<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
---------
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _____________________
Commission File Number: 0 - 26630
-------------
CULLIGAN WATER TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0350629
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Culligan Parkway, Northbrook, IL 60062
- ---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(847) 205-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
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 and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 24,659,907 shares of common
stock, par value $0.01 per share, as of August 29, 1997.
<PAGE>
FORM 10-Q
---------
CONTENTS
--------
<TABLE>
Page Number
PART I - FINANCIAL INFORMATION
<S> <C>
Consolidated Condensed Balance Sheets at January 31, 1997
and July 31, 1997................................................. 1
Consolidated Condensed Statements of Operations for the
three months ended July 31, 1996 and 1997......................... 3
Consolidated Condensed Statements of Operations for the
six months ended July 31, 1996 and 1997........................... 4
Consolidated Condensed Statements of Cash Flows for the
six months ended July 31, 1996 and 1997........................... 5
Notes to the Consolidated Condensed Financial Statements.......... 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 10
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders....... 14
Item 6: Exhibits and Reports on Form 8-K.......................... 14
Signature......................................................... 15
</TABLE>
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
at January 31, 1997 and July 31, 1997
(in thousands)
<TABLE>
<CAPTION>
January 31, July 31,
1997 1997
---------- -----------
(audited) (unaudited)
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................................. $ 8,984 $ 3,983
Accounts and notes receivable, net of allowance for doubtful accounts
of $5,695 and $5,406 at January 31, 1997 and July 31, 1997, respectively................. 80,843 97,944
Inventories................................................................................ 47,213 55,476
Deferred income taxes...................................................................... 10,964 10,740
Prepaid and other current assets........................................................... 4,650 7,501
-------- --------
Total current assets..................................................................... 152,654 175,644
Property, plant and equipment, net of accumulated depreciation............................... 78,740 97,083
Intangible assets, less accumulated amortization of $117,671 and $119,420 at
January 31, 1997 and July 31, 1997, respectively........................................... 76,883 117,066
Other noncurrent assets...................................................................... 29,085 40,001
-------- --------
Total assets............................................................................. $337,362 $429,794
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1
<PAGE>
<TABLE>
<CAPTION>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
at January 31, 1997 and July 31, 1997
(in thousands)
January 31, July 31,
1997 1997
----------- ---------
(audited) (unaudited)
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
<S> <C> <C>
Accounts payable................................................................................ $ 23,867 $ 30,928
Accrued expenses and other current liabilities.................................................. 36,950 38,447
Short-term debt and current maturities of long-term debt........................................ 12,414 4,444
-------- --------
Total current liabilities.................................................................... 73,231 73,819
-------- --------
Long-term liabilities:
Long-term debt.................................................................................. 36,231 91,479
Noncurrent and deferred income taxes............................................................ 29,805 29,852
Other noncurrent liabilities.................................................................... 24,455 24,293
-------- --------
Total long-term liabilities.................................................................. 90,491 145,624
-------- --------
Minority Interest................................................................................. -- 4,446
Stockholders' equity:
Common stock ($.01 par value; 60,000,000 shares authorized;
21,342,957 and 21,391,201 shares issued and outstanding at
January 31, 1997 and July 31, 1997, respectively)....................................... 213 214
Additional paid-in capital................................................................... 235,894 236,594
Retained earning (deficit)................................................................... (61,780) (25,716)
Foreign currency translation adjustment...................................................... (687) (5,187)
-------- --------
Total stockholders' equity.............................................................. 173,640 205,905
-------- --------
Total liabilities and stockholders' equity.............................................. $337,362 $429,794
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
2
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Condensed Statements of Operations
for the three months ended July 31, 1996 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
July 31, July 31,
1996 1997
------------ ------------
(audited) (unaudited)
<S> <C> <C>
Net sales......................................................................................... $ 91,922 $ 114,765
Cost of goods sold................................................................................ 50,550 65,008
------------ ------------
Gross profit.................................................................................... 41,372 49,757
Selling, general and administrative expenses...................................................... 28,236 32,802
Amortization of goodwill.......................................................................... 75 422
Amortization of other intangibles................................................................. 6,551 409
------------ ------------
Operating income................................................................................ 6,510 16,124
Interest income................................................................................... 634 225
Interest expense.................................................................................. (1,323) (1,467)
