UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 02549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 1-7211
IONICS, INCORPORATED
(Exact name of registrant as specified in its charter)
Massachusetts 4-2068530
(State of incorporation) (IRS Employer Identification Number)
65 Grove Street 02472-2882
Watertown, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (617)926-2500
Securities registered pursuant to Section 12(b) of the Act: Common Stock,
$1 par value
Name of each exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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. [X]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates as of March 22, 2002 was $530,069,032 (17,093,487 shares at
$31.01 per share) (includes shares owned by a trust for the indirect benefit of
a non-employee director, and by a trust for the indirect benefit of a spouse of
a non-employee director). As of March 22, 2002, 17,533,242 shares of Common
Stock, $1 par value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2001. Portions of such proxy statement are incorporated by reference into Part
III of this Annual Report on Form 10-K.
1
IONICS, INCORPORATED
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I..............................................................................................................3
ITEM 1. BUSINESS....................................................................................3
ITEM 2. PROPERTIES.................................................................................13
ITEM 3. LEGAL PROCEEDINGS..........................................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................15
PART II............................................................................................................15
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.......................................................15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........
16
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........
56
PART III...........................................................................................................56
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................56
ITEM 11. EXECUTIVE COMPENSATION.....................................................................56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................
56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................56
PART IV............................................................................................................56
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...........................56
SIGNATURES.........................................................................................................61
2
PART I
Except for historical information, the matters discussed in this Annual Report
on Form 10-K are forward-looking statements that involve risks and
uncertainties. The Company makes such forward-looking statements under the
provision of the "Safe Harbor" section of the Private Securities Litigation
Reform Act of 1995. Actual future results may vary materially from those
projected, anticipated, or indicated in any forward-looking statements as a
result of certain risk factors. Readers should pay particular attention to the
considerations described in the section of this report entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"-
"Risks and Uncertainties" and "Forward Looking Information." Readers should also
carefully review the risk factors described in the other documents that we file
from time to time with the Securities and Exchange Commission. In this Annual
Report on Form 10-K, the words "anticipates," "believes," "expects," "intends,"
"future," "could," and similar words or expressions (as well as other words or
expressions referencing future events, conditions or circumstances) identify
forward-looking statements.
ITEM 1. BUSINESS
General
Ionics, Incorporated ("Ionics," or the "Company") is a leading water
purification company engaged worldwide in the supply of water and related
services and of water treatment equipment through the use of proprietary
separations technologies and systems. Ionics' products and services are used by
the Company or its customers to desalt brackish water and seawater, to treat
water in the home, to manufacture and supply water treatment chemicals and
ultrapure water, to process food products, recycle and reclaim process water and
wastewater, and to measure levels of waterborne contaminants and pollutants. The
Company's customers include industrial companies, consumers, municipalities and
other governmental entities, and utilities. Unless the context indicates
otherwise, the terms "Ionics" and "Company" as used herein includes Ionics,
Incorporated and all its subsidiaries.
Over fifty years ago, the Company pioneered the development of the ion-exchange
membrane and the electrodialysis process. Since that time, the Company has
expanded its separations technology base to include a number of membrane and
non-membrane-based separations processes which the Company refers to as The
Ionics Toolbox(R). These separations processes include electrodialysis reversal
(EDR), reverse osmosis (RO), ultrafiltration (UF), microfiltration (MF),
electrodeionization (EDI), electrolysis, ion exchange, ozonation, carbon
adsorption, and thermal processes such as evaporation and crystallization. The
Company believes that it is the world's leading manufacturer of ion-exchange
membranes and of membrane-based systems for the desalination of water.
The Company's business activities are reported in four business group segments.
The current reporting reflects this business group structure, which the Company
put into place in the latter part of 1998. The business group structure is based
upon defined areas of management responsibility with respect to markets,
applications and products. These business group segments are the Equipment
Business Group, Ultrapure Water Group, Consumer Water Group, and Instrument
Business Group. In 2001, these segments accounted for approximately 44%, 23%,
27% and 6%, respectively, of the Company's total revenues. On December 31, 2001,
the Company sold its Aqua Cool Pure Bottled Water division, constituting the
major portion of the assets of the Consumer Water Group. Approximately 44% of
the Company's 2001 revenues were derived from foreign sales or operations.
Within the existing business group structure, the Company has instituted a
matrix-type organization which became effective at the beginning of 2002. Within
each business group, a number of product and service lines (centers of
excellence) have been identified, including desalination, reuse, surface water,
microelectronics, pharmaceuticals and instruments, among other products and
services. The Company will continue to report its results under the current
"business group" segment structure. Starting in 2002, as part of the matrix
organization, the lease of trailers for the production of ultrapure water will
be included in the results of the Ultrapure Water Group, rather than the
Equipment Business Group, where such results had been included through 2001. In
addition, the Company's non-consumer bleach-based chemical supply business,
which through 2001 had been included in the results of the Equipment Business
Group, will be included in the results of the Ultrapure Water Group starting in
2002. The discussion and financial results contained in this Annual Report on
Form 10-K do not reflect these changes.
The Company was incorporated in Massachusetts in 1948. The Company's principal
executive offices are located at 65 Grove Street, Watertown, Massachusetts
02472.
3
Information about Business Segments
Equipment Business Group
The Equipment Business Group accounted for approximately 44% of revenues in
2001. This segment provides technologies, treatment systems and services for
seawater desalination, surface water treatment, brackish water desalination,
wastewater reuse and recycle, potable water and high purity water. In addition,
this segment includes the Company's custom fabrication activities and food and
chemical processing activities.
Desalination and Related Water Treatment Equipment and Processes
Opportunities for the sale of desalination and related water treatment equipment
arise from changes in the needs of people and municipalities, from industrial
shifts and growth, and from environmental concerns. With less than 1% of the
total water on the planet fresh and usable, desalination has played an important
role in creating new water sources.
The Company sells a wide spectrum of products and systems to serve this market,
which utilize technologies including EDR, ion exchange, EDI, RO, UF, ozonation
and carbon adsorption. Depending on the customers' needs, the Company provides
standardized versions of systems utilizing one or more of the technologies
mentioned, or can supply complete turnkey plants that may include standardized
models as well as peripheral water treatment equipment, complete engineering
services, process and equipment design, project engineering, commissioning,
operator training and field service.
As examples of the Company's activities in this market, during 2001 the Company
began construction of a one million gallon-per-day seawater desalination plant
in the United Arab Emirates utilizing RO and UF membrane technology;
commissioned a 7.5 million gallon per day RO facility in Santa Ana, California
for color removal to produce clean drinking water; and received an order from a
customer for additional EDR units to expand brewing operations capacity in
Mexico.
The Company has also been participating in a growing market for surface water
treatment equipment as municipalities are being required to meet increasingly
stringent regulations for ensuring safe drinking water quality. For example, in
late 2001 the Company booked an order from the City of Minneapolis for the sale
of UF-based water treatment equipment to treat surface water used by the City
for drinking water. This award is expected to generate approximately $17 million
in revenues to the Company.
Wastewater Treatment Equipment and Processes
The market for the treatment, recycle and reuse of wastewater has shown
significant growth as world demand for water of specified quality continues to
increase and as regulations limiting waste discharges to the environment
continue to mount. The wastewater market is increasingly driven by the concept
of what Ionics calls "Ionics Total Water Management(R)," which involves the
recognition that the water streams which enter, leave or become part of a
process can be treated for use, recycle or discharge to achieve overall economic
efficiencies. Ionics services the wastewater market with proprietary brine
concentrators and crystallizers, traditional wastewater treatment equipment, and
special EDR membrane-based concentrators for recycle and reuse.
The Company designs, engineers and constructs brine concentrators, evaporators
and crystallizers which are used to clean, recover and recycle wastewater,
particularly in "zero liquid discharge" (ZLD) industrial uses. Such systems may
also incorporate EDR membrane systems as preconcentrators, and EDI membrane
systems for further treatment. A representative example in 2001 was the award to
the Company of a contract to design and supply a ZLD system for a new 2,250
megawatt natural gas-fueled power plant near Gila Bend, Arizona. This system
will be designed to operate at a flow rate of nearly 3.5 million gallons per
day.
4
Ionics also designs, engineers and constructs customized systems for industrial
wastewater customers which may include conventional treatment systems as well as
advanced separation technologies such as EDR, RO, UF and MF. Typical industrial
customers are power stations, chemical and petrochemical plants, metalworking
and automobile factories, textile manufacturers and a variety of other
industrial applications. The Company also provides custom and packaged sewage
treatment systems for municipalities and advanced membrane systems that treat
waste from conventional sewage treatment plants so that the treated wastewater
can be recycled and reused for irrigation and process water needs.
As an example of the Company's activities in membrane-based wastewater
treatment, during 2001, the Company completed a waste treatment system which
included a comprehensive integrated membrane system incorporating MF and RO for
the Luggage Point municipal sewage plant in Brisbane, Australia. Also in 2001, a
Kuwaiti project company, in which the Company has a 25% equity interest, entered
into a concession agreement in Kuwait under which the project company has
entered into a contract to construct, own and operate the largest membrane-based
water reuse facility in the world (see "Foreign Operations" under this Item I).
Water Supply for Drinking and Industrial Use
Ionics' position as a seller of purified or treated water has evolved from its
traditional role as a supplier of water treatment equipment. In certain
situations, opportunities are available for the Company to provide a complete
service package under which the Company will own and operate the water
purification facility. In these situations, the Company is responsible for the
financing, construction, operation and maintenance of the water treatment
facilities.
Ionics, through its wholly owned subsidiary, Ionics Iberica, S.A., owns and
operates a 5.5 million gallon per day capacity brackish water EDR facility and a
3.6 million gallon per day RO seawater facility on Grand Canary Island, Spain.
Under long-term contracts, the Company is selling the desalted water from both
facilities to the local water utility for distribution.
The Company's wholly owned subsidiary, Ionics (Bermuda) Ltd., owns and operates
a 600,000 gallon per day EDR brackish water desalting plant on the island of
Bermuda. This plant supplies fresh water under a long-term contract with
Watlington Waterworks Ltd., a Bermuda corporation partially owned by Ionics.
During 2001, the Company signed an agreement with the government-owned public
utility in Curacao to expand the size of the Company's existing membrane-based
seawater desalination plant from 2.6 million gallons per day to over 4.5 million
gallons per day. This expansion will permit the utility to provide fresh
drinking water to up to one-third of the island's population. On the island of
Anguilla, Ionics completed the expansion of an existing desalination plant owned
by the Company by 50% to 900,000 gallons per day in 2001.
Construction has been nearly completed in Trinidad for what will be the largest
seawater desalination plant in the Western Hemisphere and the second largest in
the world. The seawater reverse osmosis (SWRO) desalination plant will provide
the Water and Sewerage Authority of Trinidad and Tobago (WASA) and the
industries of the Point Lisas Industrial Estate with a high quality water supply
for industrial requirements. This $120 million project is owned and will be
operated by a joint venture between the Company and its local partner, Hafeez
Karamath Engineering Services Ltd. The plant began to produce water in the first
quarter of 2002 and will be phased in to its design capacity of 26.4 million
gallons per day. It is anticipated that the plant will begin water deliveries by
mid-2002. When requested by WASA, the plant can be expanded to a capacity of
28.8 million gallons per day.
The Company also owns and operates more than 35 desalination plants on a number
of Caribbean islands, which provide drinking water to hotels, resorts and
governmental entities. Drinking water on these islands is usually supplied
pursuant to water supply contracts with terms ranging from five to ten years. On
the island of Barbados, a 7.9 million gallon per day brackish water RO plant
which started up successfully in the first quarter of 2000, is providing fresh
potable drinking water to about one-fifth of the island's population.
Desalinated water is being provided to the Barbados Water Authority on a build,
own, operate ("BOO") basis by a joint venture between Ionics and its local
partner, Williams Industries.
Chemical Supply
The Company uses its Cloromat(R) electrolytic membrane-based technology to
produce sodium hypochlorite and related chlor-alkali chemicals for industrial,
commercial and other non-consumer applications. The Company's wholly owned
5
Australian subsidiary, Elite Chemicals Pty. Ltd. (Elite), utilizes Cloromat
systems to produce sodium hypochlorite on-site in Brisbane for the industrial,
commercial and janitorial supply of bleach products, and to supply sodium
hypochlorite to treat the City of Brisbane's drinking water supply. Elite also
distributes bleach products to the Sydney area. The Company also owns sodium
hypochlorite generating facilities in Ludlow, Massachusetts and Acapulco,
Mexico.
Food Processing
Under an agreement with a major U.S. dairy cooperative, the Company oversees
whey-processing activities at two plants owned by the cooperative, and receives
a processing fee based on the production of demineralized whey for its services.
Included in the equipment being utilized at these plants are its Electromat(R)
electrodialysis systems.
Fabricated Products
At its Bridgeville and Canonsburg, Pennsylvania facilities, the Company
fabricates products for industrial and defense-related applications. The
Company's experience and expertise in design, welding, machining and assembly to
meet exceptionally fine tolerances have been utilized to fabricate products
ranging from intricate small parts to large multi-ton assemblies. The Company
has entered into contracts for the fabrication of storage systems to contain
spent nuclear fuel from U.S. nuclear power plants.
Ultrapure Water Group
The Ultrapure Water Group accounted for approximately 23% of the Company's 2001
revenues. This segment provides equipment and services for specialized
industrial users of ultrapure water, such as companies in the life sciences,
microelectronics and power industries. Ultrapure water is water that has been
purified by a series of processes to the degree that remaining impurities are
measured in parts per billion or trillion. The microelectronics industry has
been a significant source of the revenues of the Ultrapure Water Group, and
softness in the microelectronics industry negatively affected the performance of
the Ultrapure Water Group in 2001.
Ultrapure Water Equipment
The demand for technologically advanced ultrapure water equipment and systems
has increased as the industries which use ultrapure water have become more
knowledgeable about their quality requirements and as such requirements have
grown more stringent. Ultrapure water needs are particularly important in the
semiconductor, pharmaceutical, petroleum and power generation industries. The
semiconductor industry in particular has increasingly demanded higher purity
water as the circuits on silicon wafers have become more densely packed.
The Company supplies sophisticated ultrapure water systems, which utilize a
combination of ion exchange, EDI, RO and UF technologies. These systems are
either trailer-mounted or land-based and vary from standardized modules to large
multimillion dollar systems, depending on the customer's requirements.
The Company has been pursuing customers in the developing microelectronics
market in the Far East. For example, during 2001, six Ionics EDI systems were
started up in Taiwan and in China for printed circuit board and semiconductor
manufacturing operations.
The Company established the Ionics Life Sciences division at the beginning of
1999 to expand its delivery of ultrapure water equipment and services to the
pharmaceutical and biotechnology industries. In 2001, among its other
activities, this division was awarded a contract to provide a turnkey ultrapure
water system for a validated water-for-injection system to a Florida-based
leader in the orthobiologics industry.
6
Ultrapure Water Supply
In industries such as power generation, semiconductors, pharmaceuticals and
biotechnology, ultrapure water is critical to product quality and yield.
Depending on the composition and quantity of the impurities to be removed or
treated, any one of several membrane separations methods can be utilized to
provide ultrapure water to the customer. Ionics has pioneered in the application
of three membrane technologies (EDR, RO and UF) combined together in a mobile
system called the "triple membrane" trailer (TMT) for use in the commercial
processing of ultrapure water. Ionics provides ultrapure water services and the
production and sale of ultrapure water from trailer-mounted units at customer
sites (until 2002, this activity had been included in the Equipment Business
Group).
The Company's EDI technology is becoming increasingly utilized in the production
of ultrapure water. EDI is a continuous, electrically driven, membrane-based
water purification process, which produces ultrapure water without the use of
strong chemical regenerants, such as sulfuric acid and caustic soda, which are
commonly required. The Company's TMT-II trailers utilize a combination of EDI,
RO and UF technologies and represent what the Company believes to be the most
advanced technology used in the commercial processing of ultrapure water.
At the end of 2001, Company-owned or operated equipment for the production of
ultrapure water and other purified process water under contract with companies
in various industries had a total capacity of approximately 25,000 gallons per
minute.
The Company has been expanding its ultrapure water activities into the Asian
market. The Company established an ultrapure water sales, service and
regeneration facility in Singapore in 1998, and opened an office in Taiwan in
1999.
One of the Company's important ultrapure water service activities is
ion-exchange regeneration services, which are provided at four U.S. locations
and one foreign location. The Company conducts regeneration activities in the
U.S. at a 66,000 square foot building in San Jose, California which contains
resin regeneration, manufacturing and service facilities. The Company also
provides system sanitization and high-flow deionization services at customer
sites.
Consumer Water Group
This business group segment accounted for approximately 27% of the Company's
2001 revenues. The Company's consumer water products currently serve the home
water purification and consumer bleach-based product market areas. On December
31, 2001, the Company completed the sale of its five-gallon bottled water
production and delivery business conducted in the United States, United Kingdom,
and France, to affiliates of Perrier Vittel S.A., a subsidiary of Nestle S.A.
The Company received total proceeds of approximately $220 million in the
transaction, of which $10 million is being held in escrow pursuant to the terms
of the divestiture agreement. The purchase price is subject to final adjustment
based on the number of customers and working capital levels, as defined in the
agreement. The Company retains equity ownership interests in joint ventures in
Bahrain, Kuwait and Saudi Arabia engaged in the bottled water business.
Home Water Purification Systems
Point-of-Entry Devices
Ionics' point-of-entry water products include ion-exchange water conditioners to
"soften" hard water, and chemicals and media for filtration and treatment. The
Company sells its products, under the General Ionics and other brand names,
through both independent distributorships and wholly owned sales and service
dealerships.
Point-of-Use Devices
The Company participates in the "point-of-use" market for over- and
under-the-sink water purifiers through the sale of RO and activated carbon-based
filtering devices, and through the manufacture and sale of HYgene(R), a
proprietary,
7
EPA-registered, silver-impregnated activated carbon filtering medium. The
Company incorporates HYgene, which is designed to prevent bacterial build-up
while providing the capability of removing undesirable tastes and odors from the
water supply, into its own bacteriostatic water conditioners and also sells
HYgene to manufacturers of household point-of-use water filters.
The Company expanded its bacteriostatic home water conditioning system
distribution activities to Ireland in 1999 and Portugal in 2000. In the first
quarter of 2002, the Company made a decision to restructure these European
distribution activities.
Bleach-Based Consumer Products
The Company's Elite Consumer Products division operates a Cloromat(R) facility
to produce and distribute bleach-based products for the consumer market,
primarily one-gallon bleach products under private label or under the Company's
own "Elite(R)", "Super ValueTM" and "UltraPureTM" brands, and methanol-based
automobile windshield wash solution. These operations are conducted in a 129,000
square foot manufacturing facility located in Ludlow, Massachusetts.
Instrument Business Group
The Company's Instrument Business Group accounted for approximately 6% of the
Company's 2001 revenues. During 2000, the Ionics Instrument Division, which was
located in Watertown, Massachusetts, was moved and consolidated with Ionics
Sievers Instruments, located in Boulder, Colorado. This business group also
includes Ionics Agar Environmental, located in Herzlia, Israel. The Company has
become a leading manufacturer of instruments that measure total organic carbon
(TOC) across the water "spectrum" from ultrapure water to wastewater. The
Sievers(R) Model 400 TOC analyzer is designed specifically to comply with new
United States Pharmacopoeia (USP) requirements for determining water quality in
the pharmaceutical industry. Ionics' Instrument Business Group offers TOC
analyzers sensitive to the parts-per-trillion range, designed specifically for
ultrapure water measurement in the semiconductor and power generation
industries. In 2001, the Company introduced the first on-line boron analyzer
designed specifically for continuous measurement of trace boron contamination, a
capability particularly important in the semiconductor and the power industries.
In addition to the Sievers product line, the Company offers a full line of TOC
monitors for process water and wastewater applications. The Company's other
instrument products, which are used both in the laboratory and on-line, measure
and detect, among other things, total carbon, sulfur, nitric oxide, chemical
oxygen demand and total oxygen demand. The Company also sells instruments for
the measurement of dissolved metals and specific chemical analyzers for ammonia,
phosphates, nitrates and chlorine.
With the acquisition of Ionics Agar Environmental in 1999, the Company now also
offers a line of instruments for the detection of thin layers of oil on water.
The Company's Leakwise(R) oil-on-water detection systems are used by a range of
industries from oil refining to power generation.
Other Information Concerning the Business of the Company
Raw Materials and Sources of Supply
All raw materials and parts and supplies essential to the business of the
Company can normally be obtained from more than one source. The Company produces
the membranes required for its equipment and systems that use the ED, EDR, MF,
UF, RO and EDI processes. Membranes used for the MF, UF and RO processes are at
times also purchased from outside suppliers and are normally available from
multiple sources. During 2000, the Company formed a joint venture with Toray
Industries, Inc. and Mitsui & Co. to manufacture and market RO membrane modules
for the desalination of seawater and brackish water using Toray's proprietary RO
manufacturing technology. Ionics has a 43% interest in the joint venture
company, Toray Membrane America, Inc. (TMA). In 2001, TMA commenced the
manufacture of RO membrane modules in space leased from the Company in
Watertown, MA.
