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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-13098
AQUA-CHEM, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 39-1900496
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7800 NORTH 113TH STREET 53201
P.O. BOX 421, MILWAUKEE, WISCONSIN (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (414) 359-0600
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 12
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Item 8. Financial Statements and Supplementary Data................. 24
Index to Financial Statements of Aqua-Chem, Inc............. 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 51
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 51
Item 11. Executive Compensation...................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 58
Item 13. Certain Relationships and Related Transactions.............. 61
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 62
Financial Statements Included in Item 8..................... 62
Index to Financial Statements and Schedule Included in Item
14........................................................ 62
Schedules Omitted as Not Required or Inapplicable........... 62
Reports on Form 8-K......................................... 63
Exhibits.................................................... 63
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PART I
ITEM 1. BUSINESS.
The Company is the world's leading manufacturer of commercial and
industrial packaged boilers, burners, related equipment and aftermarket parts.
The Company believes that in the U.S. market for each of its three principal
boiler product lines it enjoys the #1 or #2 market position. In addition,
management believes that the Company has the largest installed base of packaged
boilers in the world (estimated at over 80,000 boilers), which facilitates the
Company's sale of higher margin aftermarket parts. Management attributes the
Company's leading market positions to its extensive global distribution network,
well-recognized Cleaver-Brooks and Nebraska Boiler brand names, and its
reputation for providing high-quality, energy-efficient, low-emission boilers
with a demonstrated record of safety and durability.
The Company is also a world leader in the design and production of water
purification and treatment products and systems sold under the Aqua-Chem brand
name for selected commercial, government, military, and industrial applications.
HISTORY
Founded in 1929 as the John C. Cleaver Company and later known as
Cleaver-Brooks, the Company began as an innovative manufacturer of small,
portable boilers that were sold packaged and fully assembled. Cleaver-Brooks,
which continues to operate as a division of the Company, eventually became, and
for over 20 years has been, the world's largest manufacturer of commercial and
industrial packaged boilers, burners, related boiler-room equipment and
aftermarket parts. The Company increased its presence in the boiler market with
the acquisition of substantially all of the assets of National Dynamics
Corporation ("NDC") on June 23, 1998 (the "NDC Acquisition") and now conducts
NDC's former operations through its National Dynamics Division ("National
Dynamics").
Cleaver-Brooks began manufacturing steam-powered water purification stills
in the early 1940's in response to a military request for a portable system
capable of purifying unfit drinking water. This business, which currently
operates as the Company's Water Technologies Division ("Water Technologies"),
has become a leading manufacturer of innovative water treatment products and
systems for a variety of commercial, government, military and industrial
applications.
On July 31, 1997, Aqua-Chem management, led by Chairman and CEO Jeffrey A.
Miller, and Whitney Equity Partners, L.P. (a fund managed by J. H. Whitney &
Co.) acquired Aqua-Chem (the "Management Buy-Out") from its former owners.
BOILER MARKET
Boilers burn a variety of fuels to provide: (i) hot water for residential,
commercial, institutional and industrial uses; (ii) hot water or low-pressure
steam for use in circulatory heating systems; and (iii) process steam for a wide
variety of industrial applications and to drive turbines for the generation of
electricity. The boiler market can generally be segmented according to boiler
capacity and end use. Residential boilers are the smallest, followed by
commercial boilers, industrial boilers, and utility boilers, which are the
largest. Boiler capacities generally are measured in British Thermal Units
("BTU") or boiler horsepower ("BHP") output for smaller boilers, and in pounds
of steam per hour ("PPH") for larger boilers. One BHP equals 33,472 BTU per
hour, which in turn produces approximately 28 to 35 PPH, depending on pressure
and feedwater temperature.
Commercial packaged boilers generally range from 15 BHP (or approximately
500,000 BTU per hour) up to 250 BHP and are used in apartment buildings, hotels,
office buildings, schools, hospitals, and government buildings primarily to
provide hot water or low-pressure steam for circulatory heating systems, and, to
a lesser extent, for potable hot water. Commercial packaged boilers range in
price between $15,000 and $50,000.
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Industrial packaged boilers, with capacities from approximately 250 BHP to
over 250,000 PPH, are larger, more powerful and more expensive than commercial
packaged boilers, and are generally used to provide high-pressure process steam
for industrial applications, such as driving steam-operated presses, mill
equipment or machine tools, sterilizing equipment and products, and processing
chemicals, foods, beverages, and other products. Industrial packaged boilers are
used in a broad range of industries including paper, chemicals, electronics,
pharmaceutical, textiles, automotive, and heavy machinery. Industrial packaged
boilers range in price between $50,000 and $1 million.
Based on industry sources, the annual worldwide market for packaged,
commercial and industrial boilers of all types is estimated to be in excess of
$1 billion, of which approximately $400 million is attributable to the North
American commercial and industrial boiler market.
CLEAVER-BROOKS DIVISION
The Company's Cleaver-Brooks Division ("Cleaver-Brooks") is the world's
largest manufacturer of commercial and industrial packaged boilers. It has an
estimated installed base of approximately 80,000 boilers that remain in use and
believes it has the #1 or #2 market position in each of its principal product
lines. The Division's products include firetube and watertube boilers, burners,
and combustion and emission controls, boiler room accessories, and aftermarket
parts. Management believes that Cleaver-Brooks' reputation for providing
high-quality, energy-efficient, low-emission packaged boilers and ancillary
equipment with a demonstrated record of safety and durability often enables it
to command a premium price for its products from its diverse customer base.
Products
Cleaver-Brooks manufactures two types of packaged boilers -- firetube and
watertube -- for commercial and industrial applications. Most Cleaver-Brooks
packaged boilers can operate on multiple fuel options using both natural gas and
fuel oil. Cleaver-Brooks primarily manufactures "packaged" boilers, which are
shipped fully assembled and require minimum on-site installation, and also
manufactures a limited number of boilers that are designed to be "field-erected"
at the customer's facility. The high-quality boilers manufactured by
Cleaver-Brooks generally have a useful life of 20 years or more, depending upon
use and maintenance.
Firetube Boilers. Firetube packaged boilers heat water or produce steam by
directing hot gas from the combustion process through tubes which are submerged
in a chamber of water inside the boiler. Heat is transferred from the hot gas in
the tube through the tube walls to the water.
Cleaver-Brooks offers the industry's broadest line of firetube packaged
boilers, which are generally used in low and high pressure industrial
applications, and to produce heat and hot water for large commercial and
institutional buildings. Cleaver-Brooks firetube packaged boilers range in
capacity from 15 to 800 BHP. Although each Cleaver-Brooks firetube boiler is
manufactured to specific customer requirements, each is based on relatively
standardized pressure vessel sizes and other basic components. The prices of
Cleaver-Brooks firetube packaged boilers range from approximately $25,000 to
$150,000. Firetube packaged boilers represented approximately $66 million, or
47%, of Cleaver-Brooks' net sales for the twelve months ended March 31, 1999.
Cleaver-Brooks firetube packaged boilers are highly regarded for their
quality, efficiency, safety, design simplicity, and ease of operation and
maintenance, as well as their long product life and low emission levels. High
efficiency is often the primary criterion in selecting a boiler as a $50,000
boiler system could consume over $150,000 per year in fuel. Therefore a slight
increase in boiler efficiency can translate into substantial annual savings.
Cleaver-Brooks packaged boilers are designed to operate efficiently to reduce
customers' fuel costs. They include what Aqua-Chem believes to be the world's
highest efficiency "four-pass" design and maintain high gas velocity which
provides maximum heat transfer. They also utilize a single tube sheet design
that maintains consistent temperatures for maximum operating life. Aqua-Chem
believes that these factors provide it with a competitive advantage in the
firetube boiler market.
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Watertube Boilers. Watertube boilers produce hot water or steam by
directing water through tubes installed in a chamber filled with hot gas from
the combustion process. This fundamental difference between the firetube and
watertube process allows watertube boilers to be designed with greater capacity
and makes watertube boilers more suitable for certain large, multi-step
industrial applications than firetube boilers. Cleaver-Brooks produces watertube
packaged boilers in a range of models and capacities. Like its firetube packaged
boilers, Cleaver-Brooks watertube packaged boilers are manufactured for maximum
efficiency and ease of maintenance and are purchased by both industrial and
commercial end-users.
Cleaver-Brooks commercial watertube packaged boilers range in capacity from
15 to 250 BHP, which is comparable to its smaller capacity firetube packaged
boilers, and include flexible watertube packaged boilers designed to simplify
installation, maintenance and tube replacement. The Division's flexible
watertube packaged boilers minimize potential thermalshock damage due to
temperature fluctuation, an especially important consideration with hot water
applications.
Cleaver-Brooks only manufactures industrial watertube packaged boilers of
the "D" design (so named because the watertubes inside the boiler are shaped in
the configuration of the letter "D"), which is preferred by manufacturing
customers for most industrial applications. Cleaver-Brooks industrial watertube
packaged boilers range in capacity from 10,000 to 150,000 PPH (the approximate
equivalent of 1,400 to 4,000 BHP).
Cleaver-Brooks watertube packaged boilers range in price from approximately
$150,000 to $1,000,000. Watertube boilers represented approximately $18 million,
or 13% of the Division's net sales for the twelve months ended March 31, 1999.
Burners. Cleaver-Brooks is a leading supplier of highly-engineered, single
and multi-fuel engineered burners. These burners are installed as original
equipment on certain Cleaver-Brooks product lines, as a retrofit to existing
boilers where an upgraded or new burner is required, or, on new boilers
manufactured by competitors, under the Industrial Combustion brand name.
Cleaver-Brooks manufactures a broad range of burners that give customers the
flexibility to burn most liquid and gaseous fuels in use today. The Industrial
Combustion product line has an exceptionally strong market position
(approximately 86%) for heavy oil burners and is increasing its share of the gas
burner market. It was instrumental in originating the conversion burner business
and pioneered air atomizing and fuel metering technologies for using heavy fuel
oil.
Boiler Room Accessories. Cleaver-Brooks also offers a wide range of boiler
room accessories, most of which are used to ensure that corrosive gases and
impurities found in water do not seriously affect boiler performance. This
equipment includes deaerators, water softeners, boiler feed water systems and
chemical feed systems. Other boiler room accessories regulate the flow of water
to and from the boiler.
