<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 December 31, 1997
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 -11,972,943 shares outstanding as of January 31,
1998
================================================================================
<PAGE> 2
<TABLE>
<CAPTION>
INDEX
WATERLINK, INC. AND SUBSIDIARIES
PAGE
----
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 1997 and
December 31, 1997 3 - 4
Consolidated statements of income - Three months
ended December 31, 1996 and 1997 5
Consolidated statements of cash flows - Three months
ended December 31, 1996 and 1997 6
Notes to consolidated financial statements 7 - 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 15
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16-17
Signatures 18
</TABLE>
2
<PAGE> 3
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
September 30, 1997
1997 (Unaudited)
------------ ------------
<S> <C> <C>
ASSETS (In thousands)
Current Assets:
Cash and cash equivalents $ 2,482 $ 3,042
Accounts receivable:
Trade, net 24,625 18,700
Other 1,320 951
Inventories 10,143 10,307
Costs in excess of billings 6,413 10,040
Refundable income taxes 635 498
Deferred income taxes -- 377
Other current assets 1,177 1,293
------------ ------------
Total Current Assets 46,795 45,208
Property, plant and equipment, at cost:
Land, buildings and improvements 2,366 2,615
Machinery and equipment 2,536 2,342
Office equipment 1,463 1,885
------------ ------------
6,365 6,842
Less accumulated depreciation 554 767
------------ ------------
5,811 6,075
Other assets:
Goodwill, net 60,419 59,340
Patents, net 1,484 1,462
Deferred income taxes 611 --
Other assets 740 2,213
------------ ------------
63,254 63,015
------------ ------------
Total Assets $ 115,860 $ 114,298
============ ============
</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>
December 31,
September 30, 1997
1997 (Unaudited)
------------ ------------
(In thousands,
except share data)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 9,597 $ 7,603
Accrued expenses 9,447 8,880
Additional purchase price payable 1,760 525
Billings in excess of cost 3,425 1,481
Accrued income taxes 490 1,114
Deferred income taxes 108 --
Current portion of long-term debt 2,538 1,937
------------ ------------
Total Current Liabilities 27,365 21,540
Long-term obligations:
Long-term debt 12,502 15,775
Convertible subordinated notes-related parties 3,921 3,921
Deferred income taxes -- 360
Other long-term obligations 1,199 1,176
------------ ------------
17,622 21,232
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 11,949,710 shares at December 31, 1997 12 12
Additional paid-in capital 70,739 71,139
Foreign currency translation adjustment (44) (1,806)
Retained earnings 166 2,181
------------ ------------
Total Shareholders' Equity 70,873 71,526
------------ ------------
Total Liabilities and Shareholders' Equity $ 115,860 $ 114,298
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
PART I, ITEM I FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME UNAUDITED
Three Months Ended
December 31,
1996 1997
------------ ------------
(In thousands,
except per share data)
<S> <C> <C>
Net sales $ 9,869 $ 32,080
Cost of sales 5,914 19,986
------------ ------------
Gross profit 3,955 12,094
Selling, general and
administrative expenses 3,239 8,069
Amortization 142 432
------------ ------------
Operating Income 574 3,593
Other income (expense):
Interest expense (260) (289)
Other net (12) 27
------------ ------------
Income Before Income Taxes 302 3,331
Income taxes 75 1,316
------------ ------------
Net Income $ 227 $ 2,015
============ ============
Earnings per Common Share:
Basic $ 0.11 $ 0.17
Assuming Dilution $ 0.04 $ 0.16
Weighted Average Common Shares Outstanding:
Basic 2,085 11,907
Assuming Dilution 5,593 12,843
See notes to consolidated financial statements
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
PART I, ITEM I FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
Three Months Ended
December 31,
1996 1997
-------- ---------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 227 $ 2,015
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 223 663
Deferred income taxes -- 497
Changes in working capital:
Accounts receivable (959) 5,891
Inventories (548) (323)
Costs in excess of billings (503) (3,662)
Refundable income taxes 137
Other assets (246) (2,057)
Accounts payable 1,629 (1,814)
Accrued expenses 182 (469)
Billings in excess of cost (121) (1,926)
