<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): June 15, 1998
UNITED STATES FILTER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0266015
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
40-004 COOK STREET, PALM
DESERT, CA 92211
(Address of principal (Zip Code)
executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (760) 340-0098
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<PAGE>
ITEM 5. OTHER EVENTS
As previously announced, on June 15, 1998, United States Filter Corporation
(the "Company") completed the acquisition of Culligan Water Technologies, Inc.
("Culligan"). The acquisition was effected by means of the merger (the
"Merger") of Palm Water Acquisition Corp., a wholly owned subsidiary of the
Company, with and into Culligan, with Culligan surviving the Merger as a wholly
owned subsidiary of the Company.
This transaction has been accounted for as a pooling of interests and
accordingly, the consolidated financial statements and notes thereto of the
Company have been restated to include the accounts and operations of Culligan.
Such restated consolidated financial statements and notes thereto are included
herein. Additionally, Selected Consolidated Financial Data and Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
Company have been restated to reflect the acquisition of Culligan and are also
included herein.
<TABLE>
<CAPTION>
ITEM 7. FINANCIAL STATEMENTS
<S> <C>
Index to Consolidated Financial Statements ............................................................... 19
Independent Auditor's Report-KPMG Peat Marwick LLP ....................................................... 20
Report of Independent Auditors-Ernst & Young LLP ......................................................... 21
Consolidated Financial Statements (as restated for the acquisition
of Culligan, accounted for as a pooling of interests):
Consolidated Balance Sheets as of March 31, 1997 and 1998 ................................................ 22
Consolidated Statements of Operations for the years ended
March 31, 1996, 1997 and 1998 ........................................................................... 23
Consolidated Statements of Shareholders' Equity for the years
ended March 31, 1996, 1997 and 1998 ..................................................................... 24
Consolidated Statements of Cash Flows for the years ended
March 31, 1996, 1997 and 1998 ........................................................................... 25
Notes to Consolidated Financial Statements ............................................................... 27
</TABLE>
2
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company set forth below are
derived from the Company's audited consolidated financial statements and related
notes thereto. Each fiscal year of the Company is ended March 31. The selected
consolidated financial data should be read in conjunction with and is qualified
in its entirety by the Company's consolidated financial statements and related
notes thereto and other financial information included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,(1)
-----------------------------------------------------------------------
1994(2) 1995(3) 1996(4) 1997(5) 1998(6)
----------- ------------ ------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues $884,782 1,110,816 1,395,247 2,135,424 3,740,324
Cost of sales 648,737 814,663 1,005,336 1,582,196 2,740,787
-------- --------- --------- --------- ---------
Gross Profit 236,045 296,153 389,911 553,228 999,537
Selling, general and administrative expenses 228,047 262,985 326,912 447,644 725,249
Purchased in-process research and
development - - - - 355,308
Merger, restructuring, acquisition and other
related charges - 5,917 - 5,581 150,582
-------- --------- --------- --------- ---------
228,047 268,902 326,912 453,225 1,231,139
-------- --------- --------- --------- ---------
Operating income (loss) 7,998 27,251 62,999 100,003 (231,602)
Other income (expense):
Interest expense (18,185) (27,892) (28,706) (31,999) (63,790)
Interest and other income (3,036) 3,448 10,366 11,334 38,212
-------- --------- --------- --------- ---------
(21,221) (24,444) (18,340) (20,665) (25,578)
-------- --------- --------- --------- ---------
Income (loss) before income tax
expense (13,223) 2,807 44,659 79,338 (257,180)
Income tax expense 2,070 14,582 35,239 30,945 48,221
-------- --------- --------- --------- ---------
Net income (loss) $(15,293) (11,775) 9,420 48,393 (305,401)
======== ========= ========= ========= =========
PER COMMON SHARE DATA:(7)
Basic:
Net income (loss) $(0.26) (0.19) 0.11 0.47 (2.18)
======== ========= ========= ========= =========
Weighted average number of common
shares outstanding 61,060 64,991 78,953 102,250 139,867
======== ========= ========= ========= =========
Diluted:
Net income (loss) $(0.26) (0.19) 0.11 0.45 (2.18)
======== ========= ========= ========= =========
Weighted average number of common
shares outstanding 61,060 64,991 80,252 106,609 139,867
======== ========= ========= ========= =========
</TABLE>
3
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA
(END OF PERIOD):
<S> <C> <C> <C> <C> <C>
Working capital $158,957 155,683 214,205 594,575 704,423
Total assets $761,241 887,064 1,295,886 2,734,925 4,465,445
Notes payable and long-term debt,
including current portion $200,802 200,685 123,172 134,711 1,098,071
Convertible subordinated debt $ 60,000 105,000 200,000 554,000 554,000
Shareholders' equity $224,059 248,792 526,479 1,219,470 1,591,438
- ----------
</TABLE>
(1) The historical consolidated financial data for the fiscal years ended March
31, 1994, 1995, 1996, 1997 and 1998 have been restated to include the
accounts and operations of Culligan which was merged with the Company in
June 1998, and accounted for as a pooling of interests. Separate results of
operations of the Company and Culligan for the years ended March 31, 1994
through March 31, 1998 are presented below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31
---------------------------------------------------------------------
1994(2) 1995(3) 1996(4) 1997(5) 1998(6)
----------- ------------ ------------ ------------ ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
REVENUES
Company (as previously reported) $620,709 830,765 1,090,745 1,764,406 3,234,580
Culligan 264,073 280,051 304,502 371,018 505,744
-------- --------- --------- --------- ---------
$884,782 1,110,816 1,395,247 2,135,424 3,740,324
======== ========= ========= ========= =========
OPERATING INCOME (LOSS)
Company (as previously reported) $ 3,999 40,721 61,385 66,020 (235,209)
Culligan 3,999 (13,470) 1,614 33,983 3,607
-------- --------- --------- --------- ---------
$ 7,998 27,251 62,999 100,003 (231,602)
======== ========= ========= ========= =========
NET INCOME (LOSS)
Company (as previously reported) $ (2,773) 24,621 30,699 32,508 (299,779)
Culligan (12,520) (36,396) (21,279) 15,885 (5,622)
-------- --------- --------- --------- ---------
$(15,293) (11,775) 9,420 48,393 (305,401)
======== ========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE (7):
Basic:
As previously reported $ (0.11) 0.68 0.62 0.51 (3.13)
As restated $ (0.26) (0.19) 0.11 0.47 (2.18)
Diluted:
As previously reported $ (0.11) 0.66 0.61 0.49 (3.13)
As restated $ (0.26) (0.19) 0.11 0.45 (2.18)
</TABLE>
4
<PAGE>
(2) The fiscal year ended March 31, 1994 includes four months of results of
Ionpure Technologies Corporation and IP Holding Company ("Ionpure"),
acquired December 1, 1993 and accounted for as a purchase. Selling,
general and administrative expenses for the year ended March 31, 1994
reflect four months of integration of Ionpure, certain charges totaling
$2.4 million related to the rationalization of certain wastewater
operations and the write-off of certain intangibles in the Company's
Continental Penfield subsidiary totaling $3.7 million. In addition, the
year ended March 31, 1994 includes a charge of $8.9 million to reflect a
plan to shutdown and reorganize certain operations of Davis. Fiscal 1994
includes seven months of operations of Culligan and five months of
operations of its predecessor.
(3) The fiscal year ended March 31, 1995 includes the results of operations of
Smogless S.p.A., Crouzat S.A., Sation S.A., Seral Erich Alhauser GmbH and
the Cereflo ceramic product line from the dates of their respective
acquisitions, accounted for as purchases. Results for this period include
expenses incurred of $5.9 million related to a restructuring plan to
consolidate the production facilities and administrative functions of
certain Culligan operations in Europe.
(4) The fiscal year ended March 31, 1996 includes the results of operations of
The Permutit Company Limited and The Permutit Company Pty Ltd., Interlake
Water Systems, Arrowhead Industrial Water Inc. and Polymetrics Inc. from
the dates of their respective acquisitions, accounted for as purchases.
Selling, general and administrative expenses for the year ended March 31,
1996 includes charges totaling $3.2 million related to the write-down of
certain patents and equipment of Zimpro.
(5) The fiscal year ended March 31, 1997 includes the results of operations of
USG, WaterPro, WSMG, and PED from the dates of their respective
acquisitions, accounted for as purchases. The year ended March 31, 1997
also includes merger expenses of $5.6 million, related to the acquisition
of Davis, which was accounted for as a pooling of interests. Costs of
goods sold for the year ended March 31, 1997 includes charges recorded by
Kinetics totaling $26.0 million related to certain unreimbursed project
costs. Selling, general and administrative expenses for the year ended
March 31, 1997 includes charges totaling $6.8 million for 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.
(6) The fiscal year ended March 31, 1998 includes the results of operations for
Memtec from the date of its acquisition on December 9, 1997, accounted for
as a purchase. The year ended March 31, 1998 also includes a charge of
$299.5 million related to the acquisition from Memtec of certain in-process
research and development projects that had not reached technological
feasibility and that had no alternative future uses. Additionally the
Company recorded charges totaling $141.1 million related to a restructuring
plan that the Company implemented concurrent with the acquisitions of
Memtec and Kinetics. Cost of goods sold for the year ended March 31, 1998
includes charges recorded by Kinetics totaling $13.7 million related to
certain unreimbursed project costs. Selling, general and administrative
expenses for the year ended March 31, 1998 includes charges recorded by
Kinetics totaling $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. This period
also includes the results of the Water Filtration Business of Ametek, Inc.
(the "Water Filtration Business" or "Ametek") and Protean plc ("Protean")
from the date of their acquisitions on August 1, 1997 and December 2, 1997,
respectively, by Culligan accounted for as purchases. Culligan acquired
from Ametek and Protean certain in-process research and development
projects that had not reached technological feasibility and that had no
alternative future uses. The estimated market value of such in-process
research and development projects was approximately $55.8 million and was
expensed during fiscal 1998. The year ended March 31, 1998 also includes a
$31.1 million pre-tax gain recorded by Culligan on the sale of its
investment in Anvil Holdings, Inc. for total cash proceeds of $50.9
million. The gain is included in other income in the fiscal year ended
March 31, 1998. In addition, Culligan recorded charges totaling $9.5
million related to a restructuring plan that Culligan implemented
concurrent with its acquisition of Ametek.
(7) Net income (loss) per common share amounts are computed in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128 after
dividends on the Series A Preferred Stock of $0.7 million for the fiscal
year ended March 31, 1994, $0.7 million for the fiscal year ended March
1995 and $0.5 million for the fiscal year ended March 31, 1996. The Series
A Preferred Stock was converted into shares of Common Stock in March 1996.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contained should be read in conjunction with the
Company's consolidated financial statements and notes thereto included elsewhere
herein.
GENERAL
Since July 1991, the Company has acquired and integrated more than 150
businesses with substantial expertise in the design and manufacture of systems
for the filtration and treatment of water and wastewater. Due to the magnitude
of these acquisitions and the integration of the acquired operations with the
Company's existing businesses, results of operations for prior periods are not
necessarily comparable to or indicative of results of operation for current or
future periods.
Results of Operations
In December 1997 and June 1998 subsidiaries of the Company merged with and
into Kinetics and Culligan, respectively, in transactions accounted for as
poolings of interests. Historical consolidated financial data for the fiscal
years ended March 31, 1996 through March 31, 1998 have been restated to reflect
these acquisitions.
The following table sets forth for the periods indicated certain items in the
Selected Consolidated Financial Data as a percentage of total revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-------------------------------------------------------
1996 1997 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0 %
Cost of sales 72.1% 74.1% 73.3 %
Gross profit 27.9% 25.9% 26.7 %
Selling, general and administrative expenses 23.4% 21.0% 19.4 %
Purchased in-process research and development - - 9.5 %
Merger, restructuring, acquisition and other related charges - 0.3% 4.0 %
Operating income (loss) 4.5% 4.7% (6.2)%
Interest expense 2.1% 1.5% 1.7 %
Net income (loss) 0.7% 2.3% (8.2)%
</TABLE>
The following table sets forth a percentage breakdown of the Company's sales
by product category for the past three fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-------------------------------------------------------
1996 1997 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Sales by product category:
Capital equipment 45% 48% 42%
Services and operations 20% 20% 22%
Distribution 20% 20% 24%
Retail and consumer products 15% 12% 12%
</TABLE>
6
<PAGE>
TWELVE MONTHS ENDED MARCH 31, 1998 ("FISCAL 1998") COMPARED WITH TWELVE MONTHS
ENDED MARCH 31, 1997 ("FISCAL 1997")
Revenues
Revenues for fiscal 1998 were $3.7 billion, an increase of $1.6 billion from
$2.1 billion for the comparable period of the prior fiscal year. This 75.2%
increase was due primarily to acquisitions completed by the Company after fiscal
1997. For fiscal 1998 revenues from capital equipment sales represented 42% of
total revenues, while revenues from services and operations represented 22% of
total revenues, revenues from distribution represented 24% of total revenues and
revenues from retail and consumer products represented 12% of total revenues.
The percentage of revenues from capital equipment sales decreased in the current
year due to the Company's emphasis on the recurring revenues of the distribution
business and on the higher margin service business.
Gross Profit
Gross profit increased 80.7% to $999.5 million for fiscal 1998 from $553.2
million for the comparable period of the prior fiscal year. Total gross profit
as a percentage of revenue ("gross margin") was 26.7% for fiscal 1998 compared
to 25.9% for the comparable period of the prior fiscal year. The increase in
the gross margin can be attributed primarily to the incurrence of certain
unreimbursed project costs at Kinetics during fiscal 1997 after restatement for
the acquisition of Kinetics in the current period accounted for as a pooling of
interests.
Selling, General and Administrative Expenses
For fiscal 1998, selling, general, and administrative expenses, excluding
purchased in-process research and development and merger, restructuring,
acquisition and other related charges ("certain charges"), increased $277.6
million to $725.2 million as compared to the $447.6 million in the comparable
period in the prior year. The increase in these expenses can be attributed
primarily to the addition of sales and administrative personnel accompanying the
Company's acquisitions during the period. During fiscal 1998, selling, general
and administrative expenses, excluding certain charges, were 19.4% of revenues
compared to 21.0% for the comparable period in the prior year. The improvement
in selling, general and administrative expenses as a percentage of revenue can
be attributed to certain economies of scale accompanying the Company's and
Culligan's recent acquisitions.
