UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1999
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: 1-7211
IONICS, INCORPORATED
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2068530
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
65 Grove Street, Watertown, Massachusetts 02472
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 926-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Common Stock, $1 par value
Name of each exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
<PAGE>
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing. The aggregate market value of the
Common Stock of the registrant held by non-affiliates as of March 17, 2000 was
$417,918,073 (15,845,235 shares at $26 3/8 per share) (includes shares owned by
a trust for the indirect benefit of a non-employee director, and by a trust
for the indirect benefit of a spouse of a non-employee director).
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. As of March 17, 2000,
16,228,620 shares of Common Stock, $1 par value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Annual
Report to Stockholders. Parts I, II
(for Item 201 information) and IV
Portions of the Definitive Proxy
Statement for the Annual Meeting
of Stockholders to be held on
May 2, 2000 Part III
<PAGE>
PART I
Statements in this Annual Report on Form 10-K which are not historical
facts, so-called "forward looking statements," are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned that all forward-looking statements involve risks and
uncertainties, including those detailed in the Company's filings with the
Securities and Exchange Commission.
ITEM 1. BUSINESS
Ionics, Incorporated ("Ionics," or the "Company") is a leading water
purification company engaged worldwide in the supply of water and of water
treatment equipment through the use of proprietary separations technologies and
systems. Ionics' products and services are used by the Company or its customers
to desalt brackish water and seawater, to purify and supply bottled water, to
treat water in the home, to manufacture and supply water treatment chemicals and
ultrapure water, to process food products, recycle and reclaim process water and
wastewater, and to measure levels of waterborne contaminants and pollutants. The
Company's customers include industrial companies, consumers, municipalities and
other governmental entities, and utilities. Unless the context indicates
otherwise, the terms "Ionics" and "Company" as used herein includes Ionics,
Incorporated and all its subsidiaries.
The Company's business activities are now reported in four business
group segments. This segmentation reflects a change from three reportable
segments which the Company provided in periods prior to 1998. The current
reporting reflects the business group structure which the Company put into place
in the latter part of 1998. The business group structure is based upon defined
areas of management responsibility with respect to markets, applications and
products. These business group segments are the Equipment Business Group,
Ultrapure Water Group, Consumer Water Group, and Instrument Business Group. In
1999, these segments accounted for approximately 39%, 26%, 27% and 8%,
respectively, of the Company's total revenues. Approximately 44% of the
Company's 1999 revenues were derived from foreign sales or operations.
Over fifty years ago, the Company pioneered the development of the
ion-exchange membrane and the electrodialysis process. Since that time, the
Company has expanded its separations technology base to include a number of
membrane and non-membrane-based separations processes which the Company refers
to as The Ionics Toolbox(R). These separations processes include electrodialysis
reversal (EDR), reverse osmosis (RO), ultrafiltration (UF), microfiltration
(MF), electrodeionization (EDI), electrolysis, ion exchange, carbon adsorption,
and thermal processes such as evaporation and crystallization, as well as
solvent extraction and recovery processes. The Company believes that it is the
world's leading manufacturer of ion-exchange membranes and of membrane-based
systems for the desalination of water.
The Company was incorporated in Massachusetts in 1948. The Company's
principal executive offices are located at 65 Grove Street, Watertown,
Massachusetts 02472.
Financial Information About Business Segments
The information contained in Note 15 of Notes to Consolidated Financial
Statements contained in the Company's Annual Report to Stockholders for the year
ended December 31, 1999 is incorporated herein by reference.
Equipment Business Group
The Equipment Business Group accounted for approximately 39% of
revenues in 1999. This segment provides technologies, treatment systems and
services for seawater desalination, brackish water desalination, wastewater
reuse and recycle, potable water and high purity water. In addition, this
segment includes the Company's custom fabrication activities and food and
chemical processing activities.
<PAGE>
Desalination and Related Water Treatment Equipment
Opportunities for the sale of desalination and related water treatment
equipment arise from changes in the needs of people and municipalities, from
industrial shifts and growth, and from environmental concerns. With less than 1%
of the total water on the planet fresh and usable, desalination has played an
important role in creating new water sources.
The Company sells a wide spectrum of products and systems to serve this
market which utilize technologies including EDR, ion exchange, EDI, RO, UF,
ozonation and carbon adsorption. Depending on the customers' needs, the Company
provides standardized versions of systems utilizing one or more of the
technologies mentioned, or can supply complete turnkey plants that may include
standardized models as well as peripheral water treatment equipment, complete
engineering services, process and equipment design, project engineering,
commissioning, operator training and field service.
Wastewater Treatment Equipment
The market for wastewater treatment, recycle and reuse has shown
significant growth as world demand for water of specified quality continues to
increase and as regulations limiting waste discharges to the environment
continue to mount. The wastewater market is increasingly driven by the concept
of total water management, which involves the recognition that the water streams
which enter, leave or become part of a process can be managed to achieve overall
economic efficiencies. Ionics services the wastewater market with proprietary
brine concentrators and crystallizers, traditional wastewater treatment
equipment, and special EDR membrane-based concentrators for recycle and reuse.
The Company designs, engineers and constructs brine concentrators,
evaporators and crystallizers which are used to clean, recover and recycle
wastewater, particularly in "zero liquid discharge" industrial uses. Such
systems may also incorporate EDR membrane systems as preconcentrators. Ionics
also holds a license for a patented solvent extraction technology which
separates contaminated sludges, sediments and soils into oil, water and solids.
This technology has potential use for cleanup of toxic organic materials at
contaminated sites.
Ionics also designs, engineers and constructs customized systems for
industrial wastewater customers which may include conventional treatment systems
as well as advanced separation technologies such as EDR, RO, electrolysis and
MF. Typical industrial customers are power stations, chemical and petrochemical
plants, metal-working and automobile factories, textile manufacturers and a
variety of other industrial applications. The Company also provides custom and
packaged sewage treatment systems for municipalities. In 1999, the Company
received a contract for a large RO treatment system from the City of Corona,
California to assist the City in meeting stringent wastewater discharge
requirements.
Drinking Water Supply
Ionics' position as a seller of purified or treated water has evolved
from its traditional role as a supplier of water treatment equipment. In certain
situations, opportunities are available for the Company to provide a complete
service package involving financing, construction, operation and maintenance of
water treatment facilities.
Ionics, through its wholly owned subsidiary, Ionics Iberica, S.A., owns
and operates a 5.5 million gallon per day capacity brackish water EDR facility
and a 3.6 million gallon per day RO seawater facility on Grand Canary Island,
Spain. Under long-term contracts, the Company is selling the desalted water from
both facilities to the local water utility for distribution.
The Company's wholly owned subsidiary, Ionics (Bermuda) Ltd., owns and
operates a 600,000 gallon per day EDR brackish water desalting plant on the
island of Bermuda. This plant supplies fresh water under a long-term contract
with Watlington Waterworks Ltd., a Bermuda corporation partially owned by
Ionics.
<PAGE>
In September 1999, the Company announced that a $120 million Trinidad
seawater desalination project contract had been awarded to a Trinidad project
company established in furtherance of a joint venture between the Company and a
Trinidadian entity. Project financing has not yet been obtained for this
project. If project financing upon acceptable terms is obtained, the Company
through a local subsidiary will execute an engineering, procurement and
construction contract awarded to it.
Through its Ionics Aqua Design subsidiaries, the Company owns and
operates more than 30 desalination plants on a number of Caribbean islands,
which provide drinking water to hotels, resorts and governmental entities.
Drinking water on these islands is usually supplied pursuant to water supply
contracts with terms ranging from five to ten years. In 1999, the Company
engaged in construction of desalination facilities in Bonaire and Barbados
pursuant to contracts awarded in 1998. The Barbados facility, which is owned and
operated by a Barbados affiliate controlled by the Company, started
up in the first quarter of 2000, and is the largest brackish water desalination
facility in the Caribbean. Under an agreement with the Barbados Water Authority,
the controlled affiliate will supply water over a 15-year term. Also in 1999,
the Company signed a water supply agreement with the government-owned public
utility in Curacao for the expansion of an existing seawater desalination plant
owned and operated by the Company, and started up a seawater desalination
facility on Anguilla.
Chemical Supply
The Company uses its Cloromat(R) electrolytic membrane-based technology
to produce sodium hypochlorite and related chlor-alkali chemicals for
industrial, commercial and other non-consumer applications. The Company's wholly
owned Australian subsidiary, Elite Chemicals Pty. Ltd. (Elite), utilizes
Cloromat systems to produce sodium hypochlorite on-site in Brisbane for the
industrial, commercial and janitorial supply of bleach products, and to supply
sodium hypochlorite to treat the City of Brisbane's drinking water supply. Elite
has recently expanded its distribution of bleach products to the Sydney area.
Food Processing
Under an agreement with a major U.S. dairy cooperative, the Company
oversees whey processing activities at two plants owned by the cooperative, and
receives a processing fee based on the production of demineralized whey for its
services. Included in the equipment being utilized by the Company at these
plants are its Electromat(R) electrodialysis systems.
Custom Fabricated Products
At its Bridgeville, Pennsylvania facility, the Company fabricates
specially designed products for industrial and defense-related applications. The
Company's experience and expertise in design, welding, machining and assembly to
meet exceptionally fine tolerances have been utilized to fabricate products
ranging from intricate small parts to large multi-ton assemblies. In 1999, the
Company received a first-stage contract for the fabrication of storage systems
to contain spent nuclear fuel at a decommissioned U.S. nuclear energy plant.
Ultrapure Water Group
The Ultrapure Water Group accounted for approximately 26% of the
Company's 1999 revenues. This segment provides equipment and services for
specialized industrial users of ultrapure water, such as companies in the life
sciences, microelectronics and power industries. Ultrapure water is water that
has been purified by a series of processes to the degree that remaining
impurities are measured in parts per billion or trillion.
Ultrapure Water Equipment
The demand for technologically advanced ultrapure water equipment and
systems has increased as the industries which use ultrapure water have become
more knowledgeable about their quality requirements. Ultrapure water needs are
particularly important in the semiconductor, pharmaceutical, petroleum and power
generation industries. The semiconductor industry in particular has increasingly
demanded higher purity water as the circuits on silicon wafers have become more
densely packed.
<PAGE>
The Company supplies sophisticated ultrapure water systems which
utilize a combination of ion-exchange, EDI, RO and UF technologies. These
systems are either trailer-mounted or land-based and vary from standardized
modules to large multimillion dollar systems, depending on the customer's
requirements. In 1998, the Company was awarded an order for an ultrapure water
system utilizing the Company's EDI technology to be located in Beijing, the
first such installation in China. This facility started up in 1999. Also in
1999, the Company received a contract for an ultrapure water system for a new
semiconductor facility in Singapore.
Included in the equipment sold by the Ultrapure Water Group is the
Company's Ozgen(R) ozone-generation equipment, which is being utilized by
semiconductor plants as well as for swimming pool and aquarium disinfection.
The Company established the Ionics Life Sciences division at the
beginning of 1999 to expand its delivery of ultrapure water equipment and
services to the pharmaceutical and biotechnology industries.
Ultrapure Water Supply
In industries such as power generation, semiconductors, pharmaceuticals
and biotechnology, ultrapure water is critical to product quality and yield.
Depending on the composition and quantity of the impurities to be removed or
treated, any one of several membrane separations methods can be utilized to
provide ultrapure water to the customer. Ionics has pioneered in the application
of three membrane technologies (EDR, RO and UF) combined together in a mobile
system called the "triple membrane" trailer (TMT) for use in the commercial
processing of ultrapure water. Ionics provides ultrapure water services and
the production and sale of ultrapure water from trailer-mounted units at
customer sites.
The Company's EDI technology is becoming increasingly utilized in the
production of ultrapure water. EDI is a continuous, electrically driven,
membrane-based water purification process which produces ultrapure water without
the use of strong chemical regenerants, such as sulfuric acid and caustic soda,
which are commonly required. The Company's TMT-II trailers utilize a combination
of EDI, RO and UF technologies and represent what the Company believes to be the
most advanced technology used in the commercial processing of ultrapure water.
At the end of 1999, Company-owned or operated equipment for the
production of ultrapure water and other purified process water under contract
with companies in various industries had a total capacity of approximately
25,000 gallons per minute.
The Company has been expanding its ultrapure water activities into the
Asian market. In November 1997, the Company acquired a majority interest in a
Malaysian company, now called Ionics Enersave Engineering Sdn Bhd, which
provides ultrapure water services and systems to the southeast Asian and China
markets. The Company established an ultrapure water sales, service and
regeneration facility in Singapore in 1998, and opened an office in Taiwan in
1999.
One of the Company's important ultrapure water service activities is
ion-exchange regeneration services, which are provided at four U.S. and four
overseas locations. In addition to commissioning the Singapore facility in 1998,
the Company began operations in 1999 at a 66,000 square foot building in San
Jose, California which contains resin regeneration, manufacturing and service
facilities. The Company also provides system sanitization and high-flow
deionization services at customer sites.
Consumer Water Group
This business group segment accounted for approximately 27% of the
Company's 1999 revenues. The Company's consumer water products serve the bottled
water, home water purification, and consumer bleach-based product market areas.
<PAGE>
Aqua Cool(R) Pure Bottled Water
Ionics entered the bottled water business in 1984. The Company's
strategy is to utilize its proprietary desalination and purification technology
to produce a brand of drinking water, Aqua Cool(R) Pure Bottled Water, which can
be reproduced with uniform consistency and high quality at numerous locations
around the world. Distribution operations have been established at eight
Company-owned locations throughout England; at 18 Company-owned locations
serving a number of metropolitan areas in the eastern, southeastern and central
United States; and, through joint ventures, in Bahrain, Kuwait and Saudi Arabia.
The Company's business focuses on the sale of Aqua Cool in five-gallon bottles
to a variety of commercial and residential customers. The Company has recently
expanded its product-line to include office coffee service and other services
complementary to bottled water distribution.
At the end of 1999, there were a total of 30 Aqua Cool distribution
centers in the United States and overseas, supplied with Aqua Cool Pure Bottled
Water by nine regional water purification and bottling facilities, supplying a
customer base of approximately 135,000. Early in 1999, the Company acquired
Aquarelle SA, a French bottled water distributor with five locations in France,
with the intent of expanding the Company's bottled water operations into
continental Europe.
Home Water Purification Systems
Point-of-Use Devices
The Company participates in the "point-of-use" market for over- and
under-the-sink water purifiers through the sale of RO and activated carbon-based
filtering devices, and through the manufacture and sale of HYgene(R), a
proprietary, EPA-registered, silver-impregnated activated carbon filtering
medium. The Company incorporates HYgene, which is designed to prevent bacterial
build-up while providing the capability of removing undesirable tastes and odors
from the water supply, into its own bacteriostatic water conditioners and also
sells HYgene to manufacturers of household point-of-use water filters.
Point-of-Entry Devices
Ionics' point-of-entry water products include ion-exchange water
conditioners to "soften" hard water, and chemicals and media for filtration and
treatment. The Company sells its products, under the General Ionics and other
brand names, through both independent distributorships and wholly owned sales
and service dealerships.
In 1998, the Company introduced a new line of bacteriostatic water
conditioning systems. In 1999, the Company commenced operations in Galway,
Ireland, to provide bacteriostatic water conditioning systems to the European
marketplace.
Bleach-Based Consumer Products
The Company's Elite Consumer Products division operates a Cloromat(R)
facility to produce and distribute bleach-based products for the consumer
market, primarily one-gallon bleach products under private label or under the
Company's own "Elite(R)", "Super ValueTM" and "UltraPureTM" brands, and
methanol-based automobile windshield wash solution. These operations are
conducted in a 129,000 square foot manufacturing facility located in Ludlow,
Massachusetts.
<PAGE>
Instrument Business Group
The Company's Instrument Business Group accounted for approximately 8%
of the Company's 1999 revenues. This business segment comprises the Ionics
Instrument Division located in Watertown, Massachusetts, Ionics Sievers
Instruments, located in Boulder, Colorado, and Ionics Agar Environmental,
located in Herzlia, Israel. The Company has become a leading manufacturer of
instruments that measure total organic carbon across the water "spectrum" from
ultrapure water to wastewater. The Sievers(R) Model 400 TOC analyzer is the only
on-line TOC analyzer designed specifically to comply with new United States
Pharmacopoeia (USP) requirements for determining water quality in the
pharmaceutical industry. In 1999, Ionics Sievers introduced TOC analyzers
sensitive to the parts-per-trillion range, designed specifically for ultrapure
water measurement in the semiconductor and power generation industries.