Accrued income taxes 16 624
-------- ---------
Net cash used by operating activities (100) (424)
INVESTING ACTIVITIES
Purchases of equipment (199) (517)
Purchases of subsidiaries, net of cash acquired (213) (1,274)
-------- ---------
Net cash used in financing activities (412) (1,791)
FINANCING ACTIVITIES
Proceeds from long term borrowings 1,587 3,387
Payments on long term borrowings (698) (730)
Proceeds from sale of common stock -- 400
-------- ---------
Net cash provided by financing activities 889 3,057
Effect of exchange rate changes on cash -- (282)
Increases in cash and cash equivalents 377 560
Cash and cash equivalents at beginning of period 119 2,482
-------- ---------
Cash and cash equivalents at end of period $ 496 $ 3,042
======== =========
See notes to consolidated financial statements
</TABLE>
6
<PAGE> 7
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Information as of December 31, 1997 and for the
three months ended December 31, 1996 and 1997 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-month period ended December 31,
1997 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, December 31,
1997 1997
------------- ------------
<S> <C> <C>
Raw materials and supplies $ 4,821 $ 5,546
Work in process and finished goods 5,322 4,761
------------- ------------
$ 10,143 $ 10,307
============= ============
</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, December 31,
1997 1997
------------- ------------
<S> <C> <C>
Contract costs incurred to date $ 17,033 $ 21,548
Estimated profits 7,793 10,512
------------- ------------
Contract revenue earned to date 24,826 32,060
Less billings to date 21,838 23,501
------------- ------------
Cost and estimated earnings in excess
of billings, net 2,988 $ 8,559
============= ============
</TABLE>
7
<PAGE> 8
The above amounts are included in the accompanying consolidated balance sheet as
follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1997
------------- ------------
<S> <C> <C>
Costs in excess of billings $ 6,413 $ 10,040
Billings in excess of cost 3,425 1,481
------------- ------------
$ 2,988 $ 8,559
============= ============
</TABLE>
4. SHAREHOLDERS' EQUITY
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 1,000 stock options -- 4 4
Issuance of 42,384 shares of common
stock in connection with the
employee stock purchase plan -- 396 396
Net income 2,015 2,015
Other (1,762) (1,762)
------ -------- --------- -------- --------
Balance at December 31, 1997 $ 12 $ 71,139 $ (1,806) $ 2,181 $ 71,526
====== ======== ========= ======== ========
</TABLE>
5. EARNINGS PER SHARE
In 1997, the FASB issued SFAS No. 128, Earnings Per Share, which 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, effective February 3,
1998, the Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 98. SAB No. 98 revises 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 SFAS No. 128. All earnings per share amounts for all periods have
been restated to conform to the requirements of SFAS No. 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):
8
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1996 1997
---- ----
<S> <C> <C>
Numerator:
Numerator for basic earnings per share-
net income $ 227 $2,015
Effect of dilutive securities-interest on convertible
subordinated notes, net of tax -- 8
------ ------
Numerator for diluted earnings per share-
income available to common stockholders
after assumed conversions $ 227 $2,023
====== ======
Denominator:
Average shares outstanding-basic 2,085 11,907
Effect of dilutive securities:
Conversion of preferred stock into common stock 3,250 --
Stock options and warrants 258 858
Convertible subordinated notes -- 78
------ ------
Dilutive potential common shares 3,508 936
------ ------
Denominator for diluted earnings per share-adjusted
weighted average shares and assumed conversions 5,593 12,843
====== ======
Earnings per Common Share:
Basic $ 0.11 $ 0.17
====== ======
Assuming dilution $ 0.04 $ 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 quarter ended December 31, 1997, 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
since they would have an antidilutive effect on earnings per share.
9
<PAGE> 10
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 ten acquisitions of seventeen operating
companies and internally.
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. The Company seeks
companies which provide the potential for synergies with existing businesses.