Other income, net................................................................................. 2,733 1,127
------------ ------------
Income before income taxes and minority interest............................................. 8,554 16,009
Income taxes...................................................................................... 5,793 6,244
Minority interest................................................................................. - 293
------------ ------------
Net income................................................................................... $ 2,761 $ 9,472
============ ============
Primary income per share (Note 2):
Net income per share.......................................................................... $ 0.43 $ 0.13
============ ============
Weighted average common and common equivalent shares outstanding.............................. 21,128,561 22,208,779
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Condensed Statements of Operations
for the six months ended July 31, 1996 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
July 31, July 31,
1996 1997
----------- -----------
(audited) (unaudited)
<S> <C> <C>
Net sales............................................................... $ 175,312 $ 214,168
Cost of goods sold...................................................... 97,202 119,362
----------- -----------
Gross profit........................................................ 78,110 94,806
Selling, general and administrative expenses............................ 54,050 63,053
Amortization of goodwill................................................ 133 721
Amortization of other intangible assets................................. 16,212 824
----------- -----------
Operating income...................................................... 7,715 30,208
Interest income......................................................... 1,093 637
Interest expense........................................................ (2,705) (2,702)
Gain on disposition of investment in affiliate.......................... -- 31,098
Other income, net....................................................... 2,969 1,751
----------- -----------
Income before income taxes, minority interest and extraordinary item.. 9,072 60,992
Income taxes............................................................ 9,659 24,099
Minority interest....................................................... -- 407
----------- -----------
Income (loss) before extraordinary item............................. (587) 36,486
Extraordinary item for write-off of capitalized refinancing costs
(net of applicable income tax benefit of $272)...................... -- (422)
----------- -----------
Net Income (loss)................................................... $ (587) $ 36,064
=========== ===========
Primary income (loss) per share (Note 2):
Income (loss) before extraordinary item............................. $ (0.03) $ 1.65
Extraordinary item.................................................. -- (0.02)
----------- -----------
Net income (loss) per share......................................... $ (0.03) $ 1.63
=========== ===========
Weighted average common and common equivalent shares outstanding.... 19,915,233 22,165,960
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Condensed Statement of Cash Flows
for the six months ended July 31, 1996 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
July 31, July 31,
1996 1997
----------- -----------
(audited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................... $ (587) $ 36,064
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization........................................................ 16,345 1,545
Depreciation........................................................ 4,837 6,199
Gain on sales of assets............................................. (144) (609)
Gain on disposition of investment in affiliate...................... -- (31,098)
Gain on insurance settlement........................................ (1,880) --
Deferred income taxes............................................... (615) (16)
Changes in assets and liabilities:
Receivables, net.................................................. (9,779) (14,024)
Inventories....................................................... (2,991) (8,528)
Other current assets.............................................. (498) (2,333)
Accounts payable and accrued expenses............................. (1,332) 2,135
Other net........................................................... (2,098) (5,117)
------- --------
Net cash provided by (used in) operating activities............... 1,258 (15,782)
------- --------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment................ 5,743 1,039
Proceeds from insurance settlement.................................. 4,500 --
Proceeds from disposition of investment in affiliate................ -- 50,897
Purchases of property, plant and equipment.......................... (7,386) (15,988)
Payments for acquisitions........................................... (3,760) (63,682)
Payments for investments in joint ventures.......................... -- (2,754)
------- --------
Net cash used in investing activities............................. (903) (30,488)
------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options............................. 55 538
Borrowings of long-term debt........................................ 1,200 52,555
Repayments of long-term debt........................................ (733) (1,854)
Net short-term borrowings (repayments).............................. 1,021 (9,439)
------- --------
Net cash provided by financing activities......................... 1,543 41,800
------- --------
Effect of foreign exchange rate changes on cash......................... (242) (531)
------- --------
Net increase in cash and cash equivalents............................... 1,656 (5,001)
Cash and cash equivalents at beginning of year.......................... 3,877 8,984
------- --------
Cash and cash equivalents at end of period.............................. $ 5,533 $ 3,983
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................................ $ 2,859 $ 2,451
Income taxes........................................................ $ 9,409 $ 23,228
======= ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Condensed Financial Statements
for the quarter ended July 31, 1997
(in thousands, except share data)
1. GENERAL
Culligan Water Technologies, Inc. and subsidiaries (Culligan or the
Company) are engaged in the manufacture and sale of water purification and
treatment products and services. A substantial part of the Company's sales are
made to franchised dealers and licensees.
