<PAGE> 1
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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 March 31, 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 -12,004,604 shares outstanding as of April 30,
1998
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INDEX
WATERLINK, INC. AND SUBSIDIARIES
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 1997 and
March 31, 1998 3 - 4
Consolidated statements of income - Three months
ended March 31, 1997 and 1998; Six months ended March
31, 1997 and 1998 5
Consolidated statements of cash flows - Six months
ended March 31, 1997 and 1998 6
Notes to consolidated financial statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
September 30, 1998
1997 (Unaudited)
--------- ---------
ASSETS (In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,482 $ 8,370
Accounts receivable:
Trade, net 24,625 22,565
Other 1,320 1,693
Inventories 10,143 11,616
Costs in excess of billings 6,413 15,990
Refundable income taxes 635 496
Deferred income taxes -- 377
Other current assets 1,177 2,272
-------- --------
Total Current Assets 46,795 63,379
Property, plant and equipment, at cost:
Land, buildings and improvements 2,366 3,445
Machinery and equipment 2,536 2,852
Office equipment 1,463 2,219
-------- --------
6,365 8,516
Less accumulated depreciation 554 1,020
-------- --------
5,811 7,496
Other assets:
Goodwill, net 60,419 65,593
Patents, net 1,484 1,456
Deferred income taxes 611 --
Other assets 740 4,880
-------- --------
63,254 71,929
-------- --------
Total Assets $115,860 $142,804
======== ========
</TABLE>
See notes to consolidated financial statements
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PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
March 31,
September 30, 1998
1997 (Unaudited)
--------- ---------
(In thousands,
except share data)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade $ 9,597 $ 9,664
Accrued expenses 9,447 12,672
Additional purchase price payable 1,760 150
Billings in excess of cost 3,425 3,400
Accrued income taxes 490 1,345
Deferred income taxes 108 --
Current portion of long-term debt 2,538 2,103
--------- ---------
Total Current Liabilities 27,365 29,334
Long-term obligations:
Long-term debt 12,502 33,027
Convertible subordinated notes-related parties 3,921 6,171
Deferred income taxes -- 438
Other long-term obligations 1,199 1,342
--------- ---------
17,622 40,978
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 12,002,104 shares
at March 31, 1998 12 12
Additional paid-in capital 70,739 71,133
Foreign currency translation adjustment (44) (1,051)
Retained earnings 166 2,398
--------- ---------
Total Shareholders' Equity 70,873 72,492
--------- ---------
Total Liabilities and Shareholders' Equity $ 115,860 $ 142,804
========= =========
</TABLE>
See notes to consolidated financial statements
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PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1997 1998 1997 1998
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 14,858 $ 27,250 $ 24,727 $ 59,330
Cost of sales 8,886 17,224 14,800 37,210
-------- -------- -------- --------
Gross Profit 5,972 10,026 9,927 22,120
Selling, general and
administrative expenses 4,239 8,683 7,478 16,752
Amortization 138 410 280 842
-------- -------- -------- --------
Operating Income 1,595 933 2,169 4,526
Other income (expense):
Interest expense (352) (430) (612) (719)
Other - net 87 (46) 75 (19)
-------- -------- -------- --------
Income Before Income Taxes 1,330 457 1,632 3,788
Income taxes 572 240 647 1,556
-------- -------- -------- --------
Net Income $ 758 $ 217 $ 985 $ 2,232
======== ======== ======== ========
Earnings per Common Share:
Basic $ 0.29 $ 0.02 $ 0.42 $ 0.19
Assuming dilution $ 0.12 $ 0.02 $ 0.17 $ 0.18
Weighted Average Common Shares Outstanding:
Basic 2,649 11,981 2,364 11,943
Assuming dilution 6,141 12,637 6,132 12,700
</TABLE>
See notes to consolidated financial statements.
