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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER
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CULLIGAN WATER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware 51-0350629
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Culligan Parkway 60062
Northbrook, Illinois (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (847) 205-6000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
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Common Stock, $.01 par value New York Stock Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $565,483,158 as of April 25, 1997 (based on a closing market
price on such date of $40.25; excludes 7,334,859 shares held by persons who may
be deemed to be affiliates of the registrant).
There were 21,384,130 shares of the registrant's Common Stock ($.01 par
value) outstanding as of April 25, 1997.
Documents Incorporated by Reference
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Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on June 13, 1997 are incorporated by reference
in Part III.
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PART I
ITEM 1. BUSINESS
General
Culligan Water Technologies, Inc. (the "Company" or "Culligan") is one of
the world's leading manufacturers and distributors of water purification and
treatment products and services for household and consumer, and commercial and
industrial applications. Products and services offered by Culligan range from
those designed to solve residential water problems, such as filters for tap
water and household water softeners, to highly sophisticated equipment and
services, such as ultrafiltration and microfiltration products, desalination
systems and portable deionization services ("PDS"), designed for complex
commercial and industrial applications. In addition, Culligan's licensed bottled
water sales now rank fourth in the five-gallon bottled water market in the
United States. In fiscal 1997, Culligan entered the consumer market selling
water filtration products directly to retailers.
Culligan has been an active participant in the water purification and
treatment industry since 1936, and its Culligan(R), Everpure(R) and Bruner(R)
brands are among the most recognized in the industry. Culligan's products are
sold and serviced in over 90 countries through a worldwide network of over 1,400
sales and service centers. Supporting this distribution network, Culligan
maintains manufacturing facilities in the United States, Italy, Spain and
Canada. During the last 15 years, Culligan's residential water treatment systems
have been installed in over 3 million households in the United States,
representing the largest installed base in the country. In addition, over 1.5
million of Culligan's commercial, industrial, municipal and desalination systems
have been installed worldwide. Culligan's customer base includes such well known
names as McDonald's(R), Coca-Cola(R), Pepsi-Cola(R), Starbucks(R), 7-Eleven(R),
Navistar, Owens-Corning, Eli Lilly, Carnival Cruise Lines, Ingersoll-Rand and
Union Carbide.
With net sales of $371 million for the fiscal year ended January 31, 1997,
Culligan is one of the leaders in the highly fragmented water purification and
treatment industry. Culligan and its dealers provide a wide range of services to
support its products and offer a full line of accessories and replacement parts.
Approximately 46% of Culligan's revenues in fiscal 1997 were derived from
sources believed to be recurring in nature, such as servicing installed
equipment, sales of replacement parts, filters and other consumables, equipment
rental and royalties. In fiscal 1997, approximately 36% of Culligan's revenues
were from export and international sales. Culligan conducts its
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activities in two principal areas: household and consumer and commercial and
industrial.
Certain Historical Information
Until September 1995, the Company was a wholly-owned subsidiary of
Samsonite Corporation ("Samsonite"), formerly known as Astrum International
Corp. ("Astrum"). In September 1995, Samsonite distributed to its stockholders
all of the Company's then outstanding Common Stock, and the Company became a
separate public company (the "Spin-off"). In December 1995, the Company
successfully completed a public offering of 4,025,000 shares of Common Stock
realizing net proceeds of approximately $85 million and its Common Stock is now
listed on the New York Stock Exchange, Inc. In addition, in October 1996, the
Company issued additional shares of its common stock upon the exercise of over-
allotment options granted to underwriters in connection with a secondary public
offering of shares of Common Stock and received net proceeds of approximately
$32 million from the issuance of such shares and the exercise of stock options
by one of the selling stockholders in such secondary offering.
In June 1993, Samsonite's predecessor, Astrum, emerged from bankruptcy and
as a result, Samsonite and all of its subsidiaries, including the Company, were
required to adjust their assets and liabilities to reflect their fair values.
The reorganization value in excess of identifiable assets of the Company, which
was $112 million at the time of Astrum's emergence from bankruptcy, was
amortized through charges to the consolidated statement of operations over a
three year period that ended in June 1996. While these amounts represent non-
cash charges, they have had an adverse effect on the Company's reported results
of operations in fiscal years 1994, 1995, 1996 and the first two fiscal quarters
of 1997. See "Item 6. Selected Financial Data."
Industry Overview
Water purification and treatment has developed into a multi-billion dollar
global industry in response to an increasingly limited supply of drinkable
water, global economic expansion, the increasing need for high-quality or
ultrapure water by commercial and industrial companies, heightened public health
and safety concerns relating to drinking water, and the promulgation of numerous
governmental regulations for water quality. The Science Advisory Board of the
United States Environmental Protection Agency (the "EPA"), an independent panel
established by Congress, has cited drinking water contamination as one of the
highest ranking environmental risks. In recognition of the importance of the
public's concerns about drinking water, Congress recently re-enacted the Safe
Drinking Water Act. The Company believes that it enjoys a
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competitive advantage based on its widely recognized brand names, extensive
distribution network, broad range of products and substantial cash flow
available for investment, product development and marketing activities.
The Company believes that it has benefited from, and is in a position to
continue to benefit from, several existing and emerging market trends, including
increased consumer emphasis on health and safety concerns relating to drinking
water and water supplies, growing demand for better water quality in commercial
establishments and industrial manufacturing processes and continued promulgation
of Federal, state and local regulations relating to water purification and
treatment.
Principal components of the water purification and treatment industry
include the household, bottled water, commercial and industrial, municipal and
wastewater treatment markets. The Company is currently in each of these markets.
Household. The household market includes the sale or rental of water
softening and conditioning equipment and other products installed at the point-
of-entry to a residential water system, as well as point-of-use filtration
systems designed to improve the quality of drinking water. Household point-of-
entry and point-of-use water treatment systems are used to remove lead and other
health-related contaminants, eliminate chlorine and unpleasant odors and tastes
and soften hard water by removing minerals. Consumers' equipment needs vary by
geographical region as a result of differing water qualities and problems. The
market for such systems in the United States continues to grow in response to
public concerns relating to the quality of drinking water.
Consumer. The rapidly growing consumer market consists of the sale through
retail distribution channels of water purification and treatment systems,
principally of point-of-use filtration systems designed to improve the quality
of drinking water. The consumer market also includes the sale of point-of-entry
and water softening equipment and systems through do-it-yourself retail
distribution channels as well as the distribution of water filtration products
by co-branding with appliance and other manufacturers for sale in the retail
market. The Company first entered the consumer market in fiscal 1997.
Bottled Water. The bottled water market consists of the production and
sale of water in various sized containers through several channels of
distribution. In some cases, bottled water is sold directly to residential and
commercial customers, typically in five-gallon bottles that are delivered to the
customer's location by the bottled water company. Bottled water is also sold on
a retail basis, typically in grocery stores, convenience store chains and
vending machines and usually in one-gallon and smaller containers. Because of
growing consumer concern over the quality of water and its health effects, the
bottled water market has grown substantially in recent years and is
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expected to continue to expand. The Company is principally engaged in the five-
gallon portion of this market.
Commercial and Industrial. The commercial and industrial market encompasses
all equipment and products that treat water for commercial and industrial
purposes. Improved or customized water, free of dissolved minerals and health-
related contaminants, is an essential element in many products and manufacturing
processes. The use of untreated water in commercial and industrial businesses
may result in inconsistent product quality as well as diminished equipment
performance which can lead to expensive maintenance or replacement costs.
Consequently, manufacturers treat incoming water to maintain a consistently
acceptable degree of water quality. In addition, advances in manufacturing
technology in industries such as electronics and pharmaceuticals are dependent
upon highly purified and ultrapure water.
Municipal. Municipal and other governmental entities are often in need of
water treatment systems to supply potable water to their residents. These
systems are designed to chlorinate and remove contaminants from water supplies
and to desalt brackish water and seawater. Public concern regarding the
increasing scarcity of potable water as well as the quality of drinking water
have resulted in municipalities seeking to improve the treatment and
purification of public water supplies. In addition, requirements established by
the EPA and other governmental bodies, including the recently re-enacted Safe
Drinking Water Act, have resulted in increasing governmental legislation,
regulation and enforcement of strict standards for potable water, thereby
contributing to the need for water treatment systems to serve the municipal
market. The Company believes that there is a growing market for companies with
the ability to operate and maintain drinking water treatment facilities and to
provide build, own and operate facilities. The Company first entered the operate
and maintain (O&M) portion of the municipal drinking water treatment market in
fiscal 1996 with the acquisition of Culligan Operating Services and first
entered the build, own and operate portion of the market with the acquisition of
Culligan-Enerserve in fiscal 1997.
Wastewater. The wastewater treatment market involves the design,
manufacture, installation, operation and servicing of systems to treat the
outgoing wastewater of industrial and commercial companies and municipalities.
The growth of the wastewater treatment market is attributable in large part to
increased governmental regulation of the discharge of pollutants in wastewater
and the disposal of aqueous industrial waste, as well as heightened public
awareness of, and concern regarding, the environment and industrial pollution.
In addition to the manufacture and installation of equipment and systems to
treat wastewater, the Company believes that there is a growing market for
companies with the ability to operate and maintain wastewater treatment
facilities. The Company first entered the O&M portion of the wastewater market
in fiscal 1996 with the acquisition of Culligan Operating Services.
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Technologies
With over 60 years of experience in the water purification and treatment
industry, the Company's technology and engineering expertise allow it to offer a
wide variety of products and services designed to meet the requirements of its
customers. The principal technologies utilized in the Company's offering of
products and services are:
Filtration. A process typically used for separating solids from a liquid by
means of a porous substance such as a permeable fabric, layers of inert media
(sand, gravel, garnet) or a membrane (such as ultrafiltration or
microfiltration). Types of filtration are often characterized by the degree to
which solids are separated from the liquid phase being treated. Filters may be
used for mechanical, adsorptive, neutralizing, or catalytic processes.
Reverse Osmosis. A water treatment process that removes undesirable
materials from water by using pressure to force the water molecules through a
semipermeable membrane. This process is called "reverse" osmosis because the
pressure forces the water to flow in the reverse direction (from the
concentrated solution to the dilute solution) to the flow direction (from the
dilute to the concentrated) in the process of natural osmosis. Reverse osmosis
removes ionized salts, colloids, and organic molecules down to a molecular
weight of 100.
Ultrafiltration. A method of cross-flow filtration (similar to reverse
osmosis but using lower pressures) which uses a membrane to separate small
colloids and large molecules from water and other liquids. The ultrafiltration
process falls between reverse osmosis and microfiltration in terms of the size
of particles removed, with ultrafiltration removing particles in the 0.002 to
0.1 micron range, and typically rejecting organics over 1,000 molecular weight
while passing ions and smaller organics.
Water Softening. A form of ion exchange used for the reduction/removal of
calcium and magnesium ions, which are the principal cause of hardness in water.
The cation exchange resin method is most commonly used for residential and
commercial water treatment. Ion exchange is a reversible chemical process in
which ions from an insoluble permanent solid medium (usually a resin) are
exchanged for ions in a solution or fluid mixture surrounding the insoluble
medium.
Deionization. The removal of ionized materials from a solution by a two-
phase ion exchange procedure: First, positively-charged ions are removed by a
cation exchange resin in exchange for a chemically equivalent amount of hydrogen
ions. Second, negatively-charged ions are removed by an anion exchange resin for
a chemically equivalent amount of hydroxide ions. The hydrogen and hydroxide
ions
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introduced in this process unite to form water molecules. This process is called
deionization or demineralization by ion exchange.
Products and Services
The Company serves the household and consumer market, including the bottled
water market and the commercial and industrial markets including PDS, O&M,
build, own and operate and other markets, offering a broad range of products and
services. The Company's product lines include filtration devices, reverse
osmosis systems, desalination facilities, bottled water, water softeners,
deionizers and ultrafiltration products. Product sizes range from small devices
for residential customers to large multi-process systems that are custom
engineered and manufactured for industrial customers. Through its independent
dealers, Company-owned dealers and international distributors, the Company also
offers a full line of accessories, replacement parts and services. In addition,
the Company is a major provider of PDS, both domestically and internationally.
The Company conducts its activities in two principal areas: household and
consumer, and commercial and industrial.
Household and Consumer
The Company is the leading manufacturer and distributor of water
purification and treatment products to residential customers in the United
States. The Company's domestic and international household and consumer products
and services address residential water problems, including the removal of lead,
cysts and other health-related contaminants, the elimination of chlorine and
unpleasant odors and tastes from water, and the softening of water by removing
minerals.
The Company, through its independent and Company-owned dealers, sells,
installs and services a broad range of filters, reverse osmosis units and water
softeners that address household water problems. Culligan's strong brand
recognition, popularized by its famous "Hey Culligan Man!"(R) commercials, as
well as its extensive dealer network, have combined to give the Company a
leading position in the residential water treatment market.
The Company produces and sells mechanical filtration systems and point-of-
use filters in the household and consumer market designed to improve the quality
of drinking water. In 1988, the Company became the first to receive
certification from the independent National Sanitation Foundation ("NSF") under
NSF's standard for residential reverse osmosis drinking water systems. Since
that time, the Company has developed many proprietary reverse osmosis systems to
improve the quality of drinking
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water, including the Company's latest model of its Aqua-Cleer(R) Drinking Water
System that utilizes the reverse osmosis process to filter tap water three times
before it comes out of the faucet.
The Company also offers a wide array of water softening and conditioning
equipment and products for household use. Household automatic softeners and
portable exchange conditioners have constituted a large portion of the Company's
household business since its inception.
In fiscal 1997, Culligan, through its newly-formed Consumer Markets
Division, launched a line of water filtration products for sale through
department stores and do-it-yourself outlets and entered into several marketing
partnerships for the co-branding of products with partners that are expected to
provide rapid channel access and recurring revenue from replacement filter
sales. The first products introduced by the division, faucet mount filters, were
shipped to department stores in the second quarter of fiscal 1997. By the end of
the year, the division had expanded its product offerings with the introduction
of three new Culligan(R) home water filtration product lines designed for the
"do-it-yourself" market, consisting of under-counter systems, refrigerator
water/ice maker filter systems and a sediment and rust reduction whole house
filtration system and had announced the introduction of a designer glass pitcher
filtration system and two new monitored faucet mount systems that are being
rolled out to the high-end department store channels in fiscal 1998. In fiscal
1997, the Company also entered into a marketing partnership with Health o Meter,
the parent of Mr. Coffee, for plastic pour through pitchers and with a major
appliance manufacturer to provide a refrigerator water/ice maker filtration
system as well as a long-term corporate partnering agreement with Moen
Incorporated to develop Moen(R) products incorporating Culligan water filtration
assemblies.
Through its Everpure subsidiary, the Company also serves the residential
market by providing point-of-use filtration systems for homes and apartments as
well as recreational vehicles such as Winnebago, Fleetwood and Airstream
products. Everpure's filtration systems reduce or remove off-tastes, odors,
chlorine, dirt, rust, asbestos fibers and parasitic protozoan cysts from the
water supply.
Utilizing its distribution network and product technology, the Company
entered the bottled water market in 1987 by licensing the sale of five-gallon
containers of bottled water under the Culligan name. Because of growing consumer
concern over the quality of water and its health effects, the bottled water
market has grown substantially in recent years and is expected to continue to
expand. Culligan's licensed bottled water sales now rank fourth in the
five-gallon bottled water market in the United States with an annual growth rate
of approximately 21% in fiscal 1997 and is the only brand in the five-gallon
bottled water business with a nationwide distribution network.
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Bottled water under the Culligan name is produced at over 100 Company-
owned, franchised or licensed bottling locations and sold through over 500
Company-owned and franchised dealers in the United States. The Company receives
royalty payments from its licensed producers and dealers based on the volume of
sales. The Company's dealers typically deliver the five-gallon bottles to a
customer's home or office on a route basis, and the customer rents the dispenser
console. The dealers also pick up the empty bottles which are then cleaned and
refilled at the bottling location. The Company does not participate to any
significant extent in any other segment of the bottled water market.
Commercial and Industrial
The Company designs, manufactures and, primarily through its distribution
network, sells, installs and services a wide range of products to solve the
complex water problems of its commercial and industrial customers. These
products include filtration systems, reverse osmosis units, water softeners,
desalination systems, deionizers and high quality ultrafiltration and
microfiltration products capable of producing ultrapure water. The Company
believes that its dealer network provides it with a competitive advantage in the
commercial and industrial markets because the dealers are able to service
systems on a national and international basis.
Commercial. Commercial users require water treatment systems that remove
dissolved minerals, such as calcium, magnesium, iron or manganese, and health-
related contaminants from the available water supply and are capable of treating
large quantities of water on a cost effective basis. The Company's commercial
products use technologies similar to its residential products, but afford
greater capacity, durability and effectiveness and allow customers increased
flexibility for customization. For example, Culligan's filters, deionizers and
softeners provide food and beverage manufacturers with consistently high quality
water enabling them to preserve uniformity of taste and appearance in their
products, reduce health-related contaminants and minimize equipment maintenance
costs.
Other commercial enterprises such as airlines, hotels, restaurants, car
washes, laundromats, office buildings and apartment complexes use Culligan
products to condition, filter, deionize and otherwise treat large quantities of
water. Unique features of the Company's commercial water softeners include high
quality Cullex(R) resins, the Dubl-Safe(TM) brine system and a full range of
system controls that minimize salt usage, such as the Company's solid state
Aqua-Sensor(R) regeneration control.
Through Everpure, the Company supplies water filtration products to
commercial businesses which require consistently high quality water. Everpure is
the leading supplier of water filtration products to the food service industry.
Sales to the food service industry constituted approximately 75% of Everpure's
revenues in fiscal
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1997. Everpure's line of food service water filtration products includes systems
for post-mix beverage dispensers, ice machines, coffee makers, steamers and
vending machines that are designed to treat all levels of water contamination
and to ensure that consumer products such as coffee, soups or ice are of the
highest quality. Everpure systems also decrease maintenance costs and extend the
life of water-using equipment by removing dirt and other abrasive particles that
can damage the internal workings of such equipment.
