<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 and 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended DECEMBER 31, 1997
-----------------
or
[_] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 1-10728
-------
UNITED STATES FILTER CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0266015
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
40-004 COOK STREET, PALM DESERT, CA 92211
------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (760) 340-0098
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
The number of shares of common stock, $.01 par value, outstanding as of February
13, 1998 was 106,278,587 shares.
Total number of pages 24
---------
THERE ARE 2 EXHIBITS FILED WITH THIS REPORT
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1997
--------------- -----------------
(in thousands)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 135,144 57,821
Short-term investments 2,158 904
Accounts receivable, net 572,940 739,587
Costs and estimated earnings in excess
of billings on uncompleted contracts 130,310 205,427
Inventories 245,201 350,968
Prepaid expenses 8,931 19,893
Deferred taxes 53,152 82,246
Other current assets 17,086 28,257
---------- ---------
Total current assets 1,164,922 1,485,103
---------- ---------
Property, plant and equipment, net 319,687 761,147
Investment in leasehold interests, net 23,230 22,424
Costs in excess of net assets of businesses acquired, net 788,096 978,271
Other assets 101,628 113,837
---------- ---------
$2,397,563 3,360,782
========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1997 (CONTINUED)
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1997
-------------- -----------------
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable $ 274,653 304,890
Accrued liabilities 275,537 410,245
Current portion of long-term debt 11,956 25,464
Billings in excess of costs and estimated
earnings on uncompleted contracts 61,441 121,831
Other current liabilities 26,183 77,045
---------- ---------
Total current liabilities 649,770 939,475
---------- ---------
Notes payable 31,464 475,181
Long-term debt, excluding current portion 42,646 128,988
Convertible subordinated debentures 554,000 554,000
Deferred taxes 12,198 3,506
Other liabilities 61,655 66,108
---------- ---------
Total liabilities 1,351,733 2,167,258
---------- ---------
Shareholders' equity:
Common stock, par value $.01. Authorized 300,000
shares; 80,334 and 103,957 shares issued and
outstanding at March 31, 1997 and December 31, 1997,
respectively 803 1,040
Additional paid-in capital 1,013,734 1,500,786
Currency translation adjustment (19,491) (37,287)
Retained earnings (accumulated deficit) 50,784 (271,015)
---------- ---------
Total shareholders' equity 1,045,830 1,193,524
---------- ---------
Commitments and contingencies
---------- ---------
$2,397,563 3,360,782
========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, December 31,
-------------------------- --------------------------
1996 1997 1996 1997
------------- ---------- ------------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $463,423 829,427 1,094,636 2,346,553
Costs of sales 369,736 621,893 859,754 1,798,595
-------- --------- --------- ---------
Gross profit 93,687 207,534 234,882 547,958
Selling, general and
administrative expenses 81,482 148,478 196,752 414,546
Purchased in-process research
and development - 299,505 - 299,505
Merger, restructuring, acquisition
and other related charges - 141,109 5,581 141,109
-------- --------- --------- ---------
81,482 589,092 202,333 855,160
-------- --------- --------- ---------
Operating income (loss) 12,205 (381,558) 32,549 (307,202)
Other income (expense):
Interest expense (6,484) (13,198) (15,907) (34,374)
Other, net 1,818 1,779 2,981 3,002
-------- --------- --------- ---------
(4,666) (11,419) (12,926) (31,372)
-------- --------- --------- ---------
Income (loss) before taxes 7,539 (392,977) 19,623 (338,574)
Income tax expense (benefit) 1,211 (18,882) 3,845 (1,273)
-------- --------- --------- ---------
Net income (loss) $ 6,328 (374,095) 15,778 (337,301)
======== ========= ========= =========
Net income (loss) per common
share:
Basic $ 0.10 (3.71) 0.27 (3.65)
======== ========= ========= =========
Diluted $ 0.09 (3.71) 0.26 (3.65)
======== ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended
December 31,
---------------------
1996 1997
--------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 15,778 (337,301)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Deferred income taxes (11,700) (23,606)
Provision for doubtful accounts 3,292 6,172
Depreciation 28,406 47,236
Amortization 9,338 20,695
Write-off of in-process research and development
and goodwill - 352,025
Loss on sale or disposal of assets 3 11,557
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 7,990 (23,569)
Increase in costs and estimated earnings in excess
of billings on uncompleted contracts (35,904) (30,158)
Increase in inventories (17,125) (19,590)
(Increase) decrease in other assets (20,271) 1,723
Increase (decrease) in accounts payable and
accrued expenses 17,209 (26,450)
Increase (decrease) in billings in excess of costs and
estimated earnings on uncompleted contracts (3,561) 22,584
Increase (decrease) in other liabilities (5,081) 16,796
--------- --------
Net cash provided by (used in) operating activities (11,626) 18,114
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of property, plant & equipment (43,283) (77,683)
Payment for purchase of acquisitions, net of cash acquired (404,478) (411,082)
Proceeds from disposal of equipment 394 3,860
Sale of short-term investments 152 1,260
--------- --------
Net cash used in investing activities (447,215) (483,645)
--------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended
December 31,
---------------------
1996 1997
(in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 358,441 -
Net proceeds from sale of convertible subordinated debentures 403,650 -
Proceeds from exercise of common stock options 1,487 3,514
Principal payments on debt (7,300) (20,170)
Net (payments) proceeds from borrowings on notes payable (913) 404,914
Dividends paid (3,067) (50)
------- -------
Net cash provided by financing activities 752,298 388,208
------- -------
Net increase (decrease) in cash and cash equivalents 293,457 (77,323)
Cash and cash equivalents at March 31, 1996 and 1997 27,730 135,144
------- -------
Cash and cash equivalents at December 31, 1996 and 1997 $321,187 57,821
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 15,602 34,023
======== =======
Cash paid during the period for income taxes $ 10,596 22,212
======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Operations and Significant Accounting Policies
----------------------------------------------
The accompanying condensed consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to such
regulations. The condensed consolidated financial statements reflect all
adjustments and disclosures which are, in the opinion of management, necessary
for a fair presentation of the information contained therein. All such
adjustments are of a normal recurring nature. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto that are contained in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1997. The
results of operations for the interim periods are not necessarily indicative of
the results of the full fiscal year.
