UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): April 24, 2002
--------------
PALL CORPORATION
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(Exact name of Registrant as specified in its charter)
New York 1-4311 11-1541330
---------------------------- ------------------------ ------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
2200 Northern Boulevard, East Hills, New York 11548
--------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(516) 484-5400
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
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(Former name or former address, if changed since last report)
THIS CURRENT REPORT INCLUDES UNAUDITED FINANCIAL STATEMENTS OF FSG, THE
GROUP OF COMPANIES ACQUIRED BY PALL CORPORATION ON APRIL 24, 2002 (SEE
ITEM 2 OF THIS REPORT), AS OF AND FOR FSG'S FISCAL YEAR ENDED DECEMBER 31,
2001. THE ACCOUNTING FIRM WHICH HAD AUDITED THE FINANCIAL STATEMENTS OF
FSG FOR PRIOR FISCAL YEARS WAS ARTHUR ANDERSEN LLP. BECAUSE OF THE MUCH
PUBLICIZED EVENTS INVOLVING THAT FIRM, THE REGISTRANT IS UNABLE TO OBTAIN
A MANUALLY SIGNED AUDIT REPORT IN RESPECT OF FSG'S FINANCIAL STATEMENTS AS
OF AND FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001. ACCORDINGLY, UNAUDITED
FINANCIAL STATEMENTS OF FSG FOR THAT YEAR ARE BEING FILED IN LIEU OF
AUDITED FINANCIAL STATEMENTS. FOR ADDITIONAL INFORMATION, SEE ITEM 7 ON
PAGE 2 HEREOF.
Item 2. Acquisition or Disposition of Assets.
Registrant Pall Corporation filed a Current Report on Form 8-K on May 8,
2002 (the "Original Report") to report the closing on April 24, 2002 of the
acquisition by Pall Corporation of the Filtration and Separations Group ("FSG")
of United States Filter Corporation. For additional information regarding the
acquisition, see Item 2 of the Original Report.
Item 7. Financial Statements and Exhibits
As permitted by paragraph (a)(4) of Item 7 of Form 8-K, and as stated in
the Original Report, the financial statements and pro forma information required
in connection with the FSG acquisition are being filed by this Amendment No. 1,
as follows:
(a) Unaudited Combined Financial Statements of FSG as of and for the year
ended December 31, 2001.
(b) Unaudited Pro Forma Combined Financial Information and Unaudited Pro
Forma Combined Statements of Earnings of Pall Corporation and FSG for the
nine-month period ended April 27, 2002 and for the year ended July 28, 2001.
THIS CURRENT REPORT INCLUDES UNAUDITED FINANCIAL STATEMENTS OF FSG, THE
GROUP OF COMPANIES ACQUIRED BY PALL CORPORATION ON APRIL 24, 2002 (SEE
ITEM 2 OF THIS REPORT), AS OF AND FOR FSG'S FISCAL YEAR ENDED DECEMBER 31,
2001. THE ACCOUNTING FIRM WHICH HAD AUDITED THE FINANCIAL STATEMENTS OF
FSG FOR PRIOR FISCAL YEARS WAS ARTHUR ANDERSEN LLP. BECAUSE OF THE MUCH
PUBLICIZED EVENTS INVOLVING THAT FIRM, THE REGISTRANT IS UNABLE TO OBTAIN
A MANUALLY SIGNED AUDIT REPORT IN RESPECT OF FSG'S FINANCIAL STATEMENTS AS
OF AND FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001. ACCORDINGLY, UNAUDITED
FINANCIAL STATEMENTS OF FSG FOR THAT YEAR ARE BEING FILED IN LIEU OF
AUDITED FINANCIAL STATEMENTS.
Because of the inability of the Registrant to obtain from Arthur Andersen
an audit report for the reason mentioned above, the Registrant will not be
subsequently providing audited financial statements of FSG for the year ended
December 31, 2001. Accordingly, no independent auditor has opined that the
unaudited financial statements of FSG set forth below present fairly, in all
material respects, the financial position, the results of operations, cash flows
and the changes in shareholders' equity of FSG for the year ended December 31,
2001 in accordance with generally accepted accounting principles.
The Securities and Exchange Commission, in response to a letter from Pall
Corporation requesting a waiver of the requirement of providing audited FSG
financial statements, has advised Pall Corporation by letter as follows: "We
will not object to your proposal to include unaudited carve-out financial
statements of FSG in a Form 8-K in satisfaction of the requirement to include
audited financial statements."