Everpure complements the Company's Culligan operations by providing a
presence in selected markets where the Company's Culligan dealer network does
not generally participate. Everpure products are used extensively in many major
fast-food restaurants, including McDonald's(R), Burger King(R) and Starbucks(R),
as well as convenience store chains around the world, including 7-Eleven(R) and
Circle K(R). In 1979, Everpure received NSF certification for its filtration
cartridges, and today substantially all of the Everpure systems carry the
highest NSF rating for both aesthetic and health effects. Everpure's principal
family of filter cartridges uses its proprietary precoat filtration process,
using unique MicroPure(R) filtering media. Everpure's filtration and
disinfection products are also used in the airline, marine, offshore oil and
military markets.
Everpure operates in most western European countries and Japan. In recent
years, Everpure has expanded internationally by following its customers into
developing countries where the water supply is of questionable quality. Its
market outside the United States is primarily the food service industry,
including fast-food chains, restaurants and offices. Everpure's products are
sold directly to equipment manufacturers, fast food chains and convenience store
chains as well as to individual locations by Everpure's licensed distributors.
The Company's newly-acquired Bruner operation designs and manufactures
water softeners, filters, deionizers, dealkalizers, demineralizers, degasifiers
and reverse osmosis systems in standard and custom design configurations for
commercial and industrial applications worldwide. Bruner products are sold
through an extensive network of sales representatives supported by sales and
service locations in the United States and internationally.
Industrial. Industrial companies also require the removal of dissolved
minerals and contaminants from water before the water can be used in
manufacturing processes. A typical treatment system for these applications will
combine multiple processes, including clarification, depth filtration, carbon
filtration, softening, reverse osmosis, deionization, submicron cartridge
filtration and ultraviolet light disinfection. Through Bruner, the Company also
designs and manufactures systems for industrial large volume process water
users including packaged systems utilizing multi-cell filters to reduce or
remove turbidity, iron, hydrogen sulfide, color and other particulates from
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the water supply. Its industrial operations are also supported internationally
by its recent acquisition of Dewplan Limited, one of the UK's leading specialist
design contractors for high-purity and ultra-high-purity industrial water
treatment systems.
The Company's and Bruner's products and technologies are used to remove
dissolved minerals and contaminants from water in numerous industrial
applications, including manufacturing operations, laboratories, research, food
processing, chemical processing, pharmaceutical facilities and printing plants.
In addition, the Company and its dealers have substantial experience in
configuring systems used by manufacturers of prescription and non-prescription
drugs. Culligan and Bruner ultrapure water systems are also used by
manufacturers of products such as integrated circuits and compact discs.
PDS. The Company and its dealer network also provide PDS to commercial and
industrial customers in the United States and Europe. The Company's network
includes over 380 outlets and approximately 250 regeneration facilities. In this
growing business, the Company provides portable water deionization treatment
equipment that uses resins as the filtration medium to produce ultrapure water.
Resin is retrieved and transported by a dealer service representative to a
dealer's regeneration plant for chemical recharging when it is exhausted. Unlike
many permanent systems, PDS requires no chemical handling or maintenance by the
customer. PDS is a widely used technology among industrial and commercial
companies and provides the Company and its dealer network with a recurring
source of revenues and the opportunity to market its systems and other services
to its existing PDS customers.
Medical. Medical-related products often require ultrapure water
free from certain minerals and contaminants to operate effectively. The Company
is a leading manufacturer of reverse osmosis units that comprise an integral
part of the kidney dialysis equipment used by hospitals, hemodialysis centers
and other health service providers. The Company's reverse osmosis unit is one of
a limited number of such units registered by the FDA as a medical device
approved for this purpose.
Desalination. The Company has produced major desalination systems
throughout the world. The Company has supplied Egypt with fourteen desalination
plants along the Red Sea and in the southern Sinai region and, in the Arab
Emirate of Umm-Al Quwayn, the Company supplied a 9,000 cubic meter per day
desalination plant to serve the potable water needs of the 15,000 inhabitants.
In addition, its recently acquired Culligan-Enerserve operation builds, owns and
operates desalination and other water and wastewater treatment systems in the
Caribbean. Since its acquisition in July 1996, that operation has expanded
significantly, obtaining an additional contract with the government of the
island of St. Maarten that is expected to generate revenues of approximately $25
million over the five year term to own and operate a recently
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completed 2.6 million gallon per day desalination facility to produce water for
the island's residents.
Municipal. Although historically the municipal market has not represented a
large portion of the Company's industrial business, the Company believes that
with the re-enactment of the Safe Drinking Water Act there is significant growth
potential in this market. The Company, through the efforts of its technical and
sales personnel, designs and manufactures and, through its dealer network,
sells, installs and services equipment and plants to chlorinate and remove
contaminants from water supplies. In the United States, the Company typically
provides surface water treatment systems for small municipalities, mobile home
parks and other residential groups with populations under 3,300 people.
Culligan's Multi-Tech(R) filtration system is a low-cost, pre-engineered,
packaged plant that contains all the steps used in a conventional water
treatment plant, such as coagulation, flocculation, clarification, filtration
and disinfection. The Company currently has in place in North America, Europe
and the Middle East over 700 pre-engineered, packaged Multi-Tech(R) and similar
non-U.S. OFSY Omnifiltration(R) systems to help communities meet their needs for
clean water. In addition, the Company's Bruner operation offers self-contained
Bruner packaged water treatment plants in the municipal market. The Bruner
plants are custom engineered to produce potable water from almost any surface
water source and typically provide automated controls programmed to regulate
rapid or "flash" mixing, flocculation, settling and gravity filtration.
Through Culligan Operating Services, the Company also provides O&M services
for water and wastewater treatment facilities for municipalities and other large
users primarily in Florida and elsewhere in the Southeastern United States.
Dealer and Distribution Network
The Company believes that the size and scope of its dealer and distributor
network make it uniquely positioned in the water purification and treatment
industry. Today there are over 1,100 independent Culligan dealers and
distributors and 45 Company-owned dealers who distribute and service Culligan
products throughout the United States, Canada and Western Europe as well as
other foreign markets. In addition, there are over 350 distributors and
authorized agents in the United States and Western Europe as well as in other
foreign markets that distribute water filtration products of the Company's
Everpure subsidiary for the food service industry and other commercial
businesses. The Company's newly-acquired Bruner operation has approximately 93
sales representatives that distribute its products in the United States and
internationally. The Company believes that this diverse geographical
distribution network allows it to react rapidly to changing customer needs as
well as to market conditions.
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As part of its distribution system, the Company currently owns 26 Culligan
dealers in North America which had total revenues of approximately $70.5 million
in the last fiscal year. The Company-owned dealers are primarily located in
major metropolitan markets. Such markets include the New York City/New Jersey,
Los Angeles, Chicago, Houston, San Diego and San Francisco metropolitan areas.
Since the beginning of fiscal 1997, the Company-owned Dealer division has made
eleven acquisitions with annualized revenues of over $19 million. Such
acquisitions include dealerships in Elkhart, Indiana; Glendale, Riverside, Santa
Ana and San Diego, California; Waukegan, Illinois; bottled water operations in
Houston, Texas; Omaha, Nebraska; and San Diego, California and a portable
deionization service business in Santa Clara, California. In addition, since the
beginning of fiscal 1997, Culligan's international division has acquired seven
dealerships having aggregate annualized revenues of approximately $7 million.
Such dealerships are located in Bordeaux, Lorraine, Somme-Oise and Cote-Opale,
France; Lausanne, Switzerland; and Florence, Italy, and Eau Water Treatment
Company, an independent French company specializing in commercial applications
and technical service support. In addition, Culligan Operating Services has made
eight acquisitions of complementary operations since being acquired by the
Company in January 1996.
Company-owned dealer operations generally have a high percentage of
revenues which are derived from sources believed to be recurring in nature
(estimated to be approximately 70% of total Company-owned dealer revenues), such
as servicing equipment, sales of replacement parts, filters and other
consumables, equipment rental and royalties. The Company's dealer and
distribution network enables it to offer complete solutions to pre-use water
problems for residential, commercial and industrial customers through a
combination of testing, product selection, installation, monitoring and service.
The Company is continuously upgrading and expanding its dealer network coverage.
The Company also has utilized its dealer network and distributors to introduce
new product lines and enter new markets.
Typically, a dealer's territory covers a local community or metropolitan
area and the dealer sells or rents a significant portion of its products to
residential users.
The size of dealerships range from small local operations involving only a
few employees to large multiple site dealerships. Generally, approximately one-
half of a dealer's revenues are derived from rental and service income from
existing customers. Certain dealers, including many large dealers, are capable
of providing standard and special-order commercial and industrial products and
services. The Company's laboratories in Northbrook, Illinois; Barcelona, Spain;
and Bologna, Italy test water samples for dealers to help them to identify a
customer's water treatment needs.
12
<PAGE>
Dealers generally purchase all their requirements for water treatment
products from the Company. The Company assigns each dealer a primary area of
geographic responsibility and generally expects the dealer to cover the needs of
customers in this area, although the dealer has no exclusive right to this
territory. Virtually all of the Company's sales of household products in North
America have been made through the dealer network. Dealers purchase equipment
from the Company for sale, rental or use in their portable exchange service
programs. In addition, the Company receives royalties from the sale of bottled
water and certain supplies that bear the Culligan name.
The Company provides dealers with a variety of services, including
training, education and technical assistance. It offers the dealers management,
sales and service seminars at the time of start-up and throughout their careers.
The Company also employs technical service engineers who travel throughout the
United States aiding dealers with water quality needs. One of the unique
advantages the Company supplies to its dealers as an aid in commercial and
industrial sales is the Company's proprietary CAAP(R) pc software.
Commercial and industrial job specifications and proposals are supported by
application and technical engineers located in Northbrook, Illinois. In
addition, the Company provides the dealers with significant marketing services
and support, including an extensive co-operative advertising program. See "--
Marketing and Advertising." A finance subsidiary of the Company provides
intermediate-term loans to franchised dealers for equipment placed on rental or
lease.
Competition
The markets in which the Company competes are highly competitive. The
Company competes with many domestic and international companies in its global
markets. In most of the areas in which it competes, the Company believes it has
a competitive advantage based on its brand recognition and the ability of its
dealer network to install, service and provide technical support for the
Company's products. The Company believes it is also distinguished by the breadth
and range of its products, compared to its competitors. The principal methods of
competition are distribution capabilities, product specifications, product
knowledge, reputation, technology, service and price. Some of the Company's
competitors are multi-line companies with other principal sources of income who
have substantially greater resources than the Company while many others are
local product assemblers or service companies that purchase components and
supplies such as valves and tanks from more specialized manufacturers than the
Company.
13
<PAGE>
Marketing and Advertising
Dealers are required to participate in the Company's national cooperative
advertising program. This program provides for a variety of dealer programs and
services such as co-op advertising, consumer promotions, public relations,
market research and sales recognition. The Company shares with dealers the cost
of some promotions such as television, radio and newspaper advertising.
Cooperative advertising is typically tailored to regional and local markets and
is designed to increase sales on the local level.
The Company's famous "Hey Culligan Man!"(R) commercials have contributed to
the reputation of the Company and its distribution network as a supplier of high
quality durable water treatment products and as the leading service provider in
the water purification and treatment industry. Culligan's brand recognition is
supported by a national and regional combined advertising budget of more than
$17 million.
Manufacturing
The Company's manufacturing is vertically integrated, with many of the
major components of its water treatment units manufactured and assembled in its
own plants. The Company owns manufacturing facilities in Northbrook and
Westmont, Illinois; Mississauga, Ontario, Canada; Bologna, Italy; and Barcelona,
Spain. The Company believes that it has sufficient manufacturing capacity for
the foreseeable future. Most products are manufactured and assembled in the
region in which they are to be sold, with the exception of European household
products, which are imported from the Northbrook facility.
Research and Development
The Company's research and development activities are conducted in its own
laboratories, supplemented by on-site development and application of custom
design and engineering. The Company's research and development expenditures for
fiscal 1997, 1996 and 1995 were approximately $3.2 million, $3.2 million and
$3.3 million, respectively. Of these amounts, approximately $2.6 million, $2.3
million and $2.3 million related to laboratory research and approximately $.6
million, $.9 million and $1.0 million related to customer specific design and
engineering for fiscal 1997, 1996 and 1995, respectively. The Company also
incurs additional internal costs relating to its sales and service personnel for
product development.
14
<PAGE>
Backlog and Customers
The Company does not believe that backlog is a meaningful measurement of
its ongoing business. The Company's backlog of orders believed to be firm was
approximately $20.9 million at January 31, 1997 and approximately $23.3 million
at January 31, 1996. The Company does not believe that it is dependent on any
single customer, and no single customer accounted for more than 5% of the
Company's sales in the year ended January 31, 1997.
Trademarks, Service Marks and Trade Names
Trademarks and brand name recognition are important to the Company. The
Company generally owns the trademarks under which its products are marketed. The
Company has registered its trademarks and will continue to do so as they are
developed or acquired. The Company protects such trademarks and believes that
there is significant value associated with them. The loss of the Culligan,
Everpure, or, to a lesser extent, Bruner trademarks could have a materially
adverse effect on the business of the Company.
Seasonality
The Company's business is typically not seasonal.
Government Regulations
The Company manufactures certain water treatment products that are used as
medical devices, and, therefore, the production facility for such devices must
be FDA registered and the Company must maintain an FDA listing for these
products. Company-owned and independent dealers in the United States who
regenerate portable exchange and deionized water tanks are subject to local,
state and Federal requirements regulating the character and volume of the
processed water they discharge.
In many areas the sale and promotion of water treatment devices is
regulated at the state level by product registration, advertising restriction,
water testing, product disclosure and other regulations specific to the water
treatment industry. In some local areas, certain types of water treatment
products, including those manufactured by the Company, are restricted because of
a concern with the character and volume of water they discharge.
The Company is also subject to state franchise laws, some of which require
the Company to register with the state before it may offer a franchise and
require the
15
<PAGE>
Company to deliver specified disclosure documentation to potential franchisees.
The Company is also subject to regulation under the Federal Trade Commission's
("FTC") rule entitled "Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures." The FTC requires that
franchisors make extensive disclosure to prospective franchisees but does not
require registration. While the Company's franchising operations have not been
materially adversely affected by existing Federal, state or local regulation,
the Company cannot predict the effect of any future legislation or regulation.
Environmental Matters
The Company is subject to Federal, state and local laws relating to
environmental protection, including, but not limited to, laws relating to the
closure of underground storage tanks and discharges of wastewater. The Company
believes that it is in substantial compliance with applicable environmental
laws, and that any compliance costs associated with its ongoing operations will
not be material. Compliance with regulations of Federal, state and local
authorities regulating the discharge of materials into the environment, or
otherwise relating to the environment, has been accomplished without a material
effect on the earnings and competitive position of the Company.
In connection with the Anvil Transaction (see "--Anvil Transaction"), the
Company assumed responsibility for future costs of addressing environmental
problems at Anvil Knitwear's Asheville Dyeing and Finishing plant (the "Plant")
in Swannanoa, North Carolina. A post-closing groundwater monitoring plan is
currently being implemented at the Plant pursuant to an Administrative Consent
Order (the "Order") entered into with the North Carolina Department of
Environment, Health and Natural Resources in 1990 covering the closure of an
underground storage tank used by a prior owner that was removed in 1985.
Groundwater testing at the Plant and at two adjoining properties have shown
levels of a cleaning solvent believed to be from the Plant above action levels
under state guidelines. The Company has established reserves for such matters
and, as a result, anticipates that the potential costs of further monitoring and
corrective measures to address the groundwater problem under the Order and other
applicable laws will not have a material adverse effect on the financial
position or the results of operations of the Company.
Employees
At January 31, 1997, the Company employed approximately 2,768 people
worldwide (exclusive of employees of independent dealers) with approximately
1,989 employees in the United States and approximately 779 employees in other
countries.
16
<PAGE>
In the United States, approximately 51 employees are members of unions. In
Europe, substantially all of the Company's employees are members of unions. The
Company believes its employee relations are good.
Anvil Transaction
In January 1995, a subsidiary of Samsonite sold its Anvil Knitwear division
to Anvil Holdings and a subsidiary of Anvil Holdings. The Company purchased 30%
of the common equity, consisting of a combination of voting and non-voting
common stock and 35% of the preferred stock of Anvil Holdings for $9 million and
received a $7.5 million promissory note from Anvil Holdings. As part of the
consideration for the transaction, the Company agreed to guarantee, and thereby
undertake responsibility for, the customary indemnification obligations of the
seller under the asset purchase agreement, including those relating to breaches
of representations and warranties, as well as to assume certain environmental
liabilities. See "--Environmental Matters." In March 1997, Culligan received
approximately $51 million in cash proceeds as a result of the redemption by
Anvil Holdings of the Anvil securities owned by the Company.
17
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Identification of Executive Officers and Other Officers and Significant
Employees
Set forth below is certain information regarding each of the executive
officers and certain other officers and significant employees of the Company and
its principal operating subsidiaries:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Douglas A. Pertz 42 President and Chief Executive Officer and Director
Michael E. Salvati 44 Vice President, Finance and Chief Financial Officer
Edward A. Christensen 52 Vice President, General Counsel and Secretary
Calvin R. Hendrix 46 Group President--North America
Ronald A. Rosati 45 Group President--Point-of-Use and Retail Markets
Kenneth I. Wellings 50 Group President--International
Perialwar Regunathan 57 Sr. Vice President and Chief Technology Officer
Thomas E. Pavlick 35 Vice President and General Manager, Company-owned Division
Timothy Tousignant 39 Vice President and General Manager, Household, Commercial and
Bottled Water
Steven H. Dahlquist 36 General Manager, Industrial Products
David M. Rich 52 General Manager, Manufacturing
Michael A. Siri 42 Treasurer
</TABLE>
Douglas A. Pertz. Mr. Pertz joined the Company in his present position in
January 1995. From 1994 until January 1995, he was Corporate Vice President and
Group Executive of the Danaher Corporation ("Danaher"), a manufacturer of
products in the tool, process/environmental controls and transportation
industries and was also President and a director of Danaher's subsidiary,
Hennessy Industries, a manufacturer of transportation equipment. In addition,
from 1990 to January 1995, he was President, Chief Executive Officer and a
director of Danaher's subsidiary, NMTC, Inc. d/b/a Matco Tools, a manufacturer
of hand tools, and NMTC, Inc.'s predecessor company, Matco Tools Corporation.
