<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended June 30, 1998
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 1-13041
WATERLINK, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 34-1788678
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
----------------------------------------
4100 Holiday Street N.W., Suite 201
Canton, Ohio 44718
(Address of Principal Executive Offices)
(Zip Code)
----------------------------------------
330-649-4000
(Registrant's Telephone Number, Including Area Code)
----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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.
Common Stock, $.001 par value -12,065,204 shares outstanding as of July 31, 1998
================================================================================
<PAGE> 2
INDEX
WATERLINK, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 1997 and
June 30, 1998 3 - 4
Consolidated statements of operations - Three months
ended June 30, 1997 and 1998; Nine months ended
June 30, 1997 and 1998 5
Consolidated statements of cash flows - Nine months
ended June 30, 1997 and 1998 6
Notes to consolidated financial statements 7 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
2
<PAGE> 3
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
September 30, 1998
1997 (Unaudited)
------------- -----------
<S> <C> <C>
ASSETS (In thousands)
Current assets:
Cash and cash equivalents $ 2,482 $ 9,148
Accounts receivable:
Trade, net 24,625 31,391
Other 1,320 1,098
Inventories 10,143 20,791
Costs in excess of billings 6,413 20,033
Refundable income taxes 635 332
Deferred income taxes -- 1,067
Other current assets 1,177 4,149
-------- --------
Total Current Assets 46,795 88,009
Property, plant and equipment, at cost:
Land, buildings and improvements 2,366 4,542
Machinery and equipment 2,536 8,168
Office equipment 1,463 2,772
-------- --------
6,365 15,482
Less accumulated depreciation 554 1,408
-------- --------
5,811 14,074
Other assets:
Goodwill, net 60,419 93,825
Patents, net 1,484 1,431
Deferred income taxes 611 --
Other assets 740 6,757
-------- --------
63,254 102,013
-------- --------
Total Assets $115,860 $204,096
======== ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
June 30,
September 30, 1998
1997 (Unaudited)
------------- -----------
(In thousands,
except share data)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade $ 9,597 $ 13,387
Accrued expenses 9,447 21,274
Additional purchase price payable 1,760 75
Billings in excess of cost 3,425 5,515
Accrued income taxes 490 2,446
Deferred income taxes 108 --
Current portion of long-term debt 2,538 2,733
--------- ---------
Total Current Liabilities 27,365 45,430
Long-term obligations:
Long-term debt 12,502 79,336
Convertible subordinated notes-related parties 3,921 5,921
Deferred income taxes -- 251
Other long-term obligations 1,199 1,335
--------- ---------
17,622 86,843
Shareholders' equity:
Preferred Stock, $.001 par value, 10,000,000 shares
authorized, none issued and outstanding -- --
Common Stock, voting, $.001 par value,
Authorized - 40,000,000 shares
Issued and outstanding - 11,906,326 shares at
September 30, 1997 and 12,014,004 shares
at June 30, 1998 12 12
Additional paid-in capital 70,739 71,137
Foreign currency translation adjustment (44) (1,556)
Retained earnings 166 2,230
--------- ---------
Total Shareholders' Equity 70,873 71,823
--------- ---------
Total Liabilities and Shareholders' Equity $ 115,860 $ 204,096
========= =========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS-UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1997 1998 1997 1998
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 16,316 $ 34,937 $ 41,043 $ 94,267
Cost of sales 10,276 21,387 25,076 58,597
-------- -------- -------- --------
Gross Profit 6,040 13,550 15,967 35,670
Selling, general and
administrative expenses 5,135 10,706 12,613 27,458
Special management compensation 2,630 1,494 2,630 1,494
Amortization 154 570 434 1,412
-------- -------- -------- --------
Operating Income (Loss) (1,879) 780 290 5,306
Other income (expense):
Interest expense (544) (1,018) (1,156) (1,737)
Other - net 3 145 78 126
-------- -------- -------- --------
Income (Loss) Before Income Taxes (2,420) (93) (788) 3,695
Income taxes (benefit) (943) 75 (296) 1,631
-------- -------- -------- --------
Income (Loss) Before Extraordinary Item (1,477) (168) (492) 2,064
Extraordinary item, net of applicable income
taxes of $257,000 (385) -- (385) --
-------- -------- -------- --------
Net Income (Loss) $ (1,862) $ (168) $ (877) $ 2,064
======== ======== ======== ========
Earnings (Loss) per Common Share:
Basic
Income (loss) before extraordinary item $ (0.47) $ (0.01) $ (0.19) $ 0.17
Extraordinary item (0.12) -- (0.15) --
-------- -------- -------- --------
Net income (loss) per common share $ (0.59) $ (0.01) $ (0.34) $ 0.17
======== ======== ======== ========
Assuming dilution
Income (loss) before extraordinary item $ (0.47) $ (0.01) $ (0.19) $ 0.16
Extraordinary item (0.12) -- (0.15) --
-------- -------- -------- --------
Net income (loss) per common share $ (0.59) $ (0.01) $ (0.34) $ 0.16
======== ======== ======== ========
Weighted Average Common Shares Outstanding:
Basic 3,132 12,006 2,619 11,964
Assuming dilution 3,132 12,006 2,619 12,641
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (877) $ 2,064
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Extraordinary item 385 --
Special management charges 2,630 1,494
Depreciation and amortization 593 2,400
Deferred income taxes -- 501
Changes in working capital:
Accounts receivable (3,986) 6,103
Inventories 5,182 (1,357)
Costs in excess of billings (7,708) (10,351)
Refundable income taxes -- 303
Other assets (2,250) (6,355)
Accounts payable 690 (973)
Accrued expenses (853) 1,545
Billings in excess of cost 838 (1,125)
Accrued income taxes 1,312 1,427
-------- --------
Net cash used by operating activities (4,044) (4,324)
INVESTING ACTIVITIES
Purchases of equipment (476) (1,671)
Purchases of subsidiaries, net of cash acquired (25,785) (52,667)
-------- --------
Net cash used in financing activities (26,261) (54,338)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 21,110 67,176
Payments on long-term borrowings (30,855) (1,213)
Proceeds from sale of common stock 43,569 456
-------- --------
Net cash provided by financing activities 33,824 66,419
-------- --------
Effect of exchange rate changes on cash (65) (1,091)
Increase in cash and cash equivalents
3,454 6,666
Cash and cash equivalents at beginning of period 119 2,482
-------- --------
Cash and cash equivalents at end of period $ 3,573 $ 9,148
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE THREE AND NINE-MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine-month periods ended June
30, 1998 are not necessarily indicative of the results that may be expected for
the year ending September 30, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1997.