8
Patents and Trademarks
The Company believes that its products, know-how, servicing network and
marketing skills are more significant to its business than trademarks or patent
protection of its technology. Nevertheless, the Company has a policy of applying
for patents both in the United States and abroad on inventions made in the
course of its research and development work for which a commercial use is
considered likely. The Company owns numerous United States and foreign patents
and trademarks and has issued licenses thereunder, and currently has additional
pending patent applications. Of the approximately 75 outstanding U.S. patents
held by the Company, a substantial portion involves membranes, membrane
technology and related separations processes such as ED and EDR, RO, UF and EDI.
The Company does not believe that any of its individual patents or groups of
related patents, nor any of its trademarks, is of sufficient importance that its
termination or abandonment, or the cancellation of licenses extending rights
thereunder, would have a material adverse effect on the Company.
Seasonality
The activities of the Company's businesses are not of a seasonal nature, other
than certain activities of the Consumer Products segment. Bleach products for
swimming pool use tend to increase during the summer months, while sales levels
for automobile windshield wash solution increase in the winter months.
Customers
The nature of the Company's business is such that it frequently has in progress
large contracts with one or more customers for specific projects; however, there
is no one customer whose purchases accounted for 10% or more of the revenues of
any business segment and whose loss would have a material adverse effect on the
Company and its subsidiaries taken as a whole.
Backlog
The Company's backlog of firm orders was $258,936,000 at December 31, 2001 and
$270,622,000 at December 31, 2000. For multi-year contracts, the Company
includes in reported backlog the revenues associated with the first five years
of the contract. For multi-year contracts, which are not otherwise included in
backlog, the Company includes in backlog up to one year of revenues. The Company
expects to fill approximately 55% of its December 31, 2001 backlog during 2002.
The Company does not believe that there are any seasonal aspects to its backlog
figures.
Government Contracts
The Company does not believe that any of its sales under U.S. Government
contracts or subcontracts during 2001 are subject to renegotiation. The Company
has not had adjustments to its negotiated contract prices, nor are any
proceedings pending for such adjustments.
Research and Development
The Company is actively engaged in research and development directed toward
products for use in water purification, processing and measurement, and
separations technology. The Company's research and development expenses were
approximately $6,420,000 in 2001, $7,980,000 in 2000, and $7,066,000 in 1999.
Competition
The Company experiences competition from a variety of sources with respect to
virtually all of its products, systems and services, although the Company knows
of no single entity that competes with it across the full range of its products
and services. Competition in the markets served by the Company is based on a
number of factors, which may include price, technology, applications experience,
know-how, availability of financing, reputation, product warranties,
reliability, service and distribution.
9
With respect to the Company's Equipment Business Group, there are a number of
companies, including several sizable chemical companies that manufacture
membranes, but not equipment. There are numerous smaller companies, primarily
fabricators, that build water treatment and desalination equipment, but which
generally do not have their own proprietary membrane technology. A limited
number of companies, some of which are larger than the Company, manufacture both
membranes and equipment. The Company has numerous competitors in its
conventional water treatment, instrument and fabricated products business lines.
In 2000, the International Desalination Association released a report providing
data regarding the manufacturers of desalination equipment. According to the
report, which covered land-based water desalination plants delivered or under
construction as of December 31, 1999, with a capacity to produce 100 cubic
meters (approximately 25,000 gallons) or more of fresh water daily, the Company
ranked first in terms of the cumulative number of such plants sold, having sold
more than the next three manufacturers combined. In addition, the Company ranked
first in the total capacity of such plants sold.
With respect to the Ultrapure Water Group business segment, the Company competes
with suppliers of ultrapure water services on an international, national and
regional basis, and with other manufacturers of membrane-related equipment.
With respect to the Company's Consumer Water Group business segment, most of the
Company's competitors in point-of-entry and point-of-use products for the home
are small assemblers, serving local or regional markets. However, there are also
several large companies competing nationally in these markets.
In the case of its silver-impregnated activated carbon product lines, the
Company knows of two competitors with which it competes on a national basis.
The Company competes with many suppliers of bleach and bleach-based cleaning
products and automobile windshield wash for the consumer market, a number of
which are much larger than the Company.
The Company is unable to state with certainty its relative market position in
all aspects of its business. Many of its competitors have financial and other
resources greater than those of the Company.
Environmental Matters
Continued compliance by the Company and its subsidiaries with federal, state and
local provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment is expected to have no
material effect upon expenditures, earnings or the competitive position of the
Company or any of its subsidiaries.
The Company was notified in 1992 that it is a potentially responsible party
(PRP) at a Superfund Site, Solvent Recovery Services of New England in
Southington, Connecticut (the "SRS Site"). Ionics' share of assessments to date
for site work and administrative costs totals approximately $71,000. The United
States Environmental Protection Agency ("EPA") has not yet issued a decision
regarding clean-up methods and costs. While it is too soon to predict the scope
and cost of the final remedy that the EPA will select, based upon the large
number of PRPs identified, the Company's small volumetric ranking (approximately
0.5%) and the identities of the larger PRPs, the Company believes that its
liability in this matter will not have a material effect on the Company or its
financial position.
By letter dated March 29, 2000, the Company and other PRPs for the SRS Site were
notified that they may also have potential liability with respect to the
Angelillo Property Superfund Site, also in Southington, Connecticut (the
"Angelillo Site"), because hazardous materials were allegedly shipped from the
SRS Site to the Angelillo Site. In April 2001, the Company and other PRPs
entered into a settlement agreement with respect to the Angelillo Site, under
which the Company made a final settlement payment of approximately $3,300.
The Company has never had a product liability claim grounded in environmental
liability, and believes that the nature of its products and business makes such
a claim unlikely.
Employees
The Company and its consolidated subsidiaries employ approximately 2,100 persons
on a full-time basis. None of the Company's employees are represented by unions
or have entered into workplace agreements with the Company, except for the
employees of the Company's Australian subsidiary and certain employees of the
Company's Spanish subsidiary. The Company considers its relations with its
employees to be good.
10
Executive Officers of the Registrant
The names, ages and positions of the Company's Executive Officers are as
follows:
Age as of Positions
Name March 1, 2002 Presently Held
---- ------------- --------------
Arthur L. Goldstein* 66 President, Chief Executive Officer
and Director since 1971; Chairman
of the Board since 1990
William E. Katz 77 Executive Vice President since 1983;
Director since 1961
Edward J. Cichon 47 Vice President, Equipment Business
Group since July 1998
Alan M. Crosby 49 Vice President, Consumer Water
Group since March 2000
Anthony Di Paola 35 Vice President and Corporate
Controller since May 2000
Gary W. Groom 51 Vice President, Project Finance and
Treasurer since December 2000
Stephen Korn 56 Vice President, General Counsel and
Clerk since 1989
Daniel M. Kuzmak 49 Vice President, Finance and Chief
Financial Officer since January 2001
William J. McMahon 46 Vice President, Ultrapure Water Group
since November 2000
Theodore G. Papastavros 68 Vice President since 1975; Vice
President, Strategic Planning since 1990
Michael W. Routh 54 Vice President, Instrument Business
Group since April 2000
-------------------------------
*Member of Executive Committee
There are no family relationships between any of the officers or directors.
Executive officers of the Company are appointed each year at the meeting of
directors held on the date of the annual meeting of shareholders. There are no
arrangements or understandings pursuant to which any executive officer was
selected.
Except for Messrs. Cichon, Di Paola, Groom, Kuzmak, McMahon and Routh, all of
the above executive officers have been employed by the Company in various
capacities for more than five years.
Prior to joining the Company in July, 1998, Mr. Cichon served as a Senior Vice
President of Metcalf & Eddy, Inc., a water and wastewater engineering and
services firm, where he was employed for 18 years.
Mr. Di Paola served in various finance and accounting positions with
Thyssen-Dover Elevator Company North America from 1997 until he joined the
Company, including as Corporate Controller from 1998 to 2000. Prior to 1997, he
served as Assistant Controller for Vector Health Systems, Incorporated.
Mr. Groom was employed by Raytheon Engineers & Constructors from 1994 until he
joined the Company in December 2000. He held the position of Vice President,
Project Finance and Development from 1994 to 1998.
Mr. Kuzmak joined the Company after 15 years with ABB and its U.S. subsidiary,
including serving as Chief Financial Officer of ABB Inc. (US) from 1998 to 2000,
and Vice President, Finance of ABB Nuclear Operations and ABB Nuclear Business
from 1995 to 1998.
Mr. McMahon served as President and Chief Executive Officer of Stone &
Webster/Sonat Energy Resources LLC from 1998 until he joined the Company;
President of Stone & Webster Energy Services from 1997 to 1998; and General
Manager/Environmental Systems of DB Riley Consolidated, Inc. from 1995 to 1997.
11
Mr. Routh served as President of the Baird Division of Thermo Instrument
Systems, Inc. from 1995 to 1997, and General Manager of the Spectroscopy
Division of BioRad Laboratories, Inc., from 1998 to March, 2000.
Foreign Operations
The Company's sales to customers in foreign countries primarily involve
desalination systems, ultrapure water systems, water and wastewater treatment
systems, Cloromat systems, products and services related to these foregoing
systems, instruments and bottled water. The Company seeks to minimize financial
risks relating to its international operations. Wherever possible, the Company
obtains letters of credit or similar payment assurances denominated in U.S.
dollars. If U.S. dollar payments cannot be obtained, the Company, where
appropriate, enters into foreign exchange contracts. The Company also uses
foreign sources for equipment parts and may borrow funds in local (foreign)
currencies to offset the asset risk of foreign currency devaluation. Net foreign
currency transaction (losses)/gains included in income before income taxes and
minority interest totaled $(555,000) in 2001, $(782,000) in 2000, and $11,000 in
1999.
The Company engages in certain foreign operations both directly and through the
following wholly owned subsidiaries: Aqua Design, Inc. (including its
subsidiaries and affiliates); Elite Chemicals Pty. Ltd.; Favourable Trading
Ltd.; Global Water Services, S.A.; Ionics Acapulco S.A.; Ionics Agar
Environmental Ltd.; Ionics Asia-Pacific Pte Ltd.; Ionics (Bermuda) Ltd.; Ionics
Constructors Trinidad, Ltd.; Ionics Foreign Sales Corporation Limited; Ionics
France S.A.; Ionics (Korea) Inc.; Ionics Iberica, S.A.; Ionics Italba, S.p.A.;
Ionics Nederland B.V.; Ionics Taiwan, Inc.; Ionics (U.K.) Limited; Ionics
Ventures Ltd. (U.K.); Ionics Watertec Pty. Ltd.; Resources Conservation Co.
International; and Separatech Ltd. In early 2002, the Company entered into a
letter of intent providing for the sale by its Spanish subsidiary of its 55%
ownership interest in Ionics Enersave Engineering Sdn Bhd, a Malaysian
corporation with subsidiary operations in China.
The Company also engages in various foreign operations through investments in
affiliated companies and joint venture relationships. The activities include the
production, sale and distribution of bottled water through a 40% owned affiliate
in Bahrain, a 40% owned affiliate in Saudi Arabia, and a 49% owned affiliate in
Kuwait.
In addition, the Company has a 26% ownership interest in Watlington Waterworks,
Limited in Bermuda. Watlington collects, treats and distributes water throughout
Bermuda for both potable and non-potable uses. The Company also has a 50%
ownership interest in Yuasa-Ionics Co., Ltd., Tokyo, Japan, which among its
activities serves as a distributor of certain of the Company's products in
Japan; and, through Ionics Iberica, S.A., a 20% interest in Grupo Empresarial de
Mejoramiento Ambiental, S. de R. L. de C. V., which provides water treatment
services in Mexico. Through its Italian subsidiary, the Company has a 75%
ownership interest in Agrinord S.r.l., an Italian company engaged in waste
treatment operations. In 1999, the Company acquired a controlling 50% interest
in Ionics Freshwater Ltd., a Barbados corporation which owns and operates a
major brackish water desalination facility in Barbados. In 2000, the Company
formed a joint venture with Toray Industries, Inc. and Mitsui & Co. (U.S.A.),
Inc. to manufacture and market RO membranes. The Company has a 43% ownership in
the joint venture company, Toray Membrane America, Inc. The Company also holds a
40% interest in Desalination Company of Trinidad and Tobago Ltd., which is
constructing and will own and operate a major seawater desalination facility in
Trinidad.
In 2001, the Company acquired a 25% interest in a Kuwaiti project company,
Utilities Development Company W.L.L. (UDC), which has been awarded a concession
agreement by an agency of the Kuwaiti government for the
12
construction, ownership and operation of a major membrane-based water reuse
facility in Kuwait. The Company will participate in the project as the membrane
system supplier and as a partner in operating the plant, in addition to being an
equity participant the Company and its Kuwaiti partner, which owns the majority
interest in UDC, anticipate that project financing will be obtained by mid-2002.
Further geographical and financial information concerning the Company's foreign
operations appears in Notes 1, 5, 9, 14, 15 and 16 to the Company's Consolidated
Financial Statements included as part of this Annual Report on Form 10-K,
starting at page 30.
Financial Information about Geographical Areas
Information with respect to this item is contained in Note 16 of Notes to
Consolidated Financial Statements at page 51 of this Annual Report on Form 10-K.
ITEM 2. PROPERTIES
The Company's executive offices are located in a Company-owned facility at 65
Grove Street, Watertown, Massachusetts. Manufacturing, assembly, engineering and
other operations are carried out in a number of domestic and international
locations. The following table provides certain information as to the Company's
principal general offices and manufacturing facilities:
13
Approximate Square Feet
Business Segment of Floor Space
--------------
Location Utilizing the Location Property Interest
-------- ---------------------- -----------------
Watertown, MA Equipment Business Group Owned 134,000
(headquarters) Instrument Business Group
Consumer Water Group
Ultrapure Water Group
Watertown, MA Equipment Business Group Owned 127,000
Bridgeville, PA Equipment Business Group Owned 77,000
Consumer Water Group
Canonsburg, PA Equipment Business Group Leased 88,000
Elkton, MD* Consumer Water Group Owned 234,000
Ludlow, MA Consumer Water Group Owned 129,000
San Jose, CA Ultrapure Water Group Owned 66,000
Boulder, CO Instrument Business Group Leased 74,000
Pico Rivera, CA Ultrapure Water Group Owned 68,000
Bellevue, WA Equipment Business Group Leased 21,000
Sydney, Australia** Equipment Business Group Owned 140,000
Brisbane, Australia Equipment Business Group Owned 38,000
Brisbane, Australia Ultrapure Water Group Leased 62,000
Milan, Italy Equipment Business Group Leased 18,000
Dallas, Texas Ultrapure Water Group Owned 12,000
Dallas, Texas Ultrapure Water Group Leased 9,000
Singapore Ultrapure Water Group Leased 9,000
--------------------
* This facility is not presently utilized by the Company for its operations.
** This facility presently is partially utilized by the Company for its
operations, and the balance is leased to a third party.
The Company also owns or leases smaller facilities in which its business
segments conduct business. The Company considers the business facilities that it
utilizes to be adequate for the uses to which they are being put.
14
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in the normal course of its business in various
litigation matters, some of which are in the pre-trial discovery stages. The
Company believes that none of the pending matters will have an outcome material
to the financial condition or business of the Company.
The Company was notified in 1992 that it is a potentially responsible party
(PRP) at a Superfund Site, Solvent Recovery Services of New England in
Southington, Connecticut (the "SRS Site"). Ionics' share of assessments to date
for site work and administrative costs totals approximately $71,000. The United
States Environmental Protection Agency ("EPA") has not yet issued a decision
regarding clean-up methods and costs. While it is too soon to predict the scope
and cost of the final remedy that the EPA will select, based upon the large
number of PRPs identified, the Company's small volumetric ranking (approximately
0.5%) and the identities of the larger PRPs, the Company believes that its
liability in this matter will not have a material effect on the Company or its
financial position.
By letter dated March 29, 2000, the Company and other PRPs for the SRS Site were
notified that they may also have potential liability with respect to the
Angelillo Property Superfund Site, also in Southington, Connecticut (the
"Angelillo Site"), because hazardous materials were allegedly shipped from the
SRS Site to the Angelillo Site. In April 2001, the Company and certain other
PRPs entered into a Settlement Agreement with the EPA with respect to the
Angelillo site, under which the Company made a settlement payment of
approximately $3,300.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
symbol ION. As of March 22, 2002, there were approximately 1,100 shareholders of
record. No cash dividends were paid in either 2001 or 2000 pursuant to the
Company's current policy to retain earnings for use in its business. Also, the
Company's principal domestic credit facility does not permit the payment by the
Company of cash dividends to its shareholders.
During the period January 1, 2000 to December 31, 2001, the range of high and
low sales prices of the common stock for each quarterly period was as follows:
2001 2000
----------------------------- ---------------------------
High Low High Low
-------------- -------------- ------------- -------------
First Quarter $30.94 $23.98 $37.69 $24.50
Second Quarter 31.57 23.40 30.63 20.63
Third Quarter 31.50 19.27 34.06 20.81
Fourth Quarter 31.85 21.44 29.44 18.19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five years
ended December 31, 2001, 2000, 1999, 1998 and 1997, are derived from the
Company's Consolidated Financial Statements. This data should be read in
conjunction with the Company's audited financial statements and related notes,
and with the Item entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
15
Consolidated Statement of Operations Data
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------
Dollars in Thousands
Except Per Share Amounts 2001 % 2000 % 1999 % 1998 % 1997 %
------------------------------------------------------------------------------------------------------------------------------------
Revenues $466,732 $100.0 $474,551 100.0 $358,217 100.0 $351,326 100.0 $352,469 100.0
(Loss) income before income taxes,
minority interest, and gain on
sale of business (16,631) (3.6) (2,224) (0.5) 29,731 8.3 32,883 9.4 43,222 12.3
Net income (loss) 44,701 9.6 (1,870) (0.4) 19,361 5.4 21,386 6.1 28,329 8.0
Earnings (loss) per basic share 2.61 (0.12) 1.20 1.33 1.78
Earnings (loss) per diluted share 2.59 (0.12) 1.18 1.31 1.73
Consolidated Balance Sheet Data
For the Years Ended December 31,
-------------------------------------------------------------------------------
Dollars in Thousands 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------
Current assets 378,791 252,862 193,802 187,093 165,850
Current liabilities 158,326 173,363 99,475 85,934 66,012
------------------------------------------------------------------------------------------------------------------------
Working capital 220,465 79,499 94,327 101,159 99,838
Total assets 633,313 585,813 500,906 452,123 406,736
Long-term debt and notes payable 10,126 10,911 8,351 1,519 804
Stockholders' equity 423,353 356,861 361,852 345,598 319,659
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is a leading water purification company engaged worldwide in the
supply of water and related services and of water treatment equipment through
the use of proprietary separations technologies and systems. The Company's
products and services are used by the Company or its customers to desalt
brackish water and seawater, to treat water in the home, to manufacture and
supply water treatment chemicals and ultrapure water, to process food products,
recycle and reclaim process water and wastewater, and to measure levels of
waterborne contaminants and pollutants. The Company's customers include
industrial companies, consumers, municipalities and other governmental entities
and utilities. The following discussion and analysis of financial condition and
results of operations refers to the activities of the Company's four business
groups, which comprise the Company's reportable operating segments. These groups
are the Equipment Business Group (EBG), Ultrapure Water Group (UWG), Consumer
Water Group (CWG) and Instrument Business Group (IBG). See Note 16 to the
consolidated financial statements for additional information regarding our four
business segments.
The EBG segment provides products and services for seawater and brackish water
desalination, water reuse and recycle, surface water treatment, zero liquid
discharge and fabricated products. Significant trends influencing the
desalination market include worldwide water shortages and the need for better
quality water in many parts of the world, as well as the reduced cost of
operation of modern desalination facilities. These factors have driven a trend
toward larger plants, and toward the purchase of services including operating
and maintenance contracts. Trends impacting the water reuse and recycle market
are similar, with membrane technology becoming more prevalent in reuse and
recycling applications. The surface water market has been influenced by
increased consumer awareness of and demand for higher quality water, as well as
regulatory pressures to reduce contaminants in water supplies. Membrane
technology is also becoming more prevalent in surface water applications. The
zero liquid discharge market has been influenced by regulatory pressures on
utilities to eliminate discharge of process water, and the fabricated products
market served by the Company includes demand for the storage of spent
nuclear-fuel rods as spent fuel pools at many nuclear facilities reach capacity.
The Company is positioned to be able to compete successfully in these markets,
although it faces substantially larger competitors in many of them.
