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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: MARCH 31, 1997 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 (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (760) 340-0098
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
4 1/2% CONVERTIBLE SUBORDINATED NOTES NEW YORK STOCK EXCHANGE
DUE 2001 (NAME OF EACH EXCHANGE ON WHICH
(TITLE OF EACH CLASS) REGISTERED)
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 the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 23, 1997 was approximately $2,167,988,924.
The number of shares of Common Stock outstanding on June 23, 1997 was
80,377,604 shares.
Documents incorporated by reference:
Notice of 1997 Annual Meeting and Proxy Statement (Part III of Form 10-K).
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PART I
ITEM 1--BUSINESS
GENERAL
United States Filter Corporation (the "Company") is a leading global
provider of industrial and municipal water and wastewater treatment systems,
products and services, with an installed base of systems that the Company
believes is one of the largest worldwide. The Company is also a leading
provider of service deionization ("SDI") and outsourced water services,
including the operation of water and wastewater treatment systems at customer
sites. It is actively involved in the development of privatization initiatives
for municipal wastewater treatment facilities in the United States, Mexico and
Canada. The Company sells equipment and provides services to its customers
through more than 450 locations throughout the world. The Company also markets
a broad line of water distribution and sewer and stormwater equipment and
supplies through a network of over 110 service centers in the United States.
In addition, the Company sells, installs and services a wide range of water
treatment and water-related products for the residential and consumer markets.
The Company's principal executive offices are located at 40-004 Cook Street,
Palm Desert, California 92211 and its telephone number is (760) 340-0098. In
this report, references to the Company or U.S. Filter shall mean United States
Filter Corporation and its subsidiaries, unless the context requires
otherwise.
The Company has, since 1991, acquired and successfully integrated more than
75 United States based and international businesses. These acquisitions have
enabled the Company to expand significantly the segments of the water and
wastewater treatment industry in which it participates, to enter into
additional geographic areas and serve additional industries, municipalities,
governments and other customers and to expand its installed base, service
network and range of products and technologies. The Company intends to
actively seek additional acquisitions that enhance its geographic network,
customer base, and range of product offerings, technologies, markets and
industries served. The significant businesses acquired by the Company since
March 31, 1996 are described below.
PED. On January 6, 1997, the Company acquired the Process Equipment Division
("PED") of United Utilities Plc for approximately $166 million in cash,
including acquisition costs, and 1,320,312 shares of Common Stock of the
Company, subject to post-closing adjustments. The acquisition of PED provides
the Company with a significant manufacturing and distribution presence in the
municipal market for wastewater treatment equipment and systems, principally
in Europe and North America. PED's principal business units include Envirex, a
leading manufacturer of wastewater treatment equipment; General Filter, a
world leader in potable water treatment systems; Wallace & Tiernan, a world
leader in the manufacture of water and wastewater disinfection systems and
components; and Edward & Jones and Asdor, which design and manufacture
biosolids handling equipment.
WSMG. On December 2, 1996, the Company acquired the Water Systems and
Manufacturing Group ("WSMG") of Wheelabrator Technologies Inc. ("WTI") for
approximately $374 million in cash, including acquisition costs. The
acquisition of WSMG added to the Company's technological capabilities and
product offerings, particularly in the municipal and industrial wastewater
markets. WSMG products and systems are sold under brand names such as
Microfloc(TM), IX/ER(R), Totaltreat(TM), Memclean(TM), EVAP(TM), RMS(TM) and
ACMS(TM), and include such businesses as HPD, CPC, Rossmark, Darchet, Johnson
Screens and Westates Carbon. With close to half of WSMG's 1995 revenues
generated outside North America, principally in Europe and Asia, this
acquisition also expanded the Company's engineering and manufacturing
capabilities in those markets.
Distribution Businesses. Beginning in August 1996, the Company acquired four
businesses engaged primarily in marketing a broad line of water distribution
and sewer and stormwater collection equipment and supplies purchased from
independent manufacturers and suppliers, including underground pipe, pipe
fittings, valves, fire hydrants, water meters and related equipment. The
companies acquired were Davis Water and Waste
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Industries, Inc. ("Davis"), WaterPro Supplies Corporation ("WaterPro"), The
Utility Supply Group, Inc. ("USG"), and Sidener Supply Company ("Sidener").
These businesses serve customers in the continental United States and Mexico
through a total of more than 110 distribution facilities located in 29 states.
Another Davis unit added to the Company's capabilities in the design and
manufacture of wastewater treatment equipment. The Company issued a total of
10,417,194 shares of Common Stock in connection with these acquisitions.
EOS. On April 1, 1997, the Company acquired the contract operations and
privatization businesses ("EOS") of WTI for 2,291,059 shares of the Company's
Common Stock. EOS provides water and wastewater treatment maintenance and
operation services pursuant to approximately 130 contracts. In addition, EOS
is active in the development of privatization initiatives for municipal water
and wastewater treatment facilities. In 1995 EOS became the first company in
the United States to acquire a publicly-owned wastewater treatment plant
pursuant to Executive Order 12803. This plant is located in Franklin, Ohio.
U.S. Water. On April 11, 1997, the Company acquired United States Water
Company, Inc. ("U.S. Water"), a network of 20 service branches located
primarily in the midwestern United States serving the residential and
commercial water treatment markets. The Company issued an aggregate of 493,077
shares of Common Stock in the acquisition of U.S. Water, subject to post-
closing adjustment. The acquisition of U.S. Water's service network provides
the Company with a strong entry into the residential market for bottled water,
water softeners and whole-house and household point-of-use water treatment
products and systems.
In addition, since March 31, 1996, the Company has acquired a variety of
other businesses, principally in the water and wastewater treatment industry,
including a number of manufacturers of wastewater treatment equipment; a
wastewater treatment engineering company; European and United States
manufacturers and distributors of surface cleaning and preparation equipment;
a resource recovery business located in Los Angeles, California; a total of 16
SDI, including 12 distributors of the Company's Continental product line of
pre-engineered deionization systems, located in Alabama, Arkansas, Colorado,
Florida, Illinois, Kansas, Louisiana, Minnesota, New Mexico, Oklahoma,
Tennessee and Texas; and a number of small bottled water businesses for the
individual consumer market.
THE WATER TREATMENT INDUSTRY
Global population growth, economic expansion, scarcity of available water
resources, heightened public concern about water quality and growing
regulatory and legislative requirements have resulted in the continued growth
in demand for water and wastewater treatment. In addition to the need for
potable water, industrial companies require treated water for most
manufactured products, whether as an ingredient in the finished product or as
part of the manufacturing process. Accordingly, most manufacturers utilize
water treatment systems to purify their incoming, or "process", water. Public
water departments and private water companies, responsible for providing
potable water, employ water treatment technology to purify their water supply.
Furthermore, government regulations require most industrial companies and
municipalities to treat their outgoing wastewater.
Customers of the water and wastewater treatment industry can be classified
into three broad categories: (i) industrial and commercial businesses, which
include companies in such markets as pharmaceuticals, microelectronics,
automotive, power generation, chemical processing, oil and metal finishing;
(ii) municipal and private suppliers of public water and wastewater services;
and (iii) individual consumers of bottled water, household point-of-use
products, such as domestic filtration systems and parts, and water softening
and conditioning equipment.
INDUSTRIAL AND COMMERCIAL USERS
Industrial and commercial users have a significant need for treated water
because it is a necessary component in many products and industrial and other
processes. The quality of water varies dramatically across geographic regions,
and water contains impurities that, if untreated, can render it effectively
useless for most
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industrial purposes. The use of untreated water in manufacturing processes can
result not only in inconsistent product quality, but also in substantial
equipment degradation, which can lead to costly maintenance or replacement
costs. Consequently, most manufacturers treat their process water in order to
maintain a consistently acceptable degree of purity. For example, treated
water is an integral component of many consumer goods and is used in the
manufacture of pharmaceutical products, microelectronics and chemicals. Food
and beverage manufacturers require water with consistent quality to preserve
uniformity of taste and appearance in their products. As a result of these
process specifications, industrial customers often require a broad range of
treatment technologies to treat their process water.
In addition to treating their process water to ensure product quality,
industrial users are often required to treat their wastewater. Government
regulations regarding the disposal of aqueous industrial waste, combined with
public concern regarding industrial pollution, have led to increased awareness
on the part of businesses and public utilities as to the benefits of
wastewater treatment and waste minimization. In response to higher water
prices and rising wastewater discharge fees, industrial manufacturers have
also become aware of the cost-effectiveness of recycling their wastewater. As
a result of these factors, industrial companies increasingly require complex
systems and equipment to treat and recycle process water and wastewater.
MUNICIPAL USERS
Public awareness and governmental concern regarding the increasing scarcity
of water, the quality of drinking water, and the potential health hazards
associated with waste products discharged into the environment, have resulted
in legislation, regulation and enforcement requiring strict standards for
potable water and restrictions on the discharge of pollutants in municipal
wastewater.
The Company believes that, in many areas of the United States, aged
municipal water and wastewater treatment infrastructure is operating at or
near capacity, is in need of substantial capital expenditures and is not well-
equipped to satisfy increasing regulatory and legislative requirements. In
addition, many municipalities are experiencing reduced economic resources. The
Company believes that, as a result, many such customers are seeking innovative
solutions to their water treatment needs, such as improved technologies and
equipment, and various outsourcing and service options, such as contract
operations and privatization. Privatization involves the transfer of ownership
and operation of water and wastewater treatment facilities to companies
capable of providing such services on a long-term basis. Outside the United
States, aged infrastructure and, in many areas, underdeveloped infrastructure,
also require significant capital outlays and advanced technological approaches
to address the populations' potable water and sewage treatment needs.
INDIVIDUAL CONSUMERS
The market for individual consumers consists of bottled water, point-of-use
products, such as residential filtration systems and parts, and water
softening and conditioning equipment installed at the point of entry to a
household water system. Consumers' needs vary by geographic location as a
result of differing water qualities and level of economic development. This
segment of the industry is highly fragmented, and the Company believes there
are thousands of participants in the potable water and point-of-use products
markets.
PRODUCTS AND SERVICES
PROCESS WATER GROUP
The Company's Process Water Group provides single-source solutions for the
treatment of industrial process water and municipal drinking water through
what the Company believes to be the industry's broadest range of treatment
systems, services and proven technologies.
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Products
The Process Water Group designs, engineers, manufactures and installs pre-
engineered and customized systems for the treatment of industrial process
water and municipal drinking water utilizing a broad range of physical,
biological and chemical treatment technologies that can be combined and
configured to meet wide-ranging customer needs. The Company's process water
systems range from a pre-packaged 0.5 liter-per-minute laboratory unit to a
custom-designed boiler feedwater system that delivers thousands of gallons of
high-purity water per minute.
The separation processes and technologies utilized by the Company in process
water treatment equipment and systems include, among others, cross-flow
filtration (including reverse osmosis, ultrafiltration and microfiltration),
media filtration (including microfiltration, particle filtration and ceramic
filtration), ion exchange, continuous deionization ("CDI"), electrodialysis,
carbon adsorption, biological processes, oxidation, disinfection, aeration,
coagulation, flocculation, evaporation and crystallization. The Company's
proprietary CDI process uses ion exchange resins, ion exchange membranes and
an electrical current to produce high-purity water continuously, without the
need for strong chemicals such as sulfuric acid and caustic soda required in
typical ion exchange regeneration systems. The Company's Membralox(R) ceramic
membranes used in filtration permit the achievement of selective separations
in extreme operating environments.
The water treatment equipment and systems sold by the Process Water Group
are designed, engineered and assembled by the Company from one or more pieces
of equipment and a variety of other components manufactured by the Company or
purchased from third-party vendors. Larger industrial process water treatment
systems can be trailer- or skid-mounted, or permanently installed on the
customer's premises. Turnkey systems are generally designed and installed
within 24 months following acceptance of a customer order. On such projects,
the Company typically enters into lump-sum contracts under which the Company
receives payments throughout the contract term based on a predetermined
schedule.
The Company's principal United States manufacturing facilities for the
design, engineering, fabrication and assembly of reverse osmosis, media
filtration and ion exchange process water treatment systems are located in
Rockford, Illinois; Whittier, California; Colorado Springs, Colorado;
Plantsville, Connecticut; and St. Genevieve, Missouri. These facilities
aggregate approximately 392,300 square feet, and typically include sales,
service and office space in addition to manufacturing capacity. The Company's
CDI equipment is assembled at its facility in Lowell, Massachusetts. Smaller,
standardized ion exchange water treatment systems primarily for the laboratory
and medical markets are designed, engineered and assembled at the Company's
San Antonio, Texas location. Laboratory and analytical testing for the Process
Water Group is done at the Rockford and Lowell facilities, and research and
development is centered at Lowell.
The Process Water Group also manufactures and sells replacement parts
required to support treatment systems manufactured by both the Company and, to
a limited extent, its competitors. In addition, the Company markets
consumables, such as membranes, ion exchange resin and carbon, to its
customers.
The Company also produces and installs profile wire screens for groundwater
applications, oil and gas wells, food processing and coal/mineral processing.
These welded, continuous-slot screen products are designed and manufactured at
a 188,783 square foot facility in New Brighton, Minnesota.
The Process Water Group also assembles and sells water bottling plant
equipment, including semi-automatic, adjustable fill tables, bottling
machines, injection systems for minerals, chemicals and flavors, and ozone and
repressurization post-treatment systems for bacterial control in a 4,800
square foot facility in Santa Ana, California.
Services
SDI. The Company is a leading provider of SDI for industrial and commercial
users. SDI is a term given to portable water deionization treatment equipment
that uses ion exchange resins as the filtration medium to
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produce high-purity water and is designed to connect easily to a local water
supply. Resin is retrieved and transported by a Company service representative
to a Company regeneration plant for chemical recharging when it is exhausted.
In the United States, the Company operates 37 regeneration plants in 18
states. SDI is widely-used in commercial and industrial applications and
provides the Company with a recurring source of revenues and the opportunity
to market its systems and other services to its existing SDI customer base.
The Company, through its carbon reactivation facility located in Parker,
Arizona, also has the ability to recycle spent carbon utilized in water
treatment systems sold by the Company
Outsourced Water. In addition to SDI, the Company's North American service
business for process water treatment consists of short- and long-term
contracts for the construction and operation of customer-owned water treatment
systems, ongoing service and maintenance of existing systems and mobile water
treatment services. The Company's outsourcing programs involve standard
products and custom-designed systems installed and operated on the customers'
sites by the Company's trained service technicians. Service contracts range in
length depending on type of service from one to five years and are on a fixed
price basis, subject to adjustments for inflation and other cost increases.
The Company also offers customers the opportunity to outsource their water
purification requirements through Company-owned and operated on-site water
treatment systems. These contracts range in length from three to 20 years.
TWO. In 1995, the Company formed Treated Water Outsourcing ("TWO"), a 50/50
joint venture with Nalco Chemical Company ("Nalco"), to finance, build, own
and operate water treatment systems at customer sites under long-term
contracts. Nalco, a leader in water chemistry, supplies the chemicals
necessary for TWO's water treatment systems, while the Company supplies the
capital equipment, design and service functions to meet TWO's customers'
needs. TWO has access to Nalco's extensive sales force and customer base.
Nalco and the Company each provide advisory and administrative services in
order to assist TWO in bid and contract preparation and marketing.
Customer Markets
The markets for the Process Water Group's products and services span many
industries, as well as public water departments and private water companies
responsible for the supply of municipal drinking water. Systems and products
manufactured at United States facilities are also marketed and sold throughout
the world and, in particular, Europe, Asia and Latin America, as well as in
North America.
The Process Water Group's high-purity water treatment systems are marketed
to customers in the pharmaceutical/biotechnology, food and beverage and
medical/laboratory/research markets. Ultra-high-purity systems are offered for
the microelectronics industry, where the removal of contaminants at a
microscopic level is required. Other industrial markets for the Company's
process water treatment products and technologies include a wide variety of
applications in the automotive, chemical and petrochemical, metal finishing,
power generation, oil field and refinery, pulp and paper and mining
industries, all of which require improved or customized water in their
manufacturing or other industrial processes. The Company also offers
outsourced water services to customers in these markets, including financing,
operating and maintaining process water treatment systems at customer sites,
and providing mobile water treatment services on an emergency or short-term
basis.
The Process Water Group sells both custom-engineered and pre-assembled water
treatment systems to the municipal drinking water market. The Company offers
cryptosporidium giardia cyst removal, nitrate removal, reverse osmosis
desalination and water softening technologies, as well as intake screens,
aerators, clarifiers and disinfection, coagulation and chemical disinfection
feed equipment to this market.
WASTEWATER GROUP
The Company's Wastewater Group is a leading provider of systems and services
to treat and recycle municipal and industrial wastewater, biosolids treatment
products and technologies and liquid hazardous waste treatment and recovery
services.
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Products
The Wastewater Group designs, engineers, manufactures and installs
wastewater treatment equipment and systems for municipalities and industrial
and commercial customers utilizing a wide range of treatment technologies,
including many of those employed by the Company in process water applications.
See "Process Water Group--Products". Systems and products also are offered for
the treatment of municipal and industrial sludge and biosolids through
dewatering, thickening, conditioning, composting and drying techniques. In
addition, the Company provides systems to remove solids from liquid streams
through the use of self-cleaning bar filter screens, grinders, macerators,
conveyors and compactor systems. The Company also supplies material and
equipment to wastewater customers for the control and monitoring of hydrogen
sulfide odor. Time intervals for installation of completed equipment and
systems sold by the Wastewater Group can range from six months to two years
after acceptance of the Company's bid, depending upon the nature and
complexity of the project. Replacement parts and consumables are marketed and
sold to Wastewater Group customers as well.
The Company's broad range of technologies enables the Wastewater Group to
offer industrial customers products and systems for removing from liquid waste
streams heavy metals and other inorganic solids, organics, toxic wastes,
nitrogen compounds and solids, and free and emulsified grease and oil.
Evaporation and crystallization technologies are used to clean and recycle
wastewater, particularly in zero liquid discharge industrial applications. The
Company's significant disinfection and biological treatment capabilities,
including fixed-film and suspended growth systems that utilize microorganisms
for nitrification and denitrification, specific organic destruction, BOD/COD
reduction and nutrient removal, are critical in municipal wastewater and
sewage treatment. Biological, chemical, carbon adsorption and fluidized bed
technologies are offered to customers which require groundwater remediation
systems or landfill leachate treatment. Landfill leachate treatment systems
are designed to treat or eliminate wastewater drainage into groundwater and
surrounding waterways.
The Wastewater Group manufactures a variety of equipment and products for
inclusion in its wastewater treatment, biosolids treatment, groundwater
remediation, landfill leachate, fluid separation and odor control systems.
Components for these systems are also purchased from third party vendors. The
Company's principal North American facilities for the manufacture and assembly
of wastewater treatment products and systems are located in Madison, Indiana;
Woodstock, Illinois; Waukesha, Wisconsin; Rothschild, Wisconsin; Thomasville,
Georgia; Vineland, New Jersey; Waterboro, South Carolina; Ames, Iowa;
Edwardsville, Kansas; Warrendale, Pennsylvania; Billerica, Massachusetts; and
Sarasota, Florida. These facilities aggregate 840,556 square feet, including,
in most cases, sales and office space as well as manufacturing capacity.
Design and engineering for Wastewater Group products is performed at the
Warrendale location, as well as at facilities in Naperville, Illinois and
Pittsburgh, Pennsylvania. Laboratory and analytical testing, including
treatability studies, are conducted at the Warrendale and Rothschild plants,
and at Company facilities in Roseville, Minnesota and Vernon, California.
At a plant in St. Paul, Minnesota, the Company also manufactures automation
and control systems for municipal water and wastewater treatment equipment
using liquid level pressure and flow sensors, automatic pump
controllers/alternators and remote control technology capabilities.
Services
Contract Operations. The Company provides services under more than 130
municipal and industrial wastewater treatment plant maintenance and operation
contracts, including plant start-up assistance, plant operations and
maintenance, planning and management, training of plant supervisors, operators
and laboratory and maintenance personnel, refining process systems, management
systems for process control, and plant diagnostic evaluations and energy
audits. The Company also provides specialty repair and cleaning services for
industrial wastewater management equipment. The Company's maintenance and
operation contracts generally range in length from three to 10 years and often
provide the owner of the facility with renewal options. The majority of such
contracts are fixed price or lump sum contracts. In addition to operation and
maintenance of customer-owned facilities, the Company also offers the option
of Company-owned wastewater treatment facilities designed, constructed, owned
and operated by the Company adjacent to or within industrial customers'
facilities.