Income (Loss) per Common Share
- ------------------------------
Income (loss) per common share is computed based on the weighted average number
of shares outstanding. In the current period, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Accordingly,
"Basic EPS" and "Diluted EPS" were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
1996 1997 1996 1997
------- -------- ------ --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
BASIC
Net income (loss) applicable to common
shares $6,328 (374,095) 15,778 (337,301)
====== ======== ====== ========
Weighted average common shares outstanding 65,061 100,927 59,016 92,340
====== ======== ====== ========
Basic income (loss) per common share $ 0.10 (3.71) 0.27 (3.65)
====== ======== ====== ========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------ -------------------
1996 1997 1996 1997
------- -------- ------ --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
DILUTED
Net income (loss) applicable to common
shares $ 6,328 (374,095) 15,778 (337,301)
Add:
Effect on net income of conversion of
convertible subordinated debentures - * - ** - * - **
------- -------- ------ --------
Adjusted net income (loss) applicable to
common shares 6,328 (374,095) 15,778 (337,301)
======= ======== ====== ========
Weighted average shares outstanding 65,061 100,927 59,016 92,340
Add:
Exercise of options and assumed conversion
of subordinated debentures 2,418 * - ** 2,055 * - **
------- -------- ------ --------
Adjusted weighted average shares outstanding 67,479 100,927 61,071 92,340
======= ======== ====== ========
Diluted income (loss) per common share $ 0.09 (3.71) 0.26 (3.65)
======= ======== ====== ========
</TABLE>
* The calculation of diluted EPS does not assume conversion of
subordinated debentures for the three and nine months ended December
31, 1996 as the effect would be antidilutive to income per share.
** The calculation of diluted EPS does not assume conversion of
subordinated debentures or exercise of stock options for the three and
nine months ended December 31, 1997 as the effect would be antidilutive
to loss per share.
Note 2. Inventories
-----------
Inventories at March 31, 1997 and December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1997
-------------- -----------------
(in thousands)
<S> <C> <C>
Raw materials $ 56,830 116,446
Work-in-progress 58,619 83,136
Finished goods 129,752 151,386
-------- -------
$245,201 350,968
======== =======
</TABLE>
8
<PAGE>
Note 3. Property, Plant and Equipment
-----------------------------
On September 17, 1997, the Company acquired more than 47,000 acres of
agricultural land in Imperial County, California and other parts of the
Southwestern United States in exchange for 8.0 million shares and warrants to
acquire 1.2 million shares of common stock, par value $0.01 per share, of the
Company. These shares and warrants are subject to certain restrictions and
limitations more fully described in agreements among the Company and the holders
of such securities. The recorded value of the acquired land is approximately
$210.0 million.
Note 4. Notes Payable
-------------
As of December 31, 1997, the Company had a Senior Credit Facility which provides
credit facilities to the Company of up to $750.0 million, of which there were
outstanding borrowings of $419.1 million and outstanding letters of credit of
$40.5 million. Borrowings under the Senior Credit Facility bear interest at
variable rates of up to 0.45% above certain Eurocurrency rates or 0.15% above
BankBoston's base rate. The Senior Credit Facility is subject to customary and
usual terms.
In connection with the acquisition of The Kinetics Group, Inc. ("Kinetics") (see
note 5) the Company has an additional loan agreement with a bank that provides a
revolving line-of-credit under which a subsidiary of the Company may borrow up
to $100.0 million of which there were outstanding borrowings of $33.8 million at
December 31, 1997. Borrowings under this agreement bear interest at the bank's
reference rate or other interest rate options that the subsidiary may select.
In connection with the acquisition of Memtec Limited ("Memtec") (see note 5),
the Company has a Multi-Option, Multi-Currency Master Facility Agreement with a
bank that provides for borrowings of up to $60.0 million, of which there were
outstanding borrowings of $22.3 million as of December 31, 1997. Borrowings
under this agreement bear interest at LIBOR plus 0.75%.
Note 5. Acquisitions
------------
Effective December 31, 1997, a wholly owned subsidiary of the Company merged
with and into Kinetics in a tax-free reorganization. In connection with this
merger, the Company issued 5,803,803 shares of the Company's common stock for
all of the outstanding common stock of Kinetics (0.5824 share of the Company's
common stock for each outstanding share and each outstanding option or other
right to acquire a share of Kinetics common stock). In addition, the Company
assumed approximately $50.0 million of third party institutional debt.
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.
Separate results of operations of the combined entities for the three and nine
months ended December 31, 1996 are as follows:
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, 1996 December 31, 1996
------------------ -----------------
(in thousands, except per share data)
<S> <C> <C>
Revenues:
Company (as previously reported) $368,124 838,936
Kinetics 95,299 255,700
-------- ---------
Combined $463,423 1,094,636
======== =========
Net income (loss):
Company (as previously reported) $ 14,351 29,014
Kinetics (8,023) (13,236)
-------- ---------
Combined $ 6,328 15,778
======== =========
Income per common share:
Basic:
As previously reported $ 0.24 0.54
======== =========
As restated $ 0.10 0.27
======== =========
Diluted:
As previously reported $ 0.23 0.52
======== =========
As restated $ 0.09 0.26
======== =========
</TABLE>
Merger expenses incurred to consummate the Kinetics transaction totaled $4.3
million consisting of investment banking fees, printing fees, stock transfer
fees, legal fees, accounting fees, governmental filing fees and certain other
transaction costs and are included in merger, restructuring, acquisition and
other related charges in the accompanying December 31, 1997 Condensed
Consolidated Statements of Operations.
On December 9, 1997, the Company, through a wholly-owned subsidiary, completed
its tender offer ("Offer") to purchase all of the outstanding ordinary shares
(including American Depository Shares) of Memtec. The purchase price was $36.00
per share. The Company acquired certain shares in privately negotiated and open
market purchases prior to the Offer resulting in a total cash purchase price of
approximately $397.2 million (including estimated transaction costs of $10.6
million). The purchase price was allocated to the assets and liabilities of
Memtec based on their estimated respective fair values. The Company also
acquired from Memtec certain in-process research and development projects that
had not reached technological feasibility and that had no alternative future
use. Such projects were valued by an independent appraiser using a risk
adjusted cash flow model under which expected future cash flows were discounted,
taking into account risks related to existing and future markets and assessments
of the life expectancy of such projects. The estimated market value of such in-
process research and development projects was $299.5 million and was expensed at
the acquisition date.
Memtec is incorporated under the law of the State of New South Wales, Australia
and has worldwide operations. Memtec is a leader in the designing, engineering,
manufacturing and marketing of an extensive range of filtration products and
systems, focusing on two principal areas of the filtration market: industrial
filtration and water filtration. Memtec had revenues of approximately $243.6
million and net income of approximately $7.5 million for the year ended June 30,
1997.