16
The UWG segment provides equipment and services for the microelectronics, power,
and pharmaceutical industries, where high quality ultrapure water is required
for use in production processes, and is critical to ultimate product quality and
yield. The UWG segment has been heavily reliant upon microelectronics equipment
revenues, and the recent downturn in that sector has adversely impacted both
revenue and profitability in the UWG segment.
The CWG segment provides home water units for the treatment of water, and, until
the divestiture of the Aqua Cool Pure Bottled Water business in the U.S., U.K.
and France on December 31, 2001, the home office delivery market for bottled
water. CWG also produces bleach-based cleaning products and automobile
windshield wash solution. Trends in the home water market in which the Company
continues to operate include increased customer awareness of and demand for
higher quality water, along with reduced confidence in the quality of their own
water supplies.
The IBG segment serves microelectronics, power and pharmaceutical markets where
the measurement of water quality, including levels and types of contaminants in
process water, is critical to production processes. Similar to that of the UWG
segment, the performance of the IBG segment has been impacted by the downturn in
the microelectronics industry, although to a lesser extent than the UWG segment.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of
operations is based on the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of consolidated financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent liabilities. On an ongoing basis, the Company evaluates its
estimates, including those related to revenues, reserves for doubtful accounts,
income taxes, pensions, intangible assets, contingencies and litigation. The
Company bases its estimates on historical experience and on appropriate and
customary assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company's significant accounting policies are
described in Note 1 to the consolidated financial statements included in Item 8
of this Annual Report on Form 10-K. The Company has identified the policies
discussed below as critical to understanding its business and its results of
operations.
Revenue Recognition
For certain contracts involving customized equipment eligible for contract
accounting under American Institute of Certified Public Accountants ("AICPA")
Statement of Position No. 81-1, "Accounting for Performance of Construction-Type
and Certain Construction-Type Contracts" (SOP 81-1), revenue is recognized using
the percentage of completion accounting method based upon an efforts-expended
method. The nature of these contracts and the types of products and services
provided are considered in determining the proper accounting for a given
contract. Long-term, fixed-price contracts are recorded on a percentage of
completion basis using the cost-to-cost method of accounting where revenue is
recognized based on the ratio of costs incurred to estimated total costs at
completion. The Company follows this method since reasonably dependable
estimates of the costs of the total contract can be made. As a general rule,
sales and profits are recognized earlier under the cost-to-cost method of
percentage of completion accounting compared to the completed contract method.
Contract accounting requires significant judgment relative to assessing risks,
estimating contract costs and making related assumptions regarding schedules and
technical issues. Due to the size and nature of the Company's long-term
contracts, the estimation of cost at completion is complicated and subject to
numerous variables. Contract costs include material, labor, subcontracting and
other related costs. Assumptions must be made relative to the length of time to
complete the contract. With respect to contract change orders, claims or similar
items, judgment must be used in estimating related amounts and assessing the
potential for realization. Such amounts are only included in the contract value
when they can be reliably estimated and realization is reasonably assured,
generally upon receipt of a customer-approved change order. Given the
significance of the judgments and estimation processes described above, it is
likely that materially different amounts could be recorded if different
assumptions were used or if underlying circumstances were to change. The Company
closely monitors compliance and consistency of application of its critical
accounting policies related to contract accounting. In addition, reviews of the
status of contracts are performed through periodic contract status and
performance reviews. In all cases, changes to total estimated costs and
anticipated losses, if any, are recognized in the period in which determined.
17
For contracts involving the sale of equipment to a joint venture or other
affiliated entities in which the Company has an equity interest, the extent of
revenue and profit recognized during contract execution varies based on the
level of equity interest held by the Company. Generally, when the Company's
equity ownership in the affiliated customer is less than 20%, no revenue or
profit is deferred as the contract is executed. When the Company's equity
ownership is between 20% and 50%, provided that the Company does not control the
affiliated entity, the Company recognizes revenue as the contract is executed
but defers a portion of the profit equal to the Company's equity ownership
percentage in the entity. Upon completion of the contract, the resulting
deferred profit is amortized into revenue over the estimated useful life of the
equipment. When the Company's equity ownership exceeds 50%, or in instances
where the Company effectively controls the affiliated entity, no revenue or
profit is recognized as the contract is executed, and all profit on the contract
is deferred and amortized over the estimated useful life of equipment upon
completion of the contract. Regarding the Company's sale of equipment to
Desalcott (the project company) in connection with the Trinidad project
(discussed in this Item under "Financial Condition"), where the Company is a 40%
equity owner of Desalcott, since the Company is considered to have provided all
of the equity funding for the project either directly or through a loan to the
Company's local majority partner, the full amount of the equipment revenue
earned has been recognized as the contract is executed; however, all of the
profit has been deferred, and will be amortized over the estimated useful life
of the equipment upon completion of construction.
In addition to the construction and sale of customized equipment to its
customers, the Company also enters into contracts for desalination or water
treatment facilities which it "owns and operates" on behalf of its customers.
Under these contracts, where the Company remains the owner of the equipment,
revenue and profit is recognized as water quantities are sold to the customer.
The equipment constructed is capitalized by the Company, included in property,
plant and equipment, and amortized to cost of sales over the shorter of the
estimated useful life of the equipment or the contract term.
For sales of standard products and equipment not governed by SOP 81-1, such as
the sale of instruments and consumer water products, the Company follows the
guidance provided by the Securities and Exchange Commission's Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). The
Company does not recognize revenue unless there is persuasive evidence of an
arrangement, title and risk of loss has passed to the customer, delivery has
occurred or the services have been rendered, the sales price is fixed or
determinable and collection of the related receivable is reasonably assured. It
is the Company's policy to require an arrangement with its customers, either in
the form of a written contract or purchase order containing all of the terms and
conditions governing the arrangement, prior to the recognition of revenue. Title
and risk of loss generally passes to the customer at the time of delivery of the
product to a common carrier. At the time of the transaction, the Company
assesses whether the sale price is fixed or determinable and whether or not
collection is reasonably assured. The Company assesses whether the sale price is
fixed or determinable based upon the payment terms of the arrangement. If the
sales price is not deemed to be fixed, revenue is recognized as the amounts
become due from the customer. The Company does not generally offer a right of
return on its products and the products are generally not subject to customer
acceptance rights. The Company assesses collectibility based on a number of
factors, including past transaction and collection history with a customer and
the credit-worthiness of the customer. The Company performs ongoing credit
evaluations of its customers' financial condition but generally does not require
collateral from its customers. If the Company determines that collectibility of
the sales price is not reasonably assured, revenue is deferred until such time
as collection becomes reasonably assured, which is generally upon receipt of
payment from the customer. The Company's products are generally subject to
warranty, and related costs are provided for in cost of revenues when revenue is
recognized. While the Company engages in extensive product quality programs and
processes, the Company's warranty obligation is based upon historical product
failure rates and costs incurred in correcting a product failure. If actual
product failure rates or the costs associated with fixing failures differ from
historical rates, adjustments to the warranty liability may be required in the
period in which determined.
The Company provides lease financing to consumers for the purchase of certain
home water treatment systems. Prior to entering into the lease agreement, the
Company evaluates the creditworthiness of its customer and generally
collateralizes the lease receivable with a security interest in the customer's
personal residence. At the time the lease transaction is consummated, the
Company recognizes revenue for the full amount of the sales value of the
equipment and records a lease receivable on its balance sheet. Interest income
is recognized by the Company over the term of the lease based on the interest
rate stated in the lease. The Company evaluates the collectibility of its lease
receivables based on its historical loss experience and assessment of
prospective risk, and does so through ongoing reviews of its receivables
portfolio.
The Company provides support services to customers primarily through service
contracts, and the Company recognizes support service revenue primarily over the
term of the service contract or as services are rendered.
18
The Company also rents equipment to customers under short-term rental
agreements. The Company generally invoices customers monthly and recognizes
revenue over the rental period based on amounts billed. The rental equipment is
capitalized and depreciated to cost of revenues over its estimated useful life.
Reserve for Doubtful Accounts
The Company evaluates the adequacy of its reserve for doubtful accounts on an
ongoing basis through detailed reviews of its receivables portfolio. Estimates
are used in determining the Company's allowance for bad debts and are based on
historical collection experience, current trends including prevailing economic
conditions and adverse events that may affect a customer's ability to repay,
percentage of accounts receivable by aging category, and other factors such as
the financial condition of large customers. The Company makes adjustments to its
reserve if the evaluation of reserve requirements differs from the actual
aggregate reserve. This evaluation is inherently subjective because estimates
may be revised as more information becomes available. Reserves for doubtful
accounts are established through a charge to operations included in selling,
general and administrative expenses.
Accounting for Income Taxes
As part of the process of preparing consolidated financial statements, the
Company is required to estimate income taxes in each of the jurisdictions in
which it operates. This process involves the estimation of the Company's actual
tax liability in each jurisdiction together with an assessment of temporary
differences resulting from differing treatment of items for tax and book
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the consolidated balance sheet. The
Company must also assess the likelihood that any deferred assets will be
recovered, and must establish a valuation allowance to the extent that it
believes any recovery to be unlikely. To the extent the Company establishes a
valuation allowance, an expense will be recorded within the provision for income
taxes line in the statement of operations. At any time, the Company's provision
for income taxes could be impacted by changes in tax laws, or by administrative
actions or court rulings.
Testing for the Impairment of Goodwill and Long-Lived Assets
The Company assesses the impairment of identifiable intangibles, long-lived
assets and related goodwill whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors the Company considers
important which could indicate an impairment include significant
underperformance relative to historical or projected future operating results,
significant changes in the manner of the Company's use of the acquired asset or
the strategy for its overall business and significant negative industry or
economic trends. When the Company determines that the carrying value of
intangibles, long-lived assets and related goodwill may not be recoverable based
upon the existence of one or more of the above indicators of impairment, the
Company measures any impairment based on a projected discounted cash flow method
using a discount rate determined by Company management. Any resulting impairment
loss could have a material adverse impact on the Company's results of
operations, depending on the magnitude of the impairment. In 2001, as summarized
in Note 6 to the Consolidated Financial Statements, the Company recognized
impairment losses of approximately $13.1 million, which included approximately
$9.2 million to reduce the carrying value of assets held for sale in Malaysia,
$3.1 million of goodwill associated with previous acquisitions, and $0.7 million
associated with the residual value of bleach manufacturing equipment. On January
1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets"(FAS 142) that requires, among other things, the discontinuance of
goodwill amortization. At December 31, 2001, the Company had $19.3 million of
goodwill that will cease to be amortized. The Company is required to complete a
transitional goodwill impairment test by June 30, 2002.
19
Principles of Consolidation
The Company consolidates the balance sheet and results of operations of all
wholly and majority owned subsidiaries and controlled affiliates. The Company
also holds minority investments in certain private companies having
complementary or strategic operations in different geographical locations around
the world. These investments are included in investments in affiliates and
include investments accounted for under the equity method of accounting. Under
the equity method of accounting, which generally applies to investments that
represent a 20% to 50% ownership of the equity securities of the affiliates, the
Company's proportionate share of the earnings or losses of the affiliates is
included in equity income. Realization of the Company's investments in equity
securities may be affected by the affiliate's ability to obtain adequate funding
and execute its business plans, general market conditions, industry
considerations specific to the affiliate's business, and other factors. The
inability of an affiliate to obtain future funding or successfully execute its
business plan could adversely affect the Company's earnings in the periods
affected by those events. Future adverse changes in market conditions or poor
operating results of underlying investments could result in losses or in an
inability to recover the carrying value of the investments that may not be
reflected in an investment's current carrying value, thereby possibly requiring
an impairment charge in the future. The Company records an impairment charge
when it believes an investment has experienced a decline in value that is other
than temporary.
RESULTS OF OPERATIONS
Income from Operations - 2001 Compared to 2000
The Company reported consolidated revenues of $466.7 million and net income of
$44.7 million in 2001, compared to consolidated revenues of $474.6 million and a
net loss of $1.9 million in 2000. The increase in net income resulted primarily
from a pre-tax gain of $102.8 million on the sale of the Aqua Cool Pure Bottled
Water business in the U.S., U.K. and France. The results for 2001 were also
impacted by numerous other factors, which are further described by business
segment below.
In the EBG segment, income from operations was $6.0 million in 2001, compared to
$8.3 million in 2000. The decrease in earnings was primarily attributable to an
increase in completion cost estimates on several equipment contracts in the
Company's Ionics RCC division that had substantial civil construction scope. The
Company subsequently made a decision to minimize civil construction scope on new
contracts.
The UWG segment reported a loss of $8.8 million in 2001, compared to income from
operations of $3.2 million in 2000. The loss in 2001 was primarily attributable
to the operating losses of certain foreign subsidiaries and affiliates,
including our Malaysian affiliate (which is currently being held for sale), and
one of our Australian subsidiaries, which incurred operating losses as well as
impairment charges relating to goodwill of approximately $1.4 million. The UWG
segment was also significantly impacted by the continued downturn of the
microelectronics industry.
The CWG segment reported a loss from operations of $1.5 million in 2001 and
2000. The CWG segment includes the results of operations of the Aqua Cool Pure
Bottled Water business, which accounted for approximately $76.2 million in
revenues in 2001, and was sold by the Company to affiliates of Perrier on
December 31, 2001 (with the exception of the Company's interest in joint
ventures in Saudia Arabia, Kuwait and Bahrain). CWG results in 2001 were
impacted by losses incurred in the Aqua Cool business, in part due to the
efforts to ready that business for sale, losses in two home water locations
which the Company plans to restructure during 2002, and an impairment charge of
$0.7 million relating to the residual value of bleach manufacturing equipment.
These losses were partially offset by a gain on the sale of certain bottled
water assets earlier in the year.
The IBG segment reported income from operations of $0.9 million in 2001,
compared to $2.6 million in 2000. The decrease in income is primarily due to a
charge recorded for the impairment of goodwill of $1.7 million related to an
acquisition made in 1999.
20
The Company also recorded charges of approximately $9.2 million related to the
planned divestiture of its majority interest in its Malaysian affiliate. These
charges relate to the impairment of assets and the recognition of certain
obligations that the Company will retain after the divestiture is completed. The
Company expects the divestiture to be completed in the first half of 2002.
The Company's effective tax rate for 2001 was 49.0%, compared to 34.0% in 2000.
The increase in the effective tax rate for 2001 was caused primarily by the gain
on the sale of the Aqua Cool Pure Bottled Water business, which included
non-deductible goodwill, and by foreign losses, most significantly the losses
incurred by the Company's Malaysian affiliate, that were not benefited since
realization of those benefits was not likely.
Revenues - 2001 Compared to 2000
Consolidated revenues were $466.7 million in 2001, compared to $474.6 million in
2000. Revenues increased in both the EBG and the CWG segments, and decreased in
the UWG and IBG segments. EBG revenues of $207.9 million increased by 1.3% over
2000 revenues of $205.2 million. Total equipment revenues decreased slightly,
while supply business revenues increased over 2000. UWG revenues of $107.8
million decreased by 18.5% from 2000 revenues of $132.2 million. This decrease
is primarily the result of continued deterioration, both domestically and
internationally, in the Company's microelectronics equipment business, which
declined substantially from 2000 levels. CWG revenues of $124.0 million
increased by 14.4% over 2000 revenues of $108.3 million, reflecting increases in
the bottled water, home water and the bleach-based consumer product businesses.
IBG revenues of $27.0 million decreased by 6.1% from 2000 revenues of $28.8
million, also reflecting the further deterioration of the microelectronics
sector, which is an important customer for IBG products.
Revenues - 2000 Compared to 1999
Consolidated revenues were $474.6 million in 2000, compared with $358.2 million
in 1999. The increased revenues resulted from revenue growth across all four of
the Company's business segments. EBG revenues of $205.2 million increased by
45.9% over 1999 revenues of $140.7 million, reflecting increased capital
equipment revenues (including the desalination plant project in Trinidad, and
revenues on a large spent nuclear-fuel container contract in the Company's
fabricated products business). UWG revenues of $132.2 million increased by 41.3%
over 1999 revenues of $93.6 million, reflecting increased capital equipment
sales to the microelectronics industry, predominantly in the Far East. CWG
revenues of $108.3 million increased by 12.2% over 1999 revenues of $96.6
million, reflecting growth in both the domestic and European operations for Aqua
Cool and home water. IBG revenues of $28.8 million increased by 5.0% over 1999
revenues of $27.4 million, resulting primarily from increased sales to the
microelectronics industry.
Cost of Sales and Operating Expenses
2001 Compared to 2000
Cost of sales as a percentage of revenues was 73.1% and 73.8% in 2001 and 2000,
respectively, and overall Company gross margin was 26.9% and 26.2% in 2001 and
2000, respectively. Cost of sales as a percentage of revenue remained relatively
flat in the EBG segment, decreased in the CWG segment, and increased UWG and IBG
segments.
Cost of sales as a percentage of revenue for the EBG segment was 79.8% in 2001
compared to 80.2% in 2000, reflecting a continued high level of equipment
revenues which have lower gross margins than service revenues. The losses
incurred on several equipment contracts with civil construction scope previously
mentioned had an adverse impact the EBG cost of sales as a percentage of revenue
in 2001.
Cost of sales as a percentage of revenues for UWG increased to 82.0% in 2001
from 80.5% in 2000, reflecting cost increases incurred on projects executed by
the Company's Malaysian affiliate and one of the Company's Australian
subsidiaries. The continued downturn of the microelectronics industry also had
an adverse impact on both sales volume and profitability, as the utilization of
capacity decreased with reduced sales volume while certain components of costs
of revenues remained fixed.
Cost of sales as a percentage of revenue for CWG decreased to 59.7% in 2001 from
61.2% in 2000. Numerous factors impacted the CWG cost of sales percentage in
2001, including the gain on the sale of certain bottled water assets realized
earlier in the year offset by costs associated with readying the business for
sale in the second half of the year.
21
IBG cost of sales as a percentage of revenues increased to 48.0% in 2001 from
44.4% in 2000, primarily as a result of reduced sales volume levels caused by
the further deterioration of the microelectronics sector.
Operating expenses as a percentage of revenue increased to 29.9% in 2001 from
26.3% in 2000. The increase in 2001 reflects a significant shift in mix between
UWG, which has a lower operating expense component, and CWG, which has a
significantly higher operating expense component. Also, the operating expense
percentage was impacted by the asset impairment charges previously mentioned,
which include approximately $9.2 million relating to the planned divestiture of
the Company's majority interest in its Malaysian subsidiary, $3.1 million of
goodwill associated with previous acquisitions, and $0.7 million associated with
the residual value of bleach manufacturing equipment.
2000 Compared to 1999
Cost of sales as a percentage of revenues was 73.8% and 66.4% in 2000 and 1999,
respectively. Correspondingly, overall Company gross margin was 26.2% and 33.6%
in 2000 and 1999, respectively. The increase in cost of sales as a percentage of
revenues from 1999 to 2000 included increases in all four of the business
groups, and is attributable to several factors.
Cost of sales as a percentage of revenues for EBG increased to 80.2% in 2000
from 72.3% in 1999, reflecting a shift in business mix to lower margin capital
equipment, increased costs on certain long-term contracts, as well as
inventory-related charges and unrecoverable business development expenses
primarily relating to the Trinidad project.
Cost of sales as a percentage of revenues for UWG increased to 80.5% in 2000
from 75.5% in 1999, reflecting the continued competitive environment in the
microelectronics industry for ultrapure water capital equipment, as well as a
higher level of capital equipment sales than in 1999.
Cost of sales as a percentage of revenue for CWG increased to 61.2% in 2000 from
56.0% in 1999. Factors affecting this increase were primarily attributable to
increased fuel and labor costs associated with the bottled water group as well
as inventory-related charges that occurred late in 2000.
IBG cost of sales as a percentage of revenues increased to 44.4% in 2000 from
41.9% in 1999. The increase in cost of sales in 2000 was primarily attributable
to inventory charges incurred in 2000, relating to the relocation of the
Watertown, Massachusetts-based instrument group to Boulder, CO.
Operating expenses as a percentage of revenues increased to 26.3% in 2000
compared to 25.7% in 1999. The increase in 2000 compared to 1999 was
attributable to increased legal costs related primarily to the Company's
involvement in patent infringement lawsuits, as well as additional charges
relating to accounts receivable. Also, the Company recognized asset impairment
charges attributable to the Company's decision to abandon plans to commence
bleach-manufacturing operations in Elkton, Maryland and to write down the value
of goodwill associated with an acquisition made in 1996.
Interest, Equity Income, Gain on Sale of Aqua Cool Pure Bottled Water Business,
and Taxes
Interest income was $1.0 million in 2001, $1.3 million in 2000 and $1.0 million
in 1999. Interest expense, net of capitalized interest, was $5.2 million, $4.9
million and $0.7 million in 2001, 2000 and 1999, respectively. The interest
expense in 2001 reflected higher average borrowings (although at lower
prevailing rates) compared to 2000 and 1999. Borrowing levels in 2001 were
primarily attributable to continued investment in, and working capital
requirements of, the Trinidad project, as well as other working capital needs.