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Privatization. The Company is actively involved in the development of
privatization initiatives for municipal wastewater treatment facilities. In
July 1995, a subsidiary of EOS was the first to acquire a publicly-owned
wastewater treatment plant in the United States pursuant to Executive Order
12803 issued in 1992, which was intended to facilitate the privatization of
municipal facilities. The agreement provides for a subsidiary of the Company
to operate the 4.5 million gallon per day MCD Franklin Wastewater Treatment
Plant in Franklin, Ohio for a period of 20 years and to expand the facility as
needed to meet future population growth.
Resource Recovery. Another component of the Company's service business is
its hazardous waste treatment facilities located in Roseville, Minnesota and
Los Angeles, California. The Roseville facility operates a federal Resource
Conservation and Recovery Act ("RCRA") permitted Part B centralized treatment
and recovery facility. The Los Angeles facility operates a similar RCRA Part B
facility. These facilities receive and treat wastes generated primarily by the
metal finishing industry and printed circuit board manufacturers, and recover
from these wastes and sell reusable chemicals and metals. These facilities
offer the Company's customers a cost-effective recovery approach that reduces
processing costs, the quantity of sludge generated and the environmental
exposure associated with industrial waste. The Company also operates a
facility in Parker, Arizona, which is authorized under Section 3005 of RCRA
for the reactivation of spent carbon. The Company is currently negotiating the
final terms and conditions for a RCRA Part B permit for such facility.
Customer Markets
Municipalities in North America, Europe, Asia and Latin America are a
significant market for systems and products manufactured by the Wastewater
Group in the United States. Municipal sewage plants often utilize three stages
of treatment (primary, secondary and tertiary) before discharge to the
environment. The Company offers wastewater and biosolids treatment systems to
address those requirements. In addition, the Company's media filtration,
reverse osmosis and ion exchange technologies have the capability of adding a
fourth stage of treatment of municipal wastewater by removing remaining
contaminants to a purity level that allows water to be recycled and reused in
industrial applications. These technologies can reduce the impact of
industrial growth in communities where water tables are low.
Systems produced by the Wastewater Group are marketed to a variety of
industrial customers. Markets include the pulp and paper, chemical,
petrochemical, mining, power generation, meat and poultry, food processing,
automotive, metal finishing and microelectronics industries. The recycle/reuse
systems offered by the Company permit zero liquid discharge applications,
providing industrial customers with the ability to circulate treated water
back into plant processes, thereby reducing water usage, operating costs and
discharges to the environment. In addition, prepackaged sewage treatment
systems are sold to commercial and residential land developers, as well as
industrial plants.
DISTRIBUTION GROUP
The Company's Distribution Group markets a broad line of water distribution
and sewer and stormwater collection equipment and supplies, including
underground pipe, pipe fittings, valves, fire hydrants, water meters and other
related equipment necessary to underground construction. The Distribution
Group purchases more than 20,000 products from approximately 3,000
manufacturers and suppliers. Certain products manufactured by the Company also
are sold by the Distribution Group, as well as through the Company's other
sales channels. The Company believes it is one of the largest suppliers of
water distribution and sewer products in the United States.
The Distribution Group's products are marketed primarily to contractors and
municipalities through a network in the United States of more than 110 service
centers located in 29 states. Each service center covers a radius of 50 to 200
miles, and maintains an inventory of water and sewer products that are sold to
the industry at large. More than 95% of orders are filled and shipped from the
service centers on the date that the order is requested by the customer.
Products are transported to customers through a fleet of more than 300
vehicles, with larger orders being shipped direct from the manufacturer.
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All of the Distribution Group's locations are electronically linked through
on-line systems. These systems give the individual service centers the ability
to utilize inventory located throughout the United States to service their
accounts. The system also includes an inventory management system which
ensures that sufficient levels of inventory are available at each service
center. The Distribution Group also offers municipalities on-line computer
access that allows the customer to place orders, review quotations, check
inventory and shipment status and confirm invoices.
The Distribution Group also provides various services to its customers,
including automatic meter reading installations; water meter testing, repair
and certification; fire hydrant maintenance and replacement; manhole
rehabilitation; pipeline taps; valve installations, repairs, replacement and
testing; and on-the-job heavy duty polyethylene fusion capabilities.
CONSUMER PRODUCTS GROUP
The Company sells, installs and services a wide range of products which
address household water problems. These products include water softening and
conditioning equipment and other products installed at the point of entry to a
residential water system, designed to soften hard water by reducing or
removing minerals through ion exchange technology. The Consumer Products Group
also sells point-of-use filtration units for improving the quality of drinking
water, which utilize media filtration, reverse osmosis and/or carbon filter
processes. These products are designed to be installed under sinks or directly
at the point of use. Point-of-use systems are designed to reduce or remove
from household water dirt and other sediment, rust, lead, chlorine, sulfur,
off-tastes, odors, and other chemicals and microscopic impurities, including
parasitic protozoan cysts.
Through the Consumer Products Group's 25 service branches located
principally in the Midwestern United States, Company representatives provide
solutions to household water problems through testing and analysis, product
selection, installation, monitoring and service. The Company also offers
rental and financing of systems to residential customers.
Point-of-entry systems are manufactured at the Company's facilities in
Rockford, Illinois, as well as purchased from third party vendors. Point-of-
use products sold and installed by the Consumer Products Group are purchased
from third parties. Testing and analysis of household water samples is
performed at Process Water Group laboratories in Rockford, Illinois.
The Company also sells water in five-gallon bottles on a route basis through
its residential service branches, and in a limited number of shopping centers
on a walk-up basis. Purified drinking water is produced and bottled in five-
gallon bottles by the Company at four bottling locations in the United States.
The Consumer Products Group's representatives typically pick up for refill and
deliver the five-gallon bottles to a customer's home or office on a regular
route. Customers rent the bottled water dispensers from the Company. In
addition, at a small number of locations in Texas and Florida, the Company
also sells purified water by refilling customer-supplied containers at
shopping center locations. Consumer water filtration and water-quality related
products are also sold at these locations. The Company currently does not
participate in any other segment of the bottled water market.
INTERNATIONAL
The Company has substantial sales and significant operations outside the
United States, principally in Europe, Asia, Latin America and the Middle East.
Information regarding the amounts of revenue, operating profit and
identifiable assets attributable to each of the company's geographic areas and
export sales is incorporated herein by reference to Note 17 of the Notes to
Consolidated Financial Statements included in Item 8 of this Form 10-K.
Europe, the Middle East and Africa
Process water and wastewater treatment equipment and systems are designed,
engineered, serviced and manufactured at over 50 facilities in 13 countries
throughout Europe, the Middle East and Africa. This broad
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presence allows the Company to provide systems that respond to important local
differences in environmental legislation, water quality, availability and
cost. A wide range of separation processes and treatment technologies are
employed in these systems, including most of those utilized by the Process
Water Group and the Wastewater Group in the United States. The Company's
systems and products are sold internationally to municipalities for drinking
water purification, sewage treatment and sludge handling. The Company also has
a wide variety of industrial customers in the pharmaceutical, food and
beverage, power generation, metal finishing, chemical, petrochemical and
automotive markets.
Manufacturing facilities in Europe include plants in Tarbes, France; Almelo,
the Netherlands; Stoke-on-Trent, United Kingdom; Ransbach-Baumbach, Germany;
Dublin, Ireland; Soresina, Italy; and Madrid, Spain.
The Company also provides SDI for industrial and laboratory users throughout
western Europe, operating regeneration plants in the United Kingdom, France,
the Netherlands, Germany and Spain. Also as part of its service business in
Europe, the Company operates two municipal water treatment plants in Italy
serving more than 1.5 million people under long-term contracts.
Asia
Through manufacturing and regeneration facilities in Singapore and Malaysia,
the Company supplies a variety of process water treatment products and
services, including SDI, to microelectronics manufacturers and other
industrial customers in Asia. The Company also produces its profile wire
screen products for distribution throughout Asia from its manufacturing
facilities in Brisbane, Australia; Hyderabad, India; Ahmedabad, India; and
Yokohama, Japan. The Company serves the wastewater market for industrial
customers in Asia through the design and manufacture of wastewater treatment
systems at locations in Singapore and Malaysia, and serves the municipal
wastewater treatment market through two design and manufacturing facilities in
Taiwan. In addition, water, wastewater and sewage treatment systems designed
and manufactured at these locations and in the United States and Europe are
marketed through sales offices in Hong Kong; Singapore; Malaysia; Australia;
The Peoples Republic of China; The Republic of China (Taiwan); Japan; and
Korea.
Latin America
The Company markets process water and wastewater treatment systems
engineered and assembled by the Process Water Group and the Wastewater Group,
through sales locations in Mexico, Venezuela, Brazil, Puerto Rico and
Argentina. In Mexico, the Company also has a manufacturing facility where
pumps and other equipment are made for sale around the world. Additionally,
through a joint venture with a Mexican partner, the Company operates an SDI
business that is focused on industrial and commercial customers throughout
Mexico. The Company also owns and operates two concessions for wastewater
treatment facilities under long term contracts for the cities of Cuernavaca
and Yautepec, Mexico. These wastewater systems were designed, manufactured,
and installed by the Company.
OTHER BUSINESSES
The Company also manufactures a line of nonpolluting surface finishing
systems for use by a variety of industrial customers, including foundries,
steel processors, aircraft manufacturing, automobile producers and rubber and
plastics producers, in cleaning and finishing metal and other materials. The
Company manufactures portable, fully-enclosed units for finishing difficult-
to-clean surfaces such as concrete surfaces, ship decks and hulls. These
systems capture the emissions particulate generated by such operations,
preventing contamination of the environment. In addition, spare parts for
materials cleaning systems are produced. The Company also manufactures high-
alloy combustion grates used in the high-temperature furnaces of trash-to-
energy facilities.
10
<PAGE>
SALES AND MARKETING
The Company maintains a worldwide distribution network of sales and service
facilities, a global network of manufacturers' representatives and
international representatives, and numerous distributors and licensees.
In the United States, sales and marketing responsibilities for the Process
Water Group, Wastewater Group and Consumer Products Group are divided across
five geographic regions in the U.S. Each industrial, commercial and municipal
sales prospect is reviewed to determine which of the Company's engineering and
manufacturing resources should be utilized to best meet the customer's needs.
Technical support is available across the Company to assist marketing
personnel in working with the end-user to select the appropriate technology
for a given application.
Process Water Group products and systems are sold predominantly through a
direct sales force. The Wastewater Group's sales are made principally through
a network of independent manufacturer's representatives.
The Company's manufacturer's representatives are independent businesses
which are paid on a commission basis and in certain cases have the exclusive
right to sell the Company's products and systems in a specified geographical
area. The Company provides both engineering and marketing support to its
manufacturer's representatives.
A portion of the Company's revenues are derived from recommendations by
independent engineers and consultants who advise the ultimate customer. Both
the Company's manufacturers' representatives and direct sales force work with
engineers, consultants and customers to encourage them to specify the
Company's products.
Sales of process water, wastewater and sewage treatment systems and products
outside the United States are conducted through a direct sales force and
international representatives. In addition, a number of licensees manufacture
and sell certain of the Company's products in Europe, Asia, Africa, Australia
and Mexico. The Company provides technical support to these licensees and is
either paid a royalty on sales or participates in the sale directly. For the
fiscal years ended March 31, 1995, 1996 and 1997, the Company's sales outside
the United States were approximately $112.8 million, $212.9 million and $419.5
million, respectively, and accounted for approximately 19%, 26% and 30%,
respectively, of the Company's total sales.
The Distribution Group's equipment and supplies are marketed by Company-
employed salesmen. Salesmen call directly on customers within their assigned
territories and work with architects, engineers and government agencies to
assist customers in determining their product needs.
RAW MATERIALS AND SUPPLIES
Raw materials, primarily steel, filtration media, ion exchange resins,
membranes and component parts such as pumps and valves, and products purchased
for resale by the Distribution Group, are available from a number of sources.
The Company has not experienced difficulty in obtaining the materials,
components and supplies used in its operations.
11
<PAGE>
BACKLOG AND SEASONALITY
The Company had the following backlog as of March 31, 1996 and 1997, which
includes capital equipment purchase orders and revenues expected to be
generated during the next 12 months under certain long-term contracts. The
capital equipment orders are scheduled for delivery and installation during
the following 12 months and are believed by management to be firm.
<TABLE>
<CAPTION>
DATE AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
March 31, 1996................ $219,124
March 31, 1997................ $644,535
</TABLE>
The rate of booking new orders varies from month to month. In addition, the
orders have varying delivery schedules, and the Company's backlog as of any
particular date may not be representative of actual revenues for any
succeeding period. There is no material backlog for water distribution
equipment and supplies since these orders normally are shipped within one to
ten days following receipt of an order. Backlog also is not a meaningful
measure of ongoing business in the residential water business.
Certain of the Company's contracts for engineered products and services
provide for progress payments during the engineering and manufacturing period.
The balance is due upon acceptance or start-up, or, in the case of most
municipal and governmental purchasers, 90 to 180 days after delivery and
installation. Demand for most of the Company's products and services is not
typically affected by seasonal changes. The Distribution Group's operations
are affected by winter weather in parts of the United States, and generally
can be expected to generate lower sales in the third and fourth fiscal
quarters.
PRODUCT DEVELOPMENT; PATENTS, TRADEMARKS AND LICENSES
In order to provide its customers with cost-effective water treatment
solutions, the Company offers a wide variety of filtration and purification
technologies. The Company uses its own research and development, augmented by
customer-funded, vendor-funded and government-funded research spending, in
order to provide its customers with advanced products. In addition, the
Company uses its analytical laboratories to perform water analyses and to test
the effectiveness of filtration media and techniques in order to enhance the
Company's capability to design systems tailored specifically for the
particular needs of customers. The Company's product development expenditures
for the fiscal years ended March 31, 1995, 1996 and 1997 were approximately
$5.5 million, $6.5 million and $8.3 million, respectively.
The Company currently owns a significant number of patents in the United
States and in various countries worldwide. Although the Company believes that
the patents and trademarks associated with the Company's various product lines
are of value, it does not consider any of them to be essential to its
business.
COMPETITION
The water and wastewater treatment industry is fragmented, with numerous
regional participants in the United States and in countries throughout the
world who are limited in their geographic scope. This fragmentation is
primarily due to local differences in water quality and supply, different
levels of demand for water resulting from varying concentrations of industry
and population, and local governmental regulation. Most participants in the
water and wastewater treatment industry provide a limited number of treatment
technologies, a limited number of products or services, or focus on a
particular industry. While the number of industry participants ranges from
several large companies to hundreds of small local companies, there are few
competitors in the industry that offer a full range of water and wastewater
treatment equipment, technologies and services. The Company believes it offers
the industry's broadest range of cost-effective treatment systems, services
and proven technologies.
12
<PAGE>
The water and wastewater treatment markets are highly competitive. The
Company knows of no reliable statistics that provide a basis from which to
estimate the Company's relative competitive position in these markets. The
principal methods of competition in the water and wastewater treatment markets
in which the Company competes are technology, service, price, product
specifications, customized design, product knowledge and reputation, ability
to obtain sufficient performance bonds, timely delivery, the relative ease of
operation and maintenance and the prompt availability of replacement parts. In
the municipal contract bid process, pricing and the ability to meet bid
specifications are the primary considerations. For privatization and
outsourcing projects, performance guarantees are also a factor. While no
competitor is considered dominant, there are competitors that are divisions or
subsidiaries of larger companies which have significantly greater resources
than the Company.
In connection with the marketing of water distribution equipment and
supplies, the Company competes with a large number of independent wholesalers,
other distribution chains similar to the Company and manufacturers who sell
directly to customers. The principal methods of competition include product
knowledge by the sales force, prompt delivery following receipt of an order,
local service and price. Due to the various sources and methods of competition
and types of products sold by the Company, the Company knows of no reliable
statistics upon which there might be based an estimate of the Company's
relative competitive position in this market. However, the Company believes
that it is one of the largest distributors of water distribution equipment and
supplies in the United States based on annual revenues from sales of such
products.
The residential water market is also highly competitive and fragmented. The
Company competes in this market with companies with national distribution
networks, businesses with regional scope and local product assemblers or
service companies, as well as retail outlets. The principal methods of
competition in this market are distribution capabilities, product
specifications, product knowledge, reputation, technology, service and price.
The Company believes that there are thousands of participants in the household
water market.
PRODUCT WARRANTIES; INSURANCE
The Company generally offers one-year product warranties on its equipment.
In some instances the warranties may be for shorter or longer periods,
consistent with market practices. Performance guarantees apply to most of the
Company's systems. The costs incurred by the Company to date under its product
warranties and systems guarantees have not been material.
The Company maintains insurance for itself and its principal United States
based and international subsidiaries in amounts and with coverages which the
Company believes to be adequate and appropriate for the covered risks.
EMPLOYEES
As of March 31, 1997, the Company had approximately 10,000 full-time
employees assigned to the Company's various worldwide offices and facilities.
Certain of the Company's United States employees at Rockford, Illinois;
Whittier, California; Washington, Illinois; Granite City, Illinois; and
Warren, Michigan are covered by collective bargaining agreements, the terms of
which expire, respectively, on April 1, 1999, April 30, 1998, April 14, 1998,
November 30, 1997 and July 30, 1999. Certain of the Company's non-United
States based employees also are covered by collective bargaining agreements.
The Company believes that its relationships with the unions and with its non-
represented employees are good.
13
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard J. Heckmann............. 53 Chairman of the Board of Directors, Chief
Executive Officer and President
Michael J. Reardon.............. 43 Executive Vice President
Nicholas C. Memmo............... 35 Executive Vice President--Process Water
Group
Thierry Reyners................. 52 Executive Vice President--European Group
Andrew D. Seidel................ 35 Executive Vice President--Wastewater Group
Harry K. Hornish, Jr. .......... 52 Executive Vice President--Distribution
Group
Kevin L. Spence................. 40 Vice President and Chief Financial Officer
Damian C. Georgino.............. 36 Vice President, General Counsel and
Secretary
Tim L. Traff.................... 38 Senior Vice President
John S. Swartley................ 58 Senior Vice President--Corporate
Development
James W. Dierker................ 34 Vice President, Controller and Treasurer
Michael E. Hulme, Jr. .......... 35 Assistant General Counsel and Assistant
Secretary
</TABLE>
Richard J. Heckmann was elected Chairman of the Board of Directors, Chief
Executive Officer and President of the Company on July 16, 1990. Mr. Heckmann
was a Senior Vice President at Prudential-Bache Securities in Rancho Mirage,
California from January 1982 to August 1990. He joined the U.S. Small Business
Administration in 1977 and served as Associate Administrator for Finance and
Investment from 1978 to 1979. Prior thereto he was founder and Chairman of the
Board of Tower Scientific Corporation, a manufacturer of custom prosthetic
devices, which was sold to Hexcel Corporation in 1977. Mr. Heckmann is a
member of the management board of TWO. He is also a director of USA Waste
Services, Inc. and K2, Inc.
Michael J. Reardon was appointed Executive Vice President of the Company in
June of 1995, having previously served as Executive Vice President and Chief
Operating Officer, and prior to that as the Chief Financial Officer and
Secretary of the Company. From May 1995 to April 1996, Mr. Reardon served as
President of Arrowhead Industrial Water, Inc. a subsidiary of the Company. He
became President and General Manager of Illinois Water Treatment, Inc., a
subsidiary of the Company, in March 1992. From 1981 to July 1990 he was Chief
Financial Officer of The C&C Organization, a company engaged in restaurant
ownership, management and construction. Mr. Reardon is a certified public
accountant and was a senior auditor with Arthur Andersen & Co. from 1978 to
1981. Mr. Reardon is a member of the management board of TWO. In June 1978,
Mr. Reardon received a B.S. in Business Administration from California State
Polytechnic University, and from 1994 to 1995 attended the Kellogg Management
Institute, Northwestern University.
Nicholas C. Memmo was appointed Executive Vice President--Process Water
Group on July 1, 1995, having previously served as Senior Vice President and
General Manager of Ionpure since March 7, 1994. He had previously been Senior
Vice President--Sales & Marketing since December 8, 1992. Mr. Memmo had also
been the senior operating officer of U.S. Filter/Whittier, Inc. since January
1992, having previously been Marketing Manager of that company since January
1991. He was appointed General Manager in April 1992. Mr. Memmo was employed
from July 1984 to September 1988 with Hercules Incorporated, a New York Stock
Exchange specialty chemical and aerospace company, in sales, marketing and
distribution positions. Mr. Memmo received a B.S. degree in chemical
engineering from Drexel University. Between his employment with Hercules and
the Company, he completed an M.B.A. program at the John E. Anderson Graduate
School of Management at UCLA.