In the opinion of management, the unaudited interim consolidated financial
information of the Company contains all adjustments, consisting only of those
of a recurring nature, necessary to present fairly the Company's financial
position and results of operations. All significant intercompany accounts,
transactions and profits have been eliminated. These financial statements are
for interim periods and do not include all information normally provided in
annual financial statements and should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended January 31, 1997 filed
with the Securities and Exchange Commission. The results of operations for
interim periods are not necessarily indicative of the results that may be
expected for the full year.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based on the weighted average
number of common shares outstanding. Shares outstanding for the three month
periods ended July 31, 1996 and 1997 and for the six month period ended July
31, 1997 include the dilutive effect of stock options. The effect of these
options are not included in shares outstanding for the six months ended July
31, 1996 as they were antidilutive in such period.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1997 1997
----------- ----------
(audited) (unaudited)
<S> <C> <C>
Raw materials............................ $19,137 $23,492
Work in process.......................... 7,788 7,963
Finished goods........................... 20,288 24,021
------- -------
$47,213 $55,476
======= =======
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1997 1997
----------- ----------
(audited) (unaudited)
<S> <C> <C>
Land and land improvements............... $ 21,113 $ 21,161
Buildings................................ 28,289 29,783
Machinery and equipment.................. 51,132 76,071
-------- --------
100,534 127,015
Less accumulated depreciation (21,794) (29,932)
-------- --------
$ 78,740 $ 97,083
======== ========
</TABLE>
6
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the quarter ended July 31, 1997
(in thousands, except share data)
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1997 1997
-------------- --------------
(audited) (unaudited)
<S> <C> <C>
Tradenames................................... $43,553 $ 44,160
Goodwill..................................... 26,424 67,278
Other intangible assets...................... 6,299 6,235
------- --------
$76,883 $117,066
======= ========
</TABLE>
Amortization of intangible assets consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Six months ended
Expected July 31, July 31,
Useful ------------------------- ------------------------
Life 1996 1997 1996 1997
---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Amortization of reorganization value in (years) (unaudited) (unaudited) (unaudited) (unaudited)
excess of identifiable assets............ 3 $6,221 -- $15,551 --
Amortization of tradenames and other
"Fresh start" intangibles................ 40 325 325 650 650
------ ---- ------- ------
"Fresh start" amortization.................... 6,546 325 16,201 650
Amortization of goodwill.................... 10 to 40 75 422 133 721
Amortization of other intangibles........... 3 to 9 5 84 11 174
------ ---- ------- ------
$6,626 $831 $16,345 $1,545
====== ==== ======= ======
</TABLE>
"Fresh start" amortization consists primarily of amortization of
reorganization value in excess of identifiable assets and represents the
expense arising from the adoption of "fresh start" accounting in accordance
with SOP 90-7. Such amortization of reorganization value in excess of
identifiable assets was recorded over a period of three years and ceased on
June 30, 1996.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1997 1997
--------------- ---------------
(audited) (unaudited)
<S> <C> <C>
Accrued compensation and vacation....................................... $12,963 $11,460
Accrued income taxes.................................................... 1,536 3,634
Deferred income......................................................... 3,502 4,087
Other................................................................... 18,949 19,266
------- -------
$36,950 $38,447
======= =======
</TABLE>
7. OTHER INCOME (EXPENSE), NET
Results for the three month and six month periods ended July 31, 1996,
include a gain on an insurance settlement of $1,880 associated with a fire
which substantially destroyed the Company's facility in Belgium in July
1993.
