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CONFORMED
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from __________ to __________
COMMISSION FILE NO. -
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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 60062
NORTHBROOK, ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 205-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock, $.01 par value New York Stock Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
</TABLE>
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 $1,076,530,716 as of April 24, 1998 (based on a closing market
price on such date of $58.0625; excludes 7,334,859 shares held by persons who
may be deemed to be affiliates of the registrant).
There were 25,875,754 shares of the registrant's Common Stock ($.01 par
value) outstanding as of April 24, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
[None]
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PART I
ITEM 1. BUSINESS
GENERAL
Culligan Water Technologies, Inc. (the "Company" or "Culligan") is a leading
manufacturer and distributor of water purification and treatment products and
services principally for household, consumer, and commercial applications.
Products and services offered by Culligan range from those designed to solve
residential water problems, such as filters for tap water and household water
softeners, to highly sophisticated equipment and services, such as
ultrafiltration and microfiltration products. Culligan also offers
desalination systems and portable deionization services ("PDS"), designed for
commercial and industrial applications. In addition, Culligan sells, and
licenses its dealers to sell under the Culligan trademark, five-gallon bottled
water. 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), Elga(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. To support this distribution
network, Culligan maintains manufacturing facilities in the United States,
United Kingdom, France, 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. In addition, Culligan has a
significant installed base of water treatment and filtration systems for
commercial uses, such as food service. Culligan also has a small presence in
industrial and municipal systems and desalination systems.
With net sales of $505.7 million for the fiscal year ended January 31, 1998,
Culligan and its dealers provide a wide range of services to support its
products and offer a full line of accessories and replacement parts competing
in the highly fragmented water purification and treatment industry.
Approximately 43% of Culligan's revenues in fiscal 1998 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 1998, approximately 38% of
Culligan's revenues were from export and international sales. Culligan
conducts its activities in two principal areas: household and consumer, and
commercial and industrial.
In its fiscal year ended January 31, 1998, Culligan completed over 35
strategic, dealer and other acquisitions with annualized revenues of
approximately $350 million. The most significant of such acquisitions include
the acquisition of the water filtration business of Ametek, Inc. ("Ametek")
now known as Plymouth Products, Inc. in August 1997, and the acquisition of
Protean plc ("Protean") in December 1997. The acquired Ametek business
manufactures and markets point-of-use water filtration and treatment products
under the Ametek, Plymouth, American Plumber and other brand names and had
revenues for its year ended December 31, 1996, of approximately $69 million.
Protean manufactures, distributes and services water purification equipment
and analytical and thermal equipment. The companies in the water purification
division of Protean supply equipment which is designed to purify tap water to
the levels needed by scientific, medical and industrial customers. The
companies in the analytical and thermal equipment division supply electric
furnaces and ovens, specialized thermally controlled equipment (including
equipment for freeze-drying and thermal conditioning), instruments and
consumables for use in chromatography, glass and plastic single-use containers
and bench-top analytical equipment. Protean had total revenues of Pounds
Sterling 81.1 million (US$132.8 million) in its fiscal year ended March 31,
1997, of which Pounds Sterling 38.8 million (US$63.5 million) related to its
water purification equipment operations and Pounds Sterling 42.3 million
(US$69.3 million) related to its analytical and thermal equipment operations.
In January 1998, the Company decided to divest the analytical and thermal
operations. As a result, these operations have been recorded as discontinued
operations.
PENDING MERGER WITH U.S. FILTER
On February 9, 1998, the Company entered into the Agreement and Plan of
Merger (the "Merger Agreement"), dated as of February 9, 1998, among United
States Filter Corporation, ("USF"), the Company and Palm Water Acquisition
Corp., a newly-formed wholly owned subsidiary of USF ("Merger Sub").
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Pursuant to the Merger Agreement, Merger Sub will be merged with and into
the Company (the "Merger"). In connection with the Merger, USF will issue in
exchange for each issued and outstanding share (other than treasury shares and
shares owned by USF) of the Company's common stock, par value $.01 per share
("Company Common Stock"), 1.714 shares of common stock, par value $.01 per
share of USF ("USF Common Stock") if the average of the closing prices of the
shares of USF Common Stock as reported on the New York Stock Exchange
Composite Tape on each of the last ten trading days ending on the sixth
trading day prior to the date of the meeting of the Company's stockholders at
which the approval of the Merger by the Company's stockholders is obtained
(the "Average Share Price") is equal to or greater than $35 (the "Exchange
Ratio"); provided, however, that (i) if the Average Share Price is less than
$35, but greater than or equal to $32, then the Exchange Ratio shall be equal
to the quotient obtained (rounded to the nearest ten-thousandth of a share) by
dividing $60 by the Average Share Price; and (ii) if the Average Share Price
is less than $32, the Exchange Ratio shall be equal to 1.875. Among other
circumstances, the Merger Agreement may be terminated by the Company if the
Average Share Price, or if the average of the closing prices of the shares of
USF Common Stock as reported on the New York Stock Exchange Composite Tape for
any period of 10 consecutive trading days which ends after the last trading
day used in calculating the Average Share Price, is less than $26.25.
The Merger will be accounted for as a pooling of interests and is intended
to qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended. Consummation of the Merger is subject to
customary regulatory approvals and the approval of the stockholders of each of
the Company and USF. The Merger is expected to be consummated in the first
half of 1998.
Apollo Investment Fund, LP, and Lion Advisors, LP, (collectively, "Apollo")
which beneficially own in the aggregate 7,334,859 shares of the Company's
common stock (representing approximately 28.4% of the total number of shares
of Company Common Stock outstanding) have each entered into a Support/Voting
Agreement with USF pursuant to which they have agreed, among other things, to
cause such shares of Company Common Stock that they beneficially own to be
voted in favor of the Merger.
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
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 Corporation'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
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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.
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, consumer, bottled water, commercial and industrial,
municipal and wastewater treatment markets. The Company is currently in each
of these markets, although its principal activities are conducted in the
household bottled water and consumer 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 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 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
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and purification of public water supplies. In addition, requirements
established by the EPA and other governmental bodies, including the 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.
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 causes 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 introduced in this process unite to form water
molecules. This process is called deionization or demineralization by ion
exchange.
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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 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 to consumers
through retail stores and do-it-yourself outlets and entered into several
marketing partnerships for the co-branding of products with partners that are
designed to provide rapid channel access and recurring revenue from
replacement filter sales. During fiscal 1998, the Company restructured its
Consumer business to focus its product offerings on the hybrid and "do-it-
yourself" retail market channels. Through Ametek, the Company also markets a
full line of water filtration products, consisting primarily of point-of-use
filters, to the "do-it yourself" market, plumbing wholesale and OEM markets
under the Ametek, Plymouth, American Plumber and other brand names.
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. 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
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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 and is the only
brand in the five-gallon bottled water business with a nationwide distribution
network.
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
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.
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 a significant portion
of Everpure's revenues in fiscal 1998. 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 and convenience store chains around the world. 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.
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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 by licensed distributors directly to equipment manufacturers, fast food
chains and convenience store chains as well as to individual locations.
The companies in the water purification division of the Protean Group supply
equipment under the Elga and DWA brands which is designed to purify tap water
to the levels needed by scientific, medical and industrial customers with flow
rates from seven liters per day to 2,500 cubic meters per day. These products
incorporate multiple technologies including ion exchange, electro-
deionization, reverse osmosis filtration, and ultra-violet photo-oxidation.
Elga has been a pioneer in the water purification industry from the commercial
development of small portable deionizers to the development of ultrapure
laboratory systems or custom-designed systems.
The Company's 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 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
manufactures 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. Through Protean's DWA businesses, the Company
supplies a range of water treatment devices and ancillary systems for use in
hemodialysis centers throughout Europe.
Desalination. The Company has produced major desalination systems throughout
the world. In addition, its Culligan-Enerserve operation builds, owns and
operates desalination and other water and wastewater treatment systems in the
Caribbean.
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Municipal. Historically the municipal market has not represented a
significant portion of the Company's business. 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 and
similar non-U.S. OFSY Omnifiltration(R) systems are low-cost, pre-engineered,
packaged plants that contain all the steps used in a conventional water
treatment plant, such as coagulation, flocculation, clarification, filtration
and disinfection. 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 98 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 Bruner operation has approximately 90 sales
representatives that distribute its products in the United States and
internationally. In addition, Protean's Elga operations have approximately 50
sales representatives. The Company believes that this diverse geographical
distribution network allows it to react rapidly to changing customer needs as
well as to market conditions.
As part of its distribution system, the Company currently owns 65 Culligan
dealerships in North America which had total revenues of approximately $105
million in fiscal 1998. The Company-owned dealers are primarily located in
major metropolitan markets. Such markets include the New York/New
Jersey/Connecticut, Los Angeles, Chicago, Denver, Houston, Miami, San Diego
and San Francisco metropolitan areas. Since the beginning of fiscal 1998, the
Company-owned Dealer division has made 16 acquisitions with annualized
revenues of over $59 million. In addition, since the beginning of fiscal 1998,
Culligan's international division has acquired 14 dealerships and other
operations having aggregate annualized revenues of approximately $76 million.
Company-owned dealer operations generally have a high percentage of revenues
which are derived from sources believed to be recurring in nature, 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.
8
<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 services
that 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; High
Wycombe, United Kingdom; and Bologna, Italy. 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.
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 national and regional combined advertising.
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; Sheboygan, Wisconsin; Mississauga, Ontario, Canada; High Wycombe,
United Kingdom; 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.
9
<PAGE>
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 1998, 1997 and 1996 were approximately $4.1 million, $3.2 million,
and $3.2 million, respectively. Of these amounts, approximately $3.1 million,
$2.6 million, and $2.3 million related to laboratory research and
approximately $1.0 million, $.6 million, $.9 million related to customer
specific design and engineering for fiscal 1998, 1997 and 1996, respectively.
The Company also incurs additional internal costs relating to its sales and
service personnel for product development.
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 $36.8 million at January 31, 1998 and approximately $20.9
million at January 31, 1997. 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, 1998.
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 and Elga 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 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
10
<PAGE>
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. The Company's reserves for environmental matters currently aggregate
$2.3 million which the Company believes are adequate.
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 currently estimates that the costs of
future site remediation will range from up to $1.0 million to $1.8 million.
The Company has established reserves for such matters, which it believes to be
adequate, 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, 1998, the Company employed approximately 4,578 people
worldwide (exclusive of employees of independent dealers) with approximately
2,618 employees in the United States and approximately 1,960 employees in
other countries. In the United States, approximately 298 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 and the Company
assumed certain environmental liabilities. See "--Environmental Matters." In
March 1997, Culligan received approximately $51 million (a pre-tax gain of
$31.1 million) in cash proceeds as a result of the redemption by Anvil
Holdings of the Anvil securities owned by the Company.
YEAR 2000 RISKS
The Year 2000 issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from
the application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. Most
of Culligan's operating systems with Year 2000 issues have been modified to
address those issues; accordingly, management does not anticipate any
significant costs, problems or uncertainties associated with becoming Year
2000 compliant. Culligan is currently developing plans intended to assure that
their other internal operating systems with Year 2000 issues are modified on a
timely basis. Suppliers, customers and creditors of Culligan also face similar
Year 2000 issues. A failure on their part to successfully address the Year
2000 issue could have a material adverse effect on the business or results of
operations of Culligan.
11
<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 43 President and Chief Executive Officer
and Director
Michael E. 45 Vice President, Finance and Chief Financial Officer
Salvati
Edward A. 54 Vice President, General Counsel and Secretary
Christensen
Calvin R. Hen- 47 Group President--North America
drix
Kenneth I. 51 Group President--International
Wellings
Perialwar 58 Sr. Vice President and Chief Technology Officer
Regunathan
Diane Frisch 43 Vice President, Human Resources
Thomas E. 36 Vice President and General Manager, Company-
Pavlick owned Division
Timothy Tousi- 40 Vice President and General Manager, Household,
gnant Commercial and Bottled Water
Juan Valdes 38 Vice President Operations--North America
</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
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.
12
<PAGE>
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.
Diane Frisch. Ms. Frisch joined the Company in January 1998. For more than
five years prior thereto she was Vice President of Human Resources of Alumax
Mill Products, a division of Alumax Inc., a producer of aluminum products.
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 the 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
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.
Juan Valdes. Mr. Valdes joined the Company in his present position in June
1997. From 1995 to June 1997 he served on a consulting basis in a variety of
operating positions for Autonomous Technologies, Surgijet, Visijet and The
Toro Company. Prior to that he served as Director of Manufacturing and
Engineering for Pharmacia Intermedics from 1988-1990 and from 1990--1995 he
served as Vice President Operations for Pharmacia, Inc.