Thierry Reyners was appointed Executive Vice President--European Group on
July 1, 1995, having previously served as Senior Vice President--Europe since
March 7, 1994. He had previously been Senior Vice President--European Sales
since December 1, 1993, the date the Company acquired Ionpure. Mr. Reyners
served as Vice President and General Manager--Europe of Ionpure Technologies
Corporation from 1990 to December
14
<PAGE>
1993, and from 1981 through 1989 he was employed by Millipore Corporation,
including as European Area Manager from 1987 through 1989. Mr. Reyners has a
Ph.D. in Organic Chemistry from the Research Institute in Natural Substances,
University of Orsay, France and an M.B.A. from INSEAD, Fontainebleau, France.
Andrew D. Seidel was appointed Executive Vice President--Wastewater Group on
July 1, 1995, having previously served as Senior Vice President--Wastewater
Group and General Manager of U.S. Filter, Inc., Warrendale, Pennsylvania,
since September 28, 1993. He had previously served as Vice President--
Membralox Group since December 8, 1992, and had been General Manager of
Membralox since March 1992. From October 1991 to March 1992, Mr. Seidel was
Marketing Manager for U.S. Filter/Marlboro, Inc. From October 1990 until his
employment by the Company, he was a senior consultant with Deloitte & Touche
Management Consulting. Mr. Seidel had various responsibilities with Hercules
Incorporated from 1984 through 1988, including technical marketing and product
management at Hercules Specialty Chemical Company and Quality Control/Process
Engineering in Hercules Aerospace Company. Mr. Seidel received a B.S. degree
in chemical engineering from the University of Pennsylvania. Between his
employment with Hercules and Deloitte & Touche, he completed an M.B.A. program
at the Wharton School, the University of Pennsylvania.
Harry K. Hornish, Jr. was appointed Executive Vice President--Distribution
Group on February 20, 1997. Mr. Hornish began his career in distribution in
1974 with Owens Corning Fiberglas Corporation ("OCF"). In 1987, Mr. Hornish
was hired by CertainTeed Corporation ("CertainTeed") as President of their
Building Materials Distribution Group, which was sold by CertainTeed in 1990.
In November 1991, CertainTeed named Mr. Hornish as President of its Utility
Supply Group, Inc. ("USG"). Mr. Hornish led a buyout of USG from CertainTeed
in 1994. Mr. Hornish continued to serve as President of USG until October 25,
1996, when the Company acquired USG. Mr. Hornish holds a B.A. in Political
Science and Business Administration from Marshall University.
Kevin L. Spence was appointed Vice President of the Company on December 8,
1991 and has been Chief Financial Officer of the Company since January 6, 1992
and was Treasurer from February 17, 1992 until June 9, 1995. Mr. Spence is a
certified public accountant and was with KPMG Peat Marwick LLP from 1978 to
September 1989 and a partner with that firm from July 1988. Mr. Spence
received a B.S. in Business Administration from the University of Southern
California.
Damian C. Georgino was appointed Vice President, General Counsel and
Secretary of the Company on August 4, 1995. From September 1992 through July
31, 1995, he served as General Attorney with Aluminum Company of America
("Alcoa"), where his primary responsibilities included mergers and
acquisitions and serving as chief legal counsel for several growing
international manufacturing and service businesses. From June 1988 through
August 1992, Mr. Georgino was an Attorney with Alcoa, where his primary
responsibilities included securities, mergers and acquisitions and corporate
finance. From June 1986 through May 1988, he was an associate with Houston
Harbaugh P.C. Mr. Georgino received a B.S. degree in economics and political
science from Dickinson College in 1982 and received a JD/MBA joint degree from
Emory University.
Tim L. Traff was appointed a Senior Vice President of the Company on
December 8, 1992, having previously been Vice President--Corporate Development
since March 1992. He had been President of Traff Capital Management, a money
management company, since 1989. From 1985 to 1988 he was an analyst at SIT
Investment, a money management company. Mr. Traff received a B.S. degree in
business economics from the University of Minnesota.
John S. Swartley was appointed Senior Vice President--Corporate Development
on July 1, 1995, having previously served as a Vice President since July 1994,
when the Company acquired Liquipure Technologies, Inc. Mr. Swartley had
started a new business in 1988 with venture capital backing from Warburg,
Pincus Capital Company, L.P., and made a series of water treatment company
acquisitions that ultimately became Liquipure. From 1982 through 1987 he was
at Olin Corporation as president of its consumer products group, which dealt
mainly with pool chemicals. From 1965 through 1982 he was with General Foods
in various marketing,
15
<PAGE>
development and management positions. He received a degree in chemical
engineering from Lehigh University and an M.B.A. degree from Harvard Business
School.
James W. Dierker was appointed Vice President, Controller and Treasurer on
June 9, 1995. From July 1985 to June 1995 he was with KPMG Peat Marwick LLP,
and was a senior manager with that firm at the time of his departure. Mr.
Dierker is a certified public accountant, and received a B.S. degree in
business administration with an emphasis in accounting from California State
Polytechnic University.
Michael E. Hulme, Jr. was appointed Assistant General Counsel and Assistant
Secretary on February 13, 1996. From December 1994 through January 1996, he
served as Vice President/Corporate Counsel of Forte Hotels, Inc., formerly a
wholly owned subsidiary of Forte Plc, and from October 1992 through December
1994 as Corporate Counsel of Forte Hotels, Inc. His primary responsibilities
included hotel and real estate development, acquisition and sale transactions.
From 1989 through 1992 he was a business associate with the law firm of Duckor
& Spradling, and from 1986 through 1989 he was an associate with the law firm
of Best, Best & Krieger. Mr. Hulme received a B.A. degree in economics from
the University of California at Davis in 1983 and received a JD from the
University of Southern California in 1986.
ITEM 2--PROPERTIES
The Company has a global network of approximately 470 sales and service
facilities and 63 manufacturing plants. Because the Company has grown by
acquisition, the Company's facilities vary in terms of age and condition, but
management generally believes that these facilities are suitable and adequate
for their respective operations. Many of the Company's manufacturing
facilities operated at or near their productive capacities during fiscal 1997.
The Company's corporate headquarters is located in a Company-owned office
building in Palm Desert, California, with 18,000 square feet of floor space. A
description of the Company's other principal facilities is included in Item 1
of this Form 10-K. Approximately 20% of the Company's manufacturing facilities
are owned, with the remainder under leases expiring from June 30, 1997 through
April 30, 2026, in most cases with Company options to renew. Of the Company's
37 regeneration plants, 11 are owned and the majority of the remainder are
held under short-term leases. In most cases, the Company's 63 manufacturing
and 37 regeneration plants include sales and service offices. The Company also
owns or leases various small production facilities not described in this Form
10-K. A small number of the Company's facilities are subject to mortgages
securing notes payable due in fiscal years 1999 and 2010. See Note 11 of Notes
to Consolidated Financial Statements included in Item 8 of this Form 10-K.
ITEM 3--LEGAL PROCEEDINGS
Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the Company, including those pertaining to environmental,
product liability and safety and health matters. While the amounts claimed may
be substantial, the ultimate liability cannot now be determined because of the
considerable uncertainties that exist. Therefore, it is possible that results
of operations or liquidity in a particular period could be materially affected
by certain contingencies. However, based on facts currently available,
management believes that the disposition of matters that are pending or
asserted will not have a materially adverse effect on the financial position
of the Company. Information regarding certain environmental contingencies is
incorporated herein by reference to Item 7 of this Form 10-K under the caption
"Certain Trends and Uncertainties--Potential Environmental Risks".
ITEM 4--SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
16
<PAGE>
PART II
ITEM 5--MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE AND HOLDERS OF COMMON STOCK
The Common Stock of the Company is listed on the New York Stock Exchange and
traded under the symbol "USF." The following table sets forth for the fiscal
periods indicated the high and low sales prices of the Common Stock as
reported on the New York Stock Exchange Composite Tape. No cash dividends were
paid on the Common Stock during such periods. The amounts below have been
adjusted to reflect a three for two split of the Common Stock effective July
15, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal year ended March 31, 1996
1st Quarter................................................. $13.08 $ 9.92
2nd Quarter................................................. 16.08 12.50
3rd Quarter................................................. 18.00 13.42
4th Quarter................................................. 19.33 16.42
Fiscal year ended March 31, 1997
1st Quarter................................................. $23.75 $18.42
2nd Quarter................................................. 34.75 18.50
3rd Quarter................................................. 36.25 30.38
4th Quarter................................................. 39.00 28.88
</TABLE>
On June 23, 1997, the last reported sales price for the Common Stock as
reported on the New York Stock Exchange Composite Tape was $28.38 per share.
The number of holders of record of the Common Stock on June 23, 1997 was
approximately 3,312.
DIVIDENDS
The Company currently intends to retain earnings to provide funds for the
operation and expansion of its business and accordingly does not anticipate
paying cash dividends on the Common Stock in the foreseeable future. Any
payment of cash dividends on the Common Stock in the future will depend upon
the Company's financial condition, earnings, capital requirements and such
other factors as the Board of Directors deems relevant. Under the Company's
credit agreement with lenders for whom The First National Bank of Boston is
acting as Managing Agent, no dividends may be paid on the Common Stock without
the consent of lenders whose lending commitments constitute a majority of the
lending commitments thereunder.
17
<PAGE>
ITEM 6--SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,(1)
----------------------------------------------
1993(2) 1994(3) 1995(4) 1996(5) 1997(7)
-------- ------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues....................... $416,725 475,236 600,832 812,322 1,376,601
Cost of sales.................. 326,618 376,441 463,959 606,226 1,026,248
-------- ------- ------- ------- ---------
Gross Profit............... 90,107 98,795 136,873 206,096 350,353
Selling, general and
administrative expenses....... 84,058 101,153 108,826 160,714 261,859
Merger expenses: -- -- -- -- 5,581
-------- ------- ------- ------- ---------
84,058 101,153 108,826 160,714 267,440
-------- ------- ------- ------- ---------
Operating income (loss).... 6,049 (2,358) 28,047 45,382 82,913
Other income (expenses):
Interest expense........... (4,044) (4,486) (8,058) (15,212) (22,585)
Other...................... 915 (7,335) 1,280 4,979 3,350
-------- ------- ------- ------- ---------
(3,129) (11,821) (6,778) (10,233) (19,235)
-------- ------- ------- ------- ---------
Income (loss) before income
tax expense (benefit) and
extraordinary items....... 2,920 (14,179) 21,269 35,149 63,678
Income tax expense (benefit)... 1,237 (6,287) 6,002 13,182 17,481
-------- ------- ------- ------- ---------
Income (loss) before
extraordinary items....... 1,683 (7,892) 15,267 21,967 46,197
Extraordinary items(2)......... 864 -- -- -- --
-------- ------- ------- ------- ---------
Net income (loss).......... $ 2,547 (7,892) 15,267 21,967 46,197
======== ======= ======= ======= =========
Weighted average number of
common shares outstanding..... 22,367 25,904 29,763 43,688 60,324
PER COMMON SHARE DATA:(6)
Income (loss) before
extraordinary items........... $ 0.02 (0.33) 0.49 0.49 0.77
Extraordinary items(2)......... 0.04 -- -- -- --
-------- ------- ------- ------- ---------
Net income (loss).............. $ 0.06 (0.33) 0.49 0.49 0.77
======== ======= ======= ======= =========
CONSOLIDATED BALANCE SHEET DATA
(END OF PERIOD):
Working capital................ $ 70,258 108,602 126,417 138,652 471,597
Total assets................... $241,652 377,893 508,083 904,337 2,228,328
Notes payable and long-term
debt, including current
portion....................... $ 36,220 33,858 61,916 60,736 31,968
Convertible subordinated debt.. $ -- 60,000 105,000 200,000 554,000
Shareholders' equity........... $121,226 161,004 177,085 379,611 1,028,850
</TABLE>
18
<PAGE>
The historical consolidated financial data for the fiscal years ended March
31, 1993, 1994, 1995 and 1996 have been restated to include the accounts and
operations of Zimpro Environmental, Inc. ("Zimpro"). Davis and Sidener which
were merged with the Company in May 1996, August 1996 and March 1997,
respectively, and accounted for as poolings of interests. Separate results of
operations of the combined entities for the years ended March 31, 1993 through
March 31, 1997 are presented below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,(1)
---------------------------------------------
1993(2) 1994(3) 1995(4) 1996(5) 1997(7)
-------- ------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUES
Company (as previously
reported)...................... $128,376 180,421 272,032 472,537 1,376,601
Zimpro.......................... 38,675 29,470 31,678 28,877 --
Davis........................... 190,990 202,621 215,649 226,489 --
Sidener......................... 58,684 62,724 81,473 84,419 --
-------- ------- ------- ------- ---------
$416,725 475,236 600,832 812,322 1,376,601
======== ======= ======= ======= =========
OPERATING INCOME (LOSS)
Company (as previously
reported)...................... $ 648 (4,874) 14,585 34,955 82,913
Zimpro.......................... 1,454 (1,687) 1,026 (5,200) --
Davis........................... 1,559 1,506 7,512 10,892 --
Sidener......................... 2,388 2,697 4,924 4,735 --
-------- ------- ------- ------- ---------
$ 6,049 (2,358) 28,047 45,382 82,913
======== ======= ======= ======= =========
NET INCOME (LOSS)
Company (as previously
reported)...................... $ 67 (2,541) 8,331 20,290 46,197
Zimpro.......................... 471 (1,513) 460 (6,732) --
Davis........................... 653 (5,340) 3,448 5,749 --
Sidener......................... 1,356 1,502 3,028 2,660 --
-------- ------- ------- ------- ---------
$ 2,547 (7,892) 15,267 21,967 46,197
======== ======= ======= ======= =========
NET INCOME (LOSS) PER COMMON
SHARE:(6)
As previously reported.......... $ (0.08) (0.17) 0.34 0.54 --
As restated..................... $ 0.06 (0.33) 0.49 0.49 0.77
</TABLE>
- --------
(1) The historical consolidated financial data for the fiscal years ended
March 31, 1993 through March 31, 1996 have been restated to include the
accounts and operations of Zimpro, Davis and Sidener, which were merged
with the Company in May 1996, August 1996, and March 1997, respectively,
and accounted for as poolings of interests.
(2) The fiscal year ended March 31, 1993 includes twelve months of results of
Societe des Ceramiques Techniques, S.A. ("SCT"), acquired April 1, 1992
and three months of The Permutit Company, Inc., a United States company
acquired January 5, 1993, accounted for as purchases. The fiscal year
ended March 31, 1993 also includes extraordinary gains of $.4 million
resulting from the forgiveness of debt in connection with the buyout of a
capital lease obligation and $.5 million resulting from the Company's
Davis subsidiary's adoption of SFAS No, 109, "Accounting for Income
Taxes."
(3) The fiscal year ended March 31, 1994 includes four months of results of
Ionpure Technologies Corporation and IP Holding Company ("Ionpure"),
acquired December 1, 1993 and accounted for as a purchase. Selling,
general and administrative expenses for the year ended March 31, 1994
reflect four months of integration of Ionpure, certain charges totaling
$2.4 million related to the rationalization of certain wastewater
operations and write-off certain intangibles in the Company's Continental
Penfield subsidiary totaling $3.7 million. In addition, the year ended
March 31, 1994 includes a charge of $8.9 million to reflect a plan to
shutdown and reorganize certain operations of Davis.
(4) The fiscal year ended March 31, 1995 includes the results of operations of
Smogless S.p.A., Crouzat S.A., Sation S.A., Seral Erich Alhauser GmbH and
the Cereflo ceramic product line from the dates of their respective
acquisitions, accounted for as purchases.
19
<PAGE>
(5) The fiscal year ended March 31, 1996 includes the results of operations of
The Permutit Company Limited and The Permutit Company Pty Ltd., Interlake
Water Systems, Arrowhead Industrial Water Inc. and Polymetrics Inc. from
the dates of their respective acquisitions, accounted for as purchases.
See Note 9 of Notes to Consolidated Financial Statements. Selling, general
and administrative expenses for the year ended March 31, 1996 includes
charges totaling $3.2 million related to the write-down of certain patents
and equipment of Zimpro.
(6) Net income (loss) per common share amounts are after (i) dividends on the
Series A Preferred Stock of $.7 million for the fiscal year ended March
31, 1993, $.7 million for the fiscal year ended March 31, 1994, $.7
million for the fiscal year ended March 1995 and $.5 million for the
fiscal year ended March 31, 1996 and (ii) accretion on the Series A
Preferred Stock, a noncash accounting adjustment required by Securities
and Exchange Commission Staff Accounting Bulletin No. 68 ("SAB 68"), in
the amount of $.6 million for the fiscal year ended March 31, 1993. As of
April 1, 1993 the Company and the holder of the Series A Preferred Stock
agreed to a fixed dividend of $.7 million per year on the Series A
Preferred Stock eliminating the increasing rate and, therefore, the
accretion of dividends pursuant to SAB 68. The Series A Preferred Stock
was converted into shares of Common Stock in March 1996.
(7) The fiscal year ended March 31, 1997 includes the results of operations of
USG, WaterPro, WSMG, and PED from the dates of their respective
acquisitions, accounted for as purchases. (See Note 9 of Notes to
Consolidated Financial Statements.) The year ended March 31, 1997 also
includes merger expenses of $5.6 million, related to the acquisition of
Davis, which was accounted for as a pooling of interests.
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion contained in this Item 7 should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Form 10-K.
GENERAL
The Company's strategy is to offer a single-source solution to industrial
and municipal customers through what the Company believes is the industry's
broadest range of cost-effective systems, products, services and proven
technologies. Accordingly, since July 1991, the Company has acquired and
integrated more than 75 businesses with substantial expertise in the design
and manufacture of systems of the filtration and treatment of water and
wastewater. Due to the magnitude of these acquisitions and the integration of
the acquired operations with the Company's existing businesses, results of
operations for prior periods are not necessarily comparable to or indicative
of results of operation for current or future periods.
RESULTS OF OPERATIONS
In May 1996, August 1996 and March 1997 subsidiaries of the Company merged
with Zimpro, Davis, and Sidener, respectively, in transactions accounted for
as poolings of interests. Historical consolidated financial data for the
fiscal years ended March 31, 1993 through March 31, 1996 have been restated to
reflect these acquisitions.
20
<PAGE>
The following table sets forth for the periods indicated certain items in
the Selected Consolidated Financial Data as a percentage of total revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31,
--------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Revenues................................................ 100.0% 100.0% 100.0%
Cost of sales........................................... 77.2% 74.6% 74.5%
Gross profit............................................ 22.8% 25.4% 25.5%
Selling, general and administrative expenses............ 18.1% 19.8% 19.0%
Merger expense.......................................... -- -- 0.4%
Operating income........................................ 4.7% 5.6% 6.0%
Interest expense........................................ 1.3% 1.9% 1.6%
Net income.............................................. 2.5% 2.7% 3.4%
The following table sets forth a percentage breakdown of the Company's sales
by product category for the past three fiscal years:
<CAPTION>
FISCAL YEAR ENDED
MARCH 31,
--------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Sales by product category:
Capital equipment..................................... 36% 35% 40%
Services and operations............................... 8% 18% 14%
Distribution.......................................... 42% 33% 31%
Replacement parts, consumables and other.............. 14% 14% 15%
</TABLE>
TWELVE MONTHS ENDED MARCH 31, 1997 ("FISCAL 1997") COMPARED WITH TWELVE MONTHS
ENDED MARCH 31, 1996 ("FISCAL 1996")
Revenues
Revenues for fiscal 1997 were $1,376.6 million, an increase of $564.3
million from $812.3 for the comparable period of the prior fiscal year. This
69.5% increase was due primarily to acquisitions completed by the Company
after fiscal 1996. For fiscal 1997 revenues from capital equipment sales
represented 40.0% of total revenues, while revenues from services and
operations represented 14.0% of total revenues, revenues from distribution
represented 31.0% of total revenues and revenues from replacement parts and
consumables represented 15.0% of total revenues.
Gross Profit
Gross profit increased 70.0% to $350.4 million for fiscal 1997 from $206.1
million for the comparable period of the prior fiscal year. Total gross profit
as a percentage of revenue ("gross margin") was 25.5% for fiscal 1997 compared
to 25.4% for the comparable period of the prior fiscal year.