In addition to the Sievers product line, the Company offers a full line
of the Company's TOC monitors for process water and wastewater applications. The
Company's other instrument products, which are used both in the laboratory and
on-line, measure and detect, among other things, total carbon, sulfur, nitric
oxide, chemical oxygen demand and total oxygen demand. The Company also sells
instruments for the measurement of dissolved metals and specific chemical
analyzers for ammonia, phosphates, nitrates and chlorine.
With the acquisition of Ionics Agar Environmental in 1999, the Company
now also offers a line of instruments for the detection of thin layers of oil on
water. The Company's Leakwise(R) oil-on-water detection systems are used by a
range of industries from refining to power generation.
Other Information Concerning the Business of the Company
Raw Materials and Sources of Supply
All raw materials and parts and supplies essential to the business of
the Company can normally be obtained from more than one source. The Company
produces the membranes required for its equipment and systems that use the ED,
EDR, MF, UF, RO and EDI processes. Membranes used for the RO process are also
purchased from outside suppliers and are normally available from multiple
sources.
Patents and Trademarks
The Company believes that its products, know-how, servicing network and
marketing skills are more significant to its business than trademarks or patent
protection of its technology. Nevertheless, the Company has a policy of applying
for patents both in the United States and abroad on inventions made in the
course of its research and development work for which a commercial use is
considered likely. The Company owns numerous United States and foreign patents
and trademarks and has issued licenses thereunder, and currently has additional
pending patent applications. Of the approximately 80 outstanding U.S. patents
held by the Company, a substantial portion involves membranes, membrane
technology and related separations processes such as ED and EDR, RO, UF and EDI.
The Company does not believe that any of its individual patents or groups of
related patents, nor any of its trademarks, is of sufficient importance that its
termination or abandonment, or the cancellation of licenses extending rights
thereunder, would have a material adverse effect on the Company.
Seasonality
The activities of the Company's businesses are not of a seasonal
nature, other than certain activities of the Consumer Products segment. Bottled
water sales and bleach products for swimming pool use tend to increase during
the summer months. Also, sales levels for automobile windshield wash solution
increase in the winter months.
Customers
The nature of the Company's business is such that it frequently has in
progress large contracts with one or more customers for specific projects;
however, there is no one customer whose purchases account for 10% or more of the
Company's consolidated revenues and whose loss would have a material adverse
effect on the Company and its subsidiaries taken as a whole.
<PAGE>
Backlog
The Company's backlog of firm orders was $241,332,000 at December 31,
1999 and $189,917,000 at December 31, 1998. For multi-year contracts, the
Company includes in reported backlog the revenues associated with the first
five years of the contract. For multi-year contracts which are not otherwise
included in backlog, the Company includes in backlog up to one year of revenues.
The Company expects to fill approximately 63% of its December 31, 1999 backlog
during 2000. The Company does not believe that there are any seasonal aspects
to its backlog figures.
Government Contracts
The Company does not believe that any of its sales under U.S.
Government contracts or subcontracts during 1999 are subject to renegotiation.
The Company has not had adjustments to its negotiated contract prices, nor are
any proceedings pending for such adjustments.
Research and Development
The Company is actively engaged in research and development directed
toward products for use in water purification, processing and measurement, and
separations technology. The Company's research and development expenses were
approximately $7,066,000 in 1999, $6,635,000 in 1998 and $5,410,000 in 1997.
Competition
The Company experiences competition from a variety of sources with
respect to virtually all of its products, systems and services, although the
Company knows of no single entity that competes with it across the full range of
its products and services. Competition in the markets served by the Company is
based on a number of factors, which may include price, technology, applications
experience, know-how, availability of financing, reputation, product warranties,
reliability, service and distribution.
With respect to the Company's Equipment Business Group, there are a
number of companies, including several sizable chemical companies, that
manufacture membranes, but not equipment. There are numerous smaller companies,
primarily fabricators, that build water treatment and desalination equipment,
but which generally do not have their own proprietary membrane technology. A
limited number of companies manufacture both membranes and equipment. The
Company has numerous competitors in its conventional water treatment,
instruments and fabricated products business lines.
In 1998, the International Desalination Association released a report
providing data regarding the manufacturers of desalination equipment. According
to the report, which covered land-based water desalination plants delivered or
under construction as of December 31, 1997, with a capacity to produce 100 cubic
meters (approximately 25,000 gallons) or more of fresh water daily, the Company
ranked first in terms of the cumulative number of such plants sold, having sold
1,742 plants of such capacity, more than the next three manufacturers combined.
In addition, the Company ranked first in the total capacity of such plants sold.
With respect to the Ultrapure Water Group business segment, the Company
competes with suppliers of ultrapure water services on a national and regional
basis, and with other manufacturers of membrane-related equipment.
With respect to the Company's Consumer Water Group business segment,
there are numerous bottled water companies which compete with the Company,
including several which are much larger than the Company. Most of the Company's
competitors in point-of-entry and point-of-use products for the home are small
assemblers, serving local or regional markets. However, there are also several
large companies competing nationally in these markets.
In the case of its silver-impregnated activated carbon product lines,
the Company knows of two competitors with which it competes on a national basis.
The Company competes with many suppliers of bleach and bleach-based
cleaning products and automobile windshield wash for the consumer market, a
number of which are much larger than the Company.
<PAGE>
The Company is unable to state with certainty its relative market
position in all aspects of its business. Many of its competitors have financial
and other resources greater than those of the Company.
Environmental Matters
Continued compliance by the Company and its subsidiaries with federal,
state and local provisions regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment is
expected to have no material effect upon capital expenditures, earnings or the
competitive position of the Company or any of its subsidiaries.
In May 1998, a wholly owned California subsidiary of the Company was
notified by the U.S. Environmental Protection Agency ("EPA") that it was a
potentially responsible party (PRP) in connection with the Operating Industries,
Inc. Superfund Site in Monterey Park, California. Because of its relatively
small volumetric contribution of waste to the site, the subsidiary was eligible
to participate in a de minimis settlement, and in January 1999 made a full and
timely payment of $13,685 in settlement.
The Company is one of approximately 1,000 PRPs at a Superfund site at
Solvent Recovery Services of New England in Southington, Connecticut (the "SRS
Site"). The Company's volumetric ranking in comparison to the total volume of
wastes treated at the SRS Site is approximately 0.5%. A non-time critical
removal action, consisting of containment, pumping, and treatment of the most
heavily contaminated non-bedrock ground water, was completed in 1995. The
Company's share of combined assessments to date against all PRPs for non-time
critical removal actions and other work totals approximately $60,000. The
ultimate site clean-up cost is currently not expected to exceed $59 million, of
which the Company's share would not exceed $308,000 including the amounts
already assessed against the Company. While it is too soon to predict the scope
and cost of the final clean-up remedy that the EPA will select, based on the
Company's small volumetric ranking and the identities of the larger PRPs, which
include many substantial companies, the Company believes that its liability in
this matter will not have a material effect on the Company or its financial
position.
During 1995, the Company acquired certain real property in Maryland to
accommodate expansion of the Elite bleach-based consumer chemicals business.
Prior to its acquisition by the Company, the property had been determined to
have some contamination of soil and ground water. In conjunction with the
purchase, the Company worked closely with the Maryland Department of the
Environment and, based upon an environmental study completed by a third party
consultant, reached a preliminary agreement regarding treatment. Based upon the
costs of treatment identified by the consultant, the Company has provided a
conservative accrual, recorded as part of the cost of the property. The Company
believes that additional liability associated with treatment of the property, if
any, will not have a material effect on the Company or its financial condition.
Certain former operations of a division of the Company have been the
subject of an investigation into possible violations of environmental
regulations by the Office of the Attorney General of the Commonwealth of
Massachusetts. See Item 3, Legal Proceedings, page I-10.
The Company has never had a product liability claim grounded in
environmental liability, and believes that the nature of its products and
business makes such a claim unlikely.
Employees
The Company and its consolidated subsidiaries employ approximately
2,600 full-time persons. None of the Company's employees are represented by
unions or have entered into workplace agreements with the Company, except for
the employees of the Company's Australian subsidiary and certain employees of
the Company's Spanish subsidiary. The Company considers its relations with its
employees to be good.
<PAGE>
Foreign Operations
The Company's sales to customers in foreign countries primarily involve
desalination systems, ultrapure water systems, water and wastewater treatment
systems, Cloromat systems, products and services related to these foregoing
systems, instruments and bottled water. The Company seeks to minimize financial
risks relating to its international operations. Wherever possible, the Company
obtains letters of credit or similar payment assurances denominated in U.S.
dollars. If U.S. dollar payments cannot be secured, the Company, where
appropriate, enters into foreign currency hedging transactions. The Company also
uses foreign sources for equipment parts and may borrow funds in local (foreign)
currencies to offset the asset risk of foreign currency devaluation. Net foreign
currency transaction gains/(losses) included in income before income taxes and
minority interest totaled $11,000 in 1999, $(28,000) in 1998, and $100,000 in
1997.
The Company engages in certain foreign operations both directly and
through the following wholly owned subsidiaries: Ionics Acapulco S.A.; Ionics
(Bermuda) Ltd.; Ionics Iberica, S.A.; Ionics (U.K.) Limited; Ionics Italba,
S.p.A.; Ionics Nederland B.V.; Elite Chemicals Pty. Ltd.; Ionics France S.A.;
Resources Conservation Co. International; Ionics (Korea) Inc.; Favourable
Trading Ltd.(Ireland); Aqua Design, Inc., including its subsidiaries and
affiliates; Ionics Asia-Pacific Pte Ltd.; Ionics Taiwan, Inc.; Ionics Watertec
Pty. Ltd.; Ionics Foreign Sales Corporation Limited; Aquarelle S.A. (acquired
in early 1999); and Ionics Agar Environmental Ltd. (acquired in early 1999). In
1997, the Company acquired, through its Spanish subsidiary, a 55% ownership
interest in Ionics Enersave Engineering Sdn Bhd, a Malaysian corporation with
subsidiary operations in China.
The Company also engages in various foreign operations through
investments in affiliated companies and joint venture relationships. The
activities include the production, sale and distribution of bottled water
through a 40% owned affiliate in Bahrain, a 40% owned affiliate in Saudi Arabia,
and a 49% owned affiliate in Kuwait.
In addition, the Company has a 26% ownership interest in Watlington
Waterworks, Limited in Bermuda. Watlington collects, treats and distributes
water throughout Bermuda for both potable and non-potable uses. The Company
also has a 50% ownership interest in Yuasa-Ionics Co., Ltd., Tokyo, Japan,
which among its activities serves as a distributor of certain of the Company's
products in Japan; and, through Ionics Iberica, S.A., 20% interests in Aguas
Tratadas de Cadereyta, S.A. de C.V. and Aguas Tratadas de Madero, S.A. de C.V.,
companies organized to provide water treatment services in Mexico. Through its
Italian subsidiary, the Company has a 75% ownership interest (increased from
50% at the end of 1999) in Agrinord S.r.l., an Italian company engaged in waste
treatment operations. In 1999, the Company acquired a controlling interest in
Ionics Freshwater Ltd., a Barbados corporation which owns and operates a major
brackish water desalination facility in Barbados.
Further geographical and financial information concerning the Company's
foreign operations appears in Notes 1, 5, 8, 13, 14 and 15 to the Company's
Consolidated Financial Statements included as part of the Company's 1999 Annual
Report to Stockholders, which Notes are incorporated herein by reference.
Financial Information About Geographic Areas
The information contained in Note 15 of Notes to Consolidated Financial
Statements contained in the Company's Annual Report to Stockholders for the year
ended December 31, 1999 is incorporated herein by reference.
<PAGE>
ITEM 2. PROPERTIES
The Company's executive offices are located in Watertown,
Massachusetts. Manufacturing and other operations are carried out in a number of
locations. The following table provides certain information as to the Company's
principal general offices and manufacturing facilities:
Business Segment Property Approximate Square
Location Utilizing the Location Interest Feet of Floor Space
-------- --------------------- -------- -------------------
Watertown, MA Equipment Business Group Owned 134,000
(headquarters) Instrument Business Group
Consumer Water Group
Watertown, MA Equipment Business Group Owned 127,000
Consumer Water Group
Bridgeville, PA Equipment Business Group Owned 77,000
Canonsburg, PA Equipment Business Group Leased 88,000
Elkton, MD Consumer Water Group Owned 234,000
Ludlow, MA Consumer Water Group Owned 129,000
San Jose, CA Ultrapure Water Group Owned 66,000
Boulder, CO Instrument Business Group Leased 74,000
London, England Consumer Water Group Owned 36,000
The Company also owns or leases smaller facilities in which its
business segments conduct business. The Company makes use primarily of leased
facilities for its Aqua Cool bottled water distribution centers. The majority of
these facilities contain less than 10,000 square feet.
The Company considers the business facilities that it utilizes to be
adequate for the uses to which they are being put.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in the normal course of its business in various
litigation matters. Although the Company is unable to determine at the present
time whether it will have any liability in any of the pending matters, some of
which are in the pre-trial discovery stages, the Company believes generally that
it has meritorious defenses and that none of the pending matters will have an
outcome material to the financial condition or business of the Company.
The Attorney General of the Commonwealth of Massachusetts has been
conducting an investigation into certain former operations of a division of the
Company during portions of the years 1991 through 1995. The Company has
cooperated with this investigation of possible violations of environmental
statutes and regulations that relate to one facility that ceased operations in
1995. The Company cannot predict the outcome of this matter, but it may result
in administrative, civil or criminal charges and/or monetary payments.
<PAGE>
On March 27, 1998, the Company was served with a summons and complaint
in connection with a lawsuit now captioned United States Filter Corporation,
U.S. Filter/Ionpure, Inc., IP Holding Company, Millipore Corporation and
Millipore Investment Holdings Limited v. Ionics, Incorporated, filed in the U.S.
District Court, District of Massachusetts (Boston). Plaintiffs allege that the
Company is infringing a certain reissue patent, which issued on March 10, 1998,
by making, selling, offering to sell and using the Company's electrodeionization
(EDI) systems within the United States. On June 10, 1999, the Company was served
with a second summons and complaint alleging infringement of six EDI-related
patents issued earlier than the reissue patent which is the subject of the first
lawsuit. The Company, which pioneered the development of the EDI process over 30
years ago and holds a number of patents related to EDI technology, believes that
it has valid defenses to plaintiffs' infringement claims in both proceedings and
intends vigorously to defend itself in this litigation, which is in the
discovery stages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Reference is made to the Company's Annual Report to Stockholders for
the year ended December 31, 1999. The information set forth on page 37 entitled
"Common Stock Price Range" and on the inside back cover of such Annual Report is
hereby incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to the Company's Annual Report to Stockholders for the
year ended December 31, 1999. The information set forth on page 37 of such
Annual Report entitled "Statement of Operations Data" and "Balance Sheet Data"
is hereby incorporated by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Reference is made to the Company's Annual Report to Stockholders for the
year ended December 31, 1999. The information set forth on pages 17 through 21
of such Annual Report entitled "Management's Discussion and Analysis of Results
of Operations and Financial Condition" is hereby incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Derivative Instruments
The Company had no foreign exchange contracts outstanding at December
31, 1999. The Company has no other derivative financial instruments or other
financial and commodity instruments for which fair value disclosure would be
required under SFAS No. 119. The Company holds no investment securities which
would require disclosure of market risk.
Market Risk
The Company's primary market risk exposures are in the areas of
interest rate risk and foreign currency exchange rate risk. The Company's
investment portfolio of cash equivalents is subject to interest rate
fluctuations, but the Company believes this risk is not material due to the
short-term nature of these investments. At December 31, 1999, the Company had
$25.5 million of short-term debt and $8.4 million of long-term debt outstanding.