Purchased In-Process Research and Development
On December 9, 1997, the Company, through a wholly-owned subsidiary,
completed its tender offer ("Offer") to purchase all of the outstanding ordinary
shares (including American Depository Shares) of Memtec. The purchase price was
$36.00 per share. The Company acquired certain shares in privately negotiated
and open market purchases prior to the Offer resulting in a total cash purchase
price of approximately $397.2 million (including transaction costs of $10.6
million). The purchase price was allocated to the assets and liabilities of
Memtec based on their estimated respective fair values. The Company also
acquired from Memtec certain in-process research and development projects that
had not reached technological feasibility and that had no alternative future
uses. Such projects were valued by an independent appraiser using a risk
adjusted cash flow model under which expected future cash flows were discounted,
taking into account risks related to existing and future markets and assessments
of the life expectancy of such projects. The estimated market value of such in-
process research and development (R&D) projects was $299.5 million and was
expensed at the acquisition date.
In addition, the Company also acquired from Memtec and its subsidiaries
(consisting of Memcor, Fluid Dynamics, Filterite, and Seitz) developed
technologies including large volume purification product lines; membrane systems
for water purification and waste treatment; metal fiber product lines for
industrial applications involving elevated pressures, temperatures and corrosive
environments; disposable product lines for industrial applications; and depth
media product lines for the pharmaceutical and food and beverage industries.
7
<PAGE>
As a result of the degree of competition in the filtration industry and the
use of technological change as a competitive tool, a significant proportion of
Memtec's technology will be superseded, although the rate of change varies
significantly across the markets addressed. Memtec's R&D initiatives are
therefore targeted at superseding current products. Memtec has a range of
ongoing R&D projects in each of its product lines. Certain of these projects are
directed at next generation products for existing market applications while
others are directed at new market opportunities where Memtec's technological
base may be applicable.
Memcor R&D projects are primarily directed at enhanced microfiltration
products capable of cost effectively addressing larger scale applications or
more chemically aggressive environments. These R&D projects are at the
laboratory to pilot stage of development and require a number of years of
additional work before full introduction to the market of a product is likely.
Other Memcor R&D projects seek to utilize Memtec's knowledge of electrochemical
processes to enter new markets ranging from high quality water production to
environmental sensors. These R&D projects are also at the laboratory to pilot
stage and similarly require a number of years of additional R&D before a product
may be available for launching.
Fluid Dynamics R&D projects are directed at developing new applications for
Memtec's proprietary metallic media. The media enables precise fine filtration
in a range of hostile environments as well as having unique conductive
properties. These R&D projects are at the laboratory stage of development and
require additional research ranging from twelve months to several years
depending upon the particular product before any market launch is possible.
Filterite R&D projects center around its two proprietary technologies--the
unique Filterite highly assymetric membrane and the cold melt spinning
technology. R&D projects are examining expansion of product offerings from these
core technologies. These projects require further materials science laboratory
work followed by manufacturing prototyping and tailoring to market applications-
- -a process which will range from eighteen months to several years.
Seitz R&D is directed at next generation filtration technologies for the food
and beverage and chemicals industries drawing on the core technologies of Seitz.
These R&D projects are predominantly at the pilot stage, requiring extensive
trialing evaluation and development based on the trialing before market launches
are possible.
Failure to complete these R&D projects successfully and on time would open the
way for competitors to introduce alternate technologies, with consequent
implications for Memtec's revenues. To be successful in most cases, the R&D
projects must be developed from laboratory or pilot scale models to full scale
products capable of production within a quality accredited manufacturing
process. The existing R&D projects are expected to be completed and
commercialized over the next ten years with expected R&D and project related
expenditures of approximately $275 million over such ten year period. The
expenditures will be expensed or capitalized in accordance with generally
accepted accounting principles.
The valuation process distinguished between R&D projects with no alternate
uses or values and those with alternate uses. Predominantly all R&D projects are
at a stage of development where the progress to date is not applicable to any
other use within Memtec nor is it saleable to any third party known to
management.
During fiscal 1998, Culligan wrote-off $36.3 million of in-process research
and development purchased in connection with the acquisition of the Water
Filtration Business. As of the purchase date, the Water Filtration Business was
engaged in ongoing research and development relating to carbon block extrusion
technology which is less labor intensive than competing technologies, and a new
water filtration product line that is expected to improve the purity of water
and flow rates. Such projects were valued by an independent appraiser using a
risk adjusted cash flow model under which the expected cash flows were
discounted, taking into account the costs to complete the projects and the life
expectancy of the projects. Both of these projects are proceeding according to
schedule. It is estimated that technological and commercial feasibility will be
achieved in 6 to 12 months and that development will not require cash
expenditures that are material to the results of operations or financial
position of the Company. The principal risk associated with successfully
completing such in-process research and development is that other competitors
may bring technologically superior products to market. The market growth
potential of acquired in-process research and development is subject to certain
risks, including costs to development and commercialize such products, the cost
and feasibility of production of products utilizing the applicable technologies,
introduction of competing technologies and market acceptance of the products and
technologies involved. The Company does not believe that the failure to
complete such research
8
<PAGE>
and development projects would have a material adverse effect on its results of
operations or financial position. These technologies are expected to provide an
improvement of approximately 100% in operating margins for these particular
products as compared to overall historic operating margins of the Water
Filtration Business primarily due to anticipated cost reductions. As of the
purchase date, the Water Filtration Business was selling mold process based
water filtration products. These products rely on developed technology and do
not rely on the results of the on-going in-process research and development.
Revenues derived from the Water Filtration Business' current products are
expected to remain constant once the anticipated in-process products are
introduced. Most of the future growth is expected to come from the new products.
The existing technology of the Water Filtration Business acquired is being
amortized over 40 years.
During fiscal 1998, Culligan wrote-off $19.5 million of in-process research
and development purchased in connection with the acquisition of Protean as these
projects had not reached technological feasibility and had no alternative uses.
As of the purchase date, Elga plc, a subsidiary of Protean, was engaged in the
research and development of a series of new water filtration systems that will
employ new processes or techniques related to the filtration of tap water for
laboratory use. Such projects were valued by an independent appraiser using a
risk adjusted cash flow model under which the expected cash flows were
discounted, taking into account the cost to completed the projects and the life
expectancy of such projects. Failure to complete these projects successfully
and on time would open the way for competitors to introduce alternative
technologies, with consequent implications for Elga's revenues. The projects
are proceeding according to schedule and it is estimated that technological and
commercial feasibility will be met within the existing timeframes which range
from three months to two years. These projects are not expected to require
future cash expenditures that are material to the results of operations or
financial position of the Company. The existing technology of Protean is being
amortized over 40 years.
Merger, Restructuring, Acquisition and Other Related Charges
As of December 31, 1997, the Company completed the acquisition of Kinetics
in a tax-free reorganization, which was accounted for as a pooling of interests.
Concurrent with the merger with and into Kinetics and the acquisition of Memtec,
the Company designed and implemented a restructuring plan to streamline its
manufacturing and production base, improve efficiency and enhance its
competitiveness. The restructuring plan resulted in a pre-tax charge of $141.1
million. The plan identifies certain products and technologies acquired in
conjunction with the Memtec transaction that supersede products and technologies
acquired in earlier acquisitions of membrane related businesses. As a result
certain carrying amounts of goodwill and other intangible assets were determined
to be impaired by approximately $55.0 million in accordance with Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. In determining the amount of the impairment of these assets, the
Company valued the assets using the present value of estimated expected future
cash flows using discount rates commensurate with the risks involved. The
restructuring plan also included closing or reconfiguring of certain facilities
and reducing the work force by approximately 350 employees, most of whom work in
the facilities to be closed.
Included in merger, restructuring, acquisition and other related charges are
the following:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Write-down of goodwill and other intangible assets $ 54,950
Asset write-offs, including equipment and facilities 47,887
Merger, integration and other acquisition costs 21,135
Severance and related costs 17,137
--------------
Total $141,109
==============
Cash charges $ 36,431
Non-cash charges 104,678
--------------
Total $141,109
==============
</TABLE>
9
<PAGE>
During fiscal 1998, Culligan recorded a merger and restructuring charge of
$9.5 million in connection with the acquisition of the Water Filtration Business
and as a result of a decision made by the Company to exit the market for the
sale of consumer products in the department store and mass merchant channels so
as to focus principally on the "do-it-yourself" (DIY) and hybrid retail markets.
The merger and restructuring charge reflects the costs of integrating and
streamlining manufacturing, sales, distribution, research and development, and
administrative functions, in order to take advantage of more cost effective
technology acquired in the acquisition of the Water Filtration Business. The
merger and restructuring charge also reflects costs resulting from the decision
to exit certain retail markets, such as charges against receivables to reflect
the fact that the value of these assets diminished as a result of the decision
to exit portions of the business. Included in the $9.5 million of merger and
restructuring costs are $0.7 million for severance costs related to the
elimination of redundant employees, $4.3 million for the write-off of inventory,
$1.3 million related to the write-off of receivables, $2.5 million related to
the write-off of excess property, equipment and other assets (consisting
principally of fixed assets used in the manufacture of molded carbon block) and
$0.7 million representing legal and other professional fees. During fiscal
1998, costs amounting to $4.3 million were charged against the merger and
restructuring reserve. Total future cash requirements relating to the merger
and restructuring are expected to be immaterial.
After an income tax benefit of $38.2 million, the charges detailed above
totaling $505.9 million (including purchased in-process research and development
charges totaling $355.3 million and merger, restructuring, acquisition and other
related charges totaling $150.6 million) reduced earnings by $467.7 million.
Approximately $15.4 million of merger and restructuring related charges are
included in accrued liabilities at March 31, 1998. Additional costs to complete
the restructuring plan are not expected to be material. The write-down of
assets as a result of the restructuring plan (including assets of business'
whose products were superseded by Memtec's products) will not have a material
effect on the Company's consolidated results of operations in the future.
Operating Income (Loss)
For fiscal 1998, the Company recorded an operating loss of $231.6 million
as compared to operating income of $100.0 million in the comparable period in
the prior year. The operating loss can be attributed to the recording of
charges for purchased in-process research and development and merger,
restructuring, acquisition and other related charges as detailed above. Before
the impact of these charges, operating income for fiscal 1998 was $274.3 million
or 7.3% of revenue. For fiscal 1997, operating income before merger expenses
was 4.9% of revenues. The improvement in operating margin before certain
charges can be attributed to improvements in gross margin and selling, general
and administrative expenses as a percent of revenues as described above.
Interest Expense
Interest expense increased to $63.8 million for fiscal 1998 from $32.0 million
for the corresponding period in the prior year. Interest expense for fiscal
1998 consisted primarily of interest on the Company's: (i) 6% Convertible
Subordinated Notes issued on September 18, 1995 due 2005; (ii) 4.5% Convertible
Subordinated Debentures issued on December 11, 1996 due 2001; (iii) borrowings
under Kinetics' long-term line-of-credit; (iv) 8.0% Senior Subordinated
Debentures issued by Kinetics; (v) borrowings under Memtec's long-term line-of-
credit; (vi) Senior Guaranteed Notes issued by Memtec bearing interest at rates
ranging from 7.7% to 8.0%; (viii) other long-term debt bearing interest at rates
ranging from 2.0% to 10.1%: (viii) borrowings under Culligan's credit facility;
and (ix) borrowings under the Company's Senior Credit Facility. At March 31,
1998, the Company had cash, cash equivalents and short-term investments of $67.2
million.
Income Tax Expense
Income tax expense increased to $48.2 million in fiscal 1998 from $30.9
million in the corresponding period in the prior year. Before certain charges,
the Company had income tax expense of $86.4 million or an effective tax rate of
34.6% for fiscal 1998 as compared to 38.2% in the corresponding period in the
prior year.
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Net Income (Loss)
For fiscal 1998, income before certain charges increased $109.9 million to
$162.3 million from $52.4 million before certain charges for the same period in
the prior year. After certain charges, net loss in fiscal 1998 was $305.4
million as compared to net income of $48.4 million for fiscal 1997. Net income
(loss) per common share for fiscal 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
1997 1998
----- -------
<S> <C> <C>
Basic $0.47 $(2.18)
Diluted $0.45 $(2.18)
</TABLE>
TWELVE MONTHS ENDED MARCH 31, 1997 ("FISCAL 1997") COMPARED WITH TWELVE MONTHS
ENDED MARCH 31, 1996 ("FISCAL 1996")
Revenues
Revenues for fiscal 1997 were $2.1 billion, an increase of $0.7 billion
from $1.4 billion for the comparable period of the prior fiscal year. This 53.0%
increase was due primarily to acquisitions completed by the Company after fiscal
1996. For fiscal 1997, revenues from capital equipment sales represented 48% of
total revenues, while revenues from services and operations represented 20% of
total revenues, revenues from distribution represented 20% of total revenues and
revenues from retail and consumer products represented 12% of total revenues.
Gross Profit
Gross profit increased 41.9% to $553.2 million for fiscal 1997 from $389.9
million for the comparable period of the prior fiscal year. Total gross profit
as a percentage of revenue ("gross margin") was 25.9% for fiscal 1997 compared
to 27.9% for the comparable period of the prior fiscal year. The decrease in
gross margin is due primarily to the incurrence of certain unreimbursed project
costs at Kinetics during the fiscal year ended March 31, 1997 after restatement
for the acquisition of Kinetics in the current period accounted for as a pooling
of interests.
Selling, General and Administrative Expenses
For fiscal 1997, selling, general, and administrative expenses, excluding
merger expenses, increased $120.7 million to $447.6 million as compared to the
$326.9 million in the comparable period in the prior year. The increase in these
expenses can be attributed primarily to the addition of sales and administrative
personnel accompanying the Company's acquisitions after fiscal 1996. During
fiscal 1997, selling, general and administrative expenses, excluding Davis
merger expenses, were 21.0% of revenues compared to 23.4% for the comparable
period in the prior year. The decrease is due primarily to substantially lower
amortization of intangible assets at Culligan during fiscal 1997. The lower
amortization was offset partially by Kinetics recording certain charges in
selling, general and administrative expenses during the fiscal year ended March
31, 1997 for the write-off of certain receivables, the write-down of certain
assets, the increase in Kinetics' allowance for doubtful accounts and the
establishment of certain accruals. These charges are included in fiscal 1997
after restatement for the acquisition of Kinetics in the current period
accounted for as a pooling of interests.
Excluding Davis merger expenses, operating income as a percentage of
revenues increased to 4.9% for fiscal 1997 from 4.5% for the corresponding
period in fiscal 1996 due to the improvement in selling, general and
administrative as a percentage of revenue as described above.