The acquisition of Memtec has been accounted for as a purchase and, accordingly,
the results of Memtec's operations have been included in the consolidated
financial statements of the Company from the date of acquisition. Summarized
below are the unaudited pro forma results of operations of the Company as though
Memtec had been acquired at the beginning of the nine month periods ended
December 31, 1996 and 1997.
10
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
--------------------------------------
1996 1997
---------- ---------
(in thousands, except per common share)
<S> <C> <C>
Revenues $1,269,263 2,515,056
========== =========
Net income (loss) $ 23,454 (336,394)
========== =========
Net income (loss) per common share:
Basic $ 0.40 (3.64)
========== =========
Diluted $ 0.38 (3.64)
========== =========
</TABLE>
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 merger, restructuring, acquisition and other related charges $141,109
========
Cash charges $ 36,431
Non-cash charges 104,678
--------
$141,109
========
</TABLE>
Approximately $30.3 million of merger and restructuring related charges are
included in accrued liabilities at December 31, 1997. Additional costs to
complete the restructuring plan are not expected to be material.
After an income tax benefit of $34.5 million, the charges detailed above
totaling $440.6 million reduced earnings by $406.1 million.
11
<PAGE>
Note 6. Subsequent Event
----------------
On February 9, 1998, the Company announced it had entered into an Agreement and
Plan of Merger (the "Merger Agreement") dated as of February 9, 1998, among the
Company, Palm Water Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of the Company ("Merger Sub"), and Culligan Water Technologies, Inc.
("Culligan"), Delaware corporation. Pursuant to the Merger Agreement, Merger
Sub will be merged with and into Culligan (the "Merger"). In connection with the
Merger, the Company will issue in exchange for each issued and outstanding share
(other than treasury shares and shares owned by the Company) of Culligan common
stock, par value $.01 per share, 1.714 shares of common stock, par value $.01
per share, of the Company pursuant to formula.
The Merger will be accounted for as a pooling of interests and is intended to
qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended. Consummation of the Merger is subject to
customary regulatory approvals and the approval of the stockholders of each of
the Company and Culligan. The Merger is expected to be consummated in the first
half of fiscal 1999.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- ---------------------
Revenues for the three months ended December 31, 1997 were $829.4 million, an
increase of $366.0 million or 79.0% from the $463.4 million for the three months
ended December 31, 1996. Revenues for the nine months ended December 31, 1997
were $2.3 billion, an increase of $1.2 billion or 114.4% from the $1.1 billion
for the nine months ended December 31, 1996. These increases were due primarily
to acquisitions completed by the Company subsequent to December 31, 1996. For
the nine months ended December 31, 1997, revenues from capital equipment sales
represented 45.3% of total revenues. Revenues from services, operations,
replacement parts and consumables represented 23.9% of total revenues, while
revenues from distribution represented 29.1% of total revenues and revenues from
consumer products represented 1.7% of total revenues.
Gross profit as a percentage of revenue ("gross margin") was 25.0% for the three
months ended December 31, 1997 compared to 20.2% in the corresponding period in
the prior year. Gross margin was 23.4% for the nine months ended December 31,
1997 compared to 21.5% in the corresponding period in the prior year. These
increases in gross margin for the three and nine month periods ended December
31, 1997 were due primarily to the incurrence of certain unreimbursed project
costs at The Kinetics Group, Inc. ("Kinetics") during the three and nine months
ended December 31, 1996 after restatement for the acquisition of Kinetics in the
current period accounted for as a pooling of interests transaction (see below).
Selling, general and administrative expenses for the three months ended December
31, 1997 were $148.5 million before purchased in-process research and
development and merger, restructuring, acquisition and other related charges
described below ("non-recurring charges"), an increase of $67.0 million or 82.2%
from the $81.5 million for the three months ended December 31, 1996. During
this period, selling, general and administrative expenses (before non-recurring
charges) were 17.9% of revenues compared to 17.6% for the comparable period in
the prior year. For the nine months ended December 31, 1997, selling, general
and administrative expenses (before non-recurring charges) increased $217.7
million to $414.5 as compared to the $196.8 million, before merger expenses
described below, in the comparable period in the prior year. During this
period, selling, general and administrative expenses (before non-recurring
charges) were 17.7% of revenues compared to 18.0% (before merger expenses) for
the comparable period in the prior year.
On December 9, 1997, the Company acquired all of the outstanding shares of
Memtec Limited ("Memtec") in exchange for cash totaling $397.2 million
(including estimated transaction costs of $10.6 million). The Company acquired
from Memtec 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, as
determined by an independent appraiser, was $299.5 million and was expensed at
the acquisition date.
On December 31, 1997, the Company merged with and into Kinetics in a tax-free
reorganization, which was accounted for as a pooling of interests. Concurrent
with the merger with and into Kinetics and the acquisition of Memtec, the
Company designed and implemented a restructuring plan to streamline its
manufacturing and production base, improve efficiency and enhance its
competitiveness. The restructuring plan resulted in a pre-tax charge of $141.1
million during the three months ended December 31, 1997, including merger
expenses of $4.3 million to consummate the Kinetics transaction.
Merger expenses incurred during the nine months ended December 31, 1996 relate
to the Company's acquisition of Davis Water & Waste Industries, Inc. ("Davis")
which was accounted for as a pooling of interests. These merger expenses, which
totaled $5.6 million, consisted primarily of investment banking fees, printing
fees, stock transfer fees, accounting fees, legal fees, governmental filing fees
and certain other costs related to certain Davis pension plans and change of
control payments.
13
<PAGE>
Interest expense increased to $13.2 million for the three months ended December
31, 1997 from $6.5 million for the corresponding period in the prior year.
Interest expense increased to $34.4 million for the nine months ended December
31, 1997 from $15.9 million for the corresponding period in the prior year.
Interest expense for the three and nine months ended December 31, 1997 consisted
primarily of interest on the Company's (i) 6.0% Convertible Subordinated Notes
issued on September 18, 1995 due 2005, (ii) 4.5% Convertible Subordinated Notes
issued on December 11, 1996 due 2001, (iii) borrowings under Kinetics' long-term
line-of- credit, (iv) 8.0% Senior Subordinated Notes issued by Kinetics, (v)
borrowings under Memtec's long-term line-of- credit, (vi) Senior Guaranteed
Notes issued by Memtec bearing interest at rates ranging from 7.7% to 8.0%,
(vii) other long-term debt bearing interest at rates ranging from 2.0% to 9.2%
and (viii) borrowings under the Company's Senior Credit Facility. At December
31, 1997, the Company had cash and short-term investments of $58.7 million.