The major portion of this debt has variable interest rates and, therefore,
interest rate risk. However, a hypothetical increase of 10% in these interest
rates for a one-year period would result in additional interest expense after
taxes that would not be material in the aggregate. The Company's exposure to
foreign currency exchange rate fluctuations has been and is expected to remain
modest due to the fact that the operations of its international subsidiaries are
primarily conducted in their respective local currencies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Company's Annual Report to Stockholders for
the year ended December 31, 1999. The consolidated balance sheets of the
Registrant as of December 31, 1999 and 1998, the related consolidated statements
of operations, cash flows and stockholders' equity for the years ended December
31, 1999, 1998 and 1997, and the related notes with the opinion thereon of
PricewaterhouseCoopers LLP, independent accountants, on pages 21 through 36, and
Selected Quarterly Financial Data (unaudited) on page 37, are hereby
incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
This item is not applicable to the Company.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 with respect to directors is hereby
incorporated by reference from the Company's definitive proxy statement for the
Annual Meeting of Stockholders to be held May 2, 2000, filed with the Securities
and Exchange Commission on March 29, 2000.
The information regarding executive officers is as follows:
Age as of
Name March 1, 2000 Positions Presently Held
- ---- ------------- ------------------------
Arthur L. Goldstein 64 President, Chief Executive Officer
and Director since 1971; Chairman
of the Board since 1990
Robert J. Halliday 45 Chief Financial Officer since August 1992;
Executive Vice President and Chief
Operating Officer since February 25, 2000
William E. Katz 75 Executive Vice President since 1983;
Director since 1961
John P. Bergeron 48 Vice President since February 23, 1999;
Treasurer since November 1997
Edward J. Cichon 45 Vice President, Equipment Business Group
since July 1998
Alan M. Crosby 47 Vice President, Consumer Products Group
since March 20, 2000
Stephen Korn 54 Vice President, General Counsel and Clerk
since September 1989
Theodore G. Papastavros 66 Vice President since 1975; Vice President,
Strategic Planning since February 1990
Michael W. Routh 52 Vice President, Instrument Business Group
(commencing April 3, 2000)
- ------------------
* Member of Executive Committee
There are no family relationships between any of the officers or
directors. Executive officers of the Company are appointed each year at the
annual meeting of Directors.
Except for Messrs. Cichon and Routh, all of the above executive
officers have been employed by the Company in various capacities for more than
five years. Prior to joining the Company in July 1998, Mr. Cichon served as a
Senior Vice President of Metcalf & Eddy, Inc., a water and wastewater
engineering and services firm, where he was employed for 18 years. Mr. Routh
served as President of the Baird Division of Thermo Instrument Systems, Inc.
from 1995-1997, and General Manager of the Spectroscopy Division of BioRad
Laboratories, Inc. from 1998 to March 2000.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference
from the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held May 2, 2000, filed with the Securities and Exchange
Commission on March 29, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
from the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held May 2, 2000, filed with the Securities and Exchange
Commission on March 29, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference
from the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held May 2, 2000, filed with the Securities and Exchange
Commission on March 29, 2000.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
See Index to Financial and Financial Statement Schedules on page IV-8.
The Financial Statement Schedules are filed as part of this Annual
Report on Form 10-K.
2. Financial Statement Schedules
See Index to Financial Statements and Financial Statement Schedules on
page IV-8.
3. Exhibits
Exhibit No. Description
3.0 Articles of Organization and By-Laws
3.1 Restated Articles of Organization filed April 16, 1986 *
(filed as Exhibit 3.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
3.1(a) Amendment to Restated Articles of Organization *
filed June 19, 1987 (filed as Exhibit 3.1(a) to the
Company's Annual Report of Form 10-K for the year
ended December 31, 1997).
3.1(b) Amendment to Restated Articles of Organization *
filed May 13, 1988 (filed as Exhibit 3.1(b) to
Registration Statement No. 33-38290 on Form S-2
effective January 24, 1991).
3.1(c) Amendment to Restated Articles of Organization *
filed May 8, 1992 (filed as Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the
quarterly period ending June 30, 1996).
3.1(d) Amendment to Restated Articles of Organization *
filed May 8, 1998 (filed as Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the
quarterly period ending March 31, 1998).
<PAGE>
3.2 By-Laws, as amended through November 14, 1997 *
(filed as Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997)
4.0 Instruments defining the rights of security holders, including indentures
4.1 Renewed Rights Agreement, dated as of August 19, 1997 *
between Registrant and BankBoston N.A. (filed as
Exhibit 1 to the Company's Current Report on Form 8-K
dated August 27, 1997).
4.2 Form of Common Stock Certificate (filed as Exhibit 4.2 *
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997)
10.0 Material Contracts
10.1 1979 Stock Option Plan, as amended through *
February 22, 1996 (filed as Exhibit 10.1
to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.2 1986 Stock Option Plan for Non-Employee Directors, *
as amended through February 19, 1997 (filed as Exhibit
10.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996).
10.3 Amended and Restated Credit Agreement *
between the Company and the First National
Bank of Boston dated as of December 31, 1992
(filed as Exhibit 10.3 to the Company's
Annual Report for the year ended December
31, 1997).
10.3(1) Amendment Agreement No. 1, dated as of December *
31, 1995, to Amended and Restated Credit Agreement
between the Company and The First National Bank of
Boston (filed as Exhibit 10.2(1) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995).
10.3(2) Amendment Agreement No. 2, dated as of December *
31, 1998, to Amended and Restated Credit
Agreement between the Company and BankBoston
N.A. (filed as Exhibit 10.3(2) to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1998).
<PAGE>
10.4 Operating Agreement dated as of September 27, *
1989 between the Company and Aqua Cool
Enterprises, Inc. (filed as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.5 Term Lease Master Agreement dated as of September *
27, 1989 between the Company and Aqua Cool Enterprises,
Inc. (filed as Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
10.6 Option Agreement dated as of September 27, 1989 *
among the Company, Aqua Cool Enterprises, Inc.
and the other parties named therein (filed as Exhibit
to the Company's registration statement on Form
S-2, No. 33-38290, effective January 24, 1991).
10.7 1994 Restricted Stock Plan (filed as Exhibit 10.12 *
to the Company's Annual Report on Form 10-K dated
March 30, 1995).
10.8 1997 Stock Incentive Plan (filed as Exhibit 10.12 *
to the Company's Annual Report on Form 10-K dated
December 31, 1996).
10.9 Ionics, Incorporated Supplemental Executive *
Retirement Plan effective as of January 1, 1996
(filed as Exhibit 10.9 to the Company's Annual
Report on Form 10-K dated December 31, 1997).
10.10 Form of Employee Retention Agreement dated *
February 24, 1998 between the Company and
certain officers of the Company and its
subsidiaries (filed as Exhibit 10.10 to the
Company's Annual Report on Form 10-K dated
December 31, 1997).
10.11 1998 Non-Employee Directors Fee Plan (filed *
as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period
ending September 30, 1998).
<PAGE>
13.0 Annual Report to Stockholders of the Company for
the yearended December 31, 1999 (constituting
the following sections: Management's Discussion and
Analysis of Results of Operations and Financial
Condition; Report of Independent Accountants;
Consolidated Statements of Operations; Consolidated
Balance Sheets; Consolidated Statements of Cash Flow;
Consolidated Statements of Stockholders' Equity;
Notes to Consolidated Financial Statements; Selected
Financial Data; Board of Directors; Corporate Officers;
Location of Principal Subsidiaries, Offices and Affiliates
Worldwide; Corporate Headquarters; Trading Information;
Form 10-K Annual Report; Annual Meeting; Auditors; and
Transfer Agent and Registrar).
21.0 Subsidiaries of the Registrant.
23.0 Consents
23.1 Consent of PricewaterhouseCoopers LLP to incorporation by
reference of that firm's report dated February
22, 2000, which is included on page 21 of the
Registrant's Annual Report to Stockholders for the
year ended December 31, 1999.
24.0 Power of Attorney.
27.0 Financial Data Schedule. **
- --------------------------------
* incorporated herein by reference
** for electronic purposes only
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during
the last quarter of fiscal 1999.
Undertaking
For purposes of complying with the amendments to the rules
governing Form S-8 effective July 13, 1990 under the
Securities Act of 1933, the undersigned hereby undertakes
as follows, which undertaking shall be incorporated by
reference into Registrant's registration statements on
Form S-8 Nos. 33-14194, 33-5814, 33-2092, 2-72936,
2-82780, 2- 64255, 33-41598, 33-54293, 33-59051,
333-05225, 333-29135, and 33-54400.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by
a director, officer or controlling person of the
registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
IONICS, INCORPORATED
(Registrant)
By: /s/Arthur L. Goldstein
----------------------
Arthur L. Goldstein,
Chairman of the Board,
President and Chief
Executive Officer
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 29, 2000 By: /s/Arthur L. Goldstein
----------------------
Arthur L. Goldstein,
Chairman of the Board,
President and
Chief Executive Officer
(principal executive
officer) and Director
Date: March 29, 2000 By: /s/Robert J. Halliday
---------------------
Robert J. Halliday,
Executive Vice President,
Chief Operating Officer
and Chief Financial Officer
(principal financial officer
and principal accounting officer)
<PAGE>
Date: March 29, 2000 By: /s/Douglas R. Brown
-------------- -------------------
Douglas R. Brown, Director
Date: March 29, 2000 By: /s/William L. Brown
-------------- -------------------
William L. Brown, Director
Date: March 29, 2000 By: /s/Arnaud de Vitry d'Avaucourt
-------------- ------------------------------
Arnaud de Vitry d'Avaucourt, Director
Date: March 29, 2000 By: /s/Kathleen F. Feldstein
-------------- ------------------------
Kathleen F. Feldstein, Director
Date: March 29, 2000 By: /s/William E. Katz
-------------- ------------------
William E. Katz, Director
Date: March 29, 2000 By: /s/John J. Shields
-------------- ------------------
John J. Shields, Director
Date: March 29, 2000 By: /s/Carl S. Sloane
-------------- -----------------
Carl S. Sloane, Director
Date: March 29, 2000 By: /s/Daniel I.C. Wang
-------------- -------------------
Daniel I.C. Wang, Director
Date: March 29, 2000 By: /s/Mark S. Wrighton
-------------- -------------------
Mark S. Wrighton, Director
Date: March 29, 2000 By: /s/Allen S. Wyett
-------------- -----------------
Allen S. Wyett, Director
<PAGE>
IONICS, INCORPORATED
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGES
Report of Independent Accountants 21*
Financial Statements:
Consolidated Statements of Operations for the
Years Ended December 31, 1999, 1998 and 1997 22*
Consolidated Balance Sheets as of
December 31, 1999 and 1998 23*
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997 24*
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1999, 1998 and 1997 25*
Notes to Consolidated Financial Statements 26-36*
Supporting Financial Statement Schedules for the years ended December 31, 1999,
1998 and 1997:
Schedule II - Valuation and Qualifying Accounts IV-9
Report of Independent Accountants on Financial
Statement Schedule IV-10
- ------------------
All other schedules are omitted because the amounts are immaterial, the
schedules are not applicable, or the required information is shown in the
financial statements or the notes thereto.
* Page references are to the Annual Report to Stockholders of the Company for
the year ended December 31, 1999, which pages are incorporated herein by
reference.
<PAGE>
<TABLE>
<CAPTION>
IONICS, INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Additions
Balance at Charged to Due to
End of Costs and Acquired Balance at
Prior Year Expenses Businesses Deductions(A) End of Year
---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
and uncollectible notes receivable:
Years ended:
December 31, 1999 $2,891,000 $2,643,000 $ 6,000 $1,920,000 $3,620,000
========== ========== ======== ========== ==========
>
December 31, 1998 $2,289,000 $1,319,000 $ 0 $ 717,000 $2,891,000
========== ========== ======== ========== ==========
December 31, 1997 $2,858,000 $1,408,000 $ 40,000 $2,017,000 $2,289,000
========== ========== ======== ========== ==========
</TABLE>
(A) Deductions result primarily from the write-off of accounts.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Ionics, Incorporated:
Our audits of the consolidated financial statements referred to in our
report dated February 22, 2000 appearing in the 1999 Annual Report to Share-
holders of Ionics, Incorporated (which report and consolidated financial state-
ments are incorporated by reference in this Annual Report on Form 10-K) also
included an audit of the financial statement schedule listed in Item 14(a)(2)
of this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
February 22, 2000
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
No. Description Page
3.0 Articles of Organization and By-Laws
3.1 Restated Articles of Organization filed *
April 16, 1986 (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1997).
3.1(a) Amendment to the Restated Articles of *
Organization filed June 19, 1987 (filed
as Exhibit 3.1(a) to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1997).
3.1(b) Amendment to Restated Articles of *
Organization filed May 13, 1988
(filed as Exhibit 3.1(b) to Registration
Statement No. 33-38290 on Form
S-2 effective January 24, 1991).
3.1(c) Amendment to Restated Articles of *
Organization filed May 8, 1992
(filed as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly
period ending June 30, 1996).
3.1(d) Amendment to Restated Articles of *
Organization filed May 8, 1998
(filed as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ending March 31, 1998).
3.2 By-Laws, as amended through November 14, *
1997 (filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997).
4.0 Instruments defining the rights of security holders, including
indentures
4.1 Renewed Rights Agreement, dated as of *
August 19, 1997 between Registrant and
BankBoston N.A. (filed as Exhibit 1 to
dated August 27, 1997).
4.2 Form of Common Stock Certificate (filed as *
Exhibit 4.2 to the Company's Annual Report
on Form 10-K for the year ended
December 31, 1997).
<PAGE>
10.0 Material Contracts
10.1 1979 Stock Option Plan, as amended through *
February 22, 1996 (filed as Exhibit 10.1 to
the Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
10.2 1986 Stock Option Plan for Non-Employee *
Directors, as amended through February 19,
1997 (filed asExhibit 10.2 to the Company's
Annual Report on Form 10-K for the year
ended December 31, 1996).
10.3 Amended and Restated Credit Agreement between *
the Company and the First National Bank of
Boston dated as of December 31, 1992 (filed as
Exhibit 10.3 to the Company's Annual Report
for the year ended December 31, 1997).
10.3(1) Amendment Agreement No. 1, dated as of *
December 31, 1995, to Amended and Restated
Credit Agreement between the Company and The
First National Bank of Boston (filed as Exhibit
10.3(1) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.3(2) Amendment Agreement No. 2, dated as of *
December 31, 1998, to Amended and Restated
Credit Agreement between the Company and
BankBoston N.A. (filed as Exhibit 10.3(2) to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1998).
10.4 Operating Agreement dated as of September 27, *
1989 between the Company and Aqua Cool
Enterprises, Inc. (filed as Exhibit 10.4 to
the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
10.5 Term Lease Master Agreement dated as of *
September 27, 1989 between the Company and
Aqua Cool Enterprises, Inc. (filed as
Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.6 Option Agreement dated as of September 27, *
1989 among the Company, Aqua Cool Enterprises,
Inc.and the other parties named therein
(filed as Exhibit 10.6 to the Company's
registration statement on Form S-2, No. 33-38290,
effective January 24, 1991).
10.7 1994 Restricted Stock Plan (filed as Exhibit *
10.12 to the Company's Annual Report on Form
10-K dated March 30, 1995).
10.8 1997 Stock Incentive Plan (filed as Exhibit *
10.12 to the Company's Annual Report on Form
10-K dated December 31, 1996).
10.9 Ionics, Incorporated Supplemental Executive *
Retirement Plan effective as of January 1,
1996(filed as Exhibit 10.9 to the Company's Annual
Report on Form 10-K dated December 31, 1997).
10.10 Form of Employee Retention Agreement dated *
February 24, 1998 between the Company and
certain officers of the Company and its
subsidiaries (filed as Exhibit 10.10 to the
Company's Annual Report on Form 10-K dated
December 31, 1997).
10.11 1998 Non-Employee Directors Fee Plan (filed *
as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period
ending September 30, 1998).
13.0 Annual Report to Stockholders of the Company for the
year ended December 31, 1999 (constituting the following
sections: Management's Discussion and Analysis of Results
of Operations and Financial Condition; Report of Independent
Accountants; Consolidated Statements of Operations; Consolidated
Balance Sheets; Consolidated Statements of Cash Flow; Consolidated
Statements of Stockholders' Equity; Notes to Consolidated Financial
Statements; Selected Financial Data; Board of Directors;
Corporate Officers; Location of Principal Subsidiaries, Offices
and Affiliates Worldwide; Corporate Headquarters; Trading Information;
Form 10-K Annual Report; Annual Meeting; Auditors; and Transfer
Agent and Registrar.)