7
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the quarter ended July 31, 1997
(in thousands)
8. DERIVATIVE FINANCIAL INSTRUMENTS--ACCOUNTING POLICY
The Company uses derivative financial instruments selectively to offset
exposure to market risks arising from changes in foreign exchange rates.
Derivative financial instruments currently utilized by the Company include
foreign currency forward contracts. Hedges are executed to minimize
transaction costs on currency conversions and minimize losses due to
adverse changes in foreign currency markets. External derivative financial
instruments correlate with the Company's net exposure in specific
transactions in all material respects.
Gains or losses related to hedges of firm commitments are deferred and
included in the basis of the transaction when it is completed. Gains and
losses on unhedged foreign currency transactions are included in income as
part of other income, net. If a hedged item matures, or is sold,
extinguished, terminated, or, if related to an anticipated transaction, is
no longer likely to take place, the derivative financial instrument is
closed out and the related gain or loss is included in income as part of
other income, net.
9. FINANCING ARRANGEMENTS
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"). The Company borrowed $37.8 million under the new facility to
repay outstanding indebtedness under previous financing arrangements in May
1997. The New Credit Facility is 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, which at the option of the Company may be
converted into a four year amortizing term loan. The New Credit Facility
provides for unsecured multi-currency borrowings and a facility for the
issuance of letters of credit. The New Credit Facility is guaranteed by the
Company's principal domestic subsidiaries. Loans under the New Credit
Facility bear interest, at the election of the Company, at either a base
rate based on (i) the higher of the prime rate or .5% per annum above the
Federal Funds Rate or (ii) a Eurodollar rate, together with an applicable
margin tied to the Company's financial leverage. The New Credit Facility
contains certain customary representations and warranties and certain
financial and other covenants, including restrictions on the incurring of
indebtedness, the creation of liens, sales of assets, the making of
investments and the payment of dividends and repurchases of common stock,
as well as certain customary events of default.
In connection with the signing of the new credit facility, the Company was
required to write-off certain capitalized costs associated with the
previous credit facility. The write-off of $694, net of an applicable tax
benefit of $272, is reflected as an extraordinary item on the accompanying
consolidated condensed statement of operations.
10. ACQUISITIONS AND DIVESTITURES
During the six month period ended July 31, 1997, the Company completed
several acquisitions to compliment existing products and businesses for
approximately $63,682 and $6,885 in cash and debt, respectively. The
acquisitions are accounted for using the purchase method. Purchase price in
excess of net assets acquired is recorded as goodwill.
On March 15, 1997, the Company disposed of its investment in Anvil
Holdings, Inc. for total cash proceeds of approximately $50,897. The
transaction, which included repayment of outstanding accrued interest
receivable and dividends resulted in a pre-tax gain of approximately
$31,098.
8
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the quarter ended July 31, 1997
(in thousands)
11. SUBSEQUENT EVENT
On August 1, 1997, a wholly owned subsidiary of the Company was merged into
Ametek, Inc. with Ametek surviving the merger as a wholly owned subsidiary
of the Company with its name changed to Plymouth Products, Inc. Immediately
prior to the merger of all Ametek's assets, other than those which were
part of the water filtration business (consisting of the Plymouth Products
Division of Ametek and three foreign subsidiaries: Ametek Filters, Limited,
APIC International S.A. and AFIMO S.A.M.) were transferred to a wholly
owned subsidiary of Ametek ("New Ametek") and New Ametek assumed all of
Ametek's liabilities, except for certain liabilities relating to the water
filtration business and $25 million of indebtedness. In the merger, each
share of Ametek common stock was converted into the right to receive .105
shares of common stock of the Company (or an aggregate of up to 3,473,298
shares of the Company's common stock) and cash in lieu of fractional
shares.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparative Summary of Operating Results
- ----------------------------------------
The following discussion and analysis of results of operations compare (i)
the Company's results of operations for the three months ended July 31, 1997
with the Company's results of operations for the three months ended July 31,
1996, and (ii) the Company's results of operations for the six months ended July
31, 1997 with the results of operations for the six months ended July 31, 1996.
