<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) January 16, 1998
UNITED STATES FILTER CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
- ------------------------------- ------------ -------------------
DELAWARE 1-10728 33-0266015
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
- ---------------------------------------------------- -------------------
40-004 COOK STREET, PALM DESERT, CALIFORNIA 92211
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (760) 340-0098
--------------
(NOT APPLICABLE)
-------------------------------
(Former name or former address,
if changed from last report)
<PAGE>
Item 7 of the Registrant's Current Report on Form 8-K dated December
9, 1997 and Item 7 of the Registrant's Current Report on Form 8-K dated January
16, 1998 are hereby amended and restated as set forth below. The exhibits
referenced therein are not amended hereby.
As previously reported on a Current Report on Form 8-K dated December
9, 1997, United States Filter Corporation (the "Company") acquired approximately
96% of the outstanding ordinary shares (the "Memtec Shares") of Memtec Limited
("Memtec") on December 9, 1997, pursuant to a tender offer. Beneficial ownership
of the remaining Memtec Shares was acquired on February 3, 1998. The total
purchase price for Memtec was approximately $399.6 million in cash.
As previously reported on a Current Report on Form 8-K dated January
16, 1998, the Company acquired all of the outstanding common stock of The
Kinetics Group, Inc. ("Kinetics") on January 16, 1998 in exchange for 5,803,803
shares of Common Stock, par value $.01 per share, of the Company.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
The following are filed herewith:
<TABLE>
<S> <C>
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
Memtec:
-------
Index to Consolidated Financial Statements;
Report of Independent Accountants;
Consolidated Statements of Income for the years ended June 30, 1995,
1996 and 1997;
Consolidated Balance Sheets as of June 30, 1996 and 1997;
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1995, 1996 and 1997;
Consolidated Statements of Cash Flows for the years ended June 30,
1995, 1996 and 1997;
Notes to Consolidated Financial Statements;
Condensed Consolidated Statements of Operations for the three months
ended September 30, 1996 and 1997 (unaudited);
Condensed Consolidated Balance Sheets as of June 30, 1997 (audited)
and September 30, 1997 (unaudited);
Condensed Consolidated Statements of Cash Flows for the three months
ended September 30, 1996 and 1997 (unaudited); and
Notes to Condensed Consolidated Financial Statements (unaudited).
Kinetics:
---------
Index to Consolidated Financial Statements;
Report of Independent Auditors;
Consolidated Balance Sheets as of September 30, 1997 and 1996;
Consolidated Statements of Operations for the years ended
September 30, 1997 and 1996;
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997 and 1996;
Consolidated Statements of Cash Flows for the years ended September
30, 1997 and 1996; and
Notes to Consolidated Financial Statements.
(B) PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Combined Balance Sheet as of September 30, 1997;
Unaudited Pro Forma Combined Statement of Operations for the fiscal
years ended March 31, 1997, June 30, 1997 and September 30, 1997 and
the six months ended September 30, 1997; and
Notes to Unaudited Pro Forma Combined Financial Information.
(C) EXHIBITS
23.01 Consent of Price Waterhouse
23.02 Consent of Ernst & Young LLP
</TABLE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned hereunto duly authorized.
UNITED STATES FILTER CORPORATION
By: /s/ Kevin L. Spence
-----------------------
Kevin L. Spence
Senior Vice President
Date: February 6, 1998
<PAGE>
Memtec Limited
Consolidated Financial Statements
Years ended June 30, 1995, 1996 and 1997
<TABLE>
<S> <C>
Index to Consolidated Financial Statements; F-1
Report of Independent Accountants; F-2
Consolidated Statements of Income for the years ended June 30, 1995,
1996 and 1997; F-3
Consolidated Balance Sheets as of June 30, 1996 and 1997; F-4
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1995, 1996 and 1997; F-6
Consolidated Statements of Cash Flows for the years ended June 30, 1995,
1996 and 1997; F-7
Notes to Consolidated Financial Statements; F-8
Condensed Consolidated Statements of Operations for the three months
ended September 30, 1996 and 1997 (unaudited); F-24
Condensed Consolidated Balance Sheets as of June 30, 1997 (audited)
and September 30, 1997 (unaudited); F-25
Condensed Consolidated Statements of Cash Flows for the three months
ended September 30, 1996 and 1997 (unaudited); and F-26
Notes to Condensed Consolidated Financial Statements (unaudited). F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Shareholders
of Memtec Limited
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Memtec
Limited ("the Company") and its subsidiaries expressed in U.S. dollars at June
30, 1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1997, in conformity with
accounting principles that, as described in Note 1, are generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards in
Australia, which are the same in all material respects as auditing standards
generally accepted in the United States of America, and which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE
Sydney, Australia
September 25, 1997
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED JUNE 30
<TABLE>
<CAPTION>
(in US$ thousands except per share data) 1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES $145,029 $ 174,506 $ 243,616
Cost of sales (95,827) (112,858) (155,638)
Selling, general and administrative expenses (36,239) (43,243) (64,314)
Research and development expenses (3,380) (4,587) (7,074)
Amortization of goodwill and other intangible assets (2,720) (2,683) (2,868)
French restructuring costs and asset write-downs (Note 3) - - (1,677)
Acquisition and finance costs, net of termination fees (Note 4) - (543) 1,554
- -----------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 6,863 10,592 13,599
Interest income 108 858 701
Interest expense (2,590) (2,897) (5,613)
Other income (expense), net (Note 5) (87) (642) 115
- -----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,294 7,911 8,802
Income tax (provision) benefit (1,259) 3,160 (1,306)
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,035 $ 11,071 $ 7,496
=======================================================================================================================
Earnings per ordinary share (Note 1) $ 0.39 $ 1.18 $ 0.73
Dividends per ordinary share (Note 1) $ 0.07 $ 0.07 $ 0.08
Weighted average ordinary shares
outstanding (in thousands) (Note 1) 7,789 9,384 10,287
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
CONSOLIDATED BALANCE SHEETS
JUNE 30
<TABLE>
<CAPTION>
(in US$ thousands) 1996 1997
- -------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 28,067 $ 32,761
Accounts receivable, net of allowance
of $1,843 ($2,680 in 1996) 44,118 46,605
Notes receivable 1,376 2,147
Inventories 44,987 46,305
Prepayments and other current assets 5,556 4,610
Deferred income taxes 6,035 5,252
- -------------------------------------------------------------------
TOTAL CURRENT ASSETS 130,139 137,680
- -------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 7,626 7,161
Buildings 44,733 46,735
Machinery and equipment 57,682 65,666
Furniture and fixtures 6,573 7,146
Capital work in progress 4,817 6,659
- -------------------------------------------------------------------
121,431 133,367
Less: Accumulated depreciation (29,759) (38,304)
- -------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 91,672 95,063
- -------------------------------------------------------------------
Goodwill 60,438 58,517
Other intangible assets 8,515 7,893
Deferred income taxes 7,518 10,131
Other assets 1,510 1,879
- -------------------------------------------------------------------
TOTAL ASSETS $299,792 $311,163
===================================================================
</TABLE>
F-4
<PAGE>
CONSOLIDATED BALANCE SHEETS
JUNE 30
<TABLE>
<CAPTION>
(in US$ thousands) 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 15,109 $ 17,915
Accrued liabilities 29,811 27,134
Short-term debt 5,648 4,045
Deferred income taxes 139 623
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 50,707 49,717
- --------------------------------------------------------------------------------
NON CURRENT LIABILITIES
Long-term debt 66,165 80,286
Deferred income taxes 4,190 4,924
Pension obligations 5,922 5,378
Other 1,272 1,555
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 128,256 141,860
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 15)
SHAREHOLDERS' EQUITY
Ordinary shares A$2.50 par value; 40,000,000
shares authorized; 10,317,348 issued and
outstanding (10,236,741 in 1996) 19,853 20,012
Additional paid-in capital 157,616 159,046
Accumulated surplus (deficit) (6,490) 182
Currency translation adjustment 2,761 (7,864)
- --------------------------------------------------------------------------------
173,740 171,376
Loan receivable from the trustee of the
employee share plan (2,204) (2,073)
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 171,536 169,303
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $299,792 $311,163
================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Ordinary Shares Additional Accumulated Currency
----------------- Paid-in Surplus Translation
Shares Amount Capital (Deficit) Adjustment Total
(in US$ thousands except share volume) (thousands)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1994 75,856 $14,840 $123,181 $(19,463) $ 1,610 $120,168
- -----------------------------------------------------------------------------------------------------------------------------
Net income 3,035 3,035
Share issues 2,538 472 2,426 2,898
Issue expenses (106) (106)
Options exercised 210 38 160 198
Exercised/expired compensatory share options 400 72 832 904
Translation adjustment 1,745 1,745
Dividend (570) (570)
- -----------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1995 79,004 15,422 126,493 (16,998) 3,355 128,272
- -----------------------------------------------------------------------------------------------------------------------------
Net Income 11,071 11,071
Share issues 22,979 4,356 33,545 37,901
Issue expenses (2,915) (2,915)
Options exercised 114 75 493 568
One-for-ten reverse split of ordinary shares
effective March 29, 1996 (Note 1) (91,860)
Translation adjustment (594) (594)
Dividend (563) (563)
- -----------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1996 10,237 19,853 157,616 (6,490) 2,761 173,740
- -----------------------------------------------------------------------------------------------------------------------------
Net Income 7,496 7,496
Share issues 3 6 88 94
Issue expenses (7) (7)
Options exercised 57 114 844 958
Exercised/expired compensatory share options 20 39 505 544
Translation adjustment (10,625) (10,625)
Dividend (824) (824)
- -----------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1997 10,317 $20,012 $159,046 $ 182 (a) $ (7,864) $171,376
=============================================================================================================================
</TABLE>
For purposes of balance sheet presentation the loan receivable from the trustee
of the employees share plan has been shown as a deduction from Shareholders'
equity.
(a) Australian Corporations Law provides that a company may not pay a cash
dividend except out of its profits (retained earnings or current year
profits). Accounting principles and laws differ between the US and
Australia. Memtec Limited's consolidated retained earnings under
Australian law are A$28.9 million at June 30, 1997.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30
<TABLE>
<CAPTION>
(in US$ thousands) 1995 1996 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,035 $ 11,071 $ 7,496
- ----------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,419 9,810 13,499
Gain on sale of property, plant and equipment (71) (46) (82)
Deferred income taxes 672 (5,384) (193)
Changes in operating assets and liabilities
Accounts receivable (1,353) (8,830) (3,923)
Inventories (2,563) (8,989) (3,105)
Other assets 1,087 (1,270) 243
Accounts payable and accrued expenses 1,211 5,333 5,031
Other liabilities (1,356) 415 (1,051)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,081 2,110 17,915
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (8,366) (9,588) (19,964)
Intangible assets acquired (773) (595) (1,184)
Proceeds from sale of property, plant and equipment 240 329 336
Payment for purchase of subsidiaries,
net of cash acquired (3,474) (43,994) (1,213)
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,373) (53,848) (22,025)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of ordinary shares 3,344 35,462 1,215
Dividends paid (442) (471) (724)
Proceeds from issuance of debt 3,837 60,052 --
Repayment of debt (1,807) (13,939) (4,831)
Net revolving credit line movements (4,166) (4,116) 15,754
Principal capital lease repayments (862) (1,064) (1,174)
Proceeds from employee share plan receivable 7 7 8
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (89) 75,931 10,248
- ----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 426 (446) (1,444)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,955) 23,747 4,694
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 7,275 4,320 28,067
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,320 $ 28,067 $ 32,761
====================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented to assist the
reader in understanding and evaluating these consolidated financial
statements.
A BASIS OF PRESENTATION
Memtec Limited ("Memtec") is an Australian company listed on the
Australian Stock Exchange and the New York Stock Exchange. Memtec's
operations in America, Europe and Asia are significantly larger than those
in Australia and the predominant trading currency of Memtec is the US
dollar. Memtec's shareholders are predominantly US and European
institutional investors. Memtec therefore prepares its primary financial
statements in US dollars and in accordance with accounting principles
generally accepted in the United States of America ("US GAAP").
The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions. Actual results may
differ from these estimates.
B BASIS OF CONSOLIDATION
All companies over which Memtec exercises control are consolidated. All
inter-company accounts and transactions have been eliminated.
C REVENUE RECOGNITION
Generally, Memtec recognizes revenue in relation to the manufacture and
sale of its products at the time of shipment. However, when Memtec enters
into larger contracts requiring a production duration of more than three
months, and the contracts allow for the transfer of financial risk through
progress billings or periodic deliverables, Memtec recognizes revenue
resulting from such contracts using the percentage-of-completion method.
Losses, if any, are provided for in the period in which the loss becomes
known.
D CASH AND CASH EQUIVALENTS
Cash equivalents include certificates of deposit and other money market
investments stated at cost which approximates market. Memtec considers
investments with original maturities of ninety days or less to be cash
equivalents for purposes of the Statements of Cash Flows.
E INVENTORIES
Inventories are stated at the lower of cost (principally first in, first
out method) or net realizable value. Work-in-progress inventories include
costs incurred plus estimated profits on contracts accounted for using
the percentage-of-completion method, net of progress billings.
F-8
<PAGE>
F PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated over
their estimated useful lives using the straight line method. Straight line
and accelerated methods of depreciation are used for tax purposes.