21.0 Subsidiaries of the Registrant
23.0 Consents
23.1 Consent of PricewaterhouseCoopers LLP to incorporation
by reference of that firm's report dated February 22,
2000, which is included on page 21 of the Registrant's
Annual Report to Stockholders for the year ended
December 31, 1999.
24.0 Power of Attorney.
27.0 Financial Data Schedule. **
- --------------------------------
* incorporated herein by reference
** for electronic purposes only
IONICS, INCORPORATED
ANNUAL REPORT TO STOCKHOLDERS OF
IONICS, INCORPORATED FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1999
(The following sections constitute an Exhibit to Form 10-K: Management's
Discussion and Analysis of Results of Operations and Financial Condition; Report
of Independent Accountants; Consolidated Statements of Operations; Consolidated
Balance Sheets; Consolidated Statements of Cash Flow; Consolidated Statements of
Stockholders' Equity; Notes to Consolidated Financial Statements; Selected
Financial Data; Board of Directors; Corporate Officers; Location of Principal
Subsidiaries, Offices and Affiliates Worldwide; Corporate Headquarters; Trading
Information, Form 10-K Annual Report; Annual Meeting; Auditors; and Transfer
Agent and Registrar.)
- -------------------------------------
<PAGE>
Ionics, Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The following discussion and analysis of results of operations and financial
condition refers to the activities of the Company's four business groups, which
comprise the Company's reportable operating segments. See Note 15 to the
consolidated financial statements for a more detailed description of these four
business groups.
RESULTS OF OPERATIONS
1999 Compared to 1998
The Company reported a 2.0% increase in revenues and a 9.5% decline in net
income in 1999. Operating results continued to be impacted by weakened business
conditions which led to highly competitive equipment pricing pressures in
several markets, particularly in the microelectronics industry, which is served
by the Company's Ultrapure Water Group (UWG), and by a decline in the financial
performance of the Instrument Business Group (IBG). The decline in net income
primarily reflects lower earnings before interest, taxes and minority interest
(EBIT) of 49.9% and 60.3% in UWG and IBG, respectively, on lower revenues of
16.0% and 6.5%, respectively. IBG's decline in 1999 is due to comparison with
unusually strong performance in 1998, when the adoption of new monitoring
standards by the U.S. pharmaceutical industry resulted in very strong sales of
our Total Organic Carbon (TOC) analyzer. The stronger financial performance of
the Equipment Business Group (EBG) partially offset the decline in the results
of UWG and IBG. EBG reported increases in revenues and EBIT of 8.4% and 33.4%,
respectively, reflecting a stronger capital equipment market, particularly for
water reuse and "zero liquid discharge" applications, and improved operating
margins on the water supply business in the Caribbean. Consumer Water Group
(CWG) revenues increased by 19.4%, primarily reflecting continued revenue growth
in both the bottled water and home water businesses. EBIT for CWG increased only
2.9%, primarily due to costs relating to acquiring new customers or opening new
locations, as well as costs associated with converting to a new computer system
for all Aqua Cool(R) Pure Bottled Water domestic locations.
Revenues
Consolidated revenues were $358.2 million in 1999, compared with $351.3 million
in 1998. Higher revenues in both EBG and CWG offset revenue declines in UWG and
IBG.
EBG revenues increased by $10.9 million in 1999 over 1998, primarily resulting
from increased sales of capital equipment, particularly water reuse equipment
and desalination equipment. The revenue increase also reflects engineering and
design work begun on a $10 million contract to manufacture a storage system to
manage the containment of spent nuclear fuels.
UWG revenues decreased by $17.8 million in 1999 from 1998. UWG primarily serves
the microelectronics industry and, to a lesser extent, the power and
pharmaceutical industries. As was the case in 1998, revenues in 1999 from the
microelectronics industry continued to reflect a significant decline, primarily
due to a continuing slowdown in capital spending for new manufacturing
facilities by that industry.
CWG revenues increased by $15.7 million in 1999 from 1998, primarily reflecting
continued growth for bottled water and home water products and services. Through
the acquisition of Aquarelle SA, the Company entered the French bottled water
market at the beginning of 1999. The bottled water business also continued to
expand its customer base in both the United States and the United Kingdom. Such
expansion is being achieved primarily through internal growth and, to a lesser
extent, through small acquisitions in geographic areas contiguous to existing
locations. In the home water business, the Company opened its first
international office, in the Republic of Ireland, in the second quarter of 1999.
IBG revenues declined by $1.9 million in 1999 from 1998 levels. In the first
half of 1998, IBG benefited from strong demand for the Group's TOC analyzers as
a result of the adoption of a new U.S. pharmaceutical industry standard for
measuring water purity. Sales of TOC instruments began to increase in the second
half of 1999 as compared to the first half of the year, as a result of new
European pharmaceutical regulations and new product offerings.
<PAGE>
Ionics, Incorporated
1998 Compared to 1997
Revenues
The Company's revenues totaled $351.3 million in 1998, down slightly from $352.5
million in 1997. Revenues were higher in CWG, IBG and UWG, while revenues
declined in EBG.
EBG revenues declined by $16.1 million in 1998 as compared to 1997 because of
reduced capital equipment sales; the expiration of the Santa Barbara water
supply contract in early 1997; the sale of bleach manufacturing equipment in the
U.K. in the fourth quarter of 1997; and the consolidation of the Company's food
processing business in early 1998.
UWG revenues increased by 2.5% in 1998. Revenues in 1998 from the
microelectronics industry were down significantly from 1997 revenues, primarily
due to a slowdown in capital spending by that industry. This decline was offset
by additional revenues in 1998 resulting from the acquisition of a majority
interest in Enersave Engineering Systems Sdn Bhd, a Malaysian corporation (now
Ionics Enersave), in the third quarter of 1997. The decline in profits relating
to the reduction of revenues from the microelectronics industry was greater than
the profits contributed by Ionics Enersave.
The 10.7% increase in revenues of CWG in 1998 compared to 1997 was due to growth
in the Company's bottled water business. The bottled water business expanded its
customer base in both the United States and the United Kingdom, while also
pursuing product line expansions and realizing a higher average price per
bottle.
The revenues of IBG increased by 17.5% in 1998 compared to 1997, largely driven
by the pharmaceutical industry's increased purchases of the Company's
instruments for measuring TOC levels.
Cost of Sales and Operating Expense Comparisons
Cost of sales as a percentage of revenues was 66.4%, 67.4% and 67.2% in 1999,
1998 and 1997, respectively.
The improvement in 1999 compared to 1998 is attributable to the decrease in cost
of sales as a percentage of revenues for UWG to 75.5% in 1999 from 78.2% in
1998. This decrease resulted primarily from the higher proportion of the Group's
revenues in 1999 which were derived from higher margin service business compared
to equipment business. Cost of sales as a percentage of revenues for EBG
increased to 72.3% in 1999 from 71.5% in 1998. This increase was the result of a
shift in the mix of contracts to lower margin equipment business. Cost of sales
as a percentage of revenues for IBG increased to 41.9% in 1999 from 39.9% in
1998, primarily due to a higher portion of revenues being derived from Ionics
Sievers' lower margin service business. Cost of sales as a percentage of
revenues for CWG remained the same in 1999 and 1998 at 56.0%. Overall gross
margins for the Company also benefited from the change in mix of the Company's
sales. CWG sales grew 19.4% in 1999 (with 44.0% average gross margins), while
UWG sales declined 16.0% in 1999 (with average gross margins of 24.5%).
Cost of sales as a percentage of revenues decreased during 1998 compared to 1997
for EBG and CWG, and increased for UWG and IBG. The decrease in the EBG
percentage reflected primarily an improvement in its product mix. The decrease
in the CWG percentage reflected an overall improvement in prices in the home
water business. The increase in the UWG percentage resulted from the continued
competitive environment in the microelectronics industry for ultrapure water
capital equipment. The increase in the IBG percentage reflected increased
spending associated with manufacturing and service department operations.
Operating expenses as a percentage of revenues were 25.7% in 1999, an increase
from 23.6% in 1998 and 20.7% in 1997. Increased operating expenses as a
percentage of revenues in 1999 as compared to 1998 were attributable to:
start-up expenses for several new operating facilities in Asia, the United
States and Europe; increased expenses relative to revenues in UWG; expenses
relating to the Company's Y2K program; and continued expenses in defense of
pending patent infringement litigation. In addition, the higher operating
expenses as a percentage of revenues in 1999 reflected the impact of higher
revenue growth in CWG, which generally has higher operating expenses as a
percentage of revenues than the other business groups. The Company also
<PAGE>
Ionics, Incorporated
established additional bad debt reserves in 1999, primarily for UWG and to a
lesser extent for CWG and EBG. CWG also incurred additional expenses in 1999 in
conjunction with the installation of a new information system for the U.S. Aqua
Cool business.
Operating expenses as a percentage of revenues also increased in 1998 compared
to 1997. This increase reflected the fact that revenues from EBG, which
generally has lower selling costs relative to revenues than do other business
groups, decreased in 1998. Additionally, the Company experienced revenue growth
in IBG and CWG, which generally have higher selling costs as a percentage of
revenues than do the other business groups. Operating expenses also increased in
1998 due to expenses associated with the Company's Y2K program, increased legal
expenses, and expanded marketing initiatives, as well as the Company's continued
commitment to investment in its research and development programs.
Interest, Equity Income and Taxes
Interest income was $1.0 million, $1.1 million and $1.2 million in 1999, 1998
and 1997, respectively. Interest expense, net of capitalized interest, was $0.7
million, $0.3 million and $0.9 million in 1999, 1998 and 1997, respectively.
Capitalized interest was $1.0 million, $0.6 million and $0.2 million in 1999,
1998 and 1997, respectively. The higher interest costs incurred in 1999 reflect
the Company's higher average borrowings in that year. A large portion of the
borrowings financed plant and equipment construction and, accordingly, the
interest related to such long-term projects was capitalized.
Equity income increased to $1.1 million in 1999 from $0.6 million and $0.5
million in 1998 and 1997, respectively. The increase in equity income in 1999
resulted primarily from the Company's investment in a Mexican joint venture.
The Company's effective tax rate was 32.0% in 1999, 32.5% in 1998 and 33.0% in
1997. The reduction in the effective tax rate in 1999 was primarily due to a tax
holiday declared for 1999 in Malaysia where Ionics Enersave conducts the major
part of its operations (and where its earnings are considered permanently
invested). The reduction of the tax rate in 1998 compared to 1997 was due to the
Company's foreign sales corporation providing a proportionately larger benefit
than in prior years.
Net income decreased 9.5% to $19.4 million in 1999 compared to $21.4 million in
1998. Net income in 1998 was 24.5% lower than 1997 net income of $28.3 million.
FINANCIAL CONDITION
At December 31, 1999, the Company had total assets of $500.9 million compared to
total assets of $452.1 million at December 31, 1998. The increase in assets
primarily reflects an increase in property, plant and equipment, which included
capital expenditures of $61.5 million and $42.2 million in 1999 and 1998,
respectively. Accounts receivable also increased by $8.6 million in 1999. Other
current assets increased by approximately $6.7 million in 1999, primarily due to
an income tax refund, a related interest receivable and additional funding of
the Company's Retirement Plan. The increase in other assets in 1999 was
primarily due to goodwill relating to the acquisitions of Ionics Life Sciences,
Ionics Agar and Aquarelle SA.
Working capital decreased to $94.3 million in 1999 as compared to $101.2 million
in 1998, and the Company's current ratio decreased to 2.0 in 1999 from 2.2 in
1998.
Net cash provided by operating activities decreased by $18.9 million in 1999,
compared to 1998, primarily due to a decrease in accounts payable and accrued
expenses in 1999 from 1998. The relatively high level of accounts payable and
accrued expenses at December 31, 1998 resulted from significant purchasing
activity late in the year relating to certain large customer contracts. Net cash
provided by operating activities decreased by $1.9 million in 1998 compared to
1997, due primarily to lower net income and an increase in accounts receivable,
offset by an increase in accounts payable and accrued expenses.
Net cash used by investing activities increased by $27.5 million in 1999 over
1998 and increased by $5.8 million in 1998 over 1997. These increases primarily
reflect capital expenditures made in 1999 and 1998 and the acquisitions
completed in 1999. The Company spent $8.5 million in 1999 in acquiring Ionics
Life Sciences, Ionics Agar and Aquarelle SA. The capital expenditures of $61.5
million and $42.2 million in 1999 and 1998, respectively, were generally made to
<PAGE>
Ionics, Incorporated
expand the Company's bottled water operations and to expand or build additional
manufacturing and "own and operate" facilities. Cash from operations, borrowings
of current and long-term debt and proceeds from stock option exercises provided
funds for these expenditures. In 1997, funds were also provided through the sale
of certain fixed assets, including bleach-manufacturing equipment in the U.K.
In 1999, net cash provided by financing activities was $26.1 million, a change
of $28.9 million from the $2.8 million that was used by financing activities in
1998. This change resulted primarily from the higher level of short-term and
long-term borrowings at December 31, 1999 from the prior year-end. In 1998, net
cash used by financing activities increased by $4.1 million as compared to 1997.
The change was primarily due to a reduction in cash obtained from short-term
borrowings.
The Company maintains several lines of credit, including domestic lines totaling
$35 million, which are available to meet working capital needs. The Company
anticipates increasing its domestic lines of credit in 2000. Foreign lines of
credit, excluding those for specific project financing, total approximately $6.6
million. The Company has arranged two lines of credit totaling $8.2 million for
its controlled affiliate in Barbados to provide project financing for a
desalination plant. In addition, the Company has several facilities to
accommodate its foreign trade requirements. The Company believes that its cash
of $13.2 million at the beginning of 2000, together with cash from operations,
lines of credit and foreign trade facilities are adequate to meet its currently
anticipated needs.
Significant expenditures in 2000 are anticipated to include investments in
additional "own and operate" facilities and the continued expansion of bottled
water operations.
In addition, the Company anticipates incurring in 2000 approximately $2 million
in costs relating primarily to providing assistance to a project company in
obtaining financing for, and preliminary project management and design work on,
a $120 million seawater desalination project in Trinidad announced in September
1999. Such costs would be additional to the approximately $1 million in costs
related to this project incurred as of December 31, 1999. Financing for the
project has not yet been obtained. Should financing not be obtained, these costs
would be expensed.
Inflationary increases in material and labor costs remained moderate during the
last three years. The Company has worked to offset such cost increases by
redesigning its equipment to reduce costs. To the extent permitted by the
competitive environment, the Company has raised prices where appropriate.
YEAR 2000 (Y2K) DISCLOSURE
The Company undertook a program in years 1998 and 1999 to assure the ability of
its information and manufacturing systems to properly recognize and process
date-sensitive information beginning on January 1, 2000. To date, the Company
has completed the transition from calendar 1999 to 2000 with no reported
significant impact to operations. The Company will continue to monitor Y2K
related matters at suppliers and customers, as well as the Company's systems,
facilities and products, to ensure that latent defects do not manifest
themselves over the next several months. The Company spent approximately $1.5
million in 1998 through 1999, excluding the cost of new systems, on its Y2K
program. Costs to be expended on this program in 2000 are expected to be
insignificant.
Although a number of minor information technology projects have been deferred as
a result of the priority given to the Y2K program, no significant projects have
been delayed which would materially affect the Company's financial condition.
ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." SFAS No. 137 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
issued in June 1998. SFAS No. 137 defers the effective date of SFAS No. 133
to all fiscal years beginning after June 15, 2000. Accordingly, the Company
will adopt the provisions of SFAS No. 133 for the fiscal year 2001 which
commences on January 1, 2001. This Statement should not have a material
effect on the Company's financial statements.
<PAGE>
Ionics, Incorporated
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. This
bulletin summarizes certain views of the staff on applying generally accepted
accounting principles to revenue recognition in financial statements. The staff
believes that revenue is realized or realizable and earned when all of the
following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the seller's price to the
buyer is fixed or determinable; and collectibility is reasonably assured. The
Company believes that its current revenue recognition policy complies with the
Commission's guidelines.
FORWARD-LOOKING INFORMATION
Derivative Instruments
The Company had no foreign exchange contracts outstanding at December 31, 1999.
The Company has no other derivative financial instruments or other financial and
commodity instruments for which fair value disclosure would be required under
SFAS No. 119. The Company holds no investment securities that would require
disclosure of market risk.
