<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): June 5, 1998
WATERLINK, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 1-13041 34-1788678
(State or Other Commission File Number (IRS Employer Identification No.)
Jurisdiction of
Incorporation)
4100 Holiday Street, N.W., Suite 201, Canton, Ohio 44718
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (330) 649-4000
<PAGE> 2
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
Item 7 of Current Report on Form 8-K dated June 5, 1998 and filed on June 19,
1998 is amended to include the combined financial statements of Barnebey &
Sutcliffe Corporation and Combined Affiliates and pro forma financial
information of Waterlink, Inc. (the "Company") as shown in the following index
to the financial statements:
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
(a) Historical Combined Financial Statements of Barnebey &
Sutcliffe Corporation and Combined Affiliates
Independent Auditor's Report F-1
Combined Balance Sheets F-2
Combined Statements of Income F-4
Combined Statements of Shareholder's Equity F-5
Combined Statements of Cash Flows F-6
Notes to Combined Financial Statements F-7
(b) Unaudited Pro Forma Consolidated Financial Data
Basis of Presentation F-17
Unaudited Pro Forma Consolidated Statement of Income for the year ended
September 30, 1997 F-18
Unaudited Pro Forma Consolidated Statement of Income for the nine months
ended June 30, 1998 F-19
Notes to Unaudited Pro Forma Consolidated Financial Data F-20
</TABLE>
(c) Exhibits
Exhibit 23 - Consent of Independent Auditors
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.
WATERLINK, INC.
Dated: August 14, 1998 By: /s/ Michael J. Vantusko
---------------------------
Michael J. Vantusko
Chief Financial Officer
<PAGE> 3
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Barnebey & Sutcliffe Corporation
and Combined Affiliates
Columbus, Ohio
We have audited the accompanying combined balance sheets of Barnebey & Sutcliffe
Corporation and Combined Affiliates, wholly-owned subsidiaries of Sutcliffe
Speakman Holdings Limited, as of March 31, 1998 and 1997, and the related
combined statements of income, retained earnings, and cash flows for each of the
three fiscal years in the period ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in Note 1, the accompanying financial statements were prepared for
the purpose of complying with Rule 3-05 of Regulation S-X of the Securities and
Exchange Commission.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Barnebey & Sutcliffe
Corporation and Combined Affiliates as of March 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended March 31, 1998, in conformity with generally accepted
accounting principles.
McGladrey & Pullen, LLP
Certified Public Accountants
Minneapolis, Minnesota
April 30, 1998, except for Note 5,
as to which the date is June 5, 1998
F-1
<PAGE> 4
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
COMBINED BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS (NOTE 5) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 1,950,449 $ 2,705,039
Accounts receivable, less allowance for doubtful accounts
of $200,000 in 1998 and 1997 9,338,420 8,606,044
Inventories (Note 2) 8,806,069 7,464,392
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 3) 395,629 609,774
Deferred income taxes (Note 6) 474,000 391,000
Due from affiliate and parent (Note 8) 83,825 1,275,865
Prepaid pension cost (Note 4) 704,000 527,000
Prepaid expenses and other 521,615 499,430
-------------------------------------
TOTAL CURRENT ASSETS 22,274,007 22,078,544
-------------------------------------
Property, Plant, and Equipment
Land, building, and improvements 1,833,751 1,721,446
Machinery and equipment 9,814,765 8,996,131
Other 1,150,186 1,061,375
-------------------------------------
12,798,702 11,778,952
Less accumulated depreciation 5,815,654 4,916,124
-------------------------------------
6,983,048 6,862,828
-------------------------------------
Other assets
Intangible Assets, net of accumulated amortization of $973,746
in 1998 and $419,098 in 1997 484,562 1,039,210
Noncurrent Deferred Income Taxes (Note 6) 26,000 84,000
Investment in related party 100,478 99,845
-------------------------------------
611,040 1,223,055
-------------------------------------
$ 29,868,095 $ 30,164,427
=====================================
</TABLE>
See Notes to Combined Financial Statements.