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Merger Expenses
Merger expenses were incurred during fiscal 1997 relating to the Company's
acquisition of Davis which was accounted for as a pooling of interests. These
merger expenses, which totaled $5.6 million, consisted primarily of investment
banking fees, printing, stock transfer fees, legal fees, accounting fees,
governmental filing fees and certain other costs related to existing Davis
pension plans and change of control payments.
Interest Expense
Interest expense increased to $32.0 million for fiscal 1997 from $28.7
million for the corresponding period in the prior year. Interest expense for
fiscal 1997 consisted primarily of interest on the Company's: (i) 5% Convertible
Debentures due 2000 (all of which were, as of October 25, 1996, converted into
shares of Common Stock); (ii) 6% Convertible Subordinated Notes due 2005 issued
on September 18, 1995; (iii) 4.5% Convertible Subordinated Debentures due 2001
issued on December 11, 1996; (iv) 8% Senior Subordinated Notes issued by
Kinetics; (v) borrowings under Culligan's line of credit; (vi) borrowings under
the Company's bank line of credit; and (vii) borrowings under Kinetics' line of
credit. At March 31, 1997, the Company had cash, cash equivalents and short-
term investments of $146.3 million.
Income Tax Expense
Income tax expense decreased to $30.9 million in fiscal 1997 from $35.2
million in the corresponding period in the prior year. The Company's effective
tax rate, after merger expenses, for fiscal 1997 was 39.0% as compared to 78.9%
in the corresponding period in the prior year. At March 31, 1997, the Company
had net operating loss carryforwards of approximately $16.4 million in France
for which financial statement benefit was recognized in fiscal 1997.
Net Income
For fiscal 1997, net income increased $39.0 million to $48.4 million from
$9.4 million for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash and other working capital,
cash flow generated from operations and borrowings under the Company's Senior
Credit Facility. At March 31, 1998, the Company had working capital of $704.4
million including cash and short-term investments of $67.2 million. The
Company's long-term debt at March 31, 1998, was $554.0 million consisting of
$140.0 million of 6.0% Convertible Subordinated Notes due 2005 and $414.0
million of 4.5% Convertible Subordinated Notes due 2001. The Company also had
other long-term debt totaling $523.3 million bearing interest at rates ranging
from 2.0% to 10.1%.
As of March 31, 1998, the Company had a Senior Credit Facility which provides
credit facilities to the Company of up to $750.0 million, of which there were
outstanding borrowings of $574.8 million and outstanding letters of credit of
$40.7 million. Borrowings under the Senior Credit Facility bear interest at
variable rates of up to 0.45% above certain Eurocurrency rates or 0.15% above
BankBoston's base rate. The Senior Credit Facility is subject to customary and
usual terms.
In connection with the acquisitions of Kinetics, Memtec and Culligan, the
Company assumed three additional loan agreements with banks. One agreement
provides a revolving line-of-credit with borrowings of up to $100.0 million, of
which no amounts were outstanding at March 31, 1998. Borrowings under this
agreement bear interest at the bank's reference rate or other interest rate
options that the subsidiary may select. The second agreement is a Multi-Option,
Multi-Currency Master Facility that provides borrowings of up to $60.0 million,
of which $30.7 million was outstanding as of March 31, 1998. Borrowings under
this agreement bear interest at LIBOR plus 0.75%. The third agreement is a $300
million multi-currency revolving credit facility (the "Culligan Credit
Facility"), of which $287.8 million was outstanding at March 31, 1998.
Borrowings under the Culligan Credit
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Facility bear interest at the bank's prime rate or other interest rate options
that a subsidiary may select. The Company anticipates that it will terminate all
three of these agreements during fiscal 1999.
Subsequent to the Company's fiscal year end, on May 15, 1998, the Company
issued $500 million 6.375% Remarketable or Redeemable Securities due 2011
(Remarketing Date May 15, 2001) and $400 million 6.50% Remarketable or
Redeemable Securities due 2013 (Remarketing Date May 15, 2003) (collectively,
the "ROARS"). The net proceeds from the sale of the ROARS, including a premium
payment to the Company by NationsBanc Montgomery Securities LLC, were $913.6
million. The net proceeds were used to repay indebtedness outstanding under the
Senior Credit Facility, indebtedness assumed in the acquisition of Memtec, and a
portion of the indebtedness assumed in the acquisition of Culligan.
The Company believes its current cash position, cash flow from operations, and
available borrowings under the Company's line-of-credit will be adequate to meet
its anticipated cash needs from working capital, revenue growth, scheduled debt
repayment and capital investment objectives for at least the next twelve months.
CERTAIN TRENDS AND UNCERTAINTIES
The Company and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in the Company's
filings with the United States Securities and Exchange Commission and in its
reports to stockholders. In connection with the "Safe Harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company; any such statement is qualified by reference to the
following cautionary statements.
Acquisition Strategy. In pursuit of its strategic objective of becoming the
leading global single-source provider of water and wastewater treatment systems
and services, the Company has, since 1991, acquired more than 150 United States
based and international businesses. The Company plans to continue to pursue
acquisitions that expand the segments of the water and wastewater treatment and
water-related industries in which it participates, complement its technologies,
products or services, broaden its customer base and geographic areas served
and/or expand its global distribution network, as well as acquisitions which
provide opportunities to further and implement the Company's one-stop-shop
approach in terms of technology, distribution or service. The Company's
acquisition strategy entails the potential risks inherent in assessing the
value, strengths, weaknesses, contingent or other liabilities and potential
profitability of acquisition candidates and in integrating the operations of
acquired companies. In addition, the Company's acquisition of Memtec was
accomplished through an unsolicited tender offer, and the Company could make
other such acquisitions. The level of risk associated with such acquisitions is
generally greater because frequently they are accomplished, as was the case with
the acquisition of Memtec, without the customary representations or due
diligence typical of negotiated transactions. Although the Company generally
has been successful in pursuing acquisitions, there can be no assurance that
acquisition opportunities will continue to be available, that the Company will
have access to the capital required to finance potential acquisitions, that the
Company will continue to acquire businesses or that any business acquired will
be integrated successfully or prove profitable.
International Transactions. The Company has made and expects it will continue to
make acquisitions and expects to obtain contracts in markets outside the United
States. While these activities may provide important opportunities for the
Company to offer its products and services internationally, they also entail the
risks associated with conducting business internationally, including the risk of
currency fluctuations, slower payment of invoices, the lack in some
jurisdictions of well-developed legal systems, nationalization and possible
social, political and economic instability. In particular, the Company has
significant operations in Asia and Latin America which have been and may in the
future be adversely affected by current economic conditions in those regions.
While the full impact of this economic instability cannot be predicted, it could
have a material adverse effect on the Company's revenues and profitability.
13
<PAGE>
Reliance on Key Personnel. The operations of the Company are dependent on the
continued efforts of senior management, in particular Richard J. Heckmann, the
Company's Chairman of the Board, President and Chief Executive Officer. The
Company has entered into various agreements and compensation arrangements with
certain members of its senior management, including Mr. Heckmann, designed to
encourage their retention. There can be no assurance, however, that members of
the Company's senior management will continue in their present roles, and should
any of the Company's senior managers be unable or choose not to do so, the
Company's prospects could be adversely affected.
Profitability of Fixed Price Contracts. A significant portion of the Company's
revenues are generated under fixed price contracts. To the extent that original
cost estimates are inaccurate, scheduled deliveries are delayed or progress
under a contract is otherwise impeded, revenue recognition and profitability
from a particular contract may be adversely affected. The Company routinely
records upward or downward adjustments with respect to fixed price contracts due
to changes in estimates of costs to complete such contracts. There can be no
assurance that future downward adjustments will not be material.
Cyclicality, Seasonality and Possible Earnings Fluctuations. The sale of
capital equipment within the water treatment industry is cyclical and influenced
by various economic factors including interest rates and general fluctuations of
the business cycle. A significant portion of the Company's revenues are derived
from capital equipment sales. While the Company sells capital equipment to
customers in diverse industries and in global markets, cyclicality of capital
equipment sales and instability of general economic conditions, including those
currently unfolding in Asian and certain other markets markets, could have a
material adverse effect on the Company's revenues and profitability.
The sale of water and wastewater distribution equipment and supplies is
also cyclical and influenced by various economic factors including interest
rates, land development and housing construction industry cycles. Sales of such
equipment and supplies are also subject to seasonal fluctuation in temperate
climates. The sale of water and wastewater distribution equipment and supplies
is a significant component of the Company's business. Cyclicality and
seasonality of water and wastewater distribution equipment and supplies sales
could have a material adverse effect on the Company's revenues and
profitability.
The Company's high-purity process piping systems have been sold principally to
companies in the semiconductor and, to a lesser extent, pharmaceutical and
biotechnology industries, and sales of those systems are critically dependent on
these industries. The success of customers and potential customers for high-
purity process piping systems is linked to economic conditions in these
respective industries, which in turn are each subject to intense competitive
pressure and are affected by overall economic conditions. The semiconductor
industry in particular has historically been, and will likely continue to be,
cyclical in nature and vulnerable to general downturns in the economy. The
semiconductor and pharmaceutical industries also represent significant markets
for the Company's water and wastewater treatment systems. Downturns in these
industries could have a material adverse effect on the Company's revenues and
profitability.
Operating results from the sale of high-purity process piping systems also can
be expected to fluctuate significantly as a result of the limited pool of
existing and potential customers for these systems, the timing of new contracts,
possible deferrals or cancellations of existing contracts and the evolving and
unpredictable nature of the markets for high-purity process piping systems.
As a result of these and other factors, the Company's operating results may be
subject to quarterly or annual fluctuations. There can be no assurance that at
any given time the Company's operating results will meet or exceed stock market
analysts' expectations.
Potential Environmental Risks. The Company's business and products may be
significantly influenced by the constantly changing body of environmental laws
and regulations, which require that certain environmental standards be met and
impose liability for the failure to comply with such standards. The Company is
also subject to inherent risks associated with environmental conditions
14
<PAGE>
at facilities owned, and the state of compliance with environmental laws by
businesses acquired, by the Company. While the Company endeavors at each of its
facilities to assure compliance with environmental laws and regulations, there
can be no assurance that the Company's operations or activities, or historical
operations by others at the Company's locations, will not result in cleanup
obligations, civil or criminal enforcement actions or private actions that could
have a material adverse effect on the Company.
In that regard, at a Connecticut ion exchange resin regeneration facility (the
"South Windsor Facility") operated by a wholly owned subsidiary of the Company
(the "South Windsor Subsidiary"), acquired by the Company in October 1995 from
Anjou International Company ("Anjou"), U.S. federal and state environmental
regulatory authorities have issued certain notices of violation alleging
multiple violations of applicable wastewater pretreatment standards. The South
Windsor Subsidiary reached an agreement with the U.S. Attorney's Office and the
U.S. Environmental Protection Agency ("USEPA") to settle all agency claims and
investigations relating to this matter by entering into a plea agreement
pursuant to which the South Windsor Subsidiary will plead guilty to a single
violation of the Clean Water Act. The settlement includes a payment of $1.36
million, including a criminal penalty of $1.0 million, and annual environmental
compliance audits at the South Windsor Facility for five years. The Company
believes that this settlement will conclude this matter in its entirety;
however, the settlement does not include a formal release of all liabilities in
this regard. The Company has certain rights of indemnification from Anjou which
may be available with respect to this matter pursuant to the laws of the state
of New York or the Stock Purchase Agreement dated as of August 30, 1995 among
the Company, Anjou and Polymetrics, Inc.
In 1995, Culligan purchased an equity interest in Anvil Holdings, Inc.
("Anvil"). As a result of this transaction, Culligan assumed certain
environmental liabilities associated with soil and groundwater contamination at
Anvil Knitwear's Asheville Dyeing and Finishing Plant (the "Plant") in
Swannanoa, North Carolina. Since 1990, Culligan and Anvil have delineated and
monitored the contamination pursuant to an Administrative Consent Order entered
into with the North Carolina Department of Environment, Health and Natural
Resources related to the closure of an underground storage tank at the site.
Groundwater testing at the Plant and at two adjoining properties has shown
levels of a cleaning solvent believed to be from the Plant that are above action
levels under state guidelines. The Company has begun remediation of the
contamination. The Company currently estimates that the costs of future site
remediation will range from $1.0 million to $1.8 million and that it has
sufficient reserves for the site cleanup. The Company anticipates that the
potential costs of further monitoring and corrective measures to address the
groundwater problem under applicable laws will not have a material adverse
effect on the financial position or the results of operations of the Company.
However, because the full extent of the required cleanup has not been
determined, there can be no assurance that this matter will not have a material
adverse effect on the Company's financial position or results of operations.
The Company's activities as owner and operator of certain hazardous waste
treatment and recovery facilities are subject to stringent laws and regulations
and compliance reviews. Failure of these facilities to comply with those
regulations could result in substantial fines and the suspension or revocation
of the facility's hazardous waste permit. The Company serves as contract
operator of various municipal and industrial wastewater collection and treatment
facilities, which were developed and are owned by governmental or private
entities. The Company also operates other facilities, including service
deionization centers and manufacturing facilities, that discharge wastewater in
connection with routine operations. Under certain service contracts and
applicable environmental laws, the Company as operator of such facilities may
incur certain liabilities in the event those facilities experience malfunctions
or discharge wastewater which does not meet applicable permit limits and
regulatory requirements. In some cases, the potential for such liabilities
depends upon design or operational conditions over which the Company has
limited, if any, control.
Certain of the Company's facilities contain or in the past contained
underground storage tanks which may have caused soil or groundwater
contamination. At one site formerly owned by Culligan, the Company is
investigating, and has taken certain actions to correct, contamination that may
have resulted from a former underground storage tank. Based on the amount of
contamination believed to have been present when the tank was removed, and the
probability that some of the contamination may have originated from nearby
properties, the Company believes, although there can be no assurance, that this
matter will not have a material adverse effect on the Company's financial
position or results of operations.
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In other matters, the Company has been notified by the USEPA that it is a
potentially responsible party under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 ("CERCLA") at certain sites to which the
Company or its predecessors allegedly sent waste in the past. It is possible
that the Company could receive other such notices under CERCLA or analogous
state laws in the future. Based on sites which are currently known to the
Company that may require remediation, the Company does not believe that its
liability, if any, relating to such sites will be material. However, there can
be no assurance that such matters will not be material. In addition, to some
extent, the liabilities and risks imposed by environmental laws on the Company's
customers may adversely impact demand for certain of the Company's products or
services or impose greater liabilities and risks on the Company, which could
also have an adverse effect on the Company's competitive and financial position.