The Company recorded an income tax benefit of $18.9 million for the three months
ended December 31, 1997 as compared to income tax expense of $1.2 million in the
comparable period in the prior year. Before non-recurring charges, income tax
expense was $15.6 million, or an effective tax rate of 32.8% for the three
months ended December 31, 1997 as compared to 16.1% for the comparable period
in the prior year.
Net income before non-recurring charges for the three months ended December 31,
1997 was $32.0 million, an increase of $25.7 million from the $6.3 million for
the three months ended December 31, 1996. Net income before non-recurring
charges for the nine months ended December 31, 1997 was $68.8 million, an
increase of $49.0 million from the $19.8 million for the nine months ended
December 31, 1996. After non-recurring charges, net loss in the three months
ended December 31, 1997 was $374.1 million as compared to net income of $6.3
million in the corresponding period in the prior year. Net loss for the nine
months ended December 31, 1997 (after the non-recurring charges) was $337.3
million as compared to net income of $15.8 million in the corresponding period
in the prior year. Net income (loss) per common share for the three and nine
months ended December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
1996 1997 1996 1997
----- ----- ---- -----
<S> <C> <C> <C> <C>
Before non-recurring charges
Basic $0.10 0.32 0.34 0.75
===== ===== ==== =====
Diluted $0.09 0.31 0.32 0.73
===== ===== ==== =====
After non-recurring charges
Basic $0.10 (3.71) 0.27 (3.65)
===== ===== ==== =====
Diluted $0.09 (3.71) 0.26 (3.65)
===== ===== ==== =====
</TABLE>
Liquidity and Capital Resources
- -------------------------------
The Company's principal sources of funds are cash and other working capital,
cash flow generated from operations and borrowings under the Company's bank
line-of-credit. At December 31, 1997, the Company had working capital of $545.6
million including cash and short-term investments of $58.7 million. The
Company's long-term debt at December 31, 1997, was $554.0 million consisting of
$140.0 million of 6.0% Convertible Subordinated Notes due 2005 and $414.0
million of 4.5% Convertible Subordinated Notes due 2001. The Company also had
other long-term debt totaling $154.5 million consisting of (i) $18.3 million of
8.0% Senior Subordinated Notes issued by Kinetics, (ii) $60.0 million of Senior
Guaranteed Notes issued by Memtec bearing interest at rates ranging from 7.7% to
8.0% and (iii) other long-term debt of $76.2 million bearing interest at rates
ranging from 2.0% to 9.2%. Subsequent to December 31, 1997 substantially all of
Kinetics' debt (including borrowings on their revolving line-of-credit described
below) was repaid with borrowings under the Company's Senior Credit
Facility.
14
<PAGE>
As of December 31, 1997, the Company had a Senior Credit Facility which provides
credit facilities to the Company of up to $750.0 million, of which there were
outstanding borrowings of $419.1 million and outstanding letters of credit of
$40.5 million. Borrowings under the Senior Credit Facility bear interest at
variable rates of up to 0.45% above certain Eurocurrency rates or 0.15% above
BankBoston's base rate. The Senior Credit Facility is subject to customary and
usual terms.
In connection with the acquisitions of Kinetics and Memtec, the Company assumed
through its subsidiaries two additional loan agreements with banks. One
agreement provides a revolving line-of-credit with borrowings of up to $100.0
million, of which $33.8 million was outstanding at December 31, 1997. Borrowings
under this agreement bear interest at the bank's reference rate or other
interest rate options that the subsidiary may select. The other agreement is a
Multi-Option, Multi-Currency Master Facility that provides borrowings of up to
$60.0 million, of which $22.3 million was outstanding as of December 31, 1997.
Borrowings under this agreement bear interest at LIBOR plus 0.75%.
The Company believes its current cash position, cash flow from operations, and
available borrowings under the Company's line-of-credit will be adequate to meet
its anticipated cash needs from working capital, revenue growth, scheduled debt
repayment and capital investment objectives for at least the next twelve months.
15
<PAGE>
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
U.S. Private Securities Litigation Reform Act of 1995, the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company; any such statement is qualified by reference to the
following cautionary statements.
Acquisition Strategy In pursuit of its strategic objective of becoming the
leading global single-source provider of water and wastewater treatment systems
and services, the Company has, since 1991, acquired more than 125 United States
based and international businesses. The Company plans to continue to pursue
acquisitions that expand the segments of the water and wastewater treatment and
water-related industries in which it participates, complement its technologies,
products or services, broaden its customer base and geographic areas served
and/or expand its global distribution network, as well as acquisitions which
provide opportunities to further and implement the Company's one-stop-shop
approach in terms of technology, distribution or service. The Company's
acquisition strategy entails the potential risks inherent in assessing the
value, strengths, weaknesses, contingent or other liabilities and potential
profitability of acquisition candidates and in integrating the operations of
acquired companies. In addition, the Company's acquisition of approximately 96%
of the outstanding ordinary shares of Memtec was accomplished through a tender
offer, and the Company could make other acquisitions in the future by means of a
tender offer. The level of risk associated with such acquisitions is greater
because frequently they are accomplished, as was the case with the acquisition
of Memtec, without the customary representations or due diligence typical of
negotiated transactions. Although the Company generally has been successful in
pursuing acquisitions, there can be no assurance that acquisition opportunities
will continue to be available, that the Company will have access to the capital
required to finance potential acquisitions, that the Company will continue to
acquire businesses or that any business acquired will be integrated successfully
or prove profitable.
International Transactions The Company has made and expects it will continue
to make acquisitions and expects to obtain contracts in markets outside the
United States. While these activities may provide important opportunities for
the Company to offer its products and services internationally, they also entail
the risks associated with conducting business internationally, including the
risk of currency fluctuations, slower payment of invoices, the lack in some
jurisdictions of well-developed legal systems, nationalization and possible
social, political and economic instability. In particular, the Company has
significant operations in Asia, which will be adversely affected by current
economic conditions in that region. While the full impact of this economic
instability cannot be predicted, it could have a material adverse effect on the
Company's revenues and profitability.
Reliance On Key Personnel The Company's operations are dependent on the
continued efforts of senior management, in particular Richard J. Heckmann, the
Company's Chairman of the Board, President and Chief Executive Officer. The
Company does not presently have employment agreements with most members of
senior management, including Mr. Heckmann. Should any of the Company's senior
managers be unable or choose not to continue in their present roles, the
Company's prospects could be adversely affected.
Profitability Of Fixed Price Contracts A significant portion of the
Company's revenues are generated under fixed price contracts. To the extent
that original cost estimates are inaccurate, costs to complete increase,
delivery schedules are delayed or progress under a contract is otherwise
impeded, revenue recognition and profitability from a particular contract may be
adversely affected. The Company routinely records upward or downward
adjustments with respect to fixed price contracts due to changes in estimates of
costs to complete such contracts. There can be no assurance that future
downward adjustments will not be material.