F-2
<PAGE> 5
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Notes payable (Note 5) $ - $ 964,000
Current portion of long-term debt 392,382 383,209
Trade accounts payable 4,640,378 6,309,571
Amounts due to affiliates and parent (Note 8) 671,439 1,385,533
Accrued expenses:
Compensation 600,475 560,638
Taxes and other 2,019,142 808,848
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 3) 2,749,882 1,087,164
Income taxes payable 383,357 154,382
Dividends payable to parent 167,650 335,000
-------------------------------------
TOTAL CURRENT LIABILITIES 11,624,705 11,988,345
-------------------------------------
Noncurrent Liabilities
Long-term debt (Note 5) 487,544 879,926
Due to parent (Note 8) 5,197,150 5,197,150
-------------------------------------
TOTAL NONCURRENT LIABILITIES 5,684,694 6,077,076
-------------------------------------
Shareholder's Equity
Common stock, without par or stated value; authorized
6,501,500 shares; issued and outstanding 3,250,102 shares 6,579,683 6,579,683
Retained earnings 5,831,493 5,479,132
Cumulative translation adjustment 147,520 40,191
------------------------------------
12,558,696 12,099,006
------------------------------------
$ 29,868,095 $ 30,164,427
====================================
</TABLE>
See Notes to Combined Financial Statements
F-3
<PAGE> 6
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
COMBINED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ 56,929,070 $ 52,700,338 $ 42,839,469
Cost of revenues 41,191,478 38,150,673 30,916,045
---------------------------------------------------------
GROSS PROFIT 15,737,592 14,549,665 11,923,424
Selling, general, and administrative expense 10,889,488 9,620,991 7,884,802
---------------------------------------------------------
OPERATING INCOME 4,848,104 4,928,674 4,038,622
Other income (expense):
Interest expense (464,448) (765,604) (779,135)
Interest income and other items, net (22,070) (546,739) 21,156
---------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,361,586 3,616,331 3,280,643
Income tax expense (benefit) (Note 6) 1,243,000 (23,000) 711,000
---------------------------------------------------------
NET INCOME $ 3,118,586 $ 3,639,331 $ 2,569,643
=========================================================
</TABLE>
See Notes to Combined Financial Statements.
F-4
<PAGE> 7
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED MARCH 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Common Stock Cumulative
------------------------------ Retained Translation
Shares Amount Earnings Adjustment Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1995 3,250,102 $6,579,683 $ 2,028,162 $ (207,713) $ 8,400,132
Net income - - 2,569,643 - 2,569,643
Dividends to parent company - - (1,873,160) - (1,873,160)
Translation adjustment - - - (9,022) (9,022)
-------------------------------------------------------------------------------
Balance, March 31, 1996 3,250,102 6,579,683 2,724,645 (216,735) 9,087,593
Net income - - 3,639,331 - 3,639,331
Dividends to parent company - - (884,844) - (884,844)
Translation adjustment - - - 256,926 256,926
-------------------------------------------------------------------------------
Balance, March 31, 1997 3,250,102 6,579,683 5,479,132 40,191 12,099,006
Net income - - 3,118,586 - 3,118,586
Dividends to parent company - - (2,766,225) - (2,766,225)
Translation adjustment - - - 107,329 107,329
===============================================================================
Balance, March 31, 1998 3,250,102 $6,579,683 $ 5,831,493 $ 147,520 $ 12,558,696
===============================================================================
</TABLE>
See Notes to Combined Financial Statements
F-5
<PAGE> 8
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $3,118,586 $ 3,639,331 $ 2,569,643
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,482,679 971,153 910,063
Deferred income taxes (25,000) (143,000) (41,000)
Changes in current assets and liabilities:
Accounts receivable (732,376) (1,132,272) 658,004
Inventories (1,341,677) (143,655) (1,924,889)
Costs and estimated earnings in excess of
billings on uncompleted contracts 214,145 220,933 (129,906)
Prepaid expenses and other (22,185) 16,530 448,376
Prepaid pension cost (177,000) (283,020) (118,980)
Trade accounts payable (1,669,193) 2,427,178 (46,306)
Amounts due to affiliates (714,094) (498,272) 74,267
Amounts due from affiliates 1,192,040 1,790,083 (2,367,172)
Accrued expenses 1,250,131 (1,554,152) 1,724,775
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,662,718 (187,945) 1,042,340
Income taxes payable 228,975 (271,517) (48,227)
---------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,467,749 4,851,375 2,750,988
---------------------------------------------
Cash Flows From Investing Activities
Purchases of property, plant, and equipment (1,048,251) (967,797) (1,712,761)
Investment in related party (633) (62,596) (8,144)
---------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,048,884) (1,030,393) (1,720,905)
---------------------------------------------
Cash Flows From Financing Activities
Proceeds from debt - 730,000 1,536,678
Dividend payments to parent company (2,933,575) (1,839,670) (583,334)
Principal payments on debt (1,347,209) (1,722,297) (1,468,328)
---------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (4,280,784) (2,831,967) (514,984)
---------------------------------------------
Effect of Foreign Currency Exchange Rate Change on Cash 107,329 256,926 (9,022)
---------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (754,590) 1,245,941 506,077
Cash and Cash Equivalents (cash overdraft)
Beginning of year 2,705,039 1,459,098 953,021
---------------------------------------------
End of year $1,950,449 $ 2,705,039 $ 1,459,098
=============================================
Supplemental Disclosures of Noncash Transactions
Change in minimum pension liability and related intangible asset $ - $ 222,000 $ 5,000
Seller-financed acquisition - - 969,000
Dividends payable 167,650 335,000 1,289,826
=============================================
</TABLE>
See Notes to Combined Financial Statements.
