FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2002 -------------- 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 04-2068530 (State or other jurisdiction (IRS Employer Identification Number) of incorporation or organization) 65 Grove Street Watertown, Massachusetts 02472 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 926-2500 Former name,former address and former fiscal year, if changed since last report: 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 preceeding 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At March 31, 2002 the Company had 17,533,742 shares of Common Stock, par value $1 per share, outstanding. IONICS, INCORPORATED FORM 10-Q FOR QUARTER ENDED MARCH 31, 2002 INDEX PAGE PART I FINANCIAL INFORMATION Item 1. Financial Statements 2 Consolidated Statements of Operations 2 Consolidated Balance Sheets 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 PART II OTHER INFORMATION 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 EXHIBIT INDEX 17 -1- PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS IONICS, INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except per share amounts) Three months ended March 31, ---------------------------- 2002 2001 Revenue: Equipment Business Group $ 38,271 $ 44,981 Ultrapure Water Group 25,035 40,848 Consumer Water Group 10,491 29,345 Instrument Business Group 6,544 7,788 ----------- ------------ 80,341 122,962 ----------- ------------ Costs and expenses: Cost of sales of Equipment Business Group 28,634 35,000 Cost of sales of Ultrapure Water Group 18,998 30,680 Cost of sales of Consumer Water Group 6,830 18,004 Cost of sales of Instrument Business Group 2,753 3,439 Research and development 1,621 1,690 Selling, general and administrative 19,500 28,501 ----------- ------------ 78,336 117,314 ----------- ------------ Income from operations 2,005 5,648 Interest income 993 225 Interest expense (560) (1,604) Equity income 892 441 ----------- ------------ Income before income taxes and minority interest 3,330 4,710 Provision for income taxes 1,132 1,601 ----------- ------------ Income before minority interest 2,198 3,109 Minority interest expense 261 114 ----------- ------------ Net income $ 1,937 $ 2,995 =========== ============ Basic earnings per share $ 0.11 $ 0.18 =========== ============ Diluted earnings per share $ 0.11 $ 0.18 =========== ============ Shares used in basic earnings per share calculations 17,508 16,389 =========== ============ Shares used in diluted earnings per share calculations 17,776 16,574 =========== ============ The accompanying notes are an integral part of these financial statements. -2- IONICS, INCORPORATED CONSOLIDATED BALANCE SHEETS (Unaudited) (Amounts in thousands, except share and par value amounts) March 31, December 31, 2002 2001 --------------- -------------- Current assets: Cash and cash equivalents $ 145,717 $ 178,283 Short-term investments 1,216 21 Notes receivable, current 4,954 4,892 Accounts receivable, net 123,098 134,270 Receivables from affiliated companies 871 1,184 Inventories: Raw materials 20,890 20,047 Work in process 8,117 7,547 Finished goods 6,382 5,219 --------------- -------------- 35,389 32,813 Other current assets 10,864 11,031 Deferred income taxes 16,297 16,297 --------------- -------------- Total current assets 338,406 378,791 Notes receivable, long-term 23,257 23,210 Investments in affiliated companies 24,593 23,798 Property, plant and equipment: Land 6,333 6,288 Buildings 41,353 41,272 Machinery and equipment 250,068 243,964 Other, including furniture, fixtures and vehicles 30,434 29,938 --------------- -------------- 328,188 321,462 Less accumulated depreciation (160,417) (154,430) --------------- -------------- 167,771 167,032 Deferred income taxes, long-term 12,643 12,643 Goodwill 19,266 19,297 Other assets 8,122 8,542 --------------- -------------- Total assets $ 594,058 $ 633,313 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ 1,916 $ 14,257 Accounts payable 24,899 34,640 Customer deposits 3,617 2,159 Accrued commissions 1,968 2,011 Accrued expenses 54,593 59,524 Income taxes payable 30,260 45,735 --------------- -------------- Total current liabilities 117,253 158,326 Long-term debt and notes payable 10,244 10,126 Deferred income taxes 35,227 34,199 Other liabilities 7,381 7,309 Stockholders' equity: Common stock, par value $1, authorized shares: 55,000,000 in 2002 and 2001; issued: 17,533,742 in 2002 and 17,477,005 in 2001 17,534 17,477 Additional paid-in capital 189,741 188,555 Retained earnings 244,254 242,317 Accumulated other comprehensive income (27,576) (24,996) --------------- -------------- Total stockholders' equity 423,953 423,353 --------------- -------------- Total liabilities and stockholders' equity $ 594,058 $ 633,313 =============== ============== The accompanying notes are