Equity income was $1.4 million in 2001, compared to $1.6 million and $1.1
million in 2000 and 1999, respectively. Equity income in 2001 related primarily
to two projects located in Mexico in which the Company has a 20% equity
interest.
The Company's effective tax rate was 49.0% in 2001, 34.0% in 2000 and 32.0% in
1999. The increase in the Company's effective tax rate in 2001 was primarily
attributable to the gain on the sale of the Aqua Cool Pure Bottled Water
business, which included non-deductible goodwill, and also to foreign losses,
most significantly the losses incurred by the Company's Malaysian affiliate,
that were not benefited since realization of those benefits was not likely.
Net income in 2001 of $44.7 million compares to a net loss of $1.9 million in
2000, and to net income of $19.4 million in 1999. Net income in 2001 included a
pre-tax gain of $102.8 million resulting from the sale of CWG's Aqua Cool Pure
Bottled Water businesses in the U.S., U.K. and France. (See Note 15.)
22
FINANCIAL CONDITION
At December 31, 2001, the Company had total assets of $633.3 million, compared
to total assets of $585.8 million at December 31, 2000. The increase in assets
reflects an increase in cash and cash equivalents of $152.8 million, primarily
attributable to the gain of $102.8 million on the receipt of approximately
$210.5 million in proceeds relating to the divestiture of the Aqua Cool Pure
Bottled Water business (an additional $10.0 million is being held in escrow
under the terms of the divestiture agreement). Accounts receivable decreased by
$28.4 million, inventories decreased by $1.9 million, and other current assets
decreased by $5.4 million from 2000 to 2001, primarily as a result of the Aqua
Cool divestiture and the treatment of the Malaysian subsidiary as "held for
sale." Deferred income taxes, increased by $9.4 million primarily because of
deferred tax benefits associated with the divestiture of the Aqua Cool Pure
Bottled Water business, and the planned divestiture of the Malaysian affiliate.
Notes receivable, long-term and current investments in affiliated companies
increased from 2000 to 2001 by $5.7 million and $5.5 million, respectively. This
was primarily attributable to the Company's investment in the Trinidad
desalination project and a loan to the majority equity participant. Net
property, plant and equipment decreased by $55.8, million primarily as a result
of the Aqua Cool divestiture, and the planned divestiture of the Malaysian
subsidiary held for sale. Capital expenditures during the year were $39.6
million. Other assets decreased by $32.2 million, primarily because of goodwill
associated with the divested Aqua Cool business, as well as goodwill impairment
charges for investments made in Malaysia, Australia and Israel.
At December 31, 2001 the Company had total liabilities of $210.0 million and
stockholders' equity of $423.4 million. Notes payable and current portion of
long-term debt decreased by $60.8 million, reflecting the pay-down of bank debt
upon receipt of the proceeds from the Aqua Cool sale, as well as the treatment
of the Malaysian subsidiary as held for sale. Accounts payable decreased by
$21.4 million, primarily as a result of the Trinidad project nearing completion,
and also the treatment of the Malaysian subsidiary as held for sale. Other
current liabilities increased by $67.1 million, reflecting accruals for tax
payments and sale price reserves relating to the Aqua Cool Pure Bottled Water
sale.
Working capital increased to $220.5 million at the end of 2001 compared to $79.5
million at the end of 2000, reflecting the proceeds from the divestiture of the
Aqua Cool business. The Company's current ratio correspondingly increased to 2.4
in 2001 from 1.5 in 2000.
Net cash provided by operating activities was $13.5 million in 2001, compared to
net cash provided by operating activities of $4.3 million in 2000. Compared to
2000, cash provided by operating activities increased by $9.3 million, despite a
reduction in net income after exclusion of the gain on the sale of the Aqua Cool
business and despite a reduction in accounts payable from the level at December
31, 2000. These impacts were offset by substantially smaller accounts receivable
growth in 2001 than occurred in 2000, and by additional non-cash charges
impacting net income compared to 2000 related to asset impairment and income tax
liabilities. Net cash provided by operating activities decreased by $26.2
million in 2000 compared to 1999, primarily due to a net loss in 2000, as well
as increased accounts receivable offset by increased accounts payable and
accrued expenses. Accounts receivable increases were attributable to increased
sales revenues, while the increases in accounts payable and accrued expenses
were primarily related to litigation-related charges accrued late in 2000.
Net cash provided by investing activities was $168.0 million in 2001 compared to
a use of cash of $44.8 million in 2000. The increase in cash provided by
investing activities in 2001 compared to 2000 reflects the proceeds from the
sale of the Aqua Cool Pure Bottled Water business, of $210.5 million, offset by
capital expenditures made during the year. Net cash used by investing activities
of $44.8 million in 2000 reflected capital expenditures and acquisitions
completed in 2000, offset by cash received from the sale of certain
manufacturing equipment to Toray Membrane America, Inc. (TMA), a 43% owned
affiliate of the Company. The Company spent $4.5 million in 2000 for
acquisitions, primarily in the bottled water segment. Net cash used by investing
activities of $71.3 million in 1999 was attributable to capital expenditures and
acquisitions completed in 1999. The Company spent $8.5 million in 1999 in
certain acquisitions. Capital expenditures in 1999 of $61.5 million were
generally made to expand the Company's bottled water operations, and to expand
or build additional manufacturing and "own and operate" facilities. Cash from
operations, borrowings of current and long-term debt and proceeds from stock
option exercises provided funds for these expenditures.
In 2001, net cash used by financing activities was $28.2 million, a change of
$81.3 million from the $53.2 million that was provided by financing activities
in 2000. This change resulted from the pay-down of short-term borrowings at
year-end utilizing the proceeds from the sale of the Aqua Cool Pure Bottled
23
Water business, which was partially offset by proceeds from the issuance of
stock of $21.8 million associated with a private placement of public equity
completed earlier in the year. In 2000, net cash provided by financing
activities was $53.2 million, a change of $27.1 million from the $26.1 million
that was provided by financing activities in 1999. The change resulted primarily
from the higher level of short-term borrowings at December 31, 2000 from
December 31, 1999. In 1999, net cash provided by financing activities was $26.1
million, which resulted primarily from increased short and long-term borrowings.
The Company maintains several domestic and foreign lines of credit. On June 29,
2001 the Company entered into a third amended and restated credit agreement with
Fleet National Bank (as lender and agent), Bank of America, N.A., the Chase
Manhattan Bank, and Mellon Bank, N.A. (the "Credit Agreement"). Under the terms
of the Credit Agreement, which supercedes the prior loan agreement with Fleet
National Bank, the Company was able to borrow up to $90.0 million, subject to
certain financial covenants, including a prohibition against the payment of cash
dividends. On December 21, 2001, the Credit Agreement was amended in connection
with obtaining a waiver from the lenders to permit the sale of the Company's
bottled water assets. Under the amended Credit Agreement, the borrowing limit
was reduced to $50 million and the maturity date was changed from December 31,
2004 to April 30, 2002. On March 27, 2002, the Company paid all outstanding
borrowings under the Credit Agreement. On March 28, 2002, the Credit Agreement
was further amended to reduce maximum borrowings to $30 million, extend its term
for a period of 364 days from the date of the amendment, eliminate and revise
certain of the financial and other covenants contained therein, and make Fleet
National Bank the sole lender.
Outstanding amounts under foreign lines of credit outstanding at December 31,
2001 were $7.7 million, excluding those for specific project financing. The
Company also has several facilities to accommodate its foreign trade
requirements. At December 31, 2001, the Company's controlled Barbados affiliate
had outstanding borrowings of $8.3 million in connection with the financing of a
Barbados desalination facility. (See Note 8.)
The Company believes that its cash on hand, lines of credit and foreign trade
facilities are adequate to meet its currently anticipated operational needs.
Significant expenditures in 2002 are anticipated to include capital expenditures
and investments in additional "own and operate" facilities.
Also during 2002, construction is expected to be completed on the Trinidad
desalination facility owned by Desalination Company of Trinidad and Tobago Ltd.
(Desalcott), in which the Company has a 40% equity interest. The Company has
loaned $10 million to the 60% equity owner, Hafeez Karamath Engineering Services
Ltd. (HKES), as the source of HKES' equity contribution, in addition to the $10
million contributed by the Company for its 40% equity interest. In 2000,
Desalcott entered into a "bridge loan" agreement with a Trinidad bank providing
$60 million in construction financing. Effective November 8, 2001, the loan
agreement was amended to increase maximum borrowings to $79.9 million. However,
the bridge loan plus the $20 million equity provided to Desalcott will not
provide sufficient funds to complete construction and commissioning of the
project. The Company has committed to lend up to $10 million to Desalcott to
complete the project once all bridge loan proceeds have been expended. Although
Desalcott has received proposals, including a term sheet, for long-term debt
financing, there is no assurance that such financing will be obtained on terms
acceptable to Desalcott.
During 2001, the Company acquired a 25% equity ownership interest in a Kuwaiti
project company, Utilities Development Company W.L.L., that was awarded a
concession agreement by an agency of the Kuwaiti government for the
construction, ownership and operation of wastewater reuse facility in Kuwait. At
December 31, 2001, the Company had deferred costs of approximately $1.0 million
relating primarily to preliminary project management and
24
initial design work on the project, and had invested $1.5 million in the project
company. Although the Company anticipates that long-term financing for the
project should be obtained by mid-2002, there is no assurance that such
financing will be obtained, and the Company would expense the deferred costs and
investment in the event financing is not obtained. Also in such event, the
Company could incur its 25% proportionate share of liability under a $28 million
performance bond issued on behalf of the project company.
Inflationary increases in material and labor costs remained moderate during the
last three years. The Company has been working to offset such cost increases by
redesigning its equipment to reduce costs. To the extent permitted by the
competitive environment, the Company has raised prices where appropriate.
Net periodic pension cost amounted to $1.3 million and $0.7 million for the
years ended December 31, 2001 and 2000, respectively. Related projected benefit
obligation amounted to $19.5 million and $15.8 million at December 31, 2001 and
2000, respectively. The increase in projected benefit obligation of $3.7 million
primarily reflects the decrease in the discount rate from 7.5% to 7.0%, as well
as the lower-than-expected return on plan assets in 2001 compared to 2000.
ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial
accounting and reporting for intangible assets acquired individually or with a
group of assets (but not those acquired in a business combination) at
acquisition. This Statement also addresses financial accounting and reporting
for goodwill and other intangible assets subsequent to their acquisition. The
provisions of this Statement are required to be applied with fiscal years
beginning after December 15, 2001. This Statement is required to be applied at
the beginning of an entity's fiscal year and to be applied to all goodwill and
other intangible assets recognized in its financial statements at that date.
Impairment losses for goodwill and indefinite-lived intangible assets that arise
due to the initial application of this Statement are to be reported as resulting
from a change in accounting principle. The Company has not yet determined what
effect, if any, the adoption of SFAS No. 142 will have on the Company's
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS No. 143 provides the
accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS No. 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. The Company is currently assessing SFAS No.
143 but does not believe it will have a material impact on its financial
position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets." This accounting standard, which is effective for
fiscal years beginning after December 31, 2001, requires that long-lived assets
that are to be disposed of by sale be measured at the lower of book value or
fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that can be distinguished from the rest of the entity and will be eliminated
from the ongoing operations of the entity in a disposal transaction. The effect
of adopting SFAS No. 144 is not expected to have a material impact on the
Company's financial position or results of operations.
RISKS AND UNCERTAINTIES
The Company may face significant risks from its international operations
The Company derives a significant portion of its revenues from international
operations, which involve a number of additional risks, including the following:
o impact of possible recessionary environments in economies outside the
United States;
o longer receivables collection periods and greater difficulty in
accounts receivable collection;
o exposure to foreign taxation;
o tariffs and other trade barriers;
o transportation delays;
o foreign currency exchange rate fluctuations;
o difficulties in staffing and managing foreign operations;
o unexpected changes in regulatory requirements;
o the burdens of complying with a variety of foreign laws and
regulations; and
o political and economic instability
25
The Company may face significant risks from participating in large "own and
operate" projects
There has been a worldwide trend in the desalination and water treatment markets
towards large-scale own and operate projects. The Company has made bids on a
number of large-scale desalination and other water treatment projects in a
number of countries, under a business structure in which the Company (usually
through a subsidiary) will be an equity participant, together with one or more
local partners, in a project company which will own and operate the water
treatment facility that is the subject of the bid. The project company, if its
bid is successful, typically will enter into a concession agreement with a
government entity or utility for the provision of water or water treatment
services over a defined long period at a defined price, subject to escalation.
The project company is usually responsible for obtaining construction and
long-term financing for the project, and bears the risk of being able to do so
once the concession agreement is awarded. Under this project structure, the
Company may also sell water treatment equipment to the project company and in
addition may provide certain operation and maintenance services in connection
with the long-term operation of the facility. When these projects are located
overseas, such as the Trinidad desalination project, the Company either directly
or as a result of its equity interest in the project company, is exposed to the
risks inherent in international operations, described above. In addition, the
Company's equity investment in such projects is subject to risk that the entity
purchasing the water or the services being rendered will have the necessary
financial wherewithal over the term of the contract to continue to make payments
to the project company, and the risk that the project company's bid properly
reflected long-term operating costs so as to be able to operate at a profit over
the term of the concession agreement.
The Company has only limited protection for its proprietary technology
The Company relies on a combination of patent, trademark and trade secret laws
and restrictions on disclosure to protect its intellectual property rights. The
Company's success depends in part on its ability to obtain new patents and
licenses and to preserve other intellectual property rights covering its
products. The Company intends to continue to seek patents on its inventions when
appropriate. The process of seeking patent protection can be time-consuming and
expensive, and there is no assurance that any new patent applications will be
approved, that any patents that may issue will protect the Company's
intellectual property or that any issued patents will not be challenged by third
parties or will be sufficient in scope or strength to provide meaningful
protection or any commercial advantage to the Company. Other parties may
independently develop similar or competing technology or design around any
patents that may be issued to the Company. The Company cannot be certain that
the steps it has taken will prevent the misappropriation of its intellectual
property, particularly in foreign countries where the laws may not protect
proprietary rights as fully as in the United States.
The Company may become subject to infringement claims
Although the Company does not believe that its products infringe the proprietary
rights of any third parties, the Company has in the past been subject to
infringement claims and third parties might assert infringement claims against
the Company or its customers in the future. Furthermore, the Company may
initiate claims or litigation against third parties for infringement of its
proprietary rights or to establish the validity of its proprietary rights.
Litigation, either as plaintiff or defendant, would cause the Company to incur
substantial costs and divert management resources. Any litigation, regardless of
the outcome, could harm the Company's business.
The Company has many competitors and may not be able to compete effectively
The Company experiences competition from a variety of sources with respect to
virtually all of its products and services, although the Company does not know
of any single entity that competes with it across the full range of its
products, systems and services. Competition in the markets served by the Company
is based on a number of factors, including price, technology, applications
experience, know-how, availability of financing, reputation, product warranties,
reliability, service and distribution. Many of the Company's current and
potential competitors have greater name recognition and substantially greater
financial, marketing and other resources than does the Company. These greater
resources could, for example, allow the Company's competitors to develop
technology, products and services superior to those of the Company. As a result,
the Company may not be able to compete effectively with current or future
competitors.
The Company may not be able to develop the new products or acquire the rights to
new products necessary to remain competitive
26
The water purification industry is characterized by ongoing technological
developments and changing customer requirements. As a result, the Company's
success and continued growth depend, in part, on its ability to develop or
acquire rights to, and successfully introduce into the marketplace, enhancements
of existing products or new products that incorporate technological advances,
meet customer requirements and respond to products developed by competitors.
There can be no assurance that the Company will be successful in developing or
acquiring such rights to products on a timely basis or that such products will
adequately address the changing needs of the marketplace.
The Company may not be able to adapt to changes in technology and government
regulation fast enough to remain competitive
The water purification industry is characterized by changing technology,
competitively imposed process standards and regulatory requirements, each of
which influences the demand for the Company's products and services. Changes in
legislative, regulatory or industrial requirements may render certain of the
Company's purification products and processes obsolete. Acceptance of new
products may also be affected by the adoption of new government regulations
requiring stricter standards. The Company's ability to anticipate changes in
technology and regulatory standards and to develop and introduce new and
enhanced products successfully on a timely basis will be a significant factor in
its ability to grow and to remain competitive. There can be no assurance that
the Company will be able to achieve the technological advances that may be
necessary to remain competitive or that certain of the Company's products will
not become obsolete. In addition, the Company is subject to the risks generally
associated with new product introductions and applications, including lack of
market acceptance, delays in development or failure of products to operate
properly.
A portion of the Company's sales is dependent upon its customers' spending
cycles for capital equipment
The sale of capital equipment within the water purification industry is cyclical
and influenced by various economic factors including interest rates and general
fluctuations of the business cycle. The Equipment Business Group and Ultrapure
Water Group each derive a significant portion of its revenue from the sale of
capital equipment. While the Company sells capital equipment to customers in
diverse industries and in domestic and international markets, cyclicality of
capital equipment sales and general economic conditions could have an adverse
effect on the Company's revenues and profitability. For example, in the past
several years, conditions in the microelectronics industry have negatively
affected sales of equipment by the Ultrapure Water Group to customers in that
industry.
The Company must comply with significant environmental regulations, which can be
difficult and expensive
The Company is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of hazardous
materials used in certain of its manufacturing processes. Although the Company
believes that its activities conform to presently applicable environmental
regulations, the failure to comply with present or future regulations could
result in fines being imposed, suspension of production or a cessation of
operations. Any failure to control the use of, or adequately restrict the
discharge of, hazardous substances, or otherwise comply with environmental
regulations, could subject the Company to significant future liabilities. In
addition, there is no assurance that past use or disposal of environmentally
sensitive materials in conformity with then existing environmental laws and
regulations will not result in remediation or other significant liabilities
under current or future environmental laws or regulations.
The Company relies significantly upon certain key individuals, and its business
may suffer if it is unable to retain them.
The Company has been and is presently dependent upon the continued efforts of
our senior management team, including Arthur L. Goldstein, Chairman, President
and Chief Executive Officer. The loss of the services of Mr. Goldstein or any
other members of the senior management team could have a material adverse effect
on the Company's ability to achieve its objectives.
Higher interest rates may hurt the Company financially
The Company engages in short-term and long-term borrowing, some of which is
subject to interest rates that float with U.S. prime rates or foreign rates.
This borrowing subjects the Company to the risk that interest rates may increase
significantly and increase the cost of such borrowing.
27
If the Company is unable to continue to hire and retain skilled technical and
scientific personnel, it will have trouble developing products
The Company's success depends largely upon the continued service of its
management and scientific staff and its ability to attract, retain and motivate
highly skilled scientific, management and marketing personnel. The Company faces
significant competition for such personnel from other companies, research and
academic institutions, government and other organizations which may better be
able to attract such personnel. The loss of key personnel or the Company's
inability to hire and retain personnel who have technical and scientific
backgrounds could materially adversely affect its product development efforts
and business.
FORWARD-LOOKING INFORMATION
Derivative Instruments
In 2001, the Company's Italian subsidiary entered into a series of
U.S.dollar/euro options contracts with the intent of offsetting the foreign
exchange risk associated with forecasted cash flows related to an ongoing
project. These options contracts were not entered into for trading purposes. In
accordance with the restrictions set forth in SFAS 133, the contracts do not
qualify for hedge accounting treatment. The fair market value of the contracts
is recorded as a liability of $1.2 million in the other current liabilities
section of the Consolidated Balance Sheet. End-of-period changes in the market
value of the contracts are reflected in the selling, general and administrative
expenses in the Consolidated Statement of Operations. A hypothetical weakening
of the euro by 10% against the U.S. dollar would result in an additional loss in
fair market value of $1.5 million. In addition, the Company periodically enters
into foreign exchange contracts to hedge certain operational and balance sheet
exposures against changes in foreign currency exchange rates. With the exception
of the options contracts described above, the Company had no foreign exchange
contracts outstanding at December 31, 2001 and 2000.
Market Risk
The Company's primary market risk exposures are in the areas of interest rate
risk and foreign currency exchange rate risk. The Company's investment portfolio
of cash equivalents is subject to interest rate fluctuations, but the Company
believes this risk is not material due to the short-term nature of these
investments. At December 31, 2001, the Company had $14.3 million of short-term
debt and $10.1 million of long-term debt outstanding. The major portion of this
debt has variable interest rates and, therefore is subject to interest rate
risk. However, a hypothetical increase of 10% in these interest rates for a
one-year period would result in additional interest expense that would not be
material in the aggregate. The Company's net foreign currency exchange loss was
$0.6 million in 2001 compared to a loss of $0.8 million in 2000 and a gain of
$11,000 in 1999. The Company's exposure to foreign currency exchange rate
fluctuations is moderated by the fact that the operations of its international
subsidiaries are primarily conducted in their respective local currencies. Also,
in certain situations, the Company will consider entering into forward exchange
contracts to mitigate the impact of foreign currency exchange fluctuations.