16
<PAGE>
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 markets, could have a material adverse effect on
the Company's revenues and profitability.
The sale of water and wastewater distribution equipment and supplies is also
cyclical and influenced by various economic factors including interest rates,
land development and housing construction industry cycles. Sales of such
equipment and supplies are also subject to seasonal fluctuation in northern
climates. The sale of water and wastewater distribution equipment and supplies
is a significant component of the Company's business. Cyclicality and
seasonality of water and wastewater distribution equipment and supplies sales
could have a material adverse effect on the Company's revenues and
profitability.
The Company's high-purity process piping systems have been sold principally to
companies in the semiconductor and, to a lesser extent, pharmaceutical and
biotechnology industries, and sales of those systems are critically dependent on
these industries. The success of customers and potential customers for high-
purity process piping systems is linked to economic conditions in these
respective industries, which in turn are each subject to intense competitive
pressure and are affected by overall economic conditions. The semiconductor
industry in particular has historically been, and will likely continue to be,
cyclical in nature and vulnerable to general downturns in the economy. The
semiconductor and pharmaceutical industries also represent significant markets
for the Company's water and wastewater treatment systems. Downturns in these
industries could have a material adverse effect on the Company's revenues and
profitability.
Operating results from the sale of high-purity process piping systems also can
be expected to fluctuate significantly as a result of the limited pool of
existing and potential customers for these systems, the timing of new contracts,
possible deferrals or cancellations of existing contracts and the evolving and
unpredictable nature of the markets for high-purity process piping systems.
As a result of these and other factors, the Company's operating results may be
subject to quarterly or annual fluctuations. There can be no assurance that at
any given time the Company's operating results will meet or exceed stock market
analysts' expectations, in which event the market price of the Common Stock
could be adversely affected.
Potential Environmental Risks The Company's business and products may be
significantly influenced by the constantly changing body of environmental laws
and regulations, which require that certain environmental standards be met and
impose liability for the failure to comply with such standards. The Company is
also subject to inherent risks associated with environmental conditions at
facilities owned, and the state of compliance with environmental laws, by
businesses acquired by the Company. While the Company endeavors at each of its
facilities to assure compliance with environmental laws and regulations, there
can be no assurance that the Company's operations or activities, or historical
operations by others at the Company's locations, will not result in cleanup
obligations, civil or criminal enforcement actions or private actions that could
have a material adverse effect on the Company. In that regard, United States
federal and state environmental regulatory authorities have issued certain
notices of violation related to alleged multiple violations of applicable
wastewater pretreatment standards by a wholly owned subsidiary of the Company
(the "Subsidiary") at a Connecticut ion exchange resin regeneration facility
(the "South Windsor Facility") acquired by the Company in October 1995 from
Anjou International Company ("Anjou"). A grand jury investigation concerning
these conditions also is pending. The Subsidiary has reached a tentative
agreement with the United States Attorney's Office and the United States
Environmental Protection Agency ("USEPA") to plead guilty to a single violation
of the United States Clean Air Act, pursuant to which the Subsidiary would pay a
fine and the South Windsor Facility would undergo annual environmental
compliance audits by the USEPA for five years. The Company believes that this
settlement would conclude these matters in their entirety; however, there can be
no assurance that this settlement will become final, and it is not expected that
it
17
<PAGE>
would include a formal release of all liabilities in this regard. As a
consequence of such a settlement, the Subsidiary would be debarred from United
States government contracts for a period of time that the Company currently
expects to be brief. The Company does not believe that the debarment would have
a material adverse effect on the Subsidiary or the Company. The Company has
certain rights of indemnification from Anjou which may be available with respect
to these matters. In addition, the Company's activities as owner and operator of
certain hazardous waste treatment and recovery facilities are subject to
stringent laws and regulations and compliance reviews. Failure of these
facilities to comply with those regulations could result in substantial fines
and the suspension or revocation of the facility's hazardous waste permit. The
Company serves as contract operator of various municipal and industrial
wastewater collection and treatment facilities, which were developed and are
owned by governmental or private entities. Under those service contracts and
applicable environmental laws, the Company as operator may incur liabilities in
the event those facilities experience malfunctions or discharge wastewaters
which do not meet applicable permit limits and regulatory requirements. In some
cases, the potential for such liabilities depends upon design or operational
conditions over which the Company has limited, if any, control. In other
matters, the Company has been notified by the United States Environmental
Protection Agency that it is a potentially responsible party under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA") at certain sites to which the Company or its predecessors allegedly
sent waste in the past. It is possible that the Company could receive other such
notices under CERCLA or analogous state laws in the future. The Company does not
believe that its liability, if any, relating to such matters will be material.
However, there can be no assurance that such matters will not be material. In
addition, to some extent, the liabilities and risks imposed by environmental
laws on the Company's customers may adversely impact demand for certain of the
Company's products or services or impose greater liabilities and risks on the
Company, which could also have an adverse effect on the Company's competitive
and financial position.
Competition All of the markets in which the Company competes are highly
competitive, and most are fragmented, with numerous regional and local
participants. There are competitors of the Company in certain markets that are
divisions or subsidiaries of companies that have significantly greater resources
than the Company. The Company's process water treatment business competes in
the United States and internationally principally on the basis of product
quality and specifications, technology, reliability, price, customized design
and technical qualifications, reputation and prompt availability of local
service. The Company's wastewater treatment business competes in the United
States and internationally largely on the basis of the same factors, except that
pricing considerations can be predominant among competitors that have sufficient
technical qualifications, particularly in the municipal contract bid process.
In connection with the marketing of waterworks distribution equipment and
supplies, the Company competes not only with a large number of independent
wholesalers and with other distribution chains similar to the Company, but also
with manufacturers who sell directly to customers. The principal methods of
competition for the Company's waterworks distribution business include prompt
local service capability, product knowledge by the sales force and branch
management, and price. The Company's consumer products business competes with
companies with national distribution networks, businesses with regional scope
and local product assemblers or service companies, as well as retail outlets.
The Company believes that there are thousands of participants in the residential
water market. The consumer products business competes principally on the basis
of price, product quality and "taste," service, distribution capabilities,
geographic presence and reputation. Competitive pressures, including those
described above, and other factors could cause the Company to lose market share
or could result in significant price erosion, either of which could have a
material adverse effect upon the Company's financial position, results of
operations and cash flows.