an integral part of these financial statements. -3- IONICS, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Three Months Ended March 31, ------------------------------ 2002 2001 Operating activities: Net income $ 1,937 $ 2,995 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization 5,470 8,758 (Decrease) increase to provision for losses on accounts and notes receivable (108) 1,421 Equity in earnings of affiliates (892) (441) Changes in assets and liabilities: Notes receivable (96) (4,591) Accounts receivable 11,316 3,476 Inventories (2,494) (2,012) Other current assets 110 5,209 Investments in affiliates 56 315 Accounts payable and accrued expenses (13,029) (13,871) Income taxes (14,778) 716 Other (1,414) (440) ------------- ------------- Net cash (used) provided by operating activities (13,922) 1,535 ------------- ------------- Investing activities: Additions to property, plant and equipment (6,556) (6,513) Disposals of property, plant and equipment 178 241 Additional investments in affiliates - (3,965) (Purchase) sale of short-term investments (1,155) 515 ------------- ------------- Net cash used by investing activities (7,533) (9,722) ------------- ------------- Financing activities: Principal payments on current debt (32,082) (18,543) Proceeds from borrowings of current debt 19,750 23,368 Principal payments on long-term debt (233) (243) Proceeds from borrowings of long-term debt 400 135 Proceeds from stock option plans 1,242 576 ------------- ------------- Net cash (used) provided by financing activities (10,923) 5,293 ------------- ------------- Effect of exchange rate changes on cash (188) (627) ------------- ------------- Net change in cash and cash equivalents (32,566) (3,521) Cash and cash equivalents at beginning of period 178,283 25,497 ------------- ------------- Cash and cash equivalents at end of period $145,717 $21,976 ============= ============= The accompanying notes are an integral part of these financial statements. -4- IONICS, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation: In the opinion of the management of Ionics, Incorporated (the "Company"), all adjustments have been made that are necessary for a fair statement of the consolidated financial position of the Company, the consolidated results of its operations and the consolidated cash flows for each period presented. The consolidated results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These financial statements should be read in conjunction with the Company's 2001 Annual Report as filed on Form 10-K with the Securities and Exchange Commission. Other than as noted below, there have been no significant changes in the information reported in those Notes, other than from the normal business activities of the Company, and there have been no changes which would, in the opinion of management, have a materially adverse effect upon the Company. Certain prior year amounts have been reclassified to conform to the current year presentation with no impact on net income. 2. Commitments: 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. 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. The Company has committed to lend up to $10 million to Desalcott as an additional source of funds for project completion costs once all bridge loan proceeds have been expended. However, the bridge loan of $79.9 million and the $20 million equity provided to Desalcott, together with the additional $10 million dollars to be loaned to Desalcott by the Company, may not provide sufficient funds to pay all of Desalcott's obligations in completing construction and commissioning of the project prior to receipt of long-term financing. In such event, Desalcott would be required to seek additional funds to pay such obligations. Moreover, 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., which 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 March 31, 2002, the Company had deferred costs of approximately $1.1 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 -5- event, the Company could incur its 25% proportionate share of liability under a $28 million performance bond issued on behalf of the project company. 3. Earnings Per Share (EPS) Calculations: (Amounts in thousands, except per share amounts) For the three months ended March 31, --------------------------------------------------------------------------------------- 2002 2001 ------------------------------------------ ----------------------------------------- Net Per Share Net Per Share Income Shares Amount Income Shares Amount ------------- ------------ ------------ ------------ ------------- ------------ Basic EPS Income available to common stockholders $ 1,937 17,508 $ 0.11 $ 2,995 16,389 $ 0.18 Effect of dilutive stock options - 268 - - 185 - ------------- ------------ ------------ ------------ ------------- ------------ Diluted EPS $ 1,937 17,776 $ 0.11 $ 2,995 16,574 $ 0.18 ============= ============ ============ ============ ============= ============ 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 the three months ended March 31, 2002 and 2001 was 604,250 and 1,568,234, respectively. 