F-6
<PAGE> 9
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: On June 5, 1998, Waterlink, Inc. acquired all of the
outstanding shares of capital stock of Barnebey & Sutcliffe Corporation,
Sutcliffe Speakman Carbons Limited, Sutcliffe Croftshaw Limited, Lakeland
Processing Limited, and Sutcliffe Speakmanco 5 Limited from Sutcliffe Speakman
PLC (formerly Sutcliffe Speakman Holdings Limited). These financial statements
are prepared for the purpose of complying with Rule 3-05 of Regulation S-X of
the Securities and Exchange Commission.
NATURE OF BUSINESS: At the date of acquisition by Waterlink, Inc., Barnebey &
Sutcliffe Corporation and Combined Affiliates (the Company) were all
wholly-owned subsidiaries of Sutcliffe Speakman Holdings Limited, a company
whose registered headquarters are in the United Kingdom. A summary of the
Company's major accounting policies are set forth below. These policies have
been consistently followed in the preparation of the accompanying financial
statements.
The Company includes the following entities: Barnebey & Sutcliffe Corporation, a
U.S. company, and Sutcliffe Speakman Carbons Limited, Sutcliffe Croftshaw
Limited, Lakeland Processing Limited, and Sutcliffe Speakmanco 5 Limited, U.K.
companies.
The Company serves particular customer groups. The carbon division has both
impregnation and reactivation capabilities supplying specialty grade activated
carbon products for diverse applications. The solvent recovery division designs
and installs large turnkey and skid mounted adsorption systems generally for the
recovery and reuse of valuable solvents. The Pur Air division designs and
manufactures equipment using activated carbon for the purification of air and
water. The Company had net sales in Europe amounting to 28, 28, and 30 percent
of total net sales for the years ended March 31, 1998, 1997, and 1996,
respectively.
FOREIGN CURRENCY TRANSLATION: Financial statements of the U.K. affiliates are
translated into U.S. dollars at current rates, except that revenues, costs, and
expenses are translated at average current rates during each reporting period.
Net exchange gains or losses resulting from the translation of foreign financial
statements are accumulated and credited or charged directly to a separate
component of shareholder's equity.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
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 may differ from those estimates.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
At times, the Company maintains cash balances which exceed insured limits. To
date, no losses have occurred.
F-7
<PAGE> 10
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE AND COST RECOGNITION: Revenues from sales of standard products are
recognized at the time the product is shipped. Revenues from fixed-price,
long-term construction contracts and fixed-price contracts subject to economic
price adjustments are recognized on the percentage-of-completion method,
measured by the percentage of costs incurred to estimated total costs for each
contract. This method is used because management considers total costs to be the
best available measure of progress on the contracts.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as engineering, supplies, and
travel. Selling, general, and administrative costs are charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts are made in
the period in which losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from final
contract settlement, may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.
The asset, "costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenues recognized in excess of amounts billed. The
liability, "billings in excess of costs and estimated earnings on uncompleted
contracts," represents amounts billed in excess of revenues recognized.
INVENTORIES: Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method.
PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment are stated at
cost less accumulated depreciation. The provision for depreciation is computed
by the straight-line method over the estimated useful lives of the assets. The
useful lives range from 5 to 15 years for machinery and equipment, 10 to 15
years for buildings and improvements and 3 to 10 years for other fixed assets.
INCOME TAXES: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
respective tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
INTANGIBLE ASSETS: The Company is amortizing its intangible assets from 5 to 15
years using the straight-line method.
F-8
<PAGE> 11
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS: In accordance with Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, the Company reviews its long-lived assets
and intangibles related to those assets periodically to determine potential
impairment by comparing the carrying value of the long-lived assets outstanding
with estimated future cash flows expected to result from the use of the assets,
including cash flows from disposition. Should the sum of the expected future
cash flows be less than the carrying value, the Company would recognize an
impairment loss. An impairment loss would be measured by comparing the amount by
which the carrying value exceeds the fair value of the long-lived assets and
intangibles. To date, management has determined that no impairment of long-lived
assets exists.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of cash and cash
equivalents, accounts receivable and accounts payable are a reasonable estimate
of fair value due to the short-term nature of these instruments. The due to and
from affiliates and investment in related party do not have a ready market and
cost is assumed to approximate fair value. The company's note payable and
long-term debt obligations have costs which approximate fair value.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: The FASB has issued Statement
No. 130, Reporting Comprehensive Income, effective for fiscal years beginning
after December 15, 1997. Statement No. 130 requires reporting items which are
components of other comprehensive income, such as foreign currency items and
unrealized gains and losses on certain investments in debt and equity
securities.