Selling, General and Administrative Expenses
For fiscal 1997, selling, general, and administrative expenses, excluding
merger expenses, increased $101.2 million to $261.9 million as compared to the
$160.7 million in the comparable period in the prior year. During this period,
selling, general and administrative expenses, excluding Davis merger expenses,
were 19.0% of revenues compared to 19.8% for the comparable period in the
prior year. This decrease was primarily due to certain economies of scale
accompanying the Company's recent acquisitions.
Excluding Davis merger expenses, operating income as a percentage of
revenues increased to 6.4% for fiscal 1997 from 5.6% for the corresponding
period in fiscal 1996 due primarily to the decrease in the percentage of
selling, general and administrative expense to revenues.
21
<PAGE>
Merger Expenses
Merger expenses were incurred during fiscal 1997 relating to the Company's
acquisition of 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, stock transfer fees, legal fees, accounting fees,
governmental filing fees and certain other costs related to existing Davis
pension plans and change of control payments.
Interest Expense
Interest expense increased to $22.6 million for fiscal 1997 from $15.2
million for the corresponding period in the prior year. Interest expense for
fiscal 1997 consisted primarily of interest on the Company's: (i) 5%
Convertible Debentures due 2000 (all of which were, as of October 25, 1996,
converted into shares of Common Stock); (ii) 6% Convertible Subordinated Notes
due 2005 issued on September 18, 1995; (iii) 4.5% Convertible Subordinated
Debentures due 2001 issued on December 11, 1996; and (iv) borrowings under the
Company's bank line of credit. At March 31, 1997, the Company had cash, cash
equivalents and short-term investments of $128.4 million.
Income Tax Expense
Income tax expense increased to $17.5 million in fiscal 1997 from $13.2
million in the corresponding period in the prior year. The Company's effective
tax rate for fiscal 1997 was 27.5% as compared to 37.5% in the corresponding
period in the prior year. At March 31, 1997, the Company had net operating loss
carryforwards of approximately $16.4 million in France for which financial
statement benefit was recognized in fiscal 1997.
Net Income
For fiscal 1997 net income increased $24.2 million to $46.2 million from
$22.0 million for the same period in the prior year. Excluding Davis merger
expenses, net income totaled $50.2 million, an increase of 128.2% over the same
period in the prior year. Net income per common share for fiscal 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Before merger expenses......................................... $0.83 $0.49
After merger expenses.......................................... $0.77 $0.49
</TABLE>
TWELVE MONTHS ENDED MARCH 31, 1996 ("FISCAL 1996") COMPARED WITH TWELVE MONTHS
ENDED MARCH 31, 1995 ("FISCAL 1995")
Revenues
Revenues for fiscal 1996 were $812.3 million, an increase of $211.5 million
from $600.8 million for fiscal 1995. This 35.2% increase was due primarily to
acquisitions completed by the Company in fiscal 1995 and fiscal 1996. See Note
9 of Notes to Consolidated Financial Statements related to acquisitions.
Gross Profit
Gross profit increased 50.6% to $206.1 million for fiscal 1996 from $136.9
million for fiscal 1995. Gross margin increased to 25.4% for fiscal 1996 as
compared to 22.8% for fiscal 1995. The increase in gross margin through fiscal
1996 was due to: (i) a continued strengthening of gross margin in the recurring
and higher margin service-based revenue business; (ii) rationalization of
operations and economies of scale from the integration of acquisitions; and
(iii) a focus on products with higher gross margins in Davis' distribution
business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $160.7 million for
fiscal 1996 from $108.8 million for fiscal 1995. This increase was primarily
due to the addition of sales and administrative personnel accompanying the
Company's acquisitions during the period. As a percentage of revenues, selling,
general and
22
<PAGE>
administrative expenses were 19.8% for fiscal 1996, as compared to 18.1% for
fiscal 1995. This increase was due primarily to a write-down of certain
patents and equipment totaling $3.2 million at the Company's Zimpro subsidiary
and, to a lesser extent, increased levels of incentive compensation earned by
management and employees of Davis as compared to fiscal 1995.
Notwithstanding the increase in selling, general and administrative expenses
as a percentage of revenues, operating income as a percentage of revenues
increased from 4.7% for fiscal 1995 to 5.6% for fiscal 1996 due primarily to
improvement in gross margin.
Interest Expense
Interest expense increased to $15.2 million for fiscal 1996 from $8.1
million for fiscal 1995. Interest expense for fiscal 1996 consisted primarily
of interest on the Company's 5% Convertible Subordinated Debentures due 2000
issued October 20, 1993 and approximately seven months of interest on the
Company's 6% Convertible Subordinated notes due 2005 issued September 18,
1995, respectively, and interest on increased borrowings under the Company's
bank line of credit, which was used to finance the Company's revenue expansion
and acquisitions during the period.
Other Income (Expense)
Other income (expense) increased to $5.0 million of income for fiscal 1996
from $1.3 million of income for fiscal 1995. Other income consisted primarily
of interest income on short-term investments, which increased during fiscal
1996 primarily as a result of the Company's sale of $140.0 million aggregate
principle amount of 6% Convertible Subordinated notes on September 18, 1995
and the Company's issuance of 10.4 million shares of Common Stock on May 3,
1995 with net proceeds of approximately $98.1 million.
Income Tax Expense
Income tax expense increased to $13.2 million for fiscal 1996 from $6.0
million for fiscal 1995. This increase was attributable to increased income.
The Company's effective tax rate for fiscal 1996 was 37.5% and for fiscal 1995
was 28.2%. This increase in effective rate in fiscal 1996 is due primarily to
a net loss before income taxes of $6.1 million incurred at Zimpro (see
"Selling, General and Administrative Expenses") for which no income tax
benefit was recognized because its realization was not assured and because of
nondeductibility of certain items. As of March 31, 1996, the Company had net
operating loss carryforwards in France of approximately $20.0 million and
other European countries of approximately $7.3 million for which no financial
statement benefit has been recognized. In addition, the Company had net
operating loss carryforwards generated from its Liquipure subsidiary of
approximately $14.4 million for which financial statement benefit was
recognized in fiscal 1996. The Company also had net operating loss
carryforwards generated from Zimpro of approximately $2.9 million for which
financial statement benefit has not been recognized. In addition, the benefit
of the French loss carryforwards was required to be shared equally between the
Company and Aluminum Corporation of America until March 31, 1997. See Note 14
of Notes to Consolidated Financial Statements related to income taxes.
Net Income
Net income increased to $22.0 million for fiscal 1996 from $15.3 million for
fiscal 1995. Net income per common share was $0.49 per share (based upon 43.7
million weighted average common shares outstanding) for fiscal 1996 and $0.49
per common share (based upon 29.8 million weighted average common shares
outstanding) for fiscal 1995, after deducting $.5 million and $.7 million for
dividends on the Company's preferred shares for fiscal 1996 and 1995,
respectively.
23
<PAGE>
Liquidity and Capital Resources
The Company's principal sources of funds are cash, cash equivalents and
other working capital, cash flow generated from operations and borrowings
under the Company's bank line of credit. At March 31, 1997 the Company had
working capital of $471.6 million, including cash, cash equivalents and short-
term investments of $128.4 million. The Company's long-term debt at March 31,
1997 included $140.0 million aggregate principal amount of 6% Convertible
Subordinated Notes due 2005, $414.0 million aggregate principal amount of 4.5%
Convertible Subordinated Notes due 2001 and other long-term debt totaling
$23.1 million and bearing interest at rates ranging from 2.0% to 9.2%.
Capital expenditures totaled $19.3 million, $30.2 million and $45.4 million
for fiscal years ended March 31, 1995, 1996, 1997, respectively. Although the
Company has no material firm commitments for capital expenditures, capital
expenditure requirements are expected to increase as a result of the Company's
anticipated growth, including from the recent acquisitions and specifically
the acquisitions of WSMG, USG, WaterPro and PED.
As of March 31, 1997, the Company has an unsecured multicurrency bank line
of credit of $400.0 million, of which there were outstanding borrowings of
$6.5 million and outstanding letters of credit of $62.1 million. Borrowings
under the Credit Agreement bear interest at certain Eurocurrency rates or at
the First National Bank of Boston's base rate and have a five year maturity.
The Company believes its current cash position, cash flow from operations,
and available borrowings under the Credit Agreement will be adequate to meet
its anticipated cash needs for working capital, revenue growth, scheduled debt
repayment and capital investment objectives for at least the next twelve
months.
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 Exchange Commission
and in its reports to stockholders. In connection with the "safe harbor"
provisions of the 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 and successfully
integrated more than 75 United States based and international businesses with
strong market positions and substantial water and wastewater treatment
expertise. The Company plans to continue to pursue acquisitions that
complement its technologies, products and services, broaden its customer base
and expand its global distribution network. The Company's acquisition strategy
entails the potential risks inherent in assessing the value, strengths,
weaknesses, contingent or other liabilities and potential profitability of
acquisition candidates and in integrating the operations of acquired
companies. Although the Company generally has been successful in pursuing
these acquisitions, there can be no assurance that acquisition opportunities
will continue to be available, that the Company will have access to the
capital required to finance potential acquisitions, that the Company will
continue to acquire businesses or that any business acquired will be
integrated successfully or prove profitable.
International Transactions. The Company has made and expects it will
continue to make acquisitions and expects to obtain contracts in markets
outside the United States. While these activities may provide important
opportunities for the Company to offer its products and services
internationally, they also entail the risks associated with conducting
business internationally, including the risk of currency fluctuations, slower
payment of invoices, nationalization and possible social, political and
economic instability.
24
<PAGE>
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. There
are no employment agreements between the Company and the members of its senior
management, except Thierry Reyners, the Company's Executive Vice President--
European Group, and Harry K. Hornish, Jr., the Company's Executive Vice
President--Distribution Group. Should any of the senior managers be unable to
continue in their present roles, the Company's prospects could be adversely
affected.
Profitability Of Fixed Price Contracts. A significant portion of the
Company's revenues are generated under fixed price contracts. To the extent
that original cost estimates are inaccurate, costs to complete increase,
delivery schedules are delayed or progress under a contract is otherwise
impeded, revenue recognition and profitability from a particular contract may
be adversely affected. The Company routinely records upward or downward
adjustments with respect to fixed price contracts due to changes in estimates
of costs to complete such contracts. There can be no assurance that future
downward adjustments will not be material.
Cyclicality and Seasonality. The sale of capital equipment within the water
treatment industry is cyclical and influenced by various economic factors
including interest rates and general fluctuations of the business cycle. A
significant portion of the Company's revenues are derived from capital
equipment sales. While the Company sells capital equipment to customers in
diverse industries and in global markets, cyclicality of capital equipment
sales and instability of general economic conditions could have an adverse
effect on the Company's revenues and profitability.
The sale of water and wastewater distribution equipment and supplies is also
cyclical and influenced by various economic factors including interest rates,
land development and housing construction industry cycles. Sales of such
equipment and supplies are also subject to seasonal fluctuation in northern
climates. As a result of recent acquisitions, 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 an adverse effect on the
Company's revenues and profitability.
Potential Environmental Risks. The Company's business and products may be
significantly influenced by the constantly changing body of environmental laws
and regulations, which require that certain environmental standards be met and
impose liability for the failure to comply with such standards. The Company is
also subject to inherent risks associated with environmental conditions at
facilities owned, and the state of compliance with environmental laws, by
businesses acquired by the Company. While the Company endeavors at each of its
facilities to assure compliance with environmental laws and regulations, there
can be no assurance that the Company's operations or activities, or historical
operations by others at the Company's locations, will not result in cleanup
obligations, civil or criminal enforcement actions or private actions that
could have a material adverse effect on the Company. In that regard federal
and state environmental regulatory authorities have commenced civil
enforcement actions related to alleged multiple violations of applicable
wastewater pretreatment standards by a wholly owned subsidiary of the Company
at a Connecticut ion exchange regeneration facility acquired by the Company in
October 1995 from Anjou International Company ("Anjou"). A grand jury
investigation is pending which is believed to relate to the same conditions
that were the subject of the civil actions. The Company has certain rights of
indemnification from Anjou which may be available with respect to these
matters. In addition, the Company's activities as owner and operator of
certain hazardous waste treatment and recovery facilities are subject to
stringent laws and regulations and compliance reviews. Failure of these
facilities to comply with those regulations could result in substantial fines
and the suspension or revocation of the facility's hazardous waste permit. In
other matters, the Company has been notified by the United States
Environmental Protection Agency that it is a potentially responsible party
under the Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA") at certain sites to which the Company or its predecessors
allegedly sent waste in the past. It is possible that the Company could
receive other such notices under CERCLA or analogous state laws in the future.
The Company does not believe that its liability, if any, relating to such
matters will be material. However, there can be no assurance that such matters
will not be material. In addition, to some extent, the liabilities and risks
imposed by environmental laws on the Company's customers may adversely impact
demand for certain of the Company's products or services or impose greater
liabilities and risks on the Company, which could also have an adverse effect
on the Company's competitive or financial position.
25
<PAGE>
Competition. The water and wastewater treatment industry is fragmented and
highly competitive. The Company competes with many United States based and
international companies in its global markets. The principal methods of
competition in the markets in which the Company competes are technology,
prompt availability of local service capability, price, product
specifications, customized design, product knowledge and reputation, ability
to obtain sufficient performance bonds, timely delivery, the relative ease of
system operation and maintenance, and the prompt availability of replacement
parts. In the municipal contract bid process, pricing and ability to meet bid
specifications are the primary considerations. While no competitor is
considered dominant, there are competitors which have significantly greater
resources than the Company, which among other things, could be a competitive
disadvantage to the Company in securing certain projects.
Technological and Regulatory Change. The water and wastewater treatment
business is characterized by changing technology, competitively imposed
process standards and regulatory requirements, each of which influences the
demand for the Company's products and processes obsolete. Acceptance of new
products may also be affected by the adoption of new government regulations
requiring stricter standards. The Company's ability to anticipate changes in
technology and regulatory standards and to develop successfully and introduce
new and enhanced products on a timely basis will be a significant factor in
the Company's ability to grow and to remain competitive. There can be no
assurance that the Company will be able to achieve the technological advances
that may be necessary for it to remain competitive or that certain of its
products will not become obsolete. In addition, the Company is subject to the
risks generally associated with new product introductions and applications,
including lack of market acceptance, delays in development or failure of
products to operate properly.
Municipal and Wastewater Market. Completion of certain of the Company's
acquisitions has increased significantly the percentage of the Company's
revenues derived from municipal customers. While municipalities represent an
important market in the water and wastewater treatment industry, contractor
selection processes and funding for projects in the municipal sector entail
certain additional risks not typically encountered with industrial customers.
Competition 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. Zimpro is party to certain agreements (entered into in 1990 at the
time Zimpro was acquired from unrelated third parties by the entities from
which it was later acquired by the Company), pursuant to which Zimpro agreed,
among other things, to pay the original sellers a royalty of 3.0% of its
annual consolidated net sales of certain products in excess of $35.0 million
through October 25, 2000. Under certain interpretations of such agreements,
with which the Company disagrees, Zimpro could be liable for such royalties
with respect to the net sales attributable to products, systems and services
of certain defined wastewater treatment businesses acquired by Zimpro or the
Company or the Company's other subsidiaries after May 31, 1996. The defined
businesses include, among others, manufacturing machinery and equipment, and
engineering installation, operation and maintenance services related thereto,
for the treatment and disposal of waste liquids, toxic waste and sludge. One
of the prior sellers has revealed in a letter to the Company an interpretation
that may be contrary to that of the Company. The Company believes that it
would have meritorious defenses to any claim based upon any such
interpretation and would vigorously pursue the elimination of any threat to
expand what it believes to be its obligations pursuant to such agreements.
Impact of Recently Issued Accounting Standards. In February 1997, the
Financial Accounting Standards Board issued a new statement titled "Earnings
Per Share." The new statement is effective for fiscal years ending after
December 15, 1997. The Company does not believe that adoption of this new
standard will have a material effect on the consolidated financial statements.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Part IV, Item 14 of this Annual Report on Form 10-K for
the information required by Item 8.
