activities, or historical
operations by others at the Company's locations, will not result in cleanup
obligations, civil or criminal enforcement actions or private actions that
could have a material adverse effect on the Company. In that regard, United
States federal and state environmental regulatory authorities have issued
certain notices of violation related to alleged multiple violations of
applicable wastewater pretreatment standards by a wholly owned subsidiary of
the Company (the "Subsidiary") at a Connecticut ion exchange resin
regeneration facility (the "South Windsor Facility") acquired by the Company
in October 1995 from Anjou International Company ("Anjou"). A grand jury
investigation concerning these conditions also is pending. The Subsidiary has
reached a tentative agreement with the United States Attorney's Office and the
United States Environmental Protection Agency ("USEPA") to plead guilty to a
single violation of the United States Clean Air Act, pursuant to which the
Subsidiary would pay a fine and the South Windsor Facility would undergo
annual environmental compliance audits by the USEPA for five years. The
Company believes that this settlement would conclude these matters in their
entirety; however, there can be no assurance that this settlement will become
final, and it is not expected that it would include a formal release of all
liabilities in this regard. As a consequence of such a settlement, the
Subsidiary would be debarred from United States government contracts for a
period of time that the Company currently expects to be brief. The Company
does not believe that the debarment would have a material adverse effect on
the Subsidiary or the Company. The Company has certain rights of
indemnification from Anjou which may be available with respect to these
matters. In addition, the Company's
16
activities as owner and operator of certain hazardous waste treatment and
recovery facilities are subject to stringent laws and regulations and
compliance reviews. Failure of these facilities to comply with those
regulations could result in substantial fines and the suspension or revocation
of the facility's hazardous waste permit. The Company serves as contract
operator of various municipal and industrial wastewater collection and
treatment facilities, which were developed and are owned by governmental or
private entities. Under those service contracts and applicable environmental
laws, the Company as operator may incur liabilities in the event those
facilities experience malfunctions or discharge wastewaters which do not meet
applicable permit limits and regulatory requirements. In some cases, the
potential for such liabilities depends upon design or operational conditions
over which the Company has limited, if any, control. In other matters, the
Company has been notified by the United States Environmental Protection Agency
that it is a potentially responsible party under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") at
certain sites to which the Company or its predecessors allegedly sent waste in
the past. It is possible that the Company could receive other such notices
under CERCLA or analogous state laws in the future. The Company does not
believe that its liability, if any, relating to such matters will be material.
However, there can be no assurance that such matters will not be material. In
addition, to some extent, the liabilities and risks imposed by environmental
laws on the Company's customers may adversely impact demand for certain of the
Company's products or services or impose greater liabilities and risks on the
Company, which could also have an adverse effect on the Company's competitive
and financial position.
Competition All of the markets in which the Company competes are highly
competitive, and most are fragmented, with numerous regional and local
participants. There are competitors of the Company in certain markets that are
divisions or subsidiaries of companies that have significantly greater
resources than the Company. The Company's process water treatment business
competes in the United States and internationally principally on the basis of
product quality and specifications, technology, reliability, price, customized
design and technical qualifications, reputation and prompt availability of
local service. The Company's wastewater treatment business competes in the
United States and internationally largely on the basis of the same factors,
except that pricing considerations can be predominant among competitors that
have sufficient technical qualifications, particularly in the municipal
contract bid process. In connection with the marketing of waterworks
distribution equipment and supplies, the Company competes not only with a
large number of independent wholesalers and with other distribution chains
similar to the Company, but also with manufacturers who sell directly to
customers. The principal methods of competition for the Company's waterworks
distribution business include prompt local service capability, product
knowledge by the sales force and branch management, and price. The Company's
consumer products business competes with companies with national distribution
networks, businesses with regional scope and local product assemblers or
service companies, as well as retail outlets. The Company believes that there
are thousands of participants in the residential water market. The consumer
products business competes principally on the basis of price, product quality
and "taste," service, distribution capabilities, geographic presence and
reputation. Competitive pressures, including those described above, and other
factors could cause the Company to lose market share or could result in
significant price erosion, either of which could have a material adverse
effect upon the Company's financial position, results of operations and cash
flows.