2. INVENTORIES
Inventories consisted of the following (thousands of dollars):
<TABLE>
<CAPTION>
September 30, June 30,
1997 1998
------- -------
<S> <C> <C>
Raw materials and supplies $ 4,821 $11,698
Work in process and finished goods 5,322 9,093
------- -------
$10,143 $20,791
======= =======
</TABLE>
3. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is as
follows (thousands of dollars):
<TABLE>
<CAPTION>
September 30, June 30,
1997 1998
------- -------
<S> <C> <C>
Contract costs incurred to date $17,033 $50,772
Estimated profits 7,793 22,381
------- -------
Contract revenue earned to date 24,826 73,153
Less billings to date 21,838 58,635
------- -------
Cost and estimated earnings in excess
of billings, net $ 2,988 $14,518
======= =======
</TABLE>
7
<PAGE> 8
The above amounts are included in the accompanying consolidated balance sheets
as follows (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1997 1998
-------- --------
<S> <C> <C>
Costs in excess of billings $ 6,413 $ 20,033
Billings in excess of cost 3,425 5,515
-------- --------
$ 2,988 $ 14,518
======== ========
</TABLE>
4. ACQUISITIONS
On March 2, 1998, the Company acquired Chemitreat Services, Inc. ("C'treat") for
approximately $4,500,000; consisting of $2,250,000 in cash and $2,250,000 in
convertible subordinated notes. C'treat designs and manufactures pure
watermakers for use in the global offshore energy industry. The purchase price
includes approximately $3,593,000 of goodwill, which will be amortized on a
straight-line basis over 40 years.
On March 25, 1998, the Company acquired Aquafine Engineering Services Limited
("AES") and Purac Engineering Incorporated ("Purac") in a single transaction for
approximately $7,571,700 in cash. AES designs and manufactures industrial and
municipal water and wastewater systems and solutions principally for the United
Kingdom market. Purac designs water and wastewater systems principally for the
United States municipal market. The purchase price includes approximately
$2,801,000 of goodwill, which will be amortized on a straight-line basis over 40
years.
On June 5, 1998, the Company acquired Barnebey & Sutcliffe Corporation
("Barnebey"), Sutcliffe Speakman Carbons Limited ("Carbons"), and Sutcliffe
Croftshaw Limited ("Croftshaw") in a single transaction for approximately
$45,000,000 in cash. Barnebey is located in the United States and Carbons and
Croftshaw are located in the United Kingdom. These three companies ("Carbons
Group") design, manufacture and market products and services utilizing
activated carbon for separation, concentration and purification of water,
liquid and gases. The purchase price includes approximately $28,399,000 of
goodwill, which will be amortized on a straight-line basis over 40 years.
These acquisitions were accounted for as purchases. The allocation of the
purchase price for these acquisitions are based on estimates of the fair market
value of the net assets acquired and are subject to adjustment. The consolidated
statements of operations of the Company include the results of operations of the
acquired businesses for the period subsequent to the effective dates of these
acquisitions.
The following unaudited pro forma information presents the consolidated results
of operations of the Company assuming the acquisitions discussed above, as well
as those completed during the year ended September 30, 1997, were completed on
October 1, 1996 (thousands of dollars, except per share data):
8
<PAGE> 9
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1997 1998
-------- --------
<S> <C> <C>
Net sales $136,176 $142,621
Operating profit 8,374 9,374
Income before income taxes 1,744 5,114
Income before extraordinary item 1,046 3,069
Net income 661 3,069
Earnings per common share-basic:
Income before extraordinary item $ 0.33 $ 0.26
Net income $ 0.21 $ 0.26
Earnings per common share-assuming dilution:
Income before extraordinary item $ 0.15 $ 0.24
Net income $ 0.10 $ 0.24
</TABLE>
The pro forma results of operations are not indicative of the actual results of
operations that would have occurred had the acquisitions been made on the dates
indicated, or the results that may be obtained in the future.