26
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................... 28
Financial Statements:
Consolidated Balance Sheets as of March 31, 1996 and 1997................ 29
Consolidated Statements of Income for the Years Ended March 31, 1995,
1996 and 1997........................................................... 30
Consolidated Statements of Shareholders' Equity for the Years Ended March
31, 1995, 1996 and 1997................................................. 31
Consolidated Statements of Cash Flows for the Years Ended March 31, 1995,
1996 and 1997........................................................... 33
Notes to Consolidated Financial Statements............................... 35
Independent Auditors' Report on Schedule .................................. 57
Schedule:
Schedule II--Valuation and Qualifying Accounts........................... 58
</TABLE>
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
United States Filter Corporation:
We have audited the accompanying consolidated balance sheets of United
States Filter Corporation and subsidiaries as of March 31, 1996 and 1997, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
States Filter Corporation and subsidiaries as of March 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
June 6, 1997
28
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 2)....................... $ 18,886 126,237
Short-term investments (note 3).......................... 65 2,158
Accounts receivable, less allowance for doubtful accounts
of $10,165 at March 31, 1996 and $24,595 at March 31,
1997 (note 10).......................................... 230,973 481,015
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 10)......................... 33,575 107,537
Inventories (note 4)..................................... 84,897 242,483
Prepaid expenses......................................... 7,922 8,040
Deferred taxes (note 14)................................. 7,771 38,589
Other current assets..................................... 10,221 17,086
-------- ---------
Total current assets................................... 394,310 1,023,145
-------- ---------
Property, plant and equipment, net (notes 5 and 11)........ 171,171 296,840
Investment in leasehold interests, net (note 6)............ 27,688 23,230
Costs in excess of net assets of businesses acquired, net
(notes 7 and 9)........................................... 271,891 788,096
Other assets (note 8)...................................... 39,277 97,017
-------- ---------
$904,337 2,228,328
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $104,567 237,895
Accrued liabilities (note 13)............................ 104,445 239,337
Current portion of long-term debt (note 11).............. 7,892 10,806
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 10)......................... 15,797 42,183
Other current liabilities................................ 22,957 21,327
-------- ---------
Total current liabilities.............................. 255,658 551,548
-------- ---------
Notes payable (note 11).................................... 43,056 8,876
Long-term debt, excluding current portion (note 11)........ 9,788 12,286
Convertible subordinated debentures (note 12).............. 200,000 554,000
Deferred taxes (note 14)................................... 1,223 11,521
Other liabilities (note 13)................................ 15,001 61,247
-------- ---------
Total liabilities...................................... 524,726 1,199,478
-------- ---------
Shareholders' equity (notes 9 and 15):
Preferred stock, authorized 3,000,000 shares............. -- --
Common stock, par value $.01. Authorized 150,000 shares;
issued and outstanding 49,402 and 74,530 at March 31,
1996 and 1997, respectively............................. 353 745
Additional paid-in capital............................... 359,415 990,004
Currency translation adjustment.......................... 1,836 (19,491)
Retained earnings........................................ 18,007 57,592
-------- ---------
Total shareholders' equity............................. 379,611 1,028,850
Commitments and contingencies (notes 11, 15, 16 and 18)
-------- ---------
$904,337 2,228,328
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- ---------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Revenues......................................... $600,832 812,322 1,376,601
Costs of sales................................... 463,959 606,226 1,026,248
-------- ------- ---------
Gross profit................................. 136,873 206,096 350,353
-------- ------- ---------
Selling, general and administrative expenses..... 108,826 160,714 261,859
Merger expenses (note 9)......................... -- -- 5,581
-------- ------- ---------
108,826 160,714 267,440
-------- ------- ---------
Operating income............................. 28,047 45,382 82,913
-------- ------- ---------
Other income (expense):
Interest expense............................... (8,058) (15,212) (22,585)
Interest and other income...................... 1,280 4,979 3,350
-------- ------- ---------
(6,778) (10,233) (19,235)
-------- ------- ---------
Income before income tax expense............. 21,269 35,149 63,678
Income tax expense (note 14)..................... 6,002 13,182 17,481
-------- ------- ---------
Net income................................... $ 15,267 21,967 46,197
======== ======= =========
Net income per common share (primary and fully
diluted) (notes 1 and 15) after reduction for
dividends on preferred stock of $.02 and $.01
for the years ended March 31, 1995 and 1996,
respectively.................................... $ 0.49 0.49 0.77
======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK RETAINED
------------------ ---------------- ADDITIONAL CURRENCY EARNINGS
NUMBER OF NUMBER OF PAID-IN TRANSLATION (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) TOTAL
--------- -------- --------- ------ ---------- ----------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1994................... 880 $ 22,071 21,444 $ 95 129,273 (256) (32,572) 118,611
Restatement for
acquisitions of Zimpro,
Davis and Sidener
acquired through
pooling of interests
(note 9)............... -- -- 7,224 72 18,942 -- 23,379 42,393
----- -------- ------ ---- ------- ------ ------- -------
Balance at March 31,
1994, restated......... 880 22,071 28,668 167 148,215 (256) (9,193) 161,004
Net loss of Liquipure
for the three months
ended March 31, 1994... -- -- -- -- -- -- (313) (313)
Compensation related to
excess of fair value of
director stock options
over exercise price
(note 15).............. -- -- -- -- 122 -- -- 122
Exercise of common stock
options (note 15)...... -- -- 241 2 1,420 -- -- 1,422
Issuance of common stock
in connection with
acquisitions........... -- -- 1,056 5 8,982 -- -- 8,987
Dividends paid on
preferred stock........ -- -- -- -- -- -- (715) (715)
Reduction in valuation
of common stock issued
in connection with
Ionpure acquisition.... -- -- -- -- (9,123) -- -- (9,123)
Preferred stock issued
in connection with
acquisition of
Smogless............... 185 3,506 -- -- -- -- -- 3,506
Issuance of common stock
to pay off
indebtedness........... -- -- 89 -- 700 -- -- 700
Par value of shares
issued in connection
with three-for-two
stock split (note 15).. -- -- -- 50 (50) -- -- --
Income tax benefit from
exercise of stock
options................ -- -- -- -- 387 -- -- 387
Currency translation
adjustment............. -- -- -- -- -- (1,770) -- (1,770)
Shareholders' equity
transactions of Zimpro,
Davis and Sidener prior
to merger.............. -- -- -- -- 1,054 -- (3,443) (2,389)
Net income.............. -- -- -- -- -- -- 15,267 15,267
----- -------- ------ ---- ------- ------ ------- -------
Balance at March 31,
1995................... 1,065 25,577 30,054 224 151,707 (2,026) 1,603 177,085
Compensation related to
excess of fair value of
director stock options
over exercise price
(note 15).............. -- -- -- -- 112 -- -- 112
Conversion of preferred
shares to common shares
(note 15).............. (926) (22,936) 2,083 14 22,922 -- -- --
Redemption of Series B
convertible preferred
stock (note 15)........ (139) (2,641) -- -- (2,068) -- -- (4,709)
Issuance of common stock
in connection with
acquisitions (note 9).. -- -- 2,453 16 36,284 -- -- 36,300
Shares issued through
public offering, net of
offering costs of
$6,106,000 (note 15)... -- -- 10,350 69 97,325 -- -- 97,394
Conversion of
subordinated debentures
to common stock (note
12).................... -- -- 3,750 25 44,975 -- -- 45,000
Dividends paid on
preferred stock (note
15).................... -- -- -- -- -- -- (715) (715)
Exercise of common stock
options (note 15)...... -- -- 488 3 3,678 -- -- 3,681
Issuance of common stock
to acquire assets (note
15).................... -- -- 224 2 2,974 -- -- 2,976
Shareholders' equity
transactions of Zimpro,
Davis and Sidener prior
to merger.............. -- -- -- -- 1,506 -- (4,848) (3,342)
Currency translation
adjustment............. -- -- -- -- -- 3,862 -- 3,862
Net income.............. -- -- -- -- -- -- 21,967 21,967
----- -------- ------ ---- ------- ------ ------- -------
Balance at March 31,
1996................... -- $ -- 49,402 $353 359,415 1,836 18,007 379,611
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--(CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK RETAINED
---------------- ---------------- ADDITIONAL CURRENCY EARNINGS
NUMBER OF NUMBER OF PAID-IN TRANSLATION (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) TOTAL
--------- ------ --------- ------ ---------- ----------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss of Zimpro for
the three months ended
March 31, 1996 (note
9)..................... -- $ -- -- $ -- -- -- (606) (606)
Exercise of common stock
options (note 15)...... -- -- 659 7 5,991 -- -- 5,998
Issuance of common stock
in connection with
acquisitions (note 9).. -- -- 7,686 76 196,639 -- -- 196,715
Shareholders' equity
transactions of Zimpro,
Davis and Sidener prior
to merger.............. -- -- -- -- 897 -- (6,006) (5,109)
Issuance of common stock
to pay off indebtedness
(note 9)............... -- -- 271 2 6,741 -- -- 6,743
Conversion of
subordinated debentures
to common stock (note
12).................... -- -- 4,389 43 58,535 -- -- 58,578
Shares issued through
public offering, net of
offering costs of
$17,154 (note 15)...... -- -- 11,804 118 356,035 -- -- 356,153
Issuance of common stock
to acquire assets...... -- -- 319 3 5,894 -- -- 5,897
Par value of shares
issued in connection
with three-for-two
stock split (note 15).. -- -- -- 143 (143) -- -- --
Currency translation
adjustment............. -- -- -- -- -- (21,327) -- (21,327)
Net income.............. -- -- -- -- -- -- 46,197 46,197
--- ----- ------ ----- ------- ------- ------ ---------
Balance at March 31,
1997................... -- $ -- 74,530 $ 745 990,004 (19,491) 57,592 1,028,850
=== ===== ====== ===== ======= ======= ====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 15,267 21,967 46,197
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes........................ 713 (4,479) 14,926
Depreciation and amortization................ 17,425 27,521 43,272
Provision for doubtful accounts.............. 2,030 5,929 5,536
(Gain) loss on sale of property and
equipment................................... 377 (260) (15)
Stock and stock option compensation.......... 122 112 --
(Decrease) increase in closure reserves and
write off of intangible assets.............. (1,480) 768 --
Change in operating assets and liabilities:
(Increase) decrease in accounts
receivable................................ (9,671) (26,367) 14,529
(Increase) decrease in costs and estimated
earnings in excess of billings on
uncompleted contracts..................... 2,046 (4,599) (41,071)
Increase in inventories.................... (6,567) (5,358) (28,908)
Increase in prepaid expenses and other
assets.................................... (2,622) (5,967) (43,875)
Decrease in accounts payable and accrued
expenses.................................. (12,398) (1,809) (493)
Increase (decrease) in billings in excess
of costs and estimated earnings on
uncompleted contracts..................... 2,529 (4,096) 5,899
Decrease in other liabilities.............. (933) (1,612) (2,564)
-------- -------- --------
Net cash provided by operating
activities.............................. 6,838 1,750 13,433
-------- -------- --------
Cash flows from investing activities:
Investment in leasehold interests.............. (6,397) (8,347) --
Purchase of property, plant and equipment...... (19,275) (30,236) (45,416)
Proceeds from disposal of equipment............ 877 7,670 1,801
(Purchase) sale of short-term investments...... 13,207 9,938 (1,170)
Payment for purchase of acquisitions, net of
cash acquired................................. (2,240) (206,600) (585,070)
-------- -------- --------
Net cash used in investing activities.... (13,828) (227,575) (629,855)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from sale of common stock......... -- 97,783 356,154
Net proceeds from sale of convertible
subordinated debentures....................... -- 136,249 403,650
Proceeds from exercise of common stock
options....................................... 1,422 3,681 5,998
Principal payments of debt..................... (65,409) (72,347) (3,948)
Dividends paid on common and preferred stock... (4,293) (5,573) (3,901)
Payment to repurchase Series B preferred
stock......................................... -- (4,709) --
Net proceeds from borrowings (payments) on
notes payable................................. 75,378 68,990 (34,180)
-------- -------- --------
Net cash provided by financing
activities.............................. 7,098 224,074 723,773
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................. 108 (1,751) 107,351
Cash and cash equivalents at beginning of year... 20,529 20,637 18,886
-------- -------- --------
Cash and cash equivalents at end of year......... $ 20,637 18,886 126,237
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for interest................. $8,135 15,395 18,772
====== ====== ======
Cash paid during the year for income taxes............. $2,626 6,807 7,341
====== ====== ======
Noncash investing and financing activities consisted of
the following:
Common stock issued:
Satisfaction of debt................................. $ 700 -- --
Conversion of subordinated debentures................ -- 45,000 60,000
Purchase of property or equipment.................... -- 2,976 5,897
Property, plant and equipment exchanged for
receivables........................................... -- 5,318 --
------ ------ ------
$ 700 53,294 65,897
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
United States Filter Corporation and its wholly owned subsidiaries (the
"Company") (see note 9). All significant intercompany accounts and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Method of Accounting for Contracts
The accounting records of the Company are maintained and income is reported
for financial reporting and income tax purposes for long-term contracts under
the percentage-of-completion method of accounting. Under this method, an
estimated percentage for each contract, based on the cost of work performed to
date that has contributed to contract performance compared to the total
estimated cost, is applied to total estimated revenue. Provision is made for
the entire amount of future estimated losses on contracts in progress in the
period in which such losses are determined. Claims for additional contract
compensation due the Company are not reflected in the accounts until the year
in which such claims are allowed, except where contract terms specifically
provide for certain claims.
Contract costs include all direct material and labor and those indirect
costs related to contract performance. General and administrative expenses are
charged to expense as incurred.
Products and Services
Sales of other products and services are recorded as products are shipped or
services rendered.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using tax rates in
effect for the year in which the differences are expected to reverse.
United States income taxes are not provided on the undistributed earnings of
its non-U.S. subsidiaries as such earnings are intended to be indefinately
reinvested in those operations.
FOREIGN CURRENCY TRANSLATION
In accordance with SFAS No. 52, "Foreign Currency Translation," those assets
and liabilities that are denominated in a functional currency other than U.S.
dollars are translated into U.S. dollars at the current rate of exchange
existing at period-end and revenues and expenses are translated at the average
monthly exchange rates. Translation adjustments are included as a separate
component of shareholders' equity. Transaction gains and losses included in
net income are immaterial.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
35
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is calculated
on the straight-line method over the estimated useful lives of the respective
assets which range from three to 25 years. Leasehold improvements are
amortized on the straight-line method over the lesser of their estimated
useful lives or the related lease term.
COSTS IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED
Costs in excess of net assets of businesses acquired are amortized on the
straight-line method over a 20- to 40-year life. The Company evaluates the
recoverability of these costs based upon expectations of non-discounted cash
flows of each subsidiary. Based upon its most recent analysis, the Company
believes that no material impairment exists at March 31, 1997.
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
Investments in unconsolidated joint ventures are accounted for using the
equity method, under which the Company's share of earnings or losses from
these joint ventures is reflected in income as earned and dividends are
credited against the investment when received.
UNAMORTIZED DEBT ISSUANCE COSTS
Unamortized debt issuance costs, aggregating $6.2 million and $16.9 million
at March 31, 1996 and 1997, respectively, have been deferred and are being
amortized over the term of the related debt (see note 12).
WARRANTIES
The Company's products are generally under warranty against defects in
material and workmanship for a period of one year. The Company has accrued for
estimated future warranty costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable, and accrued liabilities approximate
fair value because of the short maturity of these instruments. The carrying
amount of the Company's revolving credit facility approximates its fair value
because the interest rate on the instrument changes with market interest
rates. The fair value of the Company's long-term debt (including current
portion) is estimated to be equal to the carrying amounts based on quoted
market prices for similar issues or on the current rates offered to the
Company for debt of the same remaining maturities.
INCOME PER COMMON SHARE
Income per common share is computed based on the weighted average number of
shares outstanding. Common stock equivalents consisting of convertible
preferred stock, convertible subordinated debentures and common stock options
are included in the computation of income per share when their effect is
dilutive.
36
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Primary and fully diluted income per common share were calculated as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------ ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net income............................................. $15,267 21,967 46,197
Dividends on preferred stock........................... (715) (536) --
------- ------ ------
Adjusted net income applicable to common shares........ $14,552 21,431 46,197
======= ====== ======
Weighted average shares outstanding.................... 29,394 42,565 58,278
Add:
Exercise of options reduced by the number of shares
purchased with proceeds............................. 369 1,123 2,046
------- ------ ------
Adjusted weighted average shares outstanding........... 29,763 43,688 60,324
======= ====== ======
Income per common share:
Net income........................................... $ 0.51 0.50 0.77
Dividends on preferred stock......................... (0.02) (0.01) --
------- ------ ------
Adjusted income per common share....................... $ 0.49 0.49 0.77
======= ====== ======
</TABLE>
On March 4, 1996, the preferred shareholder tendered its Series A Preferred
stock for conversion into Company common stock thus eliminating further
dividends (see note 15).
RECLASSIFICATIONS
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform with the 1997 presentation.
(2) CASH AND CASH EQUIVALENTS
Cash equivalents consist of demand deposits and certificates of deposit with
original maturities of 90 days or less.
(3) SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid municipal issues available
for sale with original maturities of more than 90 days when purchased, and are
carried at amortized cost, which approximates market value.
(4) INVENTORIES
Inventories at March 31, 1996 and 1997 consist of:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials................................................ $21,578 54,112
Work-in-process.............................................. 17,997 58,619
Finished goods............................................... 45,322 129,752
------- -------
$84,897 242,483
======= =======
</TABLE>
37
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at March 31, 1996 and 1997 consist of:
<TABLE>
<CAPTION>
1996 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Land...................................................... $ 9,954 20,697
Buildings and improvements................................ 46,031 102,817
Equipment................................................. 132,110 175,494
Furniture and fixtures.................................... 25,542 56,881
Vehicles.................................................. 5,159 13,270
Construction in progress.................................. 17,191 18,668
-------- -------
235,987 387,827
Less accumulated depreciation............................. (64,816) (90,987)
-------- -------
$171,171 296,840
======== =======
</TABLE>
(6) INVESTMENT IN LEASEHOLD INTERESTS
The Company has concession agreements to operate wastewater treatment plants
in Mexico. The terms of the concessions are approximately 15 to 18 years, as
amended, and include monthly payments to be received by the Company at various
prices per cubic meter of sewage treated at the facilities based upon the
Company's initial investments, fixed operating expenses and variable operating
expenses. The Company is amortizing the investments on a straight-line basis
over the terms of the concessions. Accumulated amortization at March 31, 1996
and 1997 totaled $2.0 million and $3.2 million, respectively. The investments
are stated at cost which does not exceed market based on projected non-
discounted future cash flows.
(7) COSTS IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED
Costs in excess of net assets of businesses acquired and accumulated
amortization at March 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Costs in excess of net assets of businesses acquired..... $283,275 811,054
Less accumulated amortization............................ (11,384) (22,958)
-------- -------
$271,891 788,096
======== =======
</TABLE>
38
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) OTHER ASSETS
Other assets at March 31, 1996 and 1997 consist of:
<TABLE>
<CAPTION>
1996 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Investment in unconsolidated joint ventures................... $12,419 10,645
Long-term receivables and advances............................ 6,415 7,105
Other assets at amortized cost:
Deferred debt costs......................................... 6,200 16,939
Operating permits and development costs..................... 1,212 5,994
Patents..................................................... 2,469 3,074
Other....................................................... 10,562 53,260
------- ------
$39,277 97,017
======= ======
</TABLE>
The above amounts reflect accumulated amortization of $2.0 million and $3.7
million at March 31, 1996 and 1997, respectively.
During fiscal 1996, the Company's Zimpro subsidiary evaluated certain
patents in accordance with SFAS 121. Based upon this evaluation, patents with
a carrying value of $3.6 million were written down by $2.6 million to
estimated fair value.
(9) ACQUISITIONS
On May 31, 1996, a wholly owned subsidiary of the Company merged with and
into Zimpro Environmental, Inc. ("Zimpro"), in a tax free reorganization. In
connection with this acquisition, the Company issued 877,611 shares of the
Company's common stock for all of the outstanding common and preferred shares
of Zimpro pursuant to an Agreement and Plan of Merger among the Company,
Landegger Environmental Holdings, Inc., The Black Clawson Company, a trust,
and two limited partnerships in the John Hancock Capital Growth Fund ("The
Hancock Funds") (collectively the "Stockholders"). In addition, the Company
liquidated existing indebtedness to The Hancock Funds in exchange for 172,491
shares of Company common stock and $1.0 million in cash.
Zimpro, based in Wisconsin, manufactures wastewater treatment equipment with
proprietary technologies in wet air oxidation, landfill leachate treatment
systems, ground water remediation, filtration and sludge treatment systems.
This transaction has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements and notes thereto for all
periods presented have been restated to include the accounts and operations of
Zimpro.
On August 23, 1996, a wholly-owned subsidiary of the Company merged with and
into Davis Water & Waste Industries, Inc. ("Davis"), upon the exchange of
4,817,349 shares of its common stock for all of the outstanding common and
preferred shares of Davis pursuant to an Agreement and Plan of Merger between
the Company and Davis.
Davis manufactures and markets products relating to the distribution of
water and wastewater. Davis also designs, engineers, manufactures, sells and
installs water and wastewater treatment equipment to comply with applicable
health and water quality standards.
39
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
This transaction has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements and notes thereto for all
periods presented have been restated to include the accounts and operations of
Davis.
Merger expenses incurred to consummate the Davis transaction totaled $5.6
million and consisted primarily of investment banking fees, printing, stock
fees, legal fees, accounting fees, governmental filings fees and certain other
costs related to existing Davis pension plans and change in control charges.
On March 6, 1997, a wholly-owned subsidiary of the Company merged with and
into Sidener Supply Company ("Sidener"), upon the exchange of 1,528,732 shares
of its common stock for all of the outstanding common shares of Sidener
pursuant to an Acquisitions Agreement between the Company and Sidener. In
addition, the Company issued 98,449 shares of common stock to liquidate
certain indebtedness of Sidener.
Sidener, with headquarters in St. Louis, Missouri, markets products relating
to the distribution of water and wastewater. This transaction has been
accounted for as a pooling of interests and, accordingly, the consolidated
financial statements and notes thereto for all periods presented have been
restated to include the accounts and operations of Sidener.
Separate results of operations of the combined entities for the years ended
March 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH
31,
----------------
1995 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
U.S. Filter (as previously reported).................... $272,032 472,537
Zimpro.................................................. 31,678 28,877
Davis................................................... 215,649 226,489
Sidener................................................. 81,473 84,419
-------- -------
Combined.............................................. $600,832 812,322
======== =======
Net income (loss):
U.S. Filter (as previously reported).................... 8,331 20,290
Zimpro.................................................. 460 (6,732)
Davis................................................... 3,448 5,749
Sidener................................................. 3,028 2,660
-------- -------
Combined.............................................. $ 15,267 21,967
======== =======
Net income per common share and common equivalent share:
As previously reported.................................. $ 0.34 0.54
======== =======
As restated............................................. $ 0.49 0.49
======== =======
</TABLE>
On October 25, 1996, the Company acquired all of the outstanding capital
stock of the Utility Supply Group, Inc. ("USG") pursuant to an Agreement and
Plan of Merger. The purchase price for the acquisition of USG, including
acquisition costs, was approximately $40 million, consisting of the repayment
of $18.3 million of USG long-term debt paid in cash and the delivery of
771,157 shares of Company common stock.
USG, headquartered in Waco, Texas, is a distributor of water and wastewater
related products and services to industrial and municipal customers throughout
the United States.
40
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The acquisition of USG has been accounted for as a purchase and,
accordingly, the results of operations of USG are included in the Company's
consolidated statements of income from the date of acquisition. The excess of
fair value of net assets acquired was approximately $18 million, and is being
amortized on a straight-line basis over 40 years.
On October 28, 1996, the Company acquired all of the outstanding capital
stock of WaterPro Supplies Corporation ("WaterPro") pursuant to a Stock
Purchase Agreement. The purchase price for the acquisition of WaterPro,
including acquisition costs, was approximately $91 million, consisting of
3,201,507 shares of Company common stock.
WaterPro, headquartered in Edina, Minnesota is a national distributor of
water and wastewater related products and services for municipal water, sewer
authorities and underground contractors, and has locations throughout the
United States.
The acquisition of WaterPro has been accounted for as a purchase and,
accordingly, the results of operations of WaterPro are included in the
Company's consolidated statements of income from the date of acquisition. The
excess of fair value of net assets acquired was approximately $29 million, and
is being amortized on a straight-line basis over 40 years.