Safe Harbor Statement under Private Securities Litigation Reform Act of 1995
The Company's future results of operations and certain statements contained in
this report, including, without limitation, "Management's Discussion and
Analysis of Results of Operations and Financial Condition," constitute
forward-looking statements. Such statements are based on management's current
views and assumptions and involve risks, uncertainties and other factors that
could cause actual results to differ materially from management's current
expectations. Among these factors are the matters described under "Risks and
Uncertainties" in this Item, business conditions and the general economy;
competitive factors, such as acceptance of new products and price pressures and
competition from companies larger than the Company; risk of nonpayment of
accounts receivable; risks associated with foreign operations; risks involved in
litigation; regulations and laws affecting business in each of the Company's
markets; market risk factors, as described above under "Derivative Instruments"
and "Market Risk;" and other risks and uncertainties described from time to time
in the Company's filings with the Securities and Exchange Commission.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Derivative Instruments
In 2001, the Company's Italian subsidiary entered into a series of
U.S.dollar/euro options contracts with the intent of offsetting the foreign
exchange risk associated with forecasted cash flows related to an ongoing
project. These options contracts were not entered into for trading purposes. In
accordance with the restrictions set forth in SFAS 133, the contracts do not
qualify for hedge accounting treatment. The fair market value of the contracts
is recorded as a liability of $1.2 million in the other current liabilities
section of the Consolidated Balance Sheet. End-of-period changes in the market
28
value of the contracts are reflected in the selling, general and administrative
expenses in the Consolidated Statement of Operations. A hypothetical weakening
of the euro by 10% against the U.S. dollar would result in an additional loss in
fair market value of $1.5 million. In addition, the Company periodically enters
into foreign exchange contracts to hedge certain operational and balance sheet
exposures against changes in foreign currency exchange rates. With the exception
of the options contracts described above, the Company had no foreign exchange
contracts outstanding at December 31, 2001 and 2000.
Market Risk
The Company's primary market risk exposures are in the areas of interest rate
risk and foreign currency exchange rate risk. The Company's investment portfolio
of cash equivalents is subject to interest rate fluctuations, but the Company
believes this risk is not material due to the short-term nature of these
investments. At December 31, 2001, the Company had $14.3 million of short-term
debt and $10.1 million of long-term debt outstanding. The major portion of this
debt has variable interest rates and, therefore is subject to interest rate
risk. However, a hypothetical increase of 10% in these interest rates for a
one-year period would result in additional interest expense that would not be
material in the aggregate. The Company's net foreign currency exchange loss was
$0.6 million in 2001 compared to a loss of $0.8 million in 2000 and a gain of
$11,000 in 1999. The Company's exposure to foreign currency exchange rate
fluctuations is moderated by the fact that the operations of its international
subsidiaries are primarily conducted in their respective local currencies. Also,
in certain situations, the Company will consider entering into forward exchange
contracts to mitigate the impact of foreign currency exchange fluctuations.
29
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IONICS, INCORPORATED
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
Report of Independent Accountants............................................................. 31
Financial Statements:
Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000,
and 1999............................................................................... 32
Consolidated Balance Sheets as of December 31, 2001 and 2000............................ 33
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000,
and 1999................................................................................ 34
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
2001, 2000, and 1999.................................................................... 35
Notes to Consolidated Financial Statements.............................................. 36
Supporting Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts......................................... 55
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Ionics, Incorporated:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Ionics, Incorporated and its subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
March 20, 2002, except for the first
paragraph of Note 8, as to which the
date is March 28, 2002
31
Consolidated Statements of Operations
--------------------------------------------------------------------------------------------------------------------
For the years ended December 31
--------------------------------------------------------------------------------------------------------------------
Amounts in Thousands, Except per Share Amounts 2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
Revenues:
Equipment Business Group $ 207,927 $ 205,181 $140,655
Ultrapure Water Group 107,814 132,236 93,562
Consumer Water Group 123,951 108,324 96,569
Instrument Business Group 27,040 28,810 27,431
--------------------------------------------------------------------------------------------------------------------
466,732 474,551 358,217
--------------------------------------------------
Costs and expenses:
Cost of sales of Equipment Business Group 165,850 164,556 101,744
Cost of sales of Ultrapure Water Group 88,407 106,498 70,636
Cost of sales of Consumer Water Group 74,044 66,327 54,052
Cost of sales of Instrument Business Group 12,979 12,794 11,500
Research and development 6,420 7,980 7,066
Selling, general and administrative 119,837 113,222 84,892
Impairment of long-lived assets 13,069 3,398 -
--------------------------------------------------------------------------------------------------------------------
480,606 474,775 329,890
--------------------------------------------------
(Loss) income from operations (13,874) (224) 28,327
Interest income 1,013 1,286 961
Interest expense (5,166) (4,909) (668)
Equity income 1,396 1,623 1,111
--------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes, minority interest,
and gain on sale of business (16,631) (2,224) 29,731
Gain on sale of Aqua Cool business 102,834 - -
(Provision) benefit for income taxes (42,239) 756 (9,522)
--------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest 43,964 (1,468) 20,209
Minority interest in (losses) earnings (737) 402 848
Net income (loss) $ 44,701 $ (1,870) $ 19,361
====================================================================================================================
Earnings (loss) per basic share $ 2.61 $ (0.12) $ 1.20
====================================================================================================================
Earnings (loss) per diluted share $ 2.59 $ (0.12) $ 1.18
====================================================================================================================
Shares used in basic earnings per share calculations 17,106 16,243 16,148
Shares used in diluted earnings per share calculations 17,246 16,243 16,388
The accompanying notes are an integral part of these financial statements.
32
Consolidated Balance Sheets
---------------------------------------------------------------------------------------------------------------
At December 31
---------------------------------------------------------------------------------------------------------------
Dollars in Thousands, Except Share Amounts 2001 2000
---------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 178,283 $ 25,497
Short-term investments 21 1,105
Notes receivable, current 4,892 4,741
Accounts receivable 134,270 162,711
Receivables from affiliated companies 1,184 792
Inventories 32,813 34,701
Other current assets 11,031 16,443
Deferred income taxes, current 16,297 6,872
---------------------------------------------------------------------------------------------------------------
Total current assets 378,791 252,862
---------------------------------------------------------------------------------------------------------------
Notes receivable, long-term 23,210 17,502
Investments in affiliated companies 23,798 18,310
Property, plant and equipment, net 167,032 222,843
Deferred income taxes, long-term 12,643 14,224
Other assets 27,839 60,072
---------------------------------------------------------------------------------------------------------------
Total assets $ 633,313 $ 585,813
===============================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term debt $ 14,257 $ 75,045
Accounts payable 34,640 56,014
Other current liabilities 109,429 42,304
---------------------------------------------------------------------------------------------------------------
Total current liabilities 158,326 173,363
---------------------------------------------------------------------------------------------------------------
Long-term debt and notes payable 10,126 10,911
Deferred income taxes 34,199 38,681
Other liabilities 7,309 5,997
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, par value $1, authorized shares: 55,000,000
in 2001 and 2000; issued and outstanding: 17,477,005 in
2001 and 16,369,029 in 2000. 17,477 16,369
Additional paid-in capital 188,555 162,114
Retained earnings 242,317 197,616
Accumulated other comprehensive loss (24,996) (19,238)
---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 423,353 356,861
---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 633,313 $ 585,813
===============================================================================================================
The accompanying notes are an integral part of these financial statements.
33
Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------
For the years ended December 31
-----------------------------------------------------------------------------------------------------
Dollars in Thousands 2001 2000 1999
-----------------------------------------------------------------------------------------------------
Operating activities:
Net income (loss) $ 44,701 $ (1,870) $19,361
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 33,152 30,948 26,464
Amortization of intangibles 2,787 2,847 2,333
Impairment of long-lived assets 13,069 3,398 -
Gain on sale of Aqua Cool business (102,834) - -
Provision for losses on accounts and notes receivable 4,632 5,204 2,643
Equity in earnings of affiliates (1,396) (1,623) (1,111)
Deferred income tax provision (benefit) - (2,092) 3,723
Compensation expense on restricted stock awards - 36 108
Changes in assets and liabilities,
net of effects of businesses divested and acquired:
Notes receivable (6,538) (7,913) (3,539)
Accounts receivable (1,731) (48,579) (11,405)
Inventories (2,084) (1,240) (2,081)
Other current assets 3,566 (905) (6,837)
Investments in affiliates 1,445 3,516 478
Deferred income tax assets (7,844) (16,366) (4,729)
Accounts payable and accrued expenses (9,516) 22,758 (1,640)
Income taxes payable 45,735 15,260 5,234
Other (3,636) 878 1,502
-----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,508 4,257 30,504
----------------------------------------
Investing activities:
Additions to property, plant and equipment (39,607) (41,211) (61,515)
Disposals of property, plant and equipment 2,137 11,464 2,177
Additional investments in affiliates (5,462) (9,588) (3,599)
Sale and maturity of short-term investments - - 164
Proceeds from sale of Aqua Cool 210,476 - -
Purchase of short-term investments 413 (931) -
Acquisitions, net of cash acquired - (4,491) (8,513)
-----------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 167,957 (44,757) (71,286)
----------------------------------------
Financing activities:
Principal payments on current debt (171,343) (97,891) (10,393)
Proceeds from borrowings of current debt 116,476 145,508 28,762
Principal payments on long-term debt (1,390) (2,827) (756)
Proceeds from borrowings of long-term debt 1,294 5,666 7,093
Proceeds from issuance of common stock 21,814 - -
Proceeds from stock option plans 4,990 2,734 1,424
----------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (28,159) 53,190 26,130
----------------------------------------
Effect of exchange rate changes on cash (520) (362) (949)
----------------------------------------
Net change in cash and cash equivalents 152,786 12,328 (15,601)
Cash and cash equivalents at end of prior year 25,497 13,169 28,770
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of current year $ 178,283 $25,497 $13,169
=====================================================================================================
The accompanying notes are an integral part of these financial statements.
34
Consolidated Statements of Stockholders' Equity
----------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Total
Paid-In Retained Comprehensive Unearned Stockholders'
Dollars in Thousands Shares Par Value Capital Earnings Loss Compensation Equity
----------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 16,116,649 $ 16,117 $ 157,571 $ 179,943 $ (7,889) $ (144) $ 345,598
Comprehensive income:
Net income - - - 19,361 - - 19,361
Translation adjustments, (tax $2,497) - - - - (5,016) - (5,016)
-----------
-----------
Total comprehensive income 14,345
-----------
-----------
Stock options exercised 82,033 82 1,258 - - - 1,340
Tax benefit of stock option activity - - 377 - - - 377
Shares issued to directors 2,801 2 82 - - - 84
Amortization of unearned compensation - - - - - 108 108
----------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 16,201,483 16,201 159,288 199,304 (12,905) (36) 361,852
Comprehensive income:
Net loss - - - (1,870) - - (1,870)
Translation adjustments, (tax $2,227) - - - - (6,333) - (6,333)
-----------
-----------
Total comprehensive loss (8,203)
-----------
-----------
Stock options exercised 163,200 164 2,570 - - - 2,734
Tax benefit of stock option activity - - 156 - - - 156
Shares issued to directors 4,346 4 100 - - - 104
Restricted stock shares issued 17,937 18 - - - - 18
Restricted stock shares forfeited (17,937) (18) - - - - (18)
Adjustment of equity ownership - - - 182 - - 182
Amortization of unearned compensation - - - - - 36 36
----------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 16,369,029 16,369 162,114 197,616 (19,238) - 356,861
Comprehensive income:
Net income - - - 44,701 - - 44,701
Other comprehensive income, net of tax;
Translation adjustments (tax $974) - - - - (4,112) - (4,112)
Minimum pension liability
adjustment (tax $1,009) - - - - (1,646) - (1,646)
-----------
-----------
Total comprehensive income 38,943
-----------
-----------
Stock options exercised 228,650 229 4,761 - - - 4,990
Tax benefit of stock option activity 641 - - - 641
Shares issued to directors 4,326 4 100 - - - 104
Shares issued for private placement 875,000 875 20,939 - - - 21,814
----------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2001 17,477,005 $ 17,477 $ 188,555 $ 242,317 $ (24,996) $ - $ 423,353
============================================================================================================================
The accompanying notes are an integral part of these financial statements.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Operations
The Company is involved worldwide in the manufacture and sale of membranes,
equipment for the purification, concentration, treatment and analysis of water
and wastewater, in the supply of purified water, food and chemical products, and
in the sale of home water purification equipment. Principal markets include the
United States, Europe and Asia, as well as other international markets.
Basis of Presentation
Certain prior year amounts have been reclassified to conform to the current year
presentation with no impact on net income.
Principles of Consolidation
The Company consolidates the balance sheet and results of operations of all
wholly and majority owned subsidiaries and controlled affiliates. The Company
also holds minority investments in certain private companies having
complementary or strategic operations in different geographical locations around
the world. These investments are included in investments in affiliates and
include investments accounted for at cost and under the equity method of
accounting. Under the equity method of accounting, which generally applies to
investments that represent a 20 to 50 percent ownership of the equity securities
of the affiliates, the Company's proportionate share of the earnings or losses
of the affiliates is included in equity income. Realization of the Company's
investments in equity securities may be affected by the affiliate's ability to
obtain adequate funding and execute its business plans, general market
conditions, industry considerations specific to the affiliate's business, and
other factors. The inability of an affiliate to obtain future funding or
successfully execute its business plan could adversely affect the Company's
earnings in the periods affected by those events. Future adverse changes in
market conditions or poor operating results of underlying investments could
result in losses or in an inability to recover the carrying value of the
investments that may not be reflected in an investment's current carrying value,
thereby possibly requiring an impairment charge in the future. The Company
records an impairment charge when it believes an investment has experienced a
decline in value that is other-than-temporary.
Revenue Recognition
For certain contracts involving customized equipment eligible for contract
accounting under American Institute of Certified Public Accountants ("AICPA")
Statement of Position No. 81-1, "Accounting for Performance of Construction-Type
and Certain Construction-Type Contracts" (SOP 81-1), revenue is recognized using
the percentage of completion accounting method based upon an efforts-expended
method. The nature of these contracts and the types of products and services
provided are considered in determining the proper accounting for a given
contract. Long-term, fixed-price contracts are recorded on a percentage of
completion basis using the cost-to-cost method of accounting where revenue is
recognized based on the ratio of costs incurred to estimated total costs at
completion. The Company follows this method since reasonably dependable
estimates of the costs of the total contract can be made. As a general rule,
sales and profits are recognized earlier under the cost-to-cost method of
percentage of completion accounting compared to the completed contract method.
Contract accounting requires significant judgment relative to assessing risks,
estimating contract costs and making related assumptions regarding schedules and
technical issues. Due to the size and nature of the Company's long-term
contracts, the estimation of cost at completion is complicated and subject to
numerous variables. Contract costs include material, labor, subcontracting and
other related costs. Assumptions must be made relative to the length of time to
complete the contract. With respect to contract change orders, claims or similar
items, judgment must be used in estimating related amounts and assessing the
potential for realization. Such amounts are only included in the contract value
when they can be reliably estimated and realization is reasonably assured,
generally upon receipt of a customer-approved change order. Given the
significance of the judgments and estimation processes described above, it is
likely that materially different amounts could be recorded if different
assumptions were used or if underlying circumstances were to change. The Company
closely monitors compliance and consistency of application of its critical
accounting policies related to contract accounting. In addition, reviews of the
status of contracts are performed through periodic contract status and
performance reviews. In all cases, changes to total estimated costs and
anticipated losses, if any, are recognized in the period in which determined.
36
For contracts involving the sale of equipment to a joint venture or other
affiliated entities in which the Company has an equity interest, the extent of
revenue and profit recognized during contract execution varies based on the
level of equity interest held by the Company. Generally, when the Company's
equity ownership in the affiliated customer is less than 20%, no revenue or
profit is deferred as the contract is executed. When the Company's equity
ownership is between 20% and 50%, provided that the Company does not control the
affiliated entity, the Company recognizes revenue as the contract is executed
but defers a portion of the profit equal to the Company's equity ownership
percentage in the entity. Upon completion of the contract, the resulting
deferred profit is amortized into revenue over the estimated useful life of the
equipment. When the Company's equity ownership exceeds 50%, or in instances
where the Company effectively controls the affiliated entity, no revenue or
profit is recognized as the contract is executed, and all profit on the contract
is deferred and amortized over the estimated useful life of equipment upon
completion of the contract. Regarding the Company's sale of equipment to
Desalcott (the project company) in connection with the Trinidad project, where
the Company is a 40% equity owner of Desalcott, since the Company is considered
to have provided all of the equity funding for the project either directly or
through a loan to the Company's local majority partner, the full amount of the
equipment revenue earned has been recognized as the contract is executed;
however, all of the profit has been deferred, and will be amortized over the
estimated useful life of the equipment upon completion of construction.
In addition to the construction and sale of customized equipment to its
customers, the Company also enters into contracts for desalination or water
treatment facilities which it "owns and operates" on behalf of its customers.
Under these contracts, where the Company remains the owner of the equipment,
revenue and profit is recognized as water quantities are sold to the customer.
The equipment constructed is capitalized by the Company, included in property,
plant and equipment, and amortized to cost of sales over the shorter of the
estimated useful life of the equipment or the contract term.
For sales of standard products and equipment not governed by SOP 81-1, such as
the sale of instruments and consumer water products, the Company follows the
guidance provided by the Securities and Exchange Commission's Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). The
Company does not recognize revenue unless there is persuasive evidence of an
arrangement, title and risk of loss has passed to the customer, delivery has
occurred or the services have been rendered, the sales price is fixed or
determinable and collection of the related receivable is reasonably assured. It
is the Company's policy to require an arrangement with its customers, either in
the form of a written contract or purchase order containing all of the terms and
conditions governing the arrangement, prior to the recognition of revenue. Title
and risk of loss generally passes to the customer at the time of delivery of the
product to a common carrier. At the time of the transaction, the Company
assesses whether the sale price is fixed or determinable and whether or not
collection is reasonably assured. The Company assesses whether the sale price is
fixed or determinable based upon the payment terms of the arrangement. If the
sales price is not deemed to be fixed, revenue is recognized as the amounts
become due from the customer. The Company does not generally offer a right of
return on its products and the products are generally not subject to customer
acceptance rights. The Company assesses collectibility based on a number of
factors, including past transaction and collection history with a customer and
the credit-worthiness of the customer. The Company performs ongoing credit
evaluations of its customers' financial condition but generally does not require
collateral from its customers. If the Company determines that collectibility of
the sales price is not reasonably assured, revenue is deferred until such time
as collection becomes reasonably assured, which is generally upon receipt of
payment from the customer. The Company's products are generally subject to
warranty, and related costs are provided for in cost of sales when revenue is
recognized. While the Company engages in extensive product quality programs and
processes, the Company's warranty obligation is based upon historical product
failure rates and costs incurred in correcting a product failure. If actual
product failure rates or the costs associated with fixing failures differ from
historical rates, adjustments to the warranty liability may be required in the
period in which determined.
The Company provides lease financing to consumers for the purchase of certain
home water treatment systems. Prior to entering into the lease agreement, the
Company evaluates the creditworthiness of its customer and generally
collateralizes the lease receivable with a security interest in the customer's
personal residence. At the time the lease transaction is consummated, the
Company recognizes revenue for the full amount of the sales value of the
equipment and records a lease receivable on its balance sheet. Interest income
is recognized by the Company over the term of the lease based on the interest
rate stated in the lease. The Company evaluates the collectibility of its lease
receivables based on its historical loss experience and assessment of
prospective risk, and does so through ongoing reviews of its receivables
portfolio.
The Company provides support services to customers primarily through service
contracts, and the Company recognizes support service revenue primarily over the
term of the service contract or as services are rendered.
37
The Company also rents equipment to customers under short-term rental
agreements. The Company generally invoices customers monthly and recognizes
revenue over the rental period based on amounts billed. The rental equipment is
capitalized and depreciated to cost of revenues over its estimated useful life.
Cash Equivalents
Short-term investments with an original maturity of 90 days or less from the
date of acquisition are classified as cash equivalents.
Investments
Management determines the appropriate classification of its investment in debt
securities at the time of purchase. Debt securities which the Company has the
ability and positive intent to hold to maturity are classified accordingly and
carried at cost. The Company is not involved in activities classified as the
trading of investments.
Notes Receivable
Notes receivable have been reported at their estimated net realizable value. The
allowance for uncollectible notes receivable totaled $561,000 and $186,000 at
December 31, 2001 and 2000, respectively.