With respect to the acquisitions completed to date, the Company has begun to
realize improvement in internal growth rates due to the 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 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 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, to a lesser extent, weather
conditions. 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
10
<PAGE> 11
to the timing of the awarding of such 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. As of December 31, 1997, the Company's backlog was approximately
$25.8 million. 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
December 31,
1996 1997
------ ------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 59.9 62.3
------ ------
Gross profit 40.1 37.7
Selling, general and
administrative expenses 32.8 25.2
Amortization 1.5 1.3
------ ------
Operating income 5.8 11.2
Other income (expense):
Interest expense (2.6) (0.9)
Other - net (0.1) 0.1
------ ------
Income before income taxes 3.1 10.4
Income taxes 0.8 4.1
------ ------
Net income 2.3% 6.3%
====== ======
</TABLE>
Three Months Ended December 31, 1997 Compared to Three Months Ended December 31,
1996
Net Sales: Net sales for the three months ended December 31, 1997 were
$32,080,000, an increase of $22,211,000 from the comparable prior period. The
increase was primarily due to the acquisition of the Nordic Water Products Group
subsidiaries ("Nordic Group") on March 5, 1997, of Bioclear Technology, Inc.
("Bioclear") and Lanco Environmental Products, Inc. ("Lanco") on June 27, 1997,
of Mellegard V.A. Maskiner AB ("MEVA") on September 12, 1997 and of Hycor
Corporation ("Hycor") on September 30, 1997. In addition, internal growth
accounted for $1,892,000 of the increase, which represented an internal growth
rate of 19.2%, primarily due to expansion in overseas markets and to the greater
levels of resources provided by the Company to the businesses subsequent to the
11
<PAGE> 12
acquisitions. 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 December 31, 1997 was
$12,094,000, an increase of $8,139,000 from the comparable prior period. The
increase was primarily due to the aforementioned acquisitions and internal
growth. Gross margin was 37.7% for 1997 as compared to 40.1% for 1996. Gross
margins have been impacted by the March 1997 acquisition of the Nordic Group,
which historically experiences lower margins as compared to other Waterlink
companies, as well as the finalization of certain lower margin contracts in
Germany.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the three months ended December 31, 1997 were
$8,069,000, an increase of $4,830,000 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 25.2% as compared
to 32.8% for the comparable prior period. This decrease primarily reflects the
spreading of selling, general and administrative expenses over a larger revenue
base.
Amortization: Amortization expense for the three months ended December 31, 1997
was $432,000, an increase of $290,000 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 December 31, 1997
was $289,000, an increase of $29,000 from the comparable prior period.
Income Taxes: The effective income tax rate of 39.5% for the three months ended
December 31, 1997 is in excess of the United States federal statutory rate of
34% due to primarily to non-deductible goodwill amortization related to certain
acquisitions made by the Company as well as state and local income taxes.
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.
12
<PAGE> 13
For the three months ended December 31, 1997, net cash used by
operating activities was $424,000, purchases of equipment totaled $517,000 and
purchases of businesses, net of cash acquired, totaled $1,274,000. These cash
outlays, financed primarily by long-term borrowings, reflect additional payments
made during the quarter related to acquisitions, expansion of working capital
requirements and purchases of equipment for existing operations.
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. The Company believes
that through the end of fiscal 1998, (i) future cash flow from operations, (ii)
borrowings under its credit facilities, and (iii) issuances of 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
As part of its strategic plan, the Company has implemented an
acquisition program, which has significantly impacted liquidity and capital
resources. As of December 31, 1997, the Company has made ten acquisitions
consisting of seventeen operating companies for an aggregate consideration of
$81,837,000, comprised of $59,026,000 of cash, $7,468,000 of Common Stock, and
$15,343,000 of seller financing and assumed debt, including convertible debt. Of
the $15,343,000 of seller financing and assumed debt, $6,160,000 was outstanding
at December 31, 1997.
The Company may be required to make additional purchase consideration
payments of up to $6,545,000, contingent upon the achievement of certain
operating results through fiscal 2000. The payments that may be required in
fiscal 1998, 1999 and 2000 are $4,100,000, $1,713,000 and $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.
Credit Availability
The Company currently has a $40,000,000 secured, domestic, revolving
credit facility with Bank of America National Trust & Savings Association as
agent, which expires on June 27, 2000. In connection with the domestic revolving
credit facility, the Company also has separate facilities at two overseas
subsidiaries of $4,000,000 and $3,000,000, respectively. The $40,000,000
domestic credit facility and the $7,000,000
13
<PAGE> 14
overseas facilities ("Credit Facility") 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 200 basis points.