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PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 985 $ 2,232
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation and amortization 442 1,380
Deferred income taxes -- 702
Changes in working capital:
Accounts receivable (6,020) 5,494
Inventories 2,325 (748)
Costs in excess of billings (3,611) (6,495)
Refundable income taxes -- 139
Other assets (1,053) (4,178)
Accounts payable 2,067 (1,675)
Accrued expenses 1,498 (1,967)
Billings in excess of cost 726 (646)
Accrued income taxes 669 969
-------- --------
Net cash used by operating activities (1,972) (4,793)
INVESTING ACTIVITIES
Purchases of equipment (439) (1,175)
Purchases of subsidiaries, net of cash acquired (8,750) (8,412)
-------- --------
Net cash used in financing activities (9,189) (9,587)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 21,367 20,625
Payments on long-term borrowings (6,388) (535)
Proceeds from sale of common stock 360 414
-------- --------
Net cash provided by financing activities 15,339 20,504
-------- --------
Effect of exchange rate changes on cash 1 (236)
Increase in cash and cash equivalents 4,179 5,888
Cash and cash equivalents at beginning of period 119 2,482
-------- --------
Cash and cash equivalents at end of period $ 4,298 $ 8,370
======== ========
</TABLE>
See notes to consolidated financial statements.
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PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE AND SIX-MONTH PERIODS ENDED
MARCH 31, 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 six-month periods ended March
31, 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, March 31,
1997 1998
------- -------
<S> <C> <C>
Raw materials and supplies $ 4,821 $ 6,720
Work in process and finished goods 5,322 4,896
------- -------
$10,143 $11,616
======= =======
</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, March 31,
1997 1998
------- -------
<S> <C> <C>
Contract costs incurred to date $17,033 $39,054
Estimated profits 7,793 15,721
------- -------
Contract revenue earned to date 24,826 54,775
Less billings to date 21,838 42,185
------- -------
Cost and estimated earnings in excess
of billings, net $ 2,988 $12,590
======= =======
</TABLE>
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The above amounts are included in the accompanying consolidated balance sheets
as follows (in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1997 1998
------- -------
<S> <C> <C>
Costs in excess of billings $ 6,413 $15,990
Billings in excess of cost 3,425 3,400
------- -------
$ 2,988 $12,590
======= =======
</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.
These acquisitions were accounted for as purchases. The consolidated statements
of income 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):
<TABLE>
<CAPTION>
Six Months Ended March 31,
1997 1998
---- ----
<S> <C> <C>
Net sales $68,026 $69,644
Operating profit 6,163 5,613
Income before income taxes 3,603 4,579
Net income 2,162 2,747
Earnings per common share:
Basic $ 0.79 $ 0.23
Assuming dilution $ 0.33 $ 0.22
</TABLE>
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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
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 52,466 stock options and warrants - 18 18
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 2,232 2,232
Other (36) $ (1,007) (1,043)
-------- -------- -------- -------- --------
Balance at March 31, 1998 $ 12 $ 71,133 $ (1,051) $ 2,398 $ 72,492
======== ======== ======== ======== ========
</TABLE>
6. 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. All earnings per share amounts for all periods have
been presented, and where necessary, restated to conform to the Statement 128
requirements.
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 Six Months Ended
March 31, March 31,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings per share-
net income $ 758 $ 217 $ 985 $2,232
Effect of dilutive securities-interest on convertible
subordinated notes, net of tax - - 40 -
------ ------ ------ ------
Numerator for diluted earnings per share-
income available to common stockholders
after assumed conversions $ 758 $ 217 $1,025 $2,232
====== ====== ====== ======
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Denominator:
Average shares outstanding- basic 2,649 11,981 2,364 11,943
Effect of dilutive securities:
Conversion of preferred stock into common stock 3,250 - 3,250 -
Stock options and warrants 242 656 250 757
Convertible subordinated notes - - 268 -
------ ------ ------ ------
Dilutive potential common shares 3,492 656 3,768 757
------ ------ ------ ------
Denominator for diluted earnings per share-adjusted
weighted average shares and assumed conversions 6,141 12,637 6,132 12,700
====== ====== ====== ======
Earnings per common share:
Basic earnings per share $ 0.29 $ 0.02 $ 0.42 $ 0.19
====== ====== ====== ======
Diluted earnings per share $ 0.12 $ 0.02 $ 0.17 $ 0.18
====== ====== ====== ======
</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 and six months ended March 31,
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 during the quarter and six-months ended March 31, 1998 since they
would have an antidilutive effect on earnings per share.