Maintenance and repairs are charged to expense. Profits and losses on
disposal of property, plant and equipment are taken into account in
determining the results for the year. Estimated useful lives are as
follows:
<TABLE>
<S> <C>
Buildings and improvements 25 to 50 years
Machinery and equipment 4 to 25 years
Furniture and fixtures 5 to 10 years
</TABLE>
Interest capitalized as part of the cost of constructing assets totaled
$121,000 in 1997 (Nil in 1995 and 1996).
G RECLASSIFICATIONS
Certain reclassifications of prior years' amounts have been made to
conform to the current year's presentation.
H GOODWILL
Goodwill, representing the excess of the purchase consideration over the
fair value of net assets acquired, is amortized on a straight line basis
over the periods of expected benefit, which range from 35 to 40 years.
Subsequent to the acquisition of an intangible asset, Memtec continually
evaluates whether later events and circumstances have occurred that
indicate the remaining estimated useful life of an intangible asset may
warrant revision or that the remaining balance of such an asset may not be
recoverable. When factors indicate that an intangible asset should be
evaluated for possible impairment, Memtec uses an estimate of the related
undiscounted future cash flows over the remaining life of the asset in
measuring whether the intangible asset is recoverable. If such an analysis
indicates that impairment has in fact occurred, Memtec writes down the book
value of the intangible asset to its fair market value.
I OTHER INTANGIBLE ASSETS
Costs of purchase and applications for patents and trademarks are
capitalized and amortized over their estimated useful lives, which range
from 8 to 20 years. Distributor network acquired is amortized over 17
years. Other intangible assets are amortized over the periods of expected
benefits, which range from 3 to 24 years.
J FOREIGN CURRENCY ACCOUNTING
The financial statements of Memtec's non-US operations are translated into
US dollars for financial reporting purposes. The assets and liabilities of
non-US operations whose functional currencies are other than the US dollar
are translated at rates of exchange at year-end, and revenues and expenses
are translated at average exchange rates for the year. The cumulative
translation effects are reflected in shareholders' equity. Gains and losses
on transactions denominated in other than the functional currency of an
operation are reflected in other income (expense), except for commitment
hedges as explained below.
F-9
<PAGE>
K INCOME TAXES
Memtec accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS
No. 109 is an asset and liability approach which requires the recognition
of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the
tax bases of assets and liabilities. These differences principally relate
to items such as depreciation, utilization of net operating loss
carryforwards, accruals of certain liabilities which are not deductible for
tax purposes until paid and inventory related items.
L EARNINGS PER SHARE
A one-for-ten reverse split of ordinary shares was approved by Memtec
shareholders in November 1995, and became effective on March 29, 1996.
Following the reverse split, the par value of an ordinary share was
increased from A$0.25 to A$2.50, and one ordinary share is equal to one
American Depositary Share. Per share data in the accompanying consolidated
financial statements, share data in the accompanying consolidated
statements of income, and all per share and share data in these notes have
been adjusted to give retroactive effect to the reverse ordinary share
split.
Earnings per share is computed based upon the weighted average number of
ordinary shares outstanding. Ordinary share equivalents resulting from the
assumed exercise of stock options have not been considered as their effect
is not significant.
M NON-US EMPLOYEE BENEFIT OBLIGATIONS
Non-US employee benefit obligations are accounted for under US GAAP, which
generally requires accrual over the period the benefits are being earned.
2 ACQUISITIONS
VESSEL SRL
On May 28, 1997 Memtec acquired 100% of the issued and outstanding equity
of Vessel Srl, an Italian filtration company. Under the terms of the
purchase agreement, the former owners of Vessel Srl were paid 3 billion
Italian Lira (US$1.8 million) on June 27, 1997 with a further 2 billion
Italian Lira (US$1.2 million) payable in two equal installments on May 28,
1998 and 1999. The total purchase price was US$3.2 million. The transaction
has been accounted for under the purchase method. Goodwill arising on the
purchase is US$3.1 million which is being amortized over 35 years. Pro
forma financial information in respect of the results of operations for
periods before the acquisition have not been presented because the effect
on the consolidated results of operations is considered to be
insignificant.
SEITZ-FILTER-WERKE GMBH & CO.
On April 22, 1996, Memtec, through a wholly-owned subsidiary, acquired 100%
of the outstanding equity of Seitz-Filter-Werke GmbH & Co. (a German
limited partnership) ("Seitz"), a German producer of filter media primarily
for the food and beverage industry. The purchase price was DM77.5 million
(US$51.4 million). The transaction has been accounted for under the
purchase method. Goodwill arising on the purchase was DM15.6 million
(US$10.2 million) which is being amortized over 40 years.
F-10
<PAGE>
Unaudited proforma information for the fiscal year ended June 30, 1996, as
if the acquisition had occurred on the first day of that year, is shown
below:
<TABLE>
<CAPTION>
(in US$ thousands except per share data) 1996
---------------------------------------------------------------------------
<S> <C>
Net sales $226,724
Net income 12,202
Earnings per ordinary share 1.30
---------------------------------------------------------------------------
</TABLE>
FILTRATION SA
Effective July 29, 1994 Memtec acquired 100% of the voting shares of
Filtration SA, a French company operating in the European filtration
market. Under the terms of the purchase agreement, the former owners of
Filtration SA ("FSA") were paid FF11.5 million (US$2.4 million) on July 29,
1994, FF5.75 million (US$1.1 million) on December 31, 1994, FF5.75 million
(US$1.1 million) on December 31, 1995 and FF5.75 million (US$1.1 million)
on December 31, 1996. The transaction has been accounted for under the
purchase method. Goodwill arising on the purchase is $7.0 million which is
being amortized over 35 years. Pro forma financial information in respect
of the results of operations for periods before the acquisition have not
been presented because the effect on the consolidated results of operations
is considered to be insignificant.
3 FRENCH RESTRUCTURING COSTS AND ASSET WRITE-DOWNS
Continued operating losses in Memtec's French Filterite operations resulted
in a decision by management to restructure. Employee terminations in the
fiscal year and asset write-downs, predominantly inventory, totaled
$1,677,000.
4 ACQUISITION AND FINANCE COSTS, NET OF TERMINATION FEES
In November 1996, Memtec received a fee in relation to a terminated merger
with Gelman Sciences Inc. The $3 million fee increased operating profit by
$1,554,000 after the deduction of merger related expenses.
Proceeds from the senior guaranteed notes issued in June 1996 (see Note
12(b)) were used, in part, to retire certain existing secured bank debt.
The deferred financing costs relating to this retired debt totaled
$158,000.
During 1996, Memtec pursued two potential German acquisitions. On
consummation of the Seitz acquisition in April 1996 (see Note 2), it was
decided not to pursue the other German opportunity. Costs incurred by way
of due diligence investigations and legal expenses pursuing the other
acquisition totaled $385,000.
5 OTHER INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
(in US$ thousands) 1995 1996 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Foreign exchange gains (losses), net $ 164 $ (391) $ 14
Other income (expense), net (251) (251) 101
----------------------------------------------------------------
$ (87) $ (642) $ 115
----------------------------------------------------------------
</TABLE>
F-11
<PAGE>
6 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(in US$ thousands) 1995 1996 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Income taxes paid $ 193 $2,293 $1,499
Interest paid 2,133 2,796 5,658
</TABLE>
Non cash investing and financing activities:
Memtec entered into capital lease obligations totaling $888,000, $991,000
and $1,142,000 for the acquisition of property, plant and equipment in
1995, 1996 and 1997 respectively.
Memtec issued 13,878 shares valued at $138,000, 6,279 shares valued at
$89,000 and 3,180 shares valued at $94,000 in satisfaction of a dividend
under the Dividend Reinvestment Plan in 1995, 1996 and 1997 respectively.
7 FOREIGN CURRENCY CONTRACTS
At June 30, 1997, Memtec had outstanding forward exchange contracts to
purchase $7,562,000 in foreign currencies (primarily Australian dollars
purchased by US operations and US dollars purchased by non US operations)
and to sell $2,870,000 in foreign currencies (primarily US dollars sold by
non US operations) at varying maturities throughout fiscal 1998 and 1999.
Contract value and fair value of outstanding contracts (net sales) hedging
foreign currency assets and liabilities at June 30, 1997 was $200,000 and
$226,000 respectively. Additionally, contract value and fair value of
outstanding contracts (net purchases) hedging exposure on firm foreign
currency commitments at June 30, 1997 was $4,892,000 and $4,938,000
respectively. The fair value of the foreign currency contracts is
estimated based upon dealer quotes or market prices.
<TABLE>
<CAPTION>
(in US$ thousands) 1996 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
8 INVENTORIES
Raw materials $ 14,519 $ 14,543
Work-in-progress 18,090 18,989
Finished goods 12,378 12,773
-----------------------------------------------------------------------------------------------------------
$ 44,987 $ 46,305
-----------------------------------------------------------------------------------------------------------
Costs and billings on uncompleted contracts included
in work-in-progress:
Costs and estimated earnings on contracts in progress $ 8,927 $ 21,903
Progress billings on contracts in progress (2,594) (14,417)
-----------------------------------------------------------------------------------------------------------
Costs in excess of billings on uncompleted contracts $ 6,333 $ 7,486
-----------------------------------------------------------------------------------------------------------
Costs and estimated earnings on contracts in progress $ 7,318 $ 13,883
Progress billings on contracts in progress (8,281) (15,572)
-----------------------------------------------------------------------------------------------------------
Billings in excess of costs on uncompleted contracts $ (963) $ (1,689)
-----------------------------------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
<TABLE>
<S> <C> <C>
9 GOODWILL
Goodwill $ 71,024 $ 70,638
Less: Accumulated amortization (10,586) (12,121)
-----------------------------------------------------------------------------------------------------------
$ 60,438 $ 58,517
-----------------------------------------------------------------------------------------------------------
10 OTHER INTANGIBLE ASSETS
Patents and trademarks $ 11,493 $ 11,889
Distributor network acquired 3,231 3,231
Other 6,269 6,123
-----------------------------------------------------------------------------------------------------------
20,993 21,243
Less: Accumulated amortization (12,478) (13,350)
-----------------------------------------------------------------------------------------------------------
$ 8,515 $ 7,893
-----------------------------------------------------------------------------------------------------------
11 ACCRUED LIABILITIES
Accrued commissions $ 1,641 $ 1,292
Accrued compensation 9,224 9,076
Accrued interest 225 275
Deferred income and customer deposits received 2,439 2,447
Accrued expenses 8,144 8,393
Unsecured notes to trade creditors 1,565 1,696
Income and other taxes 3,427 2,418
Provisions for warranties 1,993 1,462
Unrealized loss on foreign currency contracts 38 40
Acquisition related liabilities 1,115 35
-----------------------------------------------------------------------------------------------------------
$ 29,811 $ 27,134
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(in US$ thousands) 1996 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
12 DEBT
Short-term debt:
Credit lines $ 2,647 $ 1,709
Current maturities of long-term debt 3,001 2,336
--------------------------------------------------------------------------------
$ 5,648 $ 4,045
--------------------------------------------------------------------------------
Long-term debt:
Acquisition debt (a) $ 1,074 $ 1,190
Senior notes (b) 60,000 60,000
Revolving line of credit (c) - 16,000
Bank term loans (d) 4,155 1,783
Capital lease obligations (e) 3,322 3,102
Bank term loans 615 547
--------------------------------------------------------------------------------
69,166 82,622
Less: current maturities included in short-term (3,001) (2,336)
--------------------------------------------------------------------------------
$ 66,165 $ 80,286
--------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
(a) The acquisition debt at June 30, 1997 represents the payments due to
the former owners of Vessel Sri, an Italian company acquired in May
1997 (see Note 2) and is secured by letter of credit. Interest is
payable annually at a fixed rate of 9.0%. The acquisition debt at June
30, 1996 represents the final payment due to the former owners of
Filtration SA, a French company acquired in July 1994 (see Note 2).
(b) In 1996, Memtec Finance, Inc. issued senior guaranteed notes of $18
million due June 15, 2001; $25 million due June 15, 2003; and $17
million due June 15, 2006. Interest is payable semiannually at rates
of 7.67%, 7.81% and 7.99% respectively. The senior notes are
guaranteed by Memtec Limited and Memtec America Corporation. The
agreement requires Memtec to meet certain covenants, including
covenants relating to the maintenance of a minimum net worth, fixed
charges coverage, maximum levels of debt, and maximum levels of
secured debt.
(c) On January 22, 1997, Memtec Finance, Inc. established a US$60 million
multi-currency, multi-option facility with a bank subject to review in
January 2000. Interest is payable at LIBOR plus 0.35% (6.0% at June
30, 1997). A facility fee of 0.4% is payable quarterly in advance. The
facility is guaranteed by Memtec Limited and Memtec America
Corporation. The agreement requires Memtec to meet the covenants
listed in Note 12 (b) and, in addition, to maintain a specified
minimum current assets to current liabilities ratio.
(d) A German subsidiary has secured term loan facilities for DM13.5
million (US$7.8 million at June 30, 1997) with six banks. The term
loans are secured by certain assets of the German subsidiary. Interest
is paid quarterly on the loans at an average rate of 6.7%. The loans
are payable monthly, quarterly and semi-annually with maturities
ranging from 1998 to 2002.
(e) Capital Lease Obligations
Future minimum payments for capitalized leases were as follows at June
30:
<TABLE>
<CAPTION>
(in US$ thousands) 1997
---------------------------------------------------------------
<S> <C>
1998 $ 1,133
1999 819
2000 515
2001 329
2002 183
Thereafter 840
---------------------------------------------------------------
Total minimum lease payments 3,819
Less: amount representing interest 717
---------------------------------------------------------------
Present value of net minimum lease payments 3,102
Less: current maturities 927
---------------------------------------------------------------
Long-term obligation $ 2,175
---------------------------------------------------------------
</TABLE>
Long-term debt maturities in each of the five years subsequent to June 30,
1997 are $2,336,000 in 1998, $1,709,000 in 1999, $16,767,000 in 2000,
$18,591,000 in 2001, $239,000 in 2002 and $42,980,000 in 2003 and
thereafter.