The Credit Facility restricts or prohibits the Company from 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 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.
The Company also has in place a $3,000,000 credit facility ("Canadian
Line of Credit") with Royal Bank of Canada, a participant in the Credit Facility
referred to above, 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 December 31, 1997, approximately $31,193,000 was available for
future borrowings under the Credit Facility and the Canadian Line of Credit.
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 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 on it 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
14
<PAGE> 15
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 and legal 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 and energy), (v) the success of the Company's operating plan
(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.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
- ------- -------------------------------------------------
At the annual meeting of stockholders of the Company held on January 15, 1998:
(i) The following directors were elected to terms expiring in 2001:
<TABLE>
<CAPTION>
Class I Directors: For Against
--- -------
<S> <C> <C>
John R. Miller 10,388,073 29,704
Theodore F. Savastano 10,387,573 30,204
</TABLE>
(ii) To approve the Waterlink, Inc. 1997 Omnibus Incentive Plan of the
Company:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C> <C>
8,127,333 2,266,139 24,305
</TABLE>
(iii) To approve the Employee Stock Purchase Plan of the Company:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C> <C>
9,483,318 912,074 22,385
</TABLE>
(iv) To ratify the appointment of Ernst & Young LLP as independent certified
public auditors of the Company:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C> <C>
10,409,157 3,800 4,820
</TABLE>
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 three months ended
December 31, 1997
(b) Reports on Form 8-K/A
<TABLE>
<CAPTION>
Date Item Financial Statements
---- ---- --------------------
<S> <C> <C>
November 24, 1997 #7 Historical Financial Statements of Mellegard
V.A. Maskiner AB
Unaudited Pro Forma Condensed Consolidated
Financial Data
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C> <C>
December 11, 1997 #7 Historical Financial Statements of Hycor
Corporation
Unaudited Pro Forma Condensed Consolidated
Financial Data
</TABLE>
17
<PAGE> 18
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/ Chet S. Ross
----------------
Chet S. Ross
President and Chief Executive Officer
By: /s/ Michael J. Vantusko
-----------------------
Michael J. Vantusko
Chief Financial Officer
Dated: February 12, 1998
18
<PAGE> 1
EXHIBIT 11.1 - COMPUTATION OF EARNINGS PER SHARE
WATERLINK, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1996 1997
-------------- --------------
(In thousands,
except per share data)
<S> <C> <C>
Basic
Average common shares outstanding 2,085 11,907
Net Income $ 227 $ 2,015
============== ==============
Basic Earnings per Share $ 0.11 $ 0.17
============== ==============
Assuming Dilution
Average shares outstanding-basic 2,085 11,907
Effect of dilutive securities:
Conversion of preferred stock into common stock 3,250 --
Impact of outstanding stock options and warrants 258 858
Convertible subordinated notes -- 78
-------------- --------------
Total 5,593 12,843
============== ==============
Net Income $ 227 $ 2,015
Effect of dilutive securities- interest on convertible
subordinated notes, net of tax -- 8
-------------- --------------
$ 227 $ 2,023
============== ==============
Earnings per Share-Assuming Dilution $ 0.04 $ 0.16
============== ==============
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,042,000
<SECURITIES> 0
<RECEIVABLES> 19,651,000
<ALLOWANCES> 0
<INVENTORY> 10,307,000
<CURRENT-ASSETS> 45,208,000
<PP&E> 6,842,000
<DEPRECIATION> 767,000
<TOTAL-ASSETS> 114,298,000
<CURRENT-LIABILITIES> 21,540,000
<BONDS> 0
0
0
<COMMON> 12,000
<OTHER-SE> 71,514,000
<TOTAL-LIABILITY-AND-EQUITY> 114,298,000
<SALES> 32,080,000
<TOTAL-REVENUES> 32,080,000
<CGS> 19,986,000
<TOTAL-COSTS> 19,986,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 289,000
<INCOME-PRETAX> 3,331,000
<INCOME-TAX> 1,316,000
<INCOME-CONTINUING> 2,015,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,015,000
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
</TABLE>