10
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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 twelve 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 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
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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 March 31, 1998, the Company's
backlog was approximately $32.4 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 Six Months Ended
March 31, March 31,
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 59.8 63.2 59.9 62.7
----- ----- ----- -----
Gross profit 40.2 36.8 40.1 37.3
Selling, general and
administrative expenses 28.5 31.9 30.2 28.2
Amortization 1.0 1.5 1.1 1.5
----- ----- ----- -----
Operating income 10.7 3.4 8.8 7.6
Other income (expense):
Interest expense (2.4) (1.6) (2.5) (1.2)
Other - net 0.6 (0.1) 0.3 --
----- ----- ----- -----
Income before income taxes 8.9 1.7 6.6 6.4
Income taxes 3.8 0.9 2.6 2.6
----- ----- ----- -----
Net income 5.1% 0.8% 4.0% 3.8%
===== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Net Sales: Net sales for the three months ended March 31, 1998 were $27,250,000,
an increase of $12,392,000 from the comparable prior period. The increase was
primarily due to the timing of the following acquisitions:
- - Nordic Water Products Group subsidiaries ("Nordic Group") March 5, 1997
- - Bioclear Technology, Inc. ("Bioclear") June 27, 1997
- - Lanco Environmental Products, Inc. ("Lanco") June 27, 1997
- - 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
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- - Purac Engineering Incorporated ("Purac") March 25, 1998
In addition, internal growth accounted for $324,000 of the increase, which
represented an internal growth rate of 2.2%. 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 March 31, 1998 was
$10,026,000, an increase of $4,054,000 from the comparable prior period. The
increase was primarily due to the aforementioned acquisitions. Gross margin was
36.8% for the 1998 quarter as compared to 40.2% for the 1997 quarter. 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.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the three months ended March 31, 1998 were
$8,683,000, an increase of $4,444,000 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 31.9% as compared
to 28.5% for the comparable prior period. This percentage increase is the
result of a strong sales performance at one of the Company's larger
subsidiaries during the previous year which could not be duplicated in the
current year; as well as the Company's continued commitment to support the
necessary expenses related to its long-term internal growth and cross selling
programs. Lower than anticipated sales during the quarter ended March 31, 1998,
primarily attributable to the timing of certain orders, also contributed to
this percentage increase.
Amortization: Amortization expense for the three months ended March 31, 1998 was
$410,000, an increase of $272,000 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 March 31, 1998 was
$430,000, an increase of $78,000 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 of 52.5% for the three months ended
March 31, 1998 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. The
effective tax rate was 43.0% in the corresponding period in the prior year. The
non-deductible goodwill amortization had a more significant effect on the
overall tax rate in the quarter ended March 31, 1998 as income before income
taxes was significantly less than the corresponding period in the prior year
while non-deductible goodwill increased.
Six Months Ended March 31, 1998 Compared to Six Months Ended March 31, 1997
Net Sales: Net sales for the six months ended March 31, 1998 were $59,330,000,
an increase of $34,603,000 from the comparable prior period. The increase was
primarily due to the timing of
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<PAGE> 14
the acquisitions previously described. In addition, internal growth accounted
for $2,672,000 of the increase, which represented an internal growth rate of
10.8%, primarily reflecting industry expansion in overseas markets.
Gross Profit: Gross profit for the six months ended March 31, 1998 was
$22,120,000, an increase of $12,193,000 from the comparable prior period. The
increase was primarily due to the aforementioned acquisitions and internal
growth. Gross margin was 37.3% for 1998 as compared to 40.1% for 1997. 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 six months ended March 31, 1998 were
$16,752,000, an increase of $9,274,000 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 28.2% as compared
to 30.2% 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 six months ended March 31, 1998 was
$842,000, an increase of $562,000 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 six months ended March 31, 1998 was
$719,000, an increase of $107,000 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 of 41.1% for the six months ended
March 31, 1998 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.
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 six months ended March 31, 1998, net cash used by operating
activities was $4,793,000, purchases of equipment totaled $1,175,000 and
purchases of businesses, net of cash
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acquired, totaled $8,412,000. 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.