On December 2, 1996, pursuant to an Amended and Restated Purchase and Sale
Agreement dated September 14, 1996 between the Company and Wheelabrator Water
Technologies Inc. ("Seller"), the Company completed the acquisition of the
capital stock of certain of the Seller's subsidiaries and certain other
entities, and substantially all of the assets and liabilities of certain other
subsidiaries, collectively Wheelabrator's Water Systems and Manufacturing
Group ("WSMG"). The purchase price, as amended, for the acquisition of WSMG,
including acquisition costs, was approximately $374 million and was paid
entirely in cash.
WSMG provides a broad range of water and wastewater engineering, technology
and systems. The acquisition of WSMG has been accounted for as a purchase and,
accordingly, the results of operations of WSMG are included in the Company's
consolidated statements of income from the date of acquisition. The excess of
fair value of net assets acquired was approximately $308 million and is being
amortized on a straight-line basis over 40 years.
On January 6, 1997, pursuant to a Purchase and Sale Agreement dated October
7, 1996, between the Company and United Utilities PLC ("Seller"), the Company
completed the acquisition of the capital stock of certain other subsidiaries,
collectively, the Process Equipment Division ("PED") of Seller. The purchase
price, subject to adjustment, for the acquisition of PED, including
acquisition costs, was approximately $166 million in cash and 1,320,312 shares
of Company stock.
PED provides a broad range of water and wastewater engineering, technology
and systems. The acquisition of PED has been accounted for as a purchase and,
accordingly, the results of operations of PED are included in the Company's
consolidated statements of income from the date of acquisition. The excess of
fair value of net assets acquired was approximately $108 million and is being
amortized on a straight-line basis over 40 years.
41
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Supplementary information related to the acquisitions of USG, WaterPro, WSMG
and PED is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Assets acquired............................................... $1,018,537
Liabilities assumed........................................... (318,059)
Common stock issued........................................... (139,025)
----------
Cash paid..................................................... 561,453
Fees and expenses............................................. 3,001
Less cash acquired............................................ (11,039)
----------
Net cash paid............................................... $ 553,415
==========
</TABLE>
Summarized below are the unaudited pro forma results of operations of the
Company as though USG, WaterPro, WSMG and PED had been acquired on April 1,
1996:
<TABLE>
<CAPTION>
1997
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
Revenues............................................... $2,112,193
==========
Net income............................................. $ 58,774
==========
Net income per common share............................ $ 0.78
==========
</TABLE>
During the year ended March 31, 1997, the Company completed other
acquisitions with an aggregate purchase price, including acquisition costs, of
approximately $77 million, consisting of $19.0 million in cash and the
delivery of 2,392,768 shares of Company common stock. The excess of fair value
of net assets acquired was approximately $65 million, and is being amortized
on a straight-line basis over 40 years.
On October 2, 1995, the Company completed the acquisition of all of the
outstanding capital stock of Polymetrics, Inc., and subsidiaries, a California
corporation ("Polymetrics"), pursuant to a Stock Purchase Agreement dated as
of August 30, 1995, as amended, between the Company and Anjou International
Company, a U.S. subsidiary of Compagnie Generale des Eaux of France. The total
purchase price for the acquisition of Polymetrics including acquisition costs,
was approximately $60 million consisting of $51.7 million in cash and the
delivery of 586,844 shares of Company common stock. The transaction was
effective as of October 1, 1995.
Polymetrics designs, manufactures, installs and services water treatment
systems for the electronics, pharmaceutical, laboratory, power generation and
cogeneration industries. Polymetrics also provides water treatment services,
including service deionization ("SDI"). The acquisition of Polymetrics has
been accounted for as a purchase and, accordingly, the results of operations
of Polymetrics are included in the Company's consolidated statements of income
from the date of acquisition. The excess of fair value of net assets acquired
was approximately $48 million and is being amortized on a straight-line basis
over 40 years.
On August 11, 1995, the Company purchased substantially all of the assets
and assumed certain liabilities of Continental H/2/O Services, Inc., d/b/a
Interlake Water Systems, an Illinois corporation ("Interlake"), pursuant to an
Asset Purchase Agreement among the Company, Interlake and the Stockholders of
Interlake. The acquisition was effective as of August 1, 1995. The purchase
price for the acquisition of Interlake, including acquisition costs, was
approximately $27 million consisting of $20.1 million in cash and the delivery
of 498,054 shares of Company common stock.
Interlake provides water treatment services, including SDI, in Illinois and
Michigan. In addition, Interlake sells and services a broad range of complex
water treatment systems and was the largest distributor of the
42
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's Continental product line in the United States. The acquisition of
Interlake has been accounted for as a purchase and, accordingly, the results
of operations of Interlake are included in the Company's consolidated
statements of income from the date of acquisition. The excess of fair value of
net assets acquired was approximately $19 million, and is being amortized on a
straight-line basis over 40 years.
On April 3, 1995, the Company acquired all of the outstanding capital stock
of The Permutit Company Limited, a U.K. corporation, and The Permutit Company
Pty. Ltd., an Australian corporation (collectively "The Permutit Group"),
pursuant to a Share Purchase Agreement between the Company and Thames Water
PLC, a U.K. corporation. The aggregate purchase price was approximately $10
million and was paid entirely in cash.
The Permutit Group provides a range of products, including pre-engineered
water treatment systems for the pharmaceutical, laboratory and chemical
markets and other commercial customers. The acquisition of The Permutit Group
has been accounted for as a purchase and, accordingly, the results of
operations of The Permutit Group are included in the Company's consolidated
statements of income from the date of acquisition. The excess of cost over
fair value of net assets acquired was approximately $7 million and is being
amortized on a straight-line basis over 40 years.
On May 4, 1995, the Company completed the acquisition of all of the
outstanding capital stock of Arrowhead Industrial Water, Inc. ("AIW") from The
B.F. Goodrich Company ("Goodrich") pursuant to a Stock Purchase Agreement
dated as of February 27, 1995, as amended. The acquisition was effective as of
April 30, 1995. The purchase price, as adjusted, was $84.3 million consisting
of $82.0 million in cash and the delivery of 131,616 shares of Company common
stock.
AIW, headquartered in Lincolnshire, Illinois, is a supplier of owned and
operated on-site industrial water treatment systems in the United States and
also provides emergency and temporary mobile water treatment systems.
The acquisition of AIW has been accounted for as a purchase and,
accordingly, the results of operations of AIW are included in the Company's
consolidated statements of income from the date of acquisition. The excess of
fair value of net assets acquired was approximately $36 million and is being
amortized on a straight-line basis over 40 years.
During the year ended March 31, 1996, the Company completed other
acquisitions with an aggregate purchase price of approximately $59 million,
consisting of $40 million in cash and the delivery of 1,232,166 shares of
Company Common Stock. The excess of fair value of net assets acquired was
approximately $68 million, and is being amortized on a straight-line basis
over 40 years.
Supplementary information related to the acquisitions of Polymetrics,
Interlake, The Permutit Group and AIW is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Assets acquired............................................... $230,986
Liabilities assumed........................................... (50,911)
Common stock issued........................................... (17,484)
--------
Cash paid..................................................... 162,591
Fees and expenses............................................. 1,514
Less cash acquired............................................ (894)
--------
Net cash paid............................................... $163,211
========
</TABLE>
43
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summarized below are the unaudited pro forma results of operations of the
Company as though USG, WaterPro, WSMG, PED, Polymetrics, Interlake, The
Permutit Group and AIW had been acquired on April 1, 1995:
<TABLE>
<CAPTION>
1996
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
Revenue................................................ $1,959,289
==========
Net income............................................. $ 32,403
==========
Net income per common share............................ $ 0.49
==========
</TABLE>
(10) CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process at
March 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Contract costs incurred to date....................... $ 243,976 504,725
Estimated profits..................................... 80,700 117,740
--------- --------
Contract revenue earned to date....................... 324,676 622,465
Less billings to date................................. (306,898) (557,111)
--------- --------
Cost and estimated earnings in excess of billings,
net.................................................. $ 17,778 65,354
========= ========
The above amounts are included in the accompanying consolidated balance
sheets as:
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ $ 33,575 107,537
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ (15,797) (42,183)
--------- --------
$ 17,778 65,354
========= ========
</TABLE>
Accounts receivable include retainage which has been billed, but is not due
pursuant to retainage provisions in construction contracts until completion of
performance and acceptance by the customer. This retainage aggregated $4.8
million and $13.7 million at March 31, 1996 and 1997, respectively.
Substantially all retained balances are collectible within one year.
44
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) LONG-TERM DEBT
Long-term debt at March 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Mortgage notes payable, secured by land and buildings,
interest rates ranging from 2% to 9.2%, due in 1999
through 2010............................................. $ 7,180 13,304
Guaranteed bank notes, interest rates ranging from 3.9% to
9.2%, due in 1999 through 2004........................... 1,276 1,631
Unsecured notes payable, interest rates ranging from 3.0%
to 9.0%, due in 1997 through 2001........................ 1,007 7,194
Other..................................................... 8,217 963
------- -------
17,680 23,092
Less current portion...................................... (7,892) (10,806)
------- -------
$ 9,788 12,286
======= =======
</TABLE>
The aggregate maturities of long-term debt for each of the five years
subsequent to March 31, 1997 are as follows: 1998, $10.8 million; 1999, $1.7
million; 2000, $1.6 million; 2001, $1.6 million; 2002, $1.9 million; and
thereafter, $5.5 million.
The Company has a long-term, unsecured revolving line of credit with a bank
of up to $400.0 million, of which $6.5 million was outstanding at March 31,
1997 and is included in notes payable in the accompanying consolidated balance
sheet. The line of credit expires December, 2001 and bears interest at the
bank's base rate or, in certain circumstances, Eurodollar rate. The line of
credit is subject to certain covenants for which the Company was in compliance
at March 31, 1997. At March 31, 1997, $62.1 million of standby letters of
credit were issued under this line of credit.
(12) CONVERTIBLE SUBORDINATED DEBENTURES
On December 11, 1996, the Company sold $414.0 million aggregate principal
amount of 4.5% Convertible Subordinated Debentures due December 15, 2001 (the
"Debentures"). The Debentures are convertible into common stock at any time
prior to maturity, redemption or repurchase at a conversion price of $39.50
per share, subject to adjustments in certain circumstances. The Debentures are
not redeemable prior to December 15, 1999, at which time the Debentures become
redeemable at the option of the Company, in whole or in part, at specified
redemption prices plus accrued and unpaid interest to the date of redemption.
Interest is payable semi-annually on June 15 and December 15, commencing June
15, 1997.
On September 18, 1995 the Company sold $140.0 million aggregate principal
amount of 6% Convertible Subordinated Notes due September 15, 2005 (the
"Notes"). The Notes are convertible into common stock at any time prior to
maturity, redemption or repurchase at a conversion price of $18.33 per share,
subject to adjustment in certain circumstances. The Notes are not redeemable
prior to September 23, 1998 at which time the Notes become redeemable at the
option of the Company, in whole or in part, at specified redemption prices
plus accrued and unpaid interest to the date of redemption. Interest is
payable semi-annually on March 15 and September 15 of each year, commencing on
March 15, 1996.
Effective August 31, 1994, the Company issued $45.0 million of subordinated
debt (the "Debt") with common stock purchase warrants in connection with the
acquisition of Smogless. On September 18, 1995, these warrants to purchase 3.8
million shares of Company common stock were exercised in exchange for the
Debt.
45
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 20, 1993, the Company sold $60.0 million aggregate principal
amount of 5% convertible subordinated debentures due October 15, 2000. As of
October 25, 1996, all of such debentures were converted into a total of
approximately 4.4 million shares of Company common stock pursuant to the terms
of the debentures.
(13) ACCRUED LIABILITIES
Accrued liabilities at March 31, 1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued job costs, start-up and customer deposits........... $ 26,329 61,108
Payroll, benefits and related taxes......................... 18,450 50,406
Organization, relocation and closure costs.................. 20,239 41,088
Warranty.................................................... 6,631 25,727
Future remediation.......................................... 1,729 10,625
Sales commission............................................ 3,674 10,014
Sales, property and other taxes............................. 5,335 9,647
Interest.................................................... 3,204 7,978
Other....................................................... 18,854 22,744
-------- -------
$104,445 239,337
======== =======
</TABLE>
Included in other long-term liabilities at March 31, 1997 is $14.6 million
of retiree benefits assumed by the Company as a result of certain acquisitions
during fiscal 1997.
(14) INCOME TAXES
Income tax expense (benefit) from continuing operations for the years ended
March 31, 1995, 1996 and 1997 consist of:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current............................................ $2,274 3,484 1,584
Deferred........................................... 1,926 2,999 13,364
State:
Current............................................ 682 878 732
Deferred........................................... (454) (504) 1,404
Non-U.S.:
Current............................................ 20 4,085 5,821
Deferred........................................... 1,554 2,240 (5,424)
------ ------ ------
$6,002 13,182 17,481
====== ====== ======
</TABLE>
46
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total income tax expense differed from the amounts computed by applying the
U.S. Federal corporate tax rate of 34% for 1995 and 1996 and 35% for 1997 to
income from continuing operations before income taxes as a result of the
following:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected income tax provision.................... $ 7,231 11,951 22,287
Permanent differences............................ 24 1,573 2,302
State franchise tax, net of Federal tax benefit.. 346 666 1,937
Change in balance of valuation allowance ........ (1,973) (3,351) (10,796)
Difference in U.S. tax rate and foreign tax
rates........................................... 511 2,032 1,762
Other............................................ (137) 311 (11)
------- ------ -------
$ 6,002 13,182 17,481
======= ====== =======
</TABLE>
As of March 31, 1997, the Company has net operating loss carryforwards in
France of approximately $16.4 million with an indefinite carryforward period
for which income tax benefit was recognized during fiscal 1997. Any benefit of
the French loss carryforward was required to be shared equally between the
Company and Alcoa until March 31, 1997. As of March 31, 1997, the Company also
had net operating loss carryforwards in other non-U.S. countries of
approximately $44.6 million which expire from 1998 to 2003.
Additionally, as of March 31, 1997, the Company has recognized the future
benefit of net operating loss carryforwards generated from Liquipure of $14.4
million. These loss carryforwards expire from 2002 to 2007. These operating
loss carryforwards can be used only against future taxable income of
Liquipure.
The Company also has available, at March 31, 1997, other net operating loss
carryforwards for U.S. Federal income tax purposes of approximately $15.0
million which expire in 2007 to 2010.
47
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The sources and tax effects of temporary differences between the financial
statement carrying amounts and tax basis of assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1996 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards............................ $ 27,664 36,514
Inventory............................................... 3,540 8,044
Allowance for doubtful accounts......................... 1,776 5,215
Warranty................................................ 1,837 2,656
Vacation................................................ 1,030 1,465
Other accruals.......................................... 1,134 19,967
Tax credits............................................. 501 276
Other................................................... 6,467 1,049
-------- -------
43,949 75,186
Valuation allowance....................................... (19,946) (20,659)
-------- -------
Total deferred tax assets............................. 24,003 54,527
Deferred tax liabilities:
Depreciation and amortization........................... 12,129 11,981
Prepaid expenses........................................ 500 353
Long-term contracts..................................... 4,206 11,123
Other................................................... 620 4,002
-------- -------
17,455 27,459
-------- -------
Net deferred tax assets............................... $ 6,548 27,068
======== =======
</TABLE>
The Company believes that it is more likely than not that the net deferred
tax assets, including Federal net operating loss carryforwards, will be
realized prior to their expiration. This belief is based on recent and
anticipated future earnings and, in part, on the fact that the Company has
completed several acquisitions during and including the three years ended
March 31, 1997 of companies with strong earnings potential. A valuation
allowance of $20.7 million at March 31, 1997 has been provided primarily for
state and foreign net operating losses which may not be realized prior to
expiration.
(15) SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
In January 1992 and September 1994, the Company issued 880,000 shares of a
new Series A Cumulative Convertible Preferred Stock and 185,185 shares of a
new Series B Convertible Preferred Stock, respectively, in connection with
acquisitions. On September 18, 1995, the Company repurchased and canceled
139,518 shares of Series B Preferred stock for $4.7 million and converted
45,667 shares of Series B Preferred Stock into 102,750 shares of Company
common stock. On March 4, 1996, the holder of the Company's Series A Preferred
Stock tendered the 880,000 preferred shares for conversion into 1,980,000
shares of Company common stock pursuant to terms of the security.
COMMON STOCK
On December 5, 1994 and July 15, 1996, the Company paid in the form of stock
dividends a three-for-two split of the Company's common stock. All references
to income per common share and other common stock information in the
accompanying consolidated financial statements and notes thereto have been
restated to reflect these splits.
48
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On December 11, 1996, the Company completed an underwritten public offering
of 11,804,206 shares of its common stock at a price equal to $31.625 per
share. The net proceeds to the Company, after underwriting discounts and
commissions and other related expenses, were $356.1 million.
On May 3, 1995, the Company completed an underwritten public offering of
10,350,000 shares of its common stock at a price equal to $10.00 per share.
The net proceeds to the Company, after underwriting discounts and commissions
and other related expenses, were $97.3 million.
OPTIONS
Under the Company's 1991 Employee Stock Option Plan (the "Plan"), the
exercise price of options granted is equal to their fair market value at the
date of grant and the maximum term of the option may not exceed 10 years. If
the optionee is a holder of more than 10% of the outstanding common stock of
the Company, the option price per share is increased to at least 110% of fair
market value, and the option term is limited to 5 years. The total number of
shares of common stock available under the Plan is 3,881,250 shares. Each
option granted becomes exercisable on a cumulative basis, 25% six months
following the date of grant and 25% on each subsequent anniversary of the
grant date until fully vested.
Under the Company's 1991 Director Stock Option Plan (the "Directors Plan"),
the exercise price of options granted was equal to the higher of $2.00 below
the market price or 60% of the market price on the date of grant. Effective
April 1, 1996 the Directors Plan was amended to grant options equal to their
fair market value at the date of grant. Under the Plan, each director of the
Company who is not a full-time employee of the Company will receive each year
an option to purchase 12,000 shares of common stock. The total number of
shares available under the Directors Plan is 562,500 shares. Compensation
expense of $.1 million was recorded in fiscal 1995 and fiscal 1996 related to
the Directors Plan.
The per share weighted-average fair value of stock options granted during
fiscal 1996 and fiscal 1997 was $5.93 and $9.49, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions for fiscal 1996 and fiscal 1997: expected dividend yield 0%, risk-
free interest rate of 6.3%, expected volatility of the stock price of 41.9%
and an expected life of 5 years.
The Company continues to apply APB Opinion No. 25 in accounting for its
Plans and, accordingly, no compensation cost has been recognized for its stock
options in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income and net income per common
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
--------------
1996 1997
------- ------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net income
As reported................................................. $21,967 46,197
Pro forma................................................... $19,926 41,867
Net income per common share
As reported................................................. $ 0.49 0.77
Pro forma................................................... $ 0.44 0.69
</TABLE>
49
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma net income and net income per common share reflects only options
granted in fiscal 1996 and 1997. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net income and net income per common share amounts presented above
because compensation reflected over the options' vesting period of 10 years
and compensation cost for options granted prior to April 1, 1995 is not
considered. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that do not have vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
value of an estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
Transactions involving the Plan and Directors Plan are summarized as
follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
SHARES EXERCISE PRICE VALUE
--------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at March 31, 1994.......... 1,925,882 $ 1.35 to 10.95 $ 15,642
Options granted.................... 898,290 1.35 to 10.59 7,650
Options exercised.................. (241,040) 2.45 to 9.83 (1,422)
Options canceled................... (40,785) 7.33 to 9.83 (375)
--------- --------------- --------
Balance at March 31, 1995.......... 2,542,347 1.35 to 10.95 21,495
Options granted.................... 1,013,250 9.04 to 18.67 12,764
Options exercised.................. (487,886) 1.35 to 10.95 (3,678)
Options canceled................... (20,626) 8.53 to 10.58 (183)
--------- --------------- --------
Balance at March 31, 1996.......... 3,047,085 1.35 to 18.67 30,398
Options granted.................... 934,874 18.67 to 34.88 18,773
Options exercised.................. (659,260) 1.35 to 26.25 (11,886)
Options canceled................... (27,415) 4.97 to 13.83 (309)
--------- --------------- --------
Balance at March 31, 1997.......... 3,295,284 $ 1.35 to 34.88 $ 36,976
========= =============== ========
</TABLE>
At March 31, 1996 and 1997, the number of options exercisable was 1.8
million and 2.2 million, respectively.
In connection with the options and convertible subordinated debentures, the
Company has reserved 20.9 million shares at March 31, 1997 for future
issuance.