F-14
<PAGE>
13 FINANCIAL INSTRUMENTS AND CREDIT RISKS
Memtec enters into forward foreign currency contracts and options to hedge
foreign currency transactions. These financial instruments are designed to
minimize exposure and reduce risk associated with exchange rate
fluctuations. These financial instruments are not recorded on Memtec's
balance sheet. Gains and losses on forward foreign currency contracts and
options which hedge exposure on firm foreign currency commitments are
deferred and recognized as adjustments to the bases of those transactions.
Gains and losses on forward foreign currency contracts and options which
hedge foreign currency assets or liabilities are recognized in income as
incurred. Such amounts effectively offset gains and losses on the foreign
currency assets or liabilities that are hedged.
Memtec sells its products to a diverse group of customers in a wide range
of industries throughout the world and as such does not consider itself
exposed to concentration of credit risks. These risks are further minimized
by placing credit limits, ongoing monitoring of the customers' account
balances, and assessment of the customers' financial strengths.
Memtec's cash and cash equivalents and investments are placed with a wide
array of financial institutions with high credit ratings. This investment
policy limits Memtec's exposure to concentration of credit risks.
The carrying values of cash and cash equivalents, investments, trade
and note receivables and payables and floating rate debt approximate fair
value due to the short-term maturities of these assets and liabilities. The
fair value of the Senior Notes based on current rates offered to Memtec for
debt of the same remaining maturities is also considered to be not
materially different from the carrying value.
<TABLE>
<CAPTION>
(in US$ thousands) 1995 1996 1997
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
14 INCOME TAXES
Pretax accounting income (loss) for the years ended June 30
was taxed under the following jurisdictions:
United States $ 5,681 $ 5,561 $ 5,551
Non US (1,387) 2,350 3,251
-----------------------------------------------------------------------------------------------------------------------------
$ 4,294 $ 7,911 $ 8,802
-----------------------------------------------------------------------------------------------------------------------------
The provision (benefit) for income taxes is presented below:
CURRENT
US federal $ 462 $ 1,654 $ 896
US state 125 560 296
Non US - 336 965
-----------------------------------------------------------------------------------------------------------------------------
Total current tax expense 587 2,550 2,157
-----------------------------------------------------------------------------------------------------------------------------
DEFERRED
US federal $ 1,712 $ 242 $ 922
US state 139 35 103
Non US (1,179) (5,987) (1,876)
-----------------------------------------------------------------------------------------------------------------------------
Total deferred tax (benefit) expense 672 (5,710) (851)
-----------------------------------------------------------------------------------------------------------------------------
Net tax provision (benefit) $ 1,259 $(3,160) $ 1,306
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
<TABLE>
<S> <C> <C> <C>
The provision (benefit) for income taxes differs from the
amount of income tax determined by applying the applicable
US statutory federal income tax rate to pretax income as a
result of the following differences:
Tax expense at statutory US tax rates $ 1,460 $ 2,690 $ 2,993
Increase (decrease) in rates resulting from:
Amortization of intangibles (124) (115) (128)
State income taxes 174 393 223
Expiration of carryforward tax losses 1,018 1,399 -
Tax valuation allowance for expiration of carryforward tax
losses (1,018) (1,399) -
Tax valuation allowance for NOLs utilized (412) (213) -
Released tax valuation allowance (1,671) (6,867) (5,090)
Released tax valuation allowance credited to goodwill - - 2,244
Tax valuation allowance for current year losses 2,050 323 -
Tax valuation allowance for prior year adjustments 146 1,420 355
Prior year adjustments (277) (1,382) (456)
Effect of non US tax rates 226 300 364
Effect of changes in enacted tax rates (588) - 18
Other, primarily various non-deductible expenses 275 291 783
-----------------------------------------------------------------------------------------------------------------------------
$ 1,259 $(3,160) $ 1,306
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(in US$ thousands) 1996 1997
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets (liabilities) are comprised of the following
at June 30:
Employee benefit obligations $ 1,589 $ 1,615
Inventory reserves 745 1,483
Receivables allowance 391 231
Alternative minimum tax credits 450 -
Loss carryforwards 14,144 12,535
Other 3,770 2,252
--------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 21,089 18,116
--------------------------------------------------------------------------------------------------------------------
Depreciation (3,356) (4,571)
Amortization (279) (349)
Other (883) (627)
--------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (4,518) (5,547)
--------------------------------------------------------------------------------------------------------------------
Deferred tax asset valuation allowance (7,347) (2,733)
--------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 9,224 $ 9,836
--------------------------------------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
The valuation allowance at June 30, 1995, 1996 and 1997 primarily relates
to a provision for uncertainty as to the utilization of net operating loss
carryforwards. The reassessment of this allowance has resulted in an
increase to net income of $1,671,000, $6,867,000 and 2,846,000 in 1995,
1996 and 1997 respectively. The measurement of tax assets and liabilities
at June 30 of each year reflect foreign currency translation adjustments,
changes in enacted tax rates and movements in temporary differences. Income
taxes currently payable for 1996 and 1997 were reduced by $1,560,000 and
$3,312,000 respectively, through the utilization of net operating loss
carryforwards.
Carryforward tax losses available to reduce future taxable income are:
<TABLE>
<CAPTION>
(in US$ thousands) 1997 Expiration Dates
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
United Kingdom $ 14,580 Unlimited
Germany 1,023 Unlimited
France 4,268 1999-2002
France 1,035 Unlimited
Japan 1,810 1998-1999
Australia 12,197 Unlimited
------------------------------------------------------------------------------------------------------------
$ 34,913
------------------------------------------------------------------------------------------------------------
</TABLE>
The aggregate amount includes approximately $2.3 million which upon
recognition would adjust purchase price allocations of prior period
business combinations (primarily goodwill).
15 COMMITMENTS AND CONTINGENCIES
From time to time, Memtec is involved in litigation in the normal course of
business. These litigation matters are not believed to be material to the
future results of operations, financial position or business of Memtec.
In August 1995, a former distributor commenced litigation against Memtec.
Memtec believes the claims are without merit and is defending the
litigation vigorously. Therefore, Memtec does not believe the litigation
will result in any material liability.
In December 1995, Memtec obtained a judgement against Puroflow Inc.
("Puroflow") in connection with a debt owed by Puroflow to Memtec. In
August 1996, Puroflow filed a counterclaim against Memtec and certain other
persons. Memtec believes the counterclaim is without merit and is
defending the litigation vigorously. Therefore, Memtec does not believe
the litigation will result in any material liability.
The Australian Taxation Office ("ATO") conducts income tax audits of
Australian companies. Memtec and certain of its Australian subsidiaries are
currently subject to an income tax audit by the ATO. The audit has been
underway for approximately five years and has covered all areas of Memtec's
business since incorporation. The ATO has indicated the principal areas it
wishes to discuss further, but no assessment has been issued at this time.
It is anticipated that the ATO will complete the audit process and issue
any assessment in the 1998 fiscal year. If certain of Memtec's tax
positions were challenged by the ATO and if any such challenge were
ultimately upheld, there may be a material adverse effect on Memtec's
future results of operations. While the outcome of the ATO's audit cannot
be predicted, management believes Memtec's tax positions are appropriate
and tax provisions are adequate.
F-17
<PAGE>
The Internal Revenue Service ("IRS") has advised that it will be conducting
an income tax audit of a US subsidiary. The scope of the income tax audit
has not been determined, however, it is anticipated that the IRS will
complete the audit process and issue any assessment in the 1998 fiscal
year. If certain of Memtec's tax positions were challenged by the IRS and
if any such challenge were ultimately upheld, there may be a material
adverse effect on Memtec's future results of operations. While the outcome
of the IRS's audit cannot be predicted, management believes Mentec's tax
positions are appropriate and tax provisions are adequate.
German Revenue Authorities ("GRA") have advised that they will be
conducting an income tax audit of a German subsidiary. The scope of the
income tax audit has not been determined, however, it is anticipated that
the GRA will complete the audit process and issue any assesment in the
1998 fiscal year. If certain of Memtec's tax positions were challenged by
the GRA and if any such challenge were ultimately upheld, there may be a
material adverse effect on Memtec's future results of operations. While
the outcome of the GRA's audit cannot be predicted, management believes
Memtec's tax positions are appropriate and tax provisions are adequate.
As a means of funding working capital, Memtec discounts notes issued by
customers with its bankers in several countries. If the issuing party
fails to honor the note, the discounting bank has the right of recovery
from Memtec. Such transactions are accounted for as sales of receivables,
and all estimated losses if any, are recognized at the time of sale. Notes
discounted at June 30, 1997 totaled $4,038,000.
Commitments outstanding for the purchase of property, plant and equipment
at June 30, 1997 approximated $2,050,000.
In the normal course of business, Memtec issues letters of credit and
guarantees in relation to large contracts. These totaled $25,210,000 at
June 30, 1997.
LEASES
Memtec leases certain office space and equipment under noncancelable
operating leases. Future minimum rents payable under the leases are
$2,058,000 in 1998, $1,429,000 in 1999, $987,000 in 2000, $556,000 in 2001,
$297,000 in 2002 and $152,000 thereafter.
Total rent expense amounted to $1,988,000, $2,165,000 and $2,509,000 in
1995, 1996 and 1997 respectively.
16 SHARE INCENTIVE PLANS
Changes in outstanding ordinary share options are summarized below:
<TABLE>
<CAPTION>
1995 1996 1997
No. of Average No. of Average No. of Average
Options Exercise Options Exercise Options Exercise
(thousands) Price (thousands) Price (thousands) Price
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 308 A$20.73 305 A$18.02 446 A$20.31
Options granted 150 15.79 196 23.97 295 A$35.42
Options exercised (61) 15.60 (33) 18.48 (73) A$19.57
Options terminated or canceled (92) 25.13 (22) 23.88 (14) A$28.92
--------------------------------------------------------------------------------------------------------
Balance at end of year 305 A$18.02 446 A$20.31 654 A$27.02
--------------------------------------------------------------------------------------------------------
Options exercisable at year end 185 A$22.70 266 A$19.27 389 A$23.42
--------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year A$ 8.17 A$12.03
--------------------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
Stock options outstanding:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Range of Outstanding Remaining Exercise Price Exercisable Exercise Price
Exercise Prices 1997 Contractual Life Per Share 1997 Per Share
(thousands) (years) (thousands)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A$10-14 12 0.17 A$11.50 12 A$11.50
15-19 170 2.00 16.78 163 16.69
20-24 178 3.42 23.97 116 23.97
30-34 219 4.58 33.55 73 33.55
40-44 75 4.41 40.90 25 40.90
--------------------------------------------------------------------------------------------------------
A$10-44 654 3.50 A$27.02 389 A$23.42
--------------------------------------------------------------------------------------------------------
</TABLE>
Memtec Limited has granted options to various directors, executive
officers, employees and other persons under various share incentive plans,
including the following:
(a) Memtec Limited Employee Option Scheme: This scheme has been
superseded by the Memtec Incentive Option Plan and the Memtec Employee
Stock Option Plan. The Option Scheme was open to all directors,
employees and consultants and certain other eligible persons of Memtec
at the invitation of directors. The number of options granted was a
function of base salary. Options issued remain in place and are
exercisable on a pro rata basis over five years from the date of grant
with the exercise price being act as the market price at the time of
the granting of the options. The exercise price shall be adjusted in
the event of share splits at any time subsequent to the option date
but prior to the exercise of the option. Total options outstanding at
June 30, 1997 are 30,898 with the last expiration date being March 2,
1999.
(b) Memtec Incentive Option Plan: The plan is open to all full time or
part time employees of Memtec at the invitation of directors. The
options are exercisable on a basis determined by the Board with
options not exercised lapsing on the expiration of five years from the
grant date or 30 days after the cessation of employment of the
participant.
(c) Prior to 1992, certain granted options became exercisable or vested
based on the achievement of profit targets or movements in share
prices. These option arrangements are considered compensatory. There
was no aggregate compensation expense recorded relative to
compensatory share options in 1995, 1996 and 1997.
The exercise price for all options is equivalent to the market price on the
date the options were granted. All options must be exercised within five
years from the date of issue and do not entitle the holder to participate
by virtue of the options, in any share issues of any other corporation.
F-19
<PAGE>
Memtec applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for the Stock based compensation plans described above.
Accordingly, no compensation cost has been recognized for the fixed stock
option plans. Had compensation cost for Memtec's stock option grants
subsequent to June 30, 1995 been determined based on the fair value at the
grant dates consistent with the method of SFAS No. 123, "Accounting for
Stock-Based Compensation", Memtec's net income and earnings per share would
have been reduced to the pro forma amounts indicated below :
<TABLE>
<CAPTION>
(in US$ thousands except per share data) 1996 1997
-------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 10,359 $5,644
Earnings per ordinary share 1.10 0.55
-------------------------------------------------------------------------------
</TABLE>
Pro forma net income and earnings per share reflects only options granted
in fiscal 1996 and 1997. The full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
income and earnings per share amounts presented above because the options
do not fully vest over two years and compensation cost for options granted
prior to June 30, 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 model require the input of
highly subjective assumptions including expected stock price volatility.