As an aid to understanding the Company's operations on a comparative basis,
the following table has been prepared to set forth certain statement of
operations and other data for the three and six months ended July 31, 1996 and
July 31, 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------------------------- ----------------------------------
1996 1997 1996 1997
---- ---- ---- ----
(dollars in thousands)
Dollars % Dollars % Dollars % Dollars %
------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................................ $91,922 100.0% $114,765 100.0% $175,312 100.0% $214,168 100.0%
Gross Profit......................................... 41,372 45.0% 49,757 43.4% 78,110 44.6% 94,806 44.3%
Selling, general and administrative expenses......... 28,236 30.7% 32,802 28.6% 54,050 30.8% 63,053 29.4%
Amortization of intangible assets.................... 6.626 831 16,345 1,545
------- -------- ------- --------
Operating income..................................... 6,510 16,124 7,715 30,208
Gain on disposition of Investment in affiliate....... -- -- -- 31,098
Other income, net (a)................................ 2,733 1,127 2,969 1,751
------- -------- -------- --------
Income before interest and income taxes.............. $ 9,243 $ 17,251 $10,684 $ 63,057
======= ======== ======= ========
Adjustment income before interest and taxes (b)...... $13,584 14.8% $17,251 15.0% $24,355 13.9% $ 31,959 14.9%
======= ======== ======= ========
</TABLE>
- ---------------
(a) Other income, net for the three month and six month periods ended
July 31, 1997 includes a gain of $1,880 on an insurance settlement
associated with a fire at the Company's Belgian facility in July 1993.
(b) Adjusted income before interest and taxes is calculated as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
July 31, July 31,
---------------------- --------------------
1996 1997 1996 1997
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Income before interest and taxes..................... $ 9,243 $17,251 $10,684 $ 63,057
Amortization of reorganization value
in excess of identifiable assets................... 6,221 -- 15,551 --
Gain on insurance settlement......................... (1,880) -- (1,880) --
Gain on disposition of investment in affiliate....... -- -- -- (31,098)
------- ------- ------- --------
Adjustment income before interest and taxes.......... $13,584 $17,251 $24,355 $ 31,959
======= ======= ======= ========
</TABLE>
10
<PAGE>
Three Month and Six Month Periods Ended July 31, 1997 Compared to the Three
---------------------------------------------------------------------------
Month and Six Month Periods Ended July 31, 1996
-----------------------------------------------
Net Sales. Net sales increased $22.9 million, or 24.9%, from $91.9 million for
the three months ended July 31, 1996 to $114.8 million for the three months
ended July 31, 1997 and increased $38.9 million, or 22.2%, from $175.3 million
for the six months ended July 31, 1996 to $214.2 million for the six months
ended July 31, 1997. In the first six months of the current fiscal year,
household product sales increased $25.1 million, or 27.0%, due primarily to
increased sales at Company-owned dealerships in the U.S., the acquisition of a
bottled water company in Argentina and the continued growth of drinking and
bottled water products in the U.S. offset by the negative impact of a price
repositioning of consumer faucet-mount product lines in advance of scheduled new
product introductions and a reduction in sales caused by foreign exchange
fluctuations. Approximately $12.5 million of the increase in household revenues
was attributable to acquisitions. Commercial and industrial product sales
increased $13.7 million, or 16.7%, primarily due to increased market penetration
of commercial products in the U.S., revenues associated with a large industrial
project in the U.S. and acquisitions of non-U.S. operations during the second
half of fiscal 1997 and the beginning of fiscal 1998. Changes in currency
exchange rates had an unfavorable effect to $5.0 million in the period-to-period
comparison.