5. CAPITALIZATION
On June 5, 1998, concurrent with the acquisition of the Carbons Group, the
Company amended and restated its then existing $40,000,000 domestic revolving
credit facility with Bank of America National Trust & Savings Association as
agent by entering into a $110,000,000 secured, domestic facility, comprised of a
$75,000,000 revolving facility and a $35,000,000 term loan.
A progression of shareholders' equity follows (thousands of dollars):
<TABLE>
<CAPTION>
Foreign
Additional Currency Total
Common Paid-in Translation Retained Shareholders'
Stock Capital Adjustment Earnings Equity
----- ------- ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1997 $ 12 $70,739 $ (44) $ 166 $70,873
Exercise of 64,366 stock options and warrants -- 60 60
Issuance of 42,384 shares of common
stock in connection with the
employee stock purchase plan -- 396 396
Issuance of 928 shares of common stock
in connection with acquisitions -- 16 16
Net income 2,064 2,064
Other (74) (1,512) (1,586)
------ ------- ------- ------- -------
Balance at June 30, 1998 $ 12 $71,137 $(1,556) $ 2,230 $71,823
====== ======= ======= ======= =======
</TABLE>
6. SPECIAL MANAGEMENT CHARGES
In June 1997, the Company incurred a special charge to operations of $2,630,000,
resulting primarily from the issuance, concurrent with the Company's initial
public offering of its common stock, of a ten year option to purchase 100,000
shares of common stock at a price of $0.10 per share to an officer of the
Company pursuant to terms of an employment agreement. Of this amount,
approximately $1,138,000 was non-cash and the remainder represented cash
obligations related principally to the reimbursement of income taxes resulting
from the stock option issuance. This special charge after income taxes on a per
share basis, assuming dilution, was $0.60 and $0.50 for the nine months and
three months ended June 30, 1997, respectively.
9
<PAGE> 10
Effective June 5, 1998, Chet S. Ross resigned as the Company's president and
chief executive officer. Effective June 8, 1998, T. Scott King became the
Company's president and chief executive officer. In addition to this management
change, the Company appointed Henrik Kallen as its European President of Water
and Wastewater Systems. Due to these changes, the Company incurred a special
management charge of $1,494,000 during the quarter ended June 30, 1998
primarily attributable to the costs related to the contractual obligations of
the Company to its former chief executive officer and the costs necessary to
recruit executives to the Company. This special charge after income taxes on a
per share basis, assuming dilution, was $0.07 for the nine months and three
months ended June 30, 1998.
7. EXTRAORDINARY ITEM
During June 1997, the Company completed an initial public offering of its common
stock and used a portion of the proceeds to repay substantially all of its
outstanding indebtedness. In addition, concurrent with the initial public
offering, a note purchase agreement which would have allowed the Company to
borrow up to $10 million in subordinated indebtedness terminated in accordance
with its terms. In connection with the early retirement of certain indebtedness
and the termination of the note purchase agreement, the Company realized an
extraordinary charge of $385,000, net of taxes of $257,000, related to the
write-off of unamortized debt issuance costs and discounts associated with this
indebtedness. This extraordinary item on a per share basis, assuming dilution,
was $0.15 and $0.12 for the nine months and three months ended June 30, 1997,
respectively.
8. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Financial Accounting
Standards No. 128, Earnings per Share. Statement 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants, and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. In addition, during 1998 the Securities and
Exchange Commission issued Staff Accounting Bulletin (SAB) No. 98. SAB No. 98
revised the views of the staff contained in certain topics of the staff
accounting bulletin series, including SAB No. 83 - Earnings per Share
Computations in an Initial Public Offering, to be consistent with the provisions
of Statement 128. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the requirements of
Statement 128 and SAB No. 98.
The following table sets forth the computation of basic and diluted earnings per
share as required by Statement 128 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1997 1998 1997 1998
---- ---- ----- ----
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item $(1,477) $ (168) $ (492) $ 2,064
Extraordinary item ( 385) -- (385) --
-------- ------- ------ -------
Numerator for basic and diluted earnings per share $(1,862) $ (168) $ (877) $ 2,064
======== ======= ====== =======
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1997 1998 1997 1998
---- ---- ----- ----
<S> <C> <C> <C> <C>
Denominator:
Average shares outstanding- basic 3,132 12,006 2,619 11,964
Effect of dilutive securities:
Stock options and warrants -- -- -- 677
------- ------- ------- -------
Denominator for diluted earnings per share-
weighted average shares and assumed conversions 3,132 12,006 2,619 12,641
======= ======= ======= =======
Earnings (loss) per common share-basic:
Income (loss) before extraordinary item $ (0.47) $ (0.01) $(0.19) $0.17
Extraordinary item (0.12) -- (0.15) --
------- ------- ------ ------
Net income (loss) $ (0.59) $ (0.01) $(0.34) $0.17
======= ======= ====== ======
Earnings (loss) per common share-assuming dilution:
Income (loss) before extraordinary item $ (0.47) $ (0.01) $(0.19) $0.16
Extraordinary item (0.12) -- (0.15) --
------- ------- ------ ------
Net income (loss) $ (0.59) $ (0.01) $(0.34) $0.16
======== ======= ====== ======
</TABLE>
Certain stock options outstanding were excluded from the computation of diluted
earnings per share since the exercise prices were greater than the average
market price of common shares during the nine-months ended June 30, 1998, and
therefore, would have an antidilutive effect on earnings per share. Further,
conversion into common shares of certain outstanding convertible subordinated
notes have been excluded from the computation of diluted earnings per share for
the nine months ended June 30, 1998 since they would have an antidilutive effect
on earnings per share. For the three months ended June 30, 1998 and for the
three and nine months ended June 30, 1997, certain issuances of potential common
stock have been excluded from the diluted earnings per share computation since
their inclusion in the computation would have an antidilutive effect on earnings
per share.