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 Sheboygan, Wisconsin; Mississauga, Ontario, Canada; High Wycombe,
United Kingdom; 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.
13
<PAGE>
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.
<TABLE>
<CAPTION>
APPROXIMATE
FACILITY SIZE
LOCATION (SQ. FT.)
-------- -------------
<S> <C>
Northbrook, IL.............................................. 445,000
Sheboygan, WI............................................... 270,000
Westmont, IL................................................ 110,000
Bologna, Italy.............................................. 118,000
San Bernardino, CA.......................................... 68,000
Barcelona, Spain............................................ 65,000
High Wycombe, U.K........................................... 60,000
Shipley, West Yorks, U.K.................................... 50,000
Mississauga, Canada......................................... 42,000
Hope, Sheffield, U.K........................................ 40,000
</TABLE>
In addition to the properties listed directly above, the Company owns 36
office, light assembly, warehouse or distribution facilities in the United
States and 24 outside the United States and leases 58 such facilities in the
United States and 41 additional such facilities outside the United States.
ITEM 3. LEGAL PROCEEDINGS
In January 1997, an action was commenced by the Company in the Circuit Court
of Cook County, Illinois against United States Water Company, LP ("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. An appeal of the Court's
ruling is currently pending, although U.S. Filter and the Company have agreed
in connection with the Merger not to initiate any action with respect to such
action except as may be necessary to maintain the status quo. 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
14
<PAGE>
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. On motion of the Company and Health o Meter, the case was transferred
to the Northern District of Illinois in May 1997. 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.
In August 1997, a purported class action was filed against Culligan
International Company, certain unidentified distributors and certain other
unidentified individual defendants in the Superior Court, County of Los
Angeles, State of California. The Complaint in the action alleges that the
defendants violated provisions of California law relating to home
solicitations by failing to include language and notices relating to rights of
rescission and engaging in unfair, unlawful and deceptive business acts and
practices. The Complaint in such action seeks disgorgement of alleged illicit
profits, injunctive relief, punitive damages and treble damages and alleges
that the amount the class is entitled to exceeds $20 million. In February
1998, a second purported class action was filed against Culligan International
Company, Household International and others in the Superior Court, County of
Los Angeles, State of California. The complaint in such action also alleges
violations of California law relating to home solicitations and seeks
equitable relief and consequential and exemplary damages in an unspecified
amount. The Company intends to vigorously contest these matters and does not
believe that it will have a material adverse effect on its financial condition
or results of operations.
In November 1997, an action was commenced by Culligan Springs Limited
("Culligan Springs") against Culligan of Canada Ltd., ("Culligan of Canada"),
a wholly owned subsidiary of the Company, in Bracebridge, Ontario. Culligan
Springs is an authorized producer of bottled water under Culligan of Canada's
trademarks in Canada. The action alleges breach of contract and breach of
warranty in connection with an alleged license to use the CULLIGAN trademark
in connection with the processing, distribution and sale of bottled water in
the eastern United States. The Statement of Claim seeks $50 million in
damages, interest, attorneys fees and other unspecified relief. Culligan of
Canada answered, denying the claim. 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 the results of operations.
In February 1998, a complaint was filed by KX Industries, LP and Koslow
Technologies Corporation against the Company and its Plymouth Products
subsidiary in the United States District Court for the District of Delaware
alleging the infringement of a patent for the production of carbon block,
false advertising in connection with a carbon block faucet mount filter
marketed by the Company's consumer products division, and the misappropriation
of certain of KX's trade secrets. On May 12, 1998, the plaintiff in such
action filed an amended complaint with the Court ("Amended Complaint"). The
Amended Complaint alleges infringement of certain additional patents covering
apparatuses for and methods of making carbon block filters by continuous
extrusion, false advertising concerning compliance with ANSI/NSF Standard 53
with regard to "Lead Reduction" and "Cyst Reduction" in connection with the
marketing of certain carbon block faucet mount filters, and industrial
espionage and theft of trade secrets. The Amended Complaint seeks injunctive
relief, disgorgement, compensatory and exemplary damages in an unspecified
amount. Culligan intends to file an answer and counterclaim with the Court in
the near future denying the allegations in the Amended Complaint and
countersuing for damages for, among other things, false statements that such
carbon block faucet mount filters do not meet ANSI/NSF Standard 53. The
Company believes it has meritorious defenses to such action and does not
believe that it will have a material adverse effect on its financial condition
or the 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
15
<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>
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............................... 41 1/8 33
Feb. 1, 1997-Apr. 30, 1997.............................. 46 33 5/8
May 1, 1997-July 31, 1997............................... 47 3/8 39 3/8
Aug. 1, 1997-Oct. 31, 1997.............................. 50 13/16 39 7/8
Nov. 1, 1997-Jan. 31, 1998.............................. 52 1/4 33 15/16
Feb. 1, 1998-Apr. 24, 1998.............................. 61 11/16 35 1/4
</TABLE>
HOLDERS
As of April 24, 1998, there were approximately 2,654 holders of record of
the Common Stock.
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.
16
<PAGE>
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, 1996, January 31, 1997 and January 31, 1998 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.
<TABLE>
<CAPTION>
PREDECESSOR (A)
--------------- SEVEN MONTHS
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
ENDED JUNE 30, JANUARY 31, JANUARY JANUARY JANUARY JANUARY
1993 1994 31, 1995 31, 1996 31, 1997 31, 1998
--------------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net Sales............... $109,748 $154,325 $280,051 $304,502 $371,018 $505,744
Cost of Goods Sold (f).. 60,894 87,112 155,829 168,363 205,581 288,851
-------- -------- -------- -------- -------- --------
Gross Profit............ 48,854 67,213 124,222 136,139 165,437 216,893
Selling, General and
Administrative (f)..... 36,339 50,341 91,989 95,723 113,932 146,807
Administrative Expenses
Allocated from
Samsonite (b).......... -- -- 1,095 -- -- --
Write-off of Goodwill
and In-process Research
and Development (c).... -- -- -- -- -- 55,803
Merger and Restructuring
Expenses (d)........... -- 2,103 5,917 -- -- 5,236
Amortization of
Intangible Assets (e).. 731 22,554 38,691 38,802 17,522 5,440
-------- -------- -------- -------- -------- --------
Operating Income (Loss). 11,784 (7,785) (13,470) 1,614 33,983 3,607
Other Income (Expense),
Net (g)................ (324) 1,919 398 2,867 5,023 32,888
-------- -------- -------- -------- -------- --------
Income (Loss) Before
Interest, Taxes,
Minority Interest and
Extraordinary Item..... 11,460 (5,866) (13,072) 4,481 39,006 36,495
Interest Income......... 1,436 886 1,439 1,576 2,633 1,765
Interest Expense (h).... (1,039) (11,576) (19,085) (12,426) (5,490) (9,903)
Income Taxes............ (4,387) (3,434) (5,678) (14,910) (20,264) (32,638)
Minority Interest....... -- -- -- -- -- (919)
-------- -------- -------- -------- -------- --------
Income (Loss) before
Extraordinary Item..... 7,470 (19,990) (36,396) (21,279) 15,885 (5,200)
Extraordinary Item...... -- -- -- -- -- (422)
-------- -------- -------- -------- -------- --------
Net Income (Loss).... $ 7,470 $(19,990) $(36,396) $(21,279) $ 15,885 $ (5,622)
======== ======== ======== ======== ======== ========
PER COMMON SHARE DATA:
Basic:
Income (Loss) before
Extraordinary Item.... $ (1.26) $ (2.29) $ (1.30) $ 0.75 $ (0.22)
Extraordinary Item..... -- -- -- -- $ (.02)
-------- -------- -------- -------- --------
Net Income (Loss).... $ (1.26) $ (2.29) $ (1.30) $ 0.75 $ (0.24)
======== ======== ======== ======== ========
Diluted:
Income (Loss) Before
Extraordinary Item.... (1.26) (2.29) (1.30) $ 0.74 (0.22)
Extraordinary Item..... -- -- -- -- (0.02)
-------- -------- -------- -------- --------
Net Income (Loss).... (1.26) (2.29) (1.30) $ 0.74 (0.24)
-------- -------- -------- -------- --------
Basic Weighted Average
Number Of Common Shares
Outstanding (000's).... 15,889 15,889 16,311 21,091 23,444
Diluted Weighted Average
Number Of Common Shares
Outstanding (000's).... 15,889 15,889 16,311 21,375 23,444
OTHER DATA:
Income (Loss) Before
Interest, Taxes,
Minority Interest and
Extraordinary Item..... $ 11,460 $ (5,866) $(13,072) $ 4,481 $ 39,006 $ 36,495
Amortization of
Reorganization Value in
Excess of Identifiable
Assets (e)............. -- 21,771 37,322 37,322 15,551 --
Administrative Expenses
Allocated from
Samsonite (b).......... -- -- 1,095 -- -- --
Write-off of Goodwill
and In-Process Research
and Development (c).... -- -- -- -- -- 55,803
Merger and Restructuring
Expenses (d)........... 2,103 5,917 -- -- 5,236
Gain on Disposition of
Investment In Affiliate
(g).................... -- -- -- -- -- (31,098)
Gain on Insurance
Settlement (g)......... -- -- -- -- (1,980) --
-------- -------- -------- -------- -------- --------
Adjusted Income Before
Interest, Taxes,
Minority Interest and
Extraordinary Item..... 11,460 18,008 31,262 41,803 52,577 66,436
All Other Amortization.. 731 783 1,369 1,480 1,971 5,440
Depreciation............ 3,175 5,696 9,279 9,409 10,091 15,161
-------- -------- -------- -------- -------- --------
EBITDA (i).............. $ 15,366 $ 24,487 $ 41,910 $ 52,692 $ 64,639 $ 87,037
======== ======== ======== ======== ======== ========
</TABLE>
(See footnotes beginning on page 18)
17
<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 was amortized over a three-year period
ended in June of 1996. In addition, the statements of operations for the years
ended January 31, 1997 and 1998, include certain nonrecurring items. 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 impact on income
before interest, taxes, minority interest and extraordinary item for the years
ending January 31, 1997 and 1998 are shown below. This information does not
represent and should not be considered an alternative to income before
interest, taxes, minority interest and extraordinary item, any other measure
of performance as determined by generally accepted accounting principles or as
an indicator of operating performance.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 31,
1997 1998
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Income before interest, taxes, minority interest
and extraordinary item.......................... $39,006 $36,495
Amortization of reorganization value in excess of
identifiable assets............................. 15,551 --
Write-off of purchased in-process research and
development..................................... -- 52,633
Write-off of goodwill............................ -- 3,170
Merger and restructuring expenses................ -- 5,236
Gain on disposition of investment in affiliate... -- (31,098)
Gain on insurance settlement..................... (1,980) --
------- -------
Adjusted income before interest, taxes, minority
interest and extraordinary item................. $52,577 $66,436
======= =======
</TABLE>
- --------
(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 (e) and (h) 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) During fiscal 1998 the Company wrote off $33.1 million of in-process R&D
purchased in connection with the acquisition of the Water Filtration
Business of Ametek. As of the purchase date, the Water Filtration Business
was engaged in ongoing research and development relating to carbon block
extrusion technology which was less labor intensive than competing
technologies and a new water filtration product line that is expected to
improve the purity of water and flow rates. Both of the projects are
proceeding according to schedule. It is estimated that technological and
commercial feasibility will be achieved in 6 to 12 months and that their
development will not require cash expenditures that are material to the
results of operations or financial position of the Company. The principal
risks associated with successfully completing such in-process R&D is that
other competitors may bring a technologically superior product to market.
The Company does not believe that the failure to complete such R&D
projects would have a material adverse effect on its results of operations
or financial position. The existing technology of the Water Filtration
Business acquired was included in goodwill and is being amortized over 40
years.
18
<PAGE>
During fiscal 1998, the Company wrote-off $19.5 million of in-process R&D
purchased in connection with the acquisition of Protean as these projects
had not reached technological feasibility and have no alternative use. As
of the purchase date, Elga plc, a subsidiary of the continuing operations
of Protean, was engaged in the research and development of a series of new
water filtration systems that will employ new processes or techniques
related to the filtration of tap water for laboratory use. Such projects
were valued by an independent appraiser using a risk adjusted cash flow
model under which the expected cash flows were discounted, taking into
account the costs to complete the projects, risks related to existing and
future markets, and the life expectancy of such projects. Failure to
complete these projects successfully and on time would open the way for
competitors to introduce alternative technologies, with consequent
implications for Elga's revenues. The projects are proceeding according to
schedule and it is estimated that technological and commercial feasibility
will be met within the existing timeframes, which range from three months
to two years. These projects are not expected to require future cash
expenditures that are material to the results of operations or financial
position of the Company. The existing technology of Protean's continuing
operations acquired was included in goodwill and is being amortized over 40
years.