Competition All of the markets in which the Company competes are highly
competitive, and most are fragmented, with numerous regional and local
participants. There are competitors of the Company in certain markets that are
divisions or subsidiaries of companies that have significantly greater resources
than the Company. The Company's process water treatment business competes in
the United States and internationally principally on the basis of product
quality and specifications, technology, reliability, price, customized design
and technical qualifications, reputation and prompt availability of local
service. The Company's wastewater treatment business competes in the United
States and internationally largely on the basis of the same factors, except that
pricing considerations can be predominant among competitors that have sufficient
technical qualifications, particularly in the municipal contract bid process.
The Company's filtration and separation business competes in the United States
and internationally principally on the basis of price, technical expertise,
product quality and responsiveness to customer needs, including service and
technical support. The Company's industrial products and services business
competes in the United States and internationally principally on the basis of
quality, service and price. In connection with the marketing of waterworks
distribution equipment and supplies, the Company competes not only with a large
number of independent wholesalers and with other distribution chains similar to
the Company, but also with manufacturers who sell directly to customers. The
principal methods of competition for the Company's waterworks distribution
business include prompt local service capability, product knowledge by the sales
force and service branch management, and price. The Company's consumer products
business competes with companies with national distribution networks, businesses
with regional scope, and local product assemblers or service companies, as well
as retail outlets. The Company believes that there are thousands of
participants in the residential water business. The consumer products business
competes principally on the basis of price, product quality and "taste,"
service, distribution capabilities, geographic presence and reputation.
Competitive pressures, including those described above, and other factors could
cause the Company to lose market share or could result in significant price
erosion, either of which could have a material adverse effect upon the Company's
financial position, results of operations and cash flows.
Potential Risks Related to Water Rights and Water Transfers. The Company owns
more than 47,000 acres of agricultural land (the "Properties"), situated in the
Southwestern United States, the substantial majority of which are in Imperial
County, California (the "IID Properties") located within the Imperial Irrigation
District (the "IID"). Substantially all of the Properties are currently leased
to third party agricultural tenants, including prior owners of the Properties.
The Company acquired the Properties with appurtenant water rights, and is
actively seeking to acquire additional properties with water rights, primarily
in the Southwestern and Western United States. The Company may seek in the
future to transfer water attributable to water rights appurtenant to the
Properties, particularly the IID Properties (the "IID Water"). However, since
the IID holds title to all of the water rights within the IID in trust for the
landowners, the IID would control the timing and terms of any transfers of IID
Water by the Company. The circumstances under which transfers of water can be
made and the profitability of any transfers are subject to significant
uncertainties, including hydrologic risks of variable water supplies, risks
presented by allocations of water under existing and prospective priorities, and
risks of adverse changes to or interpretations of U.S. federal, state and local
laws, regulations and policies. Transfers of IID Water attributable to water
rights appurtenant to the IID Properties (the "IID Water Rights") are subject to
additional uncertainties. Allocations of Colorado River water, which is the
source of all water deliveries to the IID Properties, are subject to limitations
under complex international treaties, interstate compacts, U.S. federal and
state laws and regulations, and contractual arrangements and, in times of
drought, water deliveries could be curtailed by the U.S. government. Further,
any transfers of IID Water would require the approval of the U.S. Secretary of
the Interior. Even if a transfer were approved, other California water
districts and users could assert claims adverse to the IID Water Rights,
including but not limited to claims that the IID has failed to satisfy U.S.
federal law and California constitutional requirements that IID Water must be
put to reasonable and
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beneficial use. A finding that the IID's water use is unreasonable or
nonbeneficial could adversely impact title to the IID Water Rights and the
ability to transfer IID Water. Water transferred by the IID to metropolitan
areas of Southern California, such as San Diego, currently would be transported
through aqueducts owned or controlled by the Metropolitan Water District, a
quasi-governmental agency (the "MWD"). The transportation cost for any transfer
of IID Water and the volume of water which the MWD can be required to transport
at any time are subject to California laws of uncertain application, some
aspects of which are currently in litigation. The uncertainties associated with
water rights could have a material adverse effect on the Company's future
profitability.
Technological and Regulatory Risks. Portions of the water and wastewater
treatment business are characterized by changing technology, competitively
imposed process standards and regulatory requirements, each of which influences
the demand for the Company's products and services. Changes in regulatory or
industrial requirements may render certain of the Company's treatment products
and processes obsolete. Acceptance of new products may also be affected by the
adoption of new government regulations requiring stricter standards. The
Company's ability to anticipate changes in technological and regulatory
standards and to develop successfully and introduce new and enhanced products on
a timely basis will be a significant factor in the Company's ability to grow and
to remain competitive. There can be no assurance that the Company will be able
to achieve the technological advances that may be necessary for it to remain
competitive or that certain of its products will not become obsolete. In
addition, the Company is subject to the risks generally associated with new
product introductions and applications, including lack of market acceptance,
delays in development or failure of products to operate properly. The market
growth potential of acquired in-process research and development is subject to
certain risks, including costs to develop and commercialize such products, the
cost and feasibility of production of products utilizing the applicable
technologies, introduction of competing technologies and market acceptance of
the products and technologies involved.
There can be no assurance that the Company's existing or any future trademarks
or patents will be enforceable or will provide substantial protection from
competition or be of commercial benefit to the Company. In addition, the laws
of certain non-United States countries may not protect proprietary rights to the
same extent as do the laws of the United States. Successful challenges to
certain of the Company's patents or trademarks could materially adversely affect
its competitive and financial position.
Municipal Water and Wastewater Business. A significant percentage of the
Company's revenues is derived from municipal customers. While municipalities
represent an important part of the water and wastewater treatment industry,
contractor selection processes and funding for projects in the municipal sector
entail certain additional risks not typically encountered with industrial
customers. Competition for selection of a municipal contractor typically occurs
through a formal bidding process which can require the commitment of resources
and greater lead times than industrial projects. In addition, this segment is
dependent upon the availability of funding at the local level, which may be the
subject of increasing pressure as local governments are expected to bear a
greater share of the cost of public services.
Year 2000 Risks.
The Year 2000 issue concerns the potential exposures related to the automated
generation of business and financial misinformation resulting from the
application of computer programs which have been written using six digits (e.g.,
12/31/99), rather than eight (e.g., 12/31/1999), to define the applicable year
of business transactions. The Company is currently identifying which of its
information technology ("IT") and non-IT systems will be affected by Year 2000
issues. Most of the Company's IT systems with Year 2000 issues have been
modified to address those issues. The Company has also commenced identification
and assessment of its broad range of non-IT systems, which include, among other
things, components found in the Company's water and wastewater treatment plants,
process water treatment systems and hazardous waste treatment facilities
operated and/or owned under contract by the Company, as well as components found
in equipment in the Company's manufacturing facilities.
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The Company's Year 2000 compliance program consists of three phases:
identification and assessment; remediation; and testing. For any given system,
the phases occur in sequential order, from identification and assessment of Year
2000 problems, to remediation, and, finally, to testing the Company's solutions.
However, as the Company acquires additional businesses, each IT and non-IT
system of the acquired business must be independently identified and assessed.
As a result, all three phases of the Company's Year 2000 compliance program may
be occurring simultaneously as they relate to different systems, with varying
timetables to completion, depending upon the system and the date when a
particular business was acquired by the Company.
The Company has completed the identification and assessment of most of its IT
systems, and those systems have been modified to address Year 2000 problems.
The Company will continue to assess the systems of those businesses that it has
recently acquired and those businesses that it may acquire in the future. The
Company is in the identification and assessment phase with respect to all non-IT
systems, which is projected to continue until September 1999 for currently-owned
businesses. Once the Company's systems are assessed for Year 2000 issues, the
remediation phase will begin, followed by the testing phase. All phases are
expected to be completed by mid-1999, although there can be no assurance that
all phases for all businesses will be completed by that date. In particular,
there can be no assurance that acquired businesses will be Year 2000 compliant,
although the Company currently has a policy for acquisitions of businesses that
requires a candidate for acquisition to represent and warrant to the Company
that such business is Year 2000 compliant. In addition to its internal systems,
the Company has begun to assess the level of Year 2000 problems associated with
various suppliers, customers and creditors of the Company. To test the Year
2000 compliance status of its suppliers, the Company is in the process of
submitting hypothetical orders to its suppliers dated after December 31, 1999
and requesting confirmation that the orders have been correctly processed. The
Company's costs to date for its Year 2000 compliance program, excluding the
salaries of its employees, has not been material. Although the Company has not
completed its assessment, it does not currently believe that the future costs
associated with its Year 2000 compliance program will be material.
The Company is currently unable to determine the most reasonably likely worst
case scenario as it has not identified and assessed all of its systems,
particularly its non-IT systems. As the Company completes its identification
and assessment of internal and third-party systems, it will develop contingency
plans for various worst case scenarios. The Company expects to have such
contingency plans in place by September 1999. A failure to address Year 2000
issues successfully could have a material adverse effect on the Company's
business, financial condition or results of operations.
Impact of Recently Issued Accounting Standards. In June 1997, FASB issued a
new statement titled "Disclosures about Segments of an Enterprise and Related
Information". The new statement is effective for fiscal years beginning after
December 15, 1997. The Company is currently determining required disclosure
under this new standard and will include the disclosures in its next annual
report.
In June 1998, FASB issued a new statement titled "Accounting for Derivative
Instruments and Hedging Activities. The new statement is effective for fiscal
years beginning after June 15, 1999. The Company does not believe that the
adoption of this standard will have a material impact on its consolidated
financial position or results of operations.
18
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report-KPMG Peat Marwick LLP 20
Report of Independent Auditors-Ernst & Young LLP 21
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1997 and 1998 22
Consolidated Statements of Operations for the Years Ended
March 31, 1996, 1997 and 1998 23
Consolidated Statements of Shareholders' Equity for the
Years Ended March 31, 1996, 1997 and 1998 24
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1996, 1997 and 1998 25
Notes to Consolidated Financial Statements 27
</TABLE>
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
United States Filter Corporation:
We have audited the accompanying consolidated balance sheets of United
States Filter Corporation and subsidiaries as of March 31, 1997 and 1998, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended March 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the consolidated
financial statements of The Kinetics Group, Inc., a wholly owned subsidiary, as
of March 31, 1997, which statements reflect total assets constituting 6 percent
in 1997, and total revenues constituting 20 percent and 18 percent in 1996 and
1997, respectively, of the related consolidated totals. Those consolidated
financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for The Kinetics Group, Inc., is based solely on the report of the auditors.