11
<PAGE> 12
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
WATERLINK, INC. AND SUBSIDIARIES
OVERVIEW
The Company is an international provider of integrated water
purification and wastewater treatment solutions, principally to industrial and
municipal customers. Waterlink was incorporated in Delaware on December 7, 1994
and has grown externally by completing thirteen acquisitions and internally
through industry wide expansion as well as company sponsored programs.
As part of its strategic plan, the Company intends to continue an
aggressive acquisition program. The Company's acquisition program targets
businesses which provide the Company with complementary systems, equipment and
services, and broadens its customer and geographic base. In addition, the
Company seeks companies that provide the potential for synergies with existing
businesses. With respect to the acquisitions completed to date, the Company has
begun to identify and act upon opportunities to cross-sell systems, equipment
and services and as a result of the increased financial, managerial and other
resources provided by the Company to its acquired businesses. The Company
expects its internal growth rate to be a positive influence to its growth
strategy. The Company also expects that it will continue to benefit from such
synergies as it more fully integrates the acquired businesses into its
operations.
All acquisitions have been accounted for under the purchase method of
accounting and are included in the results of operations for the period
subsequent to the effective date of acquisition. Due to the timing and magnitude
of these acquisitions, results of operations for the periods presented are not
necessarily comparable to or indicative of operating results for current or
future periods.
The majority of the Company's systems and equipment are custom designed
and take a number of months to produce. Revenues from large contracts are
recognized using the percentage of completion method of accounting in the
proportion that costs bear to total estimated costs at completion. Revisions of
estimated costs or potential contract losses, if any, are recognized in the
period in which they are determined. Revenues from remaining systems and
equipment sales are recognized when shipped.
The Company has experienced quarterly fluctuations in operating results
due to the contractual nature of its business and the consequent timing of these
orders. As part of its strategic plan, the Company expects that in the future it
may receive contracts that are significantly larger than those received by the
Company historically. In addition, certain of such contracts will be subject to
the customer's ability to finance, or fund from government sources, the actual
costs of completing the project as well as receiving any necessary permits to
commence the project. Therefore, the Company expects that its future operating
results could fluctuate significantly, especially on a quarterly basis, due to
the timing of the awarding of such
12
<PAGE> 13
contracts, the ability to fund project costs, and the recognition by the Company
of revenues and profits therefrom. In addition, the Company has historically
operated with a moderate backlog. However, as a result of its strategic plan,
the Company anticipates that both the dollar volume and number of contracts in
its backlog will increase significantly. At June 30, 1998, the Company's backlog
was approximately $45.4 million. In addition, the Company also had $7.0 million
of firm commitments to purchase recurring revenue products from its recently
acquired Carbons Group at June 30, 1998. Therefore, quarterly sales and
operating results will be affected by the volume and timing of contracts
received and performed within the quarter, which are difficult to forecast. Any
significant deferral or cancellation of a contract could have a material adverse
effect on the Company's operating results in any particular quarter. Because of
these factors, the Company believes that period-to-period comparisons of its
operating results are not necessarily indicative of future performance.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, statements of
operations data as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 63.0 61.2 61.1 62.2
----- ----- ----- -----
Gross profit 37.0 38.8 38.9 37.8
Selling, general and
administrative expenses 31.5 30.6 30.7 29.1
Special management charges 16.1 4.3 6.4 1.6
Amortization 0.9 1.7 1.1 1.5
----- ----- ----- -----
Operating income (loss) (11.5) 2.2 0.7 5.6
Other income (expense):
Interest expense (3.3) (2.9) (2.8) (1.8)
Other - net 0.0 0.4 0.2 0.1
----- ----- ----- -----
Income (loss) before income taxes (14.8) (0.3) (1.9) 3.9
Income taxes (benefit) (5.8) 0.2 (0.7) 1.7
----- ----- ----- -----
Income (loss) before extraordinary item (9.0) (0.5) (1.2) 2.2
Extraordinary item, net of tax (2.4) -- (0.9) --
----- ----- ----- -----
Net income (loss) (11.4)% (0.5)% (2.1)% 2.2%
===== ===== ===== =====
</TABLE>
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Net Sales: Net sales for the three months ended June 30, 1998 were $34,937,000,
an increase of $18,621,000 from the comparable prior period. The increase was
primarily due to the timing of the following acquisitions:
* Bioclear Technology, Inc. ("Bioclear") June 27, 1997
* Lanco Environmental Products, Inc. ("Lanco") June 27, 1997
13
<PAGE> 14
* Mellegard V.A. Maskiner AB ("Meva") September 12, 1997
* Hycor Corporation ("Hycor") September 30, 1997
* Chemitreat Services, Inc. ("C'treat") March 2, 1998
* Aquafine Engineering Limited ("AES") March 25, 1998
* Purac Engineering Incorporated ("Purac") March 25, 1998
* Barnebey & Sutcliffe Corporation ("Barnebey") June 5, 1998
* Sutcliffe Speakman Carbons Limited ("Carbons") June 5, 1998
* Sutcliffe Croftshaw Limited ("Croftshaw") June 5, 1998
Internal growth accounted for $138,000 of the increase, which represented an
internal growth rate of 0.8%. The Company measures internal growth by comparing
each subsidiary's net sales from the months subsequent to their respective
acquisition dates during the prior year to those same months in the current
year.