Michael E. Salvati. Mr. Salvati became Vice President, Finance and Chief
Financial Officer of the Company in July 1996. From May 1996 to July 1996, Mr.
Salvati was a principal in a consulting practice. For more than five years prior
thereto, Mr. Salvati was a partner in the Corporate Transactions Group of KPMG
Peat Marwick LLP, where he provided strategic, financial and operational
consulting services to various creditor, equity and management constituencies.
Edward A. Christensen. Mr. Christensen became Vice President, General
Counsel and Secretary of the Company in August 1995. From November 1993 until
18
<PAGE>
May 1995, Mr. Christensen was a consultant to, and from April 1993 until
November 1993 he was Vice President and Associate General Counsel of Triarc
Companies, Inc. (formerly known as DWG Corporation). For more than five years
prior thereto, Mr. Christensen was Vice President, Secretary and Chief Legal
Officer of DWG Corporation and certain affiliated companies. DWG Corporation is
a holding company whose principal subsidiaries are Royal Crown Cola Co., Arby's
Inc., National Propane Corporation and Graniteville Company. Mr. Christensen was
also Vice President, Secretary and Chief Legal Officer of NVF Company and APL
Corporation until April 1993. Mr. Christensen is informed that subsequent
thereto such corporations became subjects of proceedings under the United States
Bankruptcy Code.
Calvin R. Hendrix. Mr. Hendrix joined the Company in his present position
in February 1997. From September 1993 to January 1997, he served as Vice
President - General Manager of the Irrigation Division of The Toro Company. For
more than five years previous to joining Toro, Mr. Hendrix was President of
Thermador Corporation, a major kitchen appliance company.
Ronald A. Rosati. Mr. Rosati joined the Company in September 1995 as Vice
President, Consumer Markets and became Group President--Point-of-Use and Retail
Markets in January 1997. For more than five years prior to joining the Company,
Mr. Rosati was a Vice President and General Manager of Hamilton Beach/Proctor
Silex, Inc., with responsibility for product line growth in both consumer and
commercial markets.
Kenneth I. Wellings. Mr. Wellings joined the Company in 1976 and became
Vice President, European Operations in August 1994, Vice President,
International in August 1995 and Group President--International in January 1997.
From 1991 to 1994, he was employed with the Company as General Manager, Retail
Division.
Perialwar Regunathan. Mr. Regunathan joined Everpure in 1968 and was
promoted to President of Everpure in September 1995. Mr. Regunathan became
Senior Vice President and Chief Technology Officer of Culligan International
Company in January 1996.
Thomas E. Pavlick. Mr. Pavlick joined the Company in 1983 and has held his
present position with Culligan International Company since 1994. Prior to
assuming his current position, Mr. Pavlick served as Eastern Regional Marketing
Manager since 1991.
Timothy Tousignant. Mr. Tousignant joined Culligan International Company as
Vice President and General Manager, Household, Commercial and Bottled Water in
March 1997. Prior to joining the Company, Mr. Tousignant was Managing Director
of Marketing, Sales and Customer Support for the Irrigation Division of The Toro
Company
19
<PAGE>
from July 1993 to March 1997. He also served in a variety of marketing positions
for General Mills, Inc. from July 1987 to July 1993, culminating in Marketing
Manager.
Steven H. Dahlquist. Mr. Dahlquist joined the Company in his present
position in August 1994. For more than five years prior thereto, he was employed
in the Filterite Division of Memtec America Corporation, a water treatment
company in Timonium, Maryland.
David M. Rich. Mr. Rich joined the Company in 1988 and has been the
Company's General Manager of Manufacturing since August 1994. For more than five
years prior thereto, he was the Director of Manufacturing in Northbrook,
Illinois.
Michael A. Siri. Mr. Siri has been Treasurer of the Company since February
1996. He was employed by the Company for more than five years prior thereto,
last serving as Director of Corporate Finance and Assistant Treasurer.
ITEM 2. PROPERTIES
The Company's world headquarters is located on 43 acres in Northbrook,
Illinois. This facility also contains Culligan's primary manufacturing and
assembly plant. Culligan's other principal manufacturing facilities are located
in Mississauga, Ontario, Canada; Bologna, Italy and Barcelona, Spain.
Everpure has one manufacturing and two light assembly facilities. Its
headquarters and main manufacturing plant are located in Westmont, Illinois;
with two non-U.S. operations located in Atsugi, Japan; and Hevertee, Belgium.
Each of the non-U.S. operations do light assembly and also warehouse and sell
products manufactured in the United States. In addition, Everpure leases a
facility in Lake Forest, California which houses a sales office.
The following table sets forth certain information relating to the
Company's principal properties and facilities, all of which are owned by the
Company. All of the Company's manufacturing plants, in the opinion of the
Company's management, have been adequately maintained, are in good operating
condition and generally have sufficient capacity to handle all present sales
volume and all sales volume contemplated in the foreseeable future. No plant is
materially underutilized.
Approximate
Facility Size
Location (Sq. Ft.)
Northbrook, IL 445,000
Westmont, IL 110,000
20
<PAGE>
Barcelona,Spain 65,000
Bologna, Italy 118,000
San Bernardino, CA 49,000
Mississauga, Canada 42,000
In addition to the properties listed above, the Company owns 17 office,
warehouse or distribution facilities in the United States and 18 outside the
United States and leases 21 such facilities in the United States and 7
additional such facilities outside the United States.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, on October 18, 1995, Everpure was served with a
complaint naming Everpure as the defendant in an action entitled Cuno
Incorporated v. Everpure, Inc. The suit was filed in the United States District
Court for the District of Connecticut alleging infringement by Everpure of a
patent issued in 1994. The Everpure product involved in the litigation was a
multipart connecting device for filter cartridges, used in many food service
applications. The complaint sought preliminary and permanent injunctive relief,
an accounting for damages, compensatory damages and interest and costs. In
addition, the Company commenced an action against Cuno Incorporated in the
United States District Court for the Northern District of Illinois for
infringement of the Company's trademark and tradedress for certain of its filter
cartridges. Such matters were settled in the fourth quarter of fiscal 1997 for
an immaterial amount.
In January 1997, an action was commenced by the Company in the Circuit
Court of Cook County, Illinois against United States Water Company, L.P. ("US
Water"), United States Water Management Company ("USWMC") Randall C. Easton
("Easton") and United States Filter Corporation ("US Filter"). The Company's
complaint in the action alleges, among other things, that the sale of US Water
to US Filter was in violation of its franchise agreements with Culligan and
applicable law and seeks declaratory judgment, injunctive and other relief as a
result of such violation. The complaint also alleges that US Filter tortiously
interfered with the Company's contractual agreements by inducing the sale of US
Water in violation of its agreements with the Company and that US Water's
president, Randy Easton, in exchange for personal incentives from US Filter,
induced violations of US Water's agreements with Culligan.
US Water, USWMC and Easton filed an Answer, Affirmative Defenses and
Counterclaims to Culligan's complaint. The counterclaims seek declaratory and
injunctive relief and purport to assert state common law claims for alleged
tortious interference with contracts and alleged violations of the Illinois
Trade Secrets Act and the Illinois Antitrust Act. US Filter separately filed an
Answer, Affirmative Defenses and Counterclaims to
21
<PAGE>
Culligan's complaint. The counterclaims purport to assert state common law
claims for alleged tortious interference with contracts tortious interference
with prospective economic advantage, alleged violations of various state law
antitrust and unfair trade practice acts, and alleged violations of the Sherman
Antitrust Act.
In April 1997, the Court ruled on the parties' motions for partial summary
judgment and determined that the Company's right of first refusal did not apply
to the sale of US Water to US Filter. The Company presently expects to appeal
such ruling. The Company does not believe that such action will have a material
effect on its financial condition or results of operations.
In January 1997, a complaint for patent infringement was filed by The
Brita Products Company and its parent ("Brita") in the United States District
Court for the Northern District of Georgia against Recovery Engineering, Inc.,
Health o Meter and the Company. Insofar as it relates to the Company, the
complaint alleges that a plastic pour-through pitcher being marketed by Health o
Meter in partnership with the Company infringes a patent held by Brita. The
complaint seeks, among other things, injunctive relief and damages in an
unspecified amount. The Company believes it has meritorious defenses to such
action and does not believe it will have a material adverse effect on its
financial condition or results of operations.
The Company is also a party to various other legal proceedings and claims
in the ordinary course of business. The Company does not believe that the
outcome of any pending matters will, individually or in the aggregate,
materially adversely affect its consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
Since December 15, 1995, the Company's Common Stock has been traded on the
New York Stock Exchange. The high and low sales prices for the Common Stock as
reported in the Consolidated Transaction Reporting System for the periods set
forth below are as follows:
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
Dec. 15, 1995 - Jan. 31, 1996 28-1/4 22-1/2
Feb. 1, 1996- Apr. 30, 1996 33-3/4 27-5/8
May 1, 1996-July 31,1996 40-3/4 32-3/4
Aug. 1, 1996-Oct. 31, 1996 40-1/4 32-7/8
Nov. 1, 1996-Jan. 31, 1997 42 33
Feb. 1, 1997-Apr. 25, 1997 46 33-5/8
</TABLE>
From the Spin-off until December 15, 1995, there was no established public
trading market for the Common Stock. During such period, approximately 84% of
the Common Stock was held by four beneficial owners and the Common Stock was not
listed on any securities exchange. During that period, the Common Stock was
traded in interdealer and over-the-counter bulletin board transactions. The
range of the bid quotations for the Common Stock since the Spin-off through
December 14, 1995 ranged from a high of $25-1/2 per share on December 12, 1995
to a low of $14 per share on September 28, 1995. Although the quotations for the
period prior to December 15, 1995 have been obtained from sources believed to be
reliable, no assurances can be given with respect to the accuracy of such
quotations or as to whether other bid prices higher or lower than those set
forth above may have been quoted. In addition, such quotations reflect
interdealer prices, which may not include retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
Holders
As of April 25, 1997, there were approximately 95 holders of record of the
Common Stock.
23
<PAGE>
Dividend Policy
The Company currently anticipates that it will not pay cash dividends on
shares of the Common Stock in the foreseeable future. The payment of dividends
will be a business decision to be made by the Company's Board of Directors from
time to time based on such considerations as the Board of Directors deems
relevant, will be payable only out of funds legally available under Delaware law
and will be subject to any restrictions which may be contained in the Company's
debt instruments. The payment of dividends on the Common Stock is currently
limited by the Company's credit facility described elsewhere herein.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical financial data for Culligan Water Technologies,
Inc. and Subsidiaries (the "Company" or "Culligan") presented below are derived
from the Company's audited consolidated financial statements. The Company's
consolidated financial statements as of and for the fiscal years ended January
31, 1995, January 31, 1996 and January 31, 1997 have been audited by KPMG Peat
Marwick LLP, independent accountants.
The selected financial information presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and notes thereto included elsewhere in this Annual Report.
24
<PAGE>
<TABLE>
<CAPTION>
Predecessor (a)
------------------------
Five Seven
Months Months
Year Ended Ended Ended Year Ended Year Ended Year Ended
January 31, June 30, January 31, January 31, January 31, January 31,
1993 1993 1994 1995 1996 1997
----------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net Sales..................................... $261,924 $109,748 | $154,325 $280,051 $304,502 $371,018
Cost of Goods Sold (e)........................ 144,343 60,894 | 87,112 155,829 168,363 205,581
-------- -------- | -------- -------- -------- --------
Gross Profit ................................. 117,581 48,854 | 67,213 124,222 136,139 165,437
Selling, General and Administrative (e)...... 87,817 36,339 | 50,341 91,989 95,723 113,932
Administrative Expenses |
Allocated from Samsonite (b)............... -- -- | -- 1,095 -- --
Restructuring Expenses (c).................... -- -- | 2,103 5,917 -- --
Amortization of Intangible Assets (d) ........ 1,745 731 | 22,554 38,691 38,802 17,522
-------- -------- | -------- -------- -------- --------
Operating Income (Loss) ...................... 28,019 11,784 | (7,785) (13,470) 1,614 33,983
Other Income (Expense), Net (f)............... 151 (324) | 1,919 398 2,867 5,023
-------- -------- | -------- -------- -------- --------
Income (Loss) Before Interest and |
Income Taxes .............................. 28,170 11,460 | (5,866) (13,072) 4,481 39,006
Interest Income............................... 4,253 1,436 | 886 1,439 1,576 2,633
Interest Expense (g).......................... (2,229) (1,039) | (11,576) (19,085) (12,426) (5,490)
Income Taxes.................................. (15,678) (4,387) | (3,434) (5,678) (14,910) (20,264)
Cumulative Effect of Changes |
in Accounting Principles for |
Income Taxes .............................. 4,602 -- | -- -- -- --
-------- -------- | -------- -------- -------- --------
Net Income (Loss) ............................ $ 19,118 $ 7,470 | ($19,990) ($36,396) ($21,279) $ 15,885
======== ======== | ======== ======== ======== ========
Outstanding Shares (000's).................... | 15,889 15,889 16,311 21,375
Net Income (Loss) Per Share................... | ($1.26) ($2.29) ($1.30) $0.74
| ======== ======== ======== ========
Other Data: |
Income (Loss) Before Interest and Taxes....... $ 28,170 $11,460 | ($5,866) ($13,072) $4,481 $39,006
Amortization of Reorganization Value in |
Excess of Identifiable Assets.............. -- -- | 21,771 37,322 37,322 15,551
Administrative Expenses Allocated from |
Samsonite................................. -- -- | -- 1,095 -- --
Restructuring Expenses ....................... | 2,103 5,917 -- --
Gain on Insurance Settlement.................. -- -- | -- -- -- (1,980)
-------- -------- | -------- -------- -------- --------
Adjusted Income Before Interest |
and Taxes ................................. 28,170 11,460 | 18,008 31,262 41,803 52,577
All Other Amortization ....................... 1,745 731 | 783 1,369 1,480 1,971
Depreciation ................................. 7,322 3,175 | 5,696 9,279 9,409 10,091
-------- -------- | -------- -------- -------- --------
EBITDA (h).................................... $37,237 $ 15,366 | $ 24,487 $ 41,910 $ 52,692 $ 64,639
======== ======== | ======== ======== ======== ========
</TABLE>
(See footnotes beginning on page 27)
25
<PAGE>
Impact of Nonrecurring Items
Included in the Company's statements of operations subsequent to June 30,
1993, are amortization and depreciation related to adjustments of assets and
liabilities to fair value in connection with the adoption of the American
Institute of Certified Public Accountants Statement of Position 90-7 entitled
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"). The most significant adjustment relates to reorganization value in
excess of identifiable assets which is being amortized over a three-year period
ending in June of 1996. In addition, the statement of operations for the year
ended January 31, 1997, includes a gain on an insurance settlement associated
with a fire at the Company's Belgian facility in July 1993. Due to the
significance of these items, and considering that they are either of a short
duration or nonrecurring, management believes that it is useful to isolate their
impact on the statement of operations. The after-tax impact on net income and
the impact on net income per share are shown below. This information does not
represent and should not be considered an alternative to net income, any other
measure of performance as determined by generally accepted accounting principles
or as an indicator of operating performance.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Year Ended
January 31,
1997
-----------
<S> <C>
Amortization of reorganization value in excess of
identifiable assets(d).................................... $(15,551)
Gain on insurance settlement, net of tax..................... $ 1,204
--------
$(14,347)
========
Impact on net income per share............................... $ (0.67)
========
</TABLE>
26
<PAGE>
(a) In June 1993, Samsonite's predecessor, Astrum International Corp.
("Astrum"), completed a financial restructuring pursuant to a plan of
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Plan"). Effective June 30, 1993 and pursuant to SOP 90-7, Astrum and all
its subsidiaries, including the Company, were required to adjust their
assets and liabilities to their fair ("Fresh Start") values. Due to the
effect of SOP 90-7, amortization of intangible assets and interest expense
(see notes (d) and (g) below) for the periods before and after June 30,
1993 are not comparable. The information for the predecessor company
reflects activity occurring through June 30, 1993, prior to the effective
date of the Plan.
(b) Administrative expenses allocated from Samsonite represent certain
accounting and management services performed for the benefit of the Company
primarily related to Astrum's reorganization and the Spin-off. In prior
years, these services were not provided, and are not anticipated to recur
on an on-going basis.
(c) The Company implemented a plan to consolidate the production facilities and
administrative functions of certain operations in Europe. The severance,
other personnel related costs and facility shut-down expenses related to
the restructuring resulted in charges in fiscal 1994 and fiscal 1995 of
$2.1 million and $5.9 million, respectively.
(d) Amortization of intangible assets consists of the following:
<TABLE>
<CAPTION>
Five Months Seven Months
Expected Year Ended Ended Ended Year Ended Year Ended Year Ended
Useful Life January 31, June 30, January 31, January 31, January 31, January 31,
(years) 1993 1993 1994 1995 1996 1997
----------- ----------- -------- ------------ ----------- ----------- -----------
Predecessor Predecessor
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amortization of reorganization |
value in excess of identifiable |
assets............................. 3 -- -- | $21,771 $37,322 $37,322 $15,551
Amortization of trademarks and |
other "Fresh Start" intangibles.... 40 -- -- | 758 1,300 1,300 1,300
------ ---- | ------- ------- ------- -------
"Fresh Start" amortization........... | 22,529 38,622 38,622 16,851
Amortization of goodwill............. 10 to 40 1,677 699 | -- 18 158 504
Amortization of other intangibles.... 3 to 9 68 32 | 25 51 22 167
------ ---- | ------- ------- ------- -------
Amortization of intangible assets.... $1,745 $731 | $22,554 $38,691 $38,802 $17,522
====== ==== | ======= ======= ======= =======
</TABLE>
"Fresh Start" amortization represents the expense arising solely as a
result of "Fresh Start" accounting in accordance with SOP 90-7.
(e) Depreciation included in cost of goods sold and selling, general and
administrative related to adjustments of assets and liabilities to fair
value in connection with the adoption of SOP 90-7 consists of the
following:
<TABLE>
<CAPTION>
Seven Months
Ended Year Ended Year Ended Year Ended
January 31, January 31, January 31, January 31,
1994 1995 1996 1997
------------ ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
"Fresh Start" depreciation in cost of goods sold........................... $ 1,040 $ 1,414 $ 1,077 $ 603
"Fresh Start" depreciation in selling, general and administrative.......... 520 707 539 301
------- ------- ------- --------
Total "Fresh Start" depreciation........................................... $ 1,560 $ 2,121 $ 1,616 $ 904
======= ======= ======= ========
Property and equipment revalued in connection with the adoption of SOP 90-
7 are being depreciated over their respective estimated useful lives,
primarily ranging from two to six years.