Culligan also wrote off the remaining goodwill of $3.2 million arising from
the acquisition of UltraPure in January 1996, related to more costly carbon
block production technology used prior to the acquisition of the Water
Filtration Business. UltraPure was engaged in the business of development,
design, production, and sale of molded carbon block and molded filtration
devices for liquid filtration. The effect on future operations related to
this write down is not expected to be material.
(d) In fiscal 1994 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.
During fiscal 1998 the Company recorded a merger and restructuring charge
of $5.2 million in connection with the acquisition of Ametek's Water
Filtration Business and as a result of a decision made by the Company to
exit the market for the sale of consumer products in the department store
and mass merchant channels so as to focus principally on the "do-it-
yourself" (DIY) and hybrid retail markets. The merger and restructuring
charge reflects the costs of integrating and streamlining manufacturing,
sales, distribution, research and development, and administrative
functions, in order to take advantage of more cost effective technology
acquired in the acquisition of Ametek's Water Filtration Business. The
merger and restructuring charge also reflects costs resulting from the
decision to exit certain retail markets, such as charges against
receivables to reflect the fact that the value of these assets diminished
as a result of the decision to exit portions of the business. Included in
the $5.2 million of merger and restructuring costs are $0.7 million for
severance costs related to the elimination of redundant employees, $1.3
million related to the write-off of receivables, $2.5 million related to
the write-off of excess property, equipment and other assets (consisting
principally of fixed assets used in the manufacture of molded carbon
block), and $0.7 million representing legal and other professional fees.
During fiscal 1998, costs amounting to $4.3 million were charged against
the merger and restructuring reserve. Total future cash requirements
relating to the merger and restructuring is expected to be immaterial.
19
<PAGE>
(e) Amortization of intangible assets consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR
FIVE MONTHS SEVEN MONTHS
EXPECTED ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
USEFUL LIFE JUNE 30, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
(YEARS) 1993 1994 1995 1996 1997 1998
----------- ----------- ------------ ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <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 1,300
-------- ---- ------- ------- ------- ------- ------
"Fresh Start"
amortization... 22,529 38,622 38,622 16,851 1,300
Amortization of
goodwill....... 10 to 40 699 18 158 504 3,701
Amortization of
other
intangibles.... 3 to 40 32 25 51 22 167 439
---- ------- ------- ------- ------- ------
Amortization of
intangible
assets......... $731 $22,554 $38,691 $38,802 $17,522 $5,440
==== ======= ======= ======= ======= ======
<CAPTION>
<S> <C> <C>
Amortization of
reorganization
value in excess
of identifiable
assets.........
Amortization of
trademarks and
other "Fresh
Start"
intangibles....
"Fresh Start"
amortization...
Amortization of
goodwill.......
Amortization of
other
intangibles....
Amortization of
intangible
assets.........
</TABLE>
<TABLE>
<CAPTION>
SEVEN
MONTHS YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
"Fresh Start"
depreciation in cost of
goods sold............. $1,040 $1,414 $1,077 $603 $304
"Fresh Start"
depreciation in
selling, general and
administrative......... 520 707 539 301 152
------ ------ ------ ---- ----
Total "Fresh Start'"
depreciation........... $1,560 $2,121 $1,616 $904 $456
====== ====== ====== ==== ====
</TABLE>
"Fresh Start" amortization represents the expense arising solely as a
result of "Fresh Start" accounting in accordance with SOP 90-7.
(f) 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:
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.
(g) 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 and for fiscal 1998 includes a gain on the Company's
disposition of its investment in Anvil Holdings, Inc. of $31,098.
(h) 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
1995 (the "Credit Facility") were used to repay in full the outstanding
balance of the note payable to Samsonite (the "Refinancing").
20
<PAGE>
(i) EBITDA is defined as income before interest, taxes, minority interest and
extraordinary item, excluding certain nonrecurring items 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>
JANAURY 31, JANAURY 31, JANAURY 31, JANAURY 31, JANAURY 31,
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Property, Plant and
Equipment, Net......... $ 68,043 $ 68,974 $ 70,749 $ 78,740 $144,631
Total Assets............ 331,035 303,431 292,570 337,362 858,263
Long-Term Debt and
Capital Lease
Obligations (Including
Current Debt).......... 159,404 114,635(a) 48,324(b) 48,645 372,167
Total Liabilities....... 278,734 255,187 173,481(b) 163,722 560,235
Stockholders' Equity.... 52,301 48,244 119,089(b) 173,640(c) 298,028
</TABLE>
- --------
(a) 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.
(b) 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
were 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.
(c) 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 were 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.
(d) During fiscal 1998, the Company completed over 35 strategic dealer and
complimentary acquisitions with annual revenues of approximately $350
million. Payments for these acquisitions during the year approximated $324
million, financed principally through net borrowings on long-term debt of
$284 million and the issuance of common stock. Additionally, the Company
had approximately $36 million in capital expenditures associated with a
new build, own and operate water treatment facility in the Caribbean,
improvements to the Company's management information systems, and the
expansion and improvement of various manufacturing operations to support
new growth initiatives.
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 1998 with the
Company's results of operations for fiscal 1997, and (ii) the Company's
results of operations for fiscal 1997 with the Company's results of operations
for fiscal 1996.
21
<PAGE>
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 1996, 1997 and 1998.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997 FISCAL 1998
---------------- ---------------- ----------------
% OF NET % OF NET % OF NET
DOLLARS SALES DOLLARS SALES DOLLARS SALES
------- -------- ------- -------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net Sales................ $304.5 100.0% $371.0 100.0% $505.7 100.0%
Gross Profit............. 136.1 44.7% 165.4 44.6% 216.9 42.9%
Selling, General and
Administrative Expenses. 95.7 31.4% 113.9 30.7% 146.8 29.0%
Write-off of Goodwill and
in-process Research and
Development............. -- -- 55.8
Merger and Restructuring
Expenses................ -- -- 5.2
Amortization of
Intangible Assets....... 38.8 17.5 5.4
------ ------ ------
Operating Income......... 1.6 34.0 3.6
Gain on Disposition of
Investment in Affiliate. -- -- 31.1
Other Income, Net (a).... 2.9 5.0 1.8
------ ------ ------
Income Before Interest,
Taxes, Minority Interest
and Extraordinary Item.. $ 4.5 $ 39.0 $ 36.5
====== ====== ======
Adjusted Income Before
Interest, Taxes,
Minority Interest and
Extraordinary Item (b).. $ 41.8 13.7% $ 52.6 14.2% $ 66.4 13.1%
EBITDA(b)................ $ 52.7 17.3% $ 64.6 17.4% $ 87.0 17.2%
</TABLE>
- --------
(a) Other income 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.
(b) Adjusted income before interest and taxes and EBITDA have been calculated
as follows:
<TABLE>
<CAPTION>
FISCAL
----------------------
1996 1997 1998
-------------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Income Before Interest, Taxes, Minority Interest and
Extraordinary Item................................. $ 4.5 $ 39.0 $ 36.5
Amortization of Reorganization Value in Excess of
Identifiable Assets................................ 37.3 15.6 --
Write-off of Goodwill and In-Process Research and
Development........................................ -- -- 55.8
Merger and Restructuring Expenses................... -- -- 5.2
Gain from Insurance Settlement...................... -- (2.0) --
Gain on Disposition of Investment in Affiliate...... -- -- (31.1)
------ ------ -------
Adjusted Income Before Interest, Taxes, Minority
Interest and Extraordinary Item.................... 41.8 52.6 66.4
All Other Depreciation and Amortization............. 10.9 12.0 20.6
------ ------ -------
EBITDA.............................................. $ 52.7 $ 64.6 $ 87.0
====== ====== =======
</TABLE>
Adjusted income before interest, taxes, minority interest and extraordinary
item 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 1998 Compared to Fiscal 1997
Net Sales. The Company recorded record sales for fiscal 1998. Net sales
increased $134.7 million, or 36.3%, to $505.7 million for fiscal 1998 from
$371.0 million in fiscal 1997. Of the increase in revenues, $115.1 million
22
<PAGE>
or 31.0% was attributable to acquisitions, and $37.4 million or 10.1% (before
including the unfavorable impact of $17.9 million or 4.8% related to the
effects of currency translation and the repositioning of the consumer product
line) was attributable to internal core growth.
In fiscal 1998, household product sales increased $81.8 million, or 40.4%,
due primarily to increased sales at Company-owned dealerships in both the U.S.
and Europe; the acquisition of the Water Filtration Business of Ametek, Inc.
on August 1, 1997, a manufacturer and supplier of point-of-use water
filtration and treatment products; the acquisition of a bottled water company
in Argentina; the continued growth of drinking and bottled water products in
the U.S.; and the issuance of a Trademark License Agreement ("TLA") with
Packaged Ice, Inc. These increases were offset by the negative impact of a
price repositioning in the consumer faucet-mount product lines and a reduction
in sales caused by foreign exchange fluctuations.
Commercial and industrial product sales increased $52.9 million, or 31.3%
primarily due to: increased market penetration of commercial products in the
U.S.; led by a full year's impact of the 1997 Culligan Enerserve acquisition,
which builds, owns and operates desalination and wastewater treatment systems
in the Carribbean; revenues associated with an industrial project in the U.S.,
the acquisition of various commercial and industrial engineering concerns such
as Dewplan in the U.K. and Idracos in Italy, and the Company's recent Protean
acquisition.
Gross Profit. Gross profit increased to $216.9 million in fiscal 1998 from
$165.4 million in fiscal 1997, a 31.1% improvement. Gross profit margins
decreased to 42.9% in fiscal 1998 from 44.6% in fiscal 1997. This decrease
primarily resulted from a shift in product mix due to a large industrial
project in the U.S., which has historically had lower margins, price
repositioning of consumer faucet mount product lines, inventory write-offs
related to the Company's decision to exit the market for the sale of consumer
products in the department store and mass merchant channels, and the overall
impact of acquisitions of international commercial/industrial operations
completed during the second half of fiscal 1997 and during fiscal 1998.
Selling, General and Administrative ("SG&A"). As a percentage of sales, SG&A
was 29.0% in fiscal 1998 as compared to 30.7% in fiscal 1997. 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,
continued cost containment initiatives and the impact of acquired businesses
which have, after integration, an SG&A level as a percentage of sales below
the Company's historical levels.
Write-off of Goodwill and in-process R&D. During fiscal 1998, the Company
wrote off $33.1 million of in-process R&D purchased in connection with the
acquisition of the Water Filtration Business. As of the purchase date, the
Water Filtration Business was engaged in ongoing research and development
relating to carbon block extrusion technology which is less labor intensive
than competing technologies, and a new water filtration product line that is
expected to improve the purity of water and flow rates. Such projects were
valued by an independent appraiser using a risk adjusted cash flow model under
which the expected cash flows were discounted, taking into account the costs
to complete the projects and the life expectancy of the projects. Both of
these projects are proceeding according to schedule. It is estimated that
technological and commercial feasibility will be achieved in 6 to 12 months
and that development will not require cash expenditures that are material to
the results of operations or financial position of the Company. The principal
risks associated with successfully completing such in-process R&D is that
other competitors may bring a technologically superior product to market. The
market growth potential of acquired in-process R&D is subject to certain
risks, including costs to develop and commercialize such products, the cost
and feasibility of production of products utilizing the applicable
technologies, introduction of competing technologies, and market acceptance of
the products and technologies involved. The Company does not believe that the
failure to complete such R&D projects would have a material adverse effect on
its results of operations or financial position. This technology is expected
to provide an improvement of approximately 100% in operating margins for these
particular products as compared to overall historic operating margins of the
water filtration business primarily due to anticipated cost reductions. As of
the purchase date, Water Filtration Business was selling mold process based
water filtration products. These products rely on developed technology and do
not rely on the results of the on-going in-process R&D. Revenues derived from
Water Filtration
23
<PAGE>
Business's current products are expected to remain constant once the
anticipated in-process products are introduced. Most of the future growth is
expected to come from the new products. The existing technology of the Water
Filtration Business acquired was included in goodwill and is being amortized
over 40 years.
During fiscal 1998, the, Company wrote-off $19.5 million of in-process R&D
purchased in connection with the acquisition of Protean as these projects had
not reached technological feasibility and have no alternative use. As of the
purchase date, Elga plc, a subsidiary of the continuing operations of Protean,
was engaged in the research and development of a series of new water
filtration systems that will employ new processes or techniques related to the
filtration of tap water for laboratory use. Such projects were valued by an
independent appraiser using a risk adjusted cash flow model under which the
expected cash flows were discounted, taking into account the costs to complete
the projects and the life expectancy of such projects. Failure to complete
these projects successfully and on time would open the way for competitors to
introduce alternative technologies, with consequent implications for Elga's
revenues. The projects are proceeding according to schedule and it is
estimated that technological and commercial feasibility will be met within the
existing timeframes which range from three months to two years. These projects
are not expected to require future cash expenditures that are material to the
results of operations or financial position of the Company. The existing
technology of Protean's continuing operations acquired has been included in
goodwill and is being amortized over 40 years.