The FASB has issued Statement No. 131, Disclosures About Segments of an
Enterprise and Related Information, effective for fiscal years beginning after
December 15, 1997. Statement No. 131 requires disclosure of certain information
for each reportable segment, including general information, profit and loss
information, segment assets, etc.
The FASB has issued Statement No. 132, Disclosures about Pensions and Other
Postretirement Benefits, effective for fiscal years beginning after December 15,
1997. Statement No. 132 revises the disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of these plans.
NOTE 2. INVENTORIES
The following table summarizes the Company's inventories:
<TABLE>
<CAPTION>
March 31
-----------------------------------------
1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw material $ 4,522,430 $ 4,240,895
Work in process 732,921 612,205
Finished goods 2,635,183 1,956,187
Inventory in transit 915,535 655,105
-----------------------------------------
$ 8,806,069 $ 7,464,392
=========================================
</TABLE>
NOTE 3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs on uncompleted contacts and earnings thereon are summarized as follows:
<TABLE>
<CAPTION>
March 31
-----------------------------------------
1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 6,364,576 $ 8,529,889
Estimated earnings 2,208,637 2,463,904
-----------------------------------------
8,573,213 10,993,793
Less billings to date 10,927,466 11,471,183
-----------------------------------------
$ (2,354,253) $ (477,390)
=========================================
</TABLE>
F-9
<PAGE> 12
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (CONTINUED)
Costs, estimated earnings, and billings on uncompleted contracts are included
in the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
March 31
-----------------------------------------
1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 395,629 $ 609,774
Billings in excess of costs and estimated earnings on
uncompleted contracts (2,749,882) (1,087,164)
-----------------------------------------
$ (2,354,253) $ (477,390)
=========================================
</TABLE>
NOTE 4. BENEFIT PLANS
The Company has defined benefit pension plans covering substantially all of its
employees. One plan covers employees located primarily in the United States. The
other plan covers employees located primarily in the United Kingdom. The plans
provide benefits based on compensation and years of service. In general, the
funding policy of the Company is to fund these plans based upon local legal
requirements, tax considerations, and investment opportunities.
The following table sets forth the components of pension expense:
<TABLE>
<CAPTION>
Years ended March 31
------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 450,000 $ 395,000 $ 344,000
Interest cost on projected benefit obligation 507,000 478,000 377,000
Actual return on plan assets 15,000 (615,000) (1,113,000)
Net amortization and deferral (915,000) (231,000) 358,000
------------------------------------------------------
Net periodic pension cost (credit) $ 57,000 $ 27,000 $ (34,000)
======================================================
</TABLE>
F-10
<PAGE> 13
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. BENEFIT PLANS (CONTINUED)
The following table sets forth the plans' funded status and amounts recognized
in the respective years noted:
<TABLE>
<CAPTION>
March 31
-----------------------------------------
1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 7,166,000 $ 6,099,000
=========================================
Accumulated benefit obligation $ 7,215,000 $ 6,151,000
=========================================
Projected benefit obligation $ (7,346,000) $ (6,846,000)
Plan assets at fair market value 8,098,000 8,686,000
-----------------------------------------
Plan assets in excess of projected benefit obligation 752,000 1,840,000
Unrecognized net (gain) loss from past experience different from
that assumed and effects of changes in assumptions 1,105,000 (40,000)
Unrecognized net transition asset at year end, net of
amortization (1,572,000) (1,687,000)
Unrecognized prior service cost 364,000 390,000
Contributions after measurement date but before year end 55,000 24,000
-----------------------------------------
Prepaid pension cost $ 704,000 $ 527,000
=========================================
</TABLE>
Assumptions used in accounting for the plans as of March 31, 1998, 1997, and
1996, are as follows:
<TABLE>
<CAPTION>
U.K. Plan U.S. Plan
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Weighted-average discount rate 8.0% 8.5%
Expected long-term rate of return on assets 9.0% 8.5%
Rates of increase in salary levels 5.5% 5.0%
</TABLE>
The plan assets are invested in a diversified portfolio of fixed-income
investments and equity securities.
NOTE 5. DEBT OBLIGATIONS
LINE OF CREDIT: At March 31, 1998, the Company had a $4,000,000 revolving
line-of-credit facility and a $600,000 line-of-credit facility for equipment
purchases with a bank which bear interest at the prime rate (8.0 percent). At
March 31, 1998, there were no outstanding balances on the revolving line-of-
credit facilities. At March 31, 1997, $964,000 was outstanding on the
$4,000,000 revolving line of credit facility. There have been no advances on
the line-of-credit facility for equipment purchases.