(16) RETIREMENT PLANS
Pursuant to the terms of a collective bargaining agreement, one of the
Company's U.S. subsidiaries has a defined benefit pension plan covering
substantially all of its hourly employees. Pension plan benefits are generally
based upon years of service and compensation. The Company's funding policy is
to contribute at least the minimum amounts required by the U.S. Employee
Retirement Income Security Act of 1974 ("ERISA") or additional amounts to
assure that plan assets will be adequate to provide retirement benefits. Plan
assets are invested in broadly diversified portfolios of government
obligations, mutual funds and fixed income and equity securities. The
accumulated benefit obligation under this plan is not material to the
consolidated financial statements.
50
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has a defined contribution plan (under IRC Section 401(k))
covering substantially all U.S. salaried and hourly participating employees
which provide for contributions based primarily upon compensation levels and
employee contributions. The Company funds its contributions to these plans as
accrued and as provided by ERISA. Defined contribution plan expense to the
Company was $.8 million, $1.6 million and $3.8 million for the years ended
March 31, 1995, 1996 and 1997, respectively.
(17) BUSINESS SEGMENT DATA AND EXPORT SALES
The Company's sole business segment is the design, manufacture, operation,
distribution and service of equipment and supplies for filtration, water
treatment and wastewater treatment for industrial and municipal customers.
There were no sales to any individual customers which accounted for 10% or
more of revenue in fiscal 1995, 1996 and 1997. Export sales were $37.9
million, $58.6 million and $85.4 million in fiscal 1995, 1996 and 1997,
respectively.
Information about the Company's operations in different geographic locations
for the years ended March 31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States................................... $488,066 599,455 957,078
Non-U.S......................................... 112,766 212,867 419,523
-------- ------- ---------
$600,832 812,322 1,376,601
======== ======= =========
Operating income:
United States................................... $ 21,619 28,301 52,982
Non-U.S......................................... 6,428 17,081 29,931
-------- ------- ---------
$ 28,047 45,382 82,913
======== ======= =========
Income before income tax expense:
United States................................... $ 16,491 21,520 39,462
Non-U.S......................................... 4,778 13,629 24,216
-------- ------- ---------
$ 21,269 35,149 63,678
======== ======= =========
Identifiable assets:
United States................................... $343,954 602,670 1,526,101
Non-U.S......................................... 164,129 301,667 702,227
-------- ------- ---------
$508,083 904,337 2,228,328
======== ======= =========
</TABLE>
(18) COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
The Company and its subsidiaries lease certain facilities and equipment
under various noncancelable and month-to-month leases. These leases are
accounted for as operating leases. Rent expense aggregated $8.3 million, $9.0
million and $13.7 million in 1995, 1996 and 1997, respectively.
51
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the future minimum annual rental commitments as of March 31,
1997, under operating leases follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
--------------
(IN THOUSANDS)
<S> <C>
Fiscal year ending:
1998........................................................ $14,956
1999........................................................ 11,177
2000........................................................ 7,335
2001........................................................ 4,345
2002........................................................ 4,513
Thereafter.................................................. 3,704
-------
Total minimum lease payments.................................. $46,030
=======
</TABLE>
CONTINGENT LIABILITIES
In December of 1995, allegations were made by federal and state
environmental regulatory authorities of multiple violations in connection with
wastewater discharges at a facility owned by the Company. The facility was
acquired by the Company as part of its acquisition of Polymetrics on October
2, 1995. The Company has rights of indemnity from the seller which could be
available if monetary damages and penalties are incurred in connection with
any alleged violations occurring prior to the Company's acquisition of
Polymetrics. In the opinion of management, the ultimate liability that may
result from the above matter will not have a material adverse effect on the
Company's consolidated financial position or results of operations (see note
9).
Zimpro is party to certain agreements (entered into in 1990 at the time
Zimpro was acquired from unrelated third parties by the entities from which it
was later acquired by the Company), pursuant to which Zimpro agreed, among
other things, to pay the original sellers a royalty of 3.0% of its annual
consolidated net sales of certain products in excess of $35.0 million through
October 25, 2000. Under certain interpretations of such agreements, with which
the Company disagrees, Zimpro could be liable for such royalties with respect
to the net sales attributable to products, systems and services of certain
defined wastewater treatment businesses acquired by Zimpro or the Company or
the Company's other subsidiaries after May 31, 1996. The defined businesses
include, among others, manufacturing machinery and equipment, and engineering,
installation, operation and maintenance services related thereto, for the
treatment and disposal of waste liquids, toxic waste and sludge. One of the
prior sellers has revealed in a letter to the Company an interpretation
contrary to that of the Company. The Company believes that it would have
meritorious defenses to any claim based upon any such interpretation and would
vigorously pursue the elimination of any threat to expand what it believes to
be its obligations pursuant to such agreements.
Legal proceedings pending against the Company consist of litigation
incidental to the Company's business and in the opinion of management, based
in part upon the opinion of counsel, the outcome of such litigation will not
materially affect the Company's consolidated financial position or results of
operations.
52
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(19) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
NET INCOME
REVENUES GROSS PROFIT NET INCOME PER SHARE*
-------- ------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
First quarter.................... $174,793 42,309 4,733 0.12
Second quarter................... $194,669 50,326 7,108 0.17
Third quarter.................... $211,673 54,188 8,061 0.17
Fourth quarter................... $231,187 59,273 2,065 0.04
1997
First quarter.................... $222,958 59,152 7,694 0.15
Second quarter................... $247,854 66,424 6,969 0.13
Third quarter.................... $368,124 91,180 14,351 0.23
Fourth quarter................... $537,665 133,597 17,183 0.23
</TABLE>
- --------
* Per common and common equivalent share.
53
<PAGE>
ITEM 9--CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item (other than the information regarding
executive officers set forth at the end of Item 1 of Part I of this Form 10-K)
will be contained in the Company's definitive Proxy Statement for its 1997
Annual Meeting of Stockholders under the captions "Election of Directors" and
"Security Ownership--Section 16(a) Beneficial Ownership Reporting Compliance,"
and is incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders under
the captions "Election of Directors" and "Executive Compensation," and is
incorporated herein by reference.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders under
the caption "Security Ownership," and is incorporated herein by reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders under
the caption "Executive Compensation--Certain Transactions," and is
incorporated herein by reference.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
The following report and financial statements are filed as part of this Form
10-K:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. 28
Consolidated Balance Sheets as of March 31, 1996 and 1997................ 29
Consolidated Statements of Income--Years Ended March 31, 1995, 1996 and
1997.................................................................... 30
Consolidated Statements of Shareholders' Equity--Years Ended March 31,
1995, 1996 and 1997..................................................... 31
Consolidated Statements of Cash Flows--Years Ended March 31, 1995, 1996
and 1997................................................................ 33
Notes to Consolidated Financial Statements............................... 35
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULE:
See (d) below.
54
<PAGE>
(a)(3) EXHIBITS:
The following exhibits are filed herewith or incorporated by reference
herein:
<TABLE>
<C> <S>
2.1 Stock Purchase Agreement dated August 30, 1995 among United States Filter
Corporation, Anjou International Company and Polymetrics, Inc.
(incorporated by reference to Exhibit 1.0 to Form 8-K dated October 2,
1995 (File No. 1-10728)).*
2.2 Agreement and Plan of Merger dated as of April 15, 1996 among United
States Filter Corporation, U.S. Filter/Zimpro Acquisition Corp.,
Landegger Environmental Holdings, Inc., John Hancock Capital Growth Fund
II Limited Partnership, John Hancock Capital Growth Fund II Limited
Partnership, Carl C. Landegger, Trustee and Black Clawson Company
(incorporated by reference to Exhibit 1.0 to Form 8-K dated May 31, 1996
(File No. 1-10728)).*
2.3 Agreement and Plan of Merger dated as of June 10, 1996 among United States
Filter Corporation, U.S. Filter/DWW Acquisition Corporation and Davis
Water & Waste Industries, Inc. (incorporated by reference to Exhibit 2.1
to Form 8-K dated June 10, 1996 (File No. 1-10728)).*
2.4 Amendment to Agreement and Plan of Merger dated as of July 10, 1996, among
United States Filter Corporation, U.S. Filter/DWW Acquisition Corporation
and Davis Water & Waste Industries, Inc., (incorporated by reference to
Exhibit 2.02 to Registration Statement on Form S-4 (File No. 333-08223)).
2.5 Amended and Restated Purchase and Sale Agreement dated as of September 14,
1996 between Wheelabrator Technologies Inc. and United States Filter
Corporation (incorporated by reference to Exhibit 2.1 to Registration
Statement on Form S-3 (File No. 333-14277)).*
2.6 Agreement and Amendment dated as of December 2, 1996 between Wheelabrator
Technologies Inc. and United States Filter Corporation (incorporated by
reference to Exhibit 2.2 to Form 8-K dated December 2, 1996 (File No. 1-
10728)).*
2.7 Agreement, dated October 7, 1996, between United Utilities PLC and certain
of its subsidiaries and United States Filter Corporation (incorporated by
reference to Exhibit 2.2 to Form 8-K dated October 28, 1996 (File No. 1-
10728)).*
2.8 Stock Purchase Agreement dated as of September 10, 1996 among Edmundson
International, Inc., United States Filter Corporation and WaterPro
Supplies Corporation (incorporated by reference to Exhibit 2.3 to
Registration Statement on Form S-3 (File No. 333-14277)).*
3.0 Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.0 to Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 (File No. 1-10728)).
3.1 Restated Bylaws (incorporated by reference to Exhibit 3.3 to Registration
Statement on Form S-1 (No. 33-41089)).
4.0 6% Convertible Subordinated Notes Indenture dated as of September 18, 1995
between United States Filter Corporation and The First National Bank of
Boston, as Trustee (incorporated by reference to Exhibit 4.3 to
Registration Statement on Form S-3 (No. 33-63281)).
4.1 4 1/2% Convertible Subordinated Notes Indenture dated as of December 17,
1996 between United States Filter Corporation and State Street Bank and
Trust Company of California, N.A., as Trustee (incorporated by reference
to Exhibit 4.1 to Registration Statement on Form S-3 (No. 333-14281)).
4.2 Amended and Restated Multicurrency Credit Agreement, dated as of December
2, 1996, among United States Filter Corporation and certain of its
subsidiaries, the Lenders named therein, DLJ Capital Funding, Inc., as
Documentation Agent, ABN AMRO Bank, N.V., as Co-Agent, and The First
National Bank of Boston, as Managing Agent (incorporated by reference to
Exhibit 4.1 to Form 8-K dated December 2, 1996 (File No. 1-10728)).
4.3 Transfer, Registration and Other Rights Agreement dated as of August 31,
1994 by and among United States Filter Corporation, Laidlaw International
Investments (Luxembourg) S.A., Laidlaw Investments (Barbados) Ltd.,
Marfit, S.p.A., Laidlaw, Inc. and Ing. Gilberto Cominetta (incorporated
by reference to Exhibit 2.5 to Form 8-K dated October 4, 1994 (File No.
1-10728)).
</TABLE>
55
<PAGE>
<TABLE>
<C> <S>
4.4 Letter Dated May 29, 1996 from Laidlaw Inc. to United States Filter
Corporation, amending the Transfer, Registration and Other Rights
Agreement dated as of August 31, 1994 (incorporated by reference to
Exhibit 4.4 to Form 10-K for the year ended March 31, 1996 (File No. 1-
10728)).
10.1 License Agreements dated November 22, 1989 between Millipore Corporation,
Millipore Investment Holdings Limited and IP Holding Company
(incorporated by reference to Exhibit 10.4 to Form 10-K for the year
ended March 31, 1994 (File No. 1-10728)).
10.2 United States Filter Corporation 1991 Employees Stock Option Plan, as
amended through September 13, 1996 (incorporated by reference to Exhibit
10.0 to Form 10-Q for the quarter ended September 30, 1996 (File No. 1-
10728)).
10.3 United States Filter Corporation 1991 Directors Stock Option Plan, as
amended through September 13, 1996 (incorporated by reference to Exhibit
10.0 to Form 10-Q for the quarter ended September 30, 1996 (File No. 1-
10728)).
10.4 Form of Executive Retention Agreement (incorporated by reference to
Exhibit 10.6 to Form 10-K for the year ended March 31, 1995 (File No. 1-
10728)).
10.5 Form of Executive Retirement Plan (incorporated by reference to Exhibit
10.7 to Form 10-K for the year ended March 31, 1995 (File No. 1-10728)).
10.6 Annual Incentive Compensation Plan Summary (incorporated by reference to
Exhibit 10.6 to Form 10-K for the year ended March 31, 1996 (File No. 1-
10728)).
10.7 Employment Agreement dated October 25, 1996 between Harry K. Hornish, Jr.
and United States Filter Corporation.
12.0 Statement re computation of ratio of earnings to fixed charges.
21.0 Schedule of Subsidiaries.
23.0 Independent Auditors' Consent.
27.0 Financial Data Schedule.
</TABLE>
- --------
* Certain exhibits and schedules to the Exhibits incorporated by reference
herein have been omitted in accordance with Item 601(b)(2) of Regulation S-
K. A copy of any omitted exhibit or schedule will be furnished to the
Commission upon request.
(B) REPORTS ON FORM 8-K:
The Company filed one report on Form 8-K during the quarter ended March 31,
1997 dated January 6, 1997 reporting the acquisition by the Company of the
Process Equipment Division of United Utilities Plc ("PED"). The Profit and
Loss Account of PED for the Six Months ended 30 September 1995 and 1996, the
Balance Sheet of PED as of 30 September 1996 and the Cash Flow Statements of
PED for the Six Months ended 30 September 1995 and 1996 were filed as part of
such Form 8-K. The other financial statements of PED and pro forma financial
information as required by Regulation S-X of the Commission were previously
filed in the Company's Form 8-K dated October 28, 1996, as amended on Form 8-
K/A dated December 19, 1996.
(C) EXHIBITS:
See (a) (3) above.
(D) FINANCIAL STATEMENT SCHEDULE:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report on Schedule.............................. 57
<CAPTION>
SCHEDULE
--------
<S> <C>
II Valuation and Qualifying Accounts................................ 58
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the United States Securities and Exchange Commission have been
omitted because such schedules are not required under the related instructions
or are inapplicable or because the information required is included in the
consolidated financial statements or notes thereto.
56
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Shareholders United States Filter Corporation:
The audits referred to in our report dated June 6, 1997 included the related
financial statement schedule as of March 31, 1996 and 1997, and for each of
the years in the three-year period ended March 31, 1997, included in the
annual report on Form 10-K of United States Filter Corporation. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
KPMG Peat Marwick LLP
Orange County, California
June 23, 1997
57
<PAGE>
SCHEDULE II--UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE-YEARS ENDED MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE ACQUIRED AMOUNTS AMOUNTS BALANCE
AT BEGINNING THROUGH CHARGED TO WRITTEN AT END
DESCRIPTION OF PERIOD ACQUISITION EXPENSE OFF OF PERIOD
----------- ------------ ----------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended March 31,
1997:
Allowance for Doubtful
Accounts............... $10,165 $11,802 $6,871 $(4,243) $24,595
======= ======= ====== ======= =======
Year Ended March 31,
1996:
Allowance for Doubtful
Accounts............... $ 4,928 $ 1,172 $6,220 $(2,155) $10,165
======= ======= ====== ======= =======
Year Ended March 31,
1995:
Allowance for Doubtful
Accounts............... $ 3,584 $ 603 $2,266 $(1,525) $ 4,928
======= ======= ====== ======= =======
</TABLE>
58
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE UNITED STATES
SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS ANNUAL
REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED.
UNITED STATES FILTER CORPORATION
/s/ Richard J. Heckmann
By: _________________________________
RICHARD J. HECKMANN
CHAIRMAN OF THE BOARD, CHIEF
EXECUTIVE OFFICER AND PRESIDENT
Date: June 23, 1997
PURSUANT TO THE REQUIREMENTS OF THE UNITED STATES 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.
SIGNATURE TITLE DATE
/s/ Richard J. Heckmann Chairman of the June 23, 1997
- ------------------------------------- Board, Chief
RICHARD J. HECKMANN Executive Officer
and President
/s/ Kevin L. Spence Vice President and June 23, 1997
- ------------------------------------- Chief Financial
KEVIN L. SPENCE Officer (Principal
Accounting Officer)
/s/ Michael J. Reardon Director and June 23, 1997
- ------------------------------------- Executive Vice
MICHAEL J. REARDON President
/s/ Tim L. Traff Director and Senior June 23, 1997
- ------------------------------------- Vice President
TIM L. TRAFF
/s/ James E. Clark Director June 23, 1997
- -------------------------------------
JAMES E. CLARK
/s/ John L. Diederich Director June 23, 1997
- -------------------------------------
JOHN L. DIEDERICH
59
<PAGE>
SIGNATURE TITLE DATE
/s/ Robert S. Hillas Director June 23, 1997
- -------------------------------------
ROBERT S. HILLAS
/s/ Arthur B. Laffer Director June 23, 1997
- -------------------------------------
ARTHUR B. LAFFER
/s/ Alfred B. Osborne, Jr. Director June 23, 1997
- -------------------------------------
ALFRED B. OSBORNE, JR.
/s/ J. Danforth Quayle Director June 23, 1997
- -------------------------------------
J. DANFORTH QUAYLE
/s/ C. Howard Wilkins, Jr. Director June 23, 1997
- -------------------------------------
C. HOWARD WILKINS, JR.
60
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 Stock Purchase Agreement dated August 30, 1995 among United States
Filter Corporation, Anjou International Company and Polymetrics, Inc.
(incorporated by reference to Exhibit 1.0 to Form 8-K dated October
2, 1995 (File No. 1-10728)).*
2.2 Agreement and Plan of Merger dated as of April 15, 1996 among United
States Filter Corporation, U.S. Filter/Zimpro Acquisition Corp.,
Landegger Environmental Holdings, Inc., John Hancock Capital Growth
Fund II Limited Partnership, John Hancock Capital Growth Fund II
Limited Partnership, Carl C. Landegger, Trustee and Black Clawson
Company (incorporated by reference to Exhibit 1.0 to Form 8-K dated
May 31, 1996 (File No. 1-10728)).*
2.3 Agreement and Plan of Merger dated as of June 10, 1996 among United
States Filter Corporation, U.S. Filter/DWW Acquisition Corporation
and Davis Water & Waste Industries, Inc. (incorporated by reference
to Exhibit 2.1 to Form 8-K dated June 10, 1996 (File No. 1-10728)).*
2.4 Amendment to Agreement and Plan of Merger dated as of July 10, 1996,
among United States Filter Corporation, U.S. Filter/DWW Acquisition
Corporation and Davis Water & Waste Industries, Inc., (incorporated
by reference to Exhibit 2.02 to Registration Statement on Form S-4
(File No. 333-08223)).
2.5 Amended and Restated Purchase and Sale Agreement dated as of September
14, 1996 between Wheelabrator Technologies Inc. and United States
Filter Corporation (incorporated by reference to Exhibit 2.1 to
Registration Statement on Form S-3 (File No. 333-14277)).*
2.6 Agreement and Amendment dated as of December 2, 1996 between
Wheelabrator Technologies Inc. and United States Filter Corporation
(incorporated by reference to Exhibit 2.2 to Form 8-K dated December
2, 1996 (File No. 1-10728)).*
2.7 Agreement, dated October 7, 1996, between United Utilities PLC and
certain of its subsidiaries and United States Filter Corporation
(incorporated by reference to Exhibit 2.2 to Form 8-K dated October
28, 1996 (File No. 1-10728)).*
2.8 Stock Purchase Agreement dated as of September 10, 1996 among
Edmundson International, Inc., United States Filter Corporation and
WaterPro Supplies Corporation (incorporated by reference to Exhibit
2.3 to Registration Statement on Form S-3 (File No. 333-14277)).*
3.0 Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.0 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (File No. 1-10728)).
3.1 Restated Bylaws (incorporated by reference to Exhibit 3.3 to
Registration Statement on Form S-1 (No. 33-41089)).
4.0 6% Convertible Subordinated Notes Indenture dated as of September 18,
1995 between United States Filter Corporation and The First National
Bank of Boston, as Trustee (incorporated by reference to Exhibit 4.3
to Registration Statement on Form S-3 (No. 33-63281)).
4.1 4 1/2% Convertible Subordinated Notes Indenture dated as of December
17, 1996 between United States Filter Corporation and State Street
Bank and Trust Company of California, N.A., as Trustee (incorporated
by reference to Exhibit 4.1 to Registration Statement on Form S-3
(No. 333-14281)).