Aftermarket Parts. Taking advantage of its industry-leading installed base
of approximately 80,000 boilers, Cleaver-Brooks offers over 15,000 aftermarket
parts for its own and other manufacturers' boilers through its computerized
immediate access system. The immediate access system electronically links
Cleaver-Brooks' sales representatives and provides information regarding parts
availability, price lists and lead time. Cleaver-Brooks' sales representatives
and distributors stock Cleaver-Brooks parts inventory on a worldwide basis.
Aftermarket parts, which generally carry higher gross margins than new boilers,
represented approximately $33 million, or 24%, of Cleaver-Brooks' net sales for
the twelve months ended March 31, 1999. As part of several strategic
initiatives, management is emphasizing further penetration of the aftermarket
parts business through additional training and support of its extensive sales
representative network.
Aftermarket products sold by Cleaver-Brooks include a wide range of
combustion and emission controls that generally enhance boiler performance or
safety, including low nitrous oxide ("NO(X)") emissions packages, conversion or
replacement burners, boiler control management systems, high turndown burners,
oxygen trim systems, and flame safeguard controls. For example, Cleaver-Brooks'
industry-leading low NO(X) emissions packages are guaranteed to as low as 20
parts per million ("ppm") of NO(X) levels and are extremely effective at
maintaining system efficiency levels. The majority of these parts are offered as
options to a boiler package.
Although boilers generally have a useful life of up to 20 years, certain
boiler parts are subject to wear and require periodic replacement. These parts
consist primarily of combustion-oriented components such as
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burners, burner-safety components, and emissions controls, but also include
certain water-bearing components. The need for aftermarket parts is a function
of the level of use to which a boiler is subjected. Boilers that "cycle" (turn
on and off) more frequently tend to wear more quickly. In addition, oil-burning
components tend to wear more quickly than natural gas-burning components.
Water-bearing components of a boiler can wear more quickly if the end-user does
not properly treat the water used in the boiler to reduce corrosive gases and
impurities that accumulate in untreated water.
Commercial boiler wear can also be affected by cold weather when a boiler
is more likely to cycle more frequently. Many Cleaver-Brooks boilers are
equipped with multi-fuel options and can readily be switched by the end-user
from one fuel to the other. In many locations, boilers are required by law to
switch from burning natural gas to oil during extended periods of cold weather,
when demand for natural gas for residential and commercial forced-air heating is
high and available gas pressure is reduced. Industrial applications can also
involve high-cycle use, causing boilers to wear more quickly. Inadequate
maintenance practices can also affect boiler wear.
In addition, the demand for aftermarket parts generally increases during
periods of economic difficulty when many businesses elect to defer the purchase
of new boilers in favor of repairing or retrofitting existing boilers. Aqua-Chem
believes that this phenomenon partially offsets the reduced demand for new
boilers during such periods.
Commitment to Quality
Cleaver-Brooks has received numerous industry and quality awards, including
the State of Wisconsin's 1995 Governor's New Product Award. Several of the
Division's products have been recognized by the Wisconsin Society of
Professional Engineers and the Model CB-LE was among a select group of winners
in a statewide competition which singled out new product innovations in large,
medium and small business segments. Additionally, with the introduction of its
low nitrous oxide (NO(X)) emissions product in the late 1980's, Aqua-Chem was
recognized by the South Coast Air Quality Management District as the first
boiler manufacturer to meet Southern California's stringent emissions standards,
as well as by the New York Bureau of Air Research.
Sales, Marketing and Customers
Cleaver-Brooks maintains strong relationships with its worldwide network of
sales and service representatives which management believes to be the most
extensive global distribution network for commercial and industrial boilers.
Cleaver-Brooks sells boilers through 50 domestic sales representatives located
throughout North America and 43 international sales representatives located in
Eastern Europe, Asia, Australia, Central and South America, and the Middle East.
These sales representatives have sold Cleaver-Brooks products for an average of
more than 25 years, and, pursuant to agreements with the Company, do not sell
products that compete directly with Cleaver-Brooks. No sales representative
accounted for more than approximately 5% of Cleaver-Brooks' net sales in the
twelve months ended March 31, 1999.
Cleaver-Brooks' sales representatives primarily offer on-demand service and
parts support to consulting engineers, contractors and end-users, as well as
offering multi-year service contracts for boiler parts and accessories.
Additionally, as is customary in the industry, sales representatives provide
on-site start-up assistance and personnel training by factory-qualified
specialists and preventive maintenance programs as part of the range of services
available to keep boiler and pretreatment equipment operating at peak
performance.
Cleaver-Brooks sells boilers to a diverse customer base in a broad range of
industries, with no significant customer concentration. Although Cleaver-Brooks'
customers vary from year to year, management believes that a substantial portion
of annual net sales are generally to repeat customers. Recent customers include
Ford, Cargill, Coca-Cola, Weyerhaeuser, Anheuser-Busch, Baxter Healthcare,
Ralston-Purina, Hewlett-Packard, Georgia Pacific, Chrysler-Jeep, Wrigley,
Sheraton, IBM, and NASA. For a further discussion of
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sales by geographic area, see Note 14 to the Company's Consolidated Financial
Statements contained elsewhere herein.
Raw Materials and Suppliers
Cleaver-Brooks' primary raw materials include steel plate and coil steel.
The Division also purchases finished components for its products, such as
burners, tubes, controls, insulation, refractory materials, valves, gauges and
pumps. Cleaver-Brooks maintains one-year supply agreements with its steel
suppliers. These arrangements generally specify volume and price, but are
cancelable at any time by either party. For raw materials not covered by supply
agreements, Cleaver-Brooks generally chooses a particular supplier based on
market conditions, availability and pricing. Cleaver-Brooks works closely with
its major suppliers and is not dependent on any single supplier for any of its
raw material or component needs. Cleaver-Brooks is currently implementing new
purchasing procedures to reduce material costs, including consolidation of its
suppliers.
Manufacturing
Cleaver-Brooks operates through five manufacturing facilities located in
Stratford, Ontario, Canada; Thomasville, Georgia; Monroe, Wisconsin; Mexico
City, Mexico and Greenville, Mississippi (however, the Company is in the process
of closing its Greenville facility and transfering production to certain other
facilities and expects to complete this process by July, 1999). Additionally,
Cleaver-Brooks conducts applied engineering and product development activities
at a Milwaukee, Wisconsin location, which is shared with Water Technologies. See
"Properties and Employees."
The Company has intensified its efforts to develop world-class
manufacturing facilities. Beginning in 1995, Aqua-Chem closed its Lebanon,
Pennsylvania facility, and consolidated its large firetube boiler production in
its Thomasville facility, and its smaller firetube boiler production in its
Stratford facility. These consolidations reduced labor and overhead costs by up
to one-third and took advantage of certain economies of scale in each facility.
In addition, the Company has been engaged in a program to improve its
manufacturing processes by adopting cellular manufacturing techniques,
just-in-time inventory controls and demand flow processing. These initiatives
have minimized scrap, identified manufacturing inefficiencies, significantly
reduced manufacturing cycle times and have already improved manufacturing
efficiency and inventory management at the Thomasville facility. Aqua-Chem
expects to implement similar cost reduction initiatives and manufacturing
improvements at its other facilities. Aqua-Chem has also established an internal
manufacturing council to address ongoing process improvements, share best
practices and instill a broad base of manufacturing expertise throughout the
organization. Additionally, in 1998, the Company decided to close its
Greenville, Mississippi manufacturing facility and relocate the manufacturing
operations currently located there to other Company facilities, including the
Lincoln, Nebraska facility acquired from NDC as part of the NDC Acquisition (the
"1998 Restructuring").
NATIONAL DYNAMICS DIVISION
On June 23, 1998, Aqua-Chem aquired substantially all the assets of NDC.
The acquisition was accounted for using the purchase method of accounting.
Products
National Dynamics primarily designs and manufactures industrial watertube
packaged boilers, waste heat recovery systems and related accessories, as well
as a variety of standard and customized fabricated steel components, such as
ductwork and stacks, which are insourced for use in National Dynamics' products
and produced on a contract basis for other waste heat recovery system
manufacturers. Since the date of Acquisition, National Dynamics' net sales of
industrial watertube boilers and waste heat recovery systems, including related
accessories and components, represented approximately 93% of NDC's net sales.
Industrial Watertube Boilers. National Dynamics produces shop-assembled
industrial watertube packaged boilers, components and other boiler accessories
under the Nebraska Boiler brand-name, chiefly for industrial and institutional
applications. The Nebraska Boiler product line consists primarily of industrial
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watertube packaged boilers with larger capacities than those manufactured by
Cleaver-Brooks. Although National Dynamics manufactures industrial watertube
packaged boilers with capacities as low as 7,000 PPH, its primary focus is on
large industrial watertube packaged boilers that range in capacity from 100,000
to 250,000 PPH. In contrast, Cleaver-Brooks focuses on commercial and industrial
watertube packaged boilers with capacities under 100,000 PPH. The Nebraska
Boiler product line also includes industrial watertube packaged boilers that are
capable of producing steam at much higher temperatures and pressures than those
manufactured by Cleaver-Brooks. For the twelve months ended March 31, 1999
National Dynamics manufactured 60 industrial watertube boilers, which typically
range in price from approximately $150,000 to $1 million each.
National Dynamics' primary unit is the "D" design watertube boiler, which
accounted for approximately 86% of National Dynamics' boiler sales for the
twelve months ended March 31, 1999. Nebraska Boiler industrial watertube
packaged boilers generally utilize the "membrane" tube design, in contrast to
Cleaver-Brooks boilers, which utilize the "tangent" tube design, each of which
is preferred by certain end users for various reasons. National Dynamics is also
one of the few boiler manufacturers that produces "O" and "A" design boilers in
addition to the "D" design. Although the "D" design is preferred for most
industrial applications, the symmetrically designed "O" and "A" boilers are more
readily transportable and better suited for certain uses. "O" design boilers in
particular are compact, fully assembled, easily transported by truck, and for
these reasons are considered ideal for use as "rental" boilers (boilers
installed temporarily to provide supplemental, backup or replacement service).
"A" design boilers typically are designed to have greater capacity than the "O"
or "D" designs and can be designed to burn a variety of alternative fuels (such
as coal, wood and saw dust). "O" and "A" design boilers accounted for
approximately 3% and 11%, respectively, of National Dynamics' boiler sales since
the date of the NDC Acquisition.