- 2 -
FILTRATION AND SEPARATIONS GROUP
Unaudited Combined Financial Statements
For the Year Ended December 31, 2001
-3-
FILTRATION AND SEPARATIONS GROUP
UNAUDITED COMBINED BALANCE SHEET
DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 15,891
Accounts receivable, net of allowance of $4,144 51,837
Notes receivable 8,715
Inventories 58,456
Costs and estimated earnings in excess of billings, net 3,715
Prepaid expenses 1,501
Deferred income taxes 6,781
Trade related receivables from Parent 7,839
Other current assets 7,907
----------
Total current assets 162,642
Property, plant and equipment, net 99,866
Goodwill, net 43,293
Patents and other intangible assets, net 5,392
Other assets 1,504
----------
Total assets $ 312,697
==========
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Lines of credit and other short-term debt $ 10,012
Current portion of long-term debt and capital lease obligations 1,017
Accounts payable 18,181
Accrued liabilities 43,968
----------
Total current liabilities 73,178
Long-term debt and capital lease obligations,
net of current portion 4,181
Pension benefit obligations 22,103
Deferred income taxes 3,822
Minority interests 138
----------
Total liabilities 103,422
----------
Commitments and contingencies (Note 16)
Parent company investment 209,275
----------
Total liabilities and Parent company investment $ 312,697
==========
The accompanying notes are an integral part of this combined financial
statement.
-4-
FILTRATION AND SEPARATIONS GROUP
UNAUDITED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
Revenues $ 275,885
Cost of sales 165,029
----------
Gross profit 110,856
Operating expenses:
Selling, general and administrative expenses 76,831
Amortization expense 1,747
Research and development costs 7,573
----------
Income from operations 24,705
Other income (expense):
Interest expense (2,361)
Interest income 722
Other income, net 2,336
----------
Income before income taxes 25,402
Provision for income taxes 9,457
----------
Net income $ 15,945
==========
The accompanying notes are an integral part of this combined financial
statement.
-5-
FILTRATION AND SEPARATIONS GROUP
UNAUDITED COMBINED STATEMENT OF PARENT COMPANY INVESTMENT
AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
Parent Company Comprehensive
Investment Income
-------------- -------------
Balance, December 31, 2000 $ 135,556
Net income 15,945 $ 15,945
Foreign currency translation adjustment (11,244) (11,244)
Capital contribution from Parent 69,018
---------- ----------
Comprehensive income $ 4,701
==========
Balance, December 31, 2001 $ 209,275
==========
The accompanying notes are an integral part of this combined financial
statement.
- 6 -
FILTRATION AND SEPARATIONS GROUP
UNAUDITED COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
Cash flows from operating activities:
Net income $ 15,945
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 10,577
Amortization 1,747
Provision for doubtful accounts 121
Loss on disposal of property and equipment 105
Loss on disposal of business 284
Deferred income taxes (4,048)
Decrease (increase) in assets, net of disposal of business:
Accounts and notes receivable (261)
Inventories (8,802)
Costs and estimated earnings in excess of billings 724
Prepaid expenses and other assets (5,390)
Trade related payables to and receivables from Parent (6,201)
Decrease in liabilities, net of disposal of business:
Accounts payable, accrued expenses and pension
benefit obligations (2,136)
--------
Net cash provided by operating activities 2,665
--------
Cash flows from investing activities:
Purchase of property, plant and equipment (15,190)
Proceeds from disposal of equipment 533
Proceeds from disposal of business 7,033
Payments related to patent costs (977)
--------
Net cash used in investing activities (8,601)
--------
Cash flows from financing activities:
Borrowings under lines of credit and other short-term debt, net 3,459
Borrowings under long-term debt 749
Payments under long-term debt and capital lease obligations (1,758)
Non-trade related payables to Parent 8,359
--------
Net cash provided by financing activities 10,809
--------
Effects of foreign currency translation on cash and cash equivalents (682)
--------
Net increase in cash and cash equivalents 4,191
Cash and cash equivalents at beginning of year 11,700
--------
Cash and cash equivalents at end of year $ 15,891
========
The accompanying notes are an integral part of this combined financial
statement.
-7-
FILTRATION AND SEPARATIONS GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(1) NATURE OF BUSINESS AND BASIS OF PRESENTATION
Filtration and Separations Group ("FSG") is comprised of certain legal
entities, directly or indirectly owned by United States Filter Corporation
and Subsidiaries ("US Filter" or "Parent"), which is a wholly-owned
subsidiary of Vivendi Environnement, S.A. ("Vivendi"). FSG manufactures
and sells filtration products for the separation and purification of
liquids and gases. FSG primarily serves the industrial, healthcare, food
and beverage, polymer, pharmaceutical/biotech, and microelectronics
markets.
The accompanying unaudited combined financial statements, which in the
opinion of FSG's management reflect all adjustments necessary to present
fairly FSG's financial position, results of operations and cash flows as
of and for the year ended December 31, 2001, were prepared on a carve out
basis for purposes of Vivendi's sale of FSG. The combined financial
statements do not reflect the pushdown of the new cost basis for FSG's
assets and liabilities, including goodwill, as a result of the Vivendi
acquisition of US Filter in April 1999. On April 24, 2002, Pall
Corporation purchased FSG for total cash consideration of $360 million.