During fiscal 1998, Culligan also wrote off the remaining goodwill of $3.2
million arising from the acquisition of UltraPure in January 1996, related to
more costly carbon block production technology used prior to the acquisition
of the Water Filtration Business. UltraPure was engaged in the business of
development, design, production, and sale of molded carbon block and molded
filtration devices for liquid filtration. The effect on future operations
related to this write down is not expected to be material.
Merger and Restructuring Charge. During fiscal 1998, the Company recorded a
merger and restructuring charge of $5.2 million in connection with the
acquisition of the Water Filtration Business and as a result of a decision
made by the Company to exit the market for the sale of consumer products in
the department store and mass merchant channels so as to focus principally on
the "do-it-yourself" (DIY) and hybrid retail markets. The merger and
restructuring charge reflects the costs of integrating and streamlining
manufacturing, sales, distribution, research and development, and
administrative functions, in order to take advantage of more cost effective
technology acquired in the acquisition of Water Filtration Business. The
merger and restructuring charge also reflects costs resulting from the
decision to exit certain retail markets, such as charges against receivables
to reflect the fact that the value of these assets diminished as a result of
the decision to exit portions of our business. Included in the $5.2 million of
merger and restructuring costs are $0.7 million for severance costs related to
the elimination of redundant employees, $1.3 million related to the write-off
of receivables, $2.5 million related to the write-off of excess property,
equipment and other assets (consists principally of fixed assets used in the
manufacture of molded carbon block), and $0.7 million representing legal and
other professional fees. During fiscal 1998, costs amounting to $4.3 million
were charged against the merger and restructuring reserve. Total future cash
requirements relating to the merger and restructuring are expected to be
immaterial.
Amortization of Intangible Assets. Amortization of intangible assets
decreased by $12.1 million in fiscal 1998. Prior year amortization expense
included approximately $15.5 million of "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. There were no such amounts in fiscal 1998. This decrease was
partially offset by the full year impact of amortization of goodwill and other
intangibles recorded in connection with the Company's fiscal 1997 acquisitions
and amortization of intangibles recorded in connection with acquisitions
consummated during fiscal 1998.
Other Income, Net. The decrease in other income, net from the prior year
comparable period was largely due to the inclusion in the prior year of a gain
on an insurance settlement of $2.0 million related to a fire at the Company's
Belgian facility in July 1993. There were no such amounts in fiscal 1998.
24
<PAGE>
Gain on Disposition of Investment in Affiliate. Gain on disposition of
investment of affiliate in fiscal 1998 relates to the Company's disposal of
its investment in Anvil Holdings, Inc. for total cash proceeds of $50.9
million. The transaction which included payment of accrued interest receivable
and dividends resulted in a pre-tax gain of $31.1 million. Proceeds were used
to reduce outstanding borrowings under the Company's credit facility.
Adjusted Income Before Interest and Taxes. Adjusted income before interest,
taxes, minority interest and extraordinary item increased $13.8 million, or
26.2%, from $52.6 million during fiscal 1997 to $66.4 million in fiscal 1998
due to the reasons described above.
EBITDA. EBITDA as a percentage of sales decreased to 17.2% in fiscal 1998 as
compared to 17.4% in fiscal 1997. 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,
increased to $8.1 million in fiscal 1998, from $2.9 million in fiscal 1997 as
a result of increased borrowings to fund additional acquisitions that were
partially offset by the paydown of debt with proceeds from the Company's
disposition of its investment in Anvil Holdings, Inc. and more favorable
interest rates resulting under its new credit facilities.
Income Taxes. The effective tax rate differs from the statutory rate
primarily because of the nondeductibility of the amortization of intangibles.
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.
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.
25
<PAGE>
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."
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating cash requirements consist principally of
acquisitions, capital expenditures and working capital requirements. 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 $7.0 million, $16.5 million, and
$13.4 million in fiscal 1998, 1997, and 1996, respectively. The decrease in
cash provided by operating activities to $7.0 million in fiscal 1998 from
$16.5 million in fiscal 1997 was principally due to improved operating results
which was more than offset by increased interest expense, merger and
restructuring costs and increased investments in working capital which were
required to fund the higher sales volume and new growth initiatives. In fiscal
1997, 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 1998, 1997 and 1996 was
$35.6 million, $17.0 million, and $8.8 million, respectively. In fiscal 1998,
capital expenditures 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. 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.
During fiscal 1998, the Company received approximately $51 million ($31.1
million, net of tax) 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.
26
<PAGE>
During fiscal 1998, the Company entered into a securities purchase agreement
with Packaged Ice, Inc. ("Packaged Ice") in which the Company purchased $23.5
million of preferred stock and warrants to purchase 1,807,692 shares of
Packaged Ice common stock. The dividend rate is 10% and can be paid in cash or
additional preferred stock and warrants to acquire additional common stock.
The Company's investment is included in other noncurrent assets in the
accompanying Consolidated Balance Sheet at January 31, 1998.
On April 30, 1997, the Company signed a new credit facility to replace a
$150 million reducing revolving 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
(collectively the "New Credit Facility"). The New Credit Facility provides for
unsecured multi-currency borrowings and 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 January
31, 1998, the Company had available credit under its New Credit Facility of
$12 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.
On October 21, 1997 the Company established a $100 million line of credit
pursuant to a letter agreement (the "Letter Agreement") with the First
National Bank of Chicago, maturing on April 21, 1998. Borrowings under the
Letter Agreement are guaranteed by the Company's principal domestic
subsidiaries and bear interest, at the election of the Company, at either a
base rate based on (i) the prime rate or (ii) a fixed rate equal to the sum of
.65% per annum plus an applicable Eurodollar rate. The Letter Agreement
incorporates by reference various representations, warranties, certain
financial and other covenants, and events of default set forth in the New
Credit Facility. As of January 31, 1998, the Company had available credit
under the Letter Agreement of $44 million. The Company intends to use the
Letter Agreement to finance future acquisitions, and for general corporate
purposes.
On March 10, 1998, the Company entered into four letter agreements (the "New
Letter Agreements") with various financial institutions to establish a 364-day
line of credit in the aggregate amount of $200 million. The Company drew
initial borrowings under the New Letter Agreements to replace indebtedness
outstanding under the Letter Agreement discussed above. The Company intends to
use the New Letter Agreements to fund future acquisitions, capital
expenditures and working capital needs of the Company. Loans made under the
New Letter Agreements bear interest, at the election of the Company, at either
(i) the prime rate or (ii) a Eurodollar rate plus .75% per annum. The New
Letter Agreements incorporate by reference various representations,
warranties, certain financial and other covenants, and events of default set
forth in the New Credit Facility.
During fiscal 1998, the Company completed a number of acquisitions of
businesses which complement existing products and operations of the Company
for an aggregate cash purchase price of approximately $323.7 million,
including the assumption of debt, which have been primarily financed through
borrowings under the New Credit Facility and Letter Agreement. 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 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
27
<PAGE>
contracts in order to hedge its exposure on certain intercompany transactions.
As of January 31, 1998, the Company had three forward exchange contracts
outstanding. The contracts, for an aggregate of $3.3 million, mature during
fiscal 1999. Identifiable assets of the Company's non-U.S. subsidiaries
translated at January 31, 1998 exchange rates were approximately $378.5
million at January 31, 1998, an increase of approximately 318% from January
31, 1997.
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 Company adopted
Statement 128 during the fourth quarter of fiscal 1998.
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 to be reported in a financial statement that is displayed
in equal prominence with the other financial statements. The Company is
currently evaluating this standard and expects to adopt the Statement in its
financial statements for the first quarter of 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 this
standard and expects to adopt the Statement in its financial statements for
the fiscal year ending January 31, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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
ITEMS 10, 11, 12 AND 13.
See, "Item 1--Executive Officers of the Company" for certain information
concerning the Company's officers required by Item 10. The other information
required by Items 10, 11, 12, and 13 will be furnished by amendment hereto on
or prior to May 31, 1998 or the Company will otherwise have filed a definitive
proxy statement involving the election of directors pursuant to Regulation 14A
with the Securities and Exchange Commission on or prior to May 31, 1998.
28
<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
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
------- ----------- ---
<C> <S> <C>
2.1 Distribution Agreement, dated as of July 14, 1995, between
Samsonite and the Company.(1)
3.1 Restated Certificate of Incorporation.(1)
3.2 Amended and Restated By-Laws.(1)
4.1 Rights Agreement between the Company and the First National
Bank of Boston as Rights Agent.(2)
4.2 Amendment No. 1 dated as of August 27, 1997 between the
Company and American Stock Transfer and 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.(5)
4.3 Amendment, dated as of February 9, 1998, to the Rights
Agreement, dated as of September 13, 1996 by and between
Culligan Water Technologies, Inc. and American Stock
Transfer and Trust (as Rights Agent), as heretofore
amended.(6)
10.1 Credit Agreement dated as of April 30, 1997 (the "Credit
Agreement") among the Borrowers, as defined therein, Bank of
America Illinois, as an Administrative Agent, Swing Line
Lender and Letter of Credit Issuing Lender, Harris Trust
Savings Bank, as Documentation Agent, The First National
Bank of Chicago, as Syndication Agent, and the financial
institutions party thereto.(4)
10.2 Short-Term Credit Agreement Dated as of April 30, 1997 (the
"Short-term Credit Agreement") among the Borrowers, as
defined therein, Bank of America Illinois, as an
Administrative Agent, Swing Line Lender and Letter of Credit
Issuing Lender, Harris Trust Savings Bank, as Documentation
Agent, The First National Bank of Chicago, as Syndication
Agent, and the financial institutions party thereto. (4)
10.3 Amendment dated February 13, 1998 to the Credit
Agreement.(9)
10.4 Amendment dated February 13, 1998 to the Short Term Credit
Agreement.(9)
10.5 Letter Agreement dated as of March 3, 1998 and related other
agreements between the Company and The First National Bank
of Chicago.(9)
10.6 Letter Agreement dated as of March 10, 1998 and related
other agreements between the Company and Bank of America.(9)
10.7 Letter Agreement dated as of March 10, 1998 and related
other agreements between the Company and Bank of
Montreal.(9)
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------- ---
<C> <S> <C>
10.8 Letter Agreement dated as of March 10, 1998 and related
other agreements between the Company and Credit Lyonnais.(9)
10.9 Form of Amended and Restated 1995 Stock Option and Incentive
Award Plan.(7)
10.10 Form of 1997 Stock Option And Incentive Award Plan.(8)
10.11 Amendment No. 1, dated as of January 31, 1997 (the
"Amendment"), by and between Culligan Water Technologies,
Inc., and Douglas A. Pertz to the Employment Agreement dated
as of December 15, 1994, by and between Culligan
International Company and Douglas A. Pertz.(4)
10.12 Employment Agreement dated as of February 1, 1997, by and
between Culligan Water Technologies, Inc. and Douglas A.
Pertz.(4)
10.13 Tax Sharing Agreement, dated as of July 14, 1995, between
Samsonite and the Company.(1)
10.14 Culligan Supplemental Retirement Plan, dated July 1,
1991.(1)
10.15 Amended and Restated Registration Rights Agreement.(3)
10.16 Form of Indemnification Agreement entered into or to be
entered into by the Company with each of its officers and
directors.(1)
10.17 Amended and Restated Agreement and Plan of Merger dated as
of February 5, 1997 among Culligan Water Technologies, Inc.,
Culligan Water Company, Inc., Ametek, Inc., and Ametek
Aerospace Products, Inc.(4)
10.18 Agreement and Plan of Merger, dated as of February 9, 1998,
among Culligan Water Technologies, Inc., United States
Filter Corporation, and Palm Water Acquisition Corp.(6)
10.19 Support/Voting Agreement, dated as of February 9, 1998
between United States Filter Corporation and Apollo
Investment Fund, LP.(6)
10.20 Support/Voting Agreement, dated as of February 9, 1998
between United States Filter Corporation and Lion Advisors,
LP.(6)
21.1 List of Subsidiaries.(9)
27.1 Financial Data Schedule.(9)
</TABLE>
- --------
(1) Incorporated by reference to the Company's Registration Statement on Form
10 (File No. 0-26630).
(2) Incorporated by reference to the Company's Annual Report on Form 10K for
the year ended January 31, 1996.