F-11
<PAGE> 14
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. DEBT OBLIGATIONS (CONTINUED)
LONG-TERM DEBT: The following table summarizes the Company's long-term debt:
<TABLE>
<CAPTION>
March 31
-----------------------------------------
1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Haymark (f.k.a. Sorb-Tech, Inc.) note payable, imputed interest
at 8.75%, with monthly installments of $20,000, including
interest through March, 2000, unsecured $ 438,884 $ 631,243
Term loan payable to a bank, bearing interest at prime (8.5% at March
31, 1998), with monthly installments of $15,200 plus
interest through July, 2000 441,042 623,542
Other -- 8,350
-----------------------------------------
879,926 1,263,135
Less current portion 392,382 383,209
-----------------------------------------
$ 487,544 $ 879,926
=========================================
</TABLE>
The following table summarizes the maturities of the Company's long-term debt:
<TABLE>
<CAPTION>
March 31:
<S> <C>
1999 $ 392,382
2000 411,502
2001 76,042
--------------------
$ 879,926
====================
</TABLE>
The line-of-credit facilities and term loan agreement are secured by all of
Barnaby & Sutcliffe's assets. The agreements governing these obligations contain
certain covenants which, among other things, place restrictions on tangible net
worth, current ratio, and borrowings. In conjunction with the acquisition of the
Company by Waterlink, Inc. on June 5, 1998, the line-of-credit facilities were
terminated and the term loan payable to a bank was paid in full.
Interest paid during 1998, 1997, and 1996 on the Company's debt obligations was
approximately $470,000, $774,000, and $758,000, respectively. These amounts
include interest payments made by the U.K. affiliates to their former parent
company.
In addition, the Company is a party to a cross guarantee for certain bank
facilities of Sutcliffe Speakman Holdings Limited. The amount guaranteed under
this arrangement was approximately $8,470,000 and $8,720,000 at March 31, 1998
and 1997, respectively. The Company was released from liability under this
agreement by the lender of its former parent company in conjunction with the
acquisition of the Company by Waterlink, Inc. on June 5, 1998.
F-12
<PAGE> 15
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. INCOME TAXES
The tax effects of the principal temporary differences are shown as follows:
<TABLE>
<CAPTION>
Years Ended March 31
-----------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets
Allowance for doubtful accounts $ 53,000 $ 79,000 $ 82,000
Inventory obsolescence 69,000 45,000 25,000
Additional inventory costs for tax purposes 119,000 94,000 25,000
Property, plant, and equipment - 21,000 90,000
Intangibles 81,000 63,000 --
Warranty 222,000 107,000 51,000
Accrued expenses 89,000 121,000 97,000
Capital allowance carryforward 2,400,000 3,300,000 4,000,000
Net operating loss carryforward 6,400,000 6,700,000 6,300,000
-----------------------------------------------------------
9,433,000 10,530,000 10,670,000
Less valuation allowance 8,800,000 10,000,000 10,300,000
-----------------------------------------------------------
633,000 530,000 370,000
-----------------------------------------------------------
Deferred tax liabilities:
Property, plant, and equipment 55,000 - -
Pension 78,000 55,000 38,000
-----------------------------------------------------------
133,000 55,000 38,000
-----------------------------------------------------------
Net deferred tax assets $ 500,000 $ 475,000 $ 332,000
===========================================================
</TABLE>
Classification of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
Years Ended March 31
-----------------------------------------
1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total noncurrent deferred tax assets $ 8,826,000 $ 10,084,000
Net current deferred tax assets 474,000 391,000
-----------------------------------------
9,300,000 10,475,000
Less valuation allowance 8,800,000 10,000,000
-----------------------------------------
Net deferred tax assets $ 500,000 $ 475,000
=========================================
</TABLE>
For tax purposes, the Company has U.K. capital allowance and net operating loss
carryforwards of approximately $7,974,000 and $20,891,000 respectively, for
relief against future income from the same trade. The capital allowances and net
operating losses may be carried forward, without a time limit, if the U.K.
affiliates continue to operate in the same trade. The capital allowance
carryforward is calculated on a 25% reducing method and terminates when the
applicable assets are written off. A valuation allowance has been established
for the capital allowance and net operating loss carryforwards, for which
realization is uncertain.