Gross Profit. Gross profit increased to $49.8 million for the three month period
from $41.4 million in the prior year, an increase of $8.4 million, or 20.3%, and
increased to $94.8 million for the six months ended July 31, 1997 from $78.1
million in the prior year, an increase of $16.7 million, or 21.4%. Gross profit
margins decreased to 43.4% and 44.3% for the three month and six month periods
respectively, from 45.0% and 44.6% in the prior year comparable periods. This
decrease primarily resulted from a shift in product mix due to the large
industrial project in the U.S., repositioning of consumer faucet-mount product
lines and the overall impact of the acquisitions of non-U.S. operations
completed during the second half of fiscal 1997 and the beginning of fiscal
1998.
Selling, General and Administrative ("SG&A"). As a percentage of sales, SG&A was
28.6% for the quarter and 29.4% for the six month period ended July 31, 1997,
decreasing as a percentage of sales, by 2.1% and 1.4%, respectively, from the
prior year comparable periods. This decrease as a percentage of sales was the
result of the impact of increased industrial sales which generally carry lower
SG&A costs as a percentage of sales, the continued cost containment initiatives
and the impact of acquired businesses which have, after integration, a SG&A
level as a percentage of sales below the Company's historical levels.
Amortization of Intangible Assets. Amortization of intangible assets decreased
significantly in the three month and six month periods of fiscal 1998 from the
prior year comparable periods primarily due to the absence of "Reorganization
Value in Excess of Identifiable Assets" attributable to the reorganization of
the Company's former parent, which became fully amortized in June 1996. This
decrease was slightly offset by additional amortization related to intangibles
recorded in connection with the Company's acquisitions. Amortization of
intangible assets related to such "Reorganization Value in Excess of
Identifiable Assets" was $6.2 million and $15.6 million for the three month and
six month periods ended July 31, 1996, respectively. There was no such
amortization in fiscal 1998.
Other Income, Net. The decrease in other income, net for the three month and six
month periods of fiscal 1998 from the prior year comparable periods was largely
due to the inclusion, in the prior year, of a gain on an insurance settlement
related to a fire at the Company's Belgian facility in July 1993, partially
offset, in the current year, by a gain on the disposition of a non-strategic
company-owned dealership.
Adjusted Income Before Interest and Taxes. Adjusted income before interest and
taxes increased $3.7 million, or 27.0%, from $13.6 million for the three month
period ended July 31, 1996, to $17.3 million for the three month period ended
July 31, 1997. For the six month period ended July 31, 1997, adjusted income
before interest and taxes increased $7.6 million, or 31.2%, to $32.0 million
from $24.4 million for the prior year's comparable period due to the reasons
described above.
Interest Income (Expenses), Net. Interest expense, net of interest income,
increased to $2.1 million during the first six months of fiscal 1998 and $1.2
million in the second quarter of fiscal 1998 from $1.6 million and $0.7 million,
respectively, in the prior year's comparable periods. Increased borrowings to
fund additional acquisitions were only partially offset by the paydown of debt
with proceeds from the Company's disposition of its equity investment in an
affiliate and the more favorable interest rates resulting from the new credit
facility entered into by the Company at the end of the first quarter of the
current fiscal year.
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 other intangible assets.
11
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's operating cash requirements consist principally of working
capital requirements, scheduled payments of principal on its outstanding
indebtedness, capital expenditures and acquisitions. The Company believes that
cash flow from operating activities and periodic borrowings will be adequate to
meet the Company's operating cash requirements in the future.
In the six months ended July 31, 1997 cash used in operating activities was
$15.8 million, a decrease of $17.0 million from the prior year's comparable
period. Improved operating results and reduced interest expense were offset by
increases in working capital which were required to fund the higher sales volume
and new initiatives such as the introduction of certain consumer products and
the "growth in partnership" program with dealers in the current year.
Cash utilized for capital expenditures during the six months ended July 31,
1997 was $16.0 million. During the first six months of fiscal 1998, capital
expenditures have increased over historical levels due to expenditures
associated with a new build, own and operate water treatment facility in the
Caribbean and the expansion of manufacturing operations to support new growth
initiatives of the Company. 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.