(3) Incorporated by reference to the Company's Registration Statement on Form
8-A filed with the Commission on September 16, 1996.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1997.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 31, 1997.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
dated February 10, 1997.
(7) Incorporated by reference to the Company's Proxy Statement on Schedule 14A
dated April 30, 1996.
(8) Incorporated by reference to the Company's Proxy Statement on Schedule 14A
dated May 14, 1997.
(9) Filed herewith.
30
<PAGE>
(b) REPORTS ON FORM 8-K
The Company filed four Current Reports on Form 8-K during the quarter ended
January 31, 1998, and to date as follows:
<TABLE>
<C> <S>
November 4, 1997 Item 5. Press Release
November 21, 1997 Item 5. Summary of Results for the Third Quarter and
Nine Months ended October 31, 1997
December 12, 1997 Item 2. Acquisition or Disposition of Assets (as amended
on Form 8-K/A dated February 17, 1998)
February 10, 1998 Item. 2. Acquisition or Disposition of Assets
</TABLE>
31
<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)
/s/ Michael E. Salvati
By: _________________________________
Michael E. Salvati
Vice President, Finance
and Chief Financial Officer
(principal financial and
accounting officer)
Dated: May 14, 1998
32
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of January 31, 1997 and 1998............... F-3
Consolidated Statements of Operations for the years ended January 31,
1996, 1997 and 1998...................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended January 31, 1996, 1997 and 1998.................................... F-5
Consolidated Statements of Cash Flows for the years ended January 31,
1996, 1997 and 1998...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
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, 1997 and 1998, 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, 1998. 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, 1997 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 31, 1998, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
April 7, 1998
Chicago, Illinois
F-2
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE PER SHARE)
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
ASSETS 1997 1998
------ ----------- -----------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents............................ $ 8,984 $ 14,293
Restricted Cash...................................... -- 3,287
Accounts and Notes Receivable, Net of Allowance for
Doubtful Accounts
of $5,695 and $7,387 in 1997 and 1998, respectively. 80,843 132,923
Inventories.......................................... 47,213 74,740
Deferred Income Taxes................................ 10,964 16,213
Net Assets of Discontinued Operations................ -- 106,743
Prepaid Expenses and Other Current Assets............ 4,650 3,541
-------- --------
Total Current Assets............................... 152,654 351,740
-------- --------
Property, Plant, and Equipment, Net.................... 78,740 144,631
Intangible Assets, Less Accumulated Amortization of
$117,671 and $178,914
in 1997 and 1998, respectively........................ 76,883 312,699
Other Noncurrent Assets................................ 29,085 49,193
-------- --------
Total Assets....................................... $337,362 $858,263
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts Payable..................................... $ 23,867 $ 39,470
Accrued Expenses..................................... 36,950 90,533
Short-Term Debt and Current Maturities of Long-Term
Debt................................................ 12,414 34,610
-------- --------
Total Current Liabilities.......................... 73,231 164,613
-------- --------
Long-Term Liabilities:
Long-Term Debt....................................... 36,231 337,557
Noncurrent and Deferred Income Taxes................. 29,805 30,703
Other Noncurrent Liabilities......................... 24,455 25,171
-------- --------
Total Long-Term Liabilities........................ 90,491 393,431
-------- --------
Minority Interest...................................... -- 2,191
-------- --------
Stockholders' Equity:
Common Stock ($.01 Par Value; 60,000,000 Shares
Authorized;
21,342,957 and 25,814,543 Shares Issued and
Outstanding at
January 31, 1997 and 1998, respectively)............ 213 258
Additional Paid-In Capital........................... 235,894 367,602
Retained Deficit..................................... (61,780) (63,879)
Foreign Currency Translation Adjustment.............. (687) (5,953)
-------- --------
Total Stockholders' Equity......................... 173,640 298,028
-------- --------
Total Liabilities and Stockholders' Equity......... $337,362 $858,263
======== ========
</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,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales............................... $ 304,502 $ 371,018 $ 505,744
Cost of Goods Sold...................... 168,363 205,581 288,851
----------- ----------- -----------
Gross Profit.......................... 136,139 165,437 216,893
Selling, General, and Administrative.... 95,723 113,932 146,807
Write-off of Goodwill and In-process
Research
and Development........................ -- -- 55,803
Merger and Restructuring Expenses....... -- -- 5,236
Amortization of Intangible Assets....... 38,802 17,522 5,440
----------- ----------- -----------
Operating Income...................... 1,614 33,983 3,607
Interest Income......................... 1,576 2,633 1,765
Interest Expense on Indebtedness to
Former Parent.......................... (5,207) -- --
Interest Expense--Other................. (7,219) (5,490) (9,903)
Other, Net.............................. 2,867 5,023 32,888
----------- ----------- -----------
Income (Loss) Before Income Taxes,
Minority Interest
and Extraordinary Item............... (6,369) 36,149 28,357
Income Taxes............................ 14,910 20,264 32,638
Minority Interest....................... -- -- 919
----------- ----------- -----------
Net Income (Loss) before
Extraordinary Item................. $ (21,279) $ 15,885 $ (5,200)
Extraordinary Item (Net of Tax Benefit
of $272)............................... -- -- (422)
----------- ----------- -----------
Net Income (Loss)................... $ (21,279) $ 15,885 $ (5,622)
=========== =========== ===========
Basic Income (Loss) Per Share:
Income (Loss) before Extraordinary
Item................................. $ (1.30) $ 0.78 $ (0.22)
Extraordinary Item.................... -- -- (0.02)
----------- ----------- -----------
Net Income (Loss) Per Share......... $ (1.30) $ 0.78 $ (0.24)
=========== =========== ===========
Weighted Average Shares Of Common Stock
Outstanding............................ 16,311,426 20,356,046 23,444,322
=========== =========== ===========
Diluted Income (Loss) Per Share:
Income (Loss) Before Extraordinary
Item................................. (1.30) $ 0.74 (0.22)
Extraordinary Item.................... -- -- (0.02)
----------- ----------- -----------
Net Income (Loss) Per Share......... (1.30) $ 0.74 (0.24)
=========== =========== ===========
Weighted Average Shares Of Common Stock
Outstanding............................ 16,311,426 21,374,672 23,444,322
=========== =========== ===========
</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,
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
Costs of Issuance and
Distribution......... 25 -- -- 25
Exercise of Stock
Options.............. 56,800 -- 735 -- -- 735
Income Tax Benefit
from Exercise of
Stock Options........ -- -- 598 -- -- 598
Shares Issued Pursuant
to Directors' Stock
Plan................. 6,974 -- 274 -- -- 274
Issuance of Common
Stock in Connection
With Acquisitions.... 4,407,812 45 130,076 3,523 -- 133,644
Net Loss.............. -- -- -- (5,622) -- (5,622)
Foreign Currency
Translation
Adjustment, Net...... -- -- -- -- (5,266) (5,266)
---------- ---- -------- --------- -------- --------
Balance at January 31,
1998................... 25,814,543 $258 $367,602 $(63,879) $(5,953) $298,028
========== ==== ======== ========= ======== ========
</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 ENDED YEAR ENDED YEAR ENDED
JANUARY 31, 1996 JANUARY 31, 1997 JANUARY 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash Flows from Operating
Activities:
Net Income (Loss)......... $ (21,279) $ 15,885 $ (5,622)
Adjustments to Reconcile
Net Income (Loss) to Net
Cash Provided by
Operating Activities:
Write-off of Goodwill
and In-process R&D..... -- -- 55,803
Depreciation............ 9,409 10,091 15,161
Amortization............ 38,802 17,522 5,440
(Gain)/Loss on Sales of
Assets................. (295) (382) 26
Gain on Disposition of
Investment in
Affiliate.............. -- -- (31,098)
Insurance Settlement.... -- (1,980) --
Deferred Income Taxes... 255 (299) (5,670)
Changes in Assets and
Liabilities:
Receivables, Net...... (5,845) (10,230) (12,409)
Inventories........... 3,575 (6,626) (7,998)
Other Current Assets.. (1,659) (636) 5,015
Accounts Payable and
Accrued Expenses..... (6,962) 345 (3,887)
Other, Net............ (2,635) (7,157) (7,808)
--------- -------- ---------
Net Cash Provided by
Operating
Activities......... 13,366 16,533 6,953
--------- -------- ---------
Cash Flows from Investing
Activities:
Proceeds from Sales of
Assets................... 2,093 6,323 2,219
Proceeds from Insurance
Settlement............... -- 4,500 --
Proceeds from Disposition
of Investment in
Affiliate................ -- -- 50,897
Capital Expenditures...... (8,841) (17,043) (35,528)
Payments for Acquisitions. (13,872) (20,745) (216,912)
Net Assets of Discontinued
Operations............... -- -- (106,743)
Restricted Cash Held in
Escrow for Protean
Acquisition.............. -- -- (3,287)
--------- -------- ---------
Net Cash Used in
Investing
Activities......... (20,620) (26,965) (309,354)
--------- -------- ---------
Cash Flows from Financing
Activities:
Net Proceeds from Sale of
Common Stock............. 85,396 26,606 25
Proceeds from Exercise of
Stock Options............ -- 5,791 735
Funding to Former Parent,
Net...................... (111,125) (6,743) --
Net Borrowings
(Repayments) of Long-term
Debt..................... 32,616 (11,165) 284,460
Net Short-term Borrowings
(Repayments)............. (2,099) 1,336 23,339
--------- -------- ---------
Net Cash Provided by
Financing
Activities......... 4,788 15,825 308,559
--------- -------- ---------
Effect of Foreign Exchange
Rate Changes on Cash....... 417 (286) (849)
--------- -------- ---------
Net Increase (Decrease) in
Cash and Cash Equivalents.. (2,049) 5,107 5,309
Cash and Cash Equivalents at
Beginning of Year.......... 5,926 3,877 8,984
--------- -------- ---------
Cash and Cash Equivalents at
End of Year................ $ 3,877 $ 8,984 $ 14,293
========= ======== =========
Supplemental Disclosures of
Cash Flow Information:
Cash Paid During the Year
for:
Interest (Including to
Former Parent)........... $ 12,149 $ 5,236 $ 6,980
Income Taxes (Excluding to
Former Parent)........... $ 8,086 $ 12,618 $ 37,064
Supplemental Schedule of
Noncash Financing
Activities:
Former Parent Contribution
to Equity Capital........ $ 4,785 $ -- $ --
</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, 1997 and 1998 and
Consolidated Statements of Operations and Cash Flows for the years ended
January 31, 1996, 1997 and 1998 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.
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.
Revenues and profits on long-term contracts, performed over extended periods
of time, are recognized under the percentage-of-completion method of
accounting, principally based on direct labor dollars incurred and related
billings from outside vendors. Revenues and profits on long-term contracts are
based on the Company's estimates to complete and are reviewed periodically,
with adjustments recorded in the period in which the revisions are made. Any
anticipated losses on contracts are charged to operations as soon as they are
determinable.
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
F-7
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
Computer Software
In 1998, the Company chose to adopt AICPA Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The amount capitalized as of January 31, 1998, was $797.
Software assets are classified as property, plant and equipment and will be
amortized over periods of up to seven years.
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 $3,221, $3,212 and $4,082 for
the years ended January 31, 1996, 1997 and 1998, 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 $250 per individual claim. Culligan purchases excess workers
compensation, automobile and general liability coverage for individual claims
in excess of $250.
Earnings (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings Per Share", in 1998. SFAS 128 simplifies the computation
of earnings per share ("EPS") previously required in Accounting Principles
Board (APB) Opinion No. 15, "Earnings Per Share," by replacing primary and
fully diluted EPS with basic and diluted EPS. Under SFAS 128, basic EPS is
calculated by dividing net earnings (loss) by the weighted-average common
shares outstanding during the period. Diluted EPS reflects the potential
dilution to basic EPS that could occur upon the conversion of stock options to
common shares using the treasury stock method based upon the weighted-average
fair value of the Company's common shares during the period. SFAS 128 was
required to be adopted by the Company in fiscal 1998 and earnings per share
for prior periods have been restated in accordance with SFAS 128. The only
reconciling item related to the numerators and denominators of the basic and
diluted earnings per share calculations is the dilutive impact of stock
options for the year ended January 31, 1997 in the amount of 1,018,626 shares
on the denominator.