F-13
<PAGE> 16
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. INCOME TAXES (CONTINUED)
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Years Ended March 31
--------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. federal $ 1,143,000 $ 951,000 $ 630,000
State and local 207,000 158,000 105,000
Foreign (82,000) (989,000) 17,000
--------------------------------------------------------------
1,268,000 120,000 752,000
--------------------------------------------------------------
Deferred:
U.S. federal (38,000) (135,000) (35,000)
State and local (7,000) (23,000) (6,000)
Foreign 20,000 15,000 -
--------------------------------------------------------------
(25,000) (143,000) (41,000)
--------------------------------------------------------------
Total $ 1,243,000 $ (23,000) $ 711,000
==============================================================
</TABLE>
The income tax provision differs from the amount of income tax by applying the
U.S. federal income tax rate to pretax income for the years ended March 31,
1998, 1997, and 1996, due to the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes at the statutory
US federal rate $ 1,483,000 $ 1,230,000 $ 1,115,000
Foreign operations (305,000) (1,332,000) (536,000)
State taxes, net of federal benefit 136,000 105,000 70,000
Other (71,000) (26,000) 62,000
--------------------------------------------------------------
$ 1,243,000 $ (23,000) $ 711,000
==============================================================
</TABLE>
Income taxes paid by the Barnebey & Sutcliffe Corporation during 1998, 1997, and
1996 were approximately $1,095,000, $1,381,000, and $789,000, respectively.
As the U.K. affiliates participated in the Sutcliffe Speakman Holdings Limited
group, they were subject to Inland Revenue provisions governing taxation of a
group of companies. Under these group provisions, the U.K. affiliates had group
relief tax receipts of approximately $63,000 and $974,000 for the years ended
March 31, 1998 and 1997 respectively, and group relief tax payments of
approximately $17,000 for the year ended March 31, 1996.
NOTE 7. LEASE OBLIGATIONS
The Company leases certain buildings and vehicles. These leases are classified
as operating leases and expire through 2003. Rent expense was approximately
$538,000, $500,000, and $537,000 for the years ended March 31, 1998, 1997, and
1996, respectively.
F-14
<PAGE> 17
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. LEASE OBLIGATIONS (CONTINUED)
Future minimum payments under these leases, by year and in the aggregate,
consist of the following at March 31, 1998:
<TABLE>
<CAPTION>
Years ending March 31:
<S> <C>
1999 $ 540,000
2000 285,000
2001 197,000
2002 152,000
2003 124,000
--------------------
$ 1,298,000
====================
</TABLE>
NOTE 8. RELATED-PARTY TRANSACTIONS
During 1998 and 1997, the Company entered into several transactions with
entities affiliated by the common ownership of Sutcliffe Speakman Holdings
Limited. These transactions and related balances are summarized below:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amounts due to affiliates:
Sutcliffe Speakman Holdings Limited:
Current $ 671,439 $ 1,385,533
Long-term 5,197,150 5,197,150
Amounts due from affiliates:
Sutcliffe Speakman Holdings Limited -- 299,837
Samuel Banner 83,825 976,028
</TABLE>
As part of the terms and conditions of the sale and purchase agreement between
Waterlink, Inc. and Sutcliffe Speakman Holdings Limited, the Company was
released from its liabilities to its former parent company at June 5, 1998.
<TABLE>
Years Ended March 31
1998 1997 1996
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Transactions with affiliates:
Sales to affiliates $ 302,098 $ 554,939 $ 377,821
Management fee charged by parent company 328,690 257,772 221,000
Interest charged by parent company 311,264 517,967 484,840
Dividends to parent company 2,766,225 884,844 1,873,160
</TABLE>
F-15
<PAGE> 18
BARNEBEY & SUTCLIFFE CORPORATION AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. OPERATIONS INFORMATION
Foreign operations consist of Sutcliffe Speakman Carbons Limited, Sutcliffe
Croftshaw Limited, Lakeland Processing Limited, and Sutcliffe Speakmanco 5
Limited, all of which are located in the United Kingdom. The operations of
Barnebey & Sutcliffe Corporation are located in the United States. A summary of
the Company's operations by geographic area is presented below:
<TABLE>
<CAPTION>
March 31
--------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States:
Sales $ 37,914,646 $ 35,487,657 $ 28,710,570
Operating profit 3,409,181 2,817,872 1,991,771
Total assets 17,939,675 16,017,534 15,868,028
==============================================================
United Kingdom:
Sales $ 19,014,424 $ 17,212,681 $ 14,128,899
Operating profit 1,438,923 2,110,802 2,046,851
Total assets 11,928,420 14,146,893 13,466,811
==============================================================
Consolidated:
Sales $ 56,929,070 $ 52,700,338 $ 42,839,469
Operating profit 4,848,104 4,928,674 4,038,622
Total assets 29,868,095 30,164,427 29,334,839
==============================================================
</TABLE>
F-16
<PAGE> 19
Waterlink, Inc. and Subsidiaries
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
BASIS OF PRESENTATION
The Consolidated Balance Sheet of Waterlink, Inc. and Subsidiaries (the
"Company") as of June 30, 1998 included in the Company's Form 10-Q for the
quarterly period ended June 30, 1998 filed on August 12, 1998 includes the
accounts of Barnebey & Sutcliffe Corporation, Sutcliffe Speakman Carbons
Limited and Sutcliffe Croftshaw Limited, collectively referred to herein as the
"Carbons Group", which was acquired on June 5, 1998. This acquisition has been
accounted for using the purchase method of accounting. The allocation of the
purchase price for this acquisition is based on an estimate of the fair market
value of the net assets acquired and is subject to adjustment. To date, no
information has been gathered that would cause the Company to believe that the
final purchase price allocation will be materially different than the
preliminary estimates.