Listed below are the legal entities that comprise FSG:
Country of Direct or indirect
incorporation ownership interest
------------- ------------------
Presian Pty Limited Australia 100%
USF Filtration Pty Limited Australia 100%
USF Seitz Filtertechnik GmbH Austria 100%
Cerindus SA* France 100%
Filtration & Separations Group SAS France 100%
Societe des Ceramiques Techniques SA France 100%
USF Filtration France SAS France 100%
Schenk Filtec GmbH Germany 100%
Schenk Werkzeugbau und Maschinenbau GmbH Germany 100%
Schumacher Umwelt und Trenntechnik GmbH Germany 100%
SeitzSchenk Filtersystems GmbH Germany 100%
SeitzSchenk Modultechnic GmbH Germany 51%
Strassburger Filterschichten GmbH Germany 100%
USF Filtration und Separations GmbH Germany 100%
USF Fluid Dynamics - Filterite GmbH Germany 100%
USF Filtration and Separations SpA Italy 100%
US Filter (Japan) Corporation** Japan 100%
USF/Schumacher (Japan) Corporation Japan 99%
Schumakcher Polska Sp. Z o.o. Poland 100%
Seitz Iberica SA Spain 100%
Cord Chemical Company Limited UK 100%
USF Filtration and Separations Limited UK 100%
USF Seitz Filterite Limited UK 100%
Allosep, Inc. USA 100%
Memtec Finance, Inc. USA 100%
-8-
FILTRATION AND SEPARATIONS GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001
USF Filtration and Separations Group, Inc. USA 100%
USFC Acquisition, Inc. USA 100%
Schenk Filtersystems, Inc. USA 100%
* The results of operations for Cerindus SA were included in these
combined financial statements through March 28, 2001, the date of its
sale (see Note 7)
**Only certain operations within this legal entity are included in these
combined financial statements.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of the
legal entities described in Note 1. All significant intercompany balances
and transactions among these companies have been eliminated.
REVENUE RECOGNITION
Products and Services:
Sales are recorded as products are shipped or services are rendered.
Method of Accounting for Contracts:
Long-term contracts are generally accounted for under the
percentage-of-completion method. Under this method, an estimated
percentage for each contract, based on the cost of work performed to date
that has contributed to contract performance compared to the total
estimated cost, is applied to the contract price and recognized as
revenue. Provision is made for the entire amount of future estimated
losses on contracts in progress in the period such losses are determined.
Contracts in which reasonably dependable estimates cannot be made or for
which inherent hazards make estimates doubtful are accounted for under the
completed-contract method.
Contract costs include all direct material and labor and indirect costs
related to contract performance. General and administrative expenses are
charged to expense as incurred.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of demand deposits and certificates of deposit
with original maturities of 90 days or less.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
LONG-LIVED ASSETS
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective
assets, ranging from 3 to 25 years. Leasehold improvements are amortized
using the straight-line method over the lesser of their estimated useful
lives or the related remaining lease terms.
-9-
FILTRATION AND SEPARATIONS GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Goodwill and other intangible assets, generally representing the excess of
cost over the fair value of net identifiable assets acquired, are stated
at cost less accumulated amortization. Amortization expense is computed
using the straight-line method over the estimated useful lives of the
respective assets, for periods up to 40 years. Included in goodwill is the
pushdown of goodwill from US Filter associated with its acquisitions of
the legal entities combined in the financial statements of FSG.
FSG periodically reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an asset may
not be recoverable. If the sum of the expected cash flows, undiscounted
and without interest, is less than the carrying amount of the asset, an
impairment loss is recognized as the amount by which the carrying amount
of the asset exceeds its fair value.
WARRANTY COSTS
FSG's products are generally warranted against defects in material and
workmanship for a period of one year. FSG has accrued for estimated future
warranty costs.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. These costs
consist primarily of salaries, development materials, supplies and
applicable overhead expenses of personnel directly involved in the
research and development of new products, manufacturing processes and
service offerings.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities
using tax rates in effect for the year in which the differences are
expected to reverse. United States income taxes are not provided on the
undistributed earnings of the non-U.S. subsidiaries as such earnings are
intended to be indefinitely reinvested in those operations.