4. Comprehensive Income: The Company has adopted the Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components. The table below sets forth "comprehensive income" as defined by SFAS No. 130 for the three-month periods ended March 31, 2002 and 2001. (Amounts in thousands) Three months ended March 31, --------------------------- 2002 2001 ------------- ------------ Net income $ 1,937 $ 2,995 Other comprehensive income, net of tax: Translation adjustments (2,580) (4,590) ------------- ------------ Comprehensive income $ (643) $(1,595) ============= ============ -6- 5. Segment Information: In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." At the end of 1998, the Company changed from three reportable segments to four reportable "business group" segments corresponding to a "business group" structure which was put into place in the latter part of 1998. The Company has instituted a matrix-type organization which became effective at the beginning of 2002. As part of the matrix organization, the Company's trailer leasing and non-consumer bleach based chemical supply businesses which were included in the Equipment Business Group in prior periods now are included in the Ultrapure Water Group. Segment information for all periods presented has been restated to reflect this change. Additionally, the Company's Aqua Cool Pure Bottled Water business, which had been reported as part of the operations of the Consumer Water Group, was sold to affiliates of Nestle S.A. on December 31, 2001 and therefore does not appear in 2002 operations. The following table summarizes the Company's operations by the four business group segments and "Corporate." (Corporate includes legal and research and development expenses not allocated to the business groups, certain Corporate administrative and insurance costs, foreign exchange gains and losses on Corporate assets, as well as the elimination of intersegment transfers.) -7- For the three months ended March 31, 2002 -------------------------------------------------------------------------------------- Equipment Ultrapure Consumer Instrument Business Water Water Business Group Group Group Group Corporate Total ------------ ------------ -------------- -------------- ----------- ------------ (Amounts in thousands) Revenue - unaffiliated customers $38,271 $ 25,035 $ 10,491 $ 6,544 $ - $80,341 Inter-segment transfers 1,894 148 - 477 (2,519) - Gross profit 9,637 6,037 3,661 3,791 - 23,126 Equity income (loss) 656 (2) 238 - - 892 Earnings (loss) before interest, tax and minority interest 2,063 (1,068) (1,495) 777 2,620 2,897 Interest income 993 Interest expense (560) Income before income taxes and minority interest 3,330 Identifiable assets 280,233 136,973 48,016 27,612 76,631 569,465 Goodwill 11,008 6,739 1,519 - - 19,266 For the three months ended March 31, 2001 -------------------------------------------------------------------------------------- Equipment Ultrapure Consumer Instrument Business Water Water Business Group Group Group Group Corporate Total ------------ ------------ -------------- -------------- ----------- ------------ (Amounts in thousands) Revenue - unaffiliated customers $44,981 $ 40,848 $ 29,345 $ 7,788 $ - $122,962 Inter-segment transfers 1,397 1,181 - 682 (3,260) - Gross profit 9,981 10,168 11,341 4,349 - 35,839 Equity income (loss) 371 54 102 - (86) 441 Earnings (loss) before interest, tax and minority interest 2,901 1,803 1,315 1,151 (1,081) 6,089 Interest income 225 Interest expense (1,604) Income before income taxes and minority interest 4,710 Goodwill 11,776 16,388 21,230 1,847 - 51,241 Identifiable assets at March 31, 2001 did not differ materially from identifiable assets at December 31, 2000. 6. Goodwill and Intangible Assets: In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, (SFAS No. 142). This accounting standard addresses financial accounting and reporting for goodwill and other intangible assets and requires that goodwill amortization be discontinued and replaced with periodic tests of impairment. A two-step impairment test is used to first identify potential goodwill impairment and then measure the amount of goodwill impairment loss, if any. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and is required to be applied at the beginning of the fiscal year. Impairment losses, if any, that arise due to the initial application of this standard will be reported as a cumulative effect of a change in accounting principle. The first step of the goodwill impairment test, which must be completed within six months of the effective date of this standard, will identify any potential goodwill impairment. The second step of the goodwill impairment test, which must be completed prior to the issuance of the annual financial statements, will measure the amount of goodwill impairment loss, if any. -8- In accordance with SFAS No. 142, amortization of goodwill was discontinued as of January 1, 2002. All of the Company's intangible assets are subject to amortization. The Company did not record any reclassification of amounts of intangible assets into or out of the amounts previously reported as goodwill. The Company has not yet completed its analysis of the effect of adopting SFAS No. 142 on its segments. The following adjusts reported net income and EPS to present pro forma amounts which exclude amortization of goodwill: (Amounts in thousands , except per share amounts) Three Months Ended March 31, ------------------------------------------------- 2002 2001 ----------------- ----------------- Net income $ 1,937 $ 2,995 Goodwill amortization, net of tax - 449 ----------------- ----------------- Adjusted net income $ 1,937 $ 3,444 ================= ================= Reported basic earnings per share $ 0.11 $ 0.18 Goodwill amortization, net of tax - 0.03 ----------------- ----------------- Adjusted basic earnings per share $ 0.11 $ 0.21 ================= ================= Reported diluted earnings per share $ 0.11 $ 0.18 Goodwill amortization, net of tax - 0.03 ----------------- ----------------- Adjusted diluted earnings per share $ 0.11 $ 0.21 ================= ================= There was no change in the carrying value of goodwill during the quarter ended March 31, 2002, other than the impact of foreign currency translation adjustment. As a result of the foreign currency translation adjustment, the Equipment Business Group's goodwill balance decreased $35 thousand and the Ultrapure Water Group's goodwill balance increased by $4 thousand from the respective balances at December 31, 2001. -9- 7. Divestiture Included in the Company's quarterly results is $2.6 million in revenues and a $0.6 million pre-tax loss in the Company's Malaysian affiliate, in which the Company holds a 55% equity interest. The Company is currently in the process of divesting this interest, and accordingly, this asset is treated as "held for sale" and included in other current assets. -10- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's Form 10-K Annual Report for the year ended December 31, 2001 contains Management's Discussion and Analysis of Financial Condition and Results of Operations at and for the year ended December 31, 2001. The following discussion and analysis describes material changes in the Company's financial condition since December 31, 2001. The analysis of results of operations compares the three months ended March 31, 2002 with the comparable period of the prior fiscal year. Results of Operations Comparison of the Three Months Ended March 31, 2002 with the Three Months Ended March 31, 2001 The Company reported consolidated revenues of $80.3 million and net income of $1.9 million for the first quarter of 2002, which compares to $123.0 million of revenues and $3.0 million of net income earned during the first quarter of 2001. Results for the first quarter of 2001 include the operations of the Aqua Cool Pure Bottled Water business, which was divested on December 31, 2001. As part of the Company's adoption of a matrix business organization effective January 1, 2002, results associated with the Company's trailer leasing and non-consumer bleach based chemical supply businesses are included in the Ultrapure Water Group (UWG), rather than the Equipment Business Group (EBG) segment where they had historically been presented. Segment information for all periods presented has been restated to reflect these changes. First quarter 2002 revenues and gross margin for these businesses were $7.3 million and $2.1 million, respectively. The Company's revenues for the first quarter of 2002 of $80.3 million compared to revenues of $123.0 million in the first quarter of 2001. Excluding the first quarter 2001 Aqua Cool Pure Bottled Water revenues of $16.9 million, first quarter 2002 revenues were down $25.7 million, or 24.2%, from the comparable period last year, with declines in all four of the Company's business segments. The reduction in revenues is primarily attributable to continued softness in the microelectronics industry affecting both the UWG and Instrument Business Group (IBG). EBG revenues of $38.3 million decreased by $6.7 million, or 14.9%, compared to revenues of $45.0 million during the first quarter of 2001. This decrease was primarily attributable to lower capital equipment revenues, reflecting the wind-down of the construction phase of the Trinidad desalination project, as well as lower