Potential Risks Related To Water Rights And Water Transfers The Company
recently acquired more than 47,000 acres of agricultural land (the
"Properties"), situated in the Southwestern United States, the substantial
majority of which are in Imperial County, California (the "IID Properties")
located within the Imperial Irrigation District (the "IID"). Substantially all
of the Properties are currently leased to third party agricultural tenants,
including prior owners of the Properties. The Company acquired the Properties
with appurtenant water rights, and is actively seeking to acquire additional
properties with water rights, primarily in the Southwestern and Western United
States. The Company may seek in the future to transfer water attributable to
water rights appurtenant to the Properties, particularly the IID Properties
(the "IID Water"). However, since the IID holds title to all of the water
rights within the IID in trust for the landowners, the IID would control the
timing and terms of any transfers of IID Water by the Company. The
circumstances under which transfers of water can be made and the profitability
of any transfers are subject to significant uncertainties, including
hydrologic risks of variable water supplies, risks presented by allocations of
water under existing and prospective priorities, and risks
17
of adverse changes to or interpretations of United States federal, state and
local laws, regulations and policies. Transfers of IID Water attributable to
water rights appurtenant to the IID Properties (the "IID Water Rights") are
subject to additional uncertainties. Allocations of Colorado River water,
which is the source of all water deliveries to the IID Properties, are subject
to limitations under complex international treaties, interstate compacts,
United States federal and state laws and regulations, and contractual
arrangements and, in times of drought, water deliveries could be curtailed by
the United States government. Further, any transfers of IID Water would
require the approval of the United States Secretary of the Interior. Even if a
transfer were approved, other California water districts and users could
assert claims adverse to the IID Water Rights, including but not limited to
claims that the IID has failed to satisfy United States federal law and
California constitutional requirements that IID Water must be put to
reasonable and beneficial use. A finding that the IID's water use is
unreasonable or nonbeneficial could adversely impact title to IID Water Rights
and the ability to transfer IID Water. Water transferred by the IID to
metropolitan areas of Southern California, such as San Diego, would be
transported through aqueducts owned or controlled by the Metropolitan Water
District, a quasi-governmental agency (the "MWD"). The transportation cost for
any transfer of IID Water and the volume of water which the MWD can be
required to transport at any time are subject to California laws of uncertain
application, some aspects of which are currently in litigation. The
uncertainties associated with water rights could have a material adverse
effect on the Company's profitability.
Technological And Regulatory Risks The water and wastewater treatment
business is characterized by changing technology, competitively imposed
process standards and regulatory requirements, each of which influences the
demand for the Company's products and services. Changes in regulatory or
industrial requirements may render certain of the Company's treatment products
and processes obsolete. Acceptance of new products may also be affected by the
adoption of new government regulations requiring stricter standards. The
Company's ability to anticipate changes in technological and regulatory
standards and to develop successfully and introduce new and enhanced products
on a timely basis will be a significant factor in the Company's ability to
grow and to remain competitive. There can be no assurance that the Company
will be able to achieve the technological advances that may be necessary for
it to remain competitive or that certain of its products will not become
obsolete. In addition, the Company is subject to the risks generally
associated with new product introductions and applications, including lack of
market acceptance, delays in development or failure of products to operate
properly.
There can be no assurance that the Company's existing or any future
trademarks or patents will be enforceable or will provide substantial
protection from competition or be of commercial benefit to the Company. In
addition, the laws of certain non-United States countries may not protect
proprietary rights to the same extent as do the laws of the United States.
Successful challenges to certain of the Company's patents or trademarks could
materially adversely affect its competitive and financial position.
Municipal Market A significant percentage of the Company's revenues is
derived from municipal customers. While municipalities represent an important
market in the water and wastewater treatment industry, contractor selection
processes and funding for projects in the municipal sector entail certain
additional risks not typically encountered with industrial customers.
Competition for selection of a municipal contractor typically occurs through a
formal bidding process which can require the commitment of significant
resources and greater lead times than industrial projects. In addition, demand
in the municipal market is dependent upon the availability of funding at the
local level, which may be the subject of increasing pressure as local
governments are expected to bear a greater share of the cost of public
services.
Year 2000 Risks The 'Year 2000' issue concerns the potential exposures
related to the automated generation of business and financial misinformation
resulting from the application of computer programs which have been written
using two digits, rather than four, to define the applicable year of business
transactions. Most of the Company's operating systems with Year 2000 issues
have been modified to address those issues; accordingly, management does not
anticipate any significant costs, problems or uncertainties associated with
becoming Year 2000 compliant. The Company is currently developing a plan to
assure that its other internal operating systems with Year 2000 issues are
modified on a timely basis. Suppliers, customers and creditors of
18
the Company also face similar Year 2000 issues. A failure to successfully
address the Year 2000 issue could have a material adverse effect on the
Company's business or results of operations.