DERIVATIVE INSTRUMENTS
Effective January 1, 2001, FSG adopted Statement of Financial Accounting
Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 138, which established
accounting and reporting standards for derivative instruments and hedging
activities. All derivative instruments are required to be measured at fair
values and recorded on the balance sheet. Changes in fair values are
required to be reported in earnings or other comprehensive income
depending on the use of the derivative and whether it qualifies for hedge
accounting. Derivative instruments are designated and accounted for as
either a hedge of a recognized asset or liability (fair value hedge) or a
hedge of a forecasted transaction (cash flow hedge). For derivatives
designated as effective cash flow hedges, changes in fair values are
recognized in other comprehensive income. Changes in fair values related
to fair value hedges, as well as the ineffective portion of cash flow
hedges, are recognized in earnings. The adoption of SFAS No. 133 did not
have a significant impact on FSG's financial position and results of
operations.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in a functional currency other than
U.S. dollars are translated into U.S. dollars at the current rate of
exchange existing at period-end and revenues and expenses are translated
at the average monthly exchange rates. Translation adjustments are
reflected in the Unaudited Combined Statements of Parent Company
Investment and Comprehensive Income. For businesses with transactions
denominated in currencies other than their functional currency, net
foreign exchange transaction gains or losses are included in determining
net income. These transactions resulted in a net gain of approximately
-10-
FILTRATION AND SEPARATIONS GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001
$2.2 million for the year ended December 31, 2001, which is included in
Other income, net, in the accompanying Unaudited Combined Statement of
Income.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 141 requires that all business
combinations be accounted for under the purchase method. The statement
further requires separate recognition of intangible assets that meet
certain criteria. The statement applies to all business combinations
initiated after June 30, 2001. SFAS No. 142 requires that an intangible
asset that is acquired shall be initially recognized and measured based on
its fair value. The statement also provides that goodwill should not be
amortized, but shall be tested for impairment annually, or more frequently
if circumstances indicate potential impairment, through a comparison of
fair value to its carrying amount. SFAS No. 142 is effective for fiscal
periods beginning after December 15, 2001. FSG has adopted SFAS No. 141
and SFAS No. 142 with respect to new goodwill as of July 1, 2001 and
anticipates adopting SFAS No. 142 with respect to existing goodwill as of
January 1, 2002. The adoption of SFAS No. 141 has not impacted FSG's
financial condition or results of operations. In accordance with SFAS No.
142, existing goodwill will continue to be amortized through the remainder
of 2001 at which time amortization will cease and FSG will perform a
transitional goodwill impairment test. While the ultimate impact of the
new accounting standard has yet to be determined, goodwill amortization
expense for the year ended December 31, 2001 totaled $1.2 million.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires the
recognition and measurement of impairment losses relating to long-lived
assets to be held and used as well as long-lived assets to be disposed of
by sale. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. FSG does not expect a material impact on its results of
operations or financial condition as a result of the adoption.
(3) CONTRACT BILLING STATUS
Information with respect to the billing status of contracts accounted for
under the percentage-of-completion method in process as of December 31,
2001 is as follows (in thousands):
Contract costs incurred $ 4,988
Estimated profits 2,976
----------
Contract revenue earned 7,964
Less billings (4,525)
----------
Costs and estimated earnings in excess of billings $ 3,439
==========
-11-
FILTRATION AND SEPARATIONS GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001
As of December 31, 2001, costs incurred related to contracts accounted for
under the completed-contract method included in costs and estimated
earnings in excess of billings amounted to $3.9 million. Billings related
to these contracts amounted to $3.6 million.
(4) INVENTORIES
Inventories as of December 31, 2001 consisted of the following (in
thousands):
Raw materials $ 21,745
Work-in-progress 16,361
Finished goods 20,350
----------
$ 58,456
==========
(5) PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment as of December 31, 2001 consisted of the
following (in thousands):
Land $ 8,577
Buildings and improvements 48,278
Equipment 63,389
Furniture and fixtures 5,356
Computer equipment 9,158
Construction in progress 5,548
---------
140,306
Less accumulated depreciation (40,440)
---------
$ 99,866
=========
Property, plant and equipment included assets financed under capital lease
obligations of approximately $1.7 million as of December 31, 2001, and
accumulated amortization related to these assets was approximately $0.6
million.
(6) GOODWILL, NET
Goodwill and accumulated amortization as of December 31, 2001 consisted of
the following (in thousands):
Goodwill $ 46,529
Less accumulated amortization (3,236)
----------
$ 43,293
==========
-12-
FILTRATION AND SEPARATIONS GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Goodwill amortization expense for the year ended December 31, 2001 totaled
approximately $1.2 million.
(7) SALES OF BUSINESSES
During 2000, Societe des Ceramiques Techniques SA ("SCT") made the
decision to dispose of a part of its business. As a result, during the
first quarter of 2001, SCT contributed certain assets and liabilities into
Cerindus SA. On March 28, 2001, Cerindus SA was sold for approximately
$7.0 million. A loss on impairment of assets held for sale of $1.2 million
was recorded as of December 31, 2000. Upon the completion of the sale, FSG
recorded an additional loss on the transaction of approximately $0.3
million, which is included in operating expenses for the year ended
December 31, 2001. FSG incurred approximately $1.1 million of transaction
costs in connection with the sale, and these costs were included in the
determination of the total loss on the sale.