Because Memtec'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 the employee stock options.
Pro forma compensation experts was calculated with the following weighted
average assumptions for grants in 1996 and 1997, respectively; dividends of
A$0.10 in both years; expected life of 2.8 and 3.1 years; expected
volatility of 43% and 41%; and risk-free interest rates of 6.6% and 6.4%.
17 EMPLOYEE RETIREMENT PLANS
Memtec offers no post employment benefits other than those described below.
AUSTRALIA
Memtec operates a defined contribution (accumulation) plan. All Australian
employees, after serving a qualifying period, are entitled to benefits on
retirement, disability or death. Employees may contribute to the Plan.
Memtec contributes to the Plan at the rate of 8 percent of members'
salaries. Costs charged to operations were $451,000, $610,000 and $697,000
in 1995, 1996 and 1997 respectively.
UNITED KINGDOM
Employees of Memtec's United Kingdom operating subsidiary, after serving a
qualifying period, are entitled to join a defined contribution
(accumulation) plan, which at present has 113 members. The rates of
contribution are 2% of the members' salaries by the members themselves and
4% of the members' salaries by the company. Costs charged to operations
were $106,000, $113,000 and $141,000 in 1995, 1996 and 1997 respectively.
F-20
<PAGE>
GERMANY
(a) Memtec GmbH
Memtec GmbH has two defined benefit plans covering in aggregate 17
employees. Costs charged to operations were $92,000, $68,000 and
$76,000 in 1995, 1996 and 1997 respectively. Actuarial data for these
plans, prepared in accordance with FAS 87, is not available and, in
the opinion of management, is not considered material to Memtec's
financial statements.
(b) Seitz Filter Works GmbH
Seitz has an unfunded defined benefit plan covering 461 employees
which was closed to new members prior to the acquisition of Seitz in
April 1996. The projected benefit obligations were determined using an
assumed discount rate of 7% for 1996 and 1997. Earned plan benefits
are determined using years of credited services and an earnings
formula.
A summary of cost components included in the net periodic pension
expense of the plan is presented below:
<TABLE>
<CAPTION>
(in US$ thousands) 1996 1997
------------------------------------------------------------------------------
<S> <C> <C>
Service cost $ 29 $ 164
Interest cost on projected benefit obligation 66 387
------------------------------------------------------------------------------
Net periodic pension expense $ 95 $ 551
------------------------------------------------------------------------------
</TABLE>
The actuarial present value of accumulated and projected benefit
obligations for service rendered to date is $5,284,000 ($5,922,000 in
1996) of which $4,655,000 ($5,265,000 in 1996) is vested. The net
pension liability recorded in the balance sheet is $5,378,000
($5,922,000 in 1996).
UNITED STATES OF AMERICA
(a) Funded Pension Plan
Effective December 31, 1992, Memtec's three defined benefit plans
(which were previously frozen on December 31, 1990) were merged into
one defined benefit plan which remains frozen. Accrual of additional
participants' benefits and eligibility to participate in the plan has
been terminated effective December 31, 1990. The plan assets will
remain with the trustee until distributed.
Previously earned plan benefits were determined using years of
credited services and an earnings formula. Memtec's funding policy is
to contribute the amount necessary to ensure plan assets meet plan
obligations previously earned. The projected benefit obligations were
determined using an assumed discount rate of 7.5% for 1995, 7.5% for
1996 and 7.5% for 1997. The assumed long-term rate of return on plan
assets is 8%, 8% and 8% for 1995, 1996 and 1997 respectively.
F-21
<PAGE>
A summary of cost components included in the net periodic pension
expense (credit) of the plan is presented below:
<TABLE>
<CAPTION>
(in US$ thousands) 1995 1996 1997
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 42 $ 43 $ 45
Interest cost on projected benefit obligation 119 124 132
Actual return on assets (124) (152) (169)
Net amortization and deferral - (9) (22)
-----------------------------------------------------------------------------------
Net periodic pension (credit) expense $ 37 $ 6 $ (14)
-----------------------------------------------------------------------------------
</TABLE>
The funded status of the plan at June 30 is presented below:
<TABLE>
<CAPTION>
(in US$ thousands) 1996 1997
-----------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of accumulated and projected
benefit obligation for service rendered to date - vested $(3,467) $(3,667)
Plan assets of fair value 3,918 4,374
-----------------------------------------------------------------------------------
Plan assets in excess (deficit) of projected benefit
obligation 451 707
Unrecognized (gain) loss (504) (746)
-----------------------------------------------------------------------------------
Account pension expense $ (53) $ (39)
-----------------------------------------------------------------------------------
</TABLE>
(b) Deferred Savings Plans
Memtec offers an employee deferred savings plan qualifying under
Section 401(k) of the Internal Revenue Code. The plan covers
substantially all US employees with more than one year's service.
Employees are encouraged to make contributions to the plan. Under the
provisions of the plan, Memtec can make a discretionary contribution
as determined by Memtec's board of directors. Memtec incurred expenses
related to this plan of $877,000, $1,072,000 and $1,168,000 in 1995,
1996 and 1997 respectively.
18 SUBSEQUENT EVENT
Following management's decision to restructure Memtec's French Pilterite
operations, Memtec has announced a plan for the termination of certain
French employees. A charge of approximately $1.05 million is expected to be
recorded in the first fiscal quarter of 1998. No further charges relating
to the restructure are anticipated.
In September 1997, United States Filter Corporation ("US Filter"), through
a subsidiary, announced that it intended to make an offer for all of the
issued shares of Memtec. Under the terms of the multi-currency, multi-
option agreement (Note 12(c)), the bank may elect to require repayment of
all debt and guarantee/bond facilities no earlier than 60 days following,
in effect, a change in control of Memtec in the manner set out in detail in
the facility agreement. In addition, various options issued by Memtec which
were not otherwise exercisable become exercisable during or at the
completion of the offer.
F-22
<PAGE>
19 GEOGRAPHIC SEGMENT INFORMATION
Memtec operates primarily in the filtration industry. Geographic segments
have been classified into three regions: United States of America, Europe
and Asia/Pacific. Asia/Pacific includes Australia, Japan and Asia.
Financial information by geographic region for 1995, 1996 and 1997 is
summarized below:
<TABLE>
<CAPTION>
Corporate
United States Asia/ Unallocated
(in US$ thousands) of America Europe Pacific & Eliminations Total
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995
Net revenues $56,315 $41,804 $46,910 $ - $145,029
Transfers between areas 28,001 29 3,189 (31,219) -
Operating profit (loss) 7,752 1,701 366 (2,956) 6,863
Identifiable assets 95,517 41,840 44,668 214 182,239
Depreciation and amortization 4,826 1,024 2,569 - 8,419
Capital expenditures 6,397 609 1,360 - 8,366
1996
Net revenues $69,403 $48,622 $56,481 $ - $174,506
Transfers between areas 31,715 3,394 6,211 (41,320) -
Operating profit (loss) 7,833 3,317 3,369 (3,927) 10,592
Identifiable assets 107,261 121,930 62,372 8,229 299,792
Depreciation and amortization 5,689 1,685 2,436 - 9,810
Capital expenditures 7,472 777 1,339 - 9,588
1997
Net revenues $91,868 $89,557 $62,191 $ - $243,616
Transfers between areas 34,220 12,706 9,246 (56,172) -
Operating profit (loss) 7,089 4,924 5,236 (3,650) 13,599
Identifiable assets 117,569 117,552 61,159 14,883 311,163
Depreciation and amortization 7,002 3,732 2,765 - 13,499
Capital expenditures 13,293 3,236 3,435 - 19,964
</TABLE>
Net recorded for the United States of America includes export sales
totaling $2,949,000, $2,606,000 and $9,259,000 in 1995, 1996 and 1997
respectively, to customers in Canada, Central America and Latin America.
F-23
<PAGE>
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30
(in US$ thousands except share data) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
NET SALES $ 62,290 $ 57,860
Cost of sales (37,269) (37,198)
Selling, general and administrative expenses (15,301) (15,221)
Research and development expenses (1,755) (1,779)
Amortization of goodwill and other intangible assets (717) (735)
Restructuring costs (1,037) -
- --------------------------------------------------------------------------------
OPERATING PROFIT 6,211 2,927
Interest income 147 192
Interest expense (1,578) (1,342)
Other (expense) income, net (49) 28
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,731 1,805
Income tax (provision) benefit (2,460) 337
- --------------------------------------------------------------------------------
NET INCOME $ 2,271 $ 2,142
================================================================================
Earnings per ordinary share $ 0.22 $ 0.21
Dividends per ordinary share (Note 4) $ 0.07 $ 0.08
Weighted average ordinary shares outstanding 10,326 10,267
(in thousands)
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-24
<PAGE>
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 June 30
(in US$ thousands except share data) 1997 1997
- -------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 21,142 $ 32,761
Accounts receivable, net of allowance of $1,705 ($1,843 at June 30) 46,371 46,605
Notes receivable 2,640 2,147
Inventories 48,401 46,305
Prepayments and other current assets 5,890 4,610
Deferred income taxes 4,844 5,252
- -------------------------------------------------------------------------------------------------------
Total current assets 129,288 137,680
- -------------------------------------------------------------------------------------------------------
Property, plant and equipment 136,586 133,367
Less: Accumulated depreciation (40,338) (38,304)
- -------------------------------------------------------------------------------------------------------
Net property, plant and equipment 96,248 95,063
- -------------------------------------------------------------------------------------------------------
Goodwill 70,026 70,638
Less: Accumulated amortization (12,507) (12,121)
- -------------------------------------------------------------------------------------------------------
Net goodwill 57,519 58,517
- -------------------------------------------------------------------------------------------------------
Other intangible assets 21,031 21,243
Less: Accumulated amortization (13,469) (13,350)
- -------------------------------------------------------------------------------------------------------
Net other intangible assets 7,562 7,893
- -------------------------------------------------------------------------------------------------------
Deferred income taxes 10,055 10,131
Other assets 1,842 1,879
- -------------------------------------------------------------------------------------------------------
Total assets $302,514 $311,163
=======================================================================================================
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 13,679 $ 17,915
Accrued liabilities 29,533 27,134
Short-term debt 3,447 4,045
Deferred income taxes 567 623
- -------------------------------------------------------------------------------------------------------
Total current liabilities 47,226 49,717
- -------------------------------------------------------------------------------------------------------
Non current liabilities
Long-term debt 75,032 80,286
Deferred income taxes 5,017 4,924
Pension obligations 5,315 5,378
Other 1,538 1,555
- -------------------------------------------------------------------------------------------------------
Total liabilities 134,128 141,860
- -------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 3)
- -------------------------------------------------------------------------------------------------------
Shareholders' equity
Ordinary shares A$2.50 par value; 40,000,000 shares authorized;
10,336,186 issued and outstanding (10,317,348 at June 30) 20,047 20,012
Additional paid-in capital 159,223 159,046
Accumulated surplus 1,681 182
Currency translation adjustment (10,552) (7,864)
- -------------------------------------------------------------------------------------------------------
170,399 171,376
Loan receivable from the trustee of the employee share plan (2,013) (2,073)
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity 168,386 169,303
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $302,514 $311,163
=======================================================================================================
</TABLE>
The accompanying notes are an integral part of condensed consolidated financial
statements.
F-25
<PAGE>
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30
(in US$ thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,271 $ 2,142
- -------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,423 3,147
Gain on sale of property, plant and equipment (1) -
Deferred income taxes 564 (712)
Changes in operating assets and liabilities:
Accounts receivable (1,017) 3,345
Inventories (2,632) (3,873)
Other assets (1,407) (2,602)
Accounts payable and other liabilities (2,009) (667)
- -------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (808) 780
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of property, plant and equipment (4,625) (3,805)
Proceeds from sale of property, plant and equipment 55 49
Intangible assets acquired (212) (215)
- -------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,782) (3,971)
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from issuance of ordinary shares 212 586
Repayment of debt (56) (95)
Net revolving credit line movements (5,556) (2,610)
Principal payments under capital lease obligations (262) (269)
Proceeds from employee share plan receivable 1 2
- -------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,661) (2,386)
- -------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (368) 21
- -------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (11,619) (5,556)
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 32,761 28,067
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 21,142 $ 22,511
=======================================================================================================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-26
<PAGE>
Notes to Condensed Consolidated Financial Statements (Unaudited)
- ----------------------------------------------------------------
1 Condensed Consolidated Financial Statements
Memtec Limited ("Memtec") is an Australian company listed on the New York
Stock Exchange and the Australian Stock Exchange. Memtec's operations in
America, Europe and Asia are significantly larger than those in Australia
and the predominant trading currency of Memtec is the US dollar. Memtec's
shareholders are predominately US and European institutional investors.
Memtec therefore prepares its primary financial statements in US dollars
and in accordance with accounting principles generally accepted in the
United States of America ("US GAAP").
The condensed consolidated balance sheet as of September 30, 1997, the
condensed consolidated statements of operations for the three month periods
ended September 30, 1997 and 1996, and the condensed consolidated
statements of cash flows for the three months ended September 30, 1997 and
1996 have been prepared by Memtec, without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at September 30, 1997 and for all periods
presented have been made.
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions. Actual results may differ
from these estimates.
The results of operations for the period ended September 30, 1997 are not
necessarily indicative of the operating results for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The unaudited interim financial
information contained in the condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto contained in Memtec's Form 10-K for the year ended June
30, 1997.