National Dynamics also manufactures industrial watertube boiler components
and accessories, such as ducts, stacks, superheaters (an integral unit in the
boiler that heats the steam produced by the boiler to temperatures in excess of
750 degreesF for particular industrial applications) and economizers (an
integral or add-on unit that captures the heated air and flue gases vented from
the boiler's combustion chamber and uses them to preheat water entering the
boiler to conserve energy).
Waste Heat Recovery Systems. National Dynamics designs and produces a
variety of packaged, modular and field-erected waste heat recovery systems under
the Energy Recovery International or "ERI" brand-name. The general principle
behind these systems is that the waste heat generated by a turbine or industrial
process can be recaptured and directed into a pressure vessel (resembling a
burnerless boiler) to generate hot water or steam, which can in turn be used to
drive a turbine to generate electricity (a process referred to as
"co-generation") or for other industrial applications. Co-generated electric
power may be used internally; however, if it is generated at levels in excess of
internal need, which is often the case, the excess electricity is generally sold
to the local power company, which has been made possible through the
deregulation of the domestic electrical power industry over the last few years.
For certain applications, waste heat recovery systems can also be designed to
operate with a supplemental heat source, such as a duct burner, that raises the
temperature and pressure to levels comparable with conventional boilers.
NDC's sales of ERI products grew rapidly in the last few years and the
Company expects that such growth will continue due to increased demand for
energy efficient and environmentally conscious power projects, as well as
increased deregulation. Waste heat recovery systems are increasingly popular
because they provide an alternative source of power at significantly reduced
fuel cost.
National Dynamics offers complete system design and service, based on the
customer's specific needs and requirements. In particular, waste heat recovery
systems are generally custom-designed for integration with the individual
customer's facility and equipment at the time of construction. For the twelve
months ended March 31, 1999, National Dynamics manufactured 24 waste heat
recovery systems.
Sales, Marketing and Customers
National Dynamics markets its products primarily on the basis of quality,
dependability and custom engineering, which is complemented by the longstanding
working relationships NDC developed with
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customers and premier engineering firms. National Dynamics products are marketed
worldwide through its 37 sales representatives and distributors, most of whom
sell both Nebraska Boiler and ERI products. Since the date of the NDC
Acquisition, one customer, Solar Turbines, accounted for approximately 19% of
National Dynamics' net sales. National Dynamics now utilizes Cleaver-Brooks'
international sales and marketing organization and representatives to market its
products internationally.
National Dynamics sells its products to a diverse customer base in a broad
range of industries, with no significant customer concentration other than
indicated in the preceding paragraph. Recent customers included Bristol-Myers,
Goodyear, Dupont, Conoco, General Mills, Mitsubishi, Chevron, Exxon, Southern
Company and 3M.
Raw Materials and Suppliers
National Dynamics' primary raw material is steel, and it also purchases
finished components for its products, such as burners, tubes, controls,
insulation, refractory materials, valves, gauges and pumps. National Dynamics is
not dependent on any single supplier for any of its raw material or component
needs.
Manufacturing
National Dynamics operates three manufacturing facilities, two of which are
located in Lincoln, Nebraska and one of which is located in Gonzales, Texas. See
"Properties and Employees." National Dynamics has recently begun a program to
improve its manufacturing processes through the adoption of cellular
manufacturing techniques, just-in-time inventory controls and demand flow
processing. These initiatives are expected to minimize scrap, identify
manufacturing inefficiencies, significantly reduce manufacturing cycle times and
improve manufacturing efficiency and inventory management.
WATER TECHNOLOGIES DIVISION
With over 50 years of experience, Water Technologies is a world leader in
the design and production of water purification and treatment products, systems,
aftermarket parts and service for selected commercial, government, military and
industrial applications. Water Technologies, which markets and sells its
products under the Aqua-Chem brand name, has two product categories: (i)
Freshwater and Military Products, which consist of products with relatively
standard components and configurations that are generally sold to customers in
the military, bottled water and pharmaceutical markets; and (ii) Seawater and
Industrial Systems, which consist primarily of large, highly engineered projects
and products that generally are sold to customers in markets for seawater
desalination and industrial evaporation processes.
Products and Services
Water Technologies manufactures products that utilize evaporation,
filtration and concentration technologies to create purified water for use in a
variety of applications. Water Technologies' primary products are thermal
distillation units, which convert seawater or contaminated fresh water into
clean water for drinking and manufacturing processes by passing feedwater over a
heated surface to create steam that is then condensed as distillate. Water
Technologies also offers reverse osmosis units, which pressurize contaminated
fresh or salt water to force it through a semipermeable membrane to produce
drinking water.
Freshwater and Military Products. Freshwater and Military Products are
primarily pre-engineered water purification and treatment products and systems
for the bottled water and pharmaceutical industries and for the military. Water
Technologies also provides services and replacement parts for its Freshwater and
Military Products. Most Freshwater and Military Products are various types of
thermal distillation units, including an all-electric thermal distillation unit
that is installed on all U.S. Navy Trident submarines. Aqua-Chem believes that
every U.S. aircraft carrier and nuclear submarine utilizes Water Technologies
products to purify water for use by onboard personnel. Water Technologies also
manufactures a reverse osmosis unit marketed under the "ROWPU" (Reverse Osmosis
Water Purification Unit) name that is sold primarily to the U.S. military.
Freshwater and Military Products also include heat exchangers, which are used by
food, chemical and other industries to cool liquids. For example, the U.S. Navy
uses Water Technologies' heat
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exchangers for seawater cooling of nuclear reactor waste water and feedwater
preheating in steam propulsion plants of nuclear aircraft carriers. Freshwater
and Military water purification units and heat exchangers generally sell for
between $100,000 and $500,000.
Although individual units may be adapted to meet unique customer
specifications, Water Technologies manufactures all Freshwater and Military
Products to basic design parameters at its Knoxville, Tennessee facility.
Freshwater and Military Products are shipped from the Knoxville facility to the
customer as fully-manufactured systems that require a minimum number of piping
and electrical connections for installation. Once installed, the unit is ready
for operation.
Seawater and Industrial Systems. Seawater and Industrial Systems are highly
engineered systems for land-based and offshore desalination and manufacturing
process plants. Water Technologies utilizes a number of thermal distillation
technologies to meet the specific needs of its Seawater and Industrial Systems
customers. Water Technologies offers both single effect systems, which are
low-cost and simple to operate, and multi-effect systems, which conserve energy
by linking two, three or more evaporators in series and, as a result, are more
popular for industrial applications. For example, Water Technologies has
installed a 10 million gallon per day seawater desalination system which
produces the entire fresh water supply for the Caribbean island of Aruba.
Seawater and Industrial Systems include thermal distillation units used by the
pulp and paper industry to concentrate heavy scaling sulfite pulping liquors.
Water Technologies also offers reverse osmosis units for industrial
applications.
Many Seawater and Industrial Systems component parts are fabricated,
assembled and hydro-tested at the Knoxville facility prior to shipment to the
customer's job site, where they are assembled into a field erected plant.
Seawater and Industrial Systems are highly project oriented, may take from 10 to
14 months to complete, and are contracted on a fixed-price basis, typically
ranging between $1 million and $10 million in installed value.
Sales, Marketing and Customers
Water Technologies utilizes a network of over 40 representatives,
distributors and licensees worldwide to sell and market its Freshwater and
Military Products. Sales representatives are compensated on a commission-only
basis, while distributors typically make a profit margin on the purchase and
resale of Water Technologies parts. Due to the unique engineering considerations
and the magnitude of the projects, most Seawater and Industrial Systems are sold
by Water Technologies directly to end-users.
For the year ended March 31, 1999, Water Technologies had approximately 345
customers worldwide, with no one customer representing more than 11% of its
gross sales. Water Technologies' leading customers generally vary from year to
year, due in part to the project-oriented nature of many of its Seawater and
Industrial Systems. Recent customers include Arvind Mills, the Aruba Water and
Energy Authority, and Newport News Shipbuilding. International customers
represented approximately 50% of Water Technologies' sales over the last three
years, with revenues generated from over 35 countries. Payment terms on
international sales are typically denominated in U.S. dollars and satisfied via
letters of credit.
Typically, over half of Water Technologies' annual revenue is based upon
fixed-priced, long-term contracts. Generally, the term of the contract for
Freshwater and Military Products extends from the order date through shipment,
which usually ranges from 4 to 12 months. A start-up or test period may follow
shipment and last for 1 to 3 months. Customers are generally billed at the time
of shipment. Contract terms for Seawater and Industrial Systems may vary between
10 and 14 months. Seawater and Industrial Systems are contracted on a
fixed-priced basis, and customers are billed for work performed according to a
pre-arranged schedule detailed in the sales contract. For a further discussion
of sales by geographic area, see Note 14 to the Company's Consolidated Financial
Statements contained elsewhere herein.
Product Service and Support
Water Technologies supports its products with a staff of engineers and
service specialists who provide parts, service, technical training, service
publications, overhaul and repair for customers around the world. For
8
<PAGE> 11
instance, Water Technologies provides qualified technical training anywhere in
the world through a team of training specialists who work closely with customers
to develop productive and dependable operators for all equipment.
When service is needed, Water Technologies dispatches a qualified service
representative who assesses the customer's system and its repair requirements.
To meet customer needs quickly, Water Technologies distributors maintain
authorized parts and service centers across the continental United States, as
well as service centers in Alaska, Canada, South America, Northern Europe,
Southeast Asia, the Middle East and India.
Raw Materials and Suppliers
Water Technologies utilizes a wide variety of raw materials in the
construction of its products, including copper-nickel, alloys, stainless steel,
electrical control systems and a number of plastic and metal component parts.
Water Technologies maintains relationships with a select group of suppliers to
leverage its purchasing power and may enter into purchasing agreements to ensure
a reliable source of materials. Water Technologies has never experienced a
significant shortage of raw materials.
Manufacturing
Water Technologies' primary production facility is located in Knoxville,
Tennessee. The Knoxville plant, an ISO 9001 certified facility, provides
fabrication, machining, welding and assembly work for the production of both
Freshwater and Military Products and the component parts of Seawater and
Industrial Systems. Units are tested at the Knoxville plant prior to shipment to
the customer's site for installation. The Division is currently implementing
cellular manufacturing techniques, just-in-time inventory controls and
demand-flow processing to improve manufacturing efficiency and reduce production
costs.