Gross Profit: Gross profit for the three months ended June 30, 1998 was
$13,550,000, an increase of $7,510,000 from the comparable prior period. The
increase was primarily due to the aforementioned acquisitions. Gross margin was
38.8% for the 1998 quarter as compared to 37.0% for the 1997 quarter.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the three months ended June 30, 1998 were
$10,706,000, an increase of $5,571,000 from the comparable prior period. The
increase was primarily due to the aforementioned acquisitions. Selling, general
and administrative expenses as a percentage of net sales were 30.6% for the
1998 quarter as compared to 31.5% for the comparable prior period. This
decrease primarily reflects the spreading of selling, general and
administrative expenses over a larger revenue base.
Special Management Charges: During the quarter ended June 30, 1998, the Company
recorded a special charge to operations of $1,494,000 related to changes in
management. Effective June 5, 1998, Chet S. Ross resigned as the Company's
president and chief executive officer. Effective June 8, 1998, T. Scott King
became the Company's president and chief executive officer. In addition to this
management change, the Company appointed Henrik Kallen as its European
President of Water and Wastewater Systems. The special charge $1,494,000 is
primarily attributable to the costs related to the contractual obligations of
the Company to its former chief executive officer and the costs necessary to
recruit executives to the Company. A special management charge of $2,630,000
for the three months ended June 30, 1997 resulted primarily from the issuance,
concurrent with the Company's initial public offering, of a ten year option to
purchase 100,000 shares of common stock at a price of $0.10 per share to an
officer of the Company pursuant to terms of an employment agreement. Of this
amount, approximately $1,138,000 was non-cash and the remainder represented
cash obligations related principally to the reimbursement of income taxes
resulting from the stock option issuance.
14
<PAGE> 15
Amortization: Amortization expense for the three months ended June 30, 1998 was
$570,000, an increase of $416,000 from the comparable prior period. The increase
was primarily due to the increased goodwill resulting from the aforementioned
acquisitions.
Interest Expense: Interest expense for the three months ended June 30, 1998 was
$1,018,000, an increase of $474,000 from the comparable prior period primarily
due to increased borrowings related to the Company's ongoing acquisition
program.
Income Taxes: The Company recorded income tax expense of $75,000 for the three
months ended June 30, 1998 on a pre-tax loss of $93,000 due to non-deductible
goodwill amortization recorded in connection with certain of its acquisitions.
The effective tax rate was 39.0% in the corresponding period in the prior year.
This effective rate is in excess of the United States federal statutory rate of
34% due primarily to non-deductible goodwill amortization related to certain
acquisitions made by the Company as well as state and local income taxes.
Extraordinary Item: During the three months ended June 30, 1997, the Company
recorded an extraordinary charge of $385,000, net of taxes of $257,000, related
to the write-off of unamortized debt issuance costs associated with certain
indebtedness retired with the net proceeds from, and discounts associated with a
note purchase agreement terminated in connection with, its initial public
offering.
Nine Months Ended June 30, 1998 Compared to Nine Months Ended June 30, 1997
Net Sales: Net sales for the nine months ended June 30, 1998 were $94,267,000,
an increase of $53,224,000 from the comparable prior period. The increase was
primarily due to the timing of the acquisitions previously described as well as
the acquisition of the Nordic Water Products Group acquired on March 5, 1997. In
addition, internal growth accounted for $2,750,000 of the increase, which
represented an internal growth rate of 6.7%.
Gross Profit: Gross profit for the nine months ended June 30, 1998 was
$35,670,000, an increase of $19,703,000 from the comparable prior period. The
increase was primarily due to the aforementioned acquisitions and internal
growth. Gross margin was 37.8% for 1998 as compared to 38.9% for 1997. Gross
margins for both periods have been impacted by the March 1997 acquisition of
the Nordic Water Products Group, which historically experiences lower margins
as compared to other Waterlink companies.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the nine months ended June 30, 1998 were
$27,458,000, an increase of $14,845,000 from the comparable prior period. The
increase was primarily due to the aforementioned acquisitions. Selling, general
and administrative expenses as a percentage of net sales were 29.1% in 1998 as
compared to 30.7% for the comparable prior period. This decrease primarily
reflects the spreading of selling, general and administrative expenses over a
larger revenue base.