Potential Risks Related To Water Rights And Water Transfers The Company
recently acquired more than 47,000 acres of agricultural land (the
"Properties"), situated in the Southwestern United States, the substantial
majority of which are in Imperial County, California (the "IID Properties")
located within the Imperial Irrigation District (the "IID"). Substantially all
of the Properties are currently leased to third party agricultural tenants,
including prior owners of the Properties. The Company acquired the Properties
with appurtenant water rights, and is actively seeking to acquire additional
properties with water rights, primarily in the Southwestern and Western United
States. The Company may seek in the future to transfer water attributable to
water rights appurtenant to the Properties, particularly the IID Properties (the
"IID Water"). However, since
18
<PAGE>
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 United States federal, state
and local laws, regulations and policies. Transfers of IID Water attributable to
water rights appurtenant to the IID Properties (the "IID Water Rights") are
subject to additional uncertainties. Allocations of Colorado River water, which
is the source of all water deliveries to the IID Properties, are subject to
limitations under complex international treaties, interstate compacts, United
States federal and state laws and regulations, and contractual arrangements and,
in times of drought, water deliveries could be curtailed by the United States
government. Further, any transfers of IID Water would require the approval of
the United States Secretary of the Interior. Even if a transfer were approved,
other California water districts and users could assert claims adverse to the
IID Water Rights, including but not limited to claims that the IID has failed to
satisfy United States federal law and California constitutional requirements
that IID Water must be put to reasonable and beneficial use. A finding that the
IID's water use is unreasonable or nonbeneficial could adversely impact title to
IID Water Rights and the ability to transfer IID Water. Water transferred by the
IID to metropolitan areas of Southern California, such as San Diego, would be
transported through aqueducts owned or controlled by the Metropolitan Water
District, a quasi-governmental agency (the "MWD"). The transportation cost for
any transfer of IID Water and the volume of water which the MWD can be required
to transport at any time are subject to California laws of uncertain
application, some aspects of which are currently in litigation. The
uncertainties associated with water rights could have a material adverse effect
on the Company's profitability.
Technological And Regulatory Risks The water and wastewater treatment
business is characterized by changing technology, competitively imposed process
standards and regulatory requirements, each of which influences the demand for
the Company's products and services. Changes in regulatory or industrial
requirements may render certain of the Company's treatment products and
processes obsolete. Acceptance of new products may also be affected by the
adoption of new government regulations requiring stricter standards. The
Company's ability to anticipate changes in technological and regulatory
standards and to develop successfully and introduce new and enhanced products on
a timely basis will be a significant factor in the Company's ability to grow and
to remain competitive. There can be no assurance that the Company will be able
to achieve the technological advances that may be necessary for it to remain
competitive or that certain of its products will not become obsolete. In
addition, the Company is subject to the risks generally associated with new
product introductions and applications, including lack of market acceptance,
delays in development or failure of products to operate properly.
There can be no assurance that the Company's existing or any future trademarks
or patents will be enforceable or will provide substantial protection from
competition or be of commercial benefit to the Company. In addition, the laws
of certain non-United States countries may not protect proprietary rights to the
same extent as do the laws of the United States. Successful challenges to
certain of the Company's patents or trademarks could materially adversely affect
its competitive and financial position.
Municipal Market A significant percentage of the Company's revenues is
derived from municipal customers. While municipalities represent an important
market in the water and wastewater treatment industry, contractor selection
processes and funding for projects in the municipal sector entail certain
additional risks not typically encountered with industrial customers.
Competition for selection of a municipal contractor typically occurs through a
formal bidding process which can require the commitment of significant resources
and greater lead times than industrial projects. In addition, demand in the
municipal market is dependent upon the availability of funding at the local
level, which may be the subject of increasing pressure as local governments are
expected to bear a greater share of the cost of public services.
19
<PAGE>
Year 2000 Risks The 'Year 2000' issue concerns the potential exposures
related to the automated generation of business and financial misinformation
resulting from the application of computer programs which have been written
using two digits, rather than four, to define the applicable year of business
transactions. Most of the Company's operating systems with Year 2000 issues
have been modified to address those issues; accordingly, management does not
anticipate any significant costs, problems or uncertainties associated with
becoming Year 2000 compliant. The Company is currently developing a plan to
assure that its other internal operating systems with Year 2000 issues are
modified on a timely basis. Suppliers, customers and creditors of the Company
also face similar Year 2000 issues. A failure to successfully address the Year
2000 issue could have a material adverse effect on the Company's business or
results of operations.
Impact of Recently Issued Accounting Standards.
In June 1997, the Financial Accounting Standards Board issued a new statement
titled "Reporting Comprehensive Income." The new statement is effective for
fiscal years beginning after December 15, 1997. The Company is currently
evaluating its options for disclosure under this new standard and will implement
the statement during its fiscal year ending March 31, 1999.
In June 1997, The Financial Accounting Standards Board issued a new statement
titled "Disclosures about Segments of an Enterprise and Related Information."
The new statement is effective for fiscal years beginning after December 15,
1997. The Company is currently evaluating its options for disclosure under this
standard and will implement the statement during its fiscal year ending March
31, 1999.
20
<PAGE>
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
N/A
Item 2. CHANGES IN SECURITIES
Privately Placed Securities
Effective December 31, 1997, the Company issued 5,803,803 shares (the "Shares")
of its common stock, par value $.01 per share (the "Common Stock"), to: The
Bianco Family 1991 Trust, dated February 1, 1991; David J. Shimmon; BT Capital
Partners Inc.; Churchill ESOP Capital Partners; D&S Partners; Silicon Valley
Bancshares; L.H. Fine, Weinress, Franskson & Presson, Inc.; Gregory Presson; in
a tax-free merger pursuant to which the Company acquired all of the outstanding
capital stock of The Kinetics Group, Inc., a Delaware Corporation. Such shares
were issued in a transaction exempt from registration pursuant to Section 4(2)
of the United States Securities Act of 1933, as amended. Pursuant to an
agreement between the parties, such shares were subsequently filed for
registration for resale pursuant to a Registration Statement on Form S-3
(Registration No. 333-45981).
Item 3. DEFAULTS UPON SENIOR SECURITIES
N/A
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
N/A
Item 5. OTHER INFORMATION
On February 9, 1998, the Company announced it had entered into an Agreement and
Plan of Merger (the "Merger Agreement") dated as of February 9, 1998, among the
Company, Palm Water Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of the Company ("Merger Sub"), and Culligan Water Technologies, Inc.,
a Delaware corporation. Pursuant to the Merger Agreement, Merger Sub will be
merged with and into Culligan (the "Merger"). In connection with the Merger, the
Company will issue in exchange for each issued and outstanding share (other than
treasury shares and shares owned by the Company) of Culligan common stock, par
value $.01 per share 1.714 shares of common stock, par value $.01 per share of
the Company pursuant to formula.