<TABLE>
<CAPTION>
September 30 June 30
(in US$ thousands) 1997 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
2 Inventories
Raw materials $ 14,189 $ 14,543
Work-in-progress 21,520 18,989
Finished goods 12,692 12,773
- ----------------------------------------------------------------------------------
$ 48,401 $ 46,305
==================================================================================
Costs and billings on uncompleted contracts included in
work-in-progress:
Costs and estimated earnings on contracts in progress $ 14,723 $ 21,903
Progress billings on contracts in progress (6,562) (14,417)
- ----------------------------------------------------------------------------------
Costs in excess of billings on uncompleted contracts $ 8,161 $ 7,486
==================================================================================
Costs and estimated earnings on contracts in progress $ 22,789 $ 13,883
Progress billings on contracts in progress (24,639) (15,572)
- ----------------------------------------------------------------------------------
Billings in excess of costs on uncompleted contracts $ (1,850) $ (1,689)
==================================================================================
</TABLE>
F-27
<PAGE>
3 Commitments and Contingencies
From time to time, Memtec is involved in litigation in the normal course of
business. These litigation matters are not believed to be material to the
future results of operations, financial position or business of Memtec.
In August 1995, a former distributor commenced litigation against Memtec.
Memtec believes the claims are without merit and is defending the
litigation vigorously. Therefore, Memtec does not believe the litigation
will result in any material liability.
In December 1995, Memtec obtained a judgment against Puroflow Inc.
("Puroflow") in connection with a debt owed by Puroflow to Memtec. In
August 1996, Puroflow filed a counterclaim against Memtec and certain other
persons. Memtec believes the counterclaim is without merit and is defending
the litigation vigorously. Therefore, Memtec does not believe the
litigation will result in any material liability.
The Australian Taxation Office ("ATO") conducts income tax audits of
Australian companies. Memtec and certain of its Australian subsidiaries are
currently subject to an income tax audit by the ATO. The audit has been
underway for approximately five years and has covered all areas of Memtec's
business since incorporation. The ATO has indicated the principal areas it
wishes to discuss further, but no assessment has been issued at this time.
It is anticipated that the ATO will complete the audit process and issue
any assessment in the 1998 fiscal year. If certain of Memtec's tax
positions were challenged by the ATO and if any such challenge were
ultimately upheld, there may be a material adverse effect on Memtec's
future results of operations. While the outcome of the ATO's audit cannot
be predicted, management believes Memtec's tax positions are appropriate
and tax provisions are adequate.
The Internal Revenue Service ("IRS") has advised that it will be conducting
an income tax audit of a US subsidiary. The scope of the income tax audit
has not been determined, however, it is anticipated that the IRS will
complete the audit process and issue any assessment in the 1998 fiscal
year. If certain of Memtec's tax positions were challenged by the IRS and
if any such challenge were ultimately upheld, there may be a material
adverse effect on Memtec's future results of operations. While the outcome
of the IRS's audit cannot be predicted, management believes Memtec's tax
positions are appropriate and tax provisions are adequate.
German Revenue Authorities ("GRA") are conducting an income tax audit of a
German subsidiary. It is anticipated that the GRA will complete the audit
process and issue any assessment in the 1998 fiscal year. If certain of
Memtec's tax positions were challenged by the GRA and if any such challenge
were ultimately upheld, there may be a material adverse effect on Memtec's
future results of operations. While the outcome of the GRA's audit cannot
be predicted, management believes Memtec's tax positions are appropriate
and tax provisions are adequate.
As a means of funding working capital, Memtec discounts notes issued by
customers with its bankers in several countries. If the issuing party fails
to honor the note, the discounting bank has the right of recovery from
Memtec. Such transactions are accounted for as sales of receivables, and
all estimated losses if any, are recognized at the time of sale. Notes
discounted at September 30, 1997 totaled $3,091,000.
In the normal course of business, Memtec issues letters of credit and
guarantees in relation to large contracts. These totaled $26,894,000 at
September 30, 1997.
4 Dividends per Ordinary Share
The dividend declared in the first fiscal quarter of both 1998 and 1997 was
A$0.10 per ordinary share. Movements in the exchange rate between the US
dollar and the Australian dollar account for the change in the reported
dividend from US$0.08 in 1997 to US$0.07 in 1998.
F-28
<PAGE>
5 Acquisition of Schumacher Umweit und Trenntechnik GmbH Group of Companies
On October 30, 1997, Memtec, through wholly owned subsidiaries, acquired
all of the issued and outstanding shares of Schumacher Umweit und
Trenntechnik GmbH ("Schumacher") and certain real property in Germany.
Schumacher's subsidiaries in Japan, France, Poland and the United States of
America are wholly owned with the exception of Japan where there is a
minority shareholding of 1.29%. Schumacher is a leading manufacturer of
ceramic filtration products primarily for the hot gas, brine, food and
beverage, sewerage/seration and chemicals industry markets.
The purchase price for the shares was DM0.4 million (US$6.3 million). The
purchase price for the real property was DM10.4 million (US$5.8 million)
including VAT. The amount of the Schumacher and Japan subsidiary debt
assumed was DM10.5 million (US$5.9 million) and (Yen)75 million (US$0.6
million) respectively, such debt being repayable within 30 days.
Pro forma financial information is not available at the date of this
filing. The required pro forma financial information will be included in an
amendment to the Form 8-K filed on November 12, 1997 (refer Part II, Other
Information, item 6.).
6 United States Filter Corporation Tender Offer
United States Filter Corporation ("US Filter"), through a subsidiary, has
commenced a tender offer to acquire all of the issued shares of Memtec, as
more fully described in US Filter's Part A Statement and related Offer to
Purchase dated October 25, 1997. Memtec has distributed a Part B Statement
and filed an amended 14D-9 in response to US Filter's offer on November 6,
1997. US Filter's offer is, unless extended, due to expire 1.00am New York
city time on November 26, 1997 and 5.00pm Sydney time on November 26, 1997.
On November 10, 1997, US Filter announced it is increasing the price of its
continuing tender offer to US$34.50.
Under the terms of the Multi-Currency, Multi-Option Master Facility
Agreement with Commonwealth Bank of Australia, the Bank may elect to
require repayment of all debt and guarantee/bond facilities no earlier than
60 days following, in effect, a change in control of Memtec in the manner
set out in detail in the Master Facility Agreement.
In addition, various options issued by Memtec which were not otherwise
exercisable become exercisable during or at completion of the offer. In
that regard, the Memtec Board has determined, in accordance with Rule 7.5
of the Memtec Incentive Option Plan, that the outstanding options under the
Plan may be exercised during a period of 90 days after receipt by the
option holders of notice of the determination. Notices were received by
option holders commencing on November 6, 1997. The Memtec Board further
determined that options not exercised within the 90 day period will
continue to vest and be exercisable at the same times as they would have
vested and been exercisable before this notice was given.
F-29
<PAGE>
The Kinetics Group, Inc.
Consolidated Financial Statements
Year ended September 30, 1997 and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-31
Auditors Financial Statements
Consolidated Balance Sheets............................................... F-32
Consolidated Statements of Operations..................................... F-34
Consolidated Statements of Stockholders' Equity........................... F-35
Consolidated Statements of Cash Flows..................................... F-36
Notes to Consolidated Financial Statements................................ F-38
</TABLE>
F-30
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
The Kinetics Group, Inc.
We have audited the accompanying consolidated balance sheets of The Kinetics
Group, Inc. as of September 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Kinetics
Group, Inc. at September 30, 1997 and 1996, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
January 16, 1998
F-31
<PAGE>
The Kinetics Group, Inc.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,907 $ 8,844
Receivables:
Currently due, less allowance for doubtful accounts of
$2,500 and $1,200 at September 30, 1997 and 1996,
respectively 83,929 46,841
Retention, due upon completion of contracts 7,996 7,191
Costs and estimated earnings in excess of billings on
contracts in progress 22,773 10,542
Inventories 2,718 2,490
Deferred income taxes 14,563 1,369
Restricted deposits -- 1,031
Prepaid expenses and other current assets 891 556
--------- ---------
Total current assets 141,777 78,864
Equipment and improvements, net 22,847 18,050
Other assets 4,611 2,065
--------- ---------
Total assets $ 169,235 $ 98,979
========= =========
</TABLE>
F-32
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
--------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,758 $ 24,754
Accrued expenses 22,200 7,679
Accrued costs on contracts in progress 14,000 1,000
Accrued taxes on income 4,856 6,003
Billings in excess of costs and estimated earnings on
contracts in progress 19,258 16,975
Current portion of note payable to bank - 647
Current portion of capital lease obligations 1,150 1,310
---------- --------
Total current liabilities 98,222 58,368
Borrowings under bank lines of credit 33,770 8,000
Senior subordinated notes 17,760 -
Note payable to bank, less current portion - 3,861
Capital lease obligations, less current portion 1,418 294
Deferred income taxes 677 677
Other liabilities 408 -
Commitments and contingent liabilities
Redeemable convertible preferred stock, $.001 per value:
6,000 shares authorized, 2,689 and 2,484 shares
issued and outstanding at September 30, 1997 and
1996, respectively, (redemption and liquidation
preference $10,756 at September 30, 1997) 10,088 9,164
Stockholders' equity:
Common stock, $.001 per value; 30,000 shares
authorized; 7,568 and 7,500 shares issued and
outstanding at September 30, 1997 and 1996,
respectively 8 8
Additional paid-in capital 13,692 10,802
Retained earnings (accumulated deficit) (6,808) 7,805
---------- --------
Total stockholders' equity 6,892 18,615
---------- --------
Total liabilities and stockholders' equity $ 169,235 $ 98,979
========== ========
</TABLE>
See accompanying notes.
F-33
<PAGE>
The Kinetics Group, Inc.
Consolidated Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996
-------------------------
<S> <C> <C>
REVENUES $387,805 $278,423
Cost of revenues 350,367 230,748
-------- --------
Gross profit 37,438 47,675
Selling, general and administrative expenses 54,331 31,673
-------- --------
Income (loss) from operations (16,893) 16,002
Other income (expense);
Other (expense) income, net 328 944
Interest expense (3,924) (1,068)
-------- --------
Income (loss) before income taxes (20,489) 15,878
Provision (benefit) for income taxes (6,800) 7,147
-------- --------
Net income (loss) $(13,689) $ 8,731
======== ========
</TABLE>
See accompanying notes.
F-34
<PAGE>
The Kinetics Group, Inc.
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
COMMON PAID-IN (ACCUMULATED STOCKHOLDERS'
-----------------
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
------ ------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balances at September 30, 1995 7,500 $ 8 $ 10,802 $ 4,421 $ 15,231
Distribution of Subchapter S
Corporation earnings to
common stockholders - - - (4,415) (4,415)
Issuance of Series B redeemable
convertible preferred stock as in-
kind dividends - - - (757) (757)
Accretion of redeemable preferred
stock - - - (175) (175)
Net income - - - 8,731 8,731
------ ------- ----------- ------------ --------------
Balances at September 30, 1996 7,500 8 10,802 7,805 18,615
Issuance of Series B redeemable
convertible preferred stock as in-
kind dividends - - - (819) (819)
Accretion of redeemable preferred
stock - - - (105) (105)
Exercise of stock options 68 - 90 - 90
Issuance of warrants in connection
with senior subordinated notes - - 2,800 - 2,800
Net loss - - - (13,689) (13,689)
------ ------- ----------- ------------ --------------
Balances at September 30, 1997 7,568 $ 8 $ 13,692 $ (6,808) $ 6,892
====== ======= =========== ============ ==============
</TABLE>
See accompanying notes.
F-35
<PAGE>
The Kinetics Group, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (13,689) $ 8,731
Adjustments to reconcile net income (loss) to net cash (used in) provided
by operating activities:
Depreciation and amortization 7,371 4,948
Deferred income taxes (13,194) (453)
Changes in operating assets and liabilities, net of effect of
combined and acquired companies:
Receivables (37,893) (13,460)
Costs and estimated earnings in excess of billings on
contracts in progress (12,231) (3,872)
Inventories (228) (110)
Prepaid expenses and other current assets (335) 39
Other noncurrent receivables 297 794
Accounts payable, trade and subcontractors 12,004 1,305
Billings in excess of costs and estimated earnings on
contracts in process 2,283 1,986
Accrued expenses 13,374 3,977
Accrued costs on contracts in progress 13,000 1,000
--------- ---------
Net cash (used in) provided by operating activities (29,241) 4,885
INVESTING ACTIVITIES
Purchase of equipment and improvements (11,418) (8,099)
Proceeds from sale and leaseback of equipment 4,500 -
Investments (989) (336)
Increases in receivables from stockholders - (408)
Repayments of receivables from stockholders 217 1,515
Increases in other assets (452) (143)
Restricted deposits 1,031 (1,031)
--------- ---------
Net cash used in investing activities (7,111) (8,502)
FINANCING ACTIVITIES
Borrowings under senior subordinated notes 20,000 -
Borrowings under bank line of credit 140,620 15,350
Repayments of borrowings under bank line of credit (114,850) (7,350)
Borrowings under note payable to bank 1,492 4,549
Repayments of note payable to bank and capital lease obligations (9,318) (4,111)
Loan fees incurred on borrowings (1,619) -
Distributions to stockholders - (4,415)
Proceeds from exercise of stock options 90 -
--------- ---------
Net cash provided by financing activities 36,415 4,023
--------- ---------
Increase in cash and cash equivalents 63 406
Cash and cash equivalents at beginning of period 8,844 8,438
--------- ---------
Cash and cash equivalents of end of period $ 8,907 $ 8,844
========= =========
</TABLE>
F-36
<PAGE>
The Kinetics Group, Inc.