The Seawater and Industrial Systems business also utilizes subcontract
manufacturers in connection with international contracts when Aqua-Chem believes
that doing so provides a competitive advantage. To implement this international
subcontracting strategy, Water Technologies employs pre-qualified subcontractors
and project managers who are responsible for ensuring that quality, schedule and
other specifications of its Seawater and Industrial Systems contracts are met.
These project managers are supported by engineers who specialize in the
erection, commissioning, performance testing and overall service and
troubleshooting of the systems.
Water Technologies shares an applied engineering and product development
facility with Cleaver-Brooks for evaluating the practical application of
evaporator technology on a broad range of processing needs. This capability is
an important part of Water Technologies' operations, enabling it to test the
performance and cost effectiveness of the systems it offers.
COMPETITION
The Company operates in a highly competitive environment. It competes
directly and indirectly with other manufacturers of industrial and commercial
boilers and water desalination and process evaporation systems, as well as with
manufacturers of parts and components for all of the foregoing. Some of the
Company's competitors are larger, have greater financial resources, and may be
less leveraged than the Company. Cleaver-Brooks competes in its markets through
its extensive global distribution network, brand recognition and longstanding
customer relationships. National Dynamics markets its products on the basis of
quality, dependability and custom engineering. Water Technologies utilizes its
superior engineering ability to differentiate itself from its competitors.
FOREIGN SALES
Aqua-Chem does not rely on any one country for the majority of its foreign
sales. For a further discussion of sales by geographic area, see Note 14 to the
Company's Consolidated Financial Statements contained elsewhere herein.
9
<PAGE> 12
REPORTING REQUIREMENTS
The Company is required to file annual reports, documents and other reports
with the SEC by Section 13 or 15(d) of the Exchange Act, as well as pursuant to
the Indenture. These reports are required to be provided to the Trustee and
security holders and are intended to be the Company's form of reporting to its
security holders. The Company's annual reports will contain certain financial
information which has been examined and reported on, with an opinion expressed
by an independent public or certified public accountant.
INTELLECTUAL PROPERTY
The Company has a number of United States and foreign patents, patent
applications, patent licensing agreements, trademarks, trademark applications
and copyrights. The Company does not consider its business to be materially
dependent upon any patent, patent application, patent license agreement,
trademark, trademark application or copyright.
ITEM 2. PROPERTIES.
PROPERTIES AND EMPLOYEES
The following table sets forth certain information regarding the Company's
properties and employees as of March 31, 1999:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE NUMBER OF
SQUARE EMPLOYEES AT
USAGE FOOTAGE OWNERSHIP FACILITY
----- ----------- --------- ------------
<S> <C> <C> <C> <C>
Milwaukee, Wisconsin.............. Aqua-Chem, Inc. 81,000 Leased (a) 220
Corporate Headquarters
Milwaukee, Wisconsin.............. Cleaver-Brooks and Water 27,000 Owned 9
Technologies
Product Development and Design
Greenville, Mississippi........... Cleaver-Brooks 88,000 Leased (b) 72(b)
Manufacturing (Commercial and
Industrial Watertube Boilers)
Stratford, Ontario, Canada........ Cleaver-Brooks of Canada, Ltd. 74,000 Owned 103(c)
Manufacturing (Firetube and
Commercial Watertube Boilers)
Mexico City, Mexico............... Cleaver-Brooks de Mexico 40,000 Owned 48(c)
Manufacturing (Miscellaneous
Parts and Components)
Thomasville, Georgia.............. Cleaver-Brooks 185,000 Owned 213
Manufacturing (Firetube
Boilers)
Knoxville, Tennessee.............. Water Technologies 162,000 Owned 157
Manufacturing
Monroe, Wisconsin................. Cleaver-Brooks 81,000 Owned 94(c)
Manufacturing (Burners and
Combustion and Emissions
Controls)
Lincoln, Nebraska................. National Dynamics 150,000 Owned 221(c)
Manufacturing (Industrial
Watertube Boilers, Waste Heat
Recovery Systems)
Lincoln, Nebraska................. National Dynamics 50,000 Owned 60
Manufacturing (Fabricated Steel
Components)
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE NUMBER OF
SQUARE EMPLOYEES AT
USAGE FOOTAGE OWNERSHIP FACILITY
----- ----------- --------- ------------
<S> <C> <C> <C> <C>
Gonzales, Texas................... National Dynamics 75,000 Owned 98
Manufacturing (Industrial
Watertube Boilers, Waste Heat
Recovery Systems and Fabricated
Steel Products)
Elk Grove Village, Illinois....... CB-Kramer Sales & Service, Inc. 46,000 Leased (d) 36
Sales, Service, Warehouse
Lebanon, Pennsylvania............. (e) 164,000 Owned (e) --(e)
-----
Total: 1,331
=====
</TABLE>
- ---------------
(a) The Company was formerly a limited partner in a partnership that owned this
facility. In July 1998 the partnership sold this facility to a third party
and the partnership was liquidated. The Company occupies the facility under
a lease which expires in June 2006.
(b) The Company plans to close the Greenville facility and transfer all
production currently located there to other Company facilities. The process
of transferring production is expected to be completed, and the Greenville
facility closed during the first half of fiscal 2000. The Company has
entered into an agreement with the union representing production workers at
the Greenville facility regarding the transfer of production and closure of
that facility. The Company occupies this facility under a year to year
lease which automatically renews until 2061 unless terminated by either
party upon six months' notice.
(c) As of March 31, 1999, approximately 26% of the Company's employees were
represented by various unions. The Company's agreements with its unions
expire on June 5, 2000 in Stratford, Ontario; on February 1, 2000 in Mexico
City, Mexico; on January 19, 2001 in Monroe, Wisconsin and on October 31,
1999 in Lincoln, Nebraska. In the last five years the Company has
experienced one strike, in 1994, by the employees represented by the
International Boilermakers Union at NDC's main manufacturing facility in
Lincoln. The strike lasted approximately six weeks in connection with a
dispute over employee contributions for health benefits.
(d) The Company occupies this facility under a lease which expires in November
1999.
(e) As of March 31, 1999 the Company's Lebanon, Pennsylvania facility, a
164,000 square foot manufacturing plant, is partially leased to third
parties. On May 27, 1999 the Company consummated the sale of this facility
and received net proceeds of $1.2 million, which approximates its carrying
value as reflected at March 31, 1999.
ITEM 3. LEGAL PROCEEDINGS.
ENVIRONMENTAL AND RELATED MATTERS
The Company is subject to a variety of foreign, federal, state and local
laws and regulations relating to the use, storage, handling, generation,
transportation, treatment, emission, discharge, disposal and remediation of, and
exposure to, hazardous and non-hazardous substances, materials, and wastes
("Environmental Laws"). The Company is also subject to laws and regulations
governing employee health and safety.
As part of the due diligence process associated with the Management Buy-Out
and the NDC Acquisition, environment audits were performed at all of the
Company's locations. The Company is in the process of taking action to implement
recommendations at certain on-site locations, which actions may include further
investigation or monitoring and possibly remediation. The Company does not
currently believe that the costs associated with these matters will have a
material adverse effect on the results of operations or the financial condition
of the Company.
11
<PAGE> 14
The Company has sold properties, and in certain cases, has retained
responsibility for environmental issues related to periods prior to the sale.
The Company is currently unaware of any subsequent property owners asserting
environmental claims related to such properties.
Although the Company believes that there are no currently existing
environmental conditions that would require the Company to incur costs that
would have a material impact on the Company, there can be no assurance that
additional environmental situations will not arise or be discovered, either with
respect to the Company's existing or formerly owned facilities, which could have
a material adverse effect on the Company's business, results of operations or
financial conditions.
LEGAL PROCEEDINGS
The Company has been named as one of a number of defendants in
approximately 8,900 lawsuits (of which approximately 6,100 are still pending)
alleging personal injury arising from exposure to asbestos-containing materials
allegedly contained in certain boilers manufactured by the Company or its
subsidiaries in the past. The Company believes that substantially all of these
lawsuits are without merit and has not admitted liability or been found liable
for the plaintiff's injuries in any of these cases. The Company has disposed of
the vast majority of the closed cases without any payment whatsoever by the
Company or its insurers to the plaintiffs, and is vigorously defending the open
cases, although many may not be resolved for several years. Because the
pleadings generally do not specify the amount of damages sought, and because the
Company is typically only one of numerous defendants initially named and it is
impossible to determine the Company's proportionate share of liability, if any,
to the plaintiffs, the Company cannot calculate its total potential liability in
these cases. However, based on its historical experience, the Company believes
that it has adequate indemnity as well as insurance coverage from a number of
different insurance carriers for any potential liability it may face as a result
of such claims, as well as liability resulting from its agreement to bear a
portion of the defense costs and indemnity payments with regard to these suits.
The Company has established a reserve on its balance sheet to cover any such
exposure and believes this reserve to be adequate. It is the view of management
that the final resolution of said claims and other similar claims which are
likely to arise in the future will not individually or in the aggregate have a
material effect on the Company's financial position or results of operations,
although no assurance to that effect can be given.
The Company is involved in various other litigation matters arising in the
normal course of business. It is the view of management that the Company's
recovery or liability, if any, under pending litigation is not expected to have
a material effect on the Company's financial position or results of operations,
although no assurance to that effect can be given.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended March 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
There is no established public trading market for any equity securities of
the Registrant.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical financial data of
Aqua-Chem as of and for: (i) the year ended December 31, 1996 derived from the
consolidated financial statements of Aqua-Chem, which have been audited by KPMG
LLP, Milwaukee, Wisconsin and are included elsewhere herein; (ii) each of the
years ended December 31, 1995, and 1994, derived from the consolidated financial
statements of Aqua-Chem, which have been audited by KPMG LLP, Milwaukee,
Wisconsin but are not included elsewhere herein; (iii) the seven-month period
ended July 31, 1997, the five-month period ended December 31, 1997, the three
12
<PAGE> 15
months ended March 31, 1998, and the year ended March 31, 1999, derived from the
consolidated financial statements of Aqua-Chem, which have been audited by
Arthur Andersen LLP, Milwaukee, Wisconsin, and are included elsewhere herein.