volume levels associated with the Zero Liquid Discharge business. UWG revenues of $25.0 million decreased by $15.8 million, or 38.7%, compared to revenues of $40.8 million in the first quarter of 2001. Revenue levels for UWG were affected by continued softness in the capital equipment portion of the microelectronics industry, both domestically and internationally. CWG revenues of $10.5 million decreased by $18.9 million, or 64.2%, compared to revenues of $29.3 million in the first quarter of 2001, which included revenues generated in the Company's bottled water business. Excluding revenues associated with the bottled water business (which was divested on December 31, 2001), revenues in the first quarter of 2002 were down 15.6%, or $1.9 million, from the first quarter of 2001. Revenues were primarily impacted by the warmer-than-expected winter, which affected revenue levels of CWG's consumer-based chemical business as a result of a lower demand for automobile windshield wash solution. -11- IBG revenues of $6.5 million decreased by $1.2 million, or 16.0%, compared to revenues of $7.8 million in the first quarter of 2001. Lower revenue levels were primarily attributable to continued softness in the microelectronics industry, an important customer for IBG products. Total Company cost of sales as a percentage of revenue was 71.2% in the first quarter of 2002 compared to 70.9% in the first quarter of 2001, and resulting gross margin was 28.8% in first quarter of 2002 and 29.1% for the first quarter of 2001. Cost of sales as a percentage of revenue decreased in the EBG and IBG segments and increased in the UWG and CWG segments in the first quarter of 2002, over the comparable period a year ago. EBG's cost of sales as a percentage of revenue decreased to 74.8% for the first quarter of 2002 compared to 77.8% for the first quarter of 2001 reflecting a shift in product mix from lower margin capital equipment to more profitable service and supply business. IBG's cost of sales as a percentage of revenue decreased to 42.1% in the first quarter of 2002 from 44.2% in the first quarter of 2001, primarily reflecting a shift in product mix from lower margin capital equipment to more profitable service revenue. UWG's cost of sales as a percentage of revenue increased slightly from 75.1% in the first quarter of 2001 to 75.9% in the first quarter of 2002, primarily attributable to lower overall volume levels in 2002 compared to 2001. CWG's cost of sales as a percentage of revenue increased to 65.1% in the first quarter of 2002 from 61.4% in the first quarter of 2001, reflecting the exclusion of the Aqua Cool Pure Bottled Water business which was divested on December 31, 2001. Operating expenses as a percentage of revenue increased to 26.3% in the first quarter of 2002 compared to 24.6% in the first quarter of 2001, resulting primarily from lower revenue levels during the first quarter of 2002. Other factors impacting operating expenses include net foreign currency exchange gains of approximately $1.7 million, relating primarily to the translation of certain of the proceeds from the sale of the Aqua Cool Pure Bottled Water business. These gains were partially offset by residual expenses incurred in the quarter of approximately $1.4 million, related primarily to on-going restructuring initiatives in the CWG segment following the divestiture of the bottled water business. Also included in the quarter's results is $2.6 million in revenues and a $0.6 million pre-tax loss in the Company's Malaysian affiliate, in which the Company holds a 55% equity interest. The Company is currently in the process of divesting of this interest, and accordingly this asset is treated as "held for sale" and included in other current assets. Interest income of $1.0 million in the first quarter of 2002 represents an increase of $0.8 million from $0.2 million earned in the first quarter of 2001, reflecting investment of the proceeds of the Aqua Cool Pure Bottled Water business divestiture. Interest expense of $0.6 million for the first quarter of 2002 compared to $1.6 million in the first quarter of 2001, represents a reduction in the average borrowings as a result of the pay-down of current debt, primarily from the proceeds of the sale of the bottled water business. Equity income of $0.9 million during the first three months of 2002 compared to $0.4 million during the first three months of 2001, primarily reflecting improved performance in two projects located in Mexico in which the Company has a 20% equity interest. The Company's effective tax rate was 34.0% for the first quarter of 2001 and 2002. The current year's effective rate reflects anticipated profit before tax adjusted for items such as non-deductible operating losses and anticipated tax planning initiatives. Financial Condition Working capital