Consolidated Statements of Cash Flows (continued)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996
--------------------------------
<S> <C> <C>
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest $ 2,700 $ 1,068
=========== ===========
Income taxes $ 7,595 $ 4,468
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations incurred $ 4,281 $ 2,398
=========== ===========
Series B redeemable convertible preferred stock
issued as in-kind dividends $ 819 $ 757
=========== ===========
</TABLE>
See accompanying notes.
F-37
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements
September 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND BASIS OF PRESENTATION
The Kinetics Group, Inc. provides high purity process piping systems for the
semiconductor, pharmaceutical, and biotechnology industries. The Company offers
its clients turnkey solutions by providing as a complement to its specialty
high-purity contracting business, engineering and design services, quality
assurance and control services, program management services and manufacturing
and distribution of specialty components.
The Kinetics Group, Inc. was incorporated on February 23, 1996. On March 31,
1996, The Kinetics Group, Inc. acquired all of the capital stock of Kinetic
Systems, Inc. (predecessor business), which became a wholly owned subsidiary of
The Kinetics Group, Inc. in a recapitalization transaction. The Kinetics Group,
Inc. had no assets, liabilities or operations prior to March 31, 1996. Common
and preferred stockholders and stock option and warrant holders of Kinetic
Systems, Inc. received identical equity securities of The Kinetics Group, Inc.
and also retained identical ownership and voting percentages in the
recapitalization transaction. The recapitalization was accounted for on a
historical-cost basis and is reflected in the consolidated financial statements
as if occurred at the beginning of the year ended September 30, 1996. The
Kinetics Group, Inc. and Kinetic Systems, Inc. (for periods prior to March 31,
1996) are referred to as the "Company" in the consolidated financial statements
and accompanying notes.
The consolidated financial statements include the financial position and results
of operations of the Company and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
MERGER WITH UNITED STATES FILTER CORPORATION
Effective December 31, 1997, The Kinetics Group, Inc. entered into a definitive
merger agreement with United States Filter Corporation ("USF"). If the merger is
consummated in accordance with the terms of the agreement, USF will acquire all
of the outstanding capital stock of The Kinetics Group, Inc. in exchange for
approximately 5.8 million shares of USF common stock to the stockholders of The
Kinetics Group, Inc. USF will also assume all outstanding employee stock options
of The Kinetics Group, Inc.
F-38
<PAGE>
The Kinetics Group, Inc.
Notes To Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
CONTRACT OPERATIONS
The Company performs its services under fixed-price, cost-type and time-and-
materials contracts. The Company invoices its customers in accordance with the
terms of its contracts, which for fixed-price contracts is generally monthly on
the basis of percentage completion on the contract, and for cost-type and time-
and-materials contracts is generally on a monthly basis as costs are incurred.
Each contract type may include a provision for retention, which represents
amounts withheld from contract progress billings until satisfactory project
completion. Retention generally ranges from five to ten percent of the total
contract amount.
Revenues and gross profit from contracts are recognized under the percentage-
of-completion method, under which an estimated percentage of each contract,
based on the ratio of costs incurred to the Company's estimates of total
anticipated costs, is applied to the total estimated project gross profit.
Revisions in cost and profit estimates made during the course of the work are
reflected in the accounting period in which the facts that require the revision
become known. A provision is made currently for the entire amount of estimated
future losses on contracts. Actual gross profit on contracts may differ from
estimates used by the Company in recording gross profit on contracts in progress
and such differences could be material to the financial statements. The Company
includes in contract revenues an amount equal to costs incurred attributable
to contract claims, when realization of such revenue is probable and the amount
is determinable.
The classification of current assets and current liabilities is determined based
on the Company's contract cycle. The length of the Company's contracts generally
varies from 6 to 15 months with the majority being completed within one year.
Accordingly, current assets and current liabilities include amounts related to
construction contracts in progress which may not be received or paid within one
year. Management estimates that of the $7,996 in retentions included in
receivables at September 30, 1997, approximately $5,350 will become due in
fiscal 1998 and $2,646 in fiscal 1999.
F-39
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposit accounts with two banks.
CONCENTRATION OF CREDIT RISK
The Company's contracts are primarily with large multinational companies in the
semiconductor, pharmaceutical and biotechnology industries. Substantially all of
the Company's revenues and earnings are derived from contracts within the United
States. Foreign and export revenues were less than 5% of total revenues in each
of fiscal 1997 and 1996.
One customer accounted for 11% of the Company's revenues in fiscal 1997 and
other customers accounted for 13% and 10% of the Company's revenues in fiscal
1996. Accounts receivable, including retentions, from one customer represented
11% of total contract receivables at September 30, 1997 (11% and 10% from two
different customers at September 30, 1996).
The Company extends credit based on evaluation of the customer's financial
condition and, generally, does not require collateral. However, the Company has
certain lien rights with respect to the related projects. The Company maintains
reserves for estimated collection losses on its accounts receivable. Actual
collection losses may differ from management's estimates, and such differences
could be material to the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, borrowings under the bank line of credit, senior subordinated
notes and capital lease obligations approximate fair value. Fair value of the
Company's debt instruments is estimated based on the Company's current
incremental borrowing rate for similar types of borrowing arrangements.
INVENTORIES
Inventories, which consist of construction materials and supplies which have not
been charged to specific contracts, are stated at the lower of cost (first-in,
first-out method) or fair value.
F-40
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Construction equipment, clean room manufacturing facilities, vehicles, and
office furniture and fixtures are depreciated over their estimated useful lives,
which range from three to seven years, using the straight-line method.
Amortization on capitalized leased equipment is included in depreciation and
amortization in the financial statements.
Leasehold improvements are amortized over the shorter of the lease term or their
estimated useful life.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," the Company records impairment losses on long-lived assets used
in operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets.
STOCK-BASED COMPENSATION
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") establishes a
fair value-based method of accounting for stock-based compensation plans and
requires additional disclosures for those companies that elect not to adopt its
provisions. In accordance with the provisions of SFAS 123, the Company applies
APB Opinion No. 25 and related interpretations in accounting for its stock
option plans and accordingly, has not recognized compensation cost in connection
with such plans. The pro forma effects on reported net income (loss) for fiscal
1997 and 1996 as if the Company had elected to recognize compensation cost based
on the fair value of the options at grant date as prescribed by SFAS 123 are
summarized in Note 7.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company believes that adoption of SFAS 130 will not have a
material impact on the Company's consolidated financial statements.
F-41
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current year
presentation.
2. FINANCIAL STATEMENT INFORMATION
CONTRACTS IN PROGRESS
Contracts in progress are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
--------------------
<S> <C> <C>
Costs incurred on contracts in progress $466,567 $234,498
Estimated earnings 43,209 24,346
--------- --------
509,776 258,844
Less progress billings 506,261 265,277
--------- --------
$ 3,515 $ (6,433)
========= ========
</TABLE>
Included in the accompanying consolidated balance sheets under the following
captions (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
--------------------
<S> <C> <C>
Costs and estimated earnings in excess of billing on
contracts in progress $ 22,773 $ 10,542
Billings in excess of costs and estimated earnings on
contracts in progress (19,258) (16,975)
-------- --------
$ 3,515 $ (6,433)
======== ========
</TABLE>
F-42
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
2. FINANCIAL STATEMENT INFORMATION (CONTINUED)
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements, at cost, consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
--------------------
<S> <C> <C>
Construction equipment $ 23,746 $ 19,042
Clean room manufacturing facilities 3,907 2,669
Vehicles 1,207 1,232
Office furniture and fixtures 8,534 5,429
Improvements 4,201 3,361
-------- --------
41,595 31,733
Less accumulated depreciation and amortization (18,748) (13,683)
-------- --------
$ 22,847 $ 18,050
======== ========
</TABLE>
OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
--------------------
<S> <C> <C>
Loan fees, net of accumulated amortization of $60 $ 1,619 $ --
Noncurrent receivables 689 297
Investment in foreign companies 1,144 836
Cash surrender value of life insurance 455 358
Deposits 524 281
Receivables from stockholders 43 260
Other 137 33
------- --------
Total $ 4,611 $ 2,065
======= ========
</TABLE>
F-43
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
2. FINANCIAL STATEMENT INFORMATION (CONTINUED)
OTHER ASSETS (CONTINUED)
During fiscal 1995 and 1996, the Company purchased approximately 10% of the
outstanding capital stock of a privately held foreign company which manufactures
specialty pipe fittings for $836,000 in cash. The investment has been recorded
at cost.
During fiscal 1997, the Company purchased approximately 49% of the outstanding
capital stock of another privately held foreign company which manufactures
specialty pipe fittings for $300,000 in cash. The investment is recorded at
cost.
ACCOUNTS PAYABLE
Accounts payable consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
-------------------
<S> <C> <C>
Trade $31,522 $21,373
Subcontractors 5,236 3,381
------- -------
$36,758 $24,754
======= =======
</TABLE>
ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
-------------------
<S> <C> <C>
Compensation and related benefits $20,751 $ 6,802
Other accrued expenses 1,449 877
------- -------
$22,200 $ 7,679
======= =======
</TABLE>
F-44
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
3. BANK CREDIT FACILITY
In August 1997, the Company entered into a loan agreement with a bank and used
proceeds of borrowings under the agreement to repay all amounts outstanding
under a loan agreement with another bank. The new loan agreement provides a
revolving line of credit under which the Company may borrow up to a maximum of
$100 million, of which up to $20 million may be used to finance letters of
credit. Borrowings under the agreement bear interest at the bank's reference
rate (8.5% at September 30, 1997) or other interest rate options which the
Company may select. At September 30, 1997, the Company had $33,770,000 in
outstanding borrowings and outstanding letters of credit of $5,300,000 under the
agreement. Borrowings under the line of credit are secured by the Company's
receivables, inventories, equipment and improvements. The agreement expires on
February 8, 2002. Under the provisions of the agreement, the Company is required
to meet certain financial and nonfinancial covenants. The agreement also
restricts the payment of dividends.
In connection with the credit facility, the Company incurred debt issuance fees
of $1.2 million that are included in other assets in the accompanying
consolidated balance sheet and are being amortized to interest expense over the
term of the credit facility.
The Company had a term note facility with another bank that provided for
borrowings of up to $6,000,000 to finance equipment purchases. Borrowings under
the facility were repaid in September 1997. Equipment financed under this
facility, along with certain other equipment, was subsequently sold to a
financial institution and leased back under operating leases. The proceeds from
the sale of the equipment were $4.5 million. The resulting gain of $408,000 has
been deferred and included in other liabilities in the accompanying consolidated
balance sheet.
4. SENIOR SUBORDINATED NOTES
On July 1, 1997, the Company issued $20 million in senior subordinated notes to
a preferred stockholder and an investor. The notes bear interest at 8% per annum
and the principal is due June 30, 2002. The notes have been recorded at the
principal amount, less $2,800,000, which represents the estimated fair value of
common stock warrants issued to the noteholders (Note 7). This amount will be
accreted by charges to interest expense over the term of the notes. The
outstanding principal is required to be repaid upon a change in control of the
Company plus a 1% prepayment penalty if repaid before September 30, 1999. The
Company may also prepay the notes at its election plus a 1% prepayment penalty.
Under the terms of the note agreement, the Company is required to meet certain
financial and nonfinancial covenants.
F-45
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
4. SENIOR SUBORDINATED NOTES (CONTINUED)
In connection with the issuance of these notes, the company incurred debt
issuance fees of $494,000 that are included in other assets in the accompanying
consolidated balance sheet and are being amortized to interest expense over the
life of the notes.
5. INCOME TAXES
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"). Deferred tax assets and liabilities are determined based on
the differences between financial reporting and the tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect, when the differences are expected to reverse.
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996
-----------------------
<S> <C> <C>
Current:
Federal $ 4,222 $ 6,085
State 2,172 1,515
-------- --------
6,394 7,600
Deferred:
Federal (11,022) (415)
State (2,172) (38)
-------- --------
(13,194) (453)
-------- --------
$ (6,800) $ 7,147
======== ========
</TABLE>
F-46
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate of
35% for fiscal 1997 and 34% for fiscal 1996 as a result of the following
differences (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996
-----------------------
<S> <C> <C>
Income tax at the federal statutory rate $(7,255) $ 5,399
State income taxes (net of federal benefit, if any) - 975
Other, net 455 773
------- -------
$(6,800) $ 7,147
======= =======
</TABLE>
Significant components of the Company's deferred income tax assets are as
follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
----------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 1,035 $ 444
Accrued expenses 13,528 650
State income taxes - 275
Other, net - 35
------- ------
14,563 1,404
Deferred tax liabilities:
Depreciation 677 712
------- ------
Net deferred tax assets $13,886 $ 692
======= ======
</TABLE>
F-47
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
6. COVERTIBLE PREFERRED STOCK
In June 1995, the Company issued 2,250,000 shares of Series A preferred stock
for $9,000,000 in cash less issuance costs of $982.000. The redeemable preferred
stock was initially recorded at fair value. The excess of the redemption value
over the carrying value is being accreted by periodic charges to retained
earnings (accumulated deficit) through June 30, 2002.
The holders of the Series A preferred stock are entitled to receive cumulative
dividends at the rate of 8% per annum. Dividends are payable each quarter and
must be paid prior to any common stock dividends. Dividends are being paid in
shares of Series B preferred stock. As a result of such dividends, 438,958 and
234,181 shares of Series B preferred stock were outstanding as of September 30,
1997 and 1996, respectively. Beginning July 1, 2002, the dividend rate will
increase annually by one-tenth of the previous year rate. Prior to any
redemption, any unpaid dividends must be paid in full. Upon any mandatory
redemption, all accrued but unpaid dividends must be paid.