Recent Developments
U.S. Filter is contemplating the issuance of $750 to $900 million of unsecured
redeemable or remarketable securities to qualified institutional buyers (as
defined in Rule 144A of the U.S. Securities Act of 1933, as amended) to
refinance existing indebtedness under U.S. Filter's Senior Credit Facility and
for general corporate purposes. The proposed issuance of such securities is not
expected to have a material impact on U.S. Filter's financial position or its
future results of operations.
Impact of Recently Issued Accounting Standards.
In June 1997, the Financial Accounting Standards Board issued a new
statement titled "Reporting Comprehensive Income." The new statement is
effective for fiscal years beginning after December 15, 1997. The Company is
currently evaluating its options for disclosure under this new standard and
will implement the statement during its fiscal year ending March 31, 1999.
In June 1997, The Financial Accounting Standards Board issued a new
statement titled "Disclosures about Segments of an Enterprise and Related
Information." The new statement is effective for fiscal years beginning after
December 15, 1997. The Company is currently evaluating its options for
disclosure under this standard and will implement the statement during its
fiscal year ending March 31, 1999.
19
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N/A
ITEM 2. CHANGES IN SECURITIES
Privately Placed Securities
Effective December 31, 1997, the Company issued 5,803,803 shares (the
"Shares") of its common stock, par value $.01 per share (the "Common Stock"),
to: The Bianco Family 1991 Trust, dated February 1, 1991; David J. Shimmon; BT
Capital Partners Inc.; Churchill ESOP Capital Partners; D&S Partners; Silicon
Valley Bancshares; L.H. Fine, Weinress, Franskson & Presson, Inc.; Gregory
Presson; in a tax-free merger pursuant to which the Company acquired all of
the outstanding capital stock of The Kinetics Group, Inc., a Delaware
Corporation. Such shares were issued in a transaction exempt from registration
pursuant to Section 4(2) of the United States Securities Act of 1933, as
amended. Pursuant to an agreement between the parties, such shares were
subsequently filed for registration for resale pursuant to a Registration
Statement on Form S-3 (Registration No. 333-45981).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
N/A
ITEM 5. OTHER INFORMATION
On February 9, 1998, the Company announced it had entered into an Agreement
and Plan of Merger (the "Merger Agreement") dated as of February 9, 1998,
among the Company, Palm Water Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Company ("Merger Sub"), and Culligan Water
Technologies, Inc., a Delaware corporation. Pursuant to the Merger Agreement,
Merger Sub will be merged with and into Culligan (the "Merger"). In connection
with the Merger, the Company will issue in exchange for each issued and
outstanding share (other than treasury shares and shares owned by the Company)
of Culligan common stock, par value $.01 per share 1.714 shares of common
stock, par value $.01 per share of the Company pursuant to formula.
The Merger will be accounted for as a pooling of interests and is intended
to qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended. Consummation of the Merger is subject to
customary regulatory approvals and the approval of the stockholders of each of
the Company and Culligan. The Merger is expected to be consummated in the
first half of fiscal 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
The followingThere are no exhibits are filed herewith or incorporated herein by
reference:
10.1 Employment Agreement between Thierry Reyners and USF Euroholding, S.A.,
a wholly-owned subsidiary of the Company
27.0 Financial Data Schedule
filing herewith.
Reports on Form 8-K
The Company filed one Current Report on Form 8-K during the quarter ended
December 31, 1997, dated December 9, 1997, reporting the consummation of the
Company's tender offer to purchase all of the outstanding ordinary shares
(including American Depository Shares, each representing one ordinary share)
of Memtec Limited.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED STATES FILTER CORPORATION
/s/ Kevin L. Spence
By: _________________________________
Kevin L. Spence
Executive Vice President, Chief
Financial Officer (Principal
Financial Officer and Duly
Authorized Officer)
Dated: May 12,14, 1998
21
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
10.1 Employment Agreement between Thierry Reyners and USF
Euroholding, S.A., a wholly-owned subsidiary of the
Company..................................................
22