(f) Other income (expense) net for fiscal 1997 includes a gain of $1,980 on an insurance
settlement associated with a fire at the Company's Belgian facility in July
1993.
</TABLE>
27
<PAGE>
(g) Interest expense for periods subsequent to June 30, 1993 includes interest
on the $150 million note payable to Samsonite issued in connection with
Astrum's reorganization. A principal payment of $20 million to Samsonite
and a $30 million contribution by Samsonite to equity capital of the
Company on December 1, 1994 and January 31, 1995, respectively, reduced the
outstanding principal during fiscal 1995. During July 1995, borrowings
under a $150 million credit facility entered into by the Company in July
1955 (the "Credit Facility") were used to repay in full the outstanding
balance of the note payable to Samsonite (the "Refinancing").
(h) EBITDA is defined as income before interest and taxes, excluding certain
nonrecurring charges in fiscal 1994 and 1995, and in fiscal 1997, the gain
on an insurance settlement, plus depreciation and amortization. The Company
believes that EBITDA provides useful information regarding a company's
financial performance. EBITDA should not be considered in isolation or as
an alternative to net income, an indicator of the Company's operating
performance, or an alternative to the Company's cash flow from operating
activities as a measure of liquidity.
<TABLE>
<CAPTION>
January 31,| January 31, January 31, January 31, January 31,
1993 | 1994(a) 1995(a) 1996(a) 1997(a)
------------------------------------------------------------------------------
Predecessor |
| (Dollars in thousands)
<S> <C> | <C> <C> <C> <C>
Balance Sheet Data: |
Property, Plant and Equipment, Net........... $ 45,326 | $ 68,043 $ 68,974 $ 70,749 $ 78,740
Total Assets................................. 305,183 | 331,035(b) 303,431 292,570 337,362
Long-Term Debt and Capital Lease............. |
Obligations (Including Current Debt)...... 11,959 | 159,404 114,635(c) 48,324(e) 48,645
Total Liabilities............................ 113,101 | 278,734 255,187 173,481(e) 163,722
Stockholders' Equity......................... 192,082 | 52,301(d) 48,244 119,089(e) 173,640(f)
</TABLE>
(a) Includes the effects of SOP 90-7 "Fresh Start" reporting recorded at June
30, 1993, net of depreciation and amortization. Pursuant to SOP 90-7, the
net book value of property and equipment was increased by $28 million,
intangible and other assets were increased by $110 million, and a deferred
tax liability of $35 million was recorded. In addition, in June 1993, the
Company issued a subordinated note payable to Samsonite in the amount of
$150 million.
(b) At January 31, 1994, cash decreased $91 million primarily as a result of
payments of dividends and intercompany payables in connection with Astrum's
reorganization.
(c) During fiscal 1995, a principal payment of $20 million to Samsonite and a
$30 million contribution by Samsonite to equity capital of the Company were
made on December 1, 1994 and January 31, 1995, respectively, related to the
note payable to Samsonite.
(d) During fiscal 1994, the Company paid dividends to Samsonite of $76 million.
In addition, the effects of "Fresh Start" reporting recorded at June 30,
1993, net of the impact of issuing the $150 million note payable to
Samsonite, reduced equity capital by approximately $47 million.
(e) During fiscal 1996, the Company completed the sale of 4,025,000 shares of
common stock. Net proceeds included in equity capital at January 31, 1996
are approximately $85 million. The Company used such proceeds to repay
borrowings under the Credit Facility. Also during fiscal 1996, prior to the
Spin-off, Samsonite contributed approximately $5 million to equity capital
of the Company.
(f) During fiscal 1997, the Company issued additional shares of common stock
upon the exercise of overallotment options granted to underwriters in
connection with a secondary public offering of shares of the Company's
common stock. The net proceeds included in equity capital at January 31,
1997 are approximately $32 million which includes proceeds from the
exercise of stock options by one of the selling stockholders in the
offering. In addition, as a result of the exercise of stock options, the
Company recognized an income tax benefit of approximately $7.5 million
which it recorded as additional paid-in-capital during fiscal 1997.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of the Company and accompanying notes
appearing elsewhere herein. In September 1995, the Company's former parent,
Samsonite Corporation, distributed to shareholders all of the Company's then
outstanding common stock (the "Spin-off"). The Company's common stock is listed
on the New York Stock Exchange ("CUL"). The Company's fiscal year ends on
January 31. The following discussion and analysis of results of operations
compare (i) the Company's results of operations for fiscal 1997 with the
Company's results of operations for fiscal 1996, and (ii) the Company's results
of operations for fiscal 1996 with the Company's results of operations for
fiscal 1995.
Results of Operations
Comparative Summary of Operating Results
As an aid to understanding the Company's operations on a comparative basis,
the following presents certain statements of operations and other data for
fiscal 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Fiscal 1995 Fiscal 1996 Fiscal 1997
% of Net % of Net % of Net
Dollars Sales Dollars Sales Dollars Sales
------- ----- ------- ----- ------- -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Net Sales............................. $280.1 100.0% $304.5 100.0% $371.0 100.0%
Gross Profit.......................... 124.2 44.3% 136.1 44.7% 165.4 44.6%
Selling, General and Administrative
Expenses............................ 92.0 32.8% 95.7 31.4% 113.9 30.7%
Administrative Expenses Allocated
from Former Parent.................. 1.1 -- --
Restructuring Expenses................ 5.9 -- --
Amortization of Intangible Assets..... 38.7 38.8 17.5
------ ------ ------
Operating Income (Loss)............... (13.5) 1.6 34.0
Other Income (Expense), Net (a)....... 0.4 2.9 5.0
------ ------ ------
Income (Loss) Before Interest
and Taxes........................... $(13.1) $ 4.5 $ 39.0
====== ====== ======
Adjusted Income Before Interest
and Taxes(b)........................ $ 31.2 11.1% $ 41.8 13.7% $ 52.6 14.2%
EBITDA(b)............................. $ 41.9 15.0% 52.7 17.3% 64.6 17.4%
(a) Other income (expense) net for fiscal 1997 includes a gain of $2.0 million on an
insurance settlement associated with a fire at the Company's Belgian
facility in July 1993.
</TABLE>
29
<PAGE>
(b) Adjusted income before interest and taxes and EBITDA have been calculated
as follows:
<TABLE>
<CAPTION>
Fiscal
--------------------------------------
1995 1996 1997
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Income (Loss) Before Interest and Taxes................................. $ (13.1) $ 4.5 $ 39.0
Amortization of Reorganization Value in Excess of Identifiable Assets... 37.3 37.3 15.6
Administrative Expenses Allocated from Former Parent.................... 1.1 -- --
Restructuring Expenses.................................................. 5.9 -- --
Gain on Insurance Settlement............................................ -- -- (2.0)
------- ------ ------
Adjusted Income Before Interest and Taxes............................... 31.2 41.8 52.6
All Other Depreciation and Amortization................................. 10.7 10.9 12.0
------- ------ ------
EBITDA.................................................................. $ 41.9 $ 52.7 $ 64.6
======= ====== ======
</TABLE>
Adjusted income before interest and taxes and EBITDA should not be considered as
an alternative to net income, any other measure of operating performance as
determined by generally accepted accounting principles or as an indicator of
the Company's operating performance.
Fiscal 1997 Compared to Fiscal 1996
Net Sales. The Company recorded record sales and earnings in fiscal 1997.
Net sales increased $66.5 million, or 21.8%, to $371.0 million for fiscal 1997
from $304.5 million in fiscal 1996. Household product sales increased $37.8
million, or 23.0%, primarily due to the introduction of consumer markets product
lines during the second half of fiscal 1997, increased sales at Company-owned
dealerships in both the U.S. and France, and the continued growth of drinking
and bottled water products in the U.S. Approximately $6.5 million of such
increase was attributable to the acquisition of retail dealers. Commercial and
industrial product sales increased $28.7 million, or 20.5%, primarily due to
acquisitions consummated in the fourth quarter of fiscal 1996 and increased
market penetration in both U.S. and international markets. Changes in currency
exchange rates had an unfavorable effect of $0.7 million in the year-to-year
comparison.
Gross Profit. Gross profit increased to $165.4 million in fiscal 1997 from
$136.1 million in fiscal 1996, a 21.5% improvement. Gross profit margins
decreased slightly to 44.6% in fiscal 1997 from 44.7% in fiscal 1996. Expected
decreases in gross margins as a percentage of sales were attributable to the
introduction of the bottled water cooler product line and the acquisitions of
commercial and industrial product lines completed at the end of fiscal 1996,
partially offset by the full-year impact of productivity improvement programs
implemented in late fiscal 1996 and a shift in product mix.
Selling, General and Administrative ("SG&A"). As a percentage of sales,
SG&A was 30.7% in fiscal 1997 as compared to 31.4% in fiscal 1996. Additional
SG&A costs resulting from the start-up of the Company's consumer markets product
group were more than offset by continued cost containment initiatives as well as
the impact from acquired businesses which had, after integration, a SG&A level
as a percentage of sales below the Company's historical levels.
30
<PAGE>
Amortization of Intangible Assets. Amortization of intangible assets
decreased by $21.3 million in fiscal 1997 from the prior year period due to the
completion in June 1996 of the "Amortization of Reorganization Value in Excess
of Identifiable Assets" attributable to the reorganization of the Company's
former parent resulting from "Fresh Start" accounting as required by SOP 90-7.
This decrease was slightly offset by amortization of goodwill and other
intangibles recorded in connection with the Company's acquisitions consummated
during the fourth quarter of fiscal 1996 and in fiscal 1997.
Other Income (Expense), Net. In fiscal 1997, other income (expense), net
included a gain of $2.0 million from an insurance settlement related to a fire
at the Company's Belgian facility in July 1993. A reduction in accruals in
fiscal 1997 offset the absence of earnings reported from an affiliate that was
recorded under the equity method of accounting in fiscal 1996.
Adjusted Income Before Interest and Taxes. Adjusted income before interest
and taxes increased $10.8 million, or 25.8%, from $41.8 million during fiscal
1996 to $52.6 million in fiscal 1997 due to the reasons described above.
EBITDA. EBITDA as a percentage of sales improved to 17.4% in fiscal 1997 as
compared to 17.3% in fiscal 1996. Increased sales and the improvement in SG&A as
a percentage of sales were offset by the expected decrease in gross profit
percentage described above.
Interest Income (Expenses), Net. Interest expense, net of interest income,
decreased to $2.9 million in fiscal 1997, from $10.9 million in fiscal 1996.
Such decrease was primarily due to a reduction in borrowings resulting from the
repayment of debt with proceeds from the Company's equity offering in the fourth
quarter of fiscal 1996 and proceeds received from the issuance of additional
shares of common stock upon the exercise of overallotment options granted to
underwriters in connection with a secondary public offering in the third quarter
of fiscal 1997 and the exercise of stock options by one of the selling
stockholders in such secondary offering. In addition, more favorable interest
rates resulting from the refinancing of debt in July 1995 reduced interest, net
during fiscal 1997.
Income Taxes. The effective tax rate differs from the statutory rate
primarily because of the nondeductibility of the "Amortization of Reorganization
Value in Excess of Identifiable Assets."
Fiscal 1996 Compared to Fiscal 1995
Net Sales. The Company achieved record sales and earnings in fiscal 1996.
Sales were $304.5 million in fiscal 1996, an increase of $24.4 million, or 8.7%,
from the fiscal 1995 total of $280.1 million. All business units reported
increased sales, led by household product sales which increased $18.0 million,
or 12.4%, largely due to strong
31
<PAGE>
sales growth outside the U.S., the inclusion of the sales of an acquired retail
dealer and moderate gains in sales of U.S. drinking water products. Commercial
and industrial product sales improved $6.4 million, or 4.8%, as these product
categories continued to benefit from improved business conditions in non-U.S.
markets and the continued improvement domestically by the Company's Everpure
product subsidiary which principally services the food service market. Changes
in currency exchange rates had a favorable effect of $6.6 million in the
year-to-year comparison.
Gross Profit. Gross profit increased to $136.1 million in fiscal 1996
compared to $124.2 million in fiscal 1995, a 9.6% improvement. The Company's
gross profit margins improved to 44.7% from 44.3%. The principal reasons for the
improved margins as a percentage of sales were the mix of products sold
internationally, as well as improved profitability related to commercial and
industrial projects, both domestically and internationally.
Selling, General and Administrative Expenses ("SG&A"). As a percentage of
sales, SG&A was 31.4% in fiscal 1996 as compared with 32.8% in fiscal 1995. The
improvement was due to cost and work force reductions internationally,
operational cost improvements domestically and administrative cost containment
initiatives implemented by the Company's new management team.
Restructuring Expenses. The restructuring of the Company's European
manufacturing and distribution operations resulted in charges totaling $5.9
million in fiscal 1995. The charges included severance costs, inventory
writedowns, architectural fees, and one time retention bonuses for key
management employees responsible for carrying out the restructuring.
Amortization of Intangible Assets. Amortization of intangible assets
increased slightly to $38.8 million in fiscal 1996 from $38.7 million in fiscal
1995 as a result of amortization related to the intangible assets recorded in
connection with the Company's acquisitions consummated during the fourth quarter
of fiscal 1996. Amortization of intangible assets in fiscal 1996 and fiscal 1995
includes $37.3 million of "Amortization of Reorganization Value in Excess of
Identifiable Assets."
Other Income (Expense), Net. The increase in other income (expense) net in
fiscal 1996 from fiscal 1995 was the result of earnings reported from an
affiliate recorded under the equity method of accounting.
Adjusted Income Before Interest and Taxes. Adjusted income before interest
and taxes increased $10.6 million or 34.0% from $31.2 million in fiscal 1995 to
$41.8 million in fiscal 1996 due principally to the reasons described above.
32
<PAGE>
EBITDA. EBITDA as a percentage of sales increased to 17.3% in fiscal 1996
from 15.0% in fiscal 1995 due primarily to increased sales and an improvement in
gross profit margins and SG&A as a percentage of sales.
Interest Income (Expense), Net. Interest income (expense), net improved
during fiscal 1996 principally as a result of a reduction in borrowings during
the year, and more favorable interest rates as a result of the refinancing of
debt in July 1995.
Income Taxes. The effective tax rate differs from the statutory rate
primarily because of the nondeductibility of the "Amortization of Reorganization
Value in Excess of Identifiable Assets" and differences in non-U.S. tax rates.
Liquidity and Capital Resources
The Company's operating cash requirements consist principally of working
capital requirements, and capital expenditures. The Company believes that cash
flow from operating activities and periodic borrowings under bank credit
facilities will be adequate to meet the Company's operating cash requirements in
the future.
Cash provided by operating activities was $16.5 million, $13.4 million, and
$12.4 million in fiscal 1997, 1996, and 1995, respectively. The increase in cash
provided by operating activities to $16.5 million in fiscal 1997 from $13.4
million in fiscal 1996 was principally due to improved operating results and
reduced interest expense, offset by increased investments in working capital
which were required to fund the higher sales volume and by new initiatives such
as the introduction of consumer product lines and a bottled water cooler
financing program. In fiscal 1996, cash flows from operations were favorably
impacted by improved operating results and reduced interest expense, offset by
increased investments in working capital.
Cash utilized for capital expenditures during fiscal 1997, 1996 and 1995
was $17.0 million, $8.8 million, and $10.8 million, respectively. In fiscal
1997, capital expenditures increased over historical levels due to expenditures
associated with new dealerships in the U.S. and France, and the expansion of
manufacturing operations at the Company's Everpure facility to support the
introduction of consumer product lines during fiscal 1997. Capital expenditures
are expected to continue to be made, as required, for the purpose of maintaining
and improving operating facilities and equipment to increase manufacturing
efficiencies and enhance the Company's competitiveness and profitability on a
worldwide basis.
At January 31, 1997, the Company had available credit under its existing
bank credit facility of approximately $115 million. The Company's existing
credit facility is available, among other things, to finance the working capital
needs of the Company, fund standby letters of credit
33
<PAGE>
to support international debt and finance acquisitions. Loans obtained under the
credit facility bear interest, at the election of the Company, at either the
bank's base rate or a Eurodollar rate, together with an applicable margin based
on the consolidated financial performance of the Company.
During the third quarter of fiscal 1997, the Company issued additional
shares of common stock upon the exercise of overallotment options granted to
underwriters in connection with a secondary public offering of shares of the
Company's common stock. The net proceeds of approximately $32 million from the
issuance of such shares and from the exercise of stock options by one of the
selling stockholders in the offering, were used to repay indebtedness under the
Credit Facility. In addition, as a result of the exercise of stock options, the
Company recognized an income tax benefit of approximately $7.5 million which it
recorded as additional paid-in capital during fiscal 1997.
Subsequent to the end of fiscal 1997, the Company received approximately
$51 million in cash proceeds as a result of the disposition of its investment in
Anvil Holdings, Inc., which it acquired in January 1995 at a cost of $9 million.
The Company used the proceeds received to repay acquisition related indebtedness
under its existing credit facility and to fund added growth.
On April 30, 1997, the Company signed a new credit facility to replace
its existing $150 million reducing revolving credit facility. The new credit
facility will be a $300 million multi-currency revolving credit facility,
consisting of a $200 million, five-year multi-currency revolving credit facility
and a $100 million, 364-day multi-currency revolving credit facility and will
provide for lower borrowing costs and fewer restrictions than under the existing
facility. It is expected that the Company will borrow under the new credit
facility and repay the outstanding indebtedness under its existing credit
facility in early May 1997.
Since the Spin-off from its former parent in September 1995, the Company
has completed the acquisition of several businesses which complement existing
products and operations of the Company. The aggregate purchase price of
approximately $48.7 million, which includes the assumption of approximately
$14.1 million of debt, was financed through borrowings under the existing credit
facility. The Company intends to continue to make strategic acquisitions as part
of its business strategy and presently expects to finance these activities
either by internally generated funds, bank borrowings, public offerings or
private placements of equity or debt securities, or a combination of the
foregoing. No assurance can be given, however, with respect to the financial or
business effect of any possible future acquisitions.