The following Unaudited Pro Forma Consolidated Statements of Income for the year
ended September 30, 1997 and the nine months ended June 30, 1998 adjust the
Company's historical statements of operations to give effect to the acquisitions
completed in fiscal 1997 and fiscal 1998 up to and including the acquisition of
the Carbons Group as if they had occurred as of October 1, 1996.
The pro forma financial statements have been derived in part from the historical
combined financial statements of the Carbons Group included elsewhere in this
filing. In preparing the pro forma financial statements, the historical combined
financial statements of the Carbons Group were converted from a March 31 fiscal
year end to a September 30 fiscal year end.
With regard to the Company, operating results for the year ended September 30,
1997 were derived from the Company's Form S-1 filed on February 12, 1998, and
operating results for the nine months ended June 30, 1998 were derived from the
Form 10-Q filed on August 12, 1998. The amounts in the column entitled "Fiscal
1997 Acquisitions" were derived from the historical financial statements of the
following acquired companies for the periods in fiscal 1997 prior to their
respective acquisition by the Company: Nordic Water Products Group, acquired
March 5, 1997; Bioclear Technology, Inc., acquired June 27, 1997; Lanco
Environmental Products, Inc., acquired June 27, 1997; Mellegard V.A. Maskiner
AB, acquired September 12, 1997; and Hycor Corporation, acquired September 30,
1997. The amounts in the column entitled "Fiscal 1998 Acquisitions" were
derived from the historical financial statements of the following acquired
companies for the periods prior to their respective acquisition by the Company:
Chemitreat Services, Inc., acquired March 2, 1998; and Aquafine Engineering
Services Limited and Purac Engineering, Inc., both acquired March 25, 1998.
The Unaudited Pro Forma Consolidated Financial Data has been prepared by the
Company's management. This pro forma data does not purport to represent the
Company's results of operations had the aforementioned acquisitions been
completed as of the beginning of the period indicated, or project the Company's
results of operations at any future date or for any future period. The
Unaudited Pro Forma Consolidated Financial Data should be read in conjunction
with the Consolidated Financial Statements and notes thereto included in the
Company's filing on Form S-1 filed February 12, 1998.
F-17
<PAGE> 20
WATERLINK, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
FISCAL FISCAL
1997 1998 CARBONS PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS GROUP ADJUSTMENTS PRO FORMA
-------- ------------ ------------ ----- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 64,699 $43,865 $20,373 $ 52,166 $ 2,740 (1) $183,843
Cost of sales 40,390 25,092 15,172 40,347 1,888 (2) 122,889
-------- -------- -------- --------- ------- -------
Gross profit 24,309 18,773 5,201 11,819 852 60,954
Selling, general and
administrative expenses 18,683 14,343 4,498 7,173 (1,553) (3) 43,144
Special management
compensation 2,630 - - - - 2,630
Amortization 751 84 - 193 1,539 (4) 2,567
-------- -------- -------- --------- ------- -------
Operating income 2,245 4,346 703 4,453 866 12,613
Other income (expense):
Interest expense (1,281) (198) (178) (711) (6,365) (5) (8,733)
Interest income and
other items, net 263 167 218 (238) 315 (6) 725
-------- -------- -------- --------- ------- -------
Income before income taxes 1,227 4,315 743 3,504 (5,184) 4,605
Income taxes 470 1,110 24 104 134 (7) 1,842
-------- -------- -------- --------- ------- -------
Income before extraordinary
item 757 3,205 719 3,400 (5,318) 2,763
Extraordinary item, net of
income taxes (385) - - - - (385)
-------- -------- -------- --------- ------- -------
Net income $ 372 $3,205 $ 719 $ 3,400 $(5,318) $ 2,378
======== ======== ======== ========= ======= =======
Pro forma net income
per share:
Basic
Income before extraordinary
item $ 0.15 $ 0.53
Extraordinary item (0.08) (0.07)
-------- -------
$ 0.07 $ 0.46
======== =======
Assuming Dilution:
Income before extraordinary
item $ 0.10 $ 0.34
Extraordinary item (0.05) (0.05)
-------- -------
$ 0.05 $ 0.29
======== =======
Number of shares used to compute
pro forma per share data:
Basic 4,924 5,207
Assuming Dilution: 7,804 8,087
</TABLE>
The accompanying notes are an integral part of this financial statement
F-18
<PAGE> 21
WATERLINK, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
FISCAL
1998 CARBONS PRO FORMA
COMPANY ACQUISITIONS GROUP ADJUSTMENTS PRO FORMA
-------- ------------ ------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net Sales $ 94,267 $ 9,220 $38,040 $ 1,094 (1) $142,621
Cost of sales 58,597 6,611 29,890 751 (2) 95,849
-------- -------- -------- ------- --------
Gross profit 35,670 2,609 8,150 343 46,772
Selling, general and
administrative expenses 27,458 2,323 5,087 (937) (3) 33,931
Special management charges 1,494 - - - 1,494
Amortization 1,412 - 479 82 (4) 1,973
-------- -------- -------- ------- --------
Operating income 5,306 286 2,584 1,198 9,374
Other income (expense):
Interest expense (1,737) (55) (365) (2,407) (5) (4,564)
Interest income and
other items, net 126 118 67 (7) (6) 304
-------- -------- -------- ------- --------
Income before income taxes 3,695 349 2,286 (1,216) 5,114
Income taxes 1,631 1 769 (356) (7) 2,045
-------- -------- -------- ------- --------
Net income $ 2,064 $ 348 $ 1,517 $ (860) $ 3,069
======== ======== ======== ======= ========
Pro forma net income
per share:
Basic $ 0.17
Assuming Dilution $ 0.16 $ 0.26
$ 0.24
Number of shares used to compute
pro forma per share data:
Basic 11,964 11,964
Assuming Dilution 12,641 12,641
</TABLE>
The accompanying notes are an integral part of this financial statement
F-19
<PAGE> 22
Waterlink, Inc. and Subsidiaries
Notes to Unaudited Pro Forma Consolidated Financial Data
Unaudited Pro Forma Consolidated Statements of Income Adjustments
The Unaudited Pro Forma Consolidated Statements of Income give effect to the
following adjustments:
(1) To recognize revenue on the percentage of completion method of
accounting at the Nordic Water Products Group, AES and Purac to
conform with Waterlink's accounting policy. These companies
previously utilized the completed contract method for statutory
accounting purposes.
(2) To adjust cost of sales for the following items:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1997 June 30, 1998
------------------ ----------------
<S> <C> (In thousands) <C>
Percentage of completion method
of accounting at the Nordic
Water Products Group, AES
and Purac $ 2,092 $ 959
Reclassification of commissions
and other expenses to selling,
general and administrative
expenses (204) (208)
---------- ----------
$ 1,888 $ 751
========== ==========
</TABLE>
(3) To adjust selling, general and administrative expenses for the following
items:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1997 June 30, 1998
------------------ ----------------
<S> <C> (In thousands) <C>
To adjust wages, benefits and
management fees to levels
specified in the employment and
management agreements entered
into as part of the business
combinations $ (1,660) $ (1,100)
Reclassification of commissions
and other expenses from cost
of sales 204 208
Depreciation and other expenses
versus rent on property,
acquired as part of the
acquisition of AES (97) (45)
---------- ----------
$ (1,553) $ (937)
========== ==========
</TABLE>
(4) To record amortization of goodwill to be recorded as a result of the
acquisitions over a period of 40 years.
(5) To record interest expense relating to debt assumed to be issued and cash
assumed to be used in connection with the acquisitions.
(6) To eliminate costs associated with a subsidiary investment not included
as part of the Carbons Group acquisition.
(7) To adjust income taxes to an effective rate of 40%.
F-20
<PAGE> 1
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-29911) pertaining to the Employee Stock Purchase Plan of
Waterlink, Inc.; 1997 Non-Employee Director Stock Option Plan of Waterlink,
Inc.; Waterlink, Inc. Amended and Restated 1995 Stock Option Plan, and the
Waterlink, Inc. 1997 Omnibus Incentive Plan of our report dated April 30, 1998,
except for Note 5 as to which is dated June 5, 1998, with respect to the
financial statements of Barnebey & Sutcliffe Corporation and Combined
Affiliates included in Amendment No. 1 of the Waterlink, Inc. Current Report
(Form 8-K/A).
McGladrey & Pullen, LLP
Certified Public Accountants
August 12, 1998
Minneapolis, Minnesota