Market Risk
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company's investment
portfolio of cash equivalents is subject to interest rate fluctuations, but the
Company believes this risk is not material due to the short-term nature of these
investments. At December 31, 1999, the Company had $25.5 million of short-term
debt and $8.4 million of long-term debt outstanding. The major portion of this
debt has variable interest rates and, therefore, interest rate risk. However, a
hypothetical increase of 10% in these interest rates for a one-year period would
result in additional interest expense after taxes that would not be material in
the aggregate. The Company's exposure to foreign currency exchange rate
fluctuations has been and is expected to remain modest due to the fact that the
operations of its international subsidiaries are primarily conducted in their
respective local currencies.
Safe Harbor Statement under Private Securities Litigation Reform Act of 1995
The Company's future results of operations and certain statements contained in
this report, including, without limitation, "Management's Discussion and
Analysis of Results of Operations and Financial Condition," constitute
forward-looking statements. Such statements are based on management's current
views and assumptions and involve risks, uncertainties and other factors that
could cause actual results to differ materially from management's current
expectations. Among these factors are business conditions and the general
economy; competitive factors, such as acceptance of new products and price
pressures; risk of nonpayment of accounts receivable; risks associated with
foreign operations; risks of latent Y2K defects; risks involved in litigation;
regulations and laws affecting business in each of the Company's markets; market
risk factors, as described above under "Derivative Instruments" and "Market
Risk;" and other risks and uncertainties described from time to time in the
Company's filings with the Securities and Exchange Commission.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Ionics, Incorporated:
In our opinion, the accompanying consolidated statements of operations and the
related consolidated balance sheets, consolidated statements of cash flows, and
consolidated statements of stockholders' equity, present fairly, in all material
respects, the financial position of Ionics, Incorporated (the "Company"), at
December 31, 1999 and December 31, 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
February 22, 2000
<PAGE>
Ionics, Incorporated
<TABLE>
<CAPTION>
Consolidated Statements of Operations
For the years ended December 31
<S> <C> <C> <C>
Amounts in Thousands, Except Per Share Amounts 1999 1998 1997
- --------------------------------------------------------------------------------------------------
Revenues:
Equipment Business Group $140,655 $129,751 $145,844
Ultrapure Water Group 93,562 111,349 108,601
Consumer Water Group 96,569 80,884 73,046
Instrument Business Group 27,431 29,342 24,978
- --------------------------------------------------------------------------------------------------
358,217 351,326 352,469
------------------------------------
Costs and expenses:
Cost of sales of Equipment Business Group 101,744 92,826 104,638
Cost of sales of Ultrapure Water Group 70,636 87,039 80,964
Cost of sales of Consumer Water Group 54,052 45,261 41,510
Cost of sales of Instrument Business Group 11,500 11,716 9,908
Research and development 7,066 6,635 5,410
Selling, general and administrative 84,892 76,299 67,593
- --------------------------------------------------------------------------------------------------
329,890 319,776 310,023
------------------------------------
Income from operations 28,327 31,550 42,446
Interest income 961 1,058 1,197
Interest expense (668) (331) (947)
Equity income 1,111 606 526
- --------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 29,731 32,883 43,222
Provision for income taxes 9,522 10,680 14,280
- --------------------------------------------------------------------------------------------------
Income before minority interest 20,209 22,203 28,942
Minority interest expense 848 817 613
- --------------------------------------------------------------------------------------------------
Net income $ 19,361 $ 21,386 $ 28,329
==================================================================================================
Earnings per basic share $ 1.20 $ 1.33 $ 1.78
==================================================================================================
Earnings per diluted share $ 1.18 $ 1.31 $ 1.73
==================================================================================================
Shares used in basic earnings per share calculations 16,148 16,077 15,936
Shares used in diluted earnings per share calculations 16,388 16,357 16,409
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Ionics, Incorporated
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31
Dollars in Thousands, Except Share Amounts 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 13,169 $ 28,770
Short-term investments 195 359
Notes receivable, current 5,374 4,144
Accounts receivable 120,407 111,844
Receivables from affiliated companies 1,231 2,329
Inventories 33,880 31,549
Other current assets 14,816 8,098
Deferred income taxes 4,730 -
- ------------------------------------------------------------------------------------------------------------------
Total current assets 193,802 187,093
- ------------------------------------------------------------------------------------------------------------------
Notes receivable, long-term 10,027 8,824
Investments in affiliated companies 10,752 7,057
Property, plant and equipment, net 227,250 195,683
Other assets 59,075 53,466
- ------------------------------------------------------------------------------------------------------------------
Total assets $500,906 $452,123
==================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term debt $ 25,514 $ 6,873
Accounts payable 41,867 37,361
Other current liabilities 32,094 38,052
Income taxes - 3,648
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 99,475 85,934
- ------------------------------------------------------------------------------------------------------------------
Long-term debt and notes payable 8,351 1,519
Deferred income taxes 26,803 17,036
Other liabilities 4,425 2,036
Commitments and contingencies - -
Stockholders' equity:
Common stock, par value $1, authorized shares: 55,000,000 in 1999 and 1998;
issued and outstanding: 16,201,483 in 1999 and 16,116,649 in 1998 16,201 16,117
Additional paid-in capital 159,288 157,571
Retained earnings 199,304 179,943
Accumulated other comprehensive income (12,905) (7,889)
Unearned compensation (36) (144)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 361,852 345,598
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $500,906 $452,123
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Ionics, Incorporated
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
For the years ended December 31
<S> <C> <C> <C>
Dollars in Thousands 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $19,361 $21,386 $28,329
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 26,464 25,519 25,833
Amortization of intangibles 2,333 1,695 1,214
Provision for losses on accounts and notes receivable 2,643 1,319 1,408
Deferred income tax provision 3,723 2,478 5,571
Compensation expense on restricted stock awards 108 108 108
Changes in assets and liabilities, net of effects of businesses
acquired:
Notes receivable (3,539) (168) (2,264)
Accounts receivable (11,405) (14,695) (7,865)
Inventories (2,081) (2,773) (2,395)
Deferred income taxes and other current assets (11,566) (1,461) 2,594
Investments in affiliates (4,232) (2,815) (1,106)
Accounts payable and accrued expenses (1,640) 20,267 (5,219)
Income taxes 5,234 (218) 2,470
Other 1,502 (4,851) (988)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 26,905 45,791 47,690
-------------------------------------
Investing activities:
Additions to property, plant and equipment (61,515) (42,196) (33,510)
Disposals of property, plant and equipment 2,177 1,882 10,114
Sale and maturity of short-term investments 164 137 -
Acquisitions, net of cash acquired (8,513) - (11,016)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (67,687) (40,177) (34,412)
-------------------------------------
Financing activities:
Principal payments on current debt (10,393) (15,339) (17,077)
Proceeds from borrowings of current debt 28,762 9,716 14,937
Principal payments on long-term debt (756) (8) (31)
Proceeds from borrowings of long-term debt 7,093 419 363
Proceeds from stock option plans 1,424 2,447 3,188
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 26,130 (2,765) 1,380
-------------------------------------
Effect of exchange rate changes on cash (949) 134 (1,140)
-------------------------------------
Net change in cash and cash equivalents (15,601) 2,983 13,518
Cash and cash equivalents at end of prior year 28,770 25,787 12,269
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of current year $13,169 $28,770 $25,787
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Ionics, Incorporated
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Other Total
Common Stock Paid-In Retained Comprehensive Unearned Stockholders'
Dollars in Thousands Shares Par Value Capital Earnings Income Compensation Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 15,823,205 $15,823 $149,337 $130,228 $ (2,811) $(360) $292,217
Comprehensive income:
Net income - - - 28,329 - - 28,329
Translation adjustments,
net of tax of $2,690 - - - - (6,315) - (6,315)
--------
Total comprehensive income 22,014
--------
Stock options exercised 163,214 163 3,025 - - - 3,188
Tax benefit of stock option activity - - 1,421 - - - 1,421
Other activity 14,866 15 696 - - - 711
Amortization of unearned compensation - - - - - 108 108
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 16,001,285 16,001 154,479 158,557 (9,126) (252) 319,659
Comprehensive income:
Net income - - - 21,386 - - 21,386
Translation adjustments,
net of tax of $(619) - - - - 1,237 - 1,237
--------
Total comprehensive income 22,623
--------
Stock options exercised 115,364 116 2,331 - - - 2,447
Tax benefit of stock option activity - - 761 - - - 761
Amortization of unearned compensation - - - - - 108 108
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 16,116,649 16,117 157,571 179,943 (7,889) (144) 345,598
Comprehensive income:
Net income - - - 19,361 - - 19,361
Translation adjustments,
net of tax of $2,497 - - - - (5,016) - (5,016)
--------
Total comprehensive income 14,345
--------
Stock options exercised 82,033 82 1,258 - - - 1,340
Tax benefit of stock option activity - - 377 - - - 377
Shares issued to directors 2,801 2 82 - - - 84
Amortization of unearned compensation - - - - - 108 108
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 16,201,483 $16,201 $159,288 $199,304 $(12,905) $ (36) $361,852
=====================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Ionics, Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Operations
The Company is involved worldwide in the manufacture and sale of membranes,
equipment for the purification, concentration, treatment and analysis of water
and wastewater, in the supply of purified water, food and chemical products, and
in the sale of bottled water and home water purifiers. Principal markets include
the United States, Europe and Asia as well as other international markets.
Basis of Presentation
Certain prior year amounts have been reclassified to conform to the current year
presentation with no impact on net income.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
wholly and majority-owned subsidiaries and controlled affiliates. All
significant intercompany accounts and transactions have been eliminated.
Investments in affiliated companies, representing non-controlling ownership
interests, are accounted for under the equity method.
Revenue Recognition
Product revenues are recorded upon shipment, and service revenues are recorded
as the services are performed. Interest revenues on consumer water equipment
loans are recognized over the life of the loans. Interest earned on customer
notes receivable, totaling $1,686,000, $1,470,000 and $1,380,000 in 1999, 1998
and 1997, respectively, is included in revenues.
Most equipment leases to customers are accounted for as operating leases and,
therefore, rental revenues are recognized over the life of the lease and the
cost of the equipment is depreciated over its useful life. Some leases are
accounted for as sales-type leases wherein the present value of the lease
revenues and costs are recognized at the time of shipment of the product.
Revenues from large contracts are recognized using the percentage completion
method of accounting in the proportion that costs incurred bear to total
estimated costs at completion. Losses, if any, are provided for in the period in
which the loss is determined.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. This
bulletin summarizes certain views of the staff on applying generally accepted
accounting principles to revenue recognition in financial statements. The staff
believes that revenue is realized or realizable and earned when all of the
following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the seller's price to the
buyer is fixed or determinable; and collectibility is reasonably assured. The
Company believes that its current revenue recognition policy complies with the
Commission's guidelines.
Cash Equivalents
Short-term investments with a maturity of 90 days or less from the date of
acquisition are classified as cash equivalents.
<PAGE>
Ionics, Incorporated
Investments
Management determines the appropriate classification of its investment in debt
securities at the time of purchase. Debt securities which the Company has the
ability and positive intent to hold to maturity are classified accordingly and
carried at cost. The Company is not involved in activities classified as the
trading of investments.
Notes Receivable
Notes receivable have been reported at their estimated realizable value. The
allowance for uncollectible notes receivable totaled $213,000 and $363,000 at
December 31, 1999 and 1998, respectively.
Inventories
Inventories are carried at the lower of cost or market, principally on the
first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. When an asset is retired or
sold, any resulting gain or loss is included in the results of operations.
Interest capitalized as property, plant and equipment amounted to $957,000,
$616,000 and $238,000 in 1999, 1998 and 1997, respectively. In general,
depreciation is computed on a straight-line basis over the expected lives of the
assets, as follows:
Classification Depreciation Lives
- -------------- ------------------
Buildings and improvements 10 - 40 years
Machinery and equipment, including supply equipment 3 - 25 years
Other 3 - 12 years
In certain situations the units of production method is utilized in order to
achieve a more appropriate matching of revenues and expenses.
The Company's policy is to depreciate processing plants, other than leased
equipment, over the shorter of their useful lives or the term of the
corresponding supply contracts.
Asset Impairment
Impairment losses resulting from an excess of carrying value of long-term assets
over their fair values are recognized as such losses are identified.
Goodwill
Goodwill is included in other assets and represents the unamortized difference
between acquisition cost and the fair value of net assets acquired in the
purchase of various entities. Goodwill is amortized on a straight-line basis
over its estimated useful life, which generally is a period ranging from 10 to
40 years. The Company evaluates the realizability of goodwill based upon
expectations of non-discounted cash flows and operating income for each
subsidiary having a material goodwill balance.
Foreign Exchange
Assets and liabilities of foreign affiliates and subsidiaries are translated at
year-end exchange rates, and the related statements of operations are translated
at average exchange rates during the year. Translation gains and losses are
accumulated net of income tax as a separate component of stockholders' equity.
Some transactions of the Company and its subsidiaries are made in currencies
different from their own. Gains and losses from these transactions are included
in income as they occur. Net foreign currency transaction gains/(losses)
included in income before income taxes and minority interest totaled $11,000,
$(28,000) and $100,000 for 1999, 1998 and 1997, respectively.
<PAGE>
Ionics, Incorporated
Income Taxes
Income tax expense is based on pretax financial accounting income. Deferred tax
assets and liabilities are recognized for the expected tax consequences of
temporary differences between the tax basis of assets and liabilities and their
reported amounts using enacted rates in effect for the year in which the
differences are expected to reverse.
Earnings Per Share
Basic earnings per share is computed based on the weighted-average number of
shares outstanding. Diluted earnings per share is computed based on the
weighted-average number of common shares outstanding while giving effect to all
potentially dilutive common shares that were outstanding during the period.
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.
Derivative Instruments and Hedging Activities
In June 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective
Date of FASB Statement No. 133." SFAS No.137 amends SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which was issued in
June 1998. SFAS No. 137 defers the effective date of SFAS No. 133 to
all fiscal years beginning after June 15, 2000. Accordingly, the Company will
adopt the provisions of SFAS No. 133 for the fiscal year 2001 which commences
on January 1, 2001. This Statement should not have a material effect on the
Company's financial statements.
<TABLE>
<CAPTION>
Note 2. Consolidated Balance Sheet Details
<S> <C> <C>
Dollars in Thousands 1999 1998
- -------------------------------------------------------------------------
Raw materials $ 20,216 $ 19,164
Work in process 8,913 8,523
Finished goods 4,751 3,862
- -------------------------------------------------------------------------
Inventories $ 33,880 $ 31,549
=========================================================================
Land $ 8,352 $ 8,194
Buildings 44,858 41,594
Machinery and equipment 299,303 259,885
Other, including furniture,
fixtures and vehicles 49,119 44,267
- -------------------------------------------------------------------------
401,632 353,940
Accumulated depreciation (174,382) (158,257)
- -------------------------------------------------------------------------
Property, plant and equipment, net $227,250 $195,683
=========================================================================
Goodwill $ 62,631 $ 53,377
Accumulated amortization (9,164) (6,831)
Other 5,608 6,920
- -------------------------------------------------------------------------
Other assets $ 59,075 $ 53,466
=========================================================================
Customer deposits $ 2,671 $ 3,965
Accrued commissions 2,362 2,203
Accrued expenses 27,061 31,884
- -------------------------------------------------------------------------
Other current liabilities $ 32,094 $ 38,052
=========================================================================
</TABLE>
<PAGE>
Ionics, Incorporated
<TABLE>
<CAPTION>
Note 3. Supplemental Schedule of Cash and Non-Cash Flow Information
<S> <C> <C> <C>
Dollars in Thousands 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Cash payments for interest
and income taxes:
Interest $ 1,740 $ 685 $ 634
Taxes $ 7,534 $8,481 $ 2,860
Liabilities assumed in
conjunction with acquisitions:
Fair value of assets purchased $11,300 $ - $19,352
Net cash paid (8,513) - (11,016)
- -----------------------------------------------------------------------------------------------
Liabilities assumed $ 2,787 $ - $ 8,336
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Note 4. Accounts Receivable
<S> <C> <C>
Dollars in Thousands 1999 1998
- -----------------------------------------------------------------
Billed receivables $ 80,647 $ 74,059
Unbilled receivables 43,167 40,313
Allowance for doubtful accounts (3,407) (2,528)
- -----------------------------------------------------------------
Accounts receivable $120,407 $111,844
=================================================================
</TABLE>
Unbilled receivables represent the excess of revenues recognized on percentage
completion contracts over amounts billed. These amounts will become billable as
the Company achieves contractual milestones. Substantially all of the unbilled
amounts at December 31, 1999 are expected to be billed during 2000.