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"). The new credit facility is 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, which at the option of the Company may be converted into a four year
amortizing term loan. The new Credit Facility provides for unsecured multi-
currency borrowings and a facility for the issuance of letters of credit. The
New Credit Facility is guaranteed by the Company's principal domestic
subsidiaries. Loans under the New Credit Facility bear interest, at the election
of the Company, at either a base rate based on (i) the higher of the prime rate
or .5% per annum above the Federal Funds rate or (ii) a Eurodollar rate,
together with an applicable margin tied to the Company's financial leverage. The
New Credit Facility contains certain customary representations and warranties
and certain financial and other covenants, including the restrictions on the
incurring of indebtedness, the creation of liens, sales of assets, the making of
investments and the payment of dividends and repurchases of common stock, as
well as certain customary events of default. As of July 31, 1997, the Company
had available credit under its New Credit Facility of $210 million. The New
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.
During the six months ended July 31, 1997, the Company completed a number
of acquisitions of businesses which complement existing products and operations
of the Company for an aggregate purchase price of approximately $70.6 million
including the assumption of debt. The Company intends to continue to make
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, France 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 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. At July 31, 1997,
the Company had four forward exchange contracts. The contracts which total $3.7
million expire in July 1998. Net assets of the Company's non-U.S. subsidiaries
translated at July 31, 1997 exchange rates were approximately $41.1 million at
July 31, 1997, a decrease of approximately 3% from January 31, 1997.
12
<PAGE>
Recently Issued Financial Accounting Standards
- ----------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("Statement
128"). Implementation of Statement 128 is required for periods ending after
December 15, 1997, Statement 128 establishes new methods for computing and
presenting earnings per share ("EPS") and replaces the presentation of primary
and fully diluted EPS with basic and diluted EPS. The new methods under this
standard are not expected to have a significant impact on the Company's EPS
amounts.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("Statement 130"). Implementation of Statement 130 is required for periods
beginning after December 15, 1997. Statement 130 establishes standards to report
and display comprehensive income and its components in a full set of general
purpose financial statements. The standard requires all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed in equal
prominence with the other financial statements. The Company is currently
evaluating its options for disclosure under this standard and will adopt the
Statement in its financial statements for the fiscal year ending January 31,
1999.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("Statement 131"). Implementation of
Statement 131 is required for periods beginning after December 15, 1997.
Statement 131 establishes standards for the way companies are to report
information about operating segments in annual financial statements and requires
those companies to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company is currently evaluating its options for disclosure under
this standard and will adopt the Statement in its financial statements for the
fiscal year ending January 31, 1999.
13
<PAGE>
PART 11--OTHER INFORMATION
- --------------------------
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on June 13, 1997
at its corporate headquarters in Northbrook, Illinois. At the meeting,
stockholders elected four directors, all of whom were previously serving as
directors of the Company, for a three-year term expiring in 2000. The directors
elected and the votes cast for and withheld were as follows:
Director Nominee For Withheld
R. Theodore Ammon 17,883,440 1,654,805
Bernard Attal 19,150,082 388,163
Robert H. Falk 19,149,542 388,703
Mark H. Rachesky 17,860,360 1,677,885
At the meeting, stockholders also approved a 1997 Stock Option and
Incentive Compensation Plan thereunder by a vote of 17,508,618 for, 1,999,142
against, 30,485 abstain (including broker non-votes); and ratified and approved
the appointment of KPMG Peat Marwick LLP as independent auditors for the Company
by a vote of 19,533,507 for, 4,000 against, 738 abstain (including broker non-
votes).
Item 6. Exhibits and Reports on Form 8-K
(a) 3. Exhibits
Copies of the following exhibit 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.
Exhibit
Number Description
4.2 Amendment No. 1 dated as of August 27, 1997 between the Company
and American Stock Transfer & Trust Company, as successor Rights
Agent to the Rights Agreement dated as of September 13, 1996
between the Company and First National Bank of Boston.
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K with the disclosures
required by Item 5 thereof on February 4, 1997.