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, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of United States Filter Corporation
and subsidiaries as of March 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
Orange County, California KPMG Peat Marwick LLP
June 1, 1998, except for the
acquisition of Culligan, which
is discussed in notes 9 and 21,
which is as of June 15, 1998
20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
The Kinetics Group, Inc.:
We have audited the consolidated balance sheets of The Kinetics Group, Inc. as
of September 30, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended September 30, 1997 (not presented separately herein). 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 the above present fairly
in all material respects, the consolidated financial position of The Kinetics
Group, Inc. at September 30, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
Walnut Creek, California Ernst & Young LLP
January 16, 1998
21
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- ----------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 144,128 66,917
Short-term investments 2,158 241
Accounts receivable, less allowance for doubtful accounts of
$32,790 at March 31, 1997 and $40,757 at March 31, 1998 653,783 873,890
Costs and estimated earnings in excess of billings on
uncompleted contracts 130,310 217,935
Inventories 292,414 473,698
Prepaid expenses 8,931 16,471
Deferred taxes 64,116 151,107
Other current assets 21,736 51,377
----------- ---------
Total current assets 1,317,576 1,851,636
----------- ---------
Property, plant and equipment, net 398,427 960,019
Investment in leasehold interests, net 23,230 21,699
Costs in excess of net assets of businesses acquired, net 814,520 1,312,776
Other assets 181,172 319,315
----------- ---------
$ 2,734,925 4,465,445
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 298,520 357,260
Accrued liabilities 312,487 535,329
Current portion of long-term debt 24,370 118,849
Billings in excess of costs and estimated earnings on
uncompleted contracts 61,441 90,073
Other current liabilities 26,183 45,702
----------- ---------
Total current liabilities 723,001 1,147,213
----------- ---------
Notes payable 42,646 574,806
Long-term debt, excluding current portion 67,695 404,416
Convertible subordinated debt 554,000 554,000
Deferred taxes 42,003 82,910
Other liabilities 86,110 110,662
----------- ---------
Total liabilities 1,515,455 2,874,007
----------- ---------
Shareholders' equity:
Preferred stock, authorized 3,000 shares -- --
Common stock, par value $.01. Authorized 300,000
shares; issued and outstanding 120,352 and
155,825 at March 31, 1997 and 1998, respectively 1,204 1,558
Additional paid-in capital 1,249,440 1,945,223
Currency translation adjustment (20,178) (57,282)
Accumulated deficit (10,996) (298,061)
----------- ---------
Total shareholders' equity 1,219,470 1,591,438
----------- ---------
Commitments and contingencies
$ 2,734,925 4,465,445
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues $ 1,395,247 2,135,424 3,740,324
Costs of sales 1,005,336 1,582,196 2,740,787
------------- ------------- ------------
Gross profit 389,911 553,228 999,537
------------- ------------- ------------
Selling, general and administrative expenses 326,912 447,644 725,249
Purchased in-process research and development - - 355,308
Merger, restructuring, acquisition and other related
charges - 5,581 150,582
------------- ------------- ------------
326,912 453,225 1,231,139
------------- ------------- ------------
Operating income (loss) 62,999 100,003 (231,602)
------------- ------------- ------------
Other income (expense):
Interest expense (28,706) (31,999) (63,790)
Interest and other income 10,366 11,334 38,212
------------- ------------- ------------
(18,340) (20,665) (25,578)
------------- ------------- ------------
Income (loss) before income tax expense 44,659 79,338 (257,180)
Income tax expense 35,239 30,945 48,221
------------- ------------- ------------
Net income (loss) $ 9,420 48,393 (305,401)
============= ============= ============
Net income (loss) per common share:
Basic $ 0.11 0.47 (2.18)
============= =========== ============
Diluted $ 0.11 0.45 (2.18)
============= =========== =============
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(in thousands)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK RETAINED
---------------------- ------------------- ADDITIONAL CURRENCY EARNINGS
NUMBER OF NUMBER OF PAID-IN TRANSLATION (ACCUMULATED)
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) TOTAL
------------ --------- ---------- -------- ----------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 1,065 $ 25,577 35,858 $ 282 170,691 (2,026) 6,024 200,548
Restatement for acquisition
of Culligan acquired through
poolings of interests -- -- 29,792 298 105,676 (1,344) (56,386) 48,244
------ -------- ------- ------ ------- ------ ------- --------
Balance at March 31, 1995,
restated 1,065 25,577 65,650 580 276,367 (3,370) (50,362) 248,792
Compensation related to
excess of fair value of
director stock options over
exercise price -- -- -- -- 112 -- -- 112
Conversion of preferred
shares to common shares (926) (22,936) 2,083 14 22,922 -- -- --
Redemption of Series B
convertible preferred
stock (139) (2,641) -- -- (2,068) -- -- (4,709)
Issuance of common stock in
connection with acquisitions -- -- 2,453 16 36,284 -- -- 36,300
Shares issued through public
offering net of offering
costs of $6,106 -- -- 10,350 69 97,325 -- -- 97,394
Shares issued by Culligan
through public offering net
of offering costs of $9,191 -- -- 7,547 75 85,321 -- -- 85,396
Conversion of subordinated
debt to common stock -- -- 3,750 25 44,975 -- -- 45,000
Dividends paid on preferred
stock -- -- -- -- -- -- (715) (715)
Exercise of common stock
options -- -- 488 3 3,678 -- -- 3,681
Issuances of common stock to
acquire assets -- -- 224 2 2,974 -- -- 2,976
Currency translation adjustment -- -- -- -- -- 5,805 -- 5,805
Shareholders' equity transactions
of Kinetics, Culligan
and other entities prior to
merger -- -- -- -- 7,223 -- (10,196) (2,973)
Net income -- -- -- -- -- -- 9,420 9,420
------ -------- ------- ------ ------- ------ ------- ---------
Balance at March 31, 1996 -- -- 92,545 784 575,113 2,435 (51,853) 526,479
Exercise of common stock
options -- -- 1,933 20 11,859 -- -- 11,879
Issuance of common stock in
connection with acquisitions -- -- 7,686 76 196,548 -- -- 196,624
Issuance of common stock to
pay off indebtedness -- -- 271 2 6,741 -- -- 6,743
Par value of shares issued in
connection with three-for-two
stock split -- -- -- 143 (143) -- -- --
Shares issued through public
offering, net of offering
costs of $17,154 -- -- 11,804 118 356,036 -- -- 356,154
Shares issued by Culligan
through public offering net
of offering costs of $1,584 -- -- 1,405 15 26,591 -- -- 26,606
Conversion of subordinated
debt to common stock -- -- 4,389 43 58,535 -- -- 58,578
Issuance of common stock to
acquire assets -- -- 319 3 5,894 -- -- 5,897
Shareholders' equity
transactions of Kinetics,
Culligan and other entities
prior to merger -- -- -- -- 12,266 -- (7,536) 4,730
Currency translation
adjustment -- -- -- -- -- (22,613) -- (22,613)
Net income -- -- -- -- -- -- 48,393 48,393
------ -------- ------- ------ --------- ------- ------- ---------
Balance at March 31, 1997 -- -- 120,352 1,204 1,249,440 (20,178) (10,996) 1,219,470
Exercise of common stock
options -- -- 613 6 6,270 -- -- 6,276
Issuance of common stock in
connection with acquisitions -- -- 34,801 347 657,994 -- -- 658,341
Shareholders' equity
transactions of Kinetics,
Culligan and other
entities prior to merger -- -- 13 -- 30,377 -- 18,336 48,713
Issuance of common stock to
acquire assets -- -- 46 1 1,142 -- -- 1,143
Currency translation
adjustment -- -- -- -- -- (37,104) -- (37,104)
Net loss -- -- -- -- -- -- (305,401) (305,401)
------ -------- ------- ------ --------- ------ -------- ---------
Balance at March 31, 1998 -- $ -- 155,825 $ 1,558 1,945,223 (57,282) (298,061) 1,591,438
====== ======== ======== ======= ========= ======= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 9,420 48,393 (305,401)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred income taxes (4,677) 1,433 (32,978)
Depreciation 34,633 46,060 79,843
Amortization 46,047 32,196 33,762
Write-off of purchased in-process research
and development and goodwill - - 407,828
Provision for doubtful accounts 5,929 5,536 7,620
(Gain) loss on sale or disposal of property and equipment (555) (397) 11,575
Gain on disposition of investment in affiliate - - (31,098)
Stock and stock option compensation 112 - -
Increase in closure reserves and write-off
of intangible assets 768 - -
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (45,448) (33,594) 4,327
Increase in costs and estimated earnings in
excess of billings on uncompleted contracts (8,471) (53,302) (37,337)
Increase in inventories (1,893) (35,762) (38,498)
Increase in prepaid expenses and other assets (7,018) (44,549) (41,643)
Increase (decrease) in accounts payable and accrued expenses (2,489) 38,230 1,003
Increase (decrease) in billings in excess of costs and
estimated earnings on uncompleted contracts (2,110) 8,182 (10,154)
Decrease in other liabilities (3,830) (11,987) (5,930)
--------- -------- --------
Net cash provided by operating activities 20,418 439 42,919
--------- -------- --------
Cash flows from investing activities:
Investment in leasehold interests (8,347) - -
Purchase of property, plant and equipment (47,176) (73,877) (163,120)
Proceeds from disposal of equipment 9,763 12,624 9,719
Proceeds from disposition of investment in affiliate - - 50,897
(Purchase) sale of short-term investments 9,871 (374) 1,923
Payment for purchase of acquisitions, net of cash acquired (220,808) (602,304) (784,829)
--------- -------- --------
Net cash used in investing activities (256,697) (663,931) (885,410)
--------- -------- --------
Cash flows from financing activities:
Net proceeds from sale of common stock 183,179 382,760 25
Net proceeds from sale of convertible subordinated
debt 136,249 403,650 -
Proceeds from exercise of common stock options 3,681 11,879 6,276
Net borrowings (repayments) of debt (41,392) (23,222) 255,914
Dividends paid on common and preferred stock (9,988) (3,901) (50)
Funding to former parent of subsidiary (111,125) (6,743) -
Payment to repurchase Series B preferred stock (4,709) - -
Net proceeds from borrowings on notes payable 76,990 11,590 503,115
--------- -------- --------
Net cash provided by financing activities 232,885 776,013 765,280
--------- -------- --------
Net increase (decrease) in cash and cash equivalents (3,394) 112,521 (77,211)
Cash and cash equivalents at beginning of year 35,001 31,607 144,128
--------- -------- --------
Cash and cash equivalents at end of year $ 31,607 144,128 66,917
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
<TABLE>
<CAPTION>
1996 1997 1998
------- ------ ------
(in thousands)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 28,612 26,708 52,528
======= ====== ======
Cash paid during the year for income taxes $ 19,361 27,554 61,946
======= ====== ======
Non cash investing and financing activities consisted
of the following:
Common stock issued:
Conversion of subordinated debt $ 45,000 60,000 -
Purchase of property or equipment 2,976 5,897 1,143
Property, plant and equipment exchanged for receivables 5,318 - -
Former parent of subsidiary contribution 4,785 - -
------- ------ ------
$ 58,079 65,897 1,143
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended March 31, 1996, 1997 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
United States Filter Corporation and wholly owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION
Method of Accounting for Contracts
The accounting records of the Company are maintained and income is reported
for financial reporting and income tax purposes for long-term contracts under
the percentage-of-completion method of accounting. Under this method, an
estimated percentage for each contract, based on the cost of work performed
to date that has contributed to contract performance compared to the
estimated cost, is applied to contract price and recognized as revenue.
Provision is made for the entire amount of future estimated losses on
contracts in progress in the period such losses are determined. Claims for
additional contract compensation due the Company are not reflected in the
accounts until the year in which such claims are allowed, except where
contract terms specifically provide for certain claims.
Contract costs include all direct material and labor and indirect costs
related to contract performance. General and administrative expenses are
charged to expense as incurred.
Products and Services
Sales of other products and services are recorded as products are shipped
or services rendered.
INCOME TAXES
Deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
tax rates in effect for the year in which the differences are expected to
reverse.
United States income taxes are not provided on the undistributed earnings
of its non-U.S. subsidiaries as such earnings are intended to be indefinitely
reinvested in those operations.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in a functional currency other than U.S.
dollars are translated into U.S. dollars at the current rate of exchange
existing at period-end and revenues and expenses are translated at the
average monthly exchange rates. Translation adjustments are included as a
separate component of shareholders' equity. Transaction gains and losses
included in net income (loss) are immaterial. The effects of exchange rate
changes on cash are immaterial as of March 31, 1997 and 1998 and for each of
the years in the three year period ended March 31, 1998.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
27
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated on the
straight-line method over the estimated useful lives of the respective assets
which range from three to 40 years. Leasehold improvements are amortized on
the straight-line method over the lesser of their estimated useful lives or
the related lease term.
COSTS IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED
Costs in excess of net assets of businesses acquired are amortized on the
straight-line method over a 20- to 40-year life. The Company evaluates the
recoverability of these costs based upon expectations of non-discounted cash
flows of each subsidiary.
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
Investments in unconsolidated joint ventures are accounted for using the
equity method. The Company's share of earnings or losses from these joint
ventures is reflected in income and dividends are credited against the
investment when received.
NET UNAMORTIZED DEBT ISSUANCE COSTS
Net unamortized debt issuance costs, aggregating $16.9 million and $11.2
million at March 31, 1997 and 1998, respectively, have been deferred and are
being amortized over the term of the related debt ranging from five to ten
years.
WARRANTIES
The Company`s products are generally warrantied against defects in material
and workmanship for a period of one year. The Company has accrued for
estimated future warranty costs.
ENVIRONMENTAL EXPENDITURES
Expenditures for environmental protection are expensed or
capitalized, as appropriate. Costs associated with remediation activities
are expensed. Liabilities are recorded when remedial efforts are probable
and the costs can be reasonably estimated.
ADVERTISING
Costs incurred for advertising, including costs incurred under the
Company's U.S. cooperative advertising program with its dealers and
franchisees, are expensed when incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable, and accrued liabilities approximate
fair value because of the short maturity of these instruments. The carrying
amount of the Company's revolving credit facility approximates its fair value
because the interest rate on the instrument changes with market interest
rates. The fair value of the Company's long-term debt (including current
portion) is estimated to be equal to the carrying amounts based on quoted
market prices for similar issues or on the current rates offered to the
Company for debt of the same remaining maturities.
28
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is computed based on the weighted average
number of shares outstanding and in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share". Dilutive
securities consisting of convertible preferred stock, convertible
subordinated debt and common stock options are included in the computation of
income (loss) per diluted share when their effect is dilutive. Accordingly,
"Basic EPS" and "Diluted EPS" were calculated as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
BASIC (in thousands, except per share data)
<S> <C> <C> <C>
Net income (loss) $ 9,420 48,393 (305,401)
Dividends on preferred common stock (536) - *** - ***
--------- --------- ----------
Net income (loss) applicable to common shares $ 8,884 48,393 (305,401)
========= ========= ==========
Weighted average shares outstanding 78,953 102,250 139,867
========= ========= ==========
Basic income (loss) per common share $ 0.11 0.47 (2.18)
========= ========= ==========
DILUTED
Net income (loss) applicable to common shares $ 8,884 48,393 (305,401)
Add:
Effect on net income (loss) of conversions of
convertible subordinated debt - * - * - *
--------- --------- ----------
Adjusted net income (loss) applicable to common shares $ 8,884 48,393 (305,401)
========= ========== ===========
Weighted average common shares outstanding 78,953 102,250 139,867
Add:
Exercise of options 1,299 4,359 - **
Assumed conversion of subordinated debt - * - * - *
--------- --------- ----------
Adjusted weighted average common shares outstanding 80,252 106,609 139,867
========= ========= ==========
Diluted income (loss) per common share $ 0.11 0.45 (2.18)
========= ========= ==========
</TABLE>
- -------------------
* The calculation of Diluted EPS for the years ended March 31, 1996, 1997 and
1998 does not assume conversion of subordinated debt as its effect would be
antidilutive to income (loss) per common share.
** The calculation of Diluted EPS for the year ended March 31, 1998 does not
assume the exercise of options as the effect would be antidilutive to loss
per common share. Under the treasury stock method, the exercise of all
outstanding options would have increased the weighted average number of
shares by 2,449,000 for the year ended March 31, 1998.
*** On March 4, 1996, the preferred shareholder tendered its Series A Preferred
Stock for conversion into Company common stock thus eliminating further
dividends.
RECLASSIFICATIONS
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform with the 1998 presentation.
(2) CASH AND CASH EQUIVALENTS
Cash equivalents consist of demand deposits and certificates of deposit
with original maturities of 90 days or less.
29
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(3) SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid municipal issues available
for sale with original maturities of more than 90 days when purchased, and
are carried at amortized cost, which approximates market value.
(4) INVENTORIES
Inventories at March 31, 1997 and 1998 consist of:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Raw materials $ 75,967 130,501
Work-in-process 66,407 102,198
Finished goods 150,040 240,999
--------------- ---------------
$ 292,414 473,698
=============== ===============
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at March 31, 1997 and 1998 consist of:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Land $ 41,810 273,307
Buildings and improvements 139,214 311,311
Equipment 250,372 457,584
Furniture and fixtures 65,415 105,079
Vehicles 14,477 21,449
Construction in progress 18,668 35,714
--------------- -------------
529,956 1,204,444
Less accumulated depreciation (131,529) (244,425)
--------------- -------------
$ 398,427 960,019
=============== =============
</TABLE>
(6) INVESTMENT IN LEASEHOLD INTERESTS
The Company has concession agreements to operate wastewater treatment
plants in Mexico. The terms of the concessions are approximately 15 to 18
years, as amended, and include monthly payments to be received by the
Company at various prices per cubic meter of sewage treated at the
facilities based upon the Company's initial investments, fixed operating
expenses and variable operating expenses. The Company is amortizing the
investments on a straight-line basis over the terms of the concessions.
Accumulated amortization at March 31, 1997 and 1998 totaled $3.2 million
and $4.7 million, respectively. The investments are stated at cost which is
not impaired based on projected non-discounted future cash flows.
30
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(7) COSTS IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED
Costs in excess of net assets of businesses acquired and accumulated
amortization at March 31, 1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
(in thousands)
<S> <C> <C>
Costs in excess of net assets of businesses acquired $ 838,140 1,362,813
Less accumulated amortization (23,620) (50,037)
--------------- ---------------
$ 814,520 1,312,776
=============== ===============
</TABLE>
(8) OTHER ASSETS
Other assets at March 31, 1997 and 1998 consist of:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Investment in joint ventures at equity $ 10,645 14,141
Long-term receivables and advances 7,837 4,960
Other assets at amortized cost:
Developed technology - 93,966
Trademarks 44,160 42,947
Deferred debt costs 16,939 11,154
Operating permits and development costs 5,994 10,054
Patents 3,074 4,990
Other 92,523 137,103
----------- ------------
$ 181,172 319,315
=========== ============
</TABLE>
The above amounts reflect accumulated amortization of $8.7 million and
$14.1 million at March 31, 1997 and 1998, respectively.