Billed receivables include retainage amounts of $1,416,000 and $3,654,000 at
December 31, 1999 and 1998, respectively. Substantially all of the retainage
amounts are collectible within one year.
Note 5. Investments in Affiliated Companies
The Company's investments in the following foreign affiliates are accounted for
under the equity method. The principal business activities of these foreign
affiliates involve the production, sale and distribution of bottled or treated
water and the sale of equipment and replacement parts.
Ownership
Affiliate Percentage
- -------------------------------------------------------------------------------
Agrinord S.r.l. - Italy 50%
Aguas Tratadas de Cadereyta S.A. de C.V. - Mexico 20%
Aguas Tratadas de Madero, S.A. de C.V. - Mexico 20%
Aqua Cool Kuwait - Kuwait 49%
Aqua Cool Saudi Arabia - Saudi Arabia 40%
Aqua Design Ltd. - Cayman Islands 39%
Jalal-Ionics, Ltd. - Bahrain 40%
Mega a.s. - Czech Republic 25%
Watlington Waterworks, Ltd. - Bermuda 26%
Yuasa-Ionics Co., Ltd. - Japan 50%
The Company's percentage ownership interest in a foreign affiliate may vary from
its interest in the earnings of such affiliate.
Activity in investments in affiliated companies:
<PAGE>
Ionics, Incorporated
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Dollars in Thousands 1999 1998 1997
- ------------------------------------------------------------------------------
Investments at end
of prior year $ 7,057 $3,983 $2,908
Equity in earnings 1,111 606 526
Distributions received (475) (396) (575)
Cumulative translation
adjustments (540) 172 (7)
Reclassification of Watlington
Waterworks from other
assets resulting from change in
ownership interest - 1,208 -
Additional investments 3,599 1,484 1,131
- ------------------------------------------------------------------------------
Investments at end of current year $10,752 $7,057 $3,983
==============================================================================
</TABLE>
At December 31, 1999, the Company's equity in the total assets and in the total
liabilities of its foreign affiliates was $24,171,000 and $13,419,000,
respectively. The Company's equity in the 1999 total revenues of these
affiliates was $7,962,000.
Note 6. Commitments and Contingencies
Litigation
The Company is involved in the normal course of its business in various
litigation matters, some of which are in the pre-trial discovery stages. The
Company believes generally that it has meritorious defenses and that none of the
pending matters will have an outcome material to the financial condition or
business of the Company.
The Company was notified in 1992 that it is a potentially responsible party
(PRP) at a Superfund site, Solvent Recovery Services of New England in
Southington, Connecticut (the "SRS Site"). Ionics' share of assessments to date
for site work totals approximately $60,000. The ultimate site clean-up cost is
currently not expected to exceed $59 million, of which the Company's share would
not exceed $308,000 including the amounts already assessed against the Company.
While it is too soon to predict the scope and cost of the final remedy that the
EPA will select, based upon the large number of PRPs identified, the Company's
small volumetric ranking (approximately 0.5%) and the identities of the larger
PRPs, the Company believes that its liability in this matter will not have a
material effect on the Company or its financial position.
The Attorney General of the Commonwealth of Massachusetts has been conducting an
investigation into certain former operations of a division of the Company during
portions of the years 1991 through 1995. The Company has cooperated with this
investigation of possible violations of environmental statutes and regulations
that relate to one facility that ceased operations in 1995. The Company cannot
predict the outcome of this matter, but it may result in administrative, civil
or criminal charges and/or monetary payments.
On March 27, 1998, the Company was served with a summons and complaint in
connection with a lawsuit now captioned United States Filter Corporation, U.S.
Filter/Ionpure, Inc., IP Holding Company, Millipore Corporation and Millipore
Investment Holdings Limited v. Ionics, Incorporated, filed in the U.S. District
Court, District of Massachusetts (Boston). Plaintiffs allege that the Company is
infringing a certain reissue patent, which issued on March 10, 1998, by making,
selling, offering to sell and using the Company's electrodeionization (EDI)
systems within the United States. On June 10, 1999, the Company was served with
a second summons and complaint alleging infringement of six EDI-related patents
issued earlier than the reissue patent which is the subject of the first
lawsuit. The Company, which pioneered the development of the EDI process over 30
years ago and holds a number of patents related to EDI technology, believes that
it has valid defenses to the plaintiffs' infringement claims and intends
vigorously to defend itself in this litigation, which is in the discovery
stages.
<PAGE>
Ionics, Incorporated
Other Matters
As of December 31, 1999, the Company had incurred $1 million of costs relating
primarily to providing assistance to a project company in obtaining financing
for, and preliminary project management and design work on, a $120 million
seawater desalination project in Trinidad announced in September 1999. Project
financing for this project has not yet been obtained. If it were to be
determined that financing for this project was not available, such costs would
then be expensed, along with approximately $2 million expected to be incurred in
2000 prior to a determination concerning project financing.
<TABLE>
<CAPTION>
Note 7. Long-Term Debt and Notes Payable
<S> <C> <C>
Dollars in Thousands 1999 1998
- ------------------------------------------------------------------------
Borrowings outstanding $33,865 $8,392
Less installments due within one year 25,514 6,873
- ------------------------------------------------------------------------
Long-term debt and notes payable $ 8,351 $1,519
========================================================================
</TABLE>
Maturities of borrowings outstanding for the five years ending December 31, 2000
through 2004 are approximately $25,514,000, $2,191,000, $810,000, $787,000 and
$770,000, respectively.
The Company has domestic credit arrangements with various banks under which it
can borrow up to an aggregate of approximately $35 million, at the prime rate
(8.5% at December 31, 1999), the money market rate (5.75% at December 31, 1999)
or the London Interbank Offered Rate (LIBOR) plus 1/2% (6.68% at December 31,
1999), at the Company's option. The Company had outstanding borrowings of
$14,500,000 against these lines of credit at December 31, 1999. There were no
borrowings against these lines of credit at December 31, 1998.
Under foreign lines of credit, excluding those related to specific project
financing, the Company can borrow an aggregate of approximately $6.6 million at
interest rates of LIBOR plus 1/2% (6.68% at December 31, 1999) or at the lending
bank's Base Cost of Funds plus 1 3/4% (5.25% at December 31, 1999). The Company
had outstanding borrowings of $6.4 million and $1.2 million against these lines
of credit at December 31, 1999 and 1998, respectively.
The Company has arranged two lines of credit totaling $8.2 million for its
controlled affiliate in Barbados to provide project financing for a desalination
plant at LIBOR plus 2% (8.18% at December 31, 1999) for its $5.5 million line
and at a fixed rate of 8% for its $2.7 million line. These lines of credit are
payable in equal quarterly installments over a ten-year period beginning in
2000. The controlled affiliate had outstanding borrowings of $7.2 million
against these lines of credit at December 31, 1999. These lines of credit were
not open at December 31, 1998.
The Company utilizes other short-term bank loans to finance working capital
requirements for certain business units. The Company's various loan and note
agreements contain certain financial covenants typical to such agreements
relating to working capital and to consolidated tangible net worth. The
weighted-average interest rate on all borrowings at December 31, 1999 and 1998
was approximately 7% and 10%, respectively.
<PAGE>
Ionics, Incorporated
Note 8. Income Taxes
The components of domestic and foreign income before income taxes and minority
interest were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Dollars in Thousands 1999 1998 1997
- ----------------------------------------------------------------------------
U.S. $15,317 $21,468 $27,450
Non-U.S. 14,414 11,415 15,772
- ----------------------------------------------------------------------------
Income before income taxes
and minority interest $29,731 $32,883 $43,222
============================================================================
</TABLE>
<TABLE>
<CAPTION>
The provision for income taxes consisted of the following:
<S> <C> <C> <C>
Dollars in Thousands 1999 1998 1997
- -----------------------------------------------------------------------
Federal $1,353 $ 4,925 $ 5,891
Foreign 3,814 2,386 2,276
State 632 891 542
- -----------------------------------------------------------------------
Current provision 5,799 8,202 8,709
- -----------------------------------------------------------------------
Federal 4,176 2,317 3,599
Foreign (318) (116) 996
State (135) 277 976
- -----------------------------------------------------------------------
Deferred provision 3,723 2,478 5,571
- -----------------------------------------------------------------------
Provision for income taxes $9,522 $10,680 $14,280
=======================================================================
</TABLE>
<PAGE>
Ionics, Incorporated
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 1999, the
tax effects of the temporary differences were:
<TABLE>
<CAPTION>
<S> <C> <C>
Dollars in Thousands Tax Assets Liabilities
- ----------------------------------------------------------------------------
Depreciation $ - $19,310
Goodwill amortization - 876
Inventory valuation 2,641 -
Bad debt reserves 324 -
Accrued commissions 542 -
Profit on sales to foreign subsidiaries 862 -
Insurance accruals 720 -
U.S. tax on unrepatriated earnings - 5,692
Alternative minimum tax 2,307 -
Foreign withholding taxes on
undistributed earnings - 1,956
Foreign deferred liabilities, net - 3,856
Tax effect of currency translation loss 4,786 -
Net operating loss carryforwards 4,099 -
Miscellaneous 2,320 3,703
- ----------------------------------------------------------------------------
18,601 35,393
Valuation allowance for deferred tax assets (1,800) -
- ----------------------------------------------------------------------------
Deferred income taxes $16,801 $35,393
============================================================================
</TABLE>
The United States statutory corporate tax rate is reconciled to the Company's
effective tax rate as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
- ----------------------------------------------------------------------------
U.S. Federal statutory rate 35.0% 35.0% 35.0%
Foreign Sales Corporation (2.1) (2.1) (1.5)
Goodwill 1.0 0.4 0.1
State income taxes, net of
federal tax benefit 1.7 2.3 2.3
Foreign income taxed at
different rates (3.8) (3.0) (3.3)
Other, net 0.2 (0.1) 0.4
- ----------------------------------------------------------------------------
Effective tax rate 32.0% 32.5% 33.0%
============================================================================
</TABLE>
At December 31, 1999, the Company had unused tax loss carryforward benefits of
$4,099,000 (expiring in fiscal years 2004 to 2009). Because certain provisions
of the tax law may limit the utilization of these benefits, the Company has
established $1,800,000 as a valuation allowance at December 31, 1999 and 1998.
In the event this valuation allowance is no longer considered necessary, the
valuation allowance will reduce the related entity's goodwill. The remaining
unreserved portion is considered to be realizable. $2,299,000 of the net unused
tax loss carryforward benefit has been included in other assets at December 31,
1999.
The Company has elected not to provide tax on certain undistributed earnings of
its foreign subsidiaries which it considers to be permanently reinvested. The
cumulative amount of such unprovided taxes was approximately $5,065,000,
$3,932,000 and $2,843,000 as of December 31, 1999, 1998 and 1997, respectively.
<PAGE>
Ionics, Incorporated
Note 9. Stockholders' Equity
The Company adopted the disclosure-only provision of SFAS No. 123 "Accounting
for Stock-Based Compensation" in 1996. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions used for grants in 1999, 1998 and 1997: expected
volatility of 30.5% in 1999, 27.3% in 1998 and 23.4% in 1997; weighted-average,
risk-free interest rates of 5.27%, 5.41% and 6.33% in 1999, 1998 and 1997,
respectively; and expected lives of five years. No dividends are assumed. The
weighted-average fair value of options granted during 1999, 1998 and 1997 was
$11.07, $10.43 and $15.88, respectively.
At December 31, 1999, the Company had the stock-based compensation plans
described below. The Company applies Accounting Principles Board Opinion 25 in
accounting for its plans. Accordingly, any difference between the option price
and the fair market value of the stock at the date of grant is charged to
operations over the expected period of benefit to the Company. Had compensation
cost for the Company's plans been determined based on the fair value of the
options at the grant dates for awards under those plans consistent with the
method of SFAS No. 123, the Company's net income and earnings per share would
have been adjusted. On a pro forma basis, net income as reported for 1999 of
$19.4 million would have been $16.6 million, 1998 net income of $21.4 million
would have been $19.3 million and 1997 net income of $28.3 million would have
been $26.7 million. Diluted earnings per share as reported for 1999 of $1.18
would have been $1.01, 1998 diluted earnings per share of $1.31 would have been
$1.18 and 1997 diluted earnings per share of $1.73 would have been $1.63. Basic
earnings per share as reported for 1999 of $1.20 would have been $1.03, 1998
basic earnings per share of $1.33 would have been $1.20 and 1997 basic earnings
per share of $1.78 would have been $1.67. The effects of applying SFAS No. 123
in this pro forma disclosure are not indicative of future awards, which are
anticipated. SFAS No. 123 does not apply to awards prior to 1995.
Under the 1979 Stock Option Plan (the "1979 Plan"), stock options (only
non-qualified stock options after February 1989) were granted to officers and
other key employees of the Company. Options granted under the 1979 Plan are
immediately exercisable, are subject to repurchase rights that lapse generally
over a five-year period, and have a term of ten years and one day. Effective May
8, 1997, the 1979 Plan was replaced by the 1997 Stock Incentive Plan (the "1997
Plan"), and no additional options will be granted under the 1979 Plan. At
December 31, 1999 and 1998, respectively, no shares were reserved for issuance
of additional options under the 1979 Plan.
Under the 1997 Plan, incentive stock options, non-qualified stock options, and
long-term performance awards may be awarded to officers and other key employees
as well as to consultants. The 1997 Plan contains an automatic addition
provision under which a number of shares equal to two percent (2%) of the
Company's outstanding stock will be added to the 1997 Plan at the end of each of
the four fiscal year-ends of the Company following adoption of the 1997 Plan,
commencing December 31, 1997. At December 31, 1999 and 1998, there were 835,950
and 526,373 shares, respectively, reserved for issuance of additional options
under the 1997 Plan after giving effect to the automatic addition provision.
Options granted under the 1997 Plan vest over a five-year period and have a term
of ten years.
Under the 1986 Stock Option Plan for Non-Employee Directors (the "1986 Plan"),
options are granted automatically at a price not less than the fair market value
of the stock at the date of grant. The options become fully exercisable after a
six-month period, are exercisable only during certain "window" periods, and have
a term of ten years and one day. As of December 31, 1999 and 1998, 54,000 and
62,500 shares, respectively, were reserved for issuance of additional options
under the 1986 Plan.
The Company has adopted a restricted stock plan (the "1994 Plan") under which
shares of common stock may be granted to officers and other key employees of the
Company. Restrictions on the sale of such common stock typically lapse over a
five-year vesting period. No shares were issued under the 1994 Plan in 1999,
1998 and 1997. As of December 31, 1999, a total of 280,178 shares remain
reserved for issuance.
<PAGE>
Ionics, Incorporated
On August 19, 1998, the Company adopted the 1998 Non-Employee Directors' Fee
Plan ("Fee Plan"). The Fee Plan permits non-employee directors to elect to
receive payment of their annual retainer fee in cash or in common stock. The
valuation of the common stock is based on the last reported sales price of the
common stock on the New York Stock Exchange on the trading date next preceding
the date of the Board meeting at which payment will be made. Annual retainer
fees are paid in two equal installments during the year. A total of 97,199
shares were reserved for issuance under the Fee Plan as of December 31, 1999.
A summary of the status of the Company's stock option plans as of December 31,
1999, 1998 and 1997 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
- ------------------------------------------------------------------ ------------------- ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options in Thousands Options Price Options Price Options Price
- ------------------------------------------------------------------ ------------------- ------------------
Outstanding at end of prior year 2,796 $29.70 2,035 $29.31 2,200 $28.39
Granted 80 30.27 956 29.81 55 45.99
Exercised (82) 16.31 (115) 21.25 (163) 19.56
Canceled (60) 33.25 (80) 33.48 (57) 37.80
- ----------------------------------------------------------------------------------------------------------------
Outstanding at end of current year 2,734 $30.04 2,796 $29.70 2,035 $29.31
Options exercisable at year-end 1,918 $30.29 1,814 $29.89 1,964 $29.44
</TABLE>
The following table summarizes the information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options in Thousands Options Outstanding Options Exercisable
- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Weighted-
Average Weighted Weighted-
Number Remaining Average Number Average
Range of Outstanding Contract Exercise Exercisable Exercise
Exercise Prices at 12/31/99 Years Price at 12/31/99 Price
$12.25 91 0.7 $12.25 82 $12.25
$19.75-$25.63 916 3.7 22.07 916 22.07
$27.00-$29.88 991 8.5 29.38 205 29.22
$30.00-$33.81 30 8.8 32.47 21 33.39
$42.38-$48.25 706 6.8 43.48 694 43.50
- -------------------------------------------------------------------------------------------------------
$12.25-$48.25 2,734 6.2 $30.04 1,918 $30.29
</TABLE>
The Company has a Section 401(k) stock savings plan under which 150,000 shares
have been registered with the Securities and Exchange Commission for purchase on
behalf of employees. Shares are normally acquired for the plan in the open
market. Through December 31, 1999, no shares had been issued under the plan.