Inventories
Inventories are carried at the lower of cost or market, principally on the
first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Maintenance and repair costs
are expensed as incurred. Significant additions and improvements are capitalized
and depreciated. When an asset is retired or sold, any resulting gain or loss is
included in the results of operations. Interest capitalized as property, plant
and equipment amounted to $81,000, $320,000 and $957,000 in 2001, 2000 and 1999,
respectively. In general, depreciation is computed on a straight-line basis over
the expected useful lives of the assets, as follows:
Classification Depreciation Lives
-------------- ------------------
Buildings and improvements 10 - 40 years
Machinery and equipment, including supply equipment 3 - 25 years
Other 3 - 12 years
In certain situations the units of production method is utilized in order to
achieve a more appropriate matching of revenues and expenses.
The Company's policy is to depreciate processing plants, other than leased
equipment, over the shorter of their useful lives or the term of the
corresponding supply contracts.
Asset Impairment
The Company assesses the impairment of identifiable intangibles, long-lived
assets and related goodwill whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors the Company considers
important which could indicate an impairment include significant
underperformance relative to historical or projected future operating results,
significant changes in the manner of the Company's use of the acquired asset or
the strategy for its overall business and significant negative industry or
economic trends. When the Company determines that the carrying value of
intangibles, long-lived assets and related goodwill may not be recoverable based
upon the existence of one or more of the above indicators of impairment, the
Company measures any impairment based on a projected discounted cash flow method
using a discount rate determined by Company management. Any resulting impairment
loss could have a material adverse impact on the Company's results of
operations, depending on the magnitude of the impairment. In 2001 the Company
recognized impairment losses of approximately $13.1 million, which included
approximately $9.2 million to reduce the carrying value of assets held for sale
in Malaysia, $3.1 million of goodwill associated with previous acquisitions, and
$0.7 million associated with the residual value of bleach
38
manufacturing equipment. On January 1, 2002, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets"(FAS 142) that requires, among other
things, the discontinuance of goodwill amortization. At December 31, 2001, the
Company had $19.3 million of goodwill that will cease to be amortized. The
Company is required to complete a transitional goodwill impairment test by June
30, 2002. (See Note 6.)
Goodwill
Goodwill is included in other assets and represents the excess of acquisition
cost over the fair value of net assets acquired in the purchase of various
entities. Goodwill is amortized on a straight-line basis over its estimated
useful life, which generally is a period ranging from 10 to 40 years. (See Note
6.)
Research and Development
All research and development costs are expensed as incurred.
Foreign Exchange
Assets and liabilities of foreign affiliates and subsidiaries are translated at
year-end exchange rates, and the related statements of operations are translated
at average exchange rates during the year. Translation gains and losses are
accumulated net of income tax as a separate component of stockholders' equity.
Some transactions of the Company and its subsidiaries are made in currencies
different from their own. Gains and losses from these transactions are included
in income as they occur. Net foreign currency transaction (losses)/gains
included in income before income taxes and minority interest totaled $(555,000),
$(782,000) and $11,000 for 2001, 2000 and 1999, respectively.
Income Taxes
Income tax expense is based on pretax financial accounting income. Deferred tax
assets and liabilities are recognized for the expected tax consequences of
temporary differences between the tax basis of assets and liabilities and their
reported amounts using enacted rates in effect for the year in which the
differences are expected to reverse.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of shares outstanding. Diluted
earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding while
giving effect to all potentially dilutive common shares that were outstanding
during the period.
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in the Statements of
Stockholders' Equity. For 2001, comprehensive income was equal to $38.9 million
and consisted of net income, foreign currency translation adjustments and
minimum pension liability adjustment. In 2000 and 1999, comprehensive (loss)
income was $(8.2) million and $14.3 million, respectively, consisting primarily
of net (loss) income and translation adjustments.
Use of Estimates
The preparation of financial statements, in conformity with generally accepted
accounting principles in the United States of America, requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses financial
accounting and reporting for intangible assets acquired individually or with a
group of assets (but not those acquired in a business combination) at
acquisition. This Statement also addresses financial accounting and reporting
for goodwill and other intangible assets subsequent to their acquisition. The
provisions of this Statement are required to be applied with fiscal years
beginning after December 15, 2001. This Statement is required to be applied at
the beginning of an entity's fiscal year and to be applied to all goodwill and
other intangible assets recognized in its financial statements at that date.
Impairment losses for goodwill and indefinite-lived intangible assets that arise
due to the initial application of this Statement are to be reported as resulting
from a change in accounting principle. The Company has not yet determined what
effect, if any, the adoption of SFAS No. 142 will have on the Company's
financial position or results of operations.
39
In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS No. 143 provides the
accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS No. 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. The Company is currently assessing SFAS No.
143 but does not believe it will have a material impact on its financial
position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets." This accounting standard, which is effective for
fiscal years beginning after December 31, 2001, requires that long-lived assets
that are to be disposed of by sale be measured at the lower of book value or
fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that can be distinguished from the rest of the entity and will be eliminated
from the ongoing operations of the entity in a disposal transaction. The effect
of adopting SFAS No. 144 is not expected to have a material impact on the
Company's financial position and results of operations.
Note 2. Consolidated Balance Sheet Details
Dollars in Thousands 2001 2000
------------------------------------------------------------------------
Raw materials $ 20,047 $ 21,061
Work in process 7,547 8,264
Finished goods 5,219 5,376
------------------------------------------------------------------------
Inventories $ 32,813 $ 34,701
========================================================================
Land $ 6,288 $ 8,738
Buildings 41,272 48,773
Machinery and equipment 243,964 312,138
Other, including furniture,
fixtures and vehicles 29,938 48,470
------------------------------------------------------------------------
321,462 418,119
Accumulated depreciation (154,430) (195,276)
------------------------------------------------------------------------
Property, plant and equipment, net $167,032 $222,843
========================================================================
Goodwill $ 34,734 $ 64,829
Accumulated amortization (15,437) (12,650)
Other long term assets 8,542 7,893
------------------------------------------------------------------------
Other assets $ 27,839 $ 60,072
========================================================================
Customer deposits $ 2,159 $ 4,883
Accrued commissions 2,011 2,002
Accrued expenses 59,524 35,419
Income taxes payable 45,735 -
------------------------------------------------------------------------
Other current liabilities $109,429 $ 42,304
========================================================================
40
Note 3. Supplemental Schedule of Cash Flow Information
Dollars in Thousands 2001 2000 1999
-------------------------------------------------------------------------------
Cash payments for interest
and income taxes:
Interest $ 6,093 $ 4,662 $ 1,740
Taxes $ 1,865 $ 6,974 $ 7,534
Note 4. Accounts Receivable
Dollars in Thousands 2001 2000
-------------------------------------------------------------------------------
Billed receivables $ 93,993 $ 112,065
Unbilled receivables 44,485 55,710
Allowance for doubtful accounts (4,208) (5,064)
-------------------------------------------------------------------------------
Accounts receivable $134,270 $ 162,711
===============================================================================
Unbilled receivables represent the excess of revenues recognized on percentage
of completion contracts over amounts billed. These amounts will become billable
as the Company achieves certain contractual milestones. Substantially all of the
unbilled amounts at December 31, 2001 are expected to be billed during 2002.
Billed receivables include retainage amounts of $5,581,000 and $6,007,000 at
December 31, 2001 and 2000, respectively. Substantially all of the retainage
amounts are collectible within one year.
Note 5. Investments in Affiliated Companies
The Company's investments in the following foreign affiliates are accounted for
under the equity method. The principal business activities of these foreign
affiliates involve the production, sale and distribution of bottled or treated
water, the sale of membranes, equipment and replacement parts, and the ownership
and operation of water treatment facilities.
Ownership
Affiliate Percentage
-------------------------------------------------------------------------------
Aqua Cool Kuwait - Kuwait 49%
Aqua Cool Saudi Arabia - Saudi Arabia 40%
Aqua Design Ltd. - Cayman Islands 39%
Desalination Company of Trinidad and Tobago Ltd. - Trinidad 40%
Grupo Empresarial de Mejoramiento Ambiental, S. de R.L.
de C.V. - Mexico 20%
Jalal-Ionics, Ltd. - Bahrain 40%
Mega a.s. - Czech Republic 20%
Toray Membrane America, Inc. - Massachusetts, USA 43%
Utilities Development Company, W.L.L. - Kuwait 25%
Watlington Waterworks, Ltd. - Bermuda 26%
Yuasa-Ionics Co., Ltd. - Japan 50%
The Company's percentage ownership interest in a foreign affiliate may vary from
its interest in the earnings of such affiliate.
41
Activity in investments in affiliated companies:
Dollars in Thousands 2001 2000 1999
--------------------------------------------------------------------------
Investments at end
of prior year $ 18,310 $ 10,752 $ 7,057
Equity in earnings 1,396 1,623 1,111
Distributions received (1,511) (2,092) (475)
Cumulative translation
adjustments 141 (172) (540)
Reclassification of Agrinord S.r.l.
resulting from change in
ownership interest - (1,389) -
Additional investments 5,462 9,588 3,599
--------------------------------------------------------------------------
Investments at end of current year $ 23,798 $ 18,310 $ 10,752
==========================================================================
At December 31, 2001, the Company's equity in the total assets and in total
liabilities of its affiliates was $35,338,000 and $9,942,000, respectively. The
Company's equity in the 2001 total revenues of these affiliates was $13,959,000.
Note 6. Impairment of Long-Lived Assets
During 2001 and 2000, the Company wrote down approximately $13.1 million and
$3.4 million, respectively, of impaired long-lived assets. In 2001, the
write-downs included approximately $9.2 million to reduce the carrying value of
assets held for sale, $3.1 million of goodwill associated with previous
acquisitions and $0.7 million reflecting the write-off of the remaining value of
bleach manufacturing equipment. The $9.2 million charge relates to the Company's
decision to sell its majority interest in its Malaysian subsidiary (part of the
Company's Ultrapure Water Group). There is approximately $1.0 million included
in other current assets reflecting the estimated proceeds from the sale. The
Company expects to sell these assets in 2002. The $3.1 million impairment of
goodwill, relating to two separate acquisitions made in previous years, was
determined by the recent operating results and expected future performance of
the business units.
In 2000, the Company wrote down $2.0 million of bleach manufacturing equipment
attributable to the Company's decision to abandon plans to commence bleach
manufacturing operations in Elkton, Maryland. Additionally, in 2001, the Company
wrote off the residual value of this equipment amounting to $0.7 million. An
additional $0.8 million impairment of goodwill was recognized in 2000, relating
to an acquisition made in 1996.
Fair value was determined based upon future discounted cash flows using an
appropriate risk-adjusted discount rate.
Note 7. Commitments and Contingencies
Litigation
The Company is involved in the normal course of its business in various
litigation matters, some of which are in the pre-trial discovery stages. The
Company believes that none of the pending matters will have an outcome material
to its financial condition or results of operations.
The Company was notified in 1992 that it is a potentially responsible party
(PRP) at a Superfund site, Solvent Recovery Services of New England in
Southington, Connecticut (the "SRS site"). Ionics' share of assessments to date
for site work and administrative costs totals approximately $71,000. The United
States Environmental Protection Agency ("EPA") has not yet issued a decision
regarding clean-up methods and costs. While it is too soon to predict the scope
and cost of the final remedy that the EPA will select, based upon the large
number of PRPs identified, the Company's small volumetric ranking (approximately
0.5%) and the identities of the larger PRPs, the Company believes that its
liability in this matter will not have a material effect on the Company's
financial position or results of operations.
42
By letter dated March 29, 2000, the Company and other PRPs for the SRS site were
notified that they may also have potential liability with respect to the
Angelillo Property Superfund Site, also in Southington, Connecticut (the
"Angelillo site"), because hazardous materials were allegedly shipped from the
SRS site to the Angelillo site. In August 2001, the Company and certain other
PRPs entered into a settlement agreement with the EPA with respect to the
Angelillo site, under which the Company made a settlement payment of
approximately $3,300.
Other
During 2002, construction will be completed on the Trinidad desalination
facility owned by Desalination Company of Trinidad and Tobago Ltd. (Desalcott),
in which the Company has a 40% equity interest. The Company has loaned $10
million to the 60% equity owner, Hafeez Karamath Engineering Services Ltd.
(HKES), as the source of HKES' equity contribution to Desalcott, in addition to
the $10 million contributed by the Company for its 40% equity interest. In 2000,
Desalcott entered into a "bridge loan" agreement with a Trinidad bank providing
$60 million in construction financing. Effective November 8, 2001, the loan
agreement was amended to increase maximum borrowings to $79.9 million. However,
the bridge loan plus the $20 million equity provided to Desalcott will not
provide sufficient funds to complete construction and commissioning of the
project. The Company has committed to lend up to $10 million to Desalcott to
complete the project once all bridge loan proceeds have been expended. Although
Desalcott has received proposals for long term debt financing, there is no
assurance that such financing will be obtained on terms acceptable to Desalcott.
During 2001, the Company acquired a 25% equity ownership interest in a Kuwaiti
project company, Utilities Development Company W.L.L. that was awarded a
concession agreement by an agency of the Kuwaiti government for the
construction, ownership and operation of wastewater reuse facility in Kuwait. At
December 31, 2001, the Company had deferred costs of approximately $1.0 million
relating primarily to preliminary project management and initial design work on
the project, and had invested $1.5 million in the project company. Although the
Company anticipates that long-term financing for the project should be obtained
by mid-2002, there is no assurance that such financing will be obtained, and the
Company would expense the deferred costs and investment in the event financing
is not obtained. Also in such event, the Company could incur its 25%
proportionate share of liability under a $28 million performance bond issued on
behalf of the project company.
Note 8. Long-Term Debt and Notes Payable
Dollars in Thousands 2001 2000
---------------------------------------------------------------------
Borrowings outstanding $ 24,383 $ 85,956
Less installments due within one year 14,257 75,045
---------------------------------------------------------------------
Long-term debt and notes payable $ 10,126 $ 10,911
=====================================================================
The Company maintains several domestic and foreign lines of credit. On June 29,
2001 the Company entered into a third amended and restated credit agreement with
Fleet National Bank (as lender and agent) and Bank of America, N.A., the Chase
Manhattan Bank, and Mellon Bank, N.A. (the "Credit Agreement"). Under the terms
of the Credit Agreement, which supercedes the prior loan agreement with Fleet
National Bank, the Company had the right to borrow up to $90.0 million, subject
to certain financial covenants, including a prohibition against the payment of
cash dividends. On December 21, 2001, the Credit Agreement was amended in
connection with obtaining a waiver from the lenders to permit the sale of the
Company's bottled water assets. Under the amended Credit Agreement, the
borrowing limit was reduced to $50 million and the maturity date was changed
from December 31, 2002 to April 30, 2002. On March 27, 2002, the Company paid
all outstanding borrowings under the Credit Agreement. On March 28, 2002, the
Credit Agreement was further amended to reduce maximum borrowings to $30
million, extend its term for a period of 364 days from the date of amendment,
eliminate and revise certain of the financial and other covenants contained
therein and make Fleet National Bank the sole lender. Borrowings under the
Credit Agreement as amended bear interest at the prime rate or 1.25% above the
London Interbank Offered Rate (LIBOR), at the Company's option.
43
At December 31, 2001, the prime rate was 4.75% and LIBOR was 1.87%. The Company
had outstanding borrowings of $10,000,000 and $65,000,000 against its domestic
lines of credit at December 31, 2001 and 2000, respectively.
Maturities of borrowings outstanding for the five years ending December 31, 2002
through 2006 are approximately $14,257,000, $1,217,000, $1,266,000, $1,299,000
and $1,328,000, respectively.
Under foreign lines of credit, excluding those related to specific project
financing, the Company had approximately $10.2 million available for borrowing
at interest rates ranging from 5.3% to 9.0% at December 31, 2001. The Company
had outstanding borrowings of $7.7 million and $3.0 million against these lines
of credit at December 31, 2001 and 2000, respectively.
The Company has arranged lines of credit totaling $10.0 million for its
controlled affiliate in Barbados to provide project financing for a desalination
plant at LIBOR plus 2.0% (4.16% at December 31, 2001) for its $6.4 million line,
at a fixed rate of 8.0% for its $2.7 million line and at a fixed rate of 8.75%
for its $0.9 million line. These lines of credit are payable in equal quarterly
installments over a ten-year period beginning in 2000. The controlled affiliate
had outstanding borrowings of $8.3 million and $9.2 million against these lines
of credit at December 31, 2001 and 2000, respectively.
The Company utilizes other short-term bank loans to finance working capital
requirements for certain business units. The Company's various loan and note
agreements contain certain financial covenants relating to working capital, cash
flow, capital expenditures and consolidated tangible net worth. The
weighted-average interest rate on all borrowings at December 31, 2001 and 2000
was 6% and 8%, respectively.
Although the Company believes that its cash from operations, lines of credit and
foreign trade facilities are adequate to meet its currently anticipated
operational needs, the Company is currently investigating additional sources of
financing to augment current funding sources in order to pursue large project
development and to replace a portion of its domestic credit line.
Note 9. Income Taxes
The components of domestic and foreign income (loss) before income taxes and
minority interest were as follows:
Dollars in Thousands 2001 2000 1999
------------------------------------------------------------------------
U.S. $ 4,269 $(16,974) $ 15,317
Non-U.S. 81,934 14,750 14,414
------------------------------------------------------------------------
Income (loss) before income taxes
and minority interest $ 86,203 $(2,224) $ 29,731
========================================================================
The provision for income taxes consisted of the following:
Dollars in Thousands 2001 2000 1999
------------------------------------------------------------------------
Federal $(7,963) $ 3,264 $(1,353)
Foreign (37,246) (5,304) (3,814)
State (2,720) 704 (632)
------------------------------------------------------------------------
------------------------------------------------------------------------
Current provision (47,929) (1,336) (5,799)
------------------------------------------------------------------------
Federal (605) 555 (4,176)
Foreign 6,316 1,546 318
State (21) (9) 135
------------------------------------------------------------------------
Deferred benefit (provision) 5,690 2,092 (3,723)
------------------------------------------------------------------------
(Provision) benefit for income taxes $(42,239) $ 756 $(9,522)
========================================================================
44
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 2001, the
tax effects of the temporary differences were:
Deferred Deferred
Dollars in Thousands Tax Assets Tax Liabilities
-------------------------------------------------------------------------------
Depreciation $ - $14,235
Goodwill amortization - 1,346
Inventory valuation 2,280 -
Bad debt reserves 951 -
Legal 1,419 -
Accrued commissions 564 -
Profit on sales to foreign subsidiaries 886 -
Insurance accruals 1,026 -
U.S. tax on unrepatriated earnings - 11,568
Foreign withholding taxes on
undistributed earnings - 1,196
Foreign deferred taxes 4,881 1,089
Tax effect of currency translation loss 7,934 -
Net operating loss carryforwards 7,496 -
Miscellaneous 9,243 4,765
--------------------------------------------------------------------------------
36,680 34,199
Valuation allowance for deferred tax assets (4,619) -
--------------------------------------------------------------------------------
Deferred income taxes $32,061 $34,199
================================================================================
The United States statutory corporate tax rate is reconciled to the Company's
effective tax rate as follows:
2001 2000 1999
---------------------------------------------------------------
U.S. Federal statutory rate 35.0% 34.0% 35.0%
Foreign sales corporation (0.7) (33.9) (2.1)
Goodwill 6.6 34.3 1.0
State income taxes, net of
federal tax benefit 2.1 (20.5) 1.7
Foreign income taxed at
different rates 0.7 7.2 (3.8)
Valuation allowance 5.3 - -
Non-deductible charges 0.2 13.9 0.4
Other, net (0.2) (1.0) (0.2)
---------------------------------------------------------------
Effective tax rate 49.0% 34.0% 32.0%
===============================================================
At December 31, 2001, the Company had unused tax loss carryforward benefits of
$7,496,000. Domestic tax loss carryforward benefits of $2,112,000 expire in
fiscal years 2004 to 2009. Foreign tax loss carryforward benefits of $5,384,000
expire beginning in 2005. The domestic tax loss carryforward benefits are
recorded at estimated realizable value. Because of the uncertainty of the
realization of the tax benefits of losses incurred in certain foreign
jurisdictions, the Company has established $4,619,000 as a valuation allowance
at December 31, 2001. $2,112,000 of the net unused tax loss carryforward
benefits and $1,009,000 of deferred tax benefit related to the minimum pension
liability adjustment recorded in other comprehensive income have been included
in other assets at December 31, 2001.
The Company has elected not to provide tax on certain undistributed earnings of
its foreign subsidiaries which it considers to be permanently reinvested. The
cumulative amount of such unprovided taxes was approximately $7,786,000,
$5,106,000 and $5,065,000 as of December 31, 2001, 2000 and 1999, respectively.