(9) ACQUISITIONS
Acquisitions Accounted for as Poolings of Interests
----------------------------------------------------
As of December 31, 1997, a wholly-owned subsidiary of the Company completed
the acquisition of The Kinetics Group, Inc. ("Kinetics") in a tax-free
reorganization. In connection with the acquisition, the Company issued
5,803,803 shares of the Company's common stock for all of the outstanding
common stock of Kinetics (0.5824 share of the Company's common stock for
each outstanding share and each outstanding option or other right to acquire
a share of Kinetics common stock). In addition, the Company assumed
approximately $50.0 million of third party institutional debt.
Kinetics, based in Santa Clara, California, is a provider and manufacturer
of sophisticated high-purity process piping systems and is also a leading
integrator in the United States of high purity water, fluid and gas handling
systems that are critical to the pharmaceutical, biotechnology and micro
electronics industries.
This transaction has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements and notes thereto for all
periods presented have been restated to include the accounts of Kinetics. In
restating the Company's historical financial statements for the pooling of
interests with Kinetics, the Company's balance sheet as of March 31, 1997
31
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
was combined with Kinetics audited balance sheet as of September 30, 1997.
The results of the Company for the fiscal year ended March 31, 1997 were
combined with historical results of Kinetics for the year ended September 30,
1997; historical results of the Company for the year ended March 31, 1996
were combined with historical results of Kinetics for the year ended
September 30, 1996. Accordingly, results of Kinetics for the six month period
ended September 30, 1995 (including revenue of $106.9 million and a net
income of $2.8 million) are not included in the combined results of
operations presented herein. Concurrent with the Company's merger, Kinetics
year end was recast to March 31. Accordingly, results of Kinetics for the six
month period ended September 30, 1997 (including revenue of $227.4 million
and a net loss of $8.5 million) are included in both the restated historical
results for the year ended March 31, 1997 and the results for the year ended
March 31, 1998. Merger expenses incurred to consummate the Kinetics
transaction totaled $4.3 million consisting of investment banking, printing,
stock transfer, legal, accounting and governmental filing fees as well as
certain other transaction costs and are included in merger, restructuring,
acquisition and other related charges in the accompanying consolidated
statement of operations for the year ended March 31, 1998.
Subsequent to the Company's year end, on June 15, 1998, a wholly owned
subsidiary of the Company and Culligan Water Technologies, Inc. ("Culligan")
consummated a merger and acquisition in a tax-free reorganization. The
Company issued approximately 48.6 million shares of the Company's common
stock for all of the outstanding common stock of Culligan (1.875 shares of
the Company's common stock for each outstanding share and each outstanding
option or other right to acquire a share of Culligan common stock, par value
$.01). In addition, the Company assumed approximately $491.7 million of
third party institutional debt.
Culligan is a leading manufacturer and distributor of water purification and
treatment products and services for household, consumer and commercial
applications. Products and services offered by Culligan range from those
designed to solve residential water problems, such as filters for tap water
and household softeners, to equipment and services, such as ultrafiltration
and microfiltration products. Culligan also offers desalination systems and
portable deionization services ("PDS"), designed for commercial and
industrial applications. In addition, Culligan sells and licenses its
dealers to sell under the Culligan trademark five-gallon bottled water.
This transaction has been accounted for as a pooling of interests and
accordingly, the consolidated financial statements and notes thereto for all
periods presented have been restated to include the accounts of Culligan. In
restating the Company's historical financial statements for the pooling of
interests with Culligan, the Company's balance sheets as of March 31, 1997
and 1998 were combined with Culligan's audited balance sheets as of January
31, 1997 and 1998, respectively. The results of the Company for the fiscal
years ended March 31, 1996, 1997 and 1998 were combined with the historical
results of Culligan for their fiscal years ended January 31, 1996, 1997 and
1998, respectively. Concurrent with its merger with the Company, Culligan's
year end was recast to March 31. Accordingly, results of Culligan for the
two month period ended March 31, 1998 are not included in the restated
results for the fiscal year ended March 31, 1998. Merger expenses incurred
to consummate the Culligan transaction totaled $49.2 million consisting of
investment banking, printing, stock transfer, legal, accounting and
governmental filing fees as well as certain other transaction costs, and were
expensed during the quarter ended June 30, 1998 in which the transaction was
completed.
32
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Reconciliation of the separate results of operations for the Company and
Culligan for the fiscal years ended March 31, 1996, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION> YEAR ENDED MARCH 31,
1996 1997 1998
-------------- -------------- --------------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Company (as previously reported) $ 1,090,745 1,764,406 3,234,580
Culligan 304,502 371,018 505,744
--------------- --------------- ---------------
Combined $ 1,395,247 2,135,424 3,740,324
=============== =============== ===============
Net Income (loss):
Company (as previously reported) $ 30,699 32,508 (299,779)
Culligan (21,279) 15,885 (5,622)
--------------- --------------- ---------------
Combined $ 9,420 48,393 (305,401)
=============== =============== ===============
Net Income (loss) per common share:
Basic:
As previously reported $ 0.62 0.51 (3.13)
=============== =============== ===============
As restated $ 0.11 0.47 (2.18)
=============== =============== ===============
Diluted:
As previously reported $ 0.61 0.49 (3.13)
=============== =============== ===============
As restated $ 0.11 0.45 (2.18)
=============== =============== ===============
</TABLE>
Fiscal 1998 Acquisitions Accounted for as Purchases
---------------------------------------------------
On December 9, 1997, the Company, through a wholly-owned subsidiary,
completed its tender offer ("Offer") to purchase all of the outstanding
ordinary shares of Memtec, Ltd. ("Memtec"). The total cash purchase price was
$397.2 million (including transaction costs of $10.6 million). Memtec is
incorporated under the law of the State of New South Wales, Australia and has
worldwide operations. Memtec is a leader in the designing, engineering,
manufacturing and marketing of an extensive range of filtration products and
systems, focusing on two principal areas of the filtration market: industrial
filtration and water filtration. Memtec had revenues of approximately $243.6
million and net income of approximately $7.5 million for the year ended June
30, 1997. The purchase price was allocated to the assets and liabilities of
Memtec based on their estimated respective fair values. The value of
developed technology was approximately $57.2 million, and is being amortized
on a straight-line basis over 25 years. The value of other intangible assets
including patents, trademarks, license and distribution fees was
approximately $7.3 million, and is being amortized over periods ranging from
5 to 12 years.
The Company also acquired from Memtec certain in-process research and
development projects that had not reached technological feasibility and that
had no alternative future uses. Such projects were valued by an independent
appraiser using a risk adjusted cash flow model under which expected future
cash flows were discounted using rates ranging from 31.9% to 45.9%. The
discount rates were determined by various internal and external factors
including general economic and industry economic conditions, cost and
availability of capital, product completion and technology risk, competition
and market acceptance. The future cash flows were based on significant
estimates of revenues, cost of goods sold, operating expenses, research and
development expenses, capital expenditures, depreciation and interest charges
on financed capital expenditures over the next ten years. The estimates of
these items included significant assumptions regarding (i) revenue growth,
which was assumed to grow from no revenue in the current period for the
projects currently in-process to substantially all of the revenue for the
Memtec subsidiary over the ten year period as the projects in-process
supplant or supersede the current Memtec product offerings; (ii) gross
margin, which is projected to improve approximately 5% by the end of the ten
year period as the new projects with higher gross margins supplant or
supersede the current Memtec product
33
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
offerings; (iii) operating expenses as a percentage of sales, which were
projected to be 20%. The estimated market value of such in-process research
and development projects was $299.5 million and was expensed at the
acquisition date. The allocation of the purchase price of Memtec is final and
is not expected to change materially subsequent to March 31, 1998.
Prior to being acquired by the Company, Culligan completed the acquisition
of the Water Filtration Business of Ametek, Inc. (the "Water Filtration
Business") on August 1, 1997. The purchase price was approximately $157
million, consisting of 3,466,667 shares of Culligan's common stock and cash
in lieu of fractional shares. The Water Filtration Business, located in
Sheboygan, Wisconsin, manufactures and markets point of use water filtration
and treatment products and is a leading supplier in the do-it-yourself,
plumbing wholesale, commercial and industrial water treatment markets. The
Water Filtration Business had revenues of $68.7 million and net income of
$8.2 million for the year ended December 31, 1996.
The purchase price was allocated to the assets and liabilities of the Water
Filtration Business based on their estimated respective fair values. The
excess of fair value of net assets acquired of $51.2 million and the value of
developed technology of $37.4 million are being amortized on a straight-line
basis over 40 years. In connection with this transaction, Culligan also
acquired certain in-process research and development projects that had not
reached technological feasibility and that had no alternative future use.
The estimated market value of such in-process research and development
projects was $36.3 million and was expensed during fiscal 1998.
Prior to being acquired by the Company, Culligan also completed the
acquisition of Protean plc ("Protean"), a United Kingdom corporation on
December 2, 1997. The total cash purchase price was approximately $174.0
million, including transaction costs. Protean is engaged in the design,
manufacture and sale of water purification equipment sold primarily to
commercial and industrial customers. In connection with the acquisition,
Culligan allocated a portion of the purchase price to net assets of
discontinued operations. When the Company (subsequent to its fiscal year
end) acquired Culligan, the Company decided to retain the Analytical and
Thermal Division and reallocated the purchase price of Protean accordingly.
The reallocation of the purchase price did not have a material impact on the
Company's restated financial position or results of operations.
The purchase price was allocated to the assets and liabilities of Protean
based on their respective fair values. The excess of fair value of net
assets acquired of $110.4 is being amortized on a straight-line basis over 40
years. In connection with this transaction, Culligan also acquired certain
in-process research and development projects that had not reached
technological feasibility and that had no alternative future uses. The
initial estimated market value of such in-process research and development
projects was $19.5 million as of March 31, 1998 and was expensed during
fiscal 1998. (Subsequent to the Company's fiscal year end, the final
estimated market value of such in-process research and development projects
was $23.1 million as determined by an independent appraiser. The difference
between the initial and final estimated market values of such in-process
research and development of $3.6 million was expensed subsequent to March 31,
1998 during the quarter ended June 30, 1998.)
The Company's acquisition of Memtec as well as Culligan's acquisitions of
the Water Filtration Business and Protean have been accounted for as
purchases and, accordingly, the results of operation for Memtec, the Water
Filtration Business and Protean are included in the consolidated financial
statements of the Company from the date of their respective acquisitions.
Summarized below are the unaudited pro forma results of operations of the
Company as though Memtec, the Water Filtration Business and Protean had been
acquired as of April 1, 1997:
34
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
1998
--------------
(in thousands, except
per share data)
<S> <C>
Revenues $ 4,051,337
=========
Net loss $ (311,660)
=========
Net loss per common share:
Basic $ (2.18)
=========
Diluted $ (2.18)
=========
</TABLE>
During the year ended March 31, 1998, the Company completed other
acquisitions with an aggregate purchase price, including acquisition costs,
of approximately $861.0 million, consisting of $80.0 million in cash and the
delivery of approximately 26,515,000 shares of Company common stock. The
excess of fair value of net assets acquired was approximately $263.8 million,
and is being amortized on a straight-line basis over 40 years.
Fiscal 1997 Acquisitions Accounted for as Purchases
---------------------------------------------------
On October 25, 1996, the Company acquired all of the outstanding capital
stock of the Utility Supply Group, Inc. ("USG") pursuant to an Agreement and
Plan of Merger. The purchase price for the acquisition of USG, including
acquisition costs, was approximately $40 million, consisting of the repayment
of $18.3 million of USG long-term debt paid in cash and the delivery of
771,157 shares of Company common stock.
USG, headquartered in Waco, Texas, is a distributor of water and wastewater
related products and services to industrial and municipal customers
throughout the United States.
The acquisition of USG has been accounted for as a purchase and,
accordingly, the results of operations of USG are included in the Company's
consolidated statements of operations from the date of acquisition. The
excess of fair value of net assets acquired was approximately $18 million,
and is being amortized on a straight-line basis over 40 years.
On October 28, 1996, the Company acquired all of the outstanding capital
stock of WaterPro Supplies Corporation ("WaterPro") pursuant to a Stock
Purchase Agreement. The purchase price for the acquisition of WaterPro,
including acquisition costs, was approximately $91 million, consisting of
3,201,507 shares of Company common stock.
WaterPro, headquartered in Edina, Minnesota is a national distributor of
water and wastewater related products and services for municipal water, sewer
authorities and underground contractors, and has locations throughout the
United States.
The acquisition of WaterPro has been accounted for as a purchase and,
accordingly, the results of operations of WaterPro are included in the
Company's consolidated statements of operations from the date of acquisition.
The excess of fair value of net assets acquired was approximately $29
million, and is being amortized on a straight-line basis over 40 years.
On December 2, 1996, pursuant to an Amended and Restated Purchase and Sale
Agreement dated September 14, 1996 between the Company and Wheelabrator Water
Technologies Inc. ("Seller"), the Company completed the acquisition of the
capital stock of certain of the Seller's subsidiaries and certain other
entities, and substantially all of the assets and liabilities of certain
other subsidiaries, collectively Wheelabrator's Water Systems and
Manufacturing Group ("WSMG"). The purchase price, as amended, for the
acquisition of WSMG, including acquisition costs, was approximately $374
million and was paid entirely in cash.
WSMG provides a broad range of water and wastewater engineering, technology
and systems. The acquisition of WSMG has been accounted for as a purchase
and, accordingly, the results of operations of WSMG are included in the
Company's
35
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
consolidated statements of operations from the date of acquisition.
The excess of fair value of net assets acquired was approximately $308
million and is being amortized on a straight-line basis over 40 years.
On January 6, 1997, pursuant to a Purchase and Sale Agreement dated October
7, 1996, between the Company and United Utilities PLC ("United Utilities"),
the Company completed the acquisition of the capital stock of certain other
subsidiaries, collectively, the Process Equipment Division ("PED") of United
Utilities. The purchase price for the acquisition of PED, including
acquisition costs, was approximately $166 million in cash and 1,320,312
shares of Company stock.
PED provides a broad range of water and wastewater engineering, technology
and systems. The acquisition of PED has been accounted for as a purchase
and, accordingly, the results of operations of PED are included in the
Company's consolidated statements of operations from the date of acquisition.