On January 1, 2002, FSG completed the sale of certain intangible assets
related to technology rights for total cash consideration of $24 million.
The sale resulted in a gain of approximately $22.4 million.
Sales and Income before income taxes related to the businesses sold were
$4.6 million and $3.6 million, respectively, for the year ended December
31, 2001.
(8) ACCRUED LIABILITIES
Accrued liabilities as of December 31, 2001 consisted of the following (in
thousands):
Payroll, benefits and related taxes $ 12,113
Accrued job costs and customer deposits 10,519
Income taxes 3,302
Sales, property and other taxes 2,640
Deferred royalty revenues 2,275
Relocation and closure costs 2,193
Warranty costs 2,171
Legal and tax contingencies 1,908
Sales commissions 1,450
Other 5,397
----------
$ 43,968
==========
(9) DEBT, CAPITAL LEASE OBLIGATIONS AND OTHER FINANCING ARRANGEMENTS
Information with respect to long-term debt and capital lease obligations
as of December 31, 2001 is as follows (in thousands):
-13-
FILTRATION AND SEPARATIONS GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Mortgage notes payable, secured by land and
buildings, with interest rates ranging from 4.8% to 8.9%,
due in 2002 through 2006 $ 4,013
Unsecured loan payables, with interest rates ranging from
1.0% to 7.4%, due in 2002 through 2004 418
Capital lease obligations 767
--------
5,198
Less current portion (1,017)
--------
$ 4,181
========
The aggregate maturities of long-term debt and capital lease obligations
for each of the five years subsequent to December 31, 2001 are as follows:
2002, $1.0 million; 2003, $3.1 million; 2004, $0.5 million; 2005, $0.4
million; and 2006, $0.2 million.
As of December 31, 2001, FSG had lines of credit outstanding in the
aggregate amount of $3.2 million, and $5.4 million was available for
borrowing. These facilities, with interest rates ranging from 4.5% to
8.6%, were guaranteed by US Filter.
In addition, as of December 31, 2001, FSG had outstanding short term
borrowings secured by accounts and notes receivable in the aggregate
amount of $6.8 million, and $5.4 million was available for borrowing under
these financing arrangements. Interest rates for these facilities were in
the range from 1.4% to 6.5%.
(10) PARENT COMPANY INVESTMENT
Parent company investment represents original paid-in-capital and
additional capital contributions made by US Filter, retained earnings and
foreign currency translation adjustment.
During 2001, in connection with the planned sale of FSG, US Filter made an
additional capital contribution to FSG. The capital contribution was the
result of the forgiveness of the non-trade related payables to Parent,
which resulted in an increase to Parent company investment of $69.0
million. The non-trade related payables to Parent represented the net
amount of loans provided by US Filter to FSG and loans provided by FSG to
US Filter subsidiaries. The average of such loans for the year ended
December 31, 2001 was approximately $60.0 million.
(11) SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 2001, cash paid for interest and taxes was
approximately $2.3 million and $3.2 million, respectively.
Non-cash investing and financing activities for the year ended December
31, 2001, which were excluded from the combined statement of cash flows,
consisted of the following (in thousands):
Sale of business:
Assets disposed of $ 11,534
Liabilities transferred (4,501)
--------
$ 7,033
========
Assets purchased through capital leases $ 29
========
Capital contribution from Parent $ 69,018
========
-14-
FILTRATION AND SEPARATIONS GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(12) TRANSACTIONS WITH PARENT
Summarized information with respect to FSG's transactions with US Filter
for the year ended December 31, 2001 is as follows (in thousands):
Revenues from Parent $ 9,105
Cost of sales related to revenues from Parent 6,709
--------
Gross profit $ 2,396
========
Interest income $ 451
========
Interest expense $ 1,179
========
Other income $ 110
========
Cost of sales related to purchases from US Filter for the year ended
December 31, 2001 totaled $1.1 million.
Allocations of costs from US Filter to FSG consist of insurance costs
primarily related to medical and dental benefits and general liability and
property insurance. These costs were allocated using a proportional cost
allocation method, which FSG's management believes is reasonable. The
allocations for the year ended December 31, 2001 totaled $5.1 million.
Trade related receivables from and payables to Parent primarily arise from
sales to and purchases from US Filter.
(13) INCOME TAXES
Income tax expense includes income taxes payable for the current year and
the change in deferred income tax assets and liabilities for the future
tax consequences of events that have been recognized in FSG's financial
statements or income tax returns. A valuation allowance is recognized to
reduce the carrying value of deferred income tax assets if it is believed
to be more likely than not that a component of the deferred income tax
assets will not be realized.