Additionally, the unaudited three month period ended March 31, 1997 is included.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Aqua-Chem" and the
consolidated financial statements of Aqua-Chem included elsewhere herein.
<TABLE>
<CAPTION>
PRE-BUY-OUT BASIS OF ACCOUNTING
------------------------------------------------------------
THREE MONTHS SEVEN MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
------------------------------ MARCH 31, JULY 31,
1994 1995 1996 1997 1997(A)
-------- -------- -------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................... $187,486 $183,368 $199,552 $34,972 $99,618
Cost of goods sold.......... 144,490 148,650 153,446 26,276 73,656
-------- -------- -------- ------- -------
Gross margin............... 42,996 34,718 46,106 8,696 25,962
Selling, general and
administrative expenses.... 40,981 37,772 34,446 8,427 23,323
Restructuring charges(b).... 9,011 4,593 5,038 -- --
-------- -------- -------- ------- -------
Operating income (loss).... (6,996) (7,647) 6,622 269 2,639
Other income (expense):
Interest income............ 252 358 464 184 450
Interest expense........... (1,200) (1,663) (1,448) (307) (753)
Other income (expense)..... 639 2,635 (806) 16 110
-------- -------- -------- ------- -------
Earnings (loss) before
income taxes, minority
interest and extraordinary
item....................... (7,305) (6,317) 4,832 162 2,446
Income tax expense (benefit)... (2,806) 189 507 48 421
Minority interest in
earnings (loss) of
consolidated subsidiary.... 179 (52) 231 55 171
-------- -------- -------- ------- -------
Net income (loss) before
extraordinary item......... (4,678) (6,454) 4,094 59 1,854
Extraordinary item, net of
tax........................ -- -- -- -- --
-------- -------- -------- ------- -------
Net income (loss).......... $ (4,678) $ (6,454) $ 4,094 $ 59 $ 1,854
======== ======== ======== ======= =======
OTHER FINANCIAL DATA:
EBITDA(c)................... $ (3,028) $ (4,494) $ 9,606 $ 1,130 $ 4,329
Adjusted EBITDA(d).......... (417) (3,286) 10,017 1,130 4,329
Gross profit margin......... 22.9% 18.9% 23.1% 24.9% 26.1%
Total depreciation and
amortization............... $ 3,968 $ 3,153 $ 2,984 $ 861 $ 1,690
Capital expenditures........ 1,594 4,867 2,789 360 2,195
Cash provided by (used in)
operating activities....... 891 (1,551) 8,052 1,973 4,857
Cash provided by (used in)
investing activities....... 1,973 (939) (1,025) 781 (881)
Cash provided by (used in)
financing activities....... (1,498) 538 1,492 70 6
BALANCE SHEET DATA (AT END
OF PERIOD):
Total assets................ $104,133 $101,381 $101,000 $95,957 $ --
Total debt.................. 18,098 18,636 20,128 20,198 --
Redeemable preferred
stock...................... -- -- -- -- --
Stockholders' equity
(deficit).................. 42,254 36,636 39,960 39,890 --
<CAPTION>
POST-BUY-OUT BASIS OF ACCOUNTING
-----------------------------------------
FIVE MONTHS THREE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1997(A) 1998 1999
------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................... $ 91,541 $ 36,806 $220,404
Cost of goods sold.......... 66,333 27,522 169,260
-------- -------- --------
Gross margin............... 25,208 9,284 51,144
Selling, general and
administrative expenses.... 17,136 8,910 43,791
Restructuring charges(b).... -- -- 5,881
-------- -------- --------
Operating income (loss).... 8,072 374 1,472
Other income (expense):
Interest income............ 202 148 500
Interest expense........... (2,559) (1,463) (12,842)
Other income (expense)..... 57 (69) 62
-------- -------- --------
Earnings (loss) before
income taxes, minority
interest and extraordinary
item....................... 5,772 (1,010) (10,808)
Income tax expense (benefit) 2,289 (337) (3,919)
Minority interest in
earnings (loss) of
consolidated subsidiary.... 174 72 300
-------- -------- --------
Net income (loss) before
extraordinary item......... 3,309 (745) (7,189)
Extraordinary item, net of
tax........................ -- -- (1,260)
-------- -------- --------
Net income (loss).......... $ 3,309 $ (745) $ (8,449)
======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(c)................... $ 9,356 $ 1,079 $ 6,888
Adjusted EBITDA(d).......... 10,043 1,079 14,565
Gross profit margin......... 27.5% 25.2% 23.2%
Total depreciation and
amortization............... $ 1,284 $ 705 $ 5,416
Capital expenditures........ 1,197 584 3,187
Cash provided by (used in)
operating activities....... 9,311 (6,556) (2,866)
Cash provided by (used in)
investing activities....... (50,699) (573) (51,829)
Cash provided by (used in)
financing activities....... 40,715 (51) 55,437
BALANCE SHEET DATA (AT END
OF PERIOD):
Total assets................ $124,661 $110,250 $178,231
Total debt.................. 59,691 59,671 125,000
Redeemable preferred
stock...................... 7,365 7,519 4,944
Stockholders' equity
(deficit).................. 3,638 2,789 (6,925)
</TABLE>
- ---------------
(a) On July 31, 1997, Aqua-Chem management and its shareholders acquired
Aqua-Chem in the Management Buy-Out, which was accounted for as a purchase.
As a result, all periods presented prior to August 1, 1997 were prepared
using Aqua-Chem's historical basis of accounting. All periods presented
13
<PAGE> 16
subsequent to July 31, 1997 reflect the fair values of the assets acquired
and liabilities assumed in the Management Buy-Out.
(b) For 1994 and 1995, reflects restructuring charges required to complete the
1994 Restructuring. For 1996, reflects restructuring charges required to
complete the 1996 Restructuring. For the year ended March 31, 1999,
reflects restructuring charges to complete the 1998 and 1999
Restructurings. For further information on such restructurings, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Aqua-Chem," and Note 3 to the Consolidated Financial
Statements of Aqua-Chem included in Item 8 herein.
(c) EBITDA is defined as operating income before depreciation and amortization.
(d) Adjusted EBITDA for the periods presented is defined as EBITDA excluding
non-cash restructuring charges, and, in the five months ended December 31,
1997 and the year ended March 31, 1999, excludes $687 and $1,796,
respectively, of non-cash purchase accounting adjustments to cost of goods
sold related to writing up inventory to fair market value at the time of
the Management Buy-Out and at the time of the NDC Acquisition,
respectively.
UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma financial data include the unaudited pro forma
consolidated statement of operations of the Company for the twelve months ended
December 31, 1997 (the "Pro Forma Statement of Operations"). The Pro Forma
Statement of Operations gives effect to the Management Buy-Out as if it had
occurred on January 1, 1997 and represents Aqua-Chem's Statement of Operations
for the period January 1, 1997 to July 31, 1997, prepared using Aqua-Chem's
historical basis of accounting and Aqua-Chem's Statement of Operations for the
period August 1, 1997 to December 31, 1997, prepared under a new basis of
accounting that reflects the fair values of assets acquired and liabilities
assumed, the related financing cost and all debt incurred in connection with the
Management Buy-Out, on a combined basis, adjusted as described in the footnotes.
The Pro Forma Financial Statement is based on certain estimates and
assumptions made by the management of the Company as to the operations of
Aqua-Chem which the Company believes to be reasonable. The Pro Forma Financial
Statements do not purport to be indicative of the results of operations or
financial position of Aqua-Chem that actually would have been obtained had the
Management Buy-Out been completed as of the assumed date, or to project the
results of operations or financial position of the Company for any future date
or period.
The Pro Forma Financial Statement should be read in conjunction with the
financial statements of Aqua-Chem included elsewhere herein. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Aqua-Chem, Inc.".
The Pro Forma Statement of Operations is included in order to make
comparisons to the years ended March 31, 1999 and December 31, 1996 in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Aqua-Chem, Inc.".
14
<PAGE> 17
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------- PRO FORMA
SEVEN MONTHS FIVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED MANAGEMENT ENDED
JULY 31, DECEMBER 31, DECEMBER 31, BUY-OUT DECEMBER 31,
1997 1997 1997 ADJUSTMENTS 1997
------------ ------------ ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales....................... $99,618 $91,541 $191,159 $ -- $191,159
Cost of goods sold.............. 73,656 66,333 139,989 961(a) 140,950
------- ------- -------- ------- --------
Gross margin.................. 25,962 25,208 51,170 (961) 50,209
Selling, general and
administrative expenses....... 23,323 17,136 40,459 (1,083)(a) 39,376
------- ------- -------- ------- --------
Operating income................ 2,639 8,072 10,711 122 10,833
Other income (expenses):
Interest income............... 450 202 652 (193)(b) 459
Interest expense.............. (753) (2,559) (3,312) (2,433)(c) (5,745)
Other......................... 110 57 167 52(d) 219
------- ------- -------- ------- --------
(193) (2,300) (2,493) (2,574) (5,067)
Income before income taxes and
minority interest............. 2,446 5,772 8,218 (2,452) 5,766
Income tax expense.............. 421 2,289 2,710 (421)(e) 2,289
Minority interest in earnings of
consolidated subsidiary....... 171 174 345 -- 345
------- ------- -------- ------- --------
Net income from operations...... $ 1,854 $ 3,309 $ 5,163 $(2,031) $ 3,132
======= ======= ======== ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
15
<PAGE> 18
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) Reflects the historical results of operations of Aqua-Chem adjusted for the
period from January 1, 1997 to the Management Buy-Out date as follows:
<TABLE>
<CAPTION>
COST OF SELLING, GENERAL
GOODS SOLD AND ADMINISTRATIVE
---------- ------------------
<S> <C> <C>
Additional depreciation expense due to the recording of
fixed assets at fair market value......................... $961 $ 290
Reduction of postretirement benefits expense due to the
recognition of the full accumulated postretirement benefit
liability................................................. -- (102)
Amortization of intangible assets resulting from the
Management Buy-Out (40 year amortization)................. -- 20
Elimination of certain payments to management from the
Management Buy-Out (See "Management -- Executive
Compensation" and "Certain Relationships and Related
Transactions -- Management Agreements.").................. -- (1,291)
---- -------
$961 $(1,083)
==== =======
</TABLE>
(b) Reflects a reduction of interest income for $6,600 of cash used in the
Management Buy-Out at a rate of 5.0%.