The excess of fair value of net assets acquired was approximately $108
million and is being amortized on a straight-line basis over 40 years.
Supplementary information related to the acquisitions of USG, WaterPro,
WSMG and PED is as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Assets acquired $1,018,537
Liabilities assumed (318,059)
Common stock issued (139,025)
----------
Cash paid 561,453
Fees and expenses 3,001
Less cash acquired (11,039)
----------
Net cash paid $ 553,415
==========
</TABLE>
Summarized below are the unaudited pro forma results of operations of the
Company as though Memtec, the Water Filtration Business, Protean, USG,
WaterPro, WSMG and PED had been acquired on April 1, 1996:
<TABLE>
<CAPTION>
1997
-------------
(in thousands, except
per share data)
<S> <C>
Revenues $ 2,941,278
===========
Net income $ 43,205
===========
Net income per common share:
Basic $ 0.50
===========
Diluted $ 0.49
===========
</TABLE>
During the year ended March 31, 1997, the Company completed other
acquisitions with an aggregate purchase price, including acquisition costs,
of approximately $77 million, consisting of $19.0 million in cash and the
delivery of 2,392,768 shares of Company common stock. The excess of fair
value of net assets acquired was approximately $65 million, and is being
amortized on a straight-line basis over 40 years.
Divestitures
------------
On March 15, 1997, Culligan disposed of its investment in Anvil holdings,
Inc. for total cash proceeds of $50.9 million. The transaction, which
included payment of accrued interest receivable and dividends resulted in a
pre-tax gain of approximately $31.1 million which is included in other income
in the consolidated statement of operations for the year ended March 31,
1998. Proceeds from this transaction were used to reduce outstanding
borrowings under Culligan's credit facility.
36
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(10) RESTRUCTURING CHARGES
Concurrent with the merger with and into Kinetics and the acquisition of
Memtec, the Company designed and implemented a restructuring plan to
streamline its manufacturing and production base, improve efficiency and
enhance its competitiveness. The restructuring plan resulted in a pre-tax
charge of $141.1 million. The plan identifies certain products and
technologies acquired in conjunction with the Memtec transaction that
supersede products and technologies acquired in earlier acquisitions of
membrane related businesses. As a result certain, carrying amounts of
goodwill and other intangible assets were determined to be impaired by
approximately $55.0 million in accordance with SFAS No. 121, which requires
that long-lived assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable. In determining the amount of the impairment of these assets, the
Company valued the assets using the present value of estimated expected
future cash flows using discount rates commensurate with the risks involved.
The restructuring plan also included closing or reconfiguring of certain
facilities and reducing the work force by approximately 350 employees, most
of whom work in the facilities to be closed.
Included in merger, restructuring, acquisition and other related charges
are the following:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Write-down of goodwill and other intangible assets $ 54,950
Asset write-offs, including equipment and facilities 47,887
Merger, integration and other acquisition costs 21,135
Severance and related costs 17,137
--------
Total merger, restructuring, acquisition and other related charges $141,109
========
Cash charges $ 36,431
Non-cash charges 104,678
--------
$141,109
========
</TABLE>
Approximately $15.4 million of merger and restructuring related charges are
included in accrued liabilities at March 31, 1998. Additional costs to
complete the restructuring plan are not expected to be material.
As a result of Culligan's acquisition of the Water Filtration Business on
August 1, 1997 and the subsequent decision made by Culligan to exit the
market for the sale of consumer products in the department store and mass
merchant channels, Culligan recorded a merger and restructuring charge of
$9.5 million during fiscal 1998. The merger and restructuring charge
reflects the costs of integrating and streamlining manufacturing, sales,
distribution, research and development and administrative functions in
Culligan's point of use business. Included in the $9.5 million merger and
restructuring charge are $0.7 million for severance costs related to the
elimination of redundant employees, $1.3 million related to the write down of
receivables, $2.5 million related to the write-down of excess property,
equipment and other assets, $0.7 million representing legal and other
professional fees and $4.3 million for the write down of excess inventory.
After an income tax benefit of $38.2 million, total non-recurring charges
during the year of $505.9 million (including purchased in-process research
and development charges totaling $355.3 and merger, restructuring,
acquisition and other related charges totaling $150.6) reduced earnings in
fiscal 1998 by $467.7 million.
37
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(11) CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process at
March 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Contract costs incurred to date $ 971,292 1,348,386
Estimated profits 160,949 255,347
---------------- ----------------
Contract revenue earned to date 1,132,241 1,603,733
Less billings to date (1,063,372) (1,475,871)
---------------- ----------------
Cost and estimated earnings in excess of billings, net $ 68,869 127,862
================ ================
</TABLE>
The above amounts are included in the accompanying consolidated balance
sheets as:
<TABLE>
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 130,310 217,935
Billings in excess of costs and estimated earnings on
uncompleted contracts (61,441) (90,073)
--------------- -----------------
$ 68,869 127,862
=============== =================
</TABLE>
Accounts receivable include retainage which has been billed, but is not
due pursuant to retainage provisions in construction contracts until
completion of performance and acceptance by the customer. This retainage
aggregated $21.7 million and $16.1 million at March 31, 1997 and 1998,
respectively. Substantially all retained balances are collectible within one
year.
(12) LONG-TERM DEBT
Long-term debt at March 31, 1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Mortgage notes payable, secured by land and buildings,
interest rates ranging from 2.0% to 10.0%, due in 1999
through 2013 $ 13,304 15,582
Guaranteed bank notes, interest rates ranging from
2.0% to 9.2%, due in 1999 through 2004 40,474 425,863
Unsecured notes payable, interest rates ranging from 3.8%
to 10.1%, due in 1999 through 2008 24,954 66,289
Other 13,333 15,531
--------------- ---------------
92,065 523,265
Less current portion (24,370) (118,849)
--------------- ---------------
$ 67,695 404,416
=============== ===============
</TABLE>
The aggregate maturities of long-term debt for each of the five years
subsequent to March 31, 1998 are as follows: 1999, $118.8 million; 2000,
$78.2 million; 2001, $16.6 million; 2002, $274.6 million; 2003, $9.7 million;
and thereafter, $25.4 million.
The Company has a long-term, unsecured revolving line of credit with a bank
of up to $750.0 million, of which $544.1 million was outstanding at March 31,
1998 and is included in notes payable in the accompanying consolidated
balance sheet. The line of credit expires December 2001 and bears interest
at 0.15% above the bank's base rate or at variable rates
38
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
of up to 0.45% above certain Eurocurrency rates. The line of credit is
subject to certain covenants for which the Company was in compliance at March
31, 1998. At March 31, 1998, $40.1 million of standby letters of credit were
issued under this line of credit.
In connection with the acquisitions of Kinetics, Memtec, and Culligan, the
Company assumed through its subsidiaries three additional loan agreements
with banks. One agreement provides a revolving line-of-credit with
borrowings of up to $100.0 million, of which no amounts were outstanding at
March 31, 1998. Borrowings under this agreement bear interest at the banks
reference rate or other interest rate options that a subsidiary may select.
The second agreement is a Multi-Option, Multi-Currency Master Facility that
provides borrowings of up to $60.0 million, of which $30.7 million was
outstanding as of March 31, 1998. Borrowings under this agreement bear
interest at LIBOR plus 0.75%. The third agreement is a $300 million multi-
currency revolving credit facility (the "Culligan Credit Facility"), of which
$287.8 was outstanding at March 31, 1998. Borrowings under the Culligan
Credit Facility bear interest at the bank's prime rate or other interest rate
options that a subsidiary may select. The Company anticipates that it will
terminate all three of these agreements during fiscal 1999.
(13) CONVERTIBLE SUBORDINATED DEBT
On December 11, 1996, the Company sold $414.0 million aggregate principal
amount of 4.5% Convertible Subordinated Debentures due December 15, 2001 (the
"Debentures"). The Debentures are convertible into common stock at any time
prior to maturity, redemption or repurchase at a conversion price of $39.50
per share, subject to adjustments in certain circumstances. The Debentures
are not redeemable prior to December 15, 1999, at which time the Debentures
become redeemable at the option of the Company, in whole or in part, at
specified redemption prices plus accrued and unpaid interest to the date of
redemption. Interest is payable semi-annually on June 15 and December 15,
commencing June 15, 1997.
On September 18, 1995 the Company sold $140.0 million aggregate principal
amount of 6% Convertible Subordinated Notes due September 15, 2005 (the
"Notes"). The Notes are convertible into common stock at any time prior to
maturity, redemption or repurchase at a conversion price of $18.33 per share,
subject to adjustment in certain circumstances. The Notes are not redeemable
prior to September 23, 1998 at which time the Notes become redeemable at the
option of the Company, in whole or in part, at specified redemption prices
plus accrued and unpaid interest to the date of redemption. Interest is
payable semi-annually on March 15 and September 15 of each year, commencing
on March 15, 1996.
Effective August 31, 1994, the Company issued $45.0 million of convertible
subordinated debt with common stock purchase warrants in connection with an
acquisition. On September 18, 1995, these warrants to purchase 3.8 million
shares of Company common stock were exercised in exchange for the delivery of
the $45.0 million principal amount of subordinated debt.
On October 20, 1993, the Company issued $60.0 million aggregate principal
amount of 5% convertible subordinated debentures due October 15, 2000. As of
October 25, 1996, all of such debentures were converted into a total of
approximately 4.4 million shares of Company common stock pursuant to the
terms of the debentures.
39
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(14) ACCRUED LIABILITIES
Accrued liabilities at March 31, 1997 and 1998 consist of the following:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Payroll, benefits and related taxes $ 86,669 116,229
Accrued job costs and customer deposits 78,610 105,125
Relocation and closure costs 41,088 96,019
Warranty 27,092 47,248
Sales, property and other taxes 9,647 42,497
Sales commissions 10,014 15,630
Professional fees 2,153 10,510
Interest 7,978 9,892
Future remediation 10,625 2,760
Other 38,611 89,419
--------------- ---------------
$ 312,487 535,329
=============== ===============
</TABLE>
(15) INCOME TAXES
Income tax expense (benefit) from continuing operations for the years ended
March 31, 1996, 1997 and 1998 consist of:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
Federal:
Current $ 18,362 18,322 14,879
Deferred 3,651 3,464 17,625
State:
Current 3,930 5,860 3,345
Deferred (566) (1,476) 2,372
Non-U.S.:
Current 7,735 10,787 (63)
Deferred 2,127 (6,012) 10,063
--------------- --------------- ---------------
$ 35,239 30,945 48,221
=============== =============== ===============
</TABLE>
40
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Total income tax expense (benefit) differed from the amounts computed
by applying the U.S. Federal corporate tax rate of 34% for 1996 and 35% for
1997 and 1998 to income (loss) from continuing operations before income
taxes as a result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
Expected income tax provision $ 15,184 27,768 (90,013)
Permanent differences 14,636 7,745 22,202
Non-deductible expenses related to purchased in-process
research and development and merger, restructuring,
acquisition and other related charges -- -- 113,949
State franchise tax, net of Federal tax benefit 2,624 3,398 4,285
Change in balance of valuation allowance (5,042) (9,637) (1,841)
Difference in U.S. tax rate and foreign tax rates 4,398 (306) 854
Other 3,439 1,977 (1,215)
--------------- --------------- ---------------
$ 35,239 30,945 48,221
=============== =============== ===============
</TABLE>
As of March 31, 1998, the Company has net operating loss carryforwards in
France of approximately $14.0 million with an indefinite carryforward period
for which income tax benefit was recognized during fiscal 1997. Any benefit
of the French loss carryforward was required to be shared equally between the
Company and Alcoa until March 31, 1997. As of March 31, 1998, the Company
also had net operating loss carryforwards in other non-U.S. countries of
approximately $126.5 million which expire from 1999 to indefinite.
Additionally, as of March 31, 1998, the Company has recognized the future
benefit of net operating loss carryforwards generated from Liquipure of $14.4
million. These loss carryforwards expire from 2002 to 2007. These operating
loss carryforwards can be used only against future taxable income of
Liquipure.
The Company also has available, at March 31, 1998, other net operating loss
carryforwards for U.S. Federal income tax purposes of approximately $68.3
million which expire in 2007 to 2011.
41
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The sources and tax effects of temporary differences between the financial
statement carrying amounts and tax basis of assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 40,657 91,864
Inventory 11,571 11,139
Allowance for doubtful accounts 9,509 11,574
Warranty 2,656 6,793
Vacation 1,465 4,492
Other accruals 47,855 70,139
Tax credits 276 258
Other 1,518 7,432
--------------- ---------------
115,507 203,691
Valuation allowance (23,551) (47,432)
--------------- ---------------
Total deferred tax assets 91,956 156,259
Deferred tax liabilities:
Depreciation and amortization 22,964 46,080
Prepaid expenses 353 360
Long-term contracts 11,123 4,625
Trademarks and other intangible assets 19,051 19,898
Other 16,352 17,099
--------------- ---------------
69,843 88,062
--------------- ---------------
Net deferred tax assets $ 22,113 68,197
=============== ===============
</TABLE>
The Company believes that it is more likely than not that the net deferred
tax assets, including Federal net operating loss carryforwards, will be
realized prior to their expiration. This belief is based on recent and
anticipated future earnings and, in part, on the fact that the Company has
completed several acquisitions during and including the three years ended
March 31, 1998 of companies with strong earnings potential. A valuation
allowance of $47.4 million at March 31, 1998 has been provided primarily for
state and foreign net operating losses which may not be realized prior to
expiration.
(16) SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
In January 1992 and September 1994, the Company issued 880,000 shares of a
new Series A Cumulative Convertible Preferred Stock and 185,185 shares of a
new Series B Convertible Preferred Stock, respectively, in connection with
acquisitions. On September 18, 1995, the Company repurchased and canceled
139,518 shares of Series B Preferred stock for $4.7 million and converted
45,667 shares of Series B Preferred Stock into 102,750 shares of Company
common stock. On March 4, 1996, the holder of the Company's Series A
Preferred Stock tendered the 880,000 preferred shares for conversion into
1,980,000 shares of Company Common Stock pursuant to terms of the security.
COMMON STOCK
On July 15, 1996, the Company paid in the form of stock dividends a three-
for-two split of the Company's common stock. All references herein to income
(loss) per common share and other common stock information in the
accompanying consolidated financial statements and notes thereto have been
restated to reflect the split.
On December 11, 1996, the Company sold 11,804,206 shares of its common
stock at $31.625 per share. The net proceeds to the Company, after
underwriting discounts and commissions and other related expenses, were
$356.2 million.