Each share of Series A and Series B preferred stock is convertible at any time
into Series B common stock at the option of the holder. The number of Series B
common shares into which each share of Series A preferred stock is convertible
is 0.75, subject to adjustment based on antidilution provisions. The number of
Series B common shares into which each share of Series B preferred stock is
convertible is 0.3693, subject to adjustment and antidilution provisions. At
September 30, 1997, the outstanding shares of Series A and B preferred stock
were convertible into 1,849,607 Series B shares of common stock. The Series A
preferred stock is mandatorily convertible upon the closing of a qualified
public offering under the Securities Act of 1933.
The Company must redeem all shares of Series A and Series B preferred stock at a
price of $4.00 per share upon the sale or other disposition of all or
substantially all of the Company's assets or any transaction of merger or
consolidation which includes the Company or any sale of equity securities where
the current stockholders would own less than 50% of the Company. Beginning July
1, 2002, the Company may redeem all or any portion of the shares of Series A and
Series B preferred stock outstanding at a price of $4.00 per share plus unpaid
cumulative dividends.
The holders of Series A and Series B preferred stock have restricted voting
rights. However, in the event of any default under the terms of the preferred
stock purchase agreement by the Company without remedy, the Series A and Series
B preferred stockholders may elect a majority to the Board of Directors and
assume voting rights. Also in the event of any such default, the Series A and
Series B preferred stock is redeemable at a price of $4.00 per share plus unpaid
cumulative dividends.
F-48
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
6. CONVERTIBLE PREFERRED STOCK (CONTINUED)
The holders for Series A and Series B preferred stock have liquidation
preferences of $4.00 per share plus any dividends in arrears with respect to
such stock upon the winding up or dissolution of the Company.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company's common stock consists of the following at September 30, 1997:
<TABLE>
<CAPTION>
SHARES SHARES ISSUED
AUTHORIZED AND OUTSTANDING
---------- ---------------
<S> <C> <C>
Series A 20,000,000 3,892,500
Series B 10,000,000 3,675,000
---------- ---------
30,000,000 7,567,500
========== =========
</TABLE>
The Series B common stock is nonvoting, except in the event of a proposed
reorganization, in which event it will have equal voting rights as the Series A
common stock. Series B common stock is convertible into Series A common Stock
upon the closing of a qualified public offering (as defined) and such conversion
is mandatory in the event the corporation sells all or substantially all of its
assets, upon the occurrence of any transaction of merger or consolidation which
includes the Company or any sale of equity securities subsequent to which the
current shareholders would own less than 50% of the Company, upon the closing of
a qualified public offering under the Securities Act of 1933 or the 90th day
following the date that current common stockholders fail to own a majority of
the Series A common stock.
Under the terms of a stockholder agreement that terminates upon a qualified
initial public offering of the Company's common stock, the Company may have the
right under certain circumstances to repurchase the capital stock of certain
stockholders upon their death, termination or notification of intention to sell
their shares, subject to the priority rights of other stockholders to acquire
such shares.
F-49
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK SPILT
On December 20, 1996, the stockholders approved a three-for-four reverse stock
split of issued and outstanding common stock. All common shares in the
accompanying consolidated financial statements have been retroactively adjusted
to reflect the stock split.
DIVIDENDS
Under the terms of the Company's bank credit facilities (Note 3), the Company is
prohibited from paying cash dividends on its common stock. The credit agreements
provide for the payment of required dividends on the Company's redeemable
convertible preferred stock.
COMMON STOCK WARRANTS
In connection with the issuance of senior subordinated notes, the Company issued
warrants to an outside investor and a preferred stockholder to purchase an
aggregate of 318,000 shares of Series A common stock at a purchase price of
$0.01 per share. These warrants are exercisable through June 30, 2003. On June
30, 2002, the Company has the option to repurchase for fair value the warrants
and any shares issued through exercise of the warrants. If no repurchase offer
is made on June 30, 2002, additional warrants to purchase 318,000 shares of
Series A common stock are to be issued at a purchase price of $0.01 per share.
In addition, warrants to purchase shares of Series A common stock equal to 1.5%
of the outstanding fully diluted shares of common stock are to be issued
annually beginning October 1, 1998 to the extent the senior subordinated notes
are outstanding.
In connection with the issuance of preferred stock and a loan in fiscal 1995,
the Company issued warrants to its financial advisors and a bank to purchase
293,662 shares of Series B common stock at a purchase price of $5.33 per share.
These warrants are exercisable over a five-year period ending June 25, 2000.
STOCK OPTIONS
The 1997 Stock Option Plan (the "Plan") provides for the grant of incentive
stock options, nonqualifying stock options and stock purchase rights. A total of
1,100,000 shares of Series A common stock has been reserved for issuance under
the Plan.
F-50
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
The Plan is administered by the Board of Directors or a committee thereof.
Subject to the provisions of the Plan, the Board or committee has the authority
to select the persons to whom options are granted and determine the terms of
each option, including the number of shares of common stock covered by the
option, when the option becomes exercisable, the option exercise price, which,
in the case of incentive stock options, must be at least 100% of the fair market
value of a share of common stock as of the date of grant, and, in the case of
nonstatutory stock options, must be at least 85% of the fair market value of a
share of common stock as of the date of grant, and the duration of the option
(which, in the case of incentive stock options, may not exceed ten years).
Generally, options granted under the Plan are immediately exercisable but remain
subject to repurchase by the Company for all exercised unvested shares under a
vesting schedule established by the Board or committee. The Company's repurchase
right terminates upon certain changes in control.
The Company's 1996 Key Employee Stock Option Plan provided for the issuance of
options to employees (including officers), directors and consultants to
purchase up to 337,500 shares of Series B common stock. No further shares are
available for grant under the 1996 Key Employee Stock Option Plan.
The Company has also entered into non-qualified option agreements with certain
employees and one consultant which provide for the purchase of 342,500 shares of
Series A common stock and 292,500 shares of Series B common stock. Such
agreements provide for vesting periods of up to six years with an option term of
ten years.
F-51
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
Activity under the Company's stock option plans and the non-qualified option
agreements is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES EXERCISE PRICE
------------------
SERIES A SERIES B PER SHARE
-------- -------- --------------
<S> <C> <C> <C>
Options outstanding at September 30, 1995 322,500 292,500 $ 1.33
Options granted - 468,750 10.00-19.33
-------- -------- -------------
Options outstanding at September 30, 1996 322,500 761,250 1.33-19.33
Options granted 639,500 387,624 7.00
Options cancelled - (281,250) 10.00-19.33
Options exercised (67,500) - 1.33
-------- -------- -------------
Options outstanding at September 30, 1997 894,500 867,624 $ 1.33-10.00
======== ======== =============
</TABLE>
At September 30, 1997, options to purchase 122,000 and 186,450 Series A and
Series B common shares, respectively, were vested and unexercised. All options
under the stock option plans are exercisable but all exercised unvested shares
under the vesting schedule remain subject to repurchase by the Company (none
exercised as of September 30, 1997).
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
123"). Accordingly no compensation cost has been recognized for the options
granted under the plans.
F-52
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION (CONTINUED)
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS 123, net income
would have been decreased to the pro forma amounts indicated in the table below
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996
-----------------------
<S> <C> <C>
Net income (loss) - as reported $ (13,689) $ 8,731
Net income (loss) - pro forma (13,881) 8,700
</TABLE>
The effect on pro forma net income (loss) in fiscal 1997 and 1996 is not
necessarily indicative of the effect on pro forma net income in future years.
The fair value of each grant is estimated on the date of the grant using the
minimum-value method (as permitted for non public companies) using the
following assumptions for both years:
Risk free interest rate 6%
Expected life of options 4 to 10 years
Expected dividend yield nil
Expected volatility nil
8. EMPLOYEE BENEFIT PLANS
The Company provides pension and health and welfare benefits to employees who
are members of the United Association of Journeymen and Apprentices of the
Plumbing and Pipefitting Industry of the United States and Canada under
multiemployer defined benefit plans. Approximately 67% of the Company's
full-time workforce is represented by the union. Contributions were $7,542,000
and $5,259,000 to the union pension plans and $9,753,000 and $6,478,000 to the
health and welfare plans for fiscal 1997 and 1996, respectively.
F-53
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company maintains a retirement plan under Section 401(k) of the Internal
Revenue Code, which covers nonunion employees who meet certain eligibility
requirements. Contributions by the Company, which are made at the discretion of
the Board of Directors, are funded and charged against operations as accrued.
Benefits under the plan vest in varying annual percentages depending on the
employee's hire date, with the employee becoming fully vested after the fifth
year of service. Employee contributions are fully vested at all times. The
Company contributed $142,000 and $122,000 to the Plan during fiscal 1997 and
1996, respectively, and has accrued an additional contribution of $255,000 for
fiscal 1997.
9. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities and equipment under noncancelable
operating leases and certain construction equipment under capital leases. Future
minimum payments under noncancelable operating leases with terms greater than
one year and capital leases at September 30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ---------
<S> <C> <C>
Fiscal year:
1998 $ 4,097 $ 1,267
1999 3,595 476
2000 2,986 469
2001 1,760 388
2002 1,079 329
and thereafter 622 -
------- -------
Total minimum lease payments $14,059 2,929
=======
Less amounts representing interest 361
-------
Present value of minimum lease payments (including
$1,150 recorded as a current liability) $ 2,568
=======
</TABLE>
Rent expense was approximately $2,558,000 and $1,460,000 for fiscal 1997 and
1996, respectively.
F-54
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
During fiscal 1997, the Company entered into a joint venture with a real estate
developer to construct an office building for the Company. Subsequent to
September 30, 1997, the Company made a $300,000 capital contribution for its 50%
share of the joint venture. The joint venture has leased the land on which the
building is being constructed under a 55-year lease which requires annual
payments of $417,000. The joint venture also has contractual commitments for
construction of the building in the amount of $6,100,000. The total cash
expended by the joint venture for the construction of the building through
September 30, 1997 is approximately $173,000.
The Company has entered into a 15-year building lease with the joint venture
which will require annual lease payments of $1,390,000, adjusted for price level
factors. The Company has two five-year renewal options. The Company has also
committed to make additional cash payments of $1,100,000 to the joint venture
for the cost of tenant improvements, and advances of $1,300,000 to its joint
venture partner. The Company also anticipates that it will be a guarantor of a
construction loan to the joint venture in the amount of $5,500,000.
The Company has investments in two companies in which it has guaranteed debt and
lease obligations in the aggregate amount of $250,000 at September 30, 1997. The
Company has also guaranteed obligations of two stockholders to a bank to a
maximum of $2,900,000, of which $2,500,000 was outstanding at September 30,
1997.
10 LITIGATION AND CLAIMS
The Company is a party to a number of lawsuits and claims arising out of the
normal course of business. Claims arising from certain construction contracts
have been made against the Company by project owners and subcontractors. The
Company has also made claims against certain project owners for costs incurred
in excess of contract amounts, including receivables of $4,676,000 at September
30, 1997 for which no revenue has been recognized.
F-55
<PAGE>
The Kinetics Group, Inc.
Notes to Consolidated Financial Statements (continued)
10. LITIGATION AND CLAIMS (CONTINUED)
In January 1997, the Company experienced an incident in which one of the
Company's employees died and another was seriously injured at a facility of one
of the Company's customers. The family of the deceased employee has filed a
lawsuit against the Company in U.S. District Court, Northern District of Texas,
which involves a gross negligence claim for punitive damages. The case is in the
early stages of discovery. The general contractor has also filed a lawsuit
against the Company which involves a contractual indemnity claim in connection
with the same incident. There has been no discovery in this case. The Company
has tendered defense to these matters to its insurance carrier.
Management believes that the outcome of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
However, depending on the amount and timing, an unfavorable resolution of some
or all of these matters could materially affect the Company's financial position
or its future results of operations or cash flows.
F-56
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information presents
the Pro Forma Combined Balance Sheet at September 30, 1997, giving effect to
the acquisitions of Memtec and of Kinetics as if they had been consummated on
that date. Also presented are the Pro Forma Combined Statements of Operations
for the fiscal year ended March 31, 1997 and the six months ended September
30,1997, giving effect to the acquisitions of Memtec and Kinetics as if each
of such acquisitions had been consummated as of the beginning of the
respective periods presented. The Company's fiscal year ends on March 31,
Memtec's fiscal year ends on June 30 and Kinetics' fiscal year ends on
September 30. The Pro Forma Combined Balance Sheet combines the respective
balance sheets of the Company, Memtec and Kinetics as of September 30, 1997.
The Pro Forma Combined Statement of Operations for the year ended March 31,
1997 combines the results of the Company for such year with the results of
Memtec for the year ended June 30, 1997 and the results of Kinetics for the
year ended September 30, 1997. The Pro Forma Combined Statement of Operations
for the six months ended September 30, 1997 combines the results of each of
the Company, Memtec and Kinetics for such six month period.
The pro forma data is based on the historical combined statements of the
Company, Memtec and Kinetics giving effect to the Memtec acquisition under the
purchase method of accounting, the Kinetics acquisition under the pooling of
interests method of accounting and to the assumptions and adjustments (which
the Company believes to be reasonable) described in the accompanying Notes to
Unaudited Pro Forma Combined Financial Information. Under the purchase method
of accounting, assets acquired and liabilities assumed will be recorded at
their estimated fair value at the date of acquisition. Under the pooling of
interests method of accounting, the recorded assets and liabilities of the
separate entities become the recorded assets and liabilities of the combined
entity. The pro forma adjustments set forth in the following unaudited pro
forma combined financial information are estimated and may differ from the
actual adjustments when they become known; however, no material differences
are anticipated by the Company.