increased $0.7 million during the first three months of 2002 while the Company's current ratio of 2.9 at March 31, 2002 increased from 2.4 at December 31, 2001. Net accounts receivable and accounts payable decreased $11.2 million and $9.7 million, respectively, during the first three months of 2002, primarily resulting from lower revenue levels. Current income taxes payable decreased $15.5 million during the first three months of 2002, primarily reflecting payments made on gain from the sale of the Company's Aqua Cool Pure Bottled Water business. -12- Net cash used by operating activities amounted to $13.9 million for the first three months of 2002, primarily reflecting cash used for payments of current income taxes, offset by increased collections on accounts receivable. The primary use of cash for investing activities of $7.5 million was for additions to property, plant and equipment, primarily relating to investments made in the Company's UWG segment for a build, own and operate facility in the power industry. Net cash used by financing activities was $10.9 million, primarily resulting from the pay-down of the Company's short-term borrowings utilizing the proceeds from the sale of the Aqua Cool Pure Bottled Water business. 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. The Company has committed to lend up to $10 million to Desalcott as an additional source of funds for project completion costs once all bridge loan proceeds have been expended. However, the bridge loan of $79.9 million and the $20 million equity provided to Desalcott, together with the additional $10 million dollars to be loaned to Desalcott by the Company, may not provide sufficient funds to pay all of Desalcott's obligations in completing construction and commissioning of the project prior to receipt of long-term financing. In such event, Desalcott would be required to seek additional funds to pay such obligations. Moreover, 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., which 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 March 31, 2002, the Company had deferred costs of approximately $1.1 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. On March 28, 2002, the Company amended its primary domestic credit agreement to reduce the borrowing limit to $30 million, eliminate and revise certain financial and other covenants, extend the term of the agreement until March 2003, and make Fleet National Bank the sole lender. The Company believes that its cash and cash equivalents, cash from operations, lines of credit and foreign exchange facilities are adequate to meet its currently anticipated needs for the foreseeable future. -13- Quantitative and Qualitative Disclosures about Market Risk Derivative Instruments and Market Risk -------------------------------------- There has been no material change in the information reported in the Company's 2001 Annual Report as filed on Form 10-K with the Securities and Exchange Commission with respect to these risk matters. Forward-Looking Information 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 Financial Condition and Results of Operations" 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" contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2001; business conditions and the general economy; competitive factors, such as acceptance of new products and price pressures; 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Instruments and Market Risk -------------------------------------- There has been no material change in the information reported in the Company's 2001 Annual Report as filed on Form 10-K with the Securities and Exchange Commission with respect to these risk matters. -14- PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 - 1997 Stock Incentive Plan, as amended through May 8, 2002. (b) Reports on Form 8-K One report on Form 8-K was filed by the Company with the Securities and Exchange Commission during the three-month period ended March 31, 2002. The report on Form 8-K, dated January 15, 2002, reported under Item 2 (Acquisition or Disposition of Assets) the completion of the sale by the Company of its bottled water business in the United States, United Kingdom and France to affiliates of Nestle S.A. -15- 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 thereunto duly authorized. IONICS, INCORPORATED Date: May 15, 2002 By: /s/Arthur L. Goldstein ----------------------------------------------- Arthur L. Goldstein Chairman and Chief Executive Officer (duly authorized officer) Date: May 15, 2002 By: /s/Daniel M. Kuzmak ----------------------------------------------- Daniel M. Kuzmak Vice President and Chief Financial Officer (principal financial officer) -16- EXHIBIT INDEX Exhibit Number Description -------------- ----------- 10.1 1997 Stock Incentive Plan, as amended through May 8, 2002.