The Merger will be accounted for as a pooling of interests and is intended to
qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended. Consummation of the Merger is subject to
customary regulatory approvals and the approval of the stockholders of each of
the Company and Culligan. The Merger is expected to be consummated in the first
half of fiscal 1999.
21
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
The following exhibits are filed herewith or incorporated herein by reference:
10.1 Employment Agreement between Thierry Reyners and USF Euroholding, S.A.,
a wholly-owned subsidiary of the Company
27.0 Financial Data Schedule
Reports on Form 8-K
The Company filed one Current Report on Form 8-K during the quarter ended
December 31, 1997, dated December 9, 1997, reporting the consummation of the
Company's tender offer to purchase all of the outstanding ordinary shares
(including American Depository Shares, each representing one ordinary share) of
Memtec Limited.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED STATES FILTER CORPORATION
By: /s/ Kevin L. Spence
_________________________________
Dated: February 13, 1998 Kevin L. Spence
Executive Vice President, Chief Financial
Officer
(Principal Financial Officer and
Duly Authorized Officer)
23
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
- ------- ----------- -----------
10.1 Employment Agreement between Thierry Reyners
and USF Euroholding, S.A., a wholly-owned
subsidiary of the Company
27.0 Financial Data Schedule
24
<PAGE>
EXHIBIT 10.1
In Madrid, on the 19 day of September, 1997.
BY AND BETWEEN:
--------------
THE FIRST PARTY: MR. JOSE LUIS DE LA GUARDIA, of legal age, holding Spanish
---------------
nationality whose marital status is married, and profession is Lawyer, with
professional address in 28036 Madrid, Avda. Burgos, n/degrees/ 12, and National
Identification Number 1397768; and,
THE SECOND PARTY: MR. THIERRY REYNERS, of legal age, holding French
----------------
nationality, whose marital status is married, and profession is Executive, with
professional address in 28036 Madrid, Avenida Burgos, n/degrees/ 12, and
Residence Permit Number X-339491-B.
ACTING:
------
The first party in the name and on behalf of USF EUROHOLDING, S.A., with
registered offices in 28036 Madrid, Avenida Burgos, 12 (hereinafter "the
COMPANY").
The second party (hereinafter "the HIREE"), on his own behalf and right,
who expressly admits that the contents of this document are an integral part of
his employment contract with the COMPANY and undertakes, based on the principle
of contractual trust, to loyally respect all that is determined below.
WHEREAS:
-------
It is the wish of both parties to regulate the terms and conditions by
which the position of General Manager carried out by the HIREE is governed.
Therefore, by virtue of the above, the parties, hereby mutually
acknowledging the legal capacity necessary for engaging and entering into
agreements and especially for conferring this deed, agree to regulate their
reciprocal benefits, pursuant to the provisions of Royal Decree 1382/1985 and
the following:
<PAGE>
2
STIPULATIONS:
------------
ONE - APPOINTMENT AND DURATION
-----------------------------
The HIREE is an employee of the COMPANY in the capacity of General Manager,
a position he has held since 1 January 1981.
This employment contract is for an indefinite period. Should the HIREE
wish to terminate it at any moment in the duration thereof, he is obliged to
give notice to the COMPANY a minimum of six months in advance, being held
answerable to any damages brought about by non-fulfilment of this covenant.
TWO - OBLIGATIONS AND DUTIES
---------------------------
The HIREE exercise the powers and faculties corresponding to the position
he holds, and in accordance with the rules and regulations in force for said
entity.
For the duration of this contract, and without prejudice to the obligations
and responsibilities inherent to the office of General Manager of the COMPANY
that the HIREE holds, the latter must:
a) Spend the time and attention necessary for his duties to the COMPANY,
serving it loyally to the best of his expertise and experience, and make the
best effort possible to foster the interests and appropriate development of the
COMPANY.
b) Attend to and fulfil all reasonable demands of the COMPANY's
administrative bodies. In this respect he is obliged to furnish adequate
explanations, information and assistance whenever requested as relates to his
duties and activities with the COMPANY.
c) Not commit to other activities that may be detrimental or damaging to
the adequate execution of the obligations contracted hereby.
d) Not carry out any work other than the object of this contract nor work
as the Manager or Executive of any firm other than the COMPANY, without the
express authorization of the COMPANY's Board of Directors.
<PAGE>
3
e) Inform the COMPANY's Board of Directors of any remuneration he receives
directly or indirectly as a result of any commitment or opportunity arising by
virtue of the position he holds in the COMPANY.
f) The holding of any position or office in any subsidiaries or companies
in which the COMPANY has a stake shall be exempted from the prohibitions covered
under paragraphs d) and e) above.
g) With the purposes envisaged in Spanish Legislation, he expressly
accepts his full, exclusive commitment to the COMPANY for the period that his
employment contract with said COMPANY is in force. The remuneration he receives
from the COMPANY offsets the obligation provided for in the above paragraph,
since it is hereby expressly agreed that any compensation to which he is
entitled is covered by said remuneration.
THREE - REMUNERATION AND REIMBURSEMENT FOR EXPENSES
----------------------------------------------------
1. As remuneration for his services, the HIREE shall receive, by means of
monthly payments on the last day of each month, an annual salary of 13,218,866
pesetas, subject to revision on the 1st day of April of each year.
This remuneration shall be paid in 14 monthly payments per year,
corresponding to the 12 calendar months plus two extraordinary payments.
2. The gross annual salary received at any given moment by the HIREE shall
offset and absorb any amounts to which he is entitled by virtue of application
of any legal, regulatory or conventional regulations in force, and payment of
any taxes, social contributions or similar items required shall be deducted
therefrom.
3. Moreover, the HIREE shall be reimbursed for any business or travel
expenses arising from the fulfilment of his obligations to the COMPANY. Such
expenses must be adequately justified.
FOUR - SCHOOLING EXPENSES
------------------------
The COMPANY shall reimburse the HIREE for the schooling expenses of NICOLAS
REYNERS up to a maximum amount of 300,000 pesetas per year.
<PAGE>
4
FIVE - INSURANCE COVERAGE
-------------------------
For reasons of his position, the COMPANY shall provide the HIREE with
insurance coverage for accidents, as well as life insurance for an amount
equivalent to four times the latest salary earned.
In addition, the COMPANY shall provide the HIREE with family medical
coverage through a policy taken out with La Estrella insurance company, with the
adequate coverage limits.