(c) Reflects additional interest expense determined as follows:
<TABLE>
<S> <C>
Amortization of deferred financing costs.................... $ 333
Annualized interest on existing subordinated debt ($21,000 @
10.5%).................................................... 2,205
Annualized interest on existing revolving credit facility
($5,000 @ 8.0%)........................................... 400
Annualized interest on existing term loan facility ($40,000
@ 8.0%)................................................... 3,200
Less: interest on $6,000 of principal payments against the
existing debt............................................. (393)
-------
5,745
Less: historical interest expense........................... (3,312)
-------
$ 2,433
=======
</TABLE>
A one-eighth of 1% (0.125%) change in the interest rate payable on the
outstanding amount of the existing revolving credit facility would change
annual interest expense by $6 before the effect of income taxes.
(d) Reflects the elimination of amortization of deferred financing for debt
retired in conjunction with the Management Buy-Out.
(e) Reflects the pro forma tax effects of all adjustments using Aqua-Chem's
consolidated effective tax rate for the applicable period. See Note 9 to
Aqua-Chem's consolidated financial statements for a reconciliation from the
statutory tax rate to the effective tax rate.
16
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the consolidated financial statements
of Aqua-Chem appearing elsewhere herein. For information regarding the pro forma
financial condition of Aqua-Chem, see "Unaudited Pro Forma Financial Data" and
"-- Liquidity and Capital Resources."
On December 30, 1998, Aqua-Chem elected to change the date of its fiscal
year-end to March 31. As a result, the fiscal year ended March 31, 1999 is
compared to the pro forma twelve months ended December 31, 1997. Additionally,
the three month transition period ended March 31, 1998 is included for
comparison against the three month period ended March 31, 1997.
Due to purchase accounting adjustments resulting from the Management
Buy-Out on July 31, 1997, the seven-month period ended July 31, 1997 and the
five-month period ended December 31, 1997 are not comparable in all material
respects. The financial data for the seven-month period ended July 31, 1997 and
the five-month period ended December 31, 1997 are presented within "Selected
Financial Data of Aqua-Chem." The pro forma financial data for the twelve months
ended December 31, 1997 was prepared using Aqua-Chem's historical results for
the year then ended, adjusted to reflect the Management Buy-Out as if the
Management Buy-Out had occurred on January 1, 1997. See footnote (a) to the
Notes to Unaudited Pro Forma Consolidated Statements of Operations under
"Unaudited Pro Forma Financial Data." See also "Business -- History" for further
description of the Management Buy-Out. The pro forma financial data for the
twelve months ended December 31, 1997 is discussed below in order to make
comparisons to the years ended March 31, 1999 and December 31, 1996.
RESULTS OF OPERATIONS
Composition of net sales and gross margins for Cleaver-Brooks, Water
Technologies and National Dynamics for the periods indicated is listed below, as
well as additional financial data.
<TABLE>
<CAPTION>
PRO FORMA
TWELVE THREE MONTHS ENDED
MONTHS MARCH 31,
YEAR ENDED ENDED YEAR ENDED -------------------
DECEMBER 31, DECEMBER 31, MARCH 31, 1997
1996 1997 1999 (UNAUDITED) 1998
------------ ------------ ---------- ----------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales:
Cleaver-Brooks...................... $155.6 $154.9 $139.7 $27.3 $28.1
National Dynamics................... -- -- 46.4 -- --
Water Technologies.................. 44.0 36.3 34.3 7.7 8.7
------ ------ ------ ----- -----
Total....................... $199.6 $191.2 $220.4 $35.0 $36.8
====== ====== ====== ===== =====
Gross margin:
Cleaver-Brooks...................... $ 37.3 $ 41.7 $ 35.8 $ 6.9 $ 7.4
National Dynamics................... -- -- 7.6 -- --
Water Technologies.................. 8.8 8.5 7.7 1.8 1.9
------ ------ ------ ----- -----
Total....................... $ 46.1 $ 50.2 $ 51.1 $ 8.7 $ 9.3
====== ====== ====== ===== =====
Selling, general and administrative
expenses............................ $ 34.4 $ 39.4 $ 43.8 $ 8.4 $ 8.9
Restructuring Charges................. 5.0 -- 5.9 -- --
------ ------ ------ ----- -----
Operating income (loss)............... $ 6.6 $ 10.8 $ 1.5 $ 0.3 $ 0.4
====== ====== ====== ===== =====
Other income (expense)................ $ (1.8) $ (5.1) $(12.3) $(0.1) $(1.4)
====== ====== ====== ===== =====
Net income (loss)..................... $ 4.1 $ 3.1 $ (8.4) $ 0.1 $(0.8)
====== ====== ====== ===== =====
</TABLE>
17
<PAGE> 20
Year Ended March 31, 1999 Compared To Twelve Months Ended December 31, 1997
(Pro Forma)
Net Sales. Net sales for 1999 increased $29.2 million (15.3%) to $220.4
million from $191.2 million. This increase was attributable to the NDC
Acquisition which occurred on June 23, 1998. National Dynamics contributed $46.4
million in net sales since the date of acquisition. Net sales of Cleaver-Brooks
declined $15.2 million (9.8%). $6.0 million of the decrease resulted from the
sale of the contract machining business in October 1997 with the remainder
attributable to soft orders for watertube and firetube boilers. Net sales of
watertube boilers declined $7.2 million and $2.5 million for firetube boilers.
Within the firetube boilers net sales of the premium product declined $7.1
million which was partially offset by increases in the newly introduced,
baseline products. The declines are in substantial part the result of the
economic crisis in Asia and its effect on the domestic markets. Water
Technologies' sales decreased $2.0 million (5.5%) primarily due to a large
land-based water desalination project for which revenue was recognized during
fiscal 1997 without a similar project in 1999.
Gross Margin. Gross margin increased $0.9 million (1.8%) in 1999 to $51.1
million from $50.2 million for 1997. The gross margin percentage decreased 3.1%
to 23.2% primarily due to the inclusion of National Dynamics operations for the
first time in 1998. Margins at National Dynamics reflected an inventory write-up
of $1.8 million at the date of the NDC Acquisition. This inventory was
substantially sold in the following quarter. Additionally, after adjustment for
the inventory write-up, National Dynamics' gross margin is 20.3% which is
substantially less than Aqua-Chem's normal margins without National Dynamics.
The gross margin percentage of Cleaver-Brooks declined 1.3% to 25.6%. This
decline is attributable to the shift in sales in of firetube boilers from the
premium product to the baseline product, which has a lower gross margin
percentage, as well as, manufacturing inefficiencies related to the closure of
the Greenville facility. Water Technologies' gross margin percentage declined
1.0% to 22.4%. This decline is attributable to the higher gross margin
percentage on the large land-based water desalination project in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expense increased $4.4 million (11.2%) in 1999 to $43.8 million.
The NDC Acquisition in June 1998 increased selling, general and administrative
expenses $5.2 million. This increase was partially reduced by reduced
commissions due to the decline in volume and reduced bonus and profit sharing
expenses due to the decreased profitability.
Restructuring Charges. A restructuring charge of $4.7 million was recorded
in 1999 as a result of the Board of Directors' approval of the closure of the
Greenville, MS facility. The provision included $2.9 million to write down the
value of certain fixed assets, $1.0 million for employee termination payments
and $0.8 million for other costs related to closing the existing facility. In
response to a worldwide decline in demand for boiler equipment as compared to
previous years, Aqua-Chem approved the 1999 Restructuring Plan designed to
reduce headcount to mitigate the effects of this decreased demand. As a result,
Aqua-Chem recorded an additional restructuring charge of $1.2 million related to
employee termination payments and outplacement services.
Operating Income. For the reasons set forth above, operating income
decreased $9.3 million to $1.5 million. Excluding the $5.9 million in total
restructuring charges, operating income decreased $3.4 million to $7.4 million
in fiscal 1999.
Other Income (Expense). Other income (expense) for 1999 was an expense of
$12.3 million as compared to an expense of $5.1 million for 1997, resulting in a
difference of $7.2 million (141.2%). This difference is due to higher interest
expense as a result of the increased debt issued in conjunction with the
subordinated debt offering. See "-- Liquidity and Capital Resources."
Twelve Months Ended December 31, 1997 (Pro Forma) Compared To Year Ended
December 31, 1996
Pro Forma Net Sales. Pro forma net sales declined $8.4 million (4.2%) in
1997 to $191.2 million from $199.6 million in 1996. Net sales attributable to
Cleaver-Brooks were relatively stable at $154.9 million in 1997, primarily due
to a decline of $5.5 million in sales to the Asia Pacific region and $2.0
million in reduced sales resulting from the sale of two small product lines,
offset by continued strong domestic demand for
18
<PAGE> 21
firetube boilers. Net sales attributable to Water Technologies decreased $7.7
million (17.5%) to $36.3 million in 1997, primarily due to the deferral of
certain significant orders for water purification and treatment systems during
the period, partially offset by increased demand for distillation systems for
pharmaceutical and offshore oil applications.
Pro Forma Gross Margin. Pro forma gross margin increased $4.1 million
(8.9%) in 1997 to $50.2 million from $46.1 million in 1996 despite a 4.2%
decline in net sales. Gross margin as a percentage of net sales improved to
26.3% in 1997 from 23.1% in 1996 due to (i) improved manufacturing efficiencies
at Aqua-Chem's Thomasville boiler plant, (ii) improvements in the product mix,
(iii) the completion of a large, unprofitable water purification and treatment
project in 1996 for which the Company accrued $2.0 million in 1996 for
additional estimated losses and (iv) the in-sourcing of certain key boiler
components.
Pro Forma Selling, General and Administrative Expenses. Pro forma selling,
general and administrative expenses were $39.4 million in 1997, an increase of
$5.0 million (14.3%) from $34.4 million in 1996. Selling, general and
administrative expenses as a percentage of net sales was 20.6% in 1997 as
compared with 17.3% in 1996. This increase was due primarily to a $1.0 million
increase in information systems spending and increased travel expenditures
related to Aqua-Chem's sales and marketing efforts as such expenditures returned
to normalized levels following their curtailment in 1996.