45
Note 10. Stockholders' Equity
The Company adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," in 1996. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions used for grants in 2001, 2000 and 1999: expected
volatility of 38.6% in 2001, 37.4% in 2000 and 30.5% in 1999; weighted-average,
risk-free interest rates of 4.89%, 6.25% and 5.27% in 2001, 2000 and 1999,
respectively; and expected lives of five years. No dividends are assumed. The
weighted-average fair value of options granted during 2001, 2000 and 1999 was
$11.32, $9.65 and $11.07, respectively.
At December 31, 2001, the Company had the stock-based compensation plans
described below. The Company applies Accounting Principles Board Opinion No. 25
in accounting for its plans. Accordingly, any difference between the option
price and the fair market value of the stock at the date of grant is charged to
operations over the expected period of benefit to the Company. Had compensation
cost for the Company's plans been determined based on the fair value of the
options at the grant dates for awards under those plans consistent with the
method of SFAS No. 123, the Company's net income and earnings per share would
have been adjusted. On a pro forma basis, net income as reported for 2001 of
$44.7 million would have been $42.1 million, net loss as reported for 2000 of
$1.9 million would have been $4.9 million and net income as reported for 1999 of
$19.4 million would have been $16.6 million. Diluted earnings per share as
reported for 2001 of $2.59 would have been $2.44, 2000 diluted loss per share of
$(0.12) would have been $(0.30), and 1999 diluted earnings per share of $1.18
would have been $1.01. Basic earnings per share as reported for 2001 of $2.61
would have been $2.46, 2000 basic loss per share of $(0.12) would have been
$(0.30) and 1999 basic earnings per share of $1.20 would have been $1.03. The
effects of applying SFAS No. 123 in this pro forma disclosure are not indicative
of future awards, which are anticipated. SFAS No. 123 does not apply to awards
prior to 1995.
Under the 1979 Stock Option Plan (the "1979 Plan"), stock options (only
non-qualified stock options after February 1989) were granted to officers and
other key employees of the Company. Options granted under the 1979 Plan were
immediately exercisable, were subject to repurchase rights that lapse generally
over a five-year period, and have a term of ten years and one day. Effective May
8, 1997, the 1979 Plan was replaced by the 1997 Stock Incentive Plan (the "1997
Plan"), and no additional options were granted under the 1979 Plan.
Under the 1997 Plan, incentive stock options, non-qualified stock options, and
long-term performance awards may be awarded to officers and other key employees
and to consultants. The 1997 Plan contains an automatic addition provision under
which a number of shares equal to two percent (2%) of the Company's outstanding
stock were added to the 1997 Plan at the end of each of the four fiscal
year-ends of the Company following adoption of the 1997 Plan, commencing
December 31, 1997 and ending December 31, 2000. At December 31, 2001 and 2000,
there were 637,023 and 527,256 shares, respectively, reserved for issuance of
additional options under the 1997 Plan after giving effect to the automatic
addition provision. Options granted under the 1997 Plan vest over a five-year
period and have a term of ten years. Only non-qualified stock options have been
granted under the 1997 Plan.
Under the 1986 Stock Option Plan for Non-Employee Directors (the "1986 Plan"),
options are granted at a price not less than the fair market value of the stock
at the date of grant. The options become fully exercisable after a six-month
period, are exercisable only during certain "window" periods, and have a term of
ten years and one day. As of December 31, 2001 and 2000, 29,000 and 36,000
shares, respectively, were reserved for issuance of additional options under the
1986 Plan. The 1986 Plan will terminate on December 31, 2002, pursuant to an
amendment adopted by the Company's Board of Directors on February 26, 2002.
The Company has adopted a restricted stock plan (the "1994 Plan") under which
shares of common stock may be granted to officers and other key employees of the
Company. Restrictions on the sale of such common stock typically lapse over a
five-year vesting period. No shares were granted under the 1994 Plan in 2001. In
2000, 17,937 shares were granted under the restricted stock plan to an executive
officer. The executive officer subsequently terminated his employment with the
Company in 2000, and the restricted stock was forfeited pursuant to the 1994
Plan. As of December 31, 2001, a total of 280,178 shares remain reserved for
issuance under the 1994 Plan.
On August 19, 1998, the Company adopted the 1998 Non-Employee Directors' Fee
Plan ("Fee Plan"). The Fee Plan permits non-employee directors to elect to
receive payment of their annual retainer fee in cash or in common stock. The
valuation of the common stock is based on the last reported sales price of the
common stock on the New York Stock Exchange on the trading date next preceding
the date of the Board meeting at which payment will be made. Annual retainer
fees are paid in two equal installments during the year. A total of 88,527
shares were reserved for issuance under the Fee Plan as of December 31, 2001.
46
The Company reserved 91,200 shares for options granted in 1990 to certain
non-employees in exchange for a previously granted option to purchase 50% of the
shares of a Spanish subsidiary of the Company which was merged with Ionics
Iberica, S.A. in 1992. During 1995, an additional 30,000 options were granted to
the same persons in connection with an increase in production capacity and
projected increases in the sale of water under a long-term water sale agreement
between Ionics Iberica, S.A. and the local water utility. The fair value of
these options is being charged to operations over the 10-year vesting period.
During 2000, the original 91,200 options granted in 1990 were exercised.
A summary of the status of the Company's stock option plans as of December 31,
2001, 2000 and 1999 and changes during the years ending on those dates is
presented below:
2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options in Thousands Options Price Options Price Options Price
-----------------------------------------------------------------------------------------------------------------------
Outstanding at end of prior year 3,226 $ 28.38 2,734 $ 30.04 2,796 $ 29.70
Granted 65 26.94 941 22.28 80 30.27
Exercised (229) 21.84 (163) 16.74 (82) 16.31
Cancelled (173) 30.22 (286) 30.70 (60) 33.25
-----------------------------------------------------------------------------------------------------------------------
Outstanding at end of current year 2,889 $ 28.77 3,226 $ 28.38 2,734 $ 30.04
Options exercisable at year-end 1,873 $ 30.88 1,835 $ 30.86 1,918 $ 30.29
The following table summarizes the information about stock options outstanding at December 31, 2001:
Options in Thousands Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contract Exercise Exercisable Exercise
Exercise Prices at 12/31/01 Years Price at 12/31/01 Price
-------------------------------------------------------------------------------------------------------
$19.75 - $26.50 1,417 5.7 $ 22.21 785 $ 22.28
$27.00 - $29.88 854 6.6 $ 29.33 482 $ 29.35
$30.00 - $33.81 29 7.2 $ 32.24 21 $ 33.04
$42.38 - $48.25 589 4.8 $ 43.50 585 $ 43.51
-------------------------------------------------------------------------------------------------------
$19.75 - $48.25 2,889 5.8 $ 28.77 1,873 $ 30.88
47
The Company has a Section 401(k) stock savings plan under which 150,000 shares
have been registered with the Securities and Exchange Commission for purchase on
behalf of employees. Shares are normally acquired for the plan in the open
market. Through December 31, 2001, no shares had been issued under the plan.
The Company has adopted a Renewed Stockholder Rights Plan designed to protect
stockholders against abusive takeover tactics. Each share of common stock now
carries one right. Each right entitles the holder to purchase from the Company
one share of common stock (or in certain circumstances, to receive cash,
property or other securities of the Company) at a purchase price of $175 subject
to adjustment. In certain circumstances, rights become exercisable for common
stock (or a combination of cash, property or other securities of the Company)
worth twice the exercise price of the right. The rights are not exercisable
until the occurrence of certain events as defined in the Renewed Stockholder
Rights Plan. The rights may be redeemed by the Company at $.01 per right at any
time unless certain events occur. Unless redeemed earlier, the rights, which
have no voting power, expire on August 19, 2007.
Note 11. Earnings Per Share Calculations (EPS)
Dollars in Thousands,
Except Per Share Amounts For the Year Ended 2001 For the Year Ended 2000 For the Year Ended 1999
-----------------------------------------------------------------------------------------------------------------------------------
Net Per Share Net Per Share Net Per Share
Income Shares Amount Loss Shares Amount Income Shares Amount
--------------------------------------------------------------------------------------------------
Income (loss) available to
common stockholders $ 44,701 17,106 $ 2.61 $ (1,870) 16,243 $ (0.12) $ 19,361 16,148 $ 1.20
Effect of dilutive stock options - 140 (0.02) - - - - 240 (0.02)
-----------------------------------------------------------------------------------------------------------------------------------
Diluted EPS $ 44,701 17,246 $ 2.59 $ (1,870) 16,243 $ (0.12) $ 19,361 16,388 $ 1.18
===================================================================================================================================
The effect of dilutive stock options excludes those stock options for which the
impact would have been antidilutive based on the exercise price of the options.
The number of options that were antidilutive at December 31, 2001, 2000 and 1999
were 608,750, 1,649,000, and 1,661,000, respectively. The number of options that
were antidilutive at December 31, 2000 include 175,000 shares whose dilutive
effect was included as a result of the Company's net loss.
Note 12. Operating Leases
The Company leases equipment, primarily for industrial water purification and
bottled water coolers, to customers through operating leases. The original cost
of this equipment was $95,260,000 and $116,152,000 at December 31, 2001 and
2000, respectively. The accumulated depreciation for such equipment was
$42,679,000 and $53,497,000 at December 31, 2001 and 2000, respectively. The
bottled water coolers were sold in December 31, 2001 as part of the sale of the
Company's bottled water business assets.
At December 31, 2001, future minimum rentals receivable under noncancelable
operating leases in the years 2002 through 2006 and later were approximately
$28,259,000, $25,684,000, $22,245,000, $19,179,000, $18,181,000 and $92,743,000,
respectively.
The Company leases facilities and personal property under various operating
leases. Future minimum payments due under lease arrangements are as follows:
$4,692,000 in 2002, $4,222,000 in 2003, $3,455,000 in 2004, $2,368,000 in 2005
and $6,937,000 in 2006 and later. Rent expense under these leases was
approximately $6,986,000, $5,695,000 and $4,368,000 for 2001, 2000 and 1999,
respectively.
Note 13. Profit-Sharing and Pension Plans
The Company has a contributory profit-sharing plan (defined contribution plan)
which covers employees of the Company who are members of the Fabricated Products
group of the Bridgeville Division. Company contributions to the defined
contribution plan are made from the group's pretax profits, may vary from 8% to
15% of participants' compensation, and are allocated to participants' accounts
in proportion to each participant's respective compensation. Company
contributions were $375,000, $300,000 and $281,000 in 2001, 2000 and 1999,
respectively.
The Company also has a contributory defined benefit pension plan for all other
domestic employees. Benefits are based on years of service and the employee's
average compensation. The Company's funding policy is to contribute annually an
amount that can be deducted for federal income tax purposes. The plan's assets
are comprised of money market funds, equity funds, short-term bonds and
intermediate-term bonds.
48
The following table sets forth the defined benefit plan's funded status and
amounts recognized in the Company's balance sheets at December 31, 2001 and
2000:
Dollars in Thousands 2001 2000
-------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation as of prior year-end $15,799 $14,464
Service cost 1,285 1,055
Interest cost 1,206 1,107
Spin-off of Aqua Cool participants (205) -
Assumption changes 1,500 1,932
Actuarial (gain) loss 660 (907)
Benefits paid (751) (1,852)
-------------------------------------------------------------------------------
Projected benefit obligation as of year-end $19,494 $15,799
===============================================================================
Change in Plan Assets
Fair value of plan assets as of prior year-end $14,923 $16,258
Actual return on plan assets 248 632
Employer contributions - -
Expenses paid (123) (115)
Benefits paid (751) (1,852)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Fair value of plan assets as of year-end $14,297 $14,923
===============================================================================
Funded Status
Funded status as of year-end $ (5,197) $ (876)
Unrecognized transition asset (97) (150)
Unrecognized prior service cost 299 375
Unrecognized net actuarial loss 5,822 2,824
Adjustment to recognize minimum liability (2,917) -
-------------------------------------------------------------------------------
(Accrued)/prepaid benefit cost as of year-end $ (2,090) $2,173
===============================================================================
The expense of the defined benefit plan was as follows:
Dollars in Thousands 2001 2000 1999
---------------------------------------------------------------------------
Components of Net Periodic Benefit Cost
Service cost $ 1,285 $1,055 $1,239
Interest cost 1,206 1,107 1,186
Expected return on plan assets (1,309) (1,445) (1,376)
Amortization of transition asset (53) (53) (53)
Amortization of prior service cost 37 37 37
Recognized net actuarial loss 141 - 155
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net periodic benefit cost $ 1,307 $ 701 $1,188
===========================================================================
49
The Company determined the defined benefit plan's funded status and amounts
recognized in the Company's balance sheet and the expense of the defined benefit
plan using the following assumptions: expected return on plan assets of 9.0% at
December 31, 2001, 2000 and 1999; rate of compensation increase of 5.0% at
December 31, 2001 and 2000 and 4.75% at December 31, 1999; and a discount rate
of 7.00%, 7.50% and 8.25% at December 31, 2001, 2000 and 1999, respectively.
The Ionics Section 401(k) Stock Savings Plan is available to substantially all
U.S. employees of the Company. Employees may contribute from 1% to 12% of
compensation subject to certain limits. The Company matches 50% of employee
contributions allocated to the Company's common stock up to 6% of their salary.
The Company recognized expense of $725,000, $716,000 and $735,000 in 2001, 2000
and 1999, respectively, under this plan.
In 1996, the Company's Board of Directors adopted a Supplemental Executive
Retirement Plan for officers and key employees of the Company ("SERP"). The
purpose of the SERP is to permit officers and other key employees whose base
salary exceeds the maximum pay upon which retirement benefits may be accrued in
any year to accrue retirement benefits on base salary in excess of that amount,
equivalent to the benefits that would have been accrued under the Retirement
Plan if base salary levels over that amount could be taken into account in
calculating benefits under the Retirement Plan. No expense relating to the plan
was necessary in 2001 and expenses of $50,000 and $100,000 were recorded in 2000
and 1999, respectively. The liability accrued as of December 31, 2001 and 2000
related to the plan was $406,000. The SERP is administered by the Compensation
Committee of the Board of Directors.
The Company generally does not provide post-retirement health care benefits to
its employees or any other post-retirement benefits other than those described
above.
Note 14. Financial Instruments
Off-Balance-Sheet Risk
The Company issues letters of credit and performance bonds as guarantees for
various performance and bid obligations. Approximately $77.3 million and $96.3
million of these guarantees were outstanding at December 31, 2001 and 2000,
respectively. Approximately 42% of the guarantees outstanding at December 31,
2001 are scheduled to expire in 2002. These instruments were executed with
creditworthy institutions.
In 2001, the Company's Italian subsidiary entered into a series of
U.S.dollar/euro options contracts with the intent of offsetting the foreign
exchange risk associated with forecasted cash flows related to an ongoing
project. These options contracts were not entered into for trading purposes. In
accordance with the restrictions set forth in SFAS 133, the contracts do not
qualify for hedge accounting treatment. The fair market value of the contracts
is recorded as a liability of $1.2 million in the other current liabilities
section of the Consolidated Balance Sheet. End-of-period changes in the market
value of the contracts are reflected in the selling, general and administrative
expenses in the Consolidated Statement of Operations. In addition, the Company
periodically enters into foreign exchange contracts to hedge certain operational
and balance sheet exposures against changes in foreign currency exchange rates.
With the exception of the options contracts described above, the Company had no
foreign exchange contracts outstanding at December 31, 2001 or 2000.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
investments, trade accounts receivable and notes receivable. The credit risk of
cash equivalents and investments is low as the funds are primarily invested in
U.S. money market investments and in Spanish Government securities. The
Company's concentrations of credit risk with respect to trade accounts
receivable and notes receivable is considered low. The Company's customer base
is spread across many different industries and geographies, and the Company
obtains guaranteed letters of credit for many of its foreign orders.
50
Fair Value of Financial Instruments
The carrying amounts of cash equivalents and investments closely approximate
their fair values as these items have relatively short maturities and are highly
liquid. Based on market information, the carrying amounts of notes receivable
and debt approximate their fair values.
Investments in Securities
Realized gains and losses from the sale of debt and equity securities during
fiscal 2001 and 2000 were not significant.
Long-term investments, maturing in 2003, 2004 and 2005, which the Company
intends to hold to maturity have been recorded at a net cost of $2,116,000 and
$2,551,000 at December 31, 2001 and 2000, respectively. At December 31, 2001 and
2000, the Company also had short-term investments of $21,000 and $1,105,000,
respectively, which the Company intends to hold to maturity. The cost of these
investments approximates fair value.
Note 15. Acquisitions and Divestitures
2001 Divestitures
On December 31, 2001, the Company completed the sale of its Aqua Cool Pure
Bottled Water operations in the United States, the United Kingdom and France to
affiliates of Perrier-Vittel, S.A., a subsidiary of Nestle, S.A. for
approximately $220 million, of which $10 million is being held in escrow
pursuant to the terms of the divestiture agreement. The amount of the purchase
price is subject to final adjustment based on the number of customers and
working capital levels as defined in the divestiture agreement. The Company
anticipates that the final determination of such purchase price adjustments will
be completed in the third quarter of 2002. Including reserves established for
any purchase price adjustments, the Company recorded a pre-tax gain on the sale
amounting to $102.8 million. The Aqua Cool Pure Bottled Water business had sales
of $76.2 million in 2001, $67.2 million in 2000 and $60.1 million in 1999,
losses before taxes and interest of $0.6 million in 2001 and $0.9 million in
2000, and income before taxes and interest of $6.9 million in 1999. The
consolidated financial statements and accompanying notes reflect the operating
results of the Aqua Cool Pure Bottled Water business as a continuing operation
in the Consumer Water Group segment.
2000 and 1999 Acquisitions
In 2000, the Company acquired three businesses in the CWG segment related to its
Aqua Cool business, for a total purchase price of $3.7 million. These businesses
were integrated into the Company's bottled water business and sold as part of
the divestiture referenced above. In 1999 the Company acquired three businesses
in the CWG, UWG and IBG business segments for a total purchase price of
approximately $8.5 million. The UWG and IBG businesses were integrated into the
Company's ongoing business segments. The CWG acquisition was integrated into the
Company's bottled water business and sold as part of the divestiture referenced
above.
Note 16. Segment Information
In 1998, the Company adopted SFAS No. 131. Since 1998, the Company has been
reporting four "business group" segments corresponding to a "business group"
structure put into place in the latter part of 1998. These segments are
summarized as follows:
Equipment Business Group - The EBG engages in the following activities:
o Manufacture and sale of water purification and treatment equipment and
processes from components to turnkey plants, including:
- membrane-based equipment for seawater or brackish water desalination
- membrane-based equipment for surface water treatment
- equipment for wastewater treatment, including membrane-based equipment;
brine concentrators, crystallizers and evaporators (zero liquid
discharge (ZLD) equipment); and traditional wastewater treatment
equipment
o Supply of water for drinking and industrial use through ownership and/or
operation of desalination or other water treatment facilities.
o Fabrication of specialty metal components for industrial and defense-
related applications.
o Production of sodium hypochlorite and related chlor-alkali chemicals for
industrial, municipal, commercial and other non-consumer applications
(starting in 2002, this activity will be part of the UWG).
o Provision of food processing services through oversight for customers of
whey-processing activities using the Company's membrane-based systems.
51
Ultrapure Water Group - The UWG engages in the following activities:
o Manufacture and sale of equipment, from components to turnkey systems,
utilizing various membrane-based and other technologies for the production
of ultrapure (very highly purified) water to customers in various
industries including microelectronics, pharmaceuticals and power
generation.
o Production and sale of ultrapure and high quality process water through
ownership and/or operation of ultrapure water facilities.
o Leasing of trailer-based ultrapure water equipment (prior to 2002, this
activity was part of the EBG).
o Manufacture and sale of ozone-generation equipment.
o Regeneration of ion-exchange resin for industrial customers.
Consumer Water Group - Until December 31, 2001, the largest business group
within the CWG was the Company's Aqua Cool Pure Bottled Water division, which
engaged in the U.S., U.K. and France in the production of purified drinking
water and water deliveries in five-gallon bottles to homes and offices. This
business was sold on December 31, 2001 to subsidiaries of Perrier-Vittel, S.A.
(the Company retains equity ownership interests in joint ventures in the bottled
water business in Saudi Arabia, Kuwait and Bahrain). The CWG continues to engage
in the following activities:
o Manufacture and sale of "point-of-entry" home water treatment equipment,
including ion-exchange water conditioners to "soften" hard water and
bacteriostatic treatment equipment, and related chemicals and media for
filtration and treatment.
o Manufacture and sale of "point-of-use" over- and under-the-sink water
purifiers.
o Provision of consumer finance services in connection with the sale of home
water treatment equipment.
o Manufacture, utilizing the Company's proprietary Cloromat(R) membrane-based
technology, and sale of bleach-based products for the consumer market,
under private label and the Company's own brands.
o Production and sale of methanol-based automobile windshield wash solution.