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 1998 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, 1997 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Raw materials............................................. $19,137 $15,499
Work in process........................................... 7,788 8,947
Finished goods............................................ 20,288 50,294
------- -------
Total................................................. $47,213 $74,740
======= =======
</TABLE>
(3) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at January 31, 1997 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Land and land improvements............................ $ 21,113 $ 22,639
Buildings............................................. 28,289 45,820
Machinery and equipment............................... 51,132 121,423
-------- --------
100,534 189,882
Less accumulated depreciation......................... (21,794) (45,251)
-------- --------
Total............................................. $ 78,740 $144,631
======== ========
</TABLE>
(4) ACQUISITIONS, DISCONTINUED OPERATIONS AND DIVESTITURES
Acquisitions and Discontinued Operations
In August, 1997 the Company completed a $157 million acquisition of the
Water Filtration Business of Ametek, Inc. (the "Water Filtration Business"),
by merging a wholly owned subsidiary of the Company into Ametek, Inc.
immediately following the spin-off of Ametek's non-water filtration
operations. As a result of the merger, which was accounted for under the
purchase method, 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 3,466,667 shares of the Company's common stock resulting in additional paid
in capital of $129.3 million) and cash in lieu of fractional shares. The Water
Filtration Business, located in Sheboygan Wisconsin, manufactures and markets
point of use water filtration and treatment products and is a leading supplier
in the do-it-yourself, plumbing wholesale and commercial/industrial water
treatment markets. The excess of fair value of net assets acquired of $51.2
million reflects the portion of purchase price, which could not be allocated
to other intangible asset categories. Excess fair value of purchase price and
developed technology are being amortized on a straight-line basis over a 40-
year period. The acquisition includes $33.1 million of purchased in-process
research and development which was charged to expense during the year ended
January 31, 1998 since the technology had not reached technological
feasibility and was determined to have no alternative future use. This
technology is expected to provide an improvement of approximately 100% in
operating margins for these particular products as compared to overall historic
operating margins of the water filtration business primarily due to anticipated
cost reductions. As of the purchase date, Water Filtration Business was selling
mold process based water filtration products. These products rely on developed
technology and do not rely on the results of the on-going in-process R&D.
Revenues derived from Water Filtration Business's current products are expected
to remain constant once the anticipated in-process products are introduced.
Most of the future growth is expected to come from the new products. A final
determination of the allocation of purchase price including the valuation of
patents, trademarks and tradenames, required purchase accounting adjustments
related to the finalization of Ametek's adjusted net worth as of the
acquisition date, and
F-10
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
certain final balance sheet purchase price adjustments under the Ametek
acquisition agreement have not been made. The Company does not believe that
the operating results of financial condition of the Company will be materially
impacted based upon the finalization of those allocations.
The allocation of purchase price relating to Ametek's in-process research
and development of $33.1 million was finalized during the fourth quarter of
the Company's fiscal year resulting in an additional charge during the fourth
quarter of $16.1 million.
The additional allocation was attributable to the finalization of such
information that required internal and external verification or validation of
the following:
a. Information regarding forecasted revenues and expected cashflows from
internal and external marketing inquiries of Ametek's Series 2000 product
line.
b. Verification of anticipated material and product cost structures from
outside suppliers based upon various formulation scenarios for the extended
carbon block technology.
c. Obtaining comparative applicable industry data concerning the cost of
capital, debt structure and relative beta used to discount the cash flows
of the current projects and in-process research and development projects.
On December 2, 1997, the Company declared its cash offer of approximately
$174 million to acquire all of the outstanding shares of Protean plc
("Protean"), a United Kingdom corporation, unconditional in all respects. As
of December 2, 1997, the Company owned or received valid acceptances for an
aggregate of 97.9% of Protean's outstanding shares. Subsequent thereto,
Culligan acquired the remaining outstanding shares of Protean in accordance
with United Kingdom law and Protean became a wholly owned subsidiary of the
Company. Protean is engaged in the design, manufacture and sale of water
purification equipment sold primarily to commercial and industrial customers
and analytical and thermal equipment.
In connection with the acquisition, the Company decided to divest the
Analytical and Thermal Equipment Division of Protean within the next 12 months
as these businesses do not fit the Company's long-term strategic objectives.
This Division consists of eight operating units involved in the manufacture
and sale of analytical and thermal equipment and consumables principally for
use in medical, academic, research and industrial laboratories worldwide.
These operations are reflected as discontinued operations for all periods
presented in the accompanying combined financial statements at the estimated
proceeds from the sale of such operations plus the estimated cash flows during
the holding period less the estimated interest on debt associated with the
discontinued operations. The results of the discontinued operations of Protean
have been excluded from the Consolidated Statements of Operations as the
Company intends to sell such operations within one year of the date of
acquisition. The net income of the discontinued operations of Protean from the
acquisition date to January 31, 1998 amounted to $112, which was recorded as a
reduction to Net Assets of Discontinued Operations in the accompanying
Consolidated Balance Sheet at January 31, 1998.
The acquisition of Protean has been accounted for as a purchase and,
accordingly, the results of Protean's continuing operations are included in
the Company's consolidated statements of income from the date of acquisition.
The fair market value of Protean's assets and liabilities from continuing
operations has been included in the Consolidated Balance Sheet at January 31,
1998. The excess of fair value of continuing net assets acquired of $40.4
million is being amortized on a straight-line basis over 40 years. The
acquisition includes $19.5 million of purchased in-process research and
development which was charged to expense during the year ended January 31,
1998 since the technology had not reached technological feasibility and was
determined to have no alternative
F-11
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
future use. The allocation of purchase price to goodwill and other intangible
assets including customer lists, patents, and workforce in place, is
preliminary and the final allocation is not expected to be material to the
Company's results of operations or financial position.
Summarized below are the unaudited pro forma results of operations of the
Company as though the Water Filtration Business of Ametek, Inc. and the
continuing operations of Protean had been acquired at the beginning of the
Company's fiscal year ended January 31, 1997:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1997 1998
----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues.......................................... $500,490 $596,066
Net Income (Loss)................................. $ 17,725 $ (4,755)
Basic Income per share............................ $ 0.74 $ (0.19)
Diluted Income per share.......................... $ 0.71 $ (0.19)
</TABLE>
On September 30, 1997, the Company acquired all of the outstanding capital
stock of the R&S McCoy Corporation, Florida Bottled Water Company, McCoy
Transport, Inc., H2O Ventures, Inc. and Gold Coast Water Technologies, Inc.
(collectively, referred to as "McCoy"), in a $16,865 transaction accounted for
by the pooling of interests method. Additionally, in January 1998, the Company
acquired all of the outstanding common stock of two franchise dealerships in
New England and Ohio for approximately $26,363 accounted for by the pooling of
interests method. The Company issued 941,145 shares of common stock for these
three poolings. The effect of these poolings are not material to the Company's
operations and accordingly, prior years' financial statements have not been
restated.
On April 1, 1997, the Company acquired a 51% interest in Sparkling S.A.
("Sparkling"), a bottled water company based in Buenos Aires, Argentina for a
purchase price of approximately $19.5 million. An additional 29% was acquired
on October 1, 1997 for an amount to be determined based on financial
performance for the twelve months ended March 31, 1998. The Company will
purchase the remaining 20% on March 31, 1999 at a price to be determined based
on Sparkling's financial performance for the twelve months ending March 31,
1999. Sparkling provides the Company with a strong, well established presence
in the Argentine market.
During the year ended January 31, 1998, the Company completed several other
acquisitions of businesses which complement existing products and operations
of the Company for approximately $90,924 of cash and $7,620 of notes payable.
These acquisitions have been accounted for under the purchase method of
accounting and the results of these acquired businesses have been included in
the Consolidated Statements of Operations from the dates of acquisition. The
excess of fair value of net assets acquired is being amortized on a straight-
line basis over 40 years.
During the year ended January 31, 1997, the Company completed a number of
acquisitions for approximately $20,745 of cash and $11,203 of notes payable.
These acquisitions have been accounted for under the purchase method of
accounting and the results of these acquired businesses have been included in
the Consolidated Statements of Operations from the dates of acquisition. The
excess of fair value of net assets acquired is being amortized on a straight-
line basis over 40 years.
During fiscal 1998, the Company entered into a securities purchase agreement
with Packaged Ice, Inc. ("Packaged Ice") in which the Company purchased $23.5
million of preferred stock and warrants to purchase 1,807,692 shares of
Packaged Ice common stock. The dividend rate is 10% and can be paid in cash or
additional preferred stock and warrants to acquire additional common stock.
The Company's investment is included in other noncurrent assets in the
accompanying Consolidated Balance Sheet at January 31, 1998.
F-12
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Divestitures
On March 15, 1997, the Company disposed of its investment in Anvil Holdings,
Inc. for total cash proceeds of $50,897. The transaction, which included
payment of accrued interest receivable and dividends resulted in a pre-tax
gain of approximately $31,098 which is included in other income in the
Consolidated Statement of Operations for the year ended January 31, 1998.
Proceeds from this transaction were used to reduce outstanding borrowings
under the Company's credit facility.
(5) RESTRUCTURING AND ASSET WRITE-DOWN
Restructuring
As a result of the acquisition of Ametek's Water Filtration Business on
August 1, 1997 and the subsequent decision made by the Company in the quarter
to exit the market for the sale of consumer products in the department store
and mass merchant channels, the Company recorded a merger and restructuring
charge of $5.2 million during the year ended January 31, 1998. The merger and
restructuring charge reflects the costs of integrating and streamlining
manufacturing, sales, distribution, research and development, and
administrative functions completed during the third quarter in the Company's
point-of-use business. Included in the $5.2 million merger and restructuring
charge are $0.7 million for severance costs related to the elimination of
redundant employees, $1.3 million related to the write-down of receivables
aggregating $3.1 million in the Consumer Products Division, $2.5 million
related to the write-down of excess property, equipment and other assets, and
$0.7 million representing legal and other professional fees. The property,
equipment and other assets consist principally of fixed assets used in the
manufacture of molded carbon block, of which approximately $0.5 million was
acquired in the acquisition of UltraPure in January 1996 and the balance of
which relates to property and equipment of the Company's Everpure and Consumer
Products businesses. The value of these fixed assets is considered to be
impaired as a result of improved extruded carbon block technology acquired in
the acquisition of Ametek's Water Filtration Business in August 1997. These
assets are not expected to generate any significant future cash flows and have
therefore been written-down to estimated salvage value, which is not material.
The write-down of these assets is not expected to have a material effect on
future operations. In addition to the $5.2 million merger and restructuring
charge, the Company recorded a charge of $4.2 million to cost of goods sold to
write down excess inventory and to establish reserves for excess purchase
commitments that resulted from the Company's restructuring plan. Total future
cash requirements relating to the merger and restructuring are not expected to
be material.
Asset Write-Down
The Company wrote-off $3,170 of goodwill pertaining to the Company's
UltraPure operations as a result of improved technology acquired in the
acquisition of Ametek's Water Filtration Business. Because the UltraPure
technology was abandoned in favor of technology acquired in the acquisition of
the Water Filtration Business, the Company does not expect significant future
cash flows from the UltraPure operations. As a result, the goodwill associated
with the UltraPure acquisition was written off.
(6) INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, at January 31, 1997 and
1998 consist of the following:
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Trademarks............................................... $44,160 $ 42,947
Goodwill................................................. $26,424 $215,258
Developed technology..................................... $ -- $ 37,379
Other intangible assets ................................. $ 6,299 $ 17,115
------- --------
Total................................................ $76,883 $312,699
======= ========
</TABLE>
F-13
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Amortization of intangible assets consists of the following:
<TABLE>
<CAPTION>
EXPECTED
USEFUL YEAR ENDED YEAR ENDED YEAR ENDED
LIFE JANUARY 31, JANUARY 31, JANUARY 31,
(YEARS) 1996 1997 1998
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Amortization of
reorganization value in
excess of identifiable
assets.................... 3 $37,322 $15,551 $ --
Amortization of trademarks
and other "Fresh Start"
intangibles............... 40 1,300 1,300 1,300
------- ------- ------
"Fresh Start" amortization. 38,622 16,851 1,300
Amortization of goodwill
and developed
technologies.............. 10 to 40 158 504 3,701
Amortization of other
intangibles............... 3 to 40 22 167 439
------- ------- ------
Total.................. $38,802 $17,522 $5,440
======= ======= ======
</TABLE>
"Fresh Start" amortization represents the expense arising from the adoption
of "Fresh Start" accounting in accordance with SOP 90-7.