4.2 Amended and Restated Multicurrency Credit Agreement, dated as of
December 2, 1996 among United States Filter Corporation and certain
of its subsidiaries, the Lenders named therein, DLJ Capital Funding,
Inc., as Documentation Agent, ABN AMRO Bank, N.V., as Co-Agent, and
The First National Bank of Boston, as Managing Agent (incorporated by
reference to Exhibit 4.1 to Form 8-K dated December 2, 1996 (File No.
1-10728)).
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.3 Transfer, Registration and other Rights Agreement dated as of August
31, 1994 by and among United States Filter Corporation, Laidlaw
International Investments (Luxembourg) S.A., Laidlaw Investments
(Barbados) Ltd., Marfit, S.p.A., Laidlaw, Inc. and Ing. Gilberto
Cominetta (incorporated by reference to Exhibit 2.5 to Form 8-K dated
October 4, 1994 (File No. 1-10728)).
4.4 Letter Dated May 29, 1996 from Laidlaw Inc. to United States Filter
Corporation, amending the Transfer, Registration and Other Rights
Agreement dated as of August 31, 1994 (incorporated by reference to
Exhibit 4.4 to Form 10-K for the year ended March 31, 1996 (File No.
1-10728)).
10.1 License Agreements dated November 22, 1989 between Millipore
Corporation, Millipore Investment Holdings Limited and IP Holding
Company (incorporated by reference to Exhibit 10.4 to Form 10-K for
the year ended March 31, 1994 (File No. 1-10728)).
10.2 United States Filter Corporation 1991 Employees Stock Option Plan, as
amended through September 13, 1996 (incorporated by reference to
Exhibit 10.0 to Form 10-Q for the quarter ended September 30, 1996
(File No. 1-10728)).
10.3 United States Filter Corporation 1991 Directors Stock Option Plan, as
amended through September 13, 1996 (incorporated by reference to
Exhibit 10.0 to Form 10-Q for the quarter ended September 30, 1996
(File No. 1-10728)).
10.4 Form of Executive Retention Agreement (incorporated by reference to
Exhibit 10.6 to Form 10-K for the year ended March 31, 1995 (File No.
1-10728)).
10.5 Form of Executive Retirement Plan (incorporated by reference to
Exhibit 10.7 to Form 10-K for the year ended March 31, 1995 (File No.
1-10728)).
10.6 Annual Incentive Compensation Plan Summary (incorporated by reference
to Exhibit 10.6 to Form 10-K for the year ended March 31, 1996 (file
No. 1-10728)).
10.7 Employment Agreement dated October 25, 1996 between Harry K. Hornish,
Jr. and United States Filter Corporation.
12.0 Statement re computation of ratio of earnings to fixed charges.
21.0 Schedule of Subsidiaries.
23.0 Independent Auditors' Consent.
27.0 Financial Data Schedule.
</TABLE>
- --------
* Certain exhibits and schedules to the Exhibits incorporated by reference
herein have been omitted in accordance with Item 601(b)(2) of Regulation S-
K. A copy of any omitted exhibit or schedule will be furnished to the
Commission upon request.
62
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
This Agreement (as it may be amended from time to time hereafter, the
"Agreement"), dated this 25th day of October, 1996, between The Utility Supply
Group, Inc., a Georgia Corporation (the "Company"), and Harry K. Hornish, Jr.
(the "Employee").
The Employee has been employed as the President of the Company, which is a
wholly-owned subsidiary of USG Holding Corporation (the "Parent"). The Company
is being acquired by United States Filter Corporation ("U.S. Filter") through
the merger of a subsidiary of U.S. Filter (the "Merger Subsidiary") with and
into the Parent pursuant to an Agreement and Plan of Merger, dated as of
September 6, 1996, among the Parent and its then current stockholders, U.S.
Filter and the Merger Subsidiary (the "Merger"). Upon the effectiveness of the
Merger, the separate existence of the Merger Subsidiary shall cease, the Parent
shall continue as the surviving corporation and the Company shall become an
indirect subsidiary of U.S. Filter. The Company desires that the Employee
continue in its employ following the Merger, and the Employee desires to accept
such employment, on the terms and conditions set forth below.
In consideration of the mutual agreements hereinafter set forth, the
Company and the Employee hereby agree as follows:
1. Former Employment Agreement. As a condition precedent to the
---------------------------
effectiveness of the Merger, the Employee has tendered his resignation as an
officer and director of the Parent and the Company. The Employee acknowledges
that such resignation constitutes a termination by mutual agreement between the
Company and him pursuant to Section 4(a)(v) of the Employment and
Confidentiality Agreement dated May 31, 1994 between the Company and him (the
"Former Employment Agreement") and that his covenants in Sections 5 and 6 of the
Former Employment Agreement shall survive such termination in accordance with
Section 4(b) thereof and shall not be affected by the Merger or this Agreement,
except as provided in the following sentence. The Company and the Employee agree
that the provisions of Sections 5 and 6 of the Former Employment Agreement shall
be deemed amended to the extent necessary to permit the employee's employment as
contemplated hereby.
2. Term and Location. The Company agrees to employ the Employee, and the
-----------------
Employee shall serve the Company, for the period beginning upon the
effectiveness of the Merger and ending at the close of business on March 31,
1999 (the "Term"). The Employee shall report to and shall perform the duties
assigned from time to time by the Chairman (the "Chairman") of the Board of
Directors of the Company (the "Board") or his designee, and as are provided in
the Bylaws of the Company as then in effect. The Employee is engaged initially
with the title and functions of Executive Vice President of the Company;
provided, however, that nothing herein shall preclude the Chairman or his
designee from changing the Employee's title and duties, including without
limitation (i) expanding the scope of Employee's duties and responsibilities to
include other businesses heretofore or hereafter conducted or acquired by the
Company, U.S. Filter or any of their respective Affiliates (as defined below) or
(ii) causing the Employee to render services to any Affiliate of U.S. Filter
other than the Company. For purposes of this Agreement, "Affiliate" means with
respect to any person or entity, any other person or entity that, directly or
indirectly, controls, is controlled by or is under common control with, such
person or entity. For purposes of the definition of "Affiliate" the term
"control" (and its derivatives), when used with respect to any specified person
or entity, means the power to direct the management and policies of
<PAGE>
such person or entity, directly or indirectly, whether through ownership of
voting securities, by contract or otherwise.
3. Duties. During the Term and consistent with his position, the Employee
------
shall (i) devote the whole of his working effort, time, attention and skill to
his duties hereunder, (ii) faithfully, loyally and industriously perform such
duties and exercise such powers as may be from time to time assigned to him by
the Chairman, his designee or the By-laws of the Company, (iv) diligently adhere
to and implement the directions and policies of the Chairman, the Company, the
Parent and U.S. Filter, and (v) use his best efforts to promote the interests of
the Company, the Parent, U.S. Filter and their respective Affiliates.
4. Compensation, Benefits and other Payments.
-----------------------------------------
a. During the Term, the Employee shall be paid a base salary of two
hundred fifty thousand dollars ($250,000) per annum. The Employee's salary shall
be payable in accordance with the employer's then prevailing payroll practices.
b. During the Term, the Employee shall be eligible to receive cash
performance bonuses as follows:
(i) From the effectiveness of the Merger through December 31,
1996 (the "First Bonus Period"), the Employee shall be eligible to receive a
cash bonus of up to $100,000; provided that the Company attains the objectives
upon which the employee's bonus for calendar year 1996 had been based prior to
the Merger under the Former Employment Agreement.
(ii) For the fifteen-month period from January 1, 1997 through
March 31, 1998 (the "Second Bonus Period") and for the twelve-month period from
April 1, 1998 through March 31, 1999 (the "Third Bonus Period" and each of the
First, Second and Third Bonus Periods, a "Bonus Period"), the Employee shall be
eligible to receive a cash bonus of up to $125,000 for the Second Bonus Period
and up to $100,000 for the Third Bonus Period based upon the Company's
attainment during such Bonus Period of specified performance objectives to be
established pursuant to clause (iv) below (the "Company Performance
Objectives").
(iii) For each of the Second and Third Bonus Periods, the
Employee shall be eligible to receive, in addition to any bonus payable pursuant
to clause (ii) above, a cash bonus of up to a maximum of 35% of his base salary
paid pursuant to Paragraph 4.a., based upon the attainment during such Bonus
Period by the Company, combined with any other distribution business conducted
by or through U.S. Filter or any of its Affiliates that report to the Employee
or for which the Employee otherwise has supervisory responsibility, of specified
performance objectives for such combined businesses to be established pursuant
to clause (iv) below (the "Combined Performance Objectives" and together with
the Company Performance Objectives, the "Performance Objectives").
(iv) Subject to the following sentence, the Performance
Objectives that shall apply to each of the Second and Third Bonus Periods shall
be established no later than March 31 of 1997 and 1998, respectively, by good
faith agreement of the parties. In the event that, at any time after the
establishment of Performance Objectives for a Bonus Period, the scope of
Employee's responsibilities and duties are expanded to include businesses other
than that theretofore conducted by the Company, the parties shall adjust the
Performance Objectives applicable to the Bonus Period in which such expansion
2
<PAGE>
occurs in such manner as may be appropriate in their good faith judgment such
that the Performance Objectives, as so adjusted, properly reflect such
expansion.
(v) Any cash bonus payable to the Employee pursuant to
subparagraph b. above shall be paid by check, or upon the request of the
Employee by direct deposit in an account designated by the Employee for such
purpose, in the amount thereof within 120 days following the end of the
applicable Bonus Period.
c. The Employee shall be eligible to participate in U.S. Filters'
1991 Employee Stock Option Plan, subject to all of the applicable terms and
conditions of such Plan.
d. The Employee shall be entitled to such vacation time, sick leave,
perquisites of office, fringe benefits, insurance coverage, retirement and
savings plans, other employee benefit and welfare plans, and other terms and
conditions of employment as the Company generally provides to its employees
having rank comparable to the Employee, subject to the applicable provisions of
such arrangement.
5. Termination of Employment. Unless terminated in accordance with the
-------------------------
provisions of this Paragraph 5, the Company shall continue to employ the
Employee and the Employee shall continue to work for the Company, during the
Term.
a. The Employee's employment shall terminate automatically upon the
death of the Employee.
b. The Company may terminate the Employee's employment if, due to a
physical or mental condition as certified by a physician selected by the
Company, the Employee has not substantially performed his duties hereunder for a
period of ninety (90) consecutive days.
c. The Company may terminate the Employee's employment at any time
for cause. For purposes of this Agreement, "cause" shall mean (i) a default or
other breach by the Employee of his obligations or representations under this
Agreement if the Chairman or his designee notifies the Employee of such default
or other breach in writing and the Employee fails to cure such default or other
breach within five days after such written notice has been given; (ii)
misconduct, disloyalty, dishonesty, insubordination or other deliberate act or
omission by the executive detrimental or damaging in a significant way to the
business or the good will of the Company or any of its Affiliates or materially
damaging to the Company's relationships, or the relationships of the Company's
Affiliates, with customers, suppliers or employees; (iii) fraud, embezzlement,
misappropriation, dishonesty or breach of trust; (iv) a felony or a crime of
moral turpitude; (v) a failure or refusal by the Employee to perform any or all
such Employee's duties and responsibilities hereunder if the Chairman or his
designee notifies the Employee of such failure or refusal in writing and the
Employee fails to cure such failure or refusal within five days after such
written notice has been given; or (vi) gross negligence by the Employee in the
performance of any or all of such Employee's duties and responsibilities.
d. Upon termination pursuant to subparagraph a. b. or c. above, the
Company shall pay the Employee or his estate any salary earned and unpaid to the
date of termination.
3
<PAGE>
6. Confidential Information. The Employee shall not divulge or
------------------------
communicate to any person (except in performing his duties under this Agreement)
or use for his own purposes any trade secrets, confidential commercial
information, or any other information, knowledge or data of the Company, the
Parent, U.S. Filter or any of their respective Affiliates which is not generally
known to the public.
7. Limitation on Inducements. The Employee agrees that neither he nor any
-------------------------
entity controlled by him shall for a period of one year after the termination of
his employment with the Company, employ any person who was employed by the
Company, the Parent, U.S. Filter or any of U.S. Filter's other Affiliates or
induce such person to accept employment other than with the Company, the Parent,
U.S. Filter or any of U.S. Filter's other Affiliates.
8. Proprietary Information. The Employee agrees that any and all
-----------------------
improvements, inventions, discoveries, formulae, processes, methods, know-how,
confidential data, trade secrets and other proprietary information (collectively
"Work Products") within the scope of any business of the Company or any of its
Affiliates which the Employee may conceive or make or have conceived or made
during his employment with the Company or such Affiliate shall be and are the
sole and exclusive property of the Company or such Affiliate. The Employee
shall, whenever requested to do so by the Company or such Affiliate and without
any obligation on the part of the Company or such Affiliate to pay any royalty
or other compensation to the Employee, at the Company's or such Affiliate's
expense, execute and sign any and all applications, assignments or other
instruments and do all other things which the Company or such Affiliate may deem
necessary or appropriate (i) in order to assign, transfer, convey or otherwise
make available to the Company or such Affiliate the sole and exclusive right,
title and interest in and to any Work Product or (ii) in order to apply for,
obtain, maintain, enforce or defend letters patent in the United States or in
any foreign country for any Work Product.
9. Withholding. All amounts paid to the Employee hereunder, including
-----------
without limitation pursuant to Paragraph 4, shall be subject to such deductions
and withholdings as are required by law or by policies of the employer.
10. Notices. Any notice or other communication required or permitted under
-------
this Agreement shall be effective only if it is in writing and delivered
personally or sent by registered or certified mail, postage prepaid, addressed
as follows:
If to the Company:
c/o United States Filter Corporation
40-004 Cook Street
Palm Desert, CA 92211
Attention: Chief Executive Officer
With a copy to:
Damian C. Georgino, Esq.
Vice President, General Counsel
and Secretary
United States Filter Corporation
40-004 Cook Street
4
<PAGE>
Palm Desert, CA 92211
If to the Employee:
Harry K. Hornish, Jr.
428 Woodfall
Waco, TX 76712
or to such other address as either party may designate by notice to the other,
and shall be deemed to have been given upon receipt.
11. Amendment. This Agreement may be amended only by an instrument in
---------
writing signed by the parties hereto, and any provision hereof may be waived
only by an instrument in writing signed by the party or parties against whom or
which enforcement of such waiver is sought. The failure of either party hereto
at any time to require the performance by the other party hereto of any
provision hereof shall in no way affect the full right to require such
performance at any time thereafter, nor shall the waiver by either party hereto
of a breach of any provision hereof be taken or held to be a waiver of any
succeeding breach of such provision or a waiver of the provision itself or a
waiver of any other provision of this Agreement.
12. Non-Assignment. This Agreement is binding on and is for the benefit of
--------------
the parties hereto and their respective successors, heirs, executors,
administrators and other legal representatives. Neither this Agreement nor any
right or obligation hereunder may be assigned by the Employee. This Agreement
and the rights and obligations of the Company hereunder may be assigned or
otherwise transferred by the Company to any of its Affiliates, either
contractually or by operation of law. Effective upon any such assignment or
transfer, the Company shall be released from all liability hereunder; provided
that the Company's assignee or successor agrees to be, or by operation of law
becomes, bound hereby.
13. Interpretation. If any provision of this Agreement, or portion thereof
--------------
is so broad, in scope or duration, so as to be unenforceable, such provision or
portion thereof shall be interpreted to be only so broad as is enforceable.
14. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of Delaware, other than the conflict of
laws provisions thereof.
15. Representation. The Employee represents and warrants that he is not
--------------
party to any agreement nor otherwise subject to any restriction which would
prohibit him from entering into this Agreement or performing fully his
obligations hereunder.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
Utility Supply Group, Inc.
/s/ Damian C. Georgino
-------------------------
Damian C. Georgino
Vice President
Harry K. Hornish, Jr.
/s/ Harry K. Hornish, Jr.
-------------------------
6
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating income (loss)....................... (2,358) 28,047 45,382 82,913
Portion of rental expenses deemed to represent
interest..................................... 2,174 2,767 3,000 4,567
------ ------ ------ ------
Earnings (loss) before fixed charges.......... (184) 30,814 48,382 87,480
====== ====== ====== ======
Interest expense.............................. 4,486 8,058 15,212 22,585
Portion of rental expenses deemed to represent
interest..................................... 2,174 2,767 3,000 4,567
------ ------ ------ ------
Fixed charges................................. 6,660 10,825 18,212 27,152
====== ====== ====== ======
Ratio of earnings to fixed charges............ na 2.8x 2.7x 3.2x
====== ====== ====== ======
Deficiency of earnings to fixed charges....... (6,844) na na na
====== ====== ====== ======
</TABLE>
63
<PAGE>
EXHIBIT 21.0
LIST OF SUBSIDIARIES OF THE COMPANY
The following lists the subsidiaries of United States Filter Corporation as
of June 24, 1997, excluding those subsidiaries which, considered in the
aggregate as a single subsidiary, do not constitute a significant subsidiary.
The subsidiaries listed are all wholly owned, either directly or indirectly.
<TABLE>
<CAPTION>
STATE
(COUNTRY)
OF
NAME INCORPORATION
---- --------------
<S> <C>
Consolidated Electric Company Delaware
Darchet Industrial Water Pte. Ltd. Singapore
Edwards & Jones GmbH Germany
Edwards & Jones, Ltd. United Kingdom
Envirex Inc. Delaware
General Filter Company Delaware
IP Holding Company Delaware
Illinois Water Treatment, Inc. Delaware
RWB Beheer B.V. Netherlands
Seral Erich Alhuaser GmbH & Co. KG Germany
Sidener Supply Company Missouri
Societe des Ceramiques Techniques France
U.S. Filter Distribution Group, Inc. Georgia
U.S. Filter Wastewater Group, Inc. Delaware
U.S. Filter/Ionpure Inc. Massachusetts
U.S. Filter/Wallace & Tiernan, Inc. Delaware
U.S. Filter/Zimpro, Inc. Delaware
USF EOS, Inc. Delaware
USF France S.A. France
USF Smogless S.p.a. Italy
Wallace & Tiernan GmbH Germany
Wallace & Tiernan Ltd. United Kingdom
WaterPro Supplies Corporation Massachusetts
Wheelabrator Clean Air Systems, Inc. Delaware
Wheelabrator Technologies (UK) Limited United Kingdom
Wheelabrator Water Technologies (T) Co. Ltd. Taiwan
</TABLE>
64
<PAGE>
EXHIBIT 23.0
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Shareholders United States Filter Corporation:
We consent to incorporation by reference in the Registration Statements (No.
33-49382, No. 33-56744, No. 33-73542, No. 33-89662, No. 33-63285, No. 333-
16083, No. 33-82424, No. 33-63287, No. 333-16069) on Form S-8, the
Registration Statements (No. 33-85026, No. 33-63325, No. 333-24465) on Form S-
3 and the Registration Statement (No. 333-23881) on Form S-4 of United States
Filter Corporation of our report dated June 6, 1997, relating to the
consolidated balance sheets of United States Filter Corporation as of March
31, 1996 and 1997, and the related consolidated statements of income,
shareholders' equity, and cash flows and related schedule for each of the
years in the three-year period ended March 31, 1997, which report appears in
the March 31, 1997 Annual Report on Form 10-K of United States Filter
Corporation.
KPMG Peat Marwick LLP
Orange County, California
June 23, 1997
65
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME OF UNITED STATES FILTER
CORPORATION AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 126,237
<SECURITIES> 2,158
<RECEIVABLES> 505,610
<ALLOWANCES> 24,595
<INVENTORY> 242,483
<CURRENT-ASSETS> 1,023,145
<PP&E> 387,827
<DEPRECIATION> 90,987
<TOTAL-ASSETS> 2,228,328
<CURRENT-LIABILITIES> 551,548
<BONDS> 577,092
0
0
<COMMON> 745
<OTHER-SE> 1,028,105
<TOTAL-LIABILITY-AND-EQUITY> 2,228,328
<SALES> 1,376,601
<TOTAL-REVENUES> 1,376,601
<CGS> 1,026,248
<TOTAL-COSTS> 1,026,248
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,536
<INTEREST-EXPENSE> 22,585
<INCOME-PRETAX> 63,678
<INCOME-TAX> 17,481
<INCOME-CONTINUING> 46,197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,197
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
</TABLE>