Of the legal entities included in these combined financial statements as
listed in Note 1, the entities that are incorporated in the United States
join USF Filtrations and Separations Group, Inc. in filing a consolidated
U.S. federal income tax return. All other legal entities file separate tax
returns in their respective tax jurisdictions.
The components of income, (loss) before income taxes are as follows (in
thousands):
Domestic $ (4,828)
Foreign 30,230
----------
$ 25,402
==========
-15-
FILTRATION AND SEPARATIONS GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001
The provision for income taxes consists of the following items (in
thousands):
Current:
Domestic $ (608)
Foreign 14,113
----------
$ 13,505
----------
Deferred:
Domestic (1,120)
Foreign (2,928)
----------
(4,048)
----------
Total provision for income taxes $ 9,457
==========
A reconciliation of the provision for income taxes to the U.S. Federal
corporate rate of 35% follows (in thousands).
Expected provision for income taxes $ 8,891
Permanent differences 566
State income taxes, net of Federal income tax benefit (517)
Other 517
----------
Provision for income taxes $ 9,457
==========
-16-
FILTRATION AND SEPARATIONS GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001
The sources and tax effects of temporary differences between the financial
statement carrying amounts and tax bases of assets and liabilities as of
December 31, 2001 were as follows (in thousands):
Deferred tax assets:
Operating loss carryforwards $ 20,296
Provisions and accruals 6,990
Retirement obligations 3,650
Warranty 1,103
Other 806
----------
32,845
Valuation allowance (20,285)
----------
12,560
Deferred tax liabilities:
Depreciation and amortization 6,284
Intangible assets 1,877
Other 1,440
----------
9,601
----------
Net deferred tax asset $ 2,959
==========
Realization of the operating loss carryforwards is dependent on generating
sufficient taxable income prior to expiration of the carryforwards. The
valuation allowance relates principally to the uncertainty associated with
the recovery of FSG's net operating loss carryforwards.
In accordance with APB No. 23, "Accounting for Income Taxes - Special
Areas", deferred U.S. tax liabilities have not been provided on the
undistributed earnings of foreign subsidiaries because it is the intent of
FSG to permanently reinvest these earnings.
(14) RETIREMENT PLANS AND RETIREMENT INDEMNITIES
As of December 31, 2001, FSG had defined pension benefit plans covering
certain full-time employees in Germany and Japan. In addition, FSG's
businesses in Australia, Austria, France and Italy are subject to
statutory retirement, long-time service leave and severance indemnities
that qualify as defined pension benefit plans under SFAS No. 87,
"Employers' Accounting for Pensions."
-17-
FILTRATION AND SEPARATIONS GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001
Information with respect to the defined benefit plans of FSG as of
December 31, 2001 is as follows (in thousands):
Change in benefit obligation:
Benefit obligation - beginning of year $ 24,767
Service cost 1,170
Interest cost 1,187
Plan amendments (260)
Actuarial gain (259)
Total benefits paid (1,258)
Effect of exchange rates (1,740)
----------
Benefit obligation - end of year 23,607
----------
Change in plan assets:
Fair value of plan assets - beginning of year 1,633
Actual return on plan assets 9
Company contributions 1,175
Benefits paid from plan assets (1,258)
Effect of exchange rates (159)
----------
Fair value of plan assets - end of year 1,400
----------
Funded status: (22,207)
Unrecognized actuarial loss 104
----------
Net amount recognized in the balance sheet $ (22,103)
==========
Plans with accumulated benefit obligations in
excess of plan assets consists of the following:
Accumulated benefit obligation $ 22,683
==========
Projected benefit obligation $ 23,607
==========
Plan assets at fair value $ 1,400
==========
Net periodic benefit cost for the Company's defined benefit pension plans
includes the following components:
Service cost $ 1,170
Interest cost 1,187
Expected return on plan assets (32)
Amortization of prior service cost --
Amortization of net transition asset --
Recognized actuarial loss (gain) (155)
----------
Net periodic benefit cost $ 2,170
==========
The assumptions used in accounting for these plans as of December 31, 2001
were as follows:
Discount rates 2.0% to 6.0%
Rates of increase in compensation levels 3.0% to 5.2%
Expected rates of return on plan assets 1.0% to 5.0%
Changes in assumptions used in actuarial calculations resulted in
actuarial gains of $0.3 million for the year ended December 31, 2001.
These actuarial gains have been included in the pension benefit cost.
- 18 -
FILTRATION AND SEPARATIONS GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001
During 2001, FSG made contributions to defined contribution benefit plans
covering certain full-time employees in the United States, the United
Kingdom and Australia. Benefit costs related to defined contribution
benefit plans are expensed as incurred and amounted to approximately $1.2
million for the year ended December 31, 2001.