(7) ACCRUED EXPENSES
Accrued expenses at January 31, 1997 and 1998 consist of the following:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Accrued wages and other compensation..................... $15,512 $20,402
Accrued professional fees................................ 2,153 10,021
Deferred income.......................................... 3,502 8,323
Accrued warranty expense................................. 1,365 4,153
Accruals for claims in litigation (see Note 16).......... 3,312 1,122
Other.................................................... 11,106 46,512
------- -------
Total................................................ $36,950 $90,533
======= =======
</TABLE>
(8) FINANCING ARRANGEMENTS
The Company's debt at January 31, 1997 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1997 1998
CURRENT --------------- ----------------
INTEREST LONG- LONG-
RATES CURRENT TERM CURRENT TERM
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Notes payable to banks......... 4.0-10.0% $ 9,549 $29,294 $31,762 $328,779
Other.......................... 6.5-12.0% 2,865 6,937 2,848 8,778
------- ------- ------- --------
Total...................... $12,414 $36,231 $34,610 $337,557
======= ======= ======= ========
</TABLE>
Principal payments for each of the years ending January 31, 1999, through
the year 2003 and thereafter are $34,610, $61,618, $4,767, $264,908, $2,889
and $3,375, respectively.
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
F-14
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 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. As of February 13, 1998 the New Credit Facility was
amended (the "Amended Credit Facility") to modify certain covenants and lessen
restrictions on the incurrence of debt outside the Amended Credit Facility,
guarantees, and certain other matters. The Amended Credit Facility contains
customary representations and warranties and certain financial and other
covenants as well as customary events of default including, but not limited
to, payment defaults, breaches of covenants or representations, or insolvency.
The 364-day multi-currency revolving portion of the Amended Credit Facility
was subsequently extended and currently matures at April 28, 1999. At January
31, 1998, the weighted average interest rate on borrowings under the Credit
Facility was 6.58% per annum. Of the $287,797 outstanding under the New Credit
Facility, $141,298 is denominated in British Pound Sterling which is intended
to hedge the Company's investment in Protean.
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 Consolidated Statement of
Operations for the year ended January 31, 1998.
On October 21, 1997, the Company established a $100 million line of credit
pursuant to a letter agreement (the "Letter Agreement") with The First
National Bank of Chicago. The Letter Agreement originally matured at April 21,
1998, but has subsequently been replaced with the Letter Agreements discussed
below aggregating $200 million. Borrowings under the Letter Agreement were
guaranteed by the Company's principal domestic subsidiaries and bore interest,
at the election of the Company, at either a base rate based on (i) the prime
rate or (ii) a fixed rate equal to the sum of .65% per annum plus an
applicable Eurodollar rate. The Company used the Letter Agreement to finance
various acquisitions and for general corporate purposes. As of January 31,
1998 the Company had available credit under the Letter Agreement of $44,200.
On March 10, 1998, the Company entered into four letter agreements (the "New
Letter Agreements") with various financial institutions to establish a 364-day
line of credit in the aggregate amount of $200 million. The Company drew
initial borrowings under the New Letter Agreements to replace indebtedness
incurred under the Letter Agreement discussed above. The Company intends to
use the Letter Agreements to fund future acquisitions and working capital
needs of the Company. Loans made under the New Letter Agreements bear
interest, at the election of the Company, at either (i) the prime rate or (ii)
a Eurodollar rate plus .75% per annum. The New Letter Agreements incorporate
by reference various representations, warranties, certain financial and other
covenants, and events of default set forth in the Amended Credit Facility.
At January 31, 1998, the Company had non-U.S. lines of credit of
approximately $24.6 million, with interest rates ranging from 4.4% to 10.5%
and varying maturity dates. At January 31, 1998, the weighted average interest
rate on the $13.5 million of borrowings under these lines of credit was
approximately 6.7% per annum.
(9) 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
F-15
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 ENDED YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Currently payable:
U.S. federal........................ $ 8,793 $12,516 $24,970
State............................... 1,537 2,956 4,787
Non-U.S............................. 3,650 4,966 7,060
------- ------- -------
Total currently payable........... $13,980 $20,438 $36,817
======= ======= =======
Deferred:
U.S. federal........................ $ 1,067 $ 1,122 $(3,826)
State............................... (24) (708) (692)
Non-U.S............................. (113) (588) 339
------- ------- -------
Total deferred.................... 930 (174) (4,179)
------- ------- -------
Total income taxes.............. $14,910 $20,264 $32,638
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at January 31, 1997 and
1998 are presented below:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts and notes receivable...................... $ 3,259 $ 2,556
Inventories........................................ 3,527 4,199
Insurance and litigation accruals.................. 2,822 3,051
Pension and postretirement benefits................ 4,654 5,044
Other accruals..................................... 6,884 10,776
Net operating loss carryforwards................... 4,143 4,415
Other.............................................. 469 440
-------- --------
Total gross deferred tax assets.................. 25,758 30,481
Less valuation allowance........................... (2,892) (2,992)
-------- --------
Net deferred tax assets.............................. 22,866 27,489
-------- --------
Deferred tax liabilities:
Property, plant, and equipment..................... (10,306) (12,788)
Trademarks and other intangible assets............. (19,051) (19,898)
Unremitted earnings................................ (2,550) --
-------- --------
Total gross deferred tax liabilities............. (31,907) (32,686)
-------- --------
Net deferred tax liabilities..................... $ (9,041) $ (5,197)
======== ========
</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, 1998, undistributed
earnings of non-U.S. subsidiaries that will be permanently invested and for
which no deferred taxes have been provided amount to approximately $49,300. It
is not practicable for the Company to compute the amount of unrecognized
deferred tax liability on these undistributed earnings.
F-16
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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, 1996, 1997 and 1998, was $(1,691), $1,159 and $100,
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.
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,
minority interest and extraordinary item as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Income (loss) before income taxes,
minority interest and
extraordinary item:
U.S.............................. $(9,715) $17,732 $11,222
Non-U.S.......................... 3,346 18,417 17,135
------- ------- -------
Total.......................... $(6,369) $36,149 $28,357
======= ======= =======
Income taxes computed at the U.S.
federal statutory income tax rate. $(2,229) $12,652 $ 9,925
State income taxes, net of U.S.
federal Income tax benefit........ 983 1,461 2,662
Non-U.S. rate differential......... 2,366 (2,068) 1,402
Amortization and write-off of
nondeductible intangible assets... 13,063 5,443 20,233
Change in valuation allowance...... (1,691) 1,159 100
Unremitted Earnings................ 487 1,155 (1,402)
Other, net......................... 1,931 462 (282)
------- ------- -------
Total.......................... $14,910 $20,264 $32,638
======= ======= =======
</TABLE>
(10) 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.
F-17
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Service cost.......................... $ 1,196 $1,421 $1,345
Interest cost....................... 3,297 3,415 3,692
Actual return on plan assets........ (11,289) (7,362) (8,590)
Net amortization and deferral....... 7,727 3,435 4,287
------- ------ ------
Net periodic pension cost......... $ 931 $ 909 $ 734
======= ====== ======
</TABLE>
The following table presents the plans' status reconciled with amounts
recognized as other non-current liabilities in the Consolidated Balance Sheets
at January 31, 1997 and 1998:
<TABLE>
<CAPTION>
ACCUMULATED ASSETS EXCEED
BENEFITS ACCUMULATED
EXCEED ASSETS BENEFITS
---------------- ------------------
1997 1998 1997 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested............................. $(1,942) $(3,169) $(37,042) $(41,838)
Nonvested.......................... -- (245) (1,845) (2,156)
------- ------- -------- --------
Accumulated benefit obligations...... $(1,942) $(3,414) $(38,887) $(43,994)
======= ======= ======== ========
Projected benefit obligations........ $(2,011) $(3,482) $(44,978) $(50,577)
Fair value of plan assets,
principally equity securities, and
corporate and government bonds...... -- 1,119 56,536 62,249
------- ------- -------- --------
Projected benefit obligations (in
excess of) less than plan assets.... (2,011) (2,363) 11,558 11,672
Unrecognized net gain from past
experience different from that
assumed and effect of changes in
assumptions......................... (1,073) (405) (10,222) (11,692)
Prior service cost not yet recognized
in net periodic pension cost........ 112 262 (955) (185)
------- ------- -------- --------
Prepaid (accrued) pension cost....... $(2,972) $(2,506) $ 381 $ (205)
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
---- ------- ---------
<S> <C> <C> <C>
Actuarial assumptions were:
Discount rates................................... 7.50% 8.0-8.5% 6.25%-8.5%
Rates of increase in compensation levels......... 6.00 5.00 3.75-6.00
Expected long-term rate of return on assets...... 8.50 8.50 8.50
</TABLE>
Plan assets are invested primarily in equity securities and fixed income
instruments. The 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
$3,125, $3,609 and $3,576 for the years ended January 31, 1996, 1997 and 1998,
respectively.
F-18
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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 noncurrent liabilities in the Consolidated Balance Sheets
at January 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................. $2,473 $2,638
Fully eligible active plan participants.................. 1,741 2,002
Other active plan participants........................... 2,449 2,787
------ ------
Accumulated postretirement benefit obligation in excess of
plan assets............................................... 6,663 7,427
Unrecognized net loss...................................... 1,483 1,154
------ ------
Accrued postretirement benefit cost.................... $8,146 $8,581
====== ======
</TABLE>
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Service cost.......................... $219 $195 $173
Interest cost......................... 467 483 512
Net amortization and deferral......... (74) (45) (74)
---- ---- ----
Net periodic postretirement
benefit cost..................... $612 $633 $611
==== ==== ====
</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 5.5% 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, 1998 by $1,026 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year ended
January 31, 1998 by $103. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 8.00% and
7.5% at January 31, 1997 and 1998, respectively.
(11) 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, 1999 through the year 2003 and thereafter are
$3,921, $3,297, $2,478, $1,720, $1,252, and $2,180, respectively.
F-19
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Rental expense amounted to $2,205, $2,169 and $3,056 for the years ended
January 31, 1996, 1997 and 1998, respectively.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments at January 31, 1997 and 1998 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.
(13) FINANCIAL INSTRUMENTS
Several of the Company's non-U.S. subsidiaries are exposed to foreign
currency risk as they have monetary assets and liabilities denominated in
currencies other than their respective functional currencies. Financial
instruments currently utilized by continuing operations of the Company include
local currency bank borrowings and, from time to time, forward foreign exchange
contracts. Forward exchange contracts are not held for trading purposes, but
correlate with the Company's net exposure in specific transactions in all
material respects.
As of January 31, 1997 and 1998, the Company had forward exchange contracts
not extending beyond one year, to trade principally Belgian francs, lira,
pesetas, or yen in the total gross notional amounts of $4,100 and $3,348
respectively. Unrealized gains and losses on the forward contracts are deferred
until the related transaction occurs. Deferred gains and losses on forward
exchange contracts incurred during the years ended January 31, 1996, 1997 and
1998 were not material. Other, immaterial instruments outstanding at January
31, 1998 include two interest rate swap transactions intended to mitigate
floating interest rates related to debt acquired through the Company's
discontinued Analytical & Thermal division.
(14) INTERNATIONAL OPERATIONS
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.
(15) TRANSACTIONS WITH RELATED PARTIES
The following summarizes information about certain transactions between the
Company and Samsonite:
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. During the year ended January 31, 1997, Culligan settled the
remaining tax payable with Samsonite.
F-20
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 year ended January 31, 1996, Culligan incurred interest
expense under this obligation of $5,207.
(16) LITIGATION
In August 1997, a purported class action was filed against Culligan
International Company, certain unidentified distributors and certain other
unidentified individual defendants in the Superior Court, County of Los
Angeles, State of California. The Complaint in the action alleges that the
defendants violated provisions of California law relating to home solicitations
by failing to include language and notices relating to rights of rescission and
engaging in unfair, unlawful and deceptive business acts and practices. The
Complaint in such action seeks disgorgement of alleged illicit profits,
injunctive relief, punitive damages and treble damages and alleges that the
amount the class is entitled to exceeds $20 million. In February 1998, a second
purported class action was filed against Culligan International Company,
Household International and others in the Superior Court, County of Los
Angeles, State of California. The complaint in such action also alleges
violations of California law relating to home solicitations and seeks equitable
relief and consequential and exemplary damages in an unspecified amount. The
Company intends to vigorously contest these matters and does not believe that
they will have a material adverse effect on its financial condition or results
of operations.
In November 1997, an action was commenced by Culligan Springs Limited
("Culligan Springs") against Culligan of Canada Ltd., ("Culligan of Canada"), a
wholly owned subsidiary of the Company, in Bracebridge, Ontario. Culligan
Springs is an authorized producer of bottled water under Culligan of Canada's
trademarks in Canada. The action alleges breach of contract and breach of
warranty in connection with an alleged license to use the CULLIGAN trademark in
connection with the processing, distribution and sale of bottled water in the
eastern United States. The Statement of Claim seeks $50 million in damages,
interest, attorneys fees and other unspecified relief. Culligan of Canada
answered, denying the claim. 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 the results of operations.