The Company's principal non-U.S. operations are located in Western Europe,
the economies of which are not considered to be highly inflationary. The
Company's subsidiaries in Spain, Italy and Belgium are subject to currency
fluctuations because these subsidiaries have monetary assets and liabilities
denominated in other than their respective local currencies. It is the Company's
policy not to speculate in non-U.S. currencies, but rather to hedge against
currency changes by using bank borrowings by its
34
<PAGE>
non-U.S. subsidiaries to reduce the extent to which its monetary assets are at
risk. From time to time, the Company has entered into forward exchange contracts
in order to hedge its exposure on certain intercompany transactions. As of
January 31, 1997, the Company had two forward exchange contracts outstanding.
The contracts, for an aggregate of $4.1 million, expire in July 1997. Net assets
of the Company's non-U.S. subsidiaries translated at January 31, 1997 exchange
rates were approximately $42.5 million at January 31, 1997, an increase of
approximately 14% from January 31, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 and included in this Report are
listed in the Index to Consolidated Financial Statements appearing on page F-1
and are incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10.
See, "Item 1 - Executive Officers of the Company" for certain information
concerning the Company's officers. The other information required by Item 10 is
incorporated by reference from the Registrant's Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on June 13, 1997 (the "1997 Proxy
Statement") to be filed with the Securities and Exchange Commission on or prior
to May 31, 1997.
ITEMS 11, 12 and 13.
The information required by Items 11, 12 and 13 is incorporated by
reference from the 1997 Proxy Statement.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
See Index to Financial Statements on page F-1 hereof.
2. Financial Statement Schedules
Schedule I - Culligan Water Technologies, Inc. Condensed Financial
Statements
3. Exhibits:
Copies of the Following exhibits are available at a charge of $.25 per page
upon written request to the Secretary of the Company at One Culligan Parkway,
Northbrook, IL 60062.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.1 Distribution Agreement, dated as of July 14, 1995, between Samsonite
and the Company.*
3.1 Restated Certificate of Incorporation.*
3.2 Amended and Restated By-Laws.*
4.1 Rights Agreement between the Company and the First National Bank of
Boston as Rights Agent.***
10.1 Credit Agreement dated as of July 14, 1995 (the "Existing Credit
Agreement") among the Company, Culligan International Company
("Culligan International") and the other Borrowers as defined
therein, the financial institutions named therein as Lenders (the
"Existing Lenders"), Credit Lyonnaise, New York Branch and Wells
Fargo Bank, National Association, as Co-Agents for the Lenders, and
the First National Bank of Boston, as Managing Agent for the Lenders
(the "Existing Managing Agent").*
</TABLE>
36
<PAGE>
<TABLE>
<S> <C>
10.2 Stock Pledge Agreement dated as of July 14, 1995 between Culligan
International and the Existing Managing Agent for the benefit of the
Existing Lenders.*
10.3 Stock Pledge Agreement dated as of July 14, 1995 between the Company
and the Existing Managing Agent for the benefit of the Existing
Lenders.*
10.4 International Pledge Agreement dated as of July 14, 1995 among the
Pledgors as defined therein and the Existing Managing Agent for the
benefit of the Existing Lenders.*
10.5 Note Pledge Agreement dated as of July 14, 1995 between Culligan
International and the Existing Managing Agent for the benefit of the
Existing Lenders.*
10.6 Amendment No. 1 dated as of January 29, 1996 to Existing Credit
Agreement.**
10.7 Amendment No. 2 dated as of August 1996 to the Existing Credit
Agreement.**
10.8 Form of 1995 Stock Option and Incentive Award Plan.*
10.9 Employment Agreement, dated as of December 15, 1994, between
Culligan International and Douglas A. Pertz.*
10.10 Tax Sharing Agreement, dated as of July 14, 1995, between Samsonite
and the Company.*
10.11 Culligan Supplemental Retirement Plan, dated July 1, 1991.*
10.12 Amended and Restated Registration Rights Agreement.**
10.13 Form of Indemnification Agreement entered into or to be entered into
by the Company with each of its officers and directors.*
21.1 List of Subsidiaries.**
27.1 Financial Data Schedule**
</TABLE>
37
<PAGE>
(b) Reports on Form 8-K
The registrant did not file any Current Reports on Form 8-K in the quarter
ended January 31, 1997.
- ------------------
*Incorporated by reference to the Company's Registration Statement on Form 10
(File No. 0-26630).
**Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended January 31, 1996.
***Incorporated by reference to the Company's Registration Statement on Form 8-A
filed with the Commission on September 16, 1996.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed by the
undersigned, thereunto duly authorized.
CULLIGAN WATER TECHNOLOGIES, INC.
(Registrant)
Dated: April 30, 1997
By: /s/ Douglas A. Pertz
-------------------------------------
Douglas A. Pertz
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on April 30, 1997 by the following persons on
behalf of the registrant in the capacities indicated.
Signature Title
- --------- -----
/s/ Douglas A. Pertz
- --------------------------- President and Chief Executive Officer
Douglas A. Pertz and Director
/s/ Michael E. Salvati
- --------------------------- Vice President, Finance and Chief
Michael E. Salvati Financial Officer (principal financial
and accounting officer)
/s/ Andrew D. Africk
- --------------------------- Director
Andrew D. Africk
- --------------------------- Director
R. Theodore Ammon
39
<PAGE>
/s/ Bernard Attal
- --------------------------- Director
Bernard Attal
/s/ Leon D. Black
- --------------------------- Director
Leon D. Black
/s/ Robert H. Falk
- --------------------------- Director
Robert H. Falk
- --------------------------- Director
Mark H. Rachesky
- --------------------------- Director
Robert L. Rosen
/s/ Marc J. Rowan
- --------------------------- Director
Marc J. Rowan
/s/ Stephen J. Solarz
- --------------------------- Director
Stephen J. Solarz
/s/ Carl Spielvogel
- --------------------------- Director
Carl Spielvogel
40
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Fiscal Years 1995, 1996 and 1997
Independent Auditors' Report........................................ F-2
Consolidated Balance Sheets as of January 31, 1996 and 1997......... F-3
Consolidated Statements of Operations for the years ended
January 31, 1995, 1996 and 1997................................. F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended January 31, 1995, 1996 and 1997............. F-5
Consolidated Statements of Cash Flows for the years ended
January 31, 1995, 1996 and 1997................................. F-6
Notes to Consolidated Financial Statements.......................... F-7
Financial Statement Schedule Condensed Financial Information
of Registrant Schedule 1 All other financial statement
schedules are omitted as not applicable or because the
required information is presented in the consolidated
financial statements or related notes........................... S-1
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Culligan Water Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Culligan Water
Technologies, Inc. and subsidiaries as of January 31, 1996 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended January 31,
1997. In connection with our audits of the consolidated financial statements, we
have also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements are the responsibility of the
management of Culligan Water Technologies, Inc. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Culligan
Water Technologies, Inc. and subsidiaries as of January 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
March 17, 1997
Chicago, Illinois
F-2
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value per share)
<TABLE>
<CAPTION>
ASSETS January 31, January 31,
------ 1996 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents............. $ 3,877 $ 8,984
Accounts and Notes Receivable, Net of
Allowance for Doubtful Accounts of
$6,470 and $5,695 in 1996 and 1997,
respectively......................... 68,725 80,843
Inventories........................... 39,967 47,213
Deferred Income Taxes................. 10,614 10,964
Prepaid Expenses and Other Current
Assets............................... 4,961 4,650
-------- --------
Total Current Assets............... 128,144 152,654
Property, Plant, and Equipment, Net..... 70,749 78,740
Intangible Assets, Less Accumulated
Amortization of $100,162 and $117,671
in 1996 and 1997, respectively......... 73,233 76,883
Other Noncurrent Assets................. 20,444 29,085
-------- --------
Total Assets....................... $292,570 $337,362
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------
Current Liabilities:
Accounts Payable...................... $ 22,999 $ 23,867
Accrued Expenses...................... 40,902 36,950
Short-Term Debt and Current Maturities
of Long-Term Debt.................... 9,186 12,414
-------- --------
Total Current Liabilities.......... 73,087 73,231
-------- --------
Long-Term Liabilities:
Long-Term Debt........................ 39,138 36,231
Noncurrent and Deferred Income Taxes.. 29,939 29,805
Other Noncurrent Liabilities.......... 31,317 24,455
-------- --------
Total Long-Term Liabilities........ 100,394 90,491
-------- --------
Stockholders' Equity:
Common Stock ($.01 Par Value;
60,000,000 Shares Authorized;
19,914,450 and 21,342,957 Shares
Issued and Outstanding at January 31,
1996 and 1997, respectively)......... 199 213
Additional Paid-In Capital............ 195,956 235,894
Retained Deficit...................... (77,665) (61,780)
Foreign Currency Translation 599 (687)
Adjustment........................... -------- --------
Total Stockholders' Equity......... 119,089 173,640
-------- --------
Total Liabilities and
Stockholders' Equity.............. $292,570 $337,362
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 31, January 31, January 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales............................... $ 280,051 $ 304,502 $ 371,018
Cost of Goods Sold...................... 155,829 168,363 205,581
----------- ----------- -----------
Gross Profit........................ 124,222 136,139 165,437
Selling, General, and Administrative.... 91,989 95,723 113,932
Administrative Expenses Allocated from
Former Parent....................... 1,095 -- --
Restructuring Expenses.................. 5,917 -- --
Amortization of Intangible Assets....... 38,691 38,802 17,522
----------- ----------- -----------
Operating Income (Loss)............. (13,470) 1,614 33,983
Interest Income......................... 1,439 1,576 2,633
Interest Expense on Indebtedness to
Former Parent....................... (16,867) (5,207) --
Interest Expense--Other................. (2,218) (7,219) (5,490)
Other, Net.............................. 398 2,867 5,023
----------- ----------- -----------
Income (Loss) Before Income Taxes... (30,718) (6,369) 36,149
Income Taxes............................ 5,678 14,910 20,264
----------- ----------- -----------
Net Income (Loss)................... $ (36,396) $ (21,279) $ 15,885
=========== =========== ===========
Net Income (Loss) Per Share............. $(2.29) $(1.30) $0.74
=========== =========== ===========
Weighted Average Shares of Common
Stock Outstanding................... 15,889,450 16,311,426 21,374,672
=========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except shares outstanding)
<TABLE>
<CAPTION>
Common Stock Foreign
----------------- Additional Retained Currency Total
Par Paid-in Earnings Translation Stockholders'
Shares Value Capital (Deficit) Adjustment Equity
---------- ----- ----------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1994........... 15,889,450 $159 $ 75,815 $(19,990) $(3,683) $ 52,301
Capital Contribution from
Former Parent..................... -- 30,000 -- -- 30,000
Net Loss............................ -- -- (36,396) -- (36,396)
Foreign Currency Translation
Adjustment, Net................... -- -- -- 2,339 2,339
----------------------------------------------------------------------
Balance at January 31, 1995........... 15,889,450 159 105,815 (56,386) (1,344) 48,244
Capital Contribution from
Former Parent..................... -- 4,785 -- -- 4,785
Sale of Common Stock................ 4,025,000 40 94,547 -- -- 94,587
Costs of Issuance and Distribution.. -- (9,191) -- -- (9,191)
Net Loss............................ -- -- (21,279) -- (21,279)
Foreign Currency Translation
Adjustment, Net................... -- -- -- 1,943 1,943
----------------------------------------------------------------------
Balance at January 31, 1996........... 19,914,450 199 195,956 (77,665) 599 119,089
Sale of Common Stock................. 749,239 7 28,183 -- -- 28,190
Costs of Issuance and Distribution... (1,584) -- -- (1,584)
Exercise of Stock Options............ 679,268 7 5,784 -- -- 5,791
Income Tax Benefit from Exercise
Of Stock Options................... 7,555 7,555
Net Income........................... -- -- 15,885 -- 15,885
Foreign Currency Translation
Adjustment, Net.................... -- -- -- (1,286) (1,286)
----------------------------------------------------------------------
Balance at January 31, 1997........... 21,342,957 $213 $235,894 $(61,780) $ (687) $173,640
======================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
January 31, January 31, January 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss)................................... $(36,396) $ (21,279) $ 15,885
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating Activities:
Depreciation.................................... 9,279 9,409 10,091
Amortization.................................... 38,691 38,802 17,522
Gain on Sales of Assets......................... (182) (295) (382)
Insurance Settlement............................ -- -- (1,980)
Deferred Income Taxes........................... (5,530) 255 (299)
Changes in Assets and Liabilities:
Receivables, Net................................ 68 (5,845) (10,230)
Inventories..................................... (3,754) 3,575 (6,626)
Other Current Assets............................ (215) (1,659) (636)
Accounts Payable and Accrued
Expenses....................................... 7,911 (6,962) 345
Other, Net...................................... 2,565 (2,635) (7,157)
-------- --------- --------
Net Cash Provided by
Operating Activities............................. 12,437 13,366 16,533
-------- --------- --------
Cash Flows from Investing Activities:
Proceeds from Sales of Assets....................... 1,355 2,093 6,323
Proceeds from Insurance Settlement.................. -- -- 4,500
Capital Expenditures................................ (10,767) (8,841) (17,043)
Investment in Affiliate............................. (9,000) -- --
Payments for Acquisitions........................... -- (13,872) (20,745)
-------- --------- --------
Net Cash Used in Investing
Activities....................................... (18,412) (20,620) (26,965)
-------- --------- --------
Cash Flows from Financing Activities:
Net Proceeds from Sale of Common
Stock.............................................. -- 85,396 26,606
Proceeds from Exercise of
Stock Options...................................... -- -- 5,791
Receivable from Affiliate........................... 9,815 -- --
Funding from (to) Former Parent, Net................ 10,928 (111,125) (6,743)
Net Borrowings (Repayments) of
Long-term Debt..................................... (15,882) 32,616 (11,165)
Net Short-term Borrowings
(Repayments)....................................... 569 (2,099) 1,336
-------- --------- --------
Net Cash Provided by Financing
Activities....................................... 5,430 4,788 15,825
-------- --------- --------
Effect of Foreign Exchange Rate Changes
on Cash............................................... 506 417 (286)
-------- --------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents........................................ (39) (2,049) 5,107
Cash and Cash Equivalents at Beginning
of Year............................................... 5,965 5,926 3,877
-------- --------- --------
Cash and Cash Equivalents at End of Year............... $ 5,926 $ 3,877 $ 8,984
======== ========= ========
Supplemental Disclosures of Cash Flow
Information:
Cash Paid During the Year for:
Interest (Including to Former Parent)............... $ 19,033 $ 12,149 $ 5,236
Income Taxes (Excluding to Former
Parent)............................................ $ 3,598 $ 8,086 $ 12,618
======== ========= ========
Supplemental Schedule of Noncash
Financing Activities:
Former Parent Contribution to Equity
Capital.............................................. $ -- $ 4,785 $ --
Contribution of Notes Payable of
Former Parent to Equity Capital...................... $ 30,000 $ -- $ --
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(1) Summary of Significant Accounting Policies
The Company
Culligan Water Technologies, Inc. (the "Company" or "Culligan") and
subsidiaries are engaged in the manufacture and sale of water purification and
treatment products. A significant part of the Company's sales are made to
franchised dealers and licensees.
"Fresh Start" Basis of Accounting
On May 25, 1993 the United States Bankruptcy Court confirmed a Plan of
Reorganization (the "Plan") of Culligan's parent at the time, Astrum
International Corp. ("Astrum"). Pursuant to the terms of the Plan, which became
effective on June 8, 1993, Astrum completed a comprehensive financial
reorganization (the "Restructuring"). The Restructuring has been accounted for
in accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7"). SOP 90-7 requires that the Company's
assets and liabilities be adjusted to their fair values ("Fresh Start") and that
a new reporting entity be created. Although Culligan did not file for
bankruptcy, as a subsidiary company, Culligan was required to record the effects
of Astrum's "Fresh Start" adjustments of assets and liabilities as additional
capitalization (the "recapitalization") as of June 30, 1993.
The consolidated balance sheets as of January 31, 1996 and 1997 and
consolidated statements of earnings and cash flows for the years ended January
31, 1995, 1996 and 1997 include the continuing impact of the recapitalization.
Spin-Off
On September 12, 1995, Samsonite Corporation ("Samsonite"), formerly known
as Astrum, distributed one share of Culligan common stock for each share of
Samsonite common stock in a spin-off (the "Spin-Off"). In connection with the
Spin-Off, Culligan's capital stock was recapitalized. All share amounts for the
periods preceding the Spin-Off have been retroactively restated to give effect
to the stock distribution.
Principles of Consolidation
The consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Acquisitions
During the years ended January 31, 1996 and 1997, the Company completed a
number of acquisitions to complement existing products and businesses for
approximately $13,872 and $2,878 in cash and notes payable, respectively, in the
year ended January 31, 1996 and $20,745 and $11,203 in cash and notes payable,
respectively, in the year ended January 31, 1997. The acquisitions are accounted
for using the purchase method. Purchase price in excess of net assets
acquired is recorded as goodwill.
Revenue Recognition
Sales of the Company's products are recorded upon shipment. Estimated costs
to be incurred by the Company related to product installation and warranty
fulfillment are accrued at the date of shipment.
F-7
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
Foreign Currency Translation
The accounts of the Company's non-U.S. subsidiaries are measured using local
currency as the functional currency. These operations report financial results
on a calendar year basis. The Company translates assets and liabilities
denominated in non-U.S. currencies at exchange rates prevailing at balance sheet
dates and income, costs, and expenses are translated at the average rates during
the period. Translation adjustments are included as a separate component of
stockholders' equity.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
Inventories
Inventories, consisting of materials, labor and overhead, are valued at the
lower of cost on the first-in, first-out ("FIFO") method or market.
Property, Plant, and Equipment
In connection with the adoption of "Fresh Start" accounting, the Company
adjusted property, plant, and equipment to fair market values. Depreciation is
provided on the straight-line method over the estimated useful lives of the
assets as follows:
<TABLE>
<S> <C>
Buildings and improvements...... 3 to 40 years
Furniture and fixtures.......... 4 to 10 years
Machinery and equipment......... 3 to 10 years
</TABLE>
Gains or losses resulting from dispositions are included in other income
(expense), net. Improvements which extend the life of an asset are capitalized;
maintenance and repair costs are expensed.