The following unaudited pro forma combined financial information does not
reflect certain cost savings that the Company believes may be realized
following the Memtec and Kinetics acquisitions. Such cost savings are expected
to be realized primarily through the elimination of certain overhead expenses
and geographic overlap and the implementation of strict cost controls and
standardized operating procedures. Additionally, the Company believes that
such acquisitions will enable it to realize increased operating efficiencies
and economies of scale including enhanced purchasing power and increased asset
utilization.
The pro forma data is provided for comparative purposes only. It does not
purport to be indicative of the results that actually would have occurred if
the acquisitions of Memtec and Kinetics had been consummated on the dates
indicated or that may be obtained in the future. The unaudited pro forma
combined financial information should be read in conjunction with the notes
thereto, the audited consolidated financial statements and notes thereto of
Memtec and Kinetics, included herein, and the Company's Consolidated Financial
Statements and related Notes thereto, incorporated herein by reference.
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
----------------------------------------------------------------------
HISTORICAL PRO FORMA
----------------------------- ---------------------------------------
ADJUSTMENTS
INCREASE
COMPANY MEMTEC KINETICS (DECREASE) NOTES PRO FORMA
---------- -------- -------- ----------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.................... $ 32,622 $ 21,142 $ 8,907 $ 62,671
Short-term investments.. 483 -- -- 483
Accounts receivable,
net.................... 618,256 46,371 91,925 756,552
Cost and estimated
earnings in excess of
billings on uncompleted
contracts.............. 121,494 -- 22,773 144,267
Inventories............. 303,960 48,401 2,718 355,079
Prepaid expenses........ 13,677 -- 891 14,568
Deferred taxes.......... 38,969 4,844 14,563 58,376
Other current assets..... 41,247 8,530 -- 49,777
---------- -------- -------- ----------
Total current assets... 1,170,708 129,288 141,777 1,441,773
---------- -------- -------- ----------
Property, plant and
equipment, net.......... 597,987 96,248 22,847 717,082
Investment in leasehold
interests, net.......... 22,916 -- -- 22,916
Costs in excess of net
assets of businesses
acquired, net........... 903,982 57,519 -- 961,501
Other assets............. 109,373 19,459 4,611 (11,231) a(i) 122,212
---------- -------- -------- ----------
Total assets........... $2,804,966 $302,514 $169,235 $3,265,484
========== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........ $ 278,233 $ 13,679 $ 36,758 $ 328,670
Accrued liabilities..... 272,633 29,533 36,200 338,366
Current portion of long-
term debt.............. 10,699 3,447 1,150 15,296
Billings in excess of
costs and estimated
earnings on uncompleted
contracts.............. 58,012 -- 19,258 77,270
Other current
liabilities............ 43,997 567 4,865 49,420
---------- -------- -------- ----------
Total current
liabilities........... 663,574 47,226 98,222 809,022
---------- -------- -------- ----------
Notes payable............ 6,346 -- 33,770 388,364 a(ii) 428,480
Long-term debt, excluding
current portion......... 60,521 75,032 19,178 154,731
Convertible subordinated
notes................... 554,000 -- -- 554,000
Deferred taxes........... 13,110 5,017 677 18,804
Other liabilities........ 43,679 6,853 408 50,940
---------- -------- -------- ----------
Total liabilities...... 1,341,230 134,128 152,255 2,015,977
---------- -------- -------- ----------
Preferred stock......... -- -- 10,088 (10,088) a(iii) --
Shareholders' equity:
Common stock............ 929 20,047 8 (19,997) a(iii), a(iv) 987
Additional paid-in
capital................ 1,384,570 157,210 13,692 (147,172) a(iii), a(iv) 1,408,300
Currency translation
adjustment............. (34,579) (10,552) -- 10,552 a(iv) (34,579)
Retained earnings
(accumulated deficit).. 112,816 1,681 (6,808) (232,890) a(iv), a(v) (125,201)
---------- -------- -------- ----------
Total shareholders'
equity................ 1,463,736 168,386 6,892 1,249,507
---------- -------- -------- ----------
$2,804,966 $302,514 $169,235 $3,265,484
========== ======== ======== ==========
</TABLE>
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------------------------- ---------------------------------
Fiscal Year Ended
---------------------------------------------- ADJUSTMENTS
March 31, 1997 June 30, 1997 September 30,1997 INCREASE
COMPANY MEMTEC KINETICS (DECREASE) NOTES PRO FORMA
---------- -------- -------- --------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $1,376,601 $243,616 $387,805 $2,008,022
Cost of sales........... 1,026,248 155,638 350,367 1,532,253
---------- -------- -------- ----------
Gross profit........... 350,353 87,978 37,438 475,769
Selling, general and
administrative
expenses............... 261,859 72,702 54,331 388,892
Merger and restructuring
expenses............... 5,581 1,677 -- 7,258
---------- -------- -------- ----------
Operating income
(loss)................ 82,913 13,599 (16,893 79,619
Other income (expense):
Interest expense....... (22,585) (5,613) (3,924 (22,991) b(i) (55,113)
Interest and other
income................ 3,350 816 328 4,494
---------- -------- -------- ----------
Income (loss) before
income taxes.......... 63,678 8,802 (20,489 29,000
Provision (benefit) for
income taxes........... 17,481 1,306 (6,800 (6,323) b(ii) 5,664
---------- -------- -------- ----------
Net income (loss)...... $ 46,197 $ 7,496 $(13,689 $ 23,336
========== ======== ======== ==========
Net income per common
share................. $ 0.77 $ 0.35
========== ==========
Net income per common
share excluding
certain charges....... $ 0.83 c c $ 0.77
========== ==========
Weighted average number
of common shares
outstanding............ 60,324 66,127
========== ==========
</TABLE>
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------------------------
HISTORICAL PRO FORMA
------------------------------ --------------------------------
ADJUSTMENTS
INCREASE
COMPANY MEMTEC KINETICS (DECREASE) NOTES PRO FORMA
---------- -------- -------- ----------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $1,289,722 $130,095 $227,404 $1,647,221
Cost of sales........... 971,117 81,100 205,585 1,257,802
---------- -------- -------- ----------
Gross profit.......... 318,605 48,995 21,819 389,419
Selling, general and
administrative
expenses............... 234,676 37,974 31,392 304,042
Merger and restructuring
expenses............... -- 2,714 -- 2,714
---------- -------- -------- ----------
Operating income
(loss)............... 83,929 8,307 (9,573) 82,663
Other income (expense):
Interest expense...... (18,389) (3,083) (2,787) (11,496) b(i) (35,755)
Interest and other
income............... 1,087 355 136 1,578
---------- -------- -------- ----------
Income (loss) before
income taxes......... 66,627 5,579 (12,224) 48,486
Provision (benefit) for
income taxes........... 21,357 2,631 (3,748) (3,690) b(iii) 16,550
---------- -------- -------- ----------
Net income (loss)..... $ 45,270 $ 2,948 $ (8,476) $ 31,936
========== ======== ======== ==========
Net income per common
share................ $ 0.55 $ 0.36
========== ==========
Net income per common
share excluding
certain charges...... $ 0.55 $ 0.51
========== ==========
Weighted average number
of common shares
outstanding............ 82,968 88,771
========== ==========
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
a. The Pro Forma Combined Balance Sheet has been prepared to reflect the
acquisition of Memtec under the purchase method of accounting. Including
transaction costs estimated at approximately $13.0 million, the equity
purchase price for Memtec was approximately $399.6 million in cash. The
estimated net book value, as adjusted, of Memtec and the estimated fair
value of its net assets as of the closing date is assumed to be
$168.4 million. The purchase price was allocated to the assets of Memtec
based on their estimated respective fair value. In connection with the
acquisition of Memtec, the Company acquired certain in-process research and
development projects that had not reached technological feasibility and
that had no alternative future uses. Such projects were valued using a risk
adjusted cash flow model under which expected future cash flows were
discounted, taking into account risks related to existing and future
markets and assessments of the life expectancy of such projects. The
estimated value of such in-process research and development projects was
$231.2 million at September 30, 1997 ($299.6 million at the closing date of
December 9, 1997) and was recorded as a charge to retained earnings in the
accompanying Pro Forma Combined Balance Sheet.
The Pro Forma Combined Balance Sheet has been prepared to reflect the
acquisition of Kinetics under the pooling of interests method of
accounting. The Company acquired all of the outstanding capital stock of
Kinetics in exchange for 5,803,803 shares of the Company's Common Stock
(0.5824 shares of the Company's Common Stock for each outstanding share of
Kinetics common stock). Pursuant to the pooling of interests method of
accounting, the recorded assets and liabilities of each of the Company and
Kinetics have been recorded as the assets and liabilities of the combined
entity.
The Pro Forma Combined Balance Sheet has been adjusted as follows:
(i) To eliminate the recorded investment in Memtec of $11.2 million for
the purchase of Memtec Shares prior to the Memtec Offer.
(ii) To record the assumed incurrence of $388.4 million of indebtedness
under the Senior Credit Facility with an assumed effective interest
rate of 5.92%. Such indebtedness was incurred to fund the purchase
of a portion of the Memtec Shares and to pay certain related fees
and expenses.
(iii) To reflect the conversion of Kinetics preferred stock into Kinetics
common stock. Such conversion increased Kinetics common equity
account and additional paid-in capital account by $50,000 and
$10.0 million, respectively.
(iv) To eliminate the equity of Memtec.
(v) To record the impact on retained earnings for the charge of $231.2
million related to the purchase of in-process research and
development projects.
<PAGE>
b. For the fiscal year ended March 31, 1997, the historical results of
operations of Memtec reflects its operations for the twelve months ended
June 30, 1997 and the historical results of operations of Kinetics reflects
its operations for the twelve months ended September 30, 1997. The pro forma
data for the six months ended September 30, 1997 combines the results of
each of the Company, Memtec and Kinetics for such six-month period.
The Pro Forma Combined Statements of Operations give effect to the following
adjustments:
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED
MARCH 31, SEPTEMBER 30,
1997 1997
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
(i) To adjust interest expense related to
indebtedness of $388.4 million incurred
under the Senior Credit Facility to
finance the acquisition of a portion of
the Memtec Shares and to pay certain
related fees and expenses. Interest on
such indebtedness is assumed to be at an
effective rate of 5.92% per annum......... $(22,991) $(11,496)
======== ========
(ii) To adjust the provision for income taxes
to reflect the income tax effect of the
pro forma adjustments..................... $ (6,323) $ (3,690)
======== ========
</TABLE>
<PAGE>
c. During the fiscal year ended March 31, 1997, the Company recorded merger
expenses of $5.6 million related to the acquisition of Davis. Such expenses
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.
During the fiscal year ended June 30, 1997 and the six months ended
September 30, 1997, Memtec recorded restructuring expenses of $1.7 million
and $2.7 million, respectively. Such restructuring expenses related to
employee terminations and asset write-downs at Memtec's French operations.
The restructuring was performed to focus Memtec's French operations on
global brands and away from non-core businesses.
During the fiscal year ended September 30, 1997 and the six months ended
September 30, 1997, Kinetics recorded non-recurring charges of $32.8
million and $17.3 million, respectively. During the fiscal year ended
September 30, 1997, Kinetics recorded in cost of sales non-recurring
charges of $26.0 million related to certain unreimbursed project costs,
$24.8 million of which were for Asian-based customers including $20.0
million for a single project for an Asian-based customer. Additional non-
recurring charges during the fiscal year ended September 30, 1997 of $6.8
million were included in Kinetics' selling, general and administrative
expenses. These charges related to increases in Kinetics allowance for
doubtful accounts, the write-off of certain receivables, the write-down of
certain assets and the establishment of certain accruals. During the six
months ended September 30, 1997, Kinetics recorded in cost of sales non-
recurring charges of $13.7 million related to unreimbursed project costs,
$13.4 million of which were for Asian-based customers including
$10.3 million for a single project for an Asian-based customer.
Additionally, during the six months ended September 30, 1997, Kinetics
recorded non-recurring charges in selling, general and administrative
expenses of $3.6 million related to increases in Kinetics allowance for
doubtful accounts, the write-off of certain receivables, the write-down of
certain assets and the establishment of certain accruals.
Excluding the effects of each of the charges identified above, gross
profit, operating income, net income and net income per common share for
the fiscal year ended March 31, 1997 and the six months ended September 30,
1997 would have been:
<TABLE>
<CAPTION>
PRO FORMA
---------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C>
Fiscal Year Ended March 31, 1997:
Gross profit......................................... $501,769
Operating income..................................... 119,706
Net income........................................... 50,746
Net income per common share.......................... 0.77
Six Months Ended September 30, 1997:
Gross profit......................................... $403,102
Operating income..................................... 102,682
Net income........................................... 45,369
Net income per common share.......................... 0.51
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
23.01 Consent of Price Waterhouse
23.02 Consent of Ernst & Young LLP
</TABLE>
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Form 8-K of United States Filter
Corporation of our report dated September 25, 1997 relating to the Financial
Statements of Memtec Limited which appears in this Form 8-K.
/s/ Price Waterhouse
Price Waterhouse
Sydney
February 5, 1998
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated January 16, 1998, with respect to
the financial statements of The Kinetics Group, Inc. included in the Current
Report on Form 8-K/A of United States Filter Corporation.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
February 4, 1998