In February 1998, a complaint was filed by KX Industries, LP and Koslow
Technologies Corporation against the Company and its Water Filtration Business
alleging that infringement of a patent for the production of carbon block,
false advertising in connection with a carbon block faucet mount filter
marketed by the Company's consumer products division, and the misappropriation
of certain of KX's trade secrets. The Complaint seeks injunctive relief,
disgorgement, compensatory and exemplary 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
the 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.
(17) 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, Latin America,
F-21
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Canada and the Caribbean. Information regarding the Company's operations in the
United States and internationally are presented below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JANUARY 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales:
United States....................... $203,441 $265,904 $358,265
Europe.............................. 102,607 105,558 142,752
Other non-U.S....................... 14,284 18,065 37,455
Intercompany sales.................. (15,830) (18,509) (32,728)
-------- -------- --------
Consolidated net sales............ $304,502 $371,018 $505,744
======== ======== ========
Operating income (loss):
United States....................... $ (9,027) $ 19,617 $ 3,555
Europe.............................. 8,315 13,044 (4,609)
Other non-U.S....................... 2,655 2,471 6,350
Adjustments and eliminations........ (329) (1,149) (1,689)
-------- -------- --------
Consolidated operating income..... $ 1,614 $ 33,983 $ 3,607
======== ======== ========
Depreciation expense
United States....................... $ 5,921 $ 7,234 $ 10,009
Europe.............................. 1,418 1,287 2,077
Other non-U.S....................... 194 404 2,359
Corporate........................... 1,876 1,166 716
-------- -------- --------
Total depreciation expense........ $ 9,409 $ 10,091 $ 15,161
======== ======== ========
Amortization expense
United States....................... $ 23 $ 382 $ 2,576
Europe.............................. 157 152 684
Other non-U.S....................... 0 138 722
Corporate........................... 38,622 16,850 1,458
-------- -------- --------
Total amortization expense........ $ 38,802 $ 17,522 $ 5,440
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Identifiable assets:
United States........................................ $179,438 $416,611
Europe............................................... 74,613 317,987
Other non-U.S........................................ 15,972 60,523
Corporate............................................ 67,339 63,142
-------- --------
Consolidated identifiable assets....................... $337,362 $858,263
======== ========
Capital Expenditures:
United States........................................ $ 12,702 $ 22,009
Europe............................................... 2,601 4,204
Other non-U.S........................................ 1,740 9,315
Corporate............................................ 0 0
-------- --------
Total Capital Expenditures......................... $ 17,043 $ 35,528
======== ========
</TABLE>
F-22
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(18) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- -------- ---------
<S> <C> <C> <C> <C>
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
======= ======== ======== =========
Basic Income (Loss) Per Share:
Income (Loss) Before Extraordinary
Item................................. (0.17) 0.14 0.40 0.40
Extraordinary Item.................... -- -- -- --
------- -------- -------- ---------
Net Income (Loss) Per Share......... (0.17) 0.14 0.40 0.40
======= ======== ======== =========
Diluted Income (Loss) Per Share:
Income (Loss) Before Extraordinary
Item................................. (0.17) 0.13 0.37 0.39
Extraordinary Item.................... -- -- -- --
------- -------- -------- ---------
Net income (Loss) Per Share......... (0.17) 0.13 0.37 0.39
======= ======== ======== =========
Year Ended January 31, 1998:
Net sales............................. $99,403 $114,765 $140,086 $ 151,490
Gross profit.......................... 45,049 49,757 57,002 65,085
Net income (loss)..................... $26,592 $ 9,472 $(15,160) $ (26,526)
======= ======== ======== =========
Basic Income (Loss) Per Share:
Income (Loss) Before Extraordinary
Item................................. 1.26 0.44 (0.61) (1.03)
Extraordinary Item.................... (0.02) -- -- --
------- -------- -------- ---------
Net Income (Loss) Per Share......... 1.24 0.44 (0.61) (1.03)
======= ======== ======== =========
Diluted Income (Loss) Per Share:
Income (Loss) Before Extraordinary
Item................................. 1.22 0.43 (0.61) (1.03)
Extraordinary Item.................... (0.02) -- -- --
------- -------- -------- ---------
Net Income (Loss) Per Share......... 1.20 0.43 (0.61) (1.03)
======= ======== ======== =========
</TABLE>
(19) 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") for
which American Stock Transfer and Trust Company serves as successor rights
agent. 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
F-23
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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, 1998.
In connection with the Agreement and Plan of Merger described in Note 22, the
Company has amended the Rights Agreement to among other things, provide that
the rights shall not become exercisable as a result of the Agreement and Plan
of Merger or the merger provided for therein, and reduce the beneficial
ownership threshold at which a person becomes an "Acquiring Person" under the
Rights Agreement from 15% of the outstanding shares of Company Common Stock to
9.9%.
(20) 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. Such options expire in 2005 and are fully vested as of
January 31, 1998. The Company has also granted to the CEO options for 300,000
shares at an exercise price of $33.25 under the 1997 Plan described below, in
connection with an extension of his employment agreement. Approximately 60% of
these options are exercisable in five equal annual installments upon the
attainment by the Company of performance goals developed jointly by the
Compensation Committee and the CEO, and the remainder are exercisable in five
equal annual installments, so long as the CEO remains employed with the
Company.
At January 31, 1998, the Company had 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"). 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, 1998,
the Company has granted options, net of cancellations, for 879,950 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. As of January 31,
1998, the Company has granted options for 300,000 shares pursuant to the 1997
Plan. Except for the options referred to above included under the 1997 Plan, no
options are outstanding under such Plan. 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, 1996, 1997, and 1998, and changes during the years ended on those
dates is presented below:
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 286,666 $ 9.98 1,256,434 $ 9.74 1,028,766 $22.32
Granted.................
1995 Plan............. 298,600 $12.58 362,500 $35.49 57,500 $42.09
1997 Plan............. -- 120,000 $33.25 --
Options granted outside
the plans.............. 671,168 $ 8.37 -- --
Exercised............. -- (662,768) $ 8.43 (32,320) $12.93
Cancelled............. -- (47,400) $11.33 (100,740) $25.54
--------- --------- ---------
Outstanding at end of
year................... 1,256,434 $ 9.74 1,028,766 $22.32 953,206 $22.66
========= ========= =========
Options exercisable at
year-end............... 810,923 296,530 531,466
Weighted-average fair
value of options
granted during the
year................... $ 4.81 $ 13.03 $ 14.07
</TABLE>
F-24
<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, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------- ---------------------
NUMBER WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING WEIGHTED-AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE JANUARY 31, REMAINING EXERCISE JANUARY 31, EXERCISE
PRICES 1998 CONTRACTUAL LIFE PRICE 1998 PRICE
-------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 7.87 17,500 -- $ 7.87 17,500 $ 7.87
$ 9.98 286,666 7.0 years $ 9.98 286,666 $ 9.98
$12.23 198,040 7.8 years $12.59 100,700 $12.49
$33.13-
$46.01 451,000 8.0 years $35.70 126,600 $35.10
------- -------
953,206 7.5 years $22.65 531,466 $16.37
======= =======
</TABLE>
A summary of the status of the Company's performance based stock option
activity as of January 31, 1996, 1997, and 1998, and changes during the years
ended on those dates is presented below:
<TABLE>
<CAPTION>
1996 WEIGHTED- 1997 WEIGHTED- 1998 WEIGHTED-
AVERAGE AVERAGE AVERAGE
PERFORMANCE OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------- ------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 204,760 $ 9.98 430,660 $11.10 742,660 $22.86
Granted
1995 Plan............. 225,900 $12.11 195,000 $35.24 19,500 $38.09
1997 Plan............. -- 180,000 $33.25 --
Exercised............. -- (16,500) $10.92 (24,480) $12.89
Cancelled............. -- (46,500) $10.37 (2,010) $27.97
------- ------- -------
Outstanding at end of
year................... 430,660 $11.10 742,660 $22.86 735,670 $23.72
======= ======= =======
Options exercisable at
year-end............... 105,153 194,212 380,710
Weighted-average fair
value of options
granted during the
year................... $ 4.84 $ 12.81 $ 13.18
</TABLE>
The following table summarizes information about the Company's performance
based stock options outstanding at January 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------- ---------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE JANUARY 31, REMAINING EXERCISE JANUARY 31, EXERCISE
PRICES 1998 CONTRACTUAL LIFE PRICE 1998 PRICE
-------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$9.98 204,760 7.0 years $ 9.98 204,760 $ 9.98
$12.23 130,410 8.1 years $12.23 66,450 $12.23
$33.13-
$46.01 400,500 8.9 years $34.49 109,500 $34.67
------- -------
735,670 7.8 years $23.72 380,710 $17.47
======= =======
</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
F-25
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
method prescribed by APB Opinion No. 25, the Company's net income (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C> <C>
Net Income (Loss)................... As Reported $15,885 $(5,622)
Pro Forma $15,626 $(7,272)
Earnings (Loss) per Share........... As Reported--Basic $ 0.78 $ (0.24)
As Reported--Diluted $ 0.74 (0.24)
Pro Forma--Basic $ 0.77 $ (0.31)
Pro Forma--Diluted $ 0.73 (0.31)
</TABLE>
Pro forma net income (loss) primarily reflects options granted in the years
ended January 31, 1996 and 1997. 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, 1998, will be
reflected over the options' vesting period of 5 years beginning in fiscal 1999.
The fair value of options granted under the Company's stock plans during
fiscal 1997 and 1998 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 29.98%, risk free interest rates ranging from 6.20%-
6.94% and expected lives ranging from 3 to 5 years.
(21) PUBLIC OFFERING OF COMMON STOCK
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 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 a then
existing Credit Facility.
(22) SUBSEQUENT EVENTS (UNAUDITED)
On February 9, 1998, the Company entered into the Agreement and Plan of
Merger (the "Merger Agreement"), dated as of February 9, 1998 among United
States Filter Corporation ("USF"), the Company and Palm Water Acquisition
Corp., a newly-formed wholly owned subsidiary of USF ("Merger Sub").
Pursuant to the Merger Agreement, Merger Sub will be merged with and into the
Company (the "Merger"). In connection with the Merger, USF will issue in
exchange for each issued and outstanding share (other than treasury shares and
shares owned by USF) of the Company's common stock, par value $.01 per share
("Company Common Stock"), 1.714 shares of common stock, par value $.01 per
share of USF ("USF Common Stock") if the average of the closing prices of the
shares of USF Common Stock as reported on the New York Stock Exchange Composite
Tape on each of the last ten trading days ending on the sixth trading day prior
to the date of the meeting of the Company's stockholders at which the approval
of the Merger by the Company's stockholders is obtained (the "Average Share
Price") is equal to or greater than $35 (the "Exchange Ratio"); provided,
however, that (i) if the Average Share Price is less than $35, but greater than
or equal to $32, then the Exchange Ratio shall be equal to the quotient
obtained (rounded to the nearest ten-thousandth of a share) by dividing $60 by
the Average Share Price; and (ii) if the Average Share Price is less than $32,
the Exchange Ratio shall be equal to 1.875. Among other circumstances, the
Merger Agreement may be terminated by the Company if the Average Share Price,
or if the average of the closing prices of the shares of USF Common Stock as
reported on the New York Stock Exchange Composite Tape for any period of 10
consecutive trading days which ends after the last trading day used in
calculating the Average Share Price, is less than $26.25.
F-26
<PAGE>
CULLIGAN WATER TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Merger will be accounted for as a pooling of interests and is intended to
qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended. Consummation of the Merger is subject to
customary regulatory approvals and the approval of the stockholders of each of
the Company and USF. The Merger is expected to be consummated in the first half
of 1998.
Apollo Investment Fund, LP, and Lion Advisors, LP (collectively, "Apollo"),
which beneficially own in the aggregate 7,334,859 shares of the Company's
common stock (representing approximately 28.4% of the total number of shares of
Company Common Stock outstanding) have each entered into a Support/Voting
Agreement with USF pursuant to which they have agreed, among other things, to
cause such shares of Company Common Stock that they beneficially own to be
voted in favor of the Merger.
F-27
<PAGE>
CULLIGAN WATER TECHNOLOGIES, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.3 Amendment dated February 13, 1998 to the Credit Agreement
10.4 Amendment dated February 13, 1998 to the Short Term Credit Agreement
10.5 Letter Agreement dated as of March 3, 1998 and related other agree-
ments between the Company and The First National Bank of Chicago
10.6 Letter Agreement dated as of March 10, 1998 and related other agree-
ments between the Company and Bank of America
10.7 Letter of Agreement dated as of March 10, 1998 and related other
agreements between the Company and Bank of Montreal
10.8 Letter Agreement dated as of March 10, 1998 and related other agree-
ments between the Company and Credit Lyonnais
21.1 List of Subsidiaries
27.1 Financial Data Schedule
</TABLE>