Intangible Assets
As a result of "Fresh-Start" accounting, the Company recorded reorganization
value in excess of identifiable assets. Tradenames and other intangibles were
recorded at fair market value based on independent appraisals. Intangible assets
are amortized on a straight-line basis over their estimated useful lives as
follows:
<TABLE>
<S> <C>
Reorganization value in excess of identifiable assets........ 3 years
Tradenames................................................... 40 years
Goodwill..................................................... 10 to 40 years
Other intangible assets...................................... 3 to 40 years
</TABLE>
The Company accounts for intangible assets at the lower of amortized cost or
fair value. On an ongoing basis, the Company reviews the valuation and
amortization of intangible assets by comparing carrying values to projected
discounted future operating results using a discount rate reflecting the
Company's average cost of capital and taking into consideration any events or
circumstances that could impair the assets' carrying values.
Advertising
Costs incurred for advertising, including costs incurred under the Company's
U.S. cooperative advertising program with its dealers and franchisees, are
expensed when incurred.
F-8
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
Research and Development
Research and development costs are expensed during the year in which such
costs are incurred and amounted to approximately $3,258, $3,221 and $3,212 for
the years ended January 31, 1995, 1996 and 1997, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Insurance
The Company retains risks for workers' compensation, automobile and general
liability up to $500 per individual claim. Culligan purchases excess workers
compensation, automobile and general liability coverage for individual claims in
excess of $500.
Net Income (Loss) Per Share
Net income (loss) per share is computed based on the weighted average number
of common shares and common share equivalents outstanding. Stock options are
not included as share equivalents for the years ended January 31, 1995 and 1996
because they are antidilutive.
Employee Stock Options
The Company accounts for employee stock options under the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. Accounting for the issuance of stock
options under the provisions of APB Opinion No. 25 typically does not result in
compensation expense for the Company as the exercise price of options are
normally established at the market price of the Company's common stock on the
date granted.
Use of Estimates in the Preparation of Financial Statements
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 related disclosures 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.
Reclassifications
Certain reclassifications were made to the prior periods' financial statements
in order to conform with the 1997 presentation.
F-9
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
(2) Inventories
Inventories at January 31, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Raw materials..................... $ 13,721 $ 19,137
Work in process................... 3,134 7,788
Finished goods.................... 23,112 20,288
-------- --------
Total........................... $ 39,967 $ 47,213
======== ========
</TABLE>
(3) Property, Plant, and Equipment
Property, plant, and equipment at January 31, 1996 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Land and land improvements........ $ 25,378 $ 21,113
Buildings......................... 24,039 28,289
Machinery and equipment........... 34,561 51,132
-------- --------
83,978 100,534
Less accumulated depreciation..... (13,229) (21,794)
-------- --------
Total........................... $ 70,749 $ 78,740
======== ========
</TABLE>
(4) Intangible Assets
Intangible assets, net of accumulated amortization, at January 31, 1996 and
1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Reorganization value in excess of identifiable net assets.. $15,551 $ --
Trademarks................................................. 45,373 44,160
Goodwill................................................... 8,917 26,424
Other intangible assets.................................... 3,392 6,299
------- -------
Total................................................... $73,233 $76,883
======= =======
</TABLE>
Amortization of intangible assets consists of the following:
<TABLE>
<CAPTION>
Year Year Year
Expected Ended Ended Ended
Useful January 31, January 31, January 31,
Life 1995 1996 1997
-------- ---------- ----------- -----------
(years)
<S> <C> <C> <C> <C>
Amortization of reorganization
value in excess of identifiable
assets................................. 3 $37,322 $37,322 $15,551
Amortization of trademarks and other
"Fresh Start" intangibles.............. 40 1,300 1,300 1,300
------- ------- -------
"Fresh Start" amortization.............. 38,622 38,622 16,851
Amortization of goodwill................ 10 to 40 18 158 504
Amortization of other intangibles....... 3 to 9 51 22 167
------- ------- -------
Total................................. $38,691 $38,802 $17,522
======= ======= =======
</TABLE>
F-10
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
"Fresh Start" amortization represents the expense arising from the adoption of
"Fresh Start" accounting in accordance with SOP 90-7.
(5) Accrued Expenses
Accrued expenses at January 31, 1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Accrued compensation and vacation............................. $13,069 $12,963
Accruals for claims in litigation (see Note 13)............... 5,063 3,312
Other......................................................... 22,770 20,675
-------- ---------
Total...................................................... $40,902 $36,950
======== =========
</TABLE>
(6) Financing Arrangements
The Company's debt at January 31, 1996 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------------------ -------------------
Current
Interest
Rates Current Long-Term Current Long-Term
-------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Notes payable to banks.................. 3.0-8.80% $9,008 $38,646 $ 9,549 $29,294
Other................................... 6.5-13.0% 178 492 2,865 6,937
------ ------- -------- ---------
Total.................................. $9,186 $39,138 $12,414 $36,231
====== ======= ======== =========
</TABLE>
Principal payments for each of the years ending January 31, 1998, through the
year 2002 and thereafter are $12,414, $1,399, $1,296, $30,247, $881 and $2,408,
respectively.
In July 1995, the Company and certain of its subsidiaries entered into a
revolving credit facility with several banks providing for a $150,000 reducing
revolving credit facility (the "Credit Facility"). The Credit Facility matures
in July 2000, is guaranteed by the Company and certain of its subsidiaries and
is secured by a pledge of the stock of the Company's significant subsidiaries.
Commencing on the third anniversary of the Credit Facility, the amount available
thereunder may be reduced by up to $10,000 annually depending on the Company's
consolidated leverage ratio. At January 31, 1997, the Company had borrowings of
approximately $28,400 and outstanding letters of credit of approximately $6,800
under the Credit Facility. Borrowing availability at January 31, 1997 was
approximately $114,800. The Credit Facility is available, among other things,
to finance the working capital needs of the Company, fund standby letters of
credit to support international debt and finance acquisitions. Loans under the
Credit Facility bear interest, at the election of the Company, at either a
reference rate based on the prime rate or a Eurodollar rate, together with an
applicable margin tied to the consolidated financial performance of the Company.
At January 31, 1997, the weighted average interest rate on borrowings under the
Credit Facility was 6.11% per annum.
F-11
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
The Credit Facility was amended in August 1996 to modify certain covenants
related to amounts allowed for investments in subsidiaries and affiliates. The
agreement requires the Company to achieve certain financial performance
criteria. The Credit Facility also imposes certain restrictions on the
incurrence of debt, dividends, sales of assets, investments, mergers and
acquisitions, guarantees, liens, transactions with affiliates and certain other
matters. The Credit Facility contains customary representations and warranties
and conditions to borrowings for a facility of this type, as well as customary
events of default including, but not limited to, payment defaults, breaches of
covenants or representations, insolvency and change of control.
During the year ended January 31, 1997, the Company recorded additional debt
which primarily consists of notes payable to former owners of businesses
acquired.
At January 31, 1997, the Company had non-U.S. lines of credit of approximately
$28,000, with interest rates ranging from 3.0% to 7.66% and varying maturity
dates. At January 31, 1997, the weighted average interest rate on the $9,310 of
borrowings under these lines of credit was approximately 7.23%.
(7) Income Taxes
Prior to the Spin-Off, the Company's results were included in the consolidated
U.S. federal and, where applicable, unitary state income tax returns filed by
Samsonite. For periods prior to the Spin-Off, the provision for income taxes
has been computed as if the Company had filed its own U.S. federal and state
income tax returns.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
January 31, January 31, January 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Currently payable:
U.S. federal................ $ 7,521 $ 8,793 $12,516
State....................... 1,996 1,537 2,956
Non-U.S..................... 3,007 3,650 4,966
------- ------- -------
Total currently payable.. 12,524 13,980 20,438
------- ------- -------
Deferred:
U.S. federal................ (2,334) 1,067 1,122
State....................... (670) (24) (708)
Non-U.S..................... (3,842) (113) (588)
------- ------- -------
Total deferred........... (6,846) 930 (174)
------- ------- -------
Total income taxes....... $ 5,678 $14,910 $20,264
======= ======= =======
</TABLE>
F-12
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at January 31, 1996 and 1997
are presented below:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts and notes receivable......... $ 3,005 $ 3,259
Inventories........................... 2,338 3,527
Insurance and litigation accruals..... 3,136 2,822
Pension and postretirement benefits... 4,116 4,654
Other accruals........................ 8,106 6,884
Net operating loss carryforwards...... 5,847 4,143
Other................................. 417 469
-------- --------
Total gross deferred tax assets.......... 26,965 25,758
Less valuation allowance................. (1,733) (2,892)
-------- --------
Net deferred tax assets.................. 25,232 22,866
-------- --------
Deferred tax liabilities:
Property, plant, and equipment........ (13,454) (10,306)
Trademarks and other intangible
assets............................... (19,428) (19,051)
Unremitted earnings................... (1,395) (2,550)
Other................................. (359) --
-------- --------
Total gross deferred tax liabilities..... (34,636) (31,907)
-------- --------
Net deferred tax liabilities............. $ (9,404) $ (9,041)
======== ========
</TABLE>
Deferred income taxes have been provided on undistributed earnings of non-U.S.
subsidiaries to the extent that management plans to have these earnings remitted
to the U.S. in the future. At January 31, 1997, undistributed earnings of non-
U.S. subsidiaries that will be permanently invested and for which no deferred
taxes have been provided amount to approximately $30,700. It is not practicable
for the Company to compute the amount of unrecognized deferred tax liability on
these undistributed earnings.
A valuation allowance has been provided for those net operating loss
carryforwards and temporary differences which management believes will not be
utilized. The increase (decrease) in the total valuation allowance for the
years ended January 31, 1995, 1996 and 1997, was $2,255, $(1,691) and $1,159,
respectively. Management believes that it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the remaining deferred tax assets.
F-13
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
Total income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 35% to income (loss) before income taxes as a
result of the following:
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
January 31, January 31, January 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S................................ $(23,887) $(9,715) $17,732
Non-U.S............................ (6,831) 3,346 18,417
-------- ------- -------
Total........................... $(30,718) $(6,369) $36,149
======== ======= =======
Income taxes computed at the U.S.
federal statutory income tax rate... $(10,751) $(2,229) $12,652
State income taxes, net of U.S.
federal Income tax benefit.......... 909 983 1,461
Non-U.S. rate differential............ 1,557 2,366 2,068
Amortization of nondeductible
Intangible assets................... 13,063 13,063 5,443
Change in valuation allowance......... 2,255 (1,691) 1,159
Other, net............................ (1,355) 2,418 (2,519)
-------- ------- -------
Total........................... $ 5,678 $14,910 $20,264
======== ======= =======
</TABLE>
(8) Employee Benefit Plans
Pension Plans
The Company has pension plans which cover substantially all salaried employees
and certain hourly-paid employees. Plans covering salaried employees generally
provide pension benefits to employees who complete five or more years of
service. Pension benefits are generally based upon years of service and
compensation during the final years of employment. Plans covering hourly-paid
employees generally provide pension benefits of fixed amounts for each year of
service.
The Company also has an unfunded supplemental retirement plan for certain
employees and unfunded supplemental benefit agreements for two former executives
of the Company. The annual costs of the supplemental retirement plan and
supplemental benefit agreements are included in the determination of net
periodic pension cost shown below.
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
January 31, January 31, January 31
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Service cost................... $ 1,443 $ 1,196 $ 1,421
Interest cost.................. 3,162 3,297 3,415
Actual return on plan assets... 464 (11,289) (7,362)
Net amortization and deferral.. (3,985) 7,727 3,435
------- -------- -------
Net periodic pension cost...... $ 1,084 $ 931 $ 909
======= ======== =======
</TABLE>
F-14
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
The following table presents the plans' status reconciled with amounts
recognized as other non-current liabilities in the consolidated balance sheets
at January 31, 1996 and 1997:
<TABLE>
<CAPTION>
Accumulated
Benefits Exceed Assets Exceed
Assets Accumulated Benefits
--------------------- ----------------------
1996 1997 1996 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested.................................. $(1,891) $(1,942) $(38,176) $(37,042)
Nonvested............................... -- -- (1,973) (1,845)
------- ------- -------- --------
Accumulated benefit obligations............ $(1,891) $(1,942) $(40,149) $(38,887)
======= ======= ======== ========
Projected benefit obligations.............. $(2,060) $(2,011) $(46,190) $(44,978)
Fair value of plan assets,
principally equity securities,
and corporate and government
bonds..................................... -- -- 52,402 56,536
------- ------- -------- --------
Projected benefit obligations (in
excess of) less than plan assets......... (2,060) (2,011) 6,212 11,558
Unrecognized net gain from
past experience different from
that assumed and effect of
changes in assumptions................... (1,141) (1,073) (4,507) (10,222)
Prior service cost not yet
recognized in net periodic
pension cost.............................. 142 112 (618) (955)
------- ------- -------- --------
Prepaid (accrued) pension cost............. $(3,059) $(2,972) $ 1,087 $ 381
======= ======= ======== ========
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Actuarial assumptions were:
Discount rates................. 8.25% 7.50% 8.0-8.5%
Rates of increase in
compensation levels........... 6.00 6.00 5.00
Expected long-term rate of
return on assets.............. 8.50 8.50 8.50
</TABLE>
Plan assets are invested primarily in equity securities and fixed income
instruments. The plans do not have significant liabilities other than benefit
obligations. The Company's funding policy is to contribute amounts equal to the
minimum funding requirements of the Employee Retirement Income Security Act of
1974.
Defined Contribution Plans
The Company has defined contribution plans which cover substantially all
domestic salaried employees and certain hourly-paid employees. Company
contributions are based primarily on a percentage of earnings of the Company, as
defined. The Company's expenses related to these plans were approximately
$3,167, $3,125 and $3,609 for the years ended January 31, 1995, 1996 and 1997,
respectively.
Other Postretirement Benefit Plans
The Company sponsors a defined benefit health care plan that provides
postretirement medical benefits to full-time employees who meet minimum age and
service requirements. The plan is contributory and contains other cost-sharing
features such as deductibles and limits on certain coverages. The Company has
the right to modify or terminate the plan.
F-15
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
The Company's policy is to fund the cost of these benefits as incurred.
Employees hired subsequent to August 1, 1992 are not eligible for postretirement
medical benefits.
The following table presents the plan's status reconciled with amounts
recognized as other non-current liabilities in the accompanying consolidated
balance sheets at January 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................. $2,381 $2,473
Fully eligible active plan
participants............................. 1,565 1,741
Other active plan participants............ 2,491 2,449
------ ------
Accumulated postretirement benefit
obligation in excess of plan assets......... 6,437 6,663
Unrecognized net loss........................ 1,358 1,483
------ ------
Accrued postretirement benefit cost.......... $7,795 $8,146
====== ======
</TABLE>
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
January 31, January 31, January 31,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Service cost...................... $ 293 $ 219 $ 195
Interest cost..................... 513 467 483
Net amortization and
deferral........................ -- (74) (45)
------ ------ -----
Net periodic postretirement
benefit cost..................... $ 806 $ 612 $ 633
====== ====== =====
</TABLE>
For measurement purposes, a 14% annual rate of increase in the per capita cost
of covered benefits (i.e., health care cost trend rate) was assumed for fiscal
year 1992; the rate was assumed to decrease 1% each year to 6.5% by the year
2000 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation as of
January 31, 1997 by $864 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year ended
January 31, 1997 by $105. The weighted average discount rate used in determining
the accumulated postretirement benefit obligation was 7.50% and 8.00% at January
31, 1996 and 1997, respectively.
(9) Leases
The Company leases certain office facilities or other assets for which the
future minimum rental payments under noncancelable operating leases for each of
the years ending January 31, 1998 through the year 2002 and thereafter are
$1,569, $1,335, $1,120, $803, $509, and $205, respectively.
Rental expense amounted to $2,966, $2,205 and $2,169 for the years ended
January 31, 1995, 1996 and 1997, respectively.
F-16
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
(10) Fair Value of Financial Instruments
The Company's financial instruments at January 31, 1996 and 1997 include long-
term receivables, notes payable, and long-term debt. The fair values of such
financial instruments have been determined based on market interest rates as of
the respective year-ends and are not materially different from their financial
statement carrying values.
(11) Forward Exchange Contracts
Several of the Company's non-U.S. subsidiaries are exposed to foreign exchange
rate risk as they have monetary assets and liabilities denominated in currencies
other than their respective functional currencies. It is the Company's policy
not to speculate in non-U.S. currencies but rather to manage this exposure by
utilizing local currency bank borrowings and, from time to time, by entering
into forward foreign exchange contracts. Forward exchange contracts are not
held for trading purposes.
As of January 31, 1997, the Company had two forward exchange contracts
outstanding. The contracts, for an aggregate of $4,100, expire in July 1997.
Unrealized gains and losses on the forward contracts are deferred until the
related transaction occurs. Deferred gains and losses incurred during the years
ended January 31, 1995, 1996 and 1997 were not material.
(12) International Operations
During the year ended January 31, 1995, the Company continued a strategic
restructuring plan, implemented in fiscal 1994, for certain international
operations in Europe and incurred pre-tax charges of $5,917. The charge
included the estimated costs to complete the consolidation of certain production
facilities and administrative functions.
During the year ended January 31, 1997, the Company received an insurance
settlement related to a fire which substantially destroyed the Company's
facility in Belgium during July 1993. The settlement of $4,500 was offset by
additional incremental costs related to the fire of $2,520. The resulting pre-
tax gain of $1,980 is included as a component of other, net in the consolidated
statement of operations for the year ended January 31, 1997.
(13) Transactions with Related Parties
The following summarizes information about certain transactions between the
Company and Samsonite:
Distribution Agreement
In connection with the Spin-Off, Culligan and Samsonite entered into a
Distribution Agreement (the "Distribution Agreement") providing for, among other
things, the principal corporate transactions required to effect the Spin-Off,
the conditions to the Spin-Off, the allocation between Culligan and Samsonite of
certain liabilities and expenses of the transactions and certain other
agreements governing the relationship between Culligan and Samsonite with
respect to or in connection with the Spin-Off. In the Distribution Agreement,
Culligan and Samsonite agreed to indemnify each other against certain
liabilities, including any liabilities arising out of their respective
businesses that may be asserted against the other and, in the case of Samsonite,
certain contingent liabilities relating to the bankruptcy of Astrum and certain
contingent claims by the Pension Benefit Guaranty Corporation and certain
contingent liabilities relating to Burr Ridge Insurance Company ("Burr Ridge"),
a company that was formed by Samsonite to reinsure claims for workmen's
compensation, relating largely to employees of the Company and its subsidiaries.