The Company has adopted a Renewed Stockholder Rights Plan designed to protect
stockholders against abusive takeover tactics. Each share of common stock now
carries one right. Each right entitles the holder to purchase from the Company
one share of common stock (or in certain circumstances, to receive cash,
property or other securities of the Company) at a purchase price of $175 subject
to adjustment. In certain circumstances, rights become exercisable for common
stock (or a combination of cash, property or other securities of the Company)
worth twice the exercise price of the right. The rights are not exercisable
until the occurrence of certain events as defined in the Renewed Stockholder
Rights Plan. The rights may be redeemed by the Company at $.01 per right at any
time unless certain events occur. Unless redeemed earlier, the rights, which
have no voting power, expire on August 19, 2007.
<PAGE>
Ionics, Incorporated
<TABLE>
<CAPTION>
Note 10. Earnings Per Share Calculations (EPS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in Thousands,
Except Per Share Amounts For the Year Ended 1999 For the Year Ended 1998 For the Year Ended 1997
- ------------------------ ----------------------- ----------------------- -----------------------
Net Per Share Net Per Share Net Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
- ----------------------------------------------------------- -------------------------- --------------------------
Basic EPS
Income available to
common stockholders $19,361 16,148 $1.20 $21,386 16,077 $1.33 $28,329 15,936 $1.78
Effect of dilutive stock
options - 240 (.02) - 280 (.02) - 473 (.05)
- ---------------------------------------------------------------------------------------------------------------------------
Diluted EPS $19,361 16,388 $1.18 $21,386 16,357 $1.31 $28,329 16,409 $1.73
===========================================================================================================================
</TABLE>
The effect of dilutive stock options excludes those stock options for which the
impact would have been antidilutive based on the exercise price of the options.
The number of options that were antidilutive at December 31, 1999 and 1998 were
1,661,000 and 729,000, respectively.
Note 11. Operating Leases
The Company leases equipment, primarily for industrial water purification and
bottled water coolers, to customers through operating leases. The original cost
of this equipment was $118,495,000 and $102,498,000 at December 31, 1999 and
1998, respectively. The accumulated depreciation for such equipment was
$46,964,000 and $42,539,000 at December 31, 1999 and 1998, respectively.
At December 31, 1999, future minimum rentals receivable under noncancelable
operating leases in the years 2000 through 2004 and later were approximately
$29,960,000, $26,414,000, $24,178,000, $21,905,000, $19,968,000 and
$126,994,000, respectively.
The Company leases facilities and personal property under various operating
leases. Future minimum payments due under lease arrangements are as follows:
$4,253,000 in 2000, $3,178,000 in 2001, $2,742,000 in 2002, $2,108,000 in 2003
and $2,076,000 in 2004. Rent expense under these leases was approximately
$4,368,000, $4,428,000 and $3,928,000 for 1999, 1998 and 1997, respectively.
Note 12. Profit-Sharing and Pension Plans
The Company has a contributory profit-sharing plan (defined contribution plan)
which covers employees of the Company who are members of the Bridgeville,
Pennsylvania Fabricated Products Division. Company contributions to the defined
contribution plan are made from pretax profits, may vary from 8% to 15% of
participants' compensation, and are allocated to participants' accounts in
proportion to each participant's respective compensation. Company contributions
were $281,000, $254,000 and $253,000 in 1999, 1998 and 1997, respectively.
<PAGE>
Ionics, Incorporated
The Company also has a contributory defined benefit pension plan for its other
domestic employees. Benefits are based on years of service and the employee's
average compensation. The Company's funding policy is to contribute annually an
amount that can be deducted for federal income tax purposes. The plan's assets
are comprised of money market funds, equity funds, short-term bonds and
intermediate-term bonds.
The following table sets forth the defined benefit plan's funded status and
amounts recognized in the Company's balance sheets at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
<S> <C> <C>
Dollars in Thousands 1999 1998
- ------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation as of prior year-end $15,296 $13,591
Service cost 1,239 1,347
Interest cost 1,186 987
Actuarial gain (2,347) (161)
Expenses paid (105) (117)
Benefits paid (805) (351)
- ------------------------------------------------------------------------------
Projected benefit obligation as of year-end $14,464 $15,296
==============================================================================
Change in Plan Assets
Fair value of plan assets as of prior year-end $14,145 $12,731
Actual return on plan assets (178) 1,132
Employer contributions 3,201 750
Expenses paid (105) (117)
Benefits paid (805) (351)
- ------------------------------------------------------------------------------
Fair value of plan assets as of year-end $16,258 $14,145
==============================================================================
Funded Status
Funded status as of year-end $ 1,794 $(1,151)
Unrecognized transition asset (203) (256)
Unrecognized prior service cost 412 449
Unrecognized net actuarial loss 870 1,817
- ------------------------------------------------------------------------------
Prepaid benefit cost as of year-end $ 2,873 $ 859
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
The expense of the defined benefit plan was as follows:
<S> <C> <C> <C>
Dollars in Thousands 1999 1998 1997
- -------------------------------------------------------------------------------
Components of Net Periodic
Benefit Cost
Service cost $1,239 $1,347 $1,172
Interest cost 1,186 987 932
Expected return on plan assets (1,376) (1,153) (879)
Amortization of transition asset (53) (53) (53)
Amortization of prior service cost 37 37 37
Recognized net actuarial loss 155 1 48
- -------------------------------------------------------------------------------
Net periodic benefit cost $1,188 $1,166 $1,257
===============================================================================
</TABLE>
The Company determined the defined benefit plan's funded status and amounts
recognized in the Company's balance sheet and the expense of the defined benefit
plan using the following assumptions: expected return on plan assets of 9.0% in
1999, 1998 and 1997; rate of compensation increase of 4.75% in 1999 and 1998 and
of 5.0% in 1997; and a discount rate of 8.25% in 1999, 6.75% in 1998 and 7.0% in
1997.
<PAGE>
Ionics, Incorporated
The Ionics Section 401(k) Stock Savings Plan is available to substantially all
U.S. employees of the Company. Employees may contribute from 1% to 12% of
compensation subject to certain limits. The Company matches 50% of employee
contributions allocated to the Company's common stock up to 6% of their salary.
The Company recognized expense of $735,000, $778,000 and $749,000 in 1999, 1998
and 1997, respectively, under this plan.
The Company does not provide post-retirement health care to its employees or any
other significant post-retirement benefits other than those described above.
Note 13. Financial Instruments
Off-Balance-Sheet Risk
The Company issues letters of credit and performance bonds as guarantees for
various performance and bid obligations. Approximately $72.9 million and $30.1
million of these guarantees were outstanding at December 31, 1999 and 1998,
respectively. Approximately 39% of the guarantees outstanding at December 31,
1999 are scheduled to expire in 2000. These instruments were executed with
creditworthy institutions. The Company periodically enters into foreign exchange
contracts to hedge certain operational and balance sheet exposures against
changes in foreign currency exchange rates. Because the impact of movements in
currency exchange rates on foreign exchange contracts offsets the related impact
on the underlying items being hedged, these instruments do not subject the
Company to risk that would not otherwise result from changes in currency
exchange rates. The Company had no foreign exchange contracts outstanding at
December 31, 1999 and had $318,000 of foreign exchange contracts outstanding at
December 31, 1998.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
investments, trade accounts receivable and notes receivable. The credit risk of
cash equivalents and investments is low as the funds are primarily invested in
U.S. money market investments and in Spanish Government securities. The
Company's concentrations of credit risk with respect to trade accounts
receivable and notes receivable is considered low. The Company's customer base
is spread across many different industries and geographies, and the Company
obtains guaranteed letters of credit for many of its foreign orders.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents and investments closely approximate
their fair values as these items have relatively short maturities and are highly
liquid. Based on market information, the carrying amounts of notes receivable
and debt approximate their fair values.
Investments in Securities
Realized gains and losses from the sale of debt and equity securities during
fiscal 1999 and 1998 were not significant.
Long-term investments, maturing in 2001, 2003 and 2004, which the Company
intends to hold to maturity have been recorded at a net cost of $2,228,000 and
$1,640,000 at December 31, 1999 and 1998, respectively. At December 31, 1999 and
1998, the Company also had short-term investments of $195,000 and $359,000,
respectively, which the Company intends to hold to maturity. The cost of these
investments approximates fair value.
Note 14. Acquisitions
1999 Purchases
M2 Innovative Solutions, Inc.
In January 1999, the Company acquired a 100% interest in M2 Innovative
Solutions, Inc. (now called Ionics Life Sciences, Inc.) for approximately $2.6
million. Additional payments of up to $1,425,000 may be required depending upon
the achievement of certain future operating results. Such payments will increase
the purchased goodwill of Ionics Life Sciences, Inc.
<PAGE>
Ionics, Incorporated
The acquisition was accounted for under the purchase method with the results of
Ionics Life Sciences included from January 1, 1999. Goodwill of approximately
$2.6 million is being amortized on a straight-line basis over 20 years. Pro
forma results of operations have not been presented as the effect of this
acquisition on the financial statements was not material. Ionics Life Sciences
is a supplier of ultrapure water products and services, including validated
pharmaceutical systems, to the life sciences industry.
Aquarelle SA
In January 1999, the Company acquired a 100% interest in Aquarelle SA for
approximately $4.4 million. The acquisition was accounted for under the purchase
method with the results of Aquarelle SA included from January 1, 1999. Goodwill
of approximately $4 million is being amortized on a straight-line basis over a
20-year period. Pro forma results of operations have not been presented as the
effect of this acquisition on the financial statements was not material.
Aquarelle is a French company in the five-gallon bottled water market.
Agar Technologies Process and Environmental Control, Ltd.
In January 1999, the Company acquired a 100% interest in Agar
Technologies Process and Environmental Control, Ltd. (now called
Ionics Agar Environmental Ltd.) for approximately $1.5 million.
Additional payments may be required depending upon the achievement of
certain future operating results. Such payments will increase the
purchased goodwill of Ionics Agar Environmental Ltd.
The acquisition was accounted for under the purchase method with the results of
Ionics Agar included from January 1, 1999. Goodwill of approximately $1.9
million is being amortized on a straight-line basis over 20 years. Pro forma
results of operations have not been presented as the effect of this acquisition
on the financial statements was not material. Ionics Agar is an Israeli company
which produces instruments that monitor, detect and measure oil on water
surfaces.
Prior Years' Purchases
Enersave Engineering Systems Sdn Bhd
In September 1997, the Company acquired a 55% ownership interest in Enersave
Engineering Systems Sdn Bhd (now Ionics Enersave Sdn Bhd) for approximately $9.6
million. An additional payment of $135,000 was made in 1999 based upon the
achievement of certain operating results. This payment increased the purchased
goodwill of Ionics Enersave.
The acquisition was accounted for under the purchase method with the results of
Ionics Enersave included from September 1, 1997. Goodwill of approximately $10.5
million is being amortized on a straight-line basis over 30 years. Pro forma
results of operations have not been presented as the effect of this acquisition
on the financial statements was not material. Fiscal 1997 revenues for the
period prior to September 1997 were approximately $10 million. Ionics Enersave,
a Malaysian company with operations in Malaysia and China, is a supplier of
water and wastewater treatment systems and services in Southeast Asia.
Watertec Engineering Pty. Ltd.
Effective September 1, 1997, the Company acquired 100% of the assets and
liabilities of Watertec Engineering Pty. Ltd., as Trustee of Watertec
Engineering Unit Trust and two related corporations (together Ionics Watertec)
for an initial payment of $1.9 million. An additional payment of $305,000 was
made in 1998 based upon the achievement of certain operating results. This
payment increased the purchased goodwill of Ionics Watertec.
The acquisition was accounted for under the purchase method with the results of
Ionics Watertec included from September 1, 1997. Goodwill of approximately $1.7
million is being amortized over 30 years. Pro forma results of operations have
not been presented as the effect of this acquisition on the financial statements
was not material. Fiscal 1997 revenues for the period prior to September 1, 1997
were approximately $2.3 million. Ionics Watertec is involved in the manufacture
and supply of ozonation systems for water disinfection and systems for chemical
metering.
<PAGE>
Ionics, Incorporated
Note 15. Segment Information
In 1998, the Company adopted SFAS No. 131. At the end of 1998, the Company
changed from three reportable segments to four reportable "business group"
segments corresponding to a "business group" structure, summarized below, which
was put into place in the latter part of 1998. Segment information for prior
years has been restated to reflect this change.
Equipment Business Group - equipment, supply, "own and operate" and related
services for seawater desalination, brackish water desalination, water and
wastewater treatment and food and chemical processing, for municipalities and
communities, and for the petrochemical, nuclear and electric utilities, pulp and
paper, chemical processing and related industries.
Ultrapure Water Group - equipment, supply, "own and operate" and related
services for the production of ultrapure water for the semiconductor, power and
pharmaceutical industries.
Consumer Water Group - equipment and supply services for the consumer market
including bottled water, over and under-the-sink point-of-use devices, carbon
filtering media, point-of-entry systems for treating the entire home water
supply, household bleach, and other cleaning products.
Instrument Business Group - instruments for the analysis and on-line monitoring
of certain constituents, impurities or contaminants in water or wastewater for
industrial and municipal customers.
The accounting policies of the four business group segments are the same as
those described in "Significant Accounting Policies." The Company evaluates the
performance of each business group segment and considers allocation of resources
to it based on earnings before interest, taxes, and minority interest (EBIT),
and the evaluation of EBIT with respect to capital employed.
The business group structure reflects the segmentation of the product lines,
services, and markets within defined areas of management responsibility. Four
business group managers, one for each of the reportable segments, are directly
accountable to, and maintain regular contact, with the Chief Operating Officer
and the Chief Executive Officer to discuss operating activities, financial
results, forecasts and plans.
The table on the following page summarizes the Company's operations by the four
business group segments and "Corporate." Corporate includes research and
development expenses not allocated to the business groups and certain corporate
administrative and insurance costs.
Geographic Areas
Revenues are reflected in the country from which the sales are made. Long-lived
assets include all long-term assets except for notes receivable. No foreign
country's revenues to unaffiliated customers or long-lived assets were material.
Included in the United States segment are export sales of approximately 16%, 23%
and 22% for 1999, 1998 and 1997, respectively. Including these U.S. export
sales, the percentages of total revenues attributable to activities outside the
U.S. were 44%, 47% and 41% in 1999, 1998 and 1997, respectively.