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 April 3, 1998,
the Company announced that it recently entered into a letter of intent to
purchase a group of companies with combined revenues of over $55 million. These
revenues, which are primarily recurring in nature, should
reduce the impact of the contractual nature of its businesses on a
quarterly basis. Although there can be no assurances, this acquisition is
scheduled to close in June 1998. The transaction, if completed, will be the
largest acquisition in Waterlink's history. The Company has recently received
a commitment from Bank of America National Trust & Savings Association as
agent to amend and restate the $40,000,000 domestic revolving credit facility
described below and enter into a $110,000,000 secured, domestic facility,
comprised of a $75,000,000 revolving facility and a $35,000,000 term loan.
Expected proceeds of this facility will be used to fund the acquisition
described above, refinance existing borrowings and fund working capital needs of
the Company. Upon the closing of this facility the Company will have increased
its current and long term debt to be in excess of stockholder's equity and
will bear 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 expanded credit facilities
described above, 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
During the six months ended March 31, 1998, the Company completed two
acquisitions for an aggregate consideration of $12,071,700, comprised of
$9,821,700 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 $8,045,000,
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, $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.
15
<PAGE> 16
The Company, from time to time, has and expects to make in the future
strategic investments in industry related companies. During the quarter ended
March 31, 1998 the Company invested in Aquatec Water Systems, Incorporated
("Aquatec"), a designer and manufacturer of specialized multi-chamber pumps for
the pure water industry, $700,000 in the form of a subordinated debt instrument
and expects to make a like investment in the quarter ending June 30, 1998. These
investments, in the form of subordinated debt, are convertible into
approximately 30% of the equity of Aquatec. The Company also has the option to
purchase at any time through March 2001 the remaining equity of Aquatec at a
pre-determined formula based on earnings.
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 of its overseas
subsidiaries of $4,000,000 and $3,000,000, respectively. The $40,000,000
domestic credit facility and the $7,000,000 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 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.
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 March 31, 1998, approximately $13,576,000 was available for future
borrowings under the Credit Facility and 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
16
<PAGE> 17
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 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
17
<PAGE> 18
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.
18
<PAGE> 19
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 six months ended
March 31, 1998
19
<PAGE> 20
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: May 13, 1998
20
<PAGE> 1
EXHIBIT 11.1 - COMPUTATION OF EARNINGS PER SHARE
WATERLINK, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1997 1998 1997 1998
------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Basic
Average common shares outstanding 2,649 11,981 2,364 11,943
======= ======= ======= =======
Net Income $ 758 $ 217 $ 985 2,232
======= ======= ======= =======
Basic Earnings per Share $ 0.29 $ 0.02 $ 0.42 $ 0.19
======= ======= ======= =======
Assuming Dilution
Average shares outstanding-basic 2,649 11,981 2,364 11,943
Effect of dilutive securities:
Conversion of preferred stock into
common stock 3,250 - 3,250 -
Impact of outstanding stock options
and warrants 242 656 250 757
Convertible subordinated notes - - 268 -
------- ------- ------- -------
6,141 12,637 6,132 12,700
======= ======= ======= =======
Net Income $ 758 $ 217 $ 985 2,232
Effect of dilutive securities- interest on
convertible subordinated notes, net of tax - - 40 -
======= ======= ======= =======
$ 758 $ 217 $ 1,025 2,232
======= ======= ======= =======
Earnings per Share-Assuming Dilution $ 0.12 $ 0.02 $ 0.17 $ 0.18
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 8,370,000
<SECURITIES> 0
<RECEIVABLES> 24,258,000
<ALLOWANCES> 0
<INVENTORY> 11,616,000
<CURRENT-ASSETS> 63,379,000
<PP&E> 8,516,000
<DEPRECIATION> 1,020,000
<TOTAL-ASSETS> 142,804,000
<CURRENT-LIABILITIES> 29,334,000
<BONDS> 0
0
0
<COMMON> 12,000
<OTHER-SE> 71,133,000
<TOTAL-LIABILITY-AND-EQUITY> 142,804,000
<SALES> 59,330,000
<TOTAL-REVENUES> 59,330,000
<CGS> 37,210,000
<TOTAL-COSTS> 37,210,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 719,000
<INCOME-PRETAX> 3,788,000
<INCOME-TAX> 1,556,000
<INCOME-CONTINUING> 2,232,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,232,000
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
</TABLE>