Restructuring Charges. Aqua-Chem did not record any restructuring charges
in 1997 as compared with $5.0 million in 1996 related to the 1996 Restructuring.
Pro Forma Operating Income. For the reasons set forth above, pro forma
operating income increased $4.2 million (63.6%) in 1997 to $10.8 million from
$6.6 million in 1996.
Pro Forma Other Income (Expense). Pro forma other income (expense) for 1997
was an expense of $5.1 million as compared to an expense of $1.8 million in
1996, resulting in an increase of $3.3 million (183.1%). This difference was due
primarily to the increase in interest expense of $4.3 million as a result of
increased debt issued in conjunction with the Management Buy-Out. This increase
is offset by a $0.3 million loss recorded in 1996 for additional charges related
to a disposed product line.
Seven Months Ended July 31, 1997 And Five Months Ended December 31, 1997
In addition to the comparative analysis of the pro forma operating results
for the year ended December 31, 1997 presented above, the following paragraphs
will specifically address the actual results for the seven months ended July 31,
1997 and the five months ended December 31, 1997. As noted on the accompanying
Selected Financial Data table, these periods have a different basis of
accounting as a result of the Management Buy-Out effective on July 31, 1997. For
a comparative analysis of the 1997 operating results to 1996, see the narrative
presented above.
Net Sales and Gross Margin. Net sales and gross margin for the seven months
ended July 31, 1997 were $99.6 million and $26.0 million, respectively. The net
sales and gross margin for the five months ended December 31, 1997 were $91.5
million and $25.2 million, respectively. The gross margin as a percentage of net
sales for those periods was 26.1% and 27.5%, respectively. The higher gross
margin for the five month period of December 31, 1997 results from the mix of
products and higher production levels in that period. A comparison to 1996 gross
margin levels is described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the seven months ended July 31, 1997 and five months
ended December 31, 1997 were $23.3 million and $17.1 million, respectively. This
represents 23.4% and 18.7% as a percentage of net sales for the respective
periods. The significantly higher costs as a percentage of sales in the seven
months ended July 31, 1997, is attributable to higher information systems costs
and travel expenses in the first seven months of the year. These amounts also
include certain payments to management in conjunction with the Management
Buy-Out of $1.3 million.
Other Income. Other income (expense) for the seven months ended July 31,
1997 and the five months ended December 31, 1997 was ($193) and ($2,300),
respectively. The substantially higher expenses in the
19
<PAGE> 22
five months ended December 31, 1997 result primarily from the higher interest
expense associated with the increased debt issued in conjunction with the
Management Buy-Out.
Three Months Ended March 31, 1998 Compared To Three Months Ended March 31,
1997
Net Sales. Net sales for the three month period ended March 31, 1998
increased $1.8 million (5.2%) to $36.8 million from $35.0 million. Net sales
attributable to Cleaver-Brooks increased $0.8 million (2.9%). The increased
sales resulted from volume improvements for firetube boilers, commercial
watertube boilers and parts and a substantial increase in Cleaver-Brooks de
Mexico's operation with an offsetting decrease resulting from the sale of the
contract machining business in October, 1997 representing $1.7 million of the
offsetting decrease. Net sales attributable to Water Technologies increased $1.0
million (13.0%) to $8.7 million, primarily due to a large land-based water
desalination project.
Gross Margin. Gross margin increased $0.6 million (6.8%) to $9.3 million
from $8.7 million for the same period in 1997. The gross margin percentage
improved to 25.2% from 24.9% primarily due to continued improvements in
throughput in Cleaver-Brooks' manufacturing facilities and improved parts
margins at Cleaver-Brooks.
Selling, General and Administrative Expenses. Selling, general and
administrative expense increased $0.5 million (5.7%) to $8.9 million, primarily
due to continued increased commissions earned by sales representatives from the
higher sales volume and higher costs reported by the Mexico operations resulting
from consolidation of an additional month of operating results with Aqua-Chem.
Selling, general and administrative expense as a percentage of net sales was
24.2% compared to 24.1% for the prior year period.
Operating Income. For the reasons set forth above, operating income
increased $0.1 million, to $0.4 million from $0.3 million for the three month
period ended March 31, 1997.
Other Income (Expense). Other income (expense) for the three months ended
March 31, 1998 was an expense of $1.4 million as compared to an expense of $0.1
million for the same period in 1997, resulting in a difference of $1.3 million
(1193.5%). This difference is due to increased debt issued in conjunction with
the Management Buy-Out.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $2.9 million for the year ended March
31, 1999 compared to cash provided of $14.2 million for the twelve months ended
December 31, 1997. The decrease of $17.1 million was attributable primarily to
additional interest payments related to the Subordinated Notes described below
and an increase in accounts receivable due to slower collection related to
National Dynamics. For the fiscal year ended December 31, 1996, cash provided by
operating activities was $8.1 million.
Cash used in investing activities was $51.8 million for the year ended
March 31, 1999 compared to $51.6 million for the twelve months ended December
31, 1997 and $1.0 million in 1996. The current period included $48.5 million for
the NDC Acquisition. Capital expenditures for the current period were $3.2
million as compared to $3.4 million for the twelve months ended December 31,
1997 and $2.8 million in fiscal 1996. These expenditures relate to ongoing
maintenance and upgrades to Aqua-Chem's manufacturing equipment and facilities
and to certain replacement software systems. The twelve months ended December
31, 1997 included $52.1 million used for the Management Buy-Out.
Cash provided by financing activities was $55.4 million for the year ended
March 31, 1999 compared to $40.7 million in the twelve months ended December 31,
1997 and $1.5 million in 1996. The year ended March 31, 1999 included $125.0
million in proceeds from the Subordinated Notes issued in connection with the
NDC Acquisition and repayments of $63.1 million, of which $60.1 million related
to repayment of debt incurred as a result of the Management Buy-Out and $3.0
million related to the redemption for a portion of the Preferred A stock issued
in connection with the Management Buy-Out. The twelve months ended December 31,
1997 included $65.6 million in proceeds from debt issued in connection with the
Management Buy-Out and repayments of $26.0 million, of which $20.0 million
related to repayment of debt outstanding at
20
<PAGE> 23
the time of the Management Buy-Out and $6.0 million related to repayment of debt
incurred as a result of the Management Buy-Out.
BORROWING AVAILABILITY AND LIMITATIONS.
The Company has a revolving credit facility that provides $45.0 million of
borrowing availability and is secured by substantially all assets of the
Company. Under the revolving credit facility the Company is required to maintain
an adjusted consolidated tangible net worth (consolidated tangible net worth
plus an amount equal to the aggregate outstanding principal amount of
subordinated debt) of not less than $70 million plus (on a cumulative basis) for
each fiscal quarter ending on or after June 23, 1998, the sum of (a) 50% of
consolidated net income if positive and 100% of the cash proceeds of the
issuance of any equity interest of the Company during such fiscal quarter. In
addition, the revolving credit facility as amended on May 25, 1999 requires the
Company to maintain (i) a fixed charge coverage ratio of not less than 1.0 to 1
for the quarters ended June 30, 1999 and September 30, 1999, 1.10 to 1 for the
quarter ended December 31, 1999, 1.15 to 1 for the quarter ended March 31, 2000
and 1.25 to 1 for each subsequent quarter, and (ii) a senior funded debt to
consolidated EBITDA ratio of not more than 3.5 to 1.
The Company intends to fund future working capital, capital expenditures
and debt service requirements through cash flows generated from operating
activities and from borrowings under the revolving credit facility. Management
believes it will begin to borrow under the revolving credit facility during
fiscal 2000, but that cash flows for the balance of the year will allow for the
repayment of these borrowings by year end.
At March 31, 1999 the Company had $125 million of 11 1/4% Senior
Subordinated Notes (the "Notes") outstanding under an Indenture dated June 23,
1998 (the "Indenture"). The Indenture generally prohibits the incurrence by the
Company of additional debt unless the Company satisfies one of two requirements,
the Coverage Limitation or the Basket Limitation described below. Under the
Coverage Limitation, the Company may not incur additional indebtedness unless,
on the date of such incurrence and after giving effect thereto, the Consolidated
Coverage Ratio exceeds 2.0 to 1 if such indebtedness is incurred prior to
January 1, 2000, 2.25 to 1 if such indebtedness is incurred on or after January
1, 2000 and prior to January, 2001 or 2.5 to 1 thereafter (the "Coverage
Limitation"). As of March 31, 1999, the Company could not have incurred any
additional Indebtedness under the Coverage Limitation.
The Indenture permits the Company to incur additional indebtedness of
certain types up to certain limitations applicable to each type (the "Basket
Limitation") notwithstanding the Coverage Limitation. The Company could have
incurred approximately $80.6 million of additional indebtedness under the Basket
Limitations on March 31, 1999, including the following: (a) indebtedness
pursuant to the revolving credit agreement of up to the greater of (i) $45.0
million or (ii) the sum of 50% of the book value of inventory and 85% of the
book value of accounts receivable as of such date (the limitation under clause
(ii) would have been approximately $47.3 million at March 31, 1999); (b)
indebtedness by foreign subsidiaries not exceeding the sum of (i) 60% of the
book value of inventory and (ii) 85% of the book value of accounts receivable;
(c) purchase money indebtedness not exceeding the greater of (i) $20 million or
(ii) 5% of the consolidated net worth of the Company; and (d) an additional $10
million without regard to the nature or purpose of such indebtedness.
The Company expects that its cash needs for debt service under the
Indenture during the fiscal 2000 will be approximately $14.1 million. Mandatory
repayments of the Company's outstanding indebtedness and mandatory redemptions
of the Company's outstanding Series A Preferred Stock subsequent to March 31,
2000 are $1 million, $1 million and $125 million in fiscal year 2001, fiscal
year 2002 and subsequent fiscal years, respectively.
During the year ended March 31, 2000, the Company expects to make
approximately $2.8 million of capital expenditures related to the Thomasville
facility to improve the facility's efficiency. Apart from this item, the Company
believes that its manufacturing facilities and computer software and hardware
are generally adequate to meet projected needs. Additionally, the Company
expects other capital expenditures of $3.1 million.
21
<PAGE> 24
Management believes that cash generated from operating activities together
with borrowing availability under the revolving credit facility will be adequate
to cover the Company's working capital, debt service and capital expenditure
requirements on a short and long term basis.