Special Management Charges: During the nine months ended June 30, 1998, the
Company recorded a special charge to operations of $1,494,000 related to changes
in management. Effective June 5, 1998, Chet S. Ross resigned as the Company's
president and chief executive officer. Effective June 8, 1998, T. Scott King
became the Company's president and chief executive officer. In addition to this
management change, the Company appointed Henrik Kallen as its European President
of Water and Wastewater Systems. The special charge of $1,494,000 is primarly
attributable to the costs related to the contractual obligations of the Company
to its former executive officer and the costs necessary to recruit executives to
the Company. A special management charge of $2,630,000 for the nine months ended
June 30, 1997 resulted primarily from the issuance, concurrent with the
Company's initial public offering, of a ten year option to purchase 100,000
shares of common stock at a price of $0.10 per share to an officer of the
Company pursuant to terms of an employment agreement. Of this amount,
approximately $1,138,000 was non-cash and the remainder represented cash
obligations related principally to the reimbursement of income taxes resulting
from the stock option issuance.
Amortization: Amortization expense for the nine months ended June 30, 1998 was
$1,412,000, an increase of $978,000 from the comparable prior period. The
increase was primarily due to the increased goodwill resulting from the
aforementioned acquisitions.
15
<PAGE> 16
Interest Expense: Interest expense for the nine months ended June 30, 1998 was
$1,737,000, an increase of $581,000 from the comparable prior period primarily
due to increased borrowings related to the Company's ongoing acquisition
program.
Income Taxes: The effective income tax rate was 44.1% for the nine months ended
June 30, 1998 as compared to 37.6% for the same period in 1997. These rates are
in excess of the United States federal statutory rate of 34% due primarily to
non-deductible goodwill amortization related to certain acquisitions made by the
Company as well as state and local income taxes. The impact of the effect of
non-deductible goodwill amortization can vary based upon the timing of which
acquisitions carry deductible versus non-deductible goodwill, as well as the
level of earnings during the period.
Extraordinary Item: During the nine months ended June 30, 1997, the Company
recorded an extraordinary charge of $385,000, net of taxes of $257,000, related
to the write-off of unamortized debt issuance costs associated with certain
indebtedness retired with the net proceeds from, and discounts associated with a
note purchase agreement terminated in connection with, its initial public
offering.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's primary sources of liquidity have
been (i) borrowings available under credit facilities, (ii) net proceeds from
the sale of the Company's common and preferred stock, and (iii) issuance of
common stock and seller financing incurred in connection with the Company's
completed acquisitions. Historically, the Company's primary uses of capital have
been the funding of its acquisition program and working capital expansion. The
Company does not currently anticipate making significant capital investments in
plant and equipment due to its focus on partnering with vendors which
manufacture most of the components used in the Company's systems and equipment.
For the nine months ended June 30, 1998, net cash used by operating
activities was $4,324,000, purchases of equipment totaled $1,671,000 and
purchases of businesses, net of cash acquired, totaled $52,667,000. These cash
outlays, financed primarily by long-term borrowings, reflect the cash purchase
price of acquisitions as well as additional payments made during the period
related to acquisitions, expansion of working capital requirements and purchases
of equipment for existing operations.
During the fourth quarter of fiscal 1998 the Company will announce its
strategic operational plan for fiscal 1999. This plan will provide the
foundation for the Company to achieve its goals for growth in internal sales and
profitability and for cost reduction, and to address how the Company will
integrate its future acquisitions much faster and more smoothly. While details
of the plan are still being finalized, core concepts include accelerating the
transformation of Waterlink from a holding company into an integrated provider
of solutions to specific market segments. The Company will further integrate how
it serves specific markets by establishing centralized
16
<PAGE> 17
areas of expertise through divisional segmentation of its products and services.
This segmentation will provide the Company the ability to support customer
solutions in a concise manner under the Waterlink brand name and should result
in significant cost savings over time by eliminating redundancies within
operations. It is likely that the Company will incur a charge to operations
during the quarter ending September 30, 1998 related to the costs associated
with implementation of its plan.
The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. On June 5, 1998,
concurrent with the acquisition of the Carbons Group, the Company amended and
restated its then existing $40,000,000 domestic revolving credit facility with
Bank of America National Trust & Savings Association as agent by entering into a
$110,000,000 secured, domestic facility, comprised of a $75,000,000 revolving
facility and a $35,000,000 term loan. As a result of this acquisition and the
amended and restated credit facility, the Company has caused its current and
long term debt to be in excess of stockholder's equity and bears the risks
associated with increased leverage.
The Company believes that through the end of fiscal 1998, (i) future
cash flow from operations, (ii) borrowings under the expanded credit facilities
described above, and (iii) issuances of subordinated indebtedness, Common Stock
and seller financing incurred in connection with future acquisitions will be
sufficient to fund its working capital needs, additional acquisitions and
additional contingent consideration related to acquisitions.
Acquisitions
During the nine months ended June 30, 1998, the Company completed three
acquisitions for an aggregate consideration of $57,071,700, comprised of
$54,821,700 of cash and $2,250,000 of seller financing in the form of
convertible debt.
In connection with certain of its acquisitions, the Company may be
required to make additional purchase consideration payments of up to $5,845,000,
contingent upon the achievement of certain operating results through fiscal
2000. The payments that may be required in fiscal 1998, 1999 and 2000 are
$1,900,000, $2,213,000 and $1,732,000, respectively. In connection with two of
the Company's acquisitions, the Company also may be required to make other
additional purchase consideration payments in the form of cash and Common Stock,
in an amount equal to a fixed percentage of the excess of certain specified
annual earnings targets through fiscal 2000. Since such additional purchase
consideration payments, if any, are based on a fixed percentage of such excess
amount, there is no maximum amount for such payments. Any such additional
purchase consideration payments will be treated as additional goodwill for
accounting purposes.