(15) FINANCIAL INSTRUMENTS AND RISKS AND UNCERTAINTIES
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities approximate fair value because
of the short maturity of these assets and liabilities. The fair value of
FSG's long-term debt (including current portion) is estimated to be equal
to the carrying amounts based on the current rates offered to FSG for debt
of the same remaining maturities.
Off balance sheet derivative financial instruments as of December 31, 2001
consisted of foreign currency exchange contracts. FSG enters into currency
exchange contracts in the normal course of business to manage its exposure
against foreign currency fluctuations on receivable and payable positions
resulting from sales and purchases denominated in currencies other than
the functional currency. FSG does not utilize financial instruments for
trading purposes.
As of December 31, 2001, FSG had foreign currency contracts outstanding
related to third-party payables and trade related payables to Parent with
an aggregate notional value of $1.5 million. The estimated fair values of
these contracts approximated the notional values. The foreign exchange
contracts outstanding as of December 2001 were denominated in U.S. dollars
and Euros.
FSG's products are sold to a diverse group of customers throughout the
world. As such, FSG is subject to certain risks and uncertainties as a
result of changes in general economic conditions, sources of supply,
competition, foreign exchange rates, tax reform, litigation and regulatory
developments. The diversity of FSG's products and geographic operations
mitigate the risk that adverse changes in any event would materially
affect FSG's financial position. Additionally, as a result of the
diversity of its customer base, FSG does not consider itself exposed to
concentration of credit risks. These risks are further minimized by
placing credit limits, ongoing monitoring of customers' account balances,
and assessment of customers' financial strength.
(16) COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
FSG leases certain facilities and equipment under various noncancellable
long-term and month-to-month leases. These leases are accounted for as
operating leases. Rent expense aggregated approximately $4.0 million for
the year ended December 31, 2001.
A summary of the future minimum annual commitments under operating leases
as of December 31, 2001 is as follows (in thousands):
Year ending:
2002 $ 2,836
2003 2,073
2004 1,481
2005 736
2006 606
Thereafter 1,509
--------
$ 9,241
========
- 19 -
FILTRATION AND SEPARATIONS GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001
As of December 31, 2001, FSG has guarantees outstanding in the aggregate
amount of approximately $2.9 million.
CONTINGENT LIABILITIES
Legal proceedings pending against FSG consist of litigation incidental to
FSG's business and in the opinion of management, the outcome of such
litigation is not expected to materially affect FSG's combined financial
position or future results of operations.
(17) SEGMENT INFORMATION
FSG is managed as a single industry segment in the business of
manufacturing and selling filtration products. FSG's revenues from
external customers and long-lived assets, other than goodwill and other
intangible assets, by geographic area for the year ended December 31, 2001
were as follows (in thousands):
Revenues from unaffiliated customers:
Europe $ 148,354
North America 91,381
Asia Pacific 27,045
----------
$ 266,780
----------
Long-lived assets:
Europe $ 50,602
North America 48,718
Asia Pacific 2,050
----------
$ 101,370
==========
- 20 -
PALL CORPORATION AND FILTRATION AND SEPARATIONS GROUP
Unaudited Pro Forma Combined Financial Information and
Unaudited Pro Forma Combined Statements of Earnings
For the Nine-Month Period Ended April 27, 2002
and For the Year Ended July 28, 2001
- 21 -
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
PALL CORPORATION AND FSG
On April 24, 2002, Pall Corporation ("the Company") borrowed $360 million to
acquire the Filtration and Separations Group ("FSG") from United States Filter
Corporation for total cash consideration of $360 million, subject to a post
closing adjustment of the purchase price based on the net assets acquired as of
April 27, 2002. The acquisition was funded via a 364-day variable rate credit
facility, based on LIBOR. At April 27, 2002, the applicable rate was 2.45%. The
Company expects to refinance the acquisition credit facility on a long-term
basis in fiscal 2003.
FSG's balance sheet has been consolidated with the Company's balance sheet as of
April 27, 2002. As such, the Company is not required to present a pro forma
combined balance sheet since its historical consolidated balance sheet as of
April 27, 2002 reflects the consolidation of FSG into the Company.
The unaudited pro forma combined statements of earnings for the nine months
ended April 27, 2002 and for the year ended July 28, 2001 include the results of
operations of FSG for the nine months ended March 31, 2002 and the twelve months
ended June 30, 2001, respectively. The unaudited pro forma combined statements
of earnings assume the acquisition occurred at the beginning of each period
presented. The unaudited pro forma combined statements of earnings do not give
effect to any synergies expected to result from the acquisition. They also do
not give effect to the income statement effect of purchase accounting
adjustments, charges that may result from the finalization of integration plans
or the potential write-off of in-process R&D that was acquired as such items are
dependent upon valuations and other studies that have not progressed to a stage
where there is sufficient information to make such adjustments. Accordingly, the
unaudited pro forma combined statements of earnings are not necessarily
indicative of what actually would have occurred if the acquisition had been
consummated at the beginning of each period presented, nor are they necessarily
indicative of future combined operating results.