14
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CULLIGAN WATER TECHNOLOGIES, INC.
(Registrant)
By: /S/ Michael E. Salvati
------------------------------
Name: Michael E. Salvati
Title: Vice President, Finance
and Chief Financial
Officer
Date: September 15, 1997
------------------
15
<PAGE>
Exhibit 4.2
AMENDMENT NO. 1 TO THE RIGHTS AGREEMENT
---------------------------------------
Amendment No. 1, dated as of August 27, 1997 (the "Amendment"),
between Culligan Water Technologies, Inc., a Delaware corporation (the
"Company"), and American Stock Transfer and Trust Company, a New York
corporation (the "Rights Agent").
WHEREAS, the Company and The First National Bank of Boston, a national
banking association, entered into a Rights Agreement, dated as of September 13,
1996 (the "Rights Agreement"), and that since the date the Rights Agreement was
executed, The First National Bank of Boston has resigned as Rights Agent and
American Stock Transfer and Trust Company has been appointed as the successor
Rights Agent; and
WHEREAS, in accordance with Section 26 of the Rights Agreement, the
Company desires to amend the Rights Agreement and to set forth the terms of the
amendments in this Amendment;
NOW, THEREFORE, in consideration of the premises and mutual
agreements set forth in the Rights Agreement and this Amendment, the parties
hereby agree as follows:
Section 1. Amendment of Definition of "Final Expiration Date".
Section 7(a) of the Rights Agreement is amended to delete the phrase "September
13, 1997" and to substitute in its place "September 13, 1998."
Section 2. Amendment of Definition of "Exempted Person". Section
1(g) of the Rights Agreement is amended by adding immediately after the words
"Common Stock outstanding on September 3, 1996" and before the comma and words
"and such Person's Affiliates and Associates" the following parenthetical
clause:
"(other than a Person who did not continue to be the Beneficial Owner, as
of August 27, 1997, of securities representing fifteen percent (15%) or
more of the outstanding shares of Common Stock outstanding on August 27,
1997)"
<PAGE>
Section 3. Amendment of Capital Requirement for Rights Agent.
Section 21 of the Rights Agreement is amended to delete the phrase "$50,000,000"
and to substitute in its place "$10,000,000."
Section 4. Rights Agreement as Amended. The term "Agreement" as used
in the Rights Agreement shall be deemed to refer to the Rights Agreement as
amended hereby. The foregoing amendments shall be effective as of the date
hereof and, except as set forth herein, the Rights Agreement shall remain in
full force and effect and shall be otherwise unaffected hereby.
Section 5. Execution in Counterparts. This Amendment may be executed
in any number of counterparts and each of such counterparts shall for all
purposes be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed, all as of the day and year first above written.
CULLIGAN WATER TECHNOLOGIES, INC.
By /s/ Edward A. Christensen
-------------------------------
Name: Edward A. Christensen
Title: Vice President
AMERICAN STOCK TRANSFER AND
TRUST COMPANY
By /s/ Herbert J. Lemmer
-------------------------------
Name: Herbert J. Lemmer
Title: Vice President
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JULY 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 3,983
<SECURITIES> 0
<RECEIVABLES> 97,944
<ALLOWANCES> 0
<INVENTORY> 55,476
<CURRENT-ASSETS> 7,501
<PP&E> 127,015
<DEPRECIATION> (29,932)
<TOTAL-ASSETS> 429,794
<CURRENT-LIABILITIES> 73,819
<BONDS> 0
0
0
<COMMON> 214
<OTHER-SE> 205,691
<TOTAL-LIABILITY-AND-EQUITY> 429,794
<SALES> 214,168
<TOTAL-REVENUES> 214,168
<CGS> 119,362
<TOTAL-COSTS> 119,362
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,702
<INCOME-PRETAX> 60,992
<INCOME-TAX> 24,099
<INCOME-CONTINUING> 36,486
<DISCONTINUED> 0
<EXTRAORDINARY> (422)
<CHANGES> 0
<NET-INCOME> 36,064
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.63
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