At March 31, 1999, the Company had no material market risk exposure (e.g.,
interest rate risk, foreign currency exchange rate risk or commodity price
risk).
YEAR 2000
Many computer software applications, hardware and equipment and embedded
chip systems identify dates using only the last two digits of the year. These
products may be unable to distinguish between dates in the year 2000 and dates
in the year 1900. That inability (referred to as the "Year 2000 Issue"), if not
addressed, could cause applications, equipment or systems to fail or provide
incorrect information after December 31, 1999, or when using dates after
December 31, 1999. The Company uses a number of computer software programs,
operating systems, and types of equipment with computer chips in its internal
operations, including applications used in its financial business systems, order
entry and manufacturing systems, manufacturing processes and administrative
functions. The Company also manufactures products that incorporate components
purchased from other manufacturers that contain computer chips. To the extent
that the above listed items contain source code or computer chips that are
unable to interpret appropriately the upcoming calendar year 2000,
distinguishing it from the year 1900, some level of modification or possible
replacement will be necessary.
State of Readiness -- The Company has assessed and continues to assess the
impact of the Year 2000 Issue on its operations. The Company's assessments have
focused on the three major elements of the Year 2000 Issue: IT systems; Non-IT
systems; and third party relationships.
IT Systems -- Since 1996 the Company has been executing an IT system
upgrade plan, which includes leasing a new mainframe computer at an annual cost
of $0.6 million, and the expansion of and improvements to its networks and
capital spending on hardware totaling $0.2 million. Additionally, the Company
has spent $2.0 million on new financial systems software, of which $1.8 million
has been capitalized. These systems are replacing software that has been in use
since the early 1980's. The IT system upgrade plan was not undertaken in
response to the Year 2000 Issue, nor was it accelerated due to the Year 2000
Issue.
Of these new financial systems, the general ledger, accounts receivable,
accounts payable and reporting packages have been implemented, while the human
resource/payroll package is in the installation phase with a September 1999
targeted completion date. Management believes this project is currently on
schedule to meet this target date.
The Company has received written assurances from the manufacturers that the
following hardware and software are Year 2000 compliant as a result of the IT
upgrade plan: mainframe hardware; mainframe systems software; mainframe
operating system; LAN/WAN hardware; LAN/WAN operating systems; LAN/WAN system
software; personal computers and related software; and financial systems
software.
The Company's order entry and manufacturing systems are in the process of
being upgraded to address the Year 2000 Issue. The databases for all these
systems have been expanded and regenerated. Some of these systems have been put
into production. Management believes the remaining systems are on schedule to be
placed into production in August, 1999. Other non-Year 2000 IT efforts have not
been materially delayed or impacted by Year 2000 initiatives.
Non-IT Systems -- The Company has reviewed all of its communication systems
(phone and data transmission systems), fax machines, photocopiers, postage
machines, elevators, HVAC systems, security systems and shop floor equipment
with the manufacturers or vendors of those systems and equipment and has
received verbal assurances that these systems are Year 2000 compliant. Written
certifications of Year 2000 compliance for these systems have been requested
from the manufacturers or vendors. The Company is currently reviewing the
responses it has received to date and has sent a follow up letter to any
manufacturers or vendors who have not responded.
22
<PAGE> 25
Third Party Relationships -- All of the Company's suppliers of raw
materials, components, and other goods and services have been sent a
questionnaire regarding their Year 2000 compliance and their plans to be Year
2000 compliant. Over 75% of the suppliers contacted have responded. A follow up
letter has been sent to those suppliers who have yet to respond. For those
remaining suppliers who do not respond to this questionnaire, or who do not have
a Year 2000 compliance plan in place, the Company has identified alternative
suppliers and will use an alternative supplier who has certified that it is Year
2000 compliant. For all suppliers of equipment containing computer chips which
are incorporated into the Company's products, the Company has received written
assurance that this equipment is Year 2000 compliant.
Costs to Address the Company's Year 2000 Issue -- Costs incurred by the
Company to date to address the Year 2000 Issue, excluding the IT system upgrade
costs, are approximately $0.3 million. The Company estimates total costs
remaining to be incurred prior to the year 2000 range from $0.1 million to $0.2
million. Maintenance or modification costs will be expensed as incurred, while
the costs of new software will be capitalized and amortized over the software's
useful life. These costs will be funded from operating cash flows.
Risks and Contingency Plans -- Although the Company believes its efforts
will adequately address its Year 2000 Issue internally, it is possible that the
Company will be adversely affected by problems encountered by its vendors or
suppliers. Despite any vendor's or supplier's certification regarding Year 2000
compliance, there can be no assurance that the vendor's or supplier's ability to
provide goods and services will not be adversely affected by the Year 2000
Issue. The most likely worst case scenario would be that a failure by the
Company or one or more of its vendors or suppliers to adequately and timely
address the Year 2000 Issue interrupts manufacturing of the Company's products
for a undeterminable period of time. The Company has identified and will
continue to identify alternative vendors should a vendor's ability to meet the
Company's raw material and supply requirements be impacted by the Year 2000
Issue. While the Company believes it can minimize the impact of such
non-compliance through the use of these alternative vendors, a disruption in
production could have a material adverse impact on the Company. The Company does
not currently expect to develop a formal contingency plan.
GENERAL
The costs of the Company's efforts to address the Year 2000 Issue and the
dates on which the Company believes it will complete such efforts are based upon
management's best estimates, which were derived using numerous assumptions
regarding future events. There can be no assurance that these estimates will
prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that could cause such material
differences include, but are not limited to, the Company's ability to identify,
assess, remediate and test relevant computer codes and embedded technology, the
Company's reliance on third-party assurances and the variability of definitions
of "Year 2000 compliance" which may be used by such third parties, and similar
uncertainties.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, trend analysis and other information contained in this
report relative to markets for the Company's products and trends in the
Company's operations or financial results, as wall as other statements including
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend"
and other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include general
economic conditions, the cyclical nature of its business, its customers' access
to credit, political uncertainty and civil unrest in various areas of the world,
pricing, product initiatives and other actions taken by competitors, disruptions
in production capacity, excess inventory levels, the effect of changes in laws
and regulations (including government subsidies and international trade
regulations), technological difficulties (including Year 2000), changes in
environmental laws, and employee and labor relations.
23
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS OF AQUA-CHEM, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent public accountants.................... 25
Independent auditors' report................................ 26
Consolidated balance sheet as of March 31, 1999 and December
31, 1997.................................................. 27
Consolidated statement of operations for the year ended
March 31, 1999, the three months ended March 31, 1998, the
five months ended December 31, 1997, the seven months
ended July 31, 1997 and the year ended December 31,
1996...................................................... 28
Consolidated statement of stockholders' equity for year
ended March 31, 1999, the three months ended March 31,
1998, the five months ended December 31, 1997, the seven
months ended July 31, 1997 and the year ended December 31,
1996...................................................... 29
Consolidated statement of cash flows for the year ended
March 31, 1999, the three months ended March 31, 1998, the
five months ended December 31, 1997, the seven months
ended July 31, 1997 and the year ended December 31,
1996...................................................... 30
Notes to consolidated financial statements.................. 31
</TABLE>
24
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Aqua-Chem, Inc.:
We have audited the accompanying consolidated balance sheets of Aqua-Chem,
Inc. and subsidiaries as of March 31, 1999 and December 31, 1997 and the related
consolidated statement of operations, stockholders' equity and cash flows for
the year ended March 31, 1999, the period from January 1, 1998 to March 31,
1998, the period from August 1, 1997 to December 31, 1997 and the period from
January 1, 1997 to July 31, 1997. These financial statements and the
supplemental schedule referred to below are the responsibility of Aqua-Chem'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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aqua-Chem,
Inc. and subsidiaries as of March 31, 1999 and December 31, 1997, and the
results of their operations and their cash flows for the year ended March 31,
1999, the period from January 1, 1998 to March 31, 1998, the period August 1,
1997 to December 31, 1997 and the period from January 1, 1997 to July 31, 1997,
in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The supplemental schedule,
Schedule II -- Valuation and Qualifying Accounts, is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. The supplemental schedule has
been subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
May 1, 1999
25
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Aqua-Chem, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Aqua-Chem, Inc. and subsidiaries (80%
owned subsidiary of Lyonnaise American Holding, Inc.) for the year ended
December 31, 1996. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedule, Schedule
II -- Valuation and Qualifying Accounts, for the year ended December 31, 1996.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Aqua-Chem, Inc. and subsidiaries for the year ended December 31, 1996,
in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein for the year
ended December 31, 1996.
KPMG LLP
Milwaukee, Wisconsin
January 24, 1997
26
<PAGE> 29
AQUA-CHEM, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS; EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1997
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 5,498 $ 11,936
Accounts receivable, less allowances of $848 and $638 at
March 31, 1999 and December 31, 1997.................... 39,432 33,332
Revenues in excess of billings............................ 9,754 5,068
Inventories............................................... 25,929 20,814
Deferred income taxes..................................... 6,438 4,237
Prepaid expenses and other current assets................. 5,788 1,093
-------- --------
Total current assets............................... 92,839 76,480
Property, plant and equipment -- net........................ 36,290 31,555
Intangible assets, less accumulated amortization of $1,334
and $273 at March 31, 1999 and December 31, 1997.......... 37,745 10,174
Deferred income taxes....................................... 3,304 2,086
Other assets................................................ 8,053 4,366
-------- --------
TOTAL ASSETS....................................... $178,231 $124,661
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities on long-term debt...................... $ -- $ 1,055
Accounts payable
Trade................................................... 16,797 10,685
Other................................................... 4,465 5,324
Billings in excess of revenues............................ 4,580 5,654
Compensation and profit sharing........................... 4,500 5,318
Accrued litigation settlements............................ 375 3,200
Accrued restructuring..................................... 2,531 --
Accrued interest.......................................... 3,516 245
Other accrued expenses.................................... 12,884 17,379
-------- --------
Total current liabilities.......................... 49,648 48,860
Long-term debt.............................................. 125,000 58,636
Other long-term liabilities................................. 5,078 6,006
-------- --------
Total other liabilities............................ 130,078 64,642
Minority interest........................................... 486 589
Preferred stock with mandatory redemption provisions,
maximum redemption value in aggregate of $12,255 and
$15,255, respectively..................................... 4,944