The unaudited pro forma combined statements of earnings should be read in
conjunction with the historical consolidated financial statements of the Company
as of and for the nine months ended April 27, 2002 and as of and for the year
ended July 28, 2001, filed with the Securities and Exchange Commission on the
Company's Forms 10-Q dated June 11, 2002 and 10-K dated October 26, 2001,
respectively, and FSG's unaudited combined financial statements as of and for
the year ended December 31, 2001 filed within this Form 8-K in Item 7(a).
- 22 -
PALL CORPORATION AND FSG
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
For the nine months ended April 27, 2002
(In thousands, except per share data)
Historical Pro Forma
------------------------ -------------------------------------------
Sales of
Pall FSG Businesses(a) Adjustments Combined
---------- ---------- ------------- ----------- ----------
Net Sales $ 861,931 $ 193,822 $ (500) $ -- $1,055,253
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 425,946 116,610 -- -- 542,556
Selling, general and
administrative expenses 306,471 50,940 5,810 (887)(b) 362,334
Research and development 38,474 5,789 (423) -- 43,840
Gain on sale of
technology -- (22,442) 22,442 -- --
Interest expense, net 8,668 1,187 -- 17,550(c) 27,405
---------- ---------- ---------- ---------- ----------
Total costs and expenses 779,559 152,084 27,829 16,663 976,135
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 82,372 41,738 (28,329) (16,663) 79,118
Income taxes 18,122 15,502 (11,332) (5,788) 16,504
---------- ---------- ---------- ---------- ----------
Net earnings $ 64,250 $ 26,236 $ (16,997) $ (10,875) $ 62,614
========== ========== ========== ========== ==========
Earnings per share:
Basic $ .53 $ .51
Diluted $ .52 $ .51
Average number of shares outstanding:
Basic 122,242 122,242
Diluted 123,478 123,478
See Notes to Unaudited Pro Forma Combined Statements of Earnings.
- 23 -
PALL CORPORATION AND FSG
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
For the year ended July 28, 2001
(In thousands, except per share data)
Historical Pro Forma
------------------------ ---------------------------------------------
Sales of
Pall FSG Businesses(a) Adjustments Combined
---------- ---------- ------------- ----------- ----------
Net Sales $1,235,423 $ 286,874 $ (11,489) $ -- $1,510,808
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 591,146 171,998 (8,058) -- 755,086
Selling, general and
administrative expenses 404,025 85,217 (1,420) (4,922)(b) 482,900
Research and development 56,041 7,222 (1,365) -- 61,898
Restructuring and other charges 17,248 1,504 (1,504) -- 17,248
Interest expense, net 16,643 1,580 -- 23,400(c) 41,623
---------- ---------- ---------- ---------- ----------
Total costs and expenses 1,085,103 267,521 (12,347) 18,478 1,358,755
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 150,320 19,353 858 (18,478) 152,053
Income taxes 32,310 14,072 344 (6,907) 39,819
---------- ---------- ---------- ---------- ----------
Net earnings $ 118,010 $ 5,281 $ 514 $ (11,571) $ 112,234
========== ========== ========== ========== ==========
Earnings per share:
Basic $ .96 $ .92
Diluted $ .95 $ .91
Average number of shares outstanding:
Basic 122,580 122,580
Diluted 123,735 123,735
See Notes to Unaudited Pro Forma Combined Statements of Earnings.
- 24 -
PALL CORPORATION AND FSG
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF EARNINGS
For the nine months ended April 27, 2002 and the year ended July 28, 2001
The following is a summary of the adjustments that are reflected in the pro
forma combined statements of earnings, which are based upon available
information and certain assumptions that management believes are reasonable:
(a) Adjustments were made to exclude the operating results and loss on sale
relating to Cerindus SA and the gain on sale of FSG's technology (including
a funded R&D arrangement).
(b) Represents the reversal of FSG's pre-acquisition goodwill amortization and
the Company's goodwill amortization prior to the adoption of SFAS No. 142,
Goodwill and Other Intangible Assets.
(c) Represents interest expense on the $360 million in acquisition borrowings
based on an assumed permanent financing rate of 6-1/2%.
- 25 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PALL CORPORATION
(Registrant)
By: /s/ John Adamovich, Jr.
---------------------------------
Name: John Adamovich, Jr.
Title: Group Vice President, Treasurer
and Chief Financial Officer
Date: July 3, 2002
- 26 -