Instrument Business Group - The IBG engages in the following activities:
o Manufacture and sale of laboratory and on-line instruments for the
measurement of impurities in water ranging in quality from ultrapure
process water to wastewater, including:
- total organic carbon (TOC) analyzers
- on-line boron analyzers
- instruments for the measurement of other water-borne contaminants,
- including total carbon, sulfur, nitric oxide, chemical oxygen demand
and total oxygen demand
- instruments for the measurement of dissolved metals
- specific analyzers for ammonia, phosphates, nitrates and chlorine
- instruments for the detection of thin layers of oil on water
52
Geographic Areas
Revenues are reflected in the country from which the sales are made. Long-lived
assets include all long-term assets except for notes receivable. No foreign
country's revenues to unaffiliated customers or long-lived assets were material.
Included in the United States segment are export sales of approximately 19%, 15%
and 16% for 2001, 2000 and 1999, respectively. Including these U.S. export
sales, the percentages of total revenues attributable to activities outside the
U.S. were 44%, 42% and 44% in 2001, 2000 and 1999, respectively.
Information about the Company's operations by geographic area follows:
United
Dollars in Thousands States International Total
--------------------------------------------------------------------------------
2001
Revenue - unaffiliated customers $320,522 $ 146,210 $466,732
Long-lived assets 145,789 85,523 231,312
--------------------------------------------------------------------------------
2000
Revenue - unaffiliated customers $323,071 $ 151,480 $474,551
Long-lived assets 188,287 127,162 315,449
--------------------------------------------------------------------------------
1999
Revenue - unaffiliated customers $239,591 $ 118,626 $358,217
Long-lived assets 192,416 104,661 297,077
--------------------------------------------------------------------------------
Additional information about the Company's business segments is set forth in the
following table:
53
Equipment Ultrapure Consumer Instrument
Business Water Water Business
Dollars in Thousands Group Group Group Group Corporate Total
------------------------------------------------------------------------------------------------------------------------------------
2001
Revenue - unaffiliated customers $ 207,927 $ 107,814 $ 123,951 $27,040 $ - $466,732
Inter-segment transfers 2,521 2,743 - 1,568 (6,832) -
Income (loss) from operations 5,981 (8,819) (1,509) 942 (10,469) (13,874)
Equity income (loss) 1,441 68 (57) - (56) 1,396
Earnings (loss) before interest, tax, minority interest,
and gain on sale of business 7,422 (8,751) (1,566) 942 (10,525) (12,478)
Interest income - - - - - 1,013
Interest expense - - - - - (5,166)
Loss before income taxes and minority interest
and gain on sale of business - - - - - (16,631)
Capital employed 223,586 96,887 63,493 31,062 32,708 447,736
Identifiable assets 323,545 92,443 49,453 25,641 118,433 609,515
Investments in affiliated companies 20,983 - 2,815 - - 23,798
Depreciation and amortization 12,652 8,425 13,580 997 285 35,939
Capital expenditures 13,297 12,450 12,094 1,015 751 39,607
====================================================================================================================================
2000
Revenue - unaffiliated customers $ 205,181 $ 132,236 $ 108,324 $ 28,810 $ - $ 474,551
Inter-segment transfers 6,087 3,444 - 3,088 (12,619) -
Income (loss) from operations 8,338 3,177 (1,541) 2,598 (12,796) (224)
Equity income (loss) 976 (20) 667 - - 1,623
Earnings before interest, tax and minority interest 9,314 3,157 (874) 2,598 (12,796) 1,399
Interest income - - - - - 1,286
Interest expense - - - - - (4,909)
Loss before income taxes and minority interest - - - - - (2,224)
Capital employed 152,319 144,174 164,819 34,126 (52,621) 442,817
Identifiable assets 258,588 138,321 163,281 18,454 (11,141) 567,503
Investments in affiliated companies 15,394 44 2,872 - - 18,310
Depreciation and amortization 11,688 7,595 13,270 1,098 144 33,795
Capital expenditures 8,924 12,800 17,034 766 1,687 41,211
====================================================================================================================================
1999
Revenue - unaffiliated customers $ 140,655 $ 93,562 $ 96,569 $ 27,431 $ - $ 358,217
Inter-segment transfers 2,214 593 - 1,926 (4,733) -
Income (loss) from operations 14,507 3,842 10,869 2,148 (3,039) 28,327
Equity income 444 - 667 - - 1,111
Earnings before interest, tax and minority interest 14,951 3,842 11,536 2,148 (3,039) 29,438
Interest income - - - - - 961
Interest expense - - - - - (668)
Income before income taxes and minority interest - - - - - 29,731
Capital employed 177,506 106,190 140,697 30,124 (58,800) 395,717
Identifiable assets 209,798 111,128 153,069 17,657 (1,498) 490,154
Investments in affiliated companies 7,503 - 3,249 - - 10,752
Depreciation and amortization 9,889 6,532 11,088 931 357 28,797
Capital expenditures 28,327 14,213 17,059 1,389 527 61,515
====================================================================================================================================
54
Note 17. Selected Quarterly Financial Data (Unaudited)
Earnings Earnings
Earnings Earnings (Loss) (Loss)
Dollars in Thousands Per Per Net Per Per
Except per Gross Net Basic Diluted Gross Income Basic Diluted
Share Amounts Revenues Profit Income Share Share Revenues Profit (Loss) Share Share
------------------------------------------------------------------------------------------------------------------------------------
2001 2000
First Quarter $122,962 $35,839 $ 2,995 $ 0.18 $ 0.18 First Quarter $102,795 $30,546 $ 3,562 $ 0.22 $ 0.22
Second Quarter 113,674 34,948 4,170 0.24 0.24 Second Quarter 102,804 32,687 4,215 0.26 0.26
Third Quarter 118,293 33,702 4,211 0.24 0.24 Third Quarter 124,886 33,938 2,926 0.18 0.18
Fourth Quarter* 111,803 20,963 33,325 1.91 1.90 Fourth Quarter 144,066 27,205 (12,573) (0.77) (0.77)
------------------------------------------------------------------------------------------------------------------------------------
$466,732 $125,452 $ 44,701 $ 2.61 $ 2.59 $474,551 $124,376 $ (1,870) $ (0.12) $ (0.12)
====================================================================================================================================
*In the fourth quarter of 2001, the Company reported a pretax gain of $102.8
million on the sale of the Aqua Cool Pure Bottled Water business in the U.S.,
U.K. and France. The other primary factors affecting the results for the quarter
were a charge of $9.2 million related to the planned divestiture of the
Company's Malaysian affiliate, $3.8 million in other asset and goodwill
impairment charges, increases in completion cost estimates on several equipment
contracts with substantial civil construction scope, losses in the Consumer
Water Group in part due to efforts to ready that business for sale, and other
charges related primarily to an effective tax rate for the quarter of 52.6%. The
increase in the effective tax rate was caused primarily by the gain on the sale
of the Aqua Cool business, which included non-deductible goodwill, and by
foreign losses, most significantly the losses incurred by the Company's
Malaysian affiliate, that were not benefited since realization of those benefits
was not likely.
IONICS, INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Additions
Balance at charged to due to
end of costs and Acquired Balance at
Prior Year Expenses Businesses Deductions(a) End of year
---------- -------- ---------- ------------- -----------
Allowance for
doubtful accounts
and uncollectible
notes receivable:
Years ended:
December 31, 2001 $5,250,000 $4,632,000 - $5,113,000 $4,769,000
========== ========== ======== ========== ==========
December 31, 2000 $3,620,000 $4,605,000 $599,000 $3,574,000 $5,250,000
========== ========== ======== ========== ==========
December 31, 1999 $2,891,000 $2,643,000 $ 6,000 $1,920,000 $3,620,000
========== ========== ======= ========== ==========
(a) Deductions result primarily from the write-off of accounts
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
This item is not applicable to the Company.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 with respect to directors is hereby
incorporated by reference from the Company's definitive proxy statement for the
Annual Meeting of Stockholders to be held May 8, 2002, which will be filed with
the Securities and Exchange Commission within 120 days of the close of the
Company's fiscal year. The information required by this Item concerning
Executive Officers is included in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference from the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held May 8, 2002, which will be filed with the Securities and Exchange
Commission within 120 days of the close of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference from the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held May 8, 2002, which will be filed with the Securities and Exchange
Commission within 120 days of the close of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference from the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held May 8, 2002, which will be filed with the Securities and Exchange
Commission within 120 days of the close of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Index to Financial Statements and Financial Statement Schedule on
page 30.
2. Financial Statement Schedule
See Index to Financial Statements and Financial Statement Schedule on
page 30. All other Financial Statement Schedules have been omitted
because they are either not applicable or the required information is
included in the Consolidated Financial Statements or notes thereto.
56
3. Exhibits
Exhibit No. Description
3.0 Articles of Organization and By-Laws
3.1 Restated Articles of Organization filed *
April 16, 1986 (filed as Exhibit 3.1
to the Company's Annual Report on Form
10-K for the year ended December 31,
1997).
3.1(a) Amendment to Restated Articles of *
Organization filed June 19, 1987
(filed as Exhibit 3.1(a) to the
Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
3.1(b) Amendment to Restated Articles of *
Organization filed May 13, 1988
(filed as Exhibit 3.1(b) to Registration
Statement No. 33-38290 on
Form S-2 effective January 24, 1991).
3.1(c) Amendment to Restated Articles of *
Organization filed May 8, 1992 (filed
as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ending June 30, 1996.
3.1(d) Amendment to Restated Articles of *
Organization filed May 8, 1998 (filed
as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ending March 31, 1998).
3.2 By-Laws, as amended through May 2, 2000 *
(filed as Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2000).
4.0 Instruments defining the rights of security holders,
including indentures
4.1 Renewed Rights Agreement, dated as of August 19, *
1997 between Registrant and BankBoston N.A.
(filed as Exhibit 1 to the Company's Current
Report on Form 8-K dated August 27, 1997).
4.2 Form of Common Stock Certificate (filed *
as Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1997).
10.0 Material Contract
10.1 1979 Stock Option Plan, as amended *
through February 22, 1996 (filed as
Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1995).
10.2 1986 Stock Option Plan for Non-Employee
Directors, as amended through February 26, 2002.
10.3 Second Amendment and Waiver to Third
Amended and Restated Revolving Credit
Agreement dated as of March 28, 2002
between the Company and Fleet National
Bank.
57
10.3(1) First Amendment and Waiver to Third
Amended and Restated Revolving Credit
Agreement dated as of December 21, 2001
by and among the Company, Fleet National
Bank (as agent and lender), Bank
America, N.A., The Chase Manhattan Bank
and Mellon Bank, N.A.
10.4 Third Amended and Restated Credit *
Agreement dated as of June 29, 2001,
among the Company, Fleet National Bank
(as agent and lender), Bank of America,
N.A., The Chase Manhattan Bank and
Mellon Bank, N.A. (filed as Exhibit 4.1
to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended
June 30, 2001).
10.5 Global Amendment and Affirmation *
Agreement dated as of June 29, 2001,
among the Company, Fleet National Bank
and certain subsidiaries of the Company
(filed as Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001).
10.6 Second Amended and Restated Credit *
Agreement dated as of July 28, 2000,
among the Company, Fleet National Bank
and Fleet National Bank as agent (filed
as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000).
10.6(1) Amendment Agreement No. 1 to Second *
Amended and Restated Credit Agreement
among the Company, Fleet National Bank
and Fleet National Bank as Agent dated
March 1, 2001 (filed as Exhibit 10.3(1)
to the Company's Annual Report on Form
10-K for the year ended December 31,
2000).
10.6(2) Amendment Agreement No. 2 to Second *
Amended and Restated Credit Agreement
among the Company, Fleet National Bank
and Fleet National Bank as Agent dated
May 14, 2001 (filed as Exhibit 10.2 to
the Company's Quarterly Report on Form
10-Q for the quarterly period ended
March 31, 2001).
10.7 1994 Restricted Stock Plan (filed as *
Exhibit 10.12 to the Company's Annual
Report on Form 10-K dated March 30, 1995).
10.8 1997 Stock Incentive Plan (filed as Exhibit *
10.12 to the Company's Annual Report on
Form 10-K dated December 31, 1996).
10.9 Ionics, Incorporated Supplemental Executive *
Retirement Plan effective as of January
1, 1996 (filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K dated
December 31, 1997).
10.10 Form of Employee Retention Agreement *
dated February 24, 1998 between the
Company and certain officers of the
Company and its subsidiaries (filed as
Exhibit 10.10 to the Company's Annual
Report on Form 10-K dated December 31,
1997).
58
10.11 Shareholders' Agreement dated April 3, *
2001 between the Company and Mohammed
Abdulmohsin Al-Kharafi & Sons (filed as
Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly
period ended March 31, 2001).
10.12 1998 Non-Employee Directors Fee Plan *
(filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q
for the quarterly period ending
September 30, 1998).
10.13 Shareholders' Agreement dated as of May *
12, 2000, by and among the Company,
Hafeez Karamath Engineering Services
Limited, and Desalination Company of
Trinidad and Tobago Ltd., as amended on
June 16, 2000 (filed as Exhibit 10.2 to
the Company's Quarterly Report on Form
10-Q for the quarterly period ended June
30, 2000).
10.14 Loan Agreement dated as of October 25, *
2000 between the Company and Hafeez
Karamath Engineering Services Limited
(filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year
ended December 31, 2000).
21.0 Subsidiaries of the Registrant.
23.0 Consents
23.1 Consent of PricewaterhouseCoopers LLP
24.0 Power of Attorney.
-------------------------------
*Incorporated herein by reference
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on December 3, 2001,
reporting under Item 5 the issuance of a press release announcing the
Company's agreement to sell its bottled water business.
59
Undertaking
For purposes of complying with the amendments to the rules governing Form S-8
effective July 13, 1990 under the Securities Act of 1933, the undersigned hereby
undertakes as follows, which undertaking shall be incorporated by reference into
Registrant's registration statements on Form S-8 Nos. 33-14194, 33-5814,
33-2092, 2-72936, 2-82780, 2-64255, 33-41598, 33-54293, 33-59051, 333-05225,
333-29135, 33-54400 and 333-39684.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IONICS, INCORPORATED
(Registrant)
By: /s/Arthur L. Goldstein
----------------------
Arthur L. Goldstein
Chairman of the Board
President and Chief Executive Officer
Date: March 29, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 29, 2002 By: /s/Arthur L. Goldstein
----------------------
Arthur L. Goldstein
Chairman of the Board
President and Chief Executive Officer
(principal executive officer) and Director
Date: March 29, 2002 By: /s/Daniel M. Kuzmak
-------------------
Daniel M. Kuzmak
Vice President and
Chief Financial Officer
(principal financial officer)
Date: March 29, 2002 By: /s/Anthony Di Paola
-------------------
Anthony Di Paola
Vice President and Corporate Controller
(principal accounting officer)
61
Date: March 29, 2002 By: /s/Douglas R. Brown
-------------------------------------------
Douglas R. Brown, Director
Date: March 29, 2002 By: /s/Stephen L. Brown
-------------------------------------------
Stephen L. Brown, Director
Date: March 29, 2002 By: /s/Arnaud de Vitry d'Avaucourt
-------------------------------------------
Arnaud de Vitry d'Avaucourt, Director
Date: March 29, 2002 By: /s/Kathleen F. Feldstein
-------------------------------------------
Kathleen F. Feldstein, Director
Date: March 29, 2002 By: /s/William E. Katz
-------------------------------------------
William E. Katz, Director
Date: March 29, 2002 By: /s/William K. Reilly
-------------------------------------------
William K. Reilly, Director
Date: March 29, 2002 By: /s/John J. Shields
-------------------------------------------
John J. Shields, Director
Date: March 29, 2002 By: /s/Carl S. Sloane
-------------------------------------------
Carl S. Sloane, Director
Date: March 29, 2002 By: /s/Daniel I. C. Wang
-------------------------------------------
Daniel I. C. Wang, Director
Date: March 29, 2002 By: /s/Mark S. Wrighton
-------------------------------------------
Mark S. Wrighton, Director
Date: March 29, 2002 By: /s/Allen S. Wyett
-------------------------------------------
Allen S. Wyett, Director
62
EXHIBIT INDEX
Exhibit No. Description
3.0 Articles of Organization and By-Laws
3.1 Restated Articles of Organization filed *
April 16, 1986 (filed as Exhibit 3.1
to the Company's Annual Report on Form
10-K for the year ended December 31,
1997).
3.1(a) Amendment to Restated Articles of *
Organization filed June 19, 1987
(filed as Exhibit 3.1(a) to the
Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
3.1(b) Amendment to Restated Articles of *
Organization filed May 13, 1988
(filed as Exhibit 3.1(b) to Registration
Statement No. 33-38290 on
Form S-2 effective January 24, 1991).
3.1(c) Amendment to Restated Articles of *
Organization filed May 8, 1992 (filed
as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ending June 30, 1996.
3.1(d) Amendment to Restated Articles of *
Organization filed May 8, 1998 (filed
as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ending March 31, 1998).
3.2 By-Laws, as amended through May 2, 2000 *
(filed as Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2000).
4.0 Instruments defining the rights of security holders,
including indentures
4.1 Renewed Rights Agreement, dated as of August 19, *
1997 between Registrant and BankBoston N.A.
(filed as Exhibit 1 to the Company's Current
Report on Form 8-K dated August 27, 1997).
4.2 Form of Common Stock Certificate (filed *
as Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1997).
10.0 Material Contract
10.1 1979 Stock Option Plan, as amended *
through February 22, 1996 (filed as
Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1995).
10.2 1986 Stock Option Plan for Non-Employee
Directors, as amended through February 26, 2002.
10.3 Second Amendment and Waiver to Third
Amended and Restated Revolving Credit
Agreement dated as of March 28, 2002
between the Company and Fleet National
Bank.
63
10.3(1) First Amendment and Waiver to Third
Amended and Restated Revolving Credit
Agreement dated as of December 21, 2001
by and among the Company, Fleet National
Bank (as agent and lender), Bank
America, N.A., The Chase Manhattan Bank
and Mellon Bank, N.A.
10.4 Third Amended and Restated Credit *
Agreement dated as of June 29, 2001,
among the Company, Fleet National Bank
(as agent and lender), Bank of America,
N.A., The Chase Manhattan Bank and
Mellon Bank, N.A. (filed as Exhibit 4.1
to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended
June 30, 2001).
10.5 Global Amendment and Affirmation *
Agreement dated as of June 29, 2001,
among the Company, Fleet National Bank
and certain subsidiaries of the Company
(filed as Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001).
10.6 Second Amended and Restated Credit *
Agreement dated as of July 28, 2000,
among the Company, Fleet National Bank
and Fleet National Bank as agent (filed
as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000).
10.6(1) Amendment Agreement No. 1 to Second *
Amended and Restated Credit Agreement
among the Company, Fleet National Bank
and Fleet National Bank as Agent dated
March 1, 2001 (filed as Exhibit 10.3(1)
to the Company's Annual Report on Form
10-K for the year ended December 31,
2000).
10.6(2) Amendment Agreement No. 2 to Second *
Amended and Restated Credit Agreement
among the Company, Fleet National Bank
and Fleet National Bank as Agent dated
May 14, 2001 (filed as Exhibit 10.2 to
the Company's Quarterly Report on Form
10-Q for the quarterly period ended
March 31, 2001).
10.7 1994 Restricted Stock Plan (filed as *
Exhibit 10.12 to the Company's Annual
Report on Form 10-K dated March 30, 1995).
10.8 1997 Stock Incentive Plan (filed as Exhibit *
10.12 to the Company's Annual Report on
Form 10-K dated December 31, 1996).
10.9 Ionics, Incorporated Supplemental Executive *
Retirement Plan effective as of January
1, 1996 (filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K dated
December 31, 1997).
10.10 Form of Employee Retention Agreement *
dated February 24, 1998 between the
Company and certain officers of the
Company and its subsidiaries (filed as
Exhibit 10.10 to the Company's Annual
Report on Form 10-K dated December 31,
1997).
64
10.11 Shareholders' Agreement dated April 3, *
2001 between the Company and Mohammed
Abdulmohsin Al-Kharafi & Sons (filed as
Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly
period ended March 31, 2001).
10.12 1998 Non-Employee Directors Fee Plan *
(filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q
for the quarterly period ending
September 30, 1998).
10.13 Shareholders' Agreement dated as of May *
12, 2000, by and among the Company,
Hafeez Karamath Engineering Services
Limited, and Desalination Company of
Trinidad and Tobago Ltd., as amended on
June 16, 2000 (filed as Exhibit 10.2 to
the Company's Quarterly Report on Form
10-Q for the quarterly period ended June
30, 2000).
10.14 Loan Agreement dated as of October 25, *
2000 between the Company and Hafeez
Karamath Engineering Services Limited
(filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year
ended December 31, 2000).
21.0 Subsidiaries of the Registrant.
23.0 Consents
23.1 Consent of PricewaterhouseCoopers LLP
24.0 Power of Attorney.
-------------------------------
*Incorporated herein by reference