In connection with the Spin-Off, Culligan repaid $110,000 of indebtedness owed
by it to Samsonite and, except for an intercompany tax payable, all
intercompany receivables and payables between Samsonite and Culligan were
canceled. The Distribution Agreement also provided for the sale to the Company
of all of the stock of Burr Ridge.
F-17
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
Tax Sharing Agreement
Prior to the Spin-Off, Culligan's results of operations had been included in
Samsonite's consolidated U.S. federal income tax returns. In connection with the
Spin-Off, Culligan and Samsonite entered into a Tax Sharing Agreement (the "Tax
Sharing Agreement") providing, among other things, for the allocation between
Samsonite and Culligan of federal and state tax liabilities for all periods
prior to completion of the Spin-Off. Under the Tax Sharing Agreement, the
balance in Culligan's intercompany tax payable account remained outstanding and
was converted into a long-term obligation. During the year ended January 31,
1996, Culligan paid to Samsonite, approximately $7,325 of its intercompany tax
payable. The balance of the intercompany tax payable at January 31, 1996, which
includes taxes payable through the date of the Spin-Off, was $7,324 and is
included as other noncurrent liabilities in the consolidated balance sheet.
During the year ended January 31, 1997, Culligan settled the remaining tax
payable with Samsonite.
Note Payable to Samsonite
In June 1993, Culligan issued a $150,000 subordinated note payable with an
interest rate of 11.5% to Samsonite. In December 1994, the Company made a
principal payment to Samsonite of $20,000. In January 1995, Samsonite reduced
the principal amount outstanding under the note payable through a $30,000
contribution to equity capital of the Company. The outstanding balance of such
note was repaid by Culligan during July 1995 in connection with the Refinancing.
For the years ended January 31, 1995 and 1996, Culligan incurred interest
expense under this obligation of $16,867 and $5,207, respectively.
(14) Litigation
In January 1997, an action was commenced by the Company in the Circuit Court
of Cook County, Illinois against United States Water Company, L.P. ("U.S.
Water"), United States Water Management Company ("USWMC"), Randall C. Easton
("Easton") and United States Filter Corporation ("U.S. Filter"). The Company's
Complaint in the action alleges, among other things, that the sale of U.S. Water
to U.S. Filter is in violation of its franchise agreements with Culligan and
applicable law and seeks declaratory judgment, injunctive and other relief as a
result of such violation. The Complaint also alleges that U.S. Filter
tortuously interfered with the Company's contractual agreements by inducing the
sale of U.S. Water in violation of its agreements with the Company and that U.S.
Water's president, Randy Easton, in exchange for personal incentives from U.S.
Filter, induced violations of U.S. Water's agreements with Culligan.
U.S. Water, USWMC and Easton filed an Answer, Affirmative Defenses and
Counterclaims to Culligan's Complaint. The counterclaims seek declaratory and
injunctive relief and purport to assert state common law claims for alleged
tortuous interference with contracts and alleged violations of the Illinois
Trade Secrets Act and the Illinois Antitrust Act. U.S. Filter separately filed
an Answer, Affirmative Defenses and Counterclaims to Culligan's Complaint. The
counterclaims purport to assert state common law claims for alleged tortuous
interference with contracts tortuous interference with prospective economic
advantage, alleged violations of various state law antitrust and unfair trade
practice acts, and alleged violations of the Sherman Antitrust Act.
In April 1997, the Court ruled on the parties' motions for partial summary
judgment and determined that the Company's right of first refusal did not apply
to the sale of U.S. Water to U.S. Filter. The Company presently expects to
appeal such ruling. The Company does not believe that such action will have a
material effect on its financial condition or results of operations.
In January 1997, a complaint for patent infringement was filed by The Brita
Products Company and its parent ("Brita") in the United States District Court
for the Northern District of Georgia against Recovery Engineering, Inc., Health
o meter
F-18
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
and the Company. Insofar as it relates to the Company, the Complaint alleges
that a plastic pour-through pitcher being marketed by Health o meter in
partnership with the Company infringes a patent held by Brita. The Complaint
seeks, among other things, injunctive relief and damages in an unspecified
amount. The Company believes it has meritorious defenses to such action and
does not believe it will have a material adverse effect on its financial
condition or results of operations.
The Company is party to various other pending and threatened litigation
arising in the normal course of business. While it is not possible to predict
the outcome of these matters, management believes that the pending items will
not have a material adverse effect upon the financial condition or results of
operations of the Company.
(15) Segment Information
The Company operates in one industry segment--the design, manufacture and
marketing of water treatment products and equipment. The Company has a
diversified customer base with no one customer accounting for 10% or more of
consolidated net sales. The Company has subsidiaries in Europe, the Pacific Rim,
Canada and the Caribbean. Information regarding the Company's operations in the
United States and internationally are presented below:
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
January 31, January 31, January 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales:
United States................... $190,432 $203,441 $265,904
Europe.......................... 90,686 102,607 105,558
Other non-U.S................... 12,836 14,284 18,065
Intercompany sales.............. (13,903) (15,830) (18,509)
-------- -------- --------
Consolidated net sales............ $280,051 $304,502 $371,018
======== ======== ========
Operating income (loss):
United States................... $ (7,860) $ (9,027) $ 19,617
Europe.......................... (6,119) 8,315 13,044
Other non-U.S................... 2,199 2,655 2,471
Adjustments and
eliminations................... (1,690) (329) (1,149)
-------- -------- --------
Consolidated operating income
(loss)......................... $(13,470) $ 1,614 $ 33,983
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
January 31,
------------------
1996 1997
---- ----
<S> <C> <C>
Identifiable assets:
United States................... $127,315 $179,438
Europe.......................... 67,069 74,613
Other non-U.S................... 7,787 15,972
Corporate....................... 90,399 67,339
-------- --------
Consolidated identifiable assets.. $292,570 $337,362
======== ========
</TABLE>
F-19
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
(16) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Year Ended January 31, 1996:
Net sales................... $68,767 $80,215 $74,212 $81,308
Gross profit................ 31,365 36,938 33,181 34,655
Net income (loss)........... $(6,211) $(4,956) $(4,305) $(5,807)
======= ======= ======= =======
Year Ended January 31, 1997:
Net sales................... $83,390 $91,922 $97,104 $98,602
Gross profit................ 36,738 41,372 42,610 44,717
Net income (loss)........... $(3,348) $ 2,761 $ 7,951 $ 8,521
======= ======= ======= =======
</TABLE>
(17) Stockholder Rights
On September 13, 1996, the Company adopted a stockholder rights plan and
authorized the execution of the Rights Agreement between the Company and The
First National Bank of Boston, as Rights Agent (the "Rights Agreement"). The
rights plan is intended to deter coercive or partial offers which will not
provide fair value to all stockholders and enhance the Board's ability to
represent all stockholders and thereby maximize stockholder values.
Pursuant to the Rights Agreement, one right ("Right") was issued for each
share of common stock, par value $.01 per share, of the Company outstanding as
of the close of business on September 26, 1996. Each of the Rights entitle the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $.01 per share, at a
price of $78 per one one-hundredth of a share. Initially, the Rights are
attached to common stock certificates representing shares then outstanding and
no separate rights certificates will be distributed until the occurrence of a
Distribution Date as defined in the Rights Agreement. The Rights generally will
not become exercisable unless and until, among other things, any person acquires
15% or more of the outstanding stock (other than a person that owned 15% or more
on September 3, 1996 as long as such person does not increase its percentage
ownership by more than five percentage points over its percentage ownership on
such date). The Rights are generally redeemable at $.005 per Right at any time
until 10 business days following a public announcement that a 15% or greater
position in the Company's common stock has been acquired and will expire, unless
earlier redeemed or extended, on September 13, 1997.
(18) Stock Options
Pursuant to his employment agreement, the Company granted to its chief
executive officer (CEO) options to purchase 491,426 shares at an exercise price
of $9.98 per share. Options for a cumulative total of 327,617 shares vested in
the years ended January 31, 1996 and 1997, and the remainder remain subject to
satisfaction of future vesting requirements. Such options expire in 2005. The
Company has also granted options for 300,000 shares to the CEO under the 1997
Plan described below, subject to stockholder approval of such plan, in
connection with an extension of his employment agreement. Such options are
expected to have an exercise price of $33.25, the closing price on January 31,
1997, the date such extension was agreed to in principle. Approximately 60% of
such options are exercisable in three equal annual installments upon the
attainment by the Company of performance goals developed jointly by the
Compensation Committee and the CEO, and the remainder of which are exercisable
in three equal annual installments so long as the CEO remains employed with the
Company.
F-20
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
At January 31, 1997, the Company has two stock option plans, the Culligan
1995 Amended and Restated Stock Option and Incentive Award Plan (the "1995
Plan") and the Culligan 1997 Stock Option and Incentive Award Plan (the "1997
Plan") which has been approved by the Company's Board of Directors subject to
ratification and approval by stockholders at the Company's next annual meeting.
Under the 1995 Plan, as amended, the Company may grant options to its employees
for up to 1,050,000 shares of common stock. As of January 31, 1997, the Company
has granted options, net of cancellations, for 988,100 shares pursuant to the
1995 Plan. Under the 1997 Plan, the Company may grant options to its employees
for up to 1,000,000 shares of common stock. Options under both plans vest over
a five-year period subject to satisfaction of certain time and performance
vesting criteria.
A summary of the status of the Company's fixed stock option activity as of
January 31, 1995, 1996, and 1997, and changes during the years ended on those
dates is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------ --------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fixed Options
- -------------
Outstanding at beginning
of year............................ - 286,666 $ 9.98 1,256,434 $ 9.74
Granted
1995 Plan............................... - 298,600 $12.58 362,500 $35.49
1997 Plan............................... - - 120,000 $33.25
Options granted outside the
plans.............................. 286,666 $9.98 671,168 $ 8.37 -
Exercised............................... - - (662,768) $ 8.43
Cancelled............................... - - (47,400) $11.33
------- ---------- ----------
Outstanding at end
of year............................. 286,666 $9.98 1,256,434 $ 9.74 1,028,766 $22.32
======= ========== ==========
Options exercisable at
Year-end........................... 810,923 296,530
Weighted-average fair value
of options granted during
The year........................... $ 4.81 $12.90
</TABLE>
F-21
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
The following table summarizes information about the Company's fixed stock
options outstanding at January 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ----------------------
Weighted-
Number average Weighted- Number Weighted-
Outstanding remaining average Exercisable Average
Range of January 31, contractual exercise January 31, Exercise
exercise prices 1997 life price 1997 Price
- --------------------- ------------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$7.87 17,500 - $ 7.87 17,500 $ 7.87
$9.98 286,666 8.0 years $ 9.98 191,110 $ 9.98
$12.23 - $35.625 604,600 8.8 years $26.42 87,920 $12.57
$33.25 120,000 10 years $33.25 - --
--------- -------
1,028,766 8.8 years 296,530 $10.62
========= =======
</TABLE>
A summary of the status of the Company's performance based stock option
activity as of January 31, 1995, 1996, and 1997, and changes during the years
ended on those dates is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Performance Options
- -------------------
Outstanding at beginning
of year............................ - 204,760 $ 9.98 430,660 $11.10
Granted
1995 Plan............................ - 225,900 $12.11 195,000 $35.24
1997 Plan............................ - - 180,000 $33.25
Options granted outside the
plans.................................. 204,760 $9.98 - -
Exercised............................... - - (16,500) $10.92
Cancelled............................... - - (46,500) $10.37
------- -------- --------
Outstanding at end
of year............................. 204,760 $9.98 430,660 $11.10 742,660 $22.86
======= ======== ========
Options exercisable at
year-end........................... 105,153 194,212
Weighted-average fair value
of options granted during
the year........................... $ 4.84 $12.54
</TABLE>
F-22
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
The following table summarizes information about the Company's performance
based stock options outstanding at January 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------- -------------------
Weighted-
Number average Weighted- Number Weighted-
Outstanding remaining average Exercisable average
Range of January 31, contractual exercise January 31, exercise
Exercise prices 1997 life price 1997 price
- --------------------- ------------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$9.98 204,760 8.0 years $ 9.98 136,507 $ 9.98
$12.23 - $35.625 357,900 9.1 years $24.99 57,705 $12.51
$33.25 180,000 10 years $33.25 -
-------- --------
742,660 9.0 years 194,212 $10.73
======== ========
</TABLE>
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock option plans. Had compensation cost for the Company's stock
option plans been determined using a fair value method rather than the intrinsic
value method prescribed by APB Opinion No. 25, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below.
<TABLE>
<CAPTION>
1996 1997
--------- -------
<S> <C> <C> <C>
Net Income As Reported ($21,279) $15,885
Pro Forma ($21,518) $15,626
Earnings per Share As Reported ($1.30) $ 0.74
Pro Forma ($1.32) $ 0.73
</TABLE>
Pro forma net income primarily reflects options granted in the year ended
January 31, 1996. As a result, the full impact of calculating compensation cost
for stock options under the fair value method is not reflected in the pro forma
net income amounts presented above. Compensation cost for options granted at
the end of the year ended January 31, 1997, will be reflected over the options'
vesting period of 5 years beginning in fiscal 1998.
The fair value of options granted under the Company's stock plans during
fiscal 1996 and 1997 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used: no dividend yield,
expected volatility of 27.61%, risk free interest rates ranging from 5.58% -
6.62% and expected lives from 3 to 5 years.
(19) Public Offering of Common Stock
In December 1995, the Company sold an aggregate of 4,025,000 shares of its
common stock in an underwritten public offering (the "Offering") and realized
net proceeds of approximately $85,000. The Company used such proceeds to repay
borrowings under the Credit Facility.
In October 1996, the Company issued additional shares of its common stock
upon the exercise of over-allotment options granted to underwriters in
connection with a secondary public offering of shares of the Company's common
stock. The net
F-23
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
proceeds of approximately $32,000 from the issuance of such shares and from the
exercise of stock options by one of the selling stockholders in the offering
were used to repay indebtedness under the Credit Facility.
(20) Subsequent Events (Unaudited)
Acquisitions
On February 5, 1997, the Company entered into an agreement to acquire the
water filtration business of Ametek, Inc. ("Ametek") for approximately $154
million less assumed debt, which will range from $25 million to $75 million at
the discretion of Ametek. To effect the merger, 2,133,333 to 3,466,667 shares
of Culligan common stock will be issued in exchange for 100% of Ametek stock,
depending on the level of assumed debt. Ametek's water filtration business,
which has annual sales of approximately $68,000, manufactures and markets point
of use water filtration and treatment products and is a leading supplier in the
do-it-yourself, plumbing wholesale and commercial/industrial water treatment
markets. The transaction, which is subject to certain conditions including the
approval of stockholders and noteholders of Ametek, Inc., is presently expected
to be consummated during July 1997 and will be accounted for using the purchase
method.
Presented below is certain summary unaudited pro-forma financial data as of
and for the year ended January 31, 1997. The pro-forma data has been prepared
assuming (i) the acquisition had been consummated on February 1, 1996, (ii)
Culligan assumed $25 million of debt and (iii) 3,466,667 shares of Culligan
common stock were issued to effect the acquisition. The pro-forma financial
information has also been adjusted to reflect the preliminary allocation of the
purchase price and to present the financial data of Ametek on a basis consistent
with the accounting policies of Culligan.
<TABLE>
<S> <C>
Statement of Operations Data:
Net sales $438,841
Net income $ 19,964
Net income per share $ 0.80
Balance Sheet Information:
Total assets $500,549
Long-term debt, excluding current portion $ 61,231
Stockholders' equity $301,114
Book value per common share $ 12.12
</TABLE>
Sale of Investment
On March 15, 1997, the Company disposed of its investment in Anvil Holdings,
Inc. for total cash proceeds of approximately $51 million. The transaction,
which included repayment of outstanding accrued interest receivable and
dividends, resulted in a pre-tax gain of approximately $31 million which will be
recorded in the first quarter of fiscal 1998.
F-24
<PAGE>
SCHEDULE I
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF CULLIGAN WATER TECHNOLOGIES, INC.
(in thousands)
<TABLE>
<CAPTION>
January 31,
-----------------------
1996 1997
--------- --------
<S> <C> <C>
Balance Sheets
Assets:
Investment in Culligan International Company.............. 139,150 173,640
--------- --------
Total Assets........................................... $ 139,150 $173,640
========= ========
Liabilities and Stockholders' Equity:
Accrued Expenses.......................................... 61 --
Long-term Debt............................................ 20,000 --
Stockholders' Equity:
Common Stock........................................... 199 213
Additional Paid-in Capital............................. 195,956 235,894
Accumulated Deficit.................................... (77,665) (61,780)
Cumulative Translation Adjustment...................... 599 (687)
--------- --------
Total Stockholders' Equity........................... 119,089 173,640
--------- --------
Total Liabilities and Stockholders' Equity........... $ 139,150 $173,640
========= ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 31, January 31, January 31,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statements of Operations
Equity in Income (Loss) of Culligan International $(25,453) $ (15,645) $ 16,560
Company..................................................
Operating Expenses......................................... -- -- (134)
Nonoperating Expenses--Interest Expense.................... (16,867) (8,684) (902)
-------- --------- --------
Income (Loss) before Income Tax Benefit.................... (42,320) (24,329) 15,524
Income Tax Benefit......................................... 5,924 3,050 361
-------- --------- --------
Net Income (Loss).......................................... $(36,396) $ (21,279) $ 15,885
======== ========= ========
Statements of Cash Flows
Cash Flows from Operating Activities:
Net Income (Loss)........................................ $(36,396) $ (21,279) $ 15,885
Equity in (Income) Loss of Culligan International
Company................................................. 25,453 15,645 (16,560)
Change in Accrued Expenses............................... -- 61 (61)
-------- --------- --------
Net Cash Used in Operating (10,943) (5,573) (736)
Activities........................................... -------- --------- --------
Cash Flows from Investing Activities:
Dividends Received from Culligan
International Company................................. 34,175 -- --
Capital Contribution to Culligan International
Company............................................... -- (5,712) (11,661)
-------- --------- --------
Net Cash Provided by (Used in) Investing
Activities.......................................... 34,175 (5,712) (11,661)
-------- --------- --------
Cash Flows from Financing Activities:
Net Proceeds from Sale of Common Stock -- 85,396 26,606
Net Proceeds from Exercise of Stock -- -- 5,791
Options.................................................