<PAGE>
Ioncs, Incorporated
<TABLE>
<CAPTION>
Information about the Company's operations by geographic area follows:
<S> <C> <C> <C>
United
Dollars in Thousands States International Total
- ------------------------------------------------------------------------------
1999
Revenue - unaffiliated customers $239,591 $118,626 $358,217
Long-lived assets 192,416 104,661 297,077
- -------------------------------------------------------------------------------
1998
Revenue - unaffiliated customers $242,363 $108,963 $351,326
Long-lived assets 170,528 85,678 256,206
- -------------------------------------------------------------------------------
1997
Revenue - unaffiliated customers $264,604 $ 87,865 $352,469
Long-lived assets 156,020 76,517 232,537
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
Ionics, Incorporated
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Equipment Ultrapure Consumer Instrument
Business Water Water Business
Dollars in Thousands Group Group Group Group Corporate Total
- -----------------------------------------------------------------------------------------------------------------------------------
1999
Revenue - unaffiliated customers $140,655 $ 93,562 $ 96,569 $27,431$ $ - $358,217
Inter-segment transfers 2,214 593 - 1,926 (4,733) -
Income from operations 14,507 3,842 10,869 2,148 (3,039) 28,327
Equity income 444 - 667 - - 1,111
Earnings before interest, taxes and minority interest (EBIT) 14,951 3,842 11,536 2,148 (3,039) 29,438
Interest income - - - - - 961
Interest expense - - - - - (668)
Income before income taxes and minority interest - - - - - 29,731
Capital employed 177,506 106,190 140,697 30,124 (58,800) 395,717
Identifiable assets 209,798 111,128 153,069 17,657 (1,498) 490,154
Investments in affiliated companies 7,503 - 3,249 - - 10,752
Depreciation and amortization 9,889 6,532 11,088 931 357 28,797
Capital expenditures 28,327 14,213 17,059 1,389 527 61,515
===================================================================================================================================
1998
Revenue - unaffiliated customers $129,751 $111,349 $ 80,884 $29,342 $ - $351,326
Inter-segment transfers 3,916 437 - 1,673 (6,026) -
Income from operations 11,129 7,668 10,686 5,408 (3,341) 31,550
Equity income 78 - 528 - - 606
Earnings before interest, taxes and minority interest (EBIT) 11,207 7,668 11,214 5,408 (3,341) 32,156
Interest income - - - - - 1,058
Interest expense - - - - - (331)
Income before income taxes and minority interest - - - - - 32,883
Capital employed 158,189 88,715 122,382 26,879 (42,175) 353,990
Identifiable assets 178,197 102,292 135,880 12,587 16,110 445,066
Investments in affiliated companies 4,081 - 2,976 - - 7,057
Depreciation and amortization 10,554 6,117 9,751 524 268 27,214
Capital expenditures 13,625 14,536 12,429 1,310 296 42,196
===================================================================================================================================
1997
Revenue - unaffiliated customers $145,844 $108,601 $ 73,046 $24,978 $ - $352,469
Inter-segment transfers 3,086 804 - 685 (4,575) -
Income from operations 17,811 13,649 9,045 4,570 (2,629) 42,446
Equity income (loss) 85 (95) 536 - - 526
Earnings before interest, taxes and minority interest (EBIT) 17,896 13,554 9,581 4,570 (2,629) 42,972
Interest income - - - - - 1,197
Interest expense - - - - - (947)
Income before income taxes and minority interest - - - - - 43,222
Capital employed 147,791 89,111 106,617 26,643 (37,615) 332,547
Identifiable assets 157,207 90,649 132,305 12,101 10,491 402,753
Investments in affiliated companies 1,201 - 2,782 - - 3,983
Depreciation and amortization 12,208 5,250 8,960 415 214 27,047
Capital expenditures 11,386 11,532 9,787 563 242 33,510
===================================================================================================================================
</TABLE>
<PAGE>
Ionics, Incorporated
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Statement of Operations Data
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in Thousands,
Except Per Share Amounts 1999 % 1998 % 1997 % 1996 % 1995 %
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $358,217 100.0 $351,326 100.0 $352,469 100.0 $326,662 100.0 $257,293 100.0
Income before income taxes
and minority interest 29,731 8.3 32,883 9.4 43,222 12.3 39,556 12.1 31,609 12.3
Net income 19,361 5.4 21,386 6.1 28,329 8.0 26,503 8.1 21,025 8.2
Earnings per basic share 1.20 1.33 1.78 1.71 1.45
Earnings per diluted share 1.18 1.31 1.73 1.65 1.39
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data
<S> <C> <C> <C> <C> <C>
Dollars in Thousands 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Current assets $193,802 $187,093 $165,850 $144,422 $122,387
Current liabilities 99,475 85,934 66,012 68,173 60,279
- -------------------------------------------------------------------------------------------------------------------
Working capital 94,327 101,159 99,838 76,249 62,108
Total assets 500,906 452,123 406,736 378,589 322,044
Long-term debt and notes payable 8,351 1,519 804 2,132 182
Stockholders' equity 361,852 345,598 319,659 292,217 253,044
</TABLE>
<TABLE>
<CAPTION>
Selected Quarterly Financial Data (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings Earnings Earnings Earnings
Dollars in Thousands, Per Per Per Per
Except Per Gross Net Basic Diluted Gross Net Basic Diluted
Share Amounts Revenues Profit Income Share Share Revenues Profit Income Share Share
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998
First Quarter $ 87,416 $ 29,164 $ 4,672 $ .29 $ .29 First Quarter $ 78,974 $ 28,285 $ 6,008 $ .37 $ .37
Second Quarter 84,568 29,669 5,104 .32 .31 Second Quarter 80,267 26,821 4,620 .29 .28
Third Quarter 86,671 30,712 5,369 .33 .33 Third Quarter 88,876 27,999 5,183 .32 .32
Fourth Quarter 99,562 30,740 4,216 .26 .26 Fourth Quarter 103,209 31,379 5,575 .35 .34
- -----------------------------------------------------------------------------------------------------------------------------------
$358,217 $120,285 $19,361 $1.20 $1.18 $351,326 $114,484 $21,386 $1.33 $1.31
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Common Stock Price Range
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 High Low 1998 High Low
- -----------------------------------------------------------------------------------------------------------
First Quarter $35 3/4 $24 7/8 First Quarter $45 13/16 $37 7/8
Second Quarter 36 11/16 29 3/8 Second Quarter 45 1/2 34 13/16
Third Quarter 36 15/16 27 1/4 Third Quarter 37 22 1/2
Fourth Quarter 33 1/4 25 1/2 Fourth Quarter 35 1/8 22 1/2
</TABLE>
o Corporate Information
Board of Directors Corporate Officers
Arthur L. Goldstein + Arthur L. Goldstein
Chairman of the Board, President Chairman of the Board, President
and Chief Executive Officer and Chief Executive Officer
Ionics, Incorporated
Robert J. Halliday
Douglas R. Brown * Executive Vice President
President and Chief Executive Officer Chief Operating Officer and
Advent Internatioal Corp. Chief Financial Officer
William L. Brown * William E. Katz
Retired Chairman of the Board Executive Vice President,
The First National Bank of Boston Ultrapure Water Group
Arnaud de Vitry d'Avaucourt * John P. Bergeron
Engineering Consultant Vice President and Treasurer
William E. Katz Edward J. Cichon
Executive Vice President Vice President,
Ionics, Incorporated Equipment Business Group
Kathleen F. Feldstein * Alan M. Crosby
President Vice President,
Economic Studies, Inc. Consumer Water Group
John J. Shields #+ Stephen Korn
General Partner Vice President,
Boston Capital Ventures General Counsel and Clerk
Carl S. Sloane #+ Theodore G. Papastavros
Ernest L. Arbuckle Professor Vice President,
of Business Administration Strategic Planning
Harvard University Graduate School
of Business Administration Michael W. Routh^
Vice President,
Daniel I. C. Wang * Instrument Business Group
Institute Professor
Massachusetts Institute of Technology
Mark S. Wrighton #
Chancellor Francine S. Bernitz
Washington University Vice President,
Marketing and Corporate Communications
Allen S Wyett #
President William W. Carson
Wyett Consulting Group, Inc. Vice President,
Research and Development
Steaphen G. Dickinson
Vice President and
Chief Information Officer
+ Member of Executive Committee
* Member of Audit Committee
# Member of Compensation Committee
^ As of April 3, 2000
<PAGE>
<TABLE>
<CAPTION>
o Locations of Principal Subsidiaries, Offices and Affiliates Worldwide
<S> <C> <C> <C>
Equipment Business Rotterdam, Instrument Business Galway, Ireland
Group The Netherlands Group Greensboro, North Carolina
Acapulco, Mexico Seoul, South Korea Boulder, Colorado Hatfield, England
Anguilla, BWI Sint Maarten, Netherlands Herzlia, Israel Hawalli, Kuwait
Antigua, West Indies Antilles Manchester, England Leeds, England
Barbados, West Indies St. Thomas, USVI Tokyo, Japan Le Havre, France
Bellevue, Washington Tampa, Florida Watertown, Massachusetts Lille, France
Bonaire, Netherlands Tokyo, Japan London, England
Antilles Tortola, BVI Consumer Water Lorton, Virginia
Bridgeville, Pennsylvania Watertown, Massachusetts Group Ludlow, Massachusetts
Brisbane, Australia Aston, Pennsylvania Manama, Bahrain
Buenos Aires, Argentina Ultrapure Water Baltimore, Maryland Manchester, England
Cairo, Egypt Group Beauvais, France Newcastle, England
Curacao, Netherlands Brisbane, Australia Birmingham, England Newport News, Virginia
Antilles Dallas, Texas Bridgeville, Pennsylvania Orleans, France
Dammam, Saudi Arabia Geylang, Singapore Bristol, England Paris, France
Grand Canary, Spain Kuala Lumpur, Malaysia Charlotte, North Carolina Pittsburgh, Pennsylvania
Grand Cayman, BWI North Wales, Cincinnati, Ohio Port Chester, New York
London, England Pennsylvania Cleveland, Ohio Raleigh, North Carolina
Manama, Bahrain Phoenix, Arizona Columbus, Ohio Richmond, Virginia
Mexico City, Mexico Pico Rivera, California Cuyahoga Falls, Ohio Riyadh, Saudi Arabia
Milan, Italy San Jose, California Dammam, Saudi Arabia San Jose, California
Nassau, Bahamas Taipei, Taiwan Dayton, New Jersey Southhampton, England
Paris, France Tianjin, China Farmingdale, New York Taunton, Massachusetts
Riyadh, Saudi Arabia Watertown, Massachusetts Union, New Jersey
Watertown, Massachusetts
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
o Shareholder Information
<S> <C>
Corporate Headquarters Annual Meeting
Ionics, Incorporated The Annual Meeting of Ionics' shareholders will
65 Grove Street be held on Tuesday, May 2, 2000 at 2:00 P.M. at
Watertown, Massachusetts 02472-2882 FleetBoston Financial, 100 Federal Street,
Telephone: 617-926-2500 Boston, Massachusetts.
Fax: 617-926-4304
www.ionics.com Auditors
PricewaterhouseCoopers LLP
Trading Information Boston, Massachusetts.
Ionics' common stock is traded on the New York
Stock exchange under the symbol ION. As of March Transfer Agent and Registrar
17, 2000 there were approximately 1,300 shareholders State Street Bank and Trust Company
of record. No cash dividends were paid in either 1999 Boston, Massachusetts.
or 1998 pursuant to Ionics' current policy to retain
earnings for use in its business. For information or assistance regarding individual
stock records, transactions or certificates, please call
Form 10-K Annual Report the Transfer Agent's Telephone Response Center:
Ionics' Annual Report on Form 10-K and other corpo- 1-800-426-5523 between 9 A.M. and 5 P.M.
rate information may be obtained on Ionics' home page
on the Worldwide Web at http://www.ionics.com (C)Ionics, Incorporated 2000. All rights reserved.
The Ionics Toolbox and Ionics Total Water Management
A copy of Ionics' Annual Report on Form 10-K, are registered service marks, The Ionics Brand is an
as filed with the Securities and Exchange unregistered service mark: Aqua Cool, Cloromat,
Commission, is available upon request by HYgene, Ionics, Ozgen, and Sievers are
writing to Corporate Communications, Ionics, registered trademarks, and Ionics EDR 2020 is an
Incorporated, P.O. Box 9131, Watertown, unregistered
Massachusetts 02471-9131 trademark of Ionics, Incorporated.
</TABLE>
An electronic version of Ionics' Annual Report on Form 10-K and other corporate
information may be obtained by visiting Ionics' website at www.ionics.com
This annual report
is printed entirely
on recycled paper
with a minimum of
10% post-consumer
recycled fiber.
EXHIBIT 21
IONICS, INCORPORATED
SUBSIDIARIES OF THE REGISTRANT
State or Other
Name Jurisdiction of Incorporation
---- -----------------------------
Ionics Agar Environmental Ltd. Israel
Apollo Ultrapure Water Systems, Inc. California
Aqua Design, Inc.* California
Aquarelle S.A.+ France
Elite Chemicals Pty. Ltd. Australia
Favourable Trading Ltd. Ireland
Fidelity Purewater, Inc. California
Fidelity Water Systems, Inc. California
Global Water Services, S.A.++ Panama
Ionics Acapulco, S.A. Mexico
Ionics Asia-Pacific Pte. Ltd. Singapore
Ionics (Bermuda) Ltd.* Bermuda
Ionics Enersave Engineering Sdn Bhd** Malaysia
Ionics Foreign Sales Corporation Limited Jamaica
Ionics France S.A. France
Ionics Freshwater Ltd.+++ Barbados
Ionics Iberica, S.A. Spain
Ionics Italba, S.p.A.++++ Italy
Ionics (Korea) Ltd. Delaware
Ionics Life Sciences, Inc. New Jersey
Ionics Mega a.s.*** Czech Republic
Ionics Nederland B.V. The Netherlands
Ionics Taiwan, Inc. Taiwan
Ionics Ultrapure Water Corporation California
Ionics (U.K.) Limited United Kingdom
Ionics Watertec Pty. Ltd. Australia
Resources Conservation Co. International Delaware
Separation Technology, Inc.**** Minnesota
Sievers Instruments, Inc. Colorado
* The Registrant, either directly, through Aqua Design, Inc. or through
Ionics (Bermuda) Ltd., wholly owns 13 subsidiary corporations
incorporated in various Caribbean jurisdictions. These subsidiary
corporations own and operate, or operate and maintain, desalination
plants for the supply of potable water to resorts, hotels and
municipalities.
** Registrant through Ionics Iberica, S.A.owns 55% of this entity. This
entity has subsidiary operations in Malaysia and China.
*** Registrant owns 80% of this entity.
**** Owns a U.K. subsidiary, SeparaTech Limited.
+ This entity is wholly owned by Ionics France S.A.
++ This entity is wholly owned by Ionics (U.K.) Ltd.
+++ Registrant owns 50% of this entity
++++ This entity owns a 75% interest in Agrinord S.r.1., an Italian
corporation in the waste treatment business.
E-2
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements for: the Ionics 1997 Stock Incentive Plan on Form S-8 (registration
no. 333-29135); the Ionics 1979 Stock Option Plan on Form S-8 (registration nos.
333-05225, 33-54293, 33-41598, 33-5814, 33-14194, 2-64255, 2-72936 and 2-82780);
the Ionics Section 401(k) Stock Savings Plan on Form S-8 (registration no.
33-2092); the Ionics 1994 Restricted Stock Plan (No. 33-59051); the Ionics 1986
Stock Option Plan for Non-Employee Directors (registration no. 33-54400), of our
report, dated February 22, 2000, relating to the financial statements, which
appears in the Annual Report to Shareholders, which is incorporated in this
Annual Report on Form 10-K. We also consent to the incorporation by reference of
our report dated February 22, 2000, relating to the financial statement
schedule, which appears in this Form 10-K.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
March 28, 2000
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned officers and directors of Ionics, Incorporated (the
"Company"), hereby severally constitute Arthur L. Goldstein and Stephen Korn,
and each of them, to sign for us, and in our names in the capacities indicated
below, the Annual Report on Form 10-K of the Company for the fiscal year ended
December 31, 1999, and any and all amendments to such Annual Report, hereby
ratifying and confirming our signatures as they may be signed by our attorneys
to such Annual Report and any and all amendments thereto.
Witness our hands on the respective dates set forth below.
Signature Title Date
/s/Douglas R. Brown Director March 29, 2000
Douglas R. Brown
/s/William L. Brown Director March 29, 2000
William L. Brown
/s/Arnaud de Vitry d'Avaucourt Director March 29, 2000
Arnaud de Vitry d'Avaucourt
/s/Kathleen F. Feldstein Director March 29, 2000
Kathleen F. Feldstein
/s/Arthur L. Goldstein Chairman of the Board March 29, 2000
Arthur L. Goldstein of Directors, Chief
Executive Officer and
President (Principal
Executive Officer)
/s/William E. Katz Director March 29, 2000
William E. Katz
/s/John J. Shields Director March 29, 2000
John J. Shields
/s/Carl S. Sloane Director March 29, 2000
Carl S. Sloane
/s/Daniel I.C. Wang Director March 29, 2000
Daniel I.C. Wang
/s/Mark S. Wrighton Director March 29, 2000
Mark S. Wrighton
/s/Allen S. Wyett Director March 29, 2000
Allen S. Wyett
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<LEGEND>
(Replace this text with the legend)
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<CIK> 0000052466
<NAME> Ionics, Incorporated
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