The Company, from time to time, has and expects to make in the future
strategic investments in industry related companies. During the nine months
ended June 30, 1998 the Company invested in Aquatec Water Systems, Incorporated
("Aquatec"), a designer and manufacturer of specialized multi-chamber pumps for
the pure water industry, in the form of a $1,400,000 subordinated debt
instrument. This investment is convertible into approximately 30%
17
<PAGE> 18
of the equity of Aquatec. The Company also has the option to purchase at anytime
through March 2001 the remaining equity of Aquatec at a pre-determined formula
based on earnings.
Credit Availability
The Company currently has a $110,000,000 secured, domestic facility,
comprised of a $75,000,000 revolving facility and a $35,000,000 term loan
("Credit Facility") with Bank of America National Trust & Savings Association as
agent, which expires on May 19, 2003. In connection with this facility, the
Company also has separate facilities at three of its overseas subsidiaries
aggregating $7,000,000. These credit facilities will be utilized to fund
operating activities of the Company as well as future acquisitions.
Loans under the Credit Facility bear interest at a designated variable
base rate plus spreads ranging from 0 to 25 basis points depending on the ratio
of total consolidated indebtedness to the Company's earnings before interest,
taxes, depreciation and amortization. At the Company's option, the domestic
revolving credit facility bears interest based on a designated London interbank
offering rate plus spreads ranging from 100 to 225 basis points, depending on
the Company's aforementioned leverage ratio.
The Credit Facility restricts or prohibits the Company from taking
many actions, including paying dividends and incurring or assuming other
indebtedness or liens. The Company's obligations under the Credit Facility are
secured by liens on substantially all of the Company's domestic assets,
including equipment, inventory, accounts receivable and general intangibles and
the pledge of most of the stock of the Company's subsidiaries. The Company has
guaranteed the payment by its two overseas subsidiaries of their obligations
under the overseas facilities. The two overseas subsidiaries have given a
negative pledge of their assets in connection with the overseas facilities.
Availability for future borrowings under the Credit Facility is based
on a multiple of the Company's pro forma earnings before interest, taxes,
depreciation and amortization. At June 30, 1998, approximately $6,249,000 was
available for future borrowings under the Credit Facility. Availability for
future borrowings may increase or decrease based on the pro forma operating
performance of the Company.
The Company also has in place a $3,000,000 credit facility ("Canadian
Line of Credit") with Royal Bank of Canada to fund Canadian working capital
requirements including banker's acceptances and letters of credit. Interest
rates are negotiated on an individual borrowing basis and are related to the
Royal Bank of Canada's prime rate. Borrowings are payable upon demand and are
guaranteed by Bioclear. At June 30, 1998, approximately $481,000 was available
for future borrowings under the Canadian Line of Credit.
Year 2000
Like many companies, the Company is currently in the process of
assessing its computer software, databases and related equipment and operations
to determine whether or not modifications will be required to prevent problems
related to the year 2000. These problems, which have been widely reported in the
media, could cause malfunctions in certain computer related applications with
respect to dates on or after January 1, 2000, unless corrected. In
18
<PAGE> 19
addition to commencing an assessment of its internal software, databases,
equipment and operations, the Company has also commenced inquiry of its outside
suppliers and, to the extent feasible, customers to enable a complete evaluation
of the potential impact to the Company. Although preliminary results of its
internal assessment have led management to believe that the financial impact of
correcting its year 2000 issues would not be material to the Company's financial
position or results of operations in any given year, at this time the assessment
is not complete and until it is, the Company cannot determine the ultimate
impact of this issue.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 131, Disclosures About Segments
of an Enterprise and Related Information, which changes the way public companies
report segment information in annual financial statements. The statement also
requires public companies to report selected segment information in interim
financial reports to shareholders. The statement is effective for the Company in
fiscal 1999 and restatement of comparative information for earlier years is
required in the initial year of adoption. Management does not expect the
adoption of SFAS No. 131 to have a material impact on the Company's financial
statement disclosures.
FORWARD LOOKING STATEMENTS
This quarterly report contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
including, without limitation, statements regarding the Company's plans,
strategies, objectives, expectations, intentions, and adequacy of resources. Any
statements contained herein which are not historical facts or which contain the
words intends, seeks, may, expects, believes or anticipates shall be deemed to
be forward looking statements. These forward-looking statements are subject to
certain risks, uncertainties and other factors which could cause actual results
to differ materially. While forward-looking statements are sometimes presented
with numerical specificity, they are based on a variety of assumptions made by
management regarding future circumstances over which the Company has little or
no control. A number of important factors could cause the Company's actual
results to differ materially from those in forward-looking statements or
financial information. Actual results may differ from forward-looking results
for a number of reasons, including the following: (i) changes in world economic
conditions (including, but not limited to, the potential instability of
governments, legal and banking systems in countries in which the Company
conducts business, and significant changes in currency valuation), (ii) both the
timing of orders and changes in customer demand as they affect sales and product
mix (including, but not limited to, the effect of strikes at customers'
facilities, variations in backlog and the impact of changes in industrial
business cycles), (iii) competitive factors (including, but not limited to,
changes in market penetration and the introduction of new products by existing
and new competitors), (iv) changes in operating costs (including, but not
limited to, the effects of changes in the Company's manufacturing processes;
changes in costs associated with varying levels of operations; changes resulting
from different levels of customers demands; the effects of unplanned work
stoppages; changes in cost of labor and benefits; and the cost and availability
of raw materials, including carbon, and energy), (v) the success of the
Company's strategic operational plan for fiscal 1999
19
<PAGE> 20
(including, but not limited to, its ability to achieve the total planned
benefits of its strategic plan, its ability to integrate acquisitions into
Company operations, and the ability of recently acquired companies to meet
satisfactory operating results), and (vi) unanticipated litigation, claims or
assessments (including, but not limited to, claims or problems related to
product warranty and environmental issues). Readers are referred to the
"Forward-Looking Statements" section, commencing on page 20, in the Company's
1997 Annual Report on Form 10-K filed on December 1, 1997, which identifies
important risk factors that could cause actual results to differ from those
contained in the forward-looking statements herein.