Net Borrowings (Repayments) of -- 20,000 (20,000)
Long-term Debt..........................................
Payment of Note Payable to Samsonite..................... (20,000) (100,000) --
Funding from (to) Samsonite, Net......................... (3,232) 5,889 --
-------- --------- --------
Net Cash Provided by (Used in)
Financing Activities............................... (23,232) 11,285 12,397
-------- --------- --------
Net Increase in Cash and Cash Equivalents................. -- -- --
Cash and Cash Equivalents at Beginning of
Period.................................................. -- -- --
-------- --------- --------
Cash and Cash Equivalents at End of Period................ $ -- $ -- $ --
======== ========= ========
</TABLE>
See Notes to Condensed Financial Information
S-1
<PAGE>
SCHEDULE I
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Financial Information of Culligan
Water Technologies, Inc.
(1) Investment in Culligan International Company
At January 31, 1997, the underlying net book value of Culligan
International Company (Culligan International) exceeded the investment in
Culligan International by approximately $2.4 million as a result of the effects
of Astrum's "fresh-start" adjustments of assets and liabilities recorded in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code", that were not pushed down to the books and records of Culligan
International (see "Astrum Reorganization" and "Basis of Presentation" in Note 1
of Notes to Consolidated Financial Statements).
S-2
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC.
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.7 Amendment No. 2 dated as of January 29, 1996 to Credit Agreement.
21.1 List of Subsidiaries.
<PAGE>
EXHIBIT 10.7
SECOND AMENDMENT
TO
REVOLVING CREDIT AGREEMENT
This SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT (this "Amendment") is
made and entered into as of the day of August, 1996, by and among
CULLIGAN WATER TECHNOLOGIES, INC., a Delaware corporation (the "Parent"),
CULLIGAN INTERNATIONAL COMPANY, a Delaware corporation ("CIC"), the Subsidiaries
of the Parent and CIC other than the Excluded Subsidiaries (as defined the
Credit Agreement referred to below) (the Parent and CIC and such Subsidiaries
herein referred to collectively as the "Borrowers" and, individually, as a
"Borrower"), THE FIRST NATIONAL BANK OF BOSTON ("FNBB"), a national banking
association, CREDIT LYONNAIS NEW YORK BRANCH ("Credit Lyonnais"), a duly
licensed branch under New York Banking Law of a foreign corporation organized
under the laws of the Republic of France, WELLS FARGO BANK, NATIONAL ASSOCIATION
("Wells Fargo"), a national banking association, the other Lenders (as defined
in the Credit Agreement referred to below), FNBB as Administrative and Managing
Agent for the Lenders (in such capacity, the "Managing Agent"), and CREDIT
LYONNAIS and WELLS FARGO as Co-Agents for the Lenders (the "Co-Agents" and,
collectively with the Managing Agent, the "Agents").
WHEREAS, the Borrowers, the Lenders and the Agents are party to a Revolving
Credit Agreement dated as of July 14, 1995, as amended by a First Amendment to
Revolving Credit Agreement dated as of January 29, 1996 (as so amended, the
"Credit Agreement"), pursuant to which the Lenders have extended credit to the
Borrowers on the terms set forth therein;
WHEREAS, the Borrower has requested that the Lenders and the Agents amend
the Credit Agreement, and the Lenders and the Agents are willing to amend the
Credit Agreement on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree to amend the Credit Agreement as follows:
<PAGE>
-2-
1. Definitions. Capitalized terms used herein without definition that are
defined in the Credit Agreement shall have the meanings assigned to such terms
in the Credit Agreement.
2. Amendments to (S)7.4 of the Credit Agreement. Section 7.4 of the Credit
Agreement is further amended by deleting clause (h) of the proviso therein in
its entirety and replacing it with the following:
"(h) the total cash consideration (including the amount of any Indebtedness
assumed in connection therewith) shall not exceed (A) for 51-99% owned
Subsidiaries (including Excluded Subsidiaries), notwithstanding the
provisions of (S)8.2 hereof, (i) in the event the Leverage Ratio (as
defined in (S)8.2 hereof), as at the end of the fiscal quarter immediately
preceding the proposed acquisition or Investment, as adjusted for all
acquisitions or Investments made since such date plus the proposed
acquisition or Investment (the "Adjusted Leverage Ratio"), shall exceed
3.12:1, $35,000,000 in the aggregate through the term of this Agreement, or
(ii) provided the Adjusted Leverage Ratio shall be greater than 2.50:1 but
shall not exceed 3.12:1, $42,500,000 in the aggregate through the term of
this Agreement, or (iii) provided the Adjusted Leverage Ratio shall not
exceed 2.50:1, $50,000,000 in the aggregate through the term of this
Agreement; or (B) for acquisitions of less than 51% interest in any Person
(including Excluded Subsidiaries), notwithstanding the provisions of (S)8.2
hereof, (i) in the event the Adjusted Leverage Ratio shall exceed 3.12:1,
$15,000,000 in the aggregate through the term of this Agreement, or (ii)
provided the Adjusted Leverage Ratio shall be greater than 2.50:1 but shall
not exceed 3.12:1, $32,500,000 in the aggregate through the term of this
Agreement, or (iii) provided the Adjusted Leverage Ratio shall not exceed
2.50:1, $50,000,000 in the aggregate through the term of this Agreement;
provided that any acquisition or Investment permitted hereunder when made
shall not be required to be sold or otherwise divested because subsequent
thereto the Adjusted Leverage Ratio shall increase from the Adjusted
Leverage Ratio calculated at the time of the making of such acquisition or
Investment; and"
3. Representations and Warranties. The Borrowers jointly and severally
represent and warrant as follows:
(a) The execution, delivery and performance of this Amendment and the
Credit Agreement, as modified by this Amendment, and the transactions
contemplated hereby and thereby (i) are within the corporate authority of
each of the Borrowers,
<PAGE>
-3-
(ii) have been duly authorized by all necessary corporate proceedings on
the part of each of the respective Borrowers, (iii) do not conflict with or
result in any material breach or contravention of any provision of law,
statute, rule or regulation to which any Borrower is subject or any
judgment, order, writ, injunction, license or permit applicable to any
Borrower so as to materially adversely affect the assets, business or any
activity of any Borrowers, and (iv) do not conflict with any provision of
the corporate charter or bylaws of any Borrower or any agreement or other
instrument binding upon any Borrower.
(b) The execution, delivery and performance of this Amendment and the
Credit Agreement, as modified by this Amendment, will result in valid and
legally binding obligations of the Borrowers enforceable against each in
accordance with the respective terms and provisions hereof and thereof,
except as enforceability is limited by bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting generally
the enforcement of creditors rights and except to the extent that
availability of the remedy of specific performance or injunctive relief is
subject to the discretion of the court before which any proceeding
therefore may be brought.
(c) The execution, delivery and performance by the Borrowers of this
Amendment and the Credit Agreement, as modified by this Amendment, and the
consummation by the Borrowers of the transactions contemplated hereby and
thereby do not require any approval or consent of, or filing with, any
governmental agency or authority other than those already obtained.
(d) The representations and warranties contained in (S)5 of the Credit
Agreement are true and correct in all material respects as of the date
hereof as though made on and as of the date hereof.
(e) No Default or Event of Default under the Credit Agreement has
occurred and is continuing.
4. Ratification, Affirmation, etc. Except as expressly amended hereby, the
Credit Agreement, the other Loan Documents and all documents, instruments and
agreements related thereto are hereby ratified and confirmed in all respects and
shall continue in full force and effect. Each of the Borrowers hereby affirms
its irrevocable and unconditional acceptance of joint and several liability for
the Obligations as and to the extent set forth in (S)4.13 of the Credit
Agreement.
<PAGE>
-4-
This Amendment and the Credit Agreement shall hereafter be read and construed
together as a single document, and all references in the Credit Agreement, any
other Loan Document or any agreement or instrument related to the Credit
Agreement shall hereafter refer to the Credit Agreement as amended by this
Amendment.
5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO CONFLICT
OF LAWS) AND SHALL TAKE EFFECT AS A SEALED INSTRUMENT IN ACCORDANCE WITH SUCH
LAWS.
6. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all of which
counterparts taken together shall be deemed to constitute one and the same
instrument.
7. Effectiveness. This Amendment shall become effective upon receipt by the
Managing Agent of requisite counterpart signatures required under (S)26 of the
Credit Agreement. All proceedings in connection with the transactions
contemplated by this Amendment and all documents incident thereto shall be
reasonably satisfactory in substance and form to the Managing Agent, and the
Managing Agent shall have received all information and such counterpart
originals or certified or other copies of such documents as the Managing Agent
may reasonably request.
<PAGE>
-5-
IN WITNESS WHEREOF, each of the undersigned have duly executed this
Amendment as an instrument under seal as of the date first set forth above.
THE BORROWERS: CULLIGAN WATER TECHNOLOGIES, INC.
By: /s/ Edward A. Christensen
-------------------------
Title: Vice President
----------------------
CULLIGAN INTERNATIONAL
COMPANY
By: /s/ Edward A. Christensen
-------------------------
Title: Vice President
----------------------
CULLIGAN DES PLAINES VALLEY
WATER CONDITIONING, INC.
CULLIGAN DUTCHESS-PUTNAM
WATER CONDITIONING, INC.
CULLIGAN OF FLORIDA, INC.
CULLIGAN PENINSULA
INDUSTRIAL WATER
CONDITIONING COMPANY
CULLIGAN WATER CONDITIONING,
INC.
CULLIGAN WATER CONDITIONING
OF BATTLE CREEK, INC.
CULLIGAN WATER CONDITIONING
OF BUTLER, INC.
CULLIGAN WATER CONDITIONING
OF GREATER DETROIT, INC.
CULLIGAN WATER CONDITIONING
OF HOUSTON, INC.
CULLIGAN WATER CONDITIONING
OF ORANGE COUNTY, INC.
CULLIGAN WATER CONDITIONING
OF SOUTH BEND, INC.
By: /s/ Michael A. Siri
-------------------------
Michael A. Siri
Treasurer
<PAGE>
-6-
CULLIGAN WATER CONDITIONING
OF TIPPECANOE COUNTY, INC.
GREATER CHICAGO CULLIGAN
WATER CONDITIONING, INC.
INDIANA SOFT WATER SERVICE,
INC.
INLAND EMPIRE DEALERSHIP
PROPERTY, INC.
HIGHQUALITY WATER SERVICES,
INC.
DALLAS-FORT WORTH WATER
QUALITY, INC.
ST. LOUIS SOFT WATER SERVICE,
INC.
CWC FINANCE CORP.
CWC INTERNATIONAL, INC.
CWM INTERNATIONAL, INC.
CULLIGAN DISTRIBUTION
SERVICES, INC.
SANTA BARBARA DEALERSHIP
PROPERTY, INC.
CWG, INC.
By: /s/ Michael A. Siri
-------------------------
Michael A. Siri
Treasurer
EVERPURE, INC.
By: /s/ Edward A. Christensen
-------------------------
Title: Vice President
----------------------
CULLIGAN OF CANADA, LTD.
By: /s/ Edward A. Christensen
-------------------------
Title: Vice President
----------------------
<PAGE>
-7-
CULLIGAN WATER CONDITIONING
(ONTARIO) LTD.
By: /s/ Edward A. Christensen
-------------------------------
Title: Vice President
----------------------------
WATER CONDITIONING FINANCE
LIMITED
By: /s/ Edward A. Christensen
-------------------------------
Title: Vice President
----------------------------
CULLIGAN ESPANA S.A.
CULLIGAN ITALIANA S.p.A.
CULLIGAN INTERNATIONAL (U.K.)
LIMITED
CULLIGAN N.V.
N.V. EVERPURE (EUROPE) S.A.
CULLIGAN de MEXICO S.A. de C.V.
EVERPURE JAPAN, INC.
CULLIGAN HUNGARY
VIZKEZELESI Rt.
By: /s/ Edward A. Christensen
-------------------------------
Title: Director or Authorized Agent
----------------------------
CULLIGAN WASSERTECHNIK Gmbh
By: /s/ Edward A. Christensen
-------------------------------
Title: Authorized Agent
----------------------------
CULLIGAN FRANCE S.A.
TECHNINO S.A.
SOFADIM, S.A.
By: /s/ Edward A. Christensen
-------------------------------
Title: Authorized Agent
----------------------------
<PAGE>
-8-
THE LENDERS: THE FIRST NATIONAL BANK OF
BOSTON, individually and as
Managing Agent
By: /s/ J. Lee Harper, Jr.
------------------------
Title: Vice President
---------------------
CREDIT LYONNAIS NEW YORK
BRANCH, individually and as
Co-Agent
By: /s/ Robert Ivosevich
------------------------
Title: Senior Vice President
---------------------
WELLS FARGO BANK,
NATIONAL ASSOCIATION,
individually and as Co-Agent
By: /s/ Alan W. Wray
------------------------
Title: Vice President
---------------------
BANK OF AMERICA ILLINOIS
By: /s/ Timothy J. Pepowski
------------------------
Title: Senior Vice President
---------------------
BANQUE PARIBAS
By: /s/ Ann C. Pifer
------------------------
Title: Vice President
---------------------
By: /s/ John J. McCormick, III
------------------------
Title: Vice President
---------------------
<PAGE>
-9-
HARRIS TRUST AND SAVINGS BANK
By: /s/ R. Michael Newton
------------------------
Title: Vice President
---------------------
LASALLE NATIONAL BANK
By: /s/ Michael Foster
------------------------
Title: Senior Vice President
---------------------
THE BANK OF NOVA SCOTIA
By: /s/ M. D. Smith
------------------------
Title: Agent, Operations
---------------------
UNION BANK
By: /s/ Julie B. Bloomfield
------------------------
Title: Vice President
---------------------
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State/Country of
Incorporation
<S> <C>
Culligan International Company Delaware
Bruner Corporation Delaware
Burr Ridge Insurance Company Vermont
Culligan of Canada, Ltd. Canada
Culligan Water Conditioning (Ontario) Ltd. Canada
Water Conditioning Finance Ltd. Canada
Culligan Consumer Direct, Inc. Delaware
Culligan Des Plaines Valley Water Conditioning, Inc. Illinois
Culligan Distribution Services, Inc. Iowa
Culligan Dutchess-Putnam Water Conditioning, Inc. New York
Culligan Espana S.A. Spain
Culligan of Florida, Inc. Florida
Culligan France S.A. France
Aqua France Comte France
Culligan Aquitaine France
Culligan Somme-Oise France
S.A. Pierre Moret France
Societe De Traitement Des Eaux Du Littoral France
Societe E.A.U. France
Sofadim, S.A. France
Technino France
Culligan Hungary Vizkezelesi Rt Hungary
Culligan International (UK) Ltd. England
Dewplan Limited England
Culligan Italiana S.p.A. Italy
Culligan N.V. Belgium
Culligan Operating Services, Inc. Delaware
Culligan Peninsula Industrial Water Conditioning Co. California
Culligan Sales Company, Inc. Delaware
Culligan (Switzerland) S.A. Switzerland
Culligan Water Company, Inc. Delaware
Culligan Water Company of Nebraska, Inc. Delaware
Culligan Water Company of San Diego, Inc. Delaware
Culligan Water Company of Washington, Inc. Delaware
Culligan Water Conditioning, Inc. Wisconsin
Culligan Water Conditioning of Battle Creek, Inc. Michigan
Culligan Water Conditioning of Butler, Inc. Pennsylvania
Culligan Water Conditioning of Greater Detroit Michigan
Culligan Water Conditioning of Houston, Inc. Texas
Culligan Water Conditioning of Orange County California
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Culligan Water Conditioning of South Bend, Inc. Indiana
Culligan Water Conditioning of Tippecanoe County, Inc. Indiana
CWC Finance Corp. Illinois
CWC, Inc. New Jersey
CWC International, Inc. Delaware
CWG, Inc. Delaware
Culligan Wassertechnik GmbH Germany
CWM International, Inc. Delaware
Culligan de Mexico S.A. de C.V. Mexico
Dallas-Ft. Worth Water Quality, Inc. Texas
Enerserve N.V. Netherland
Antilles
Enerserve (Antigua) Limited Antigua and
Barbuda
Enersave Company Limited Anguilla,
West Indies
Everpure, Inc. Nevada
Everpure Japan, Inc. Japan
N.V. Everpure (Europe) S.A. Belgium
Greater Chicago Culligan Water Conditioning, Inc. Illinois
High Quality Water Service, Inc. California
Indiana Soft Water Services, Inc. Indiana
Inland Empire Dealership Property, Inc. California
Layton Soft Water, Inc. California
Layton Manufacturing Corp. California
St. Louis Soft Water Service, Inc. Missouri
Santa Barbara Dealership Property, Inc. California
Sparkling S.A. Argentina
Ultrapure Systems, Inc. Minnesota
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10K FOR THE YEAR ENDED JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-1-1996
<PERIOD-END> JAN-31-1997
<CASH> 8,984
<SECURITIES> 0
<RECEIVABLES> 80,843
<ALLOWANCES> 0
<INVENTORY> 47,213
<CURRENT-ASSETS> 152,654
<PP&E> 78,740
<DEPRECIATION> 0
<TOTAL-ASSETS> 337,362
<CURRENT-LIABILITIES> 73,231
<BONDS> 0
0
0
<COMMON> 213
<OTHER-SE> 173,427
<TOTAL-LIABILITY-AND-EQUITY> 337,362
<SALES> 371,018
<TOTAL-REVENUES> 371,018
<CGS> 205,581
<TOTAL-COSTS> 205,581
<OTHER-EXPENSES> 5,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,490
<INCOME-PRETAX> 36,149
<INCOME-TAX> 20,264
<INCOME-CONTINUING> 15,885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,885
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.74
</TABLE>