42
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
On May 3, 1995, the Company sold 10,350,000 shares of its common stock at
$10.00 per share. The net proceeds to the Company, after underwriting
discounts and commissions and other related expenses, were $97.4 million.
OPTIONS
Under the Company's 1991 Employee Stock Option Plan (the "Plan"), the
exercise price of options granted is equal to their fair market value at the
date of grant and the maximum term of the option may not exceed 10 years. If
the optionee is a holder of more than 10% of the outstanding common stock of
the Company, the option price per share is increased to at least 110% of fair
market value, and the option term is limited to 5 years. The total number of
shares of common stock available under the Plan is approximately 8.9 million
shares. Each option granted becomes exercisable on a cumulative basis, 25%
six months following the date of grant and 25% on each subsequent anniversary
of the grant date until fully vested.
Under the Company's 1991 Director Stock Option Plan (the "Directors Plan"),
the exercise price of options granted was equal to the higher of $2.00 below
the market price or 60% of the market price on the date of grant. Effective
April 1, 1996 the Directors Plan was amended to grant options equal to their
fair market value at the date of grant. Under the Directors Plan, each
director of the Company who is not a full-time employee of the Company will
receive each year an option to purchase 12,000 shares of common stock. The
total number of shares available under the Directors Plan is 562,500 shares.
Compensation expense of $0.1 million was recorded in fiscal 1996 related to
the Directors Plan.
The per share weighted-average fair value of stock options granted during
fiscal 1996, 1997 and 1998 was $3.40, $8.61 and $13.73 respectively, on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ----------------- ----------------
<S> <C> <C> <C>
Risk-free interest rate 6.3% 6.3% 5.7%
Expected dividend yield -- -- --
Expected stock price volatility 41.9% 41.9% 44.9%
Expected remaining life in years 5 5 5
</TABLE>
The Company continues to apply APB Opinion No. 25 in accounting for its
Plans and, accordingly, no compensation cost has been recognized for its
stock options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, the Company's net income (loss) and net
income (loss) per common share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1996 1997 1998
--------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss)
<S> <C> <C> <C>
As reported $ 9,420 48,393 (305,401)
============== ============== ==============
Pro forma $ 5,523 34,468 (320,723)
============== ============== ==============
Net income (loss) per common share:
Basic:
As reported $ 0.11 0.47 (2.18)
============== ============== ==============
Pro forma $ 0.06 0.34 (2.29)
============== ============== ==============
Diluted:
As reported $ 0.11 0.45 (2.18)
============== ============== ==============
Pro forma $ 0.06 0.32 (2.29)
============== ============== ==============
</TABLE>
43
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Pro forma net income (loss) and net income (loss) per common share reflects
only options granted after April 1, 1995. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net income (loss) and net income (loss) per common
share amounts presented above because compensation reflected over the
options' vesting period of 10 years and compensation cost for options granted
prior to April 1, 1995 is not considered. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options
that do not have vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the
Company's stock options have characteristics significantly different from
those of traded options and because changes in the subjective input
assumptions can materially affect the value of an estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of stock options.
Transactions involving the Plan and Directors Plan are summarized as
follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
SHARES EXERCISE PRICE VALUE
---------- ------------------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at March 31, 1995 3,557,482 $ 1.35 to 10.95 $ 31,942
Options granted 3,667,637 1.35 to 18.67 26,952
Options exercised (487,886) 1.35 to 10.95 (3,678)
Options canceled (20,626) 8.53 to 10.58 (183)
---------- ------------------------ --------------
Balance at March 31, 1996 6,716,607 1.35 to 18.67 55,033
Options granted 3,737,385 12.02 to 34.88 69,621
Options exercised (1,932,838) 1.35 to 26.25 (17,653)
Options canceled (203,478) 4.97 to 13.83 (1,328)
---------- ------------------------ --------------
Balance at March 31, 1997 8,317,676 1.35 to 34.88 105,673
Options granted 1,801,225 26.00 to 37.75 52,383
Options exercised (612,346) 1.35 to 27.75 (6,272)
Options canceled (213,632) 13.83 to 30.25 (3,046)
---------- ------------------------ --------------
Balance at March 31, 1998 9,292,923 $ 1.35 to 37.75 $ 148,738
========== ======================== ==============
</TABLE>
At March 31, 1997 and 1998, the number of options exercisable was 3.1
million and 4.7 million, respectively.
The following table summarizes certain information regarding options
outstanding at March 31, 1998.
<TABLE>
<CAPTION>
Weighted Weighted
Range of Number average average
exercise price of options remaining life exercise price
-------------- ---------- -------------- --------------
<S> <C> <C> <C>
$1.35 to 11.63 3,430,355 6.6 years $ 6.77
12.02 to 22.75 3,689,418 8.4 17.12
26.00 to 37.75 2,173,150 9.0 28.33
-------------- ---------- -------------- --------------
$1.35 to 37.75 9,292,923 7.9 years 16.00
============== ========== ============== ==============
</TABLE>
In connection with the options and convertible subordinated debt, the
Company has reserved 20.8 million shares at March 31, 1998 for future
issuance.
44
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(17) RETIREMENT PLANS
Pursuant to the terms of a collective bargaining agreement, one of the
Company's U.S. subsidiaries has a defined benefit pension plan covering
substantially all of its hourly employees. Pension plan benefits are
generally based upon years of service and compensation. The Company's funding
policy is to contribute at least the minimum amounts required by the U.S.
Employee Retirement Income Security Act of 1974 ("ERISA") or additional
amounts to assure that plan assets will be adequate to provide retirement
benefits. Plan assets are invested in broadly diversified portfolios of
government obligations, mutual funds and fixed income and equity securities.
The accumulated benefit obligation under this plan is not material to the
consolidated financial statements.
A subsidiary of 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 (the "Pipefitters Union") under multiemployer defined benefit
plans. Contributions to the Pipefitters Union pension and health and welfare
plans were not material to the Company's financial position as of March 31,
1997 and 1998 nor to its results of operations for each of the years in the
three year period ended March 31, 1998.
In connection with the acquisition of Culligan, the Company assumed
obligations under certain existing Culligan pension plans. Culligan has
pension plans which cover substantially all domestic salaried employees and
certain hourly-paid employees. Plans covering salaried employees generally
provide pension benefits to employees who complete five or more years of
service. Pension benefits are generally based upon years of service and
compensation during the final years of employment. Plans covering hourly-paid
employees generally provide pension benefits or fixed amounts for each year
of service.
Culligan also has an unfunded supplemental retirement plan for certain
employees and unfunded supplemental benefit agreements for two former
executives. The annual costs of the supplemental retirement plan and
supplemental benefit agreements are included in the determination of net
periodic pension cost shown below.
Net periodic pension cost includes the following components:
FISCAL YEAR ENDED MARCH 31,
1996 1997 1998
-------- -------- --------
(in thousands)
Service costs $ 1,196 1,421 1,345
Interest cost 3,297 3,415 3,692
Actual return on plan assets (11,289) (7,362) (8,590)
Net amortization and deferral 7,727 3,435 4,287
-------- -------- --------
Net periodic pension cost $ 931 909 734
======== ======== ========
45
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following table presents the plans' status reconciled with amounts
recognized as other non-current liabilities in the consolidated balance
sheets at March 31, 1997 and 1998:
<TABLE>
<CAPTION>
Accumulated Assets Exceed
Benefits Accumulated
Exceed Assets Benefits
--------------------- ---------------------
1997 1998 1997 1998
-------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested $ (1,942) (3,169) (37,042) (41,838)
Nonvested -- (245) (1,845) (2,156)
------- -------- --------- --------
Accumulated benefit obligations $ (1,942) (3,414) (38,887) (43,994)
======== ======== ========= ========
Projected benefit obligations $ (2,011) (3,482) (44,978) (50,577)
Fair value of plan assets, principally equity securities,
and corporate and government bonds -- 1,119 56,536 62,249
-------- -------- --------- --------
Projected benefit obligations (in excess of) less than
plan assets (2,011) (2,363) 11,558 11,672
Unrecognized net gain from past experience different
from that assumed and effect of changes in assumptions (1,073) (405) (10,222) (11,692)
Prior service cost not yet recognized in net periodic
pension cost 112 262 (955) (185)
-------- -------- --------- --------
Prepaid (accrued) pension cost $ (2,972) (2,506) 381 (205)
======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
Actuarial assumptions were:
<S> <C> <C> <C>
Discount rates 7.50% 8.00-8.50% 6.25-8.50%
Rates of increase in compensation levels 6.00% 5.00% 3.75-6.00%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
</TABLE>
Plan assets are invested primarily in equity securities and fixed income
instruments. The Culligan pension plan does not have significant liabilities
other than benefit obligations. The Company's funding policy is to contribute
amounts equal to the minimum funding requirements of ERISA.
The Company also assumed in its acquisition of Culligan a defined benefit
health care plan that provides postretirement medical benefits to full-time
employees who meet minimum age and service requirements. The plan is
contributory and contains other cost-sharing features such as deductibles and
limits on certain coverages. The Company has the right to modify or terminate
the plan. The accumulated postretirement benefit obligation and net periodic
postretirement benefit cost are immaterial to the Company's consolidated
financial position and results of operations.
The Company has a defined contribution plan (under IRC Section 401(k))
covering substantially all U.S. salaried and hourly participating employees
which provide for contributions based primarily upon compensation levels and
employee contributions. The Company funds its contributions to these plans as
provided by ERISA. Defined contribution plan expense to the Company was $4.7
million, $7.4 million and $11.2 million for the years ended March 31, 1996,
1997 and 1998, respectively.
46
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(18) BUSINESS SEGMENT DATA AND EXPORT SALES
The Company's sole business segment is the design, manufacture, operation,
distribution and service of equipment and supplies for filtration, water
treatment and wastewater treatment for industrial, municipal, commercial and
retail customers. No individual customers accounted for 10% or more of
revenue in fiscal 1996, 1997 and 1998. Export sales were $64.2 million, $93.9
million and $125.8 million in fiscal 1996, 1997 and 1998, respectively.
Information about the Company`s operations in different geographic
locations for the years ended March 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Revenues from unaffiliated
customers:
United States $ 1,079,233 1,608,400 2,743,009
Non-U.S. 316,014 527,024 997,315
------------ ------------ ------------
$ 1,395,247 2,135,424 3,740,324
============ ============ ============
Operating income (loss):
United States $ 35,538 58,152 70,183
Non-U.S. 27,461 41,851 (301,785)
------------ ------------ ------------
$ 62,999 100,003 (231,602)
============ ============ ============
Income (loss) before income taxes $ 23,275 42,747 52,183
United States 21,384 36,591 (309,363)
------------ ------------ ------------
Non-U.S. $ 44,659 79,338 (257,180)
============ ============ ============
Identifiable assets:
United States $ 919,363 1,942,113 2,853,959
Non-U.S. 376,523 792,812 1,611,486
------------ ------------ ------------
$ 1,295,886 2,734,925 4,465,445
============ ============ ============
</TABLE>
(19) COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
The Company and its subsidiaries lease certain facilities and equipment
under various noncancelable long-term and month-to-month leases. These leases
are accounted for as operating leases. Rent expense aggregated $12.7 million,
$18.5 million and $45.0 million in 1996, 1997 and 1998, respectively.
47
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
A summary of the future minimum annual rental commitments as of March 31,
1998, under operating leases follows:
OPERATING
LEASES
--------------
(in thousands)
Fiscal year ending:
1999 $ 36,040
2000 28,946
2001 21,705
2002 16,172
2003 11,531
Thereafter 35,282
----------
Total minimum lease payments $ 149,676
==========
CONTINGENT LIABILITIES
In December of 1995, allegations were made by federal and state
environmental regulatory authorities of multiple violations in connection
with wastewater discharges at a facility owned by the Company. The Company as
part of its acquisition of Polymetrics on October 2, 1995 acquired the
facility. The Company has rights of indemnity from the seller which could be
available if monetary damages and penalties are incurred in connection with
any alleged violations occurring prior to the Company's acquisition of
Polymetrics. In the opinion of management, the ultimate liability that may
result from the above matter will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Legal proceedings pending against the Company consist of litigation
incidental to the Company's business and in the opinion of management, based
in part upon the opinion of counsel, the outcome of such litigation will not
materially affect the Company's consolidated financial position or results of
operations.
(20) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
NET INCOME
(LOSS) PER SHARE
NET INCOME ----------------------
REVENUES GROSS PROFIT (LOSS) BASIC DILUTED
---------- ------------ ---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
--------------
<S> <C> <C> <C> <C> <C>
First quarter $ 378,543 108,445 6,031 0.06 0.06
Second quarter $ 427,982 110,860 2,832 0.03 0.03
Third quarter $ 560,527 136,297 14,279 0.14 0.13
Fourth quarter $ 768,372 197,626 25,251 0.21 0.21
1998
--------------
First quarter $ 792,936 195,363 39,295 0.31 0.30
Second quarter $ 938,358 239,867 33,563 0.26 0.25
Third quarter $ 969,513 268,773 (389,255) (2.63) (2.63)
Fourth quarter $ 1,039,517 295,534 10,996 0.07 0.07
</TABLE>
48
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(21) SUBSEQUENT EVENTS
Remarketable or Redeemable Securities Issuance. On May 15, 1998, the
Company issued $500 million 6.375% Remarketable or Redeemable Securities due
2011 (Remarketing Date May 15, 2001) and $400 million 6.50% Remarketable or
Redeemable Securities due 2013 (Remarketing Date May 15, 2003) (collectively,
the "ROARS"). The net proceeds from the sale of the ROARS, including a
premium payment to the Company by NationsBanc Montgomery Securities LLC, were
$913.6 million. The net proceeds were used to repay indebtedness outstanding
under the Senior Credit Facility, indebtedness assumed in the acquisition of
Memtec, and a portion of the indebtedness assumed in the acquisition of
Culligan.
Culligan Acquisition. On June 15, 1998, a wholly owned subsidiary of the
Company and Culligan consummated a merger and acquisition in a tax-free
reorganization. The Company issued approximately 48.6 million shares of the
Company's common stock for all of the outstanding common stock of Culligan
(1.875 shares of the Company's common stock for each outstanding share and
each outstanding option or other right to acquire a share of Culligan common
stock, par value $.01). In addition, the Company assumed approximately $491.7
million of third party institutional debt. The merger was accounted for as a
pooling of interests (see note 9).
49
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UNITED STATES FILTER CORPORATION
Date: September 14, 1998
By: /s/ Kevin L. Spence
---------------------------------
Kevin L. Spence
Executive Vice President/
Chief Financial Officer
50