The COMPANY shall take out an insurance policy to cover the risks of the
HIREE in any travel he undertakes in carrying out his activities for the
COMPANY, without prejudice to the Social Security benefits to which he is
entitled.
The HIREE has a share in the Personal Pension Plan that the COMPANY has
with the company Commercial Union.
SIX - HOLIDAYS
--------------
The HIREE shall be entitled to 30 working days of paid holidays annually,
as well as any holidays set by the competent authorities.
The HIREE shall take his annual holidays in accordance with the practice of
his profession and the service needs of the COMPANY.
SEVEN - TRAVEL/COMMUTES
-----------------------
The COMPANY shall place at the disposal of the HIREE a company-owned
vehicle, the market price and characteristics of which shall be in line with the
COMPANY's established internal policy in this regard, which HIREE should use for
travel/commuting purposes.
EIGHT - CONFIDENTIALITY AND TRADE SECRET
----------------------------------------
For the duration of this contract, the HIREE, except in carrying out his
duties or when beneficial to the COMPANY, may not reveal to any other person or
company, either in Spain or outside the country, any information concerning any
matters, business, finances, trade contracts, clients or other
<PAGE>
5
subjects relating to the COMPANY without the express authorization thereof, and
must use any means necessary to avoid publicity regarding said secrets,
knowledge or information.
Both for the duration of his contract with the COMPANY and once said
contract has been discharged, he shall keep in strictest confidence the
characteristics and peculiarities of the operations and business of the COMPANY
in anything relating to confidential information, that is, any information that
is not common knowledge outside the COMPANY, whatever the subject matter.
The obligation to maintain trade secrets means that he shall not make use
of any information concerning the transactions or potential transactions of the
COMPANY and shall not reveal to anyone, without COMPANY authorization, any
information or trade or confidential secret as regards the COMPANY's activities,
nor facilitate any information whatsoever as regards inventions, research,
business plans or market research made or undertaken by or for the COMPANY.
In any event, he is obliged to leave at the COMPANY's disposal any
documentation, samples, material, drawings or plans concerning said COMPANY's
activities that he has in his possession at the time of his termination from the
COMPANY.
Any infringement of the obligation to maintain trade secrets as set out
herein shall constitute just cause for dismissal, with the COMPANY being
entitled to claims for any damages incurred, if it so deems.
NINE - NON-COMPETITION
----------------------
Once the present employment contract has been discharged and for a period
of two (2) years, the HIREE may not carry out any activity whatsoever involving
competition with the COMPANY which, in compensation, shall pay him on a monthly
basis for the duration of said period an amount equivalent to 60% of the latest
monthly salary in cash he was earning before termination of the contract.
Non-fulfilment of the provisions of the above paragraph of this stipulation
on the part of the HIREE shall make him liable under the legislation in force,
whether said liability is of a civil, criminal, labour, commercial or any other
nature, and above all shall make him answerable to reimbursing to the
<PAGE>
6
COMPANY any amounts received as referred to in the above paragraph, as well as
to paying any claims for damages.
TEN - ALTERATIONS TO CONTRACT
-----------------------------
Any type of modification that must be made regarding the clauses of this
contract shall be formalized in writing.
ELEVEN - BREACH
---------------
He admits that breach of the terms and conditions of this employment
contract with the COMPANY involves commitment of a breach of trust and,
therefore, is just cause for termination of said contract, without prejudice to
any actions the COMPANY may file in claims for damages.
TWELVE - DISCHARGE OF CONTRACT AT WORKER'S BEHEST
-------------------------------------------------
HIREE may discharge the present contract with the right to receive any
indemnity payments agreed to in Stipulation Thirteen for cases of discharge due
to abandonment of the COMPANY or due to dismissal declared wrongful or null,
under the following grounds:
a) Substantial changes in working conditions having a negative bearing on
the HIREE'S professional training, or that are detrimental to his dignity, or
that are made in serious breach of trust on the part of the COMPANY.
b) Non-payment or continued delay in payment of the amounts of compensation
agreed to.
c) Succession of the company or any important change in the ownership of
the COMPANY'S shareholders the effect of which would change or replace its
governing bodies, or in the content and approach of the COMPANY'S principal
activities. If discharge of the employment contract at behest of the HIREE is
due exclusively to the reasons covered in this paragraph, the COMPANY must pay
HIREE an amount equivalent to 24 monthly payments of the latest cash salary he
had been earning as indemnity payment.
d) Any other serious breach of contract on the part of the COMPANY.
<PAGE>
7
THIRTEEN - DISCHARGE OF CONTRACT AT EMPLOYER'S BEHEST
-----------------------------------------------------
The COMPANY may discharge this contract by abandonment or by means of
dismissal based on serious, willful breach of contract by the HIREE, according
to the provisions of Article 11 of Royal Decree 1382/1985. With six months'
advance notice in such a case.
In the cases referred to in the above paragraph, the COMPANY shall pay
the HIREE an amount equivalent to 6 months' payment of the latest cash salary
the HIREE had been earning as indemnity payment, except in the case of dismissal
declared as fitting by the competent jurisdiction.
FOURTEEN - RETURN OF COMPANY DOCUMENTS
--------------------------------------
Following discharge of the present contract, the HIREE must return to
the COMPANY any correspondence, documents, reports, files or any other property
belonging to the COMPANY and any copies thereof that were in his possession or
under his control, since, in any event, such material is the exclusive property
of the COMPANY and the HIREE renounces any right he may have due to the
temporary possession or control of said information or objects.
FIFTEEN - APPLICABLE LEGISLATION AND JURISDICTION
-------------------------------------------------
For any matter not covered herein, the parties shall abide by the
provisions of any applicable legal, regulatory or conventional regulations in
force, and expressly agree that for any matters arising or actions brought
regarding the interpretation, fulfilment or breach of the agreements made
hereby, they shall submit to the jurisdiction of the Courts and Tribunals of
Madrid, expressly waiving any other jurisdiction to which they may be entitled.
In witness whereof, the parties hereby express their agreement and
consent and execute, and for the record and purposes set out in law, sign the
present contract in triplicate in the place and on the date indicated above.
THE COMPANY THE HIREE
[SIGNATURE ILLEGIBLE] [SIGNATURE ILLEGIBLE]
<TABLE> <S> <C>
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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STATES FILTER CORPORATION AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-START> OCT-01-1997 APR-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
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<SECURITIES> 904 0
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<INTEREST-EXPENSE> 13,198 34,374
<INCOME-PRETAX> (392,977) (338,574)
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<INCOME-CONTINUING> (374,095) (337,301)
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<NET-INCOME> (374,095) (337,301)
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