20
<PAGE> 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Computation of earnings per share.
27.1 Financial Data Schedule as of and for the nine months ended
June 30, 1998
(b) Reports on Form 8-K and Form 8-K/A
The Company filed three reports on Form 8-K during the quarter
ended June 30, 1998. On April 9, 1998, the Company filed a
current report dated March 25, 1998 with regard to the
acquisition of Aquafine Engineering Services Limited and Purac
Engineering Incorporated (Item No. 2). On May 21, 1998 the
Company filed a current report dated May 21, 1998 to file the
press release announcing certain management changes (Item Nos. 2
and 7(c)). On June 19, 1998, the Company filed a current report
dated June 5, 1998 with regard to the acquisition of Barnebey &
Sutcliffe Corporation, Sutcliffe Speakman Carbons Limited and
Sutcliffe Croftshaw Limited (Item Nos. 2 and 7(c)).
The Company filed on June 5, 1998 on Form 8-K/A, Amendment No. 1
to current report dated March 25, 1998 with regard to the
acquisition of Aquafine Engineering Services Limited and Purac
Engineering Incorporated. This report amends Item No. 7 to
include the historical combined financial statements of Aquafine
Engineering Services Limited and Purac Engineering Incorporated
and the unaudited pro forma consolidated financial data of
Waterlink, Inc.
21
<PAGE> 22
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.
Waterlink, Inc.
(Registrant)
By: /s/ T. Scott King
-------------------------------------
T. Scott King
President and Chief Executive Officer
By: /s/ Michael J. Vantusko
-------------------------------------
Michael J. Vantusko
Chief Financial Officer
Dated: August 12, 1998
22
<PAGE> 1
EXHIBIT 11.1 - COMPUTATION OF EARNINGS PER SHARE
WATERLINK, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1997 1998 1997 1998
------- ------ ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Basic
Average common shares outstanding 3,132 12,006 2,619 11,964
======= ======= ======= =======
Income (loss) before extraordinary item $(1,477) $ (168) $ (492) $ 2,064
Extraordinary item (385) -- (385) --
------- ------- ------- -------
Net Income (Loss) $(1,862) $ (168) $ (877) $ 2,064
======= ======= ======= =======
Income (loss) before extraordinary item $ (0.47) $ (0.01) $ (0.19) $ 0.17
Extraordinary item (0.12) -- (0.15) --
------- ------- ------- -------
Net Income (Loss) $ (0.59) $ (0.01) $ (0.34) $ 0.17
======= ======= ======= =======
Assuming Dilution
Average shares outstanding-basic 3,132 12,006 2,619 11,964
Effect of dilutive securities:
Impact of outstanding stock options
and warrants -- -- -- 677
------- ------- ------- -------
3,132 12,006 2,619 12,641
======= ======= ======= =======
Income (loss) before extraordinary item $(1,477) $ (168) $ (492) $ 2,064
Extraordinary item (385) -- (385) --
------- ------- ------- -------
Net Income (Loss) $(1,862) $ (168) $ (877) $ 2,064
======= ======= ======= =======
Income (loss) before extraordinary item $ (0.47) $ (0.01) $ (0.19) $ 0.16
Extraordinary item (0.12) -- (0.15) --
------- ------- ------- -------
Net Income (Loss) $ (0.59) $ (0.01) $ (0.34) $ 0.16
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 9,148,000
<SECURITIES> 0
<RECEIVABLES> 32,489,000
<ALLOWANCES> 0
<INVENTORY> 20,791,000
<CURRENT-ASSETS> 88,009,000
<PP&E> 15,482,000
<DEPRECIATION> 1,408,000
<TOTAL-ASSETS> 204,096,000
<CURRENT-LIABILITIES> 45,430,000
<BONDS> 0
0
0
<COMMON> 12,000
<OTHER-SE> 71,137,000
<TOTAL-LIABILITY-AND-EQUITY> 204,096,000
<SALES> 94,267,000
<TOTAL-REVENUES> 94,267,000
<CGS> 58,597,000
<TOTAL-COSTS> 58,597,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,737,000
<INCOME-PRETAX> 3,695,000
<INCOME-TAX> 1,631,000
<INCOME-CONTINUING> 2,064,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,064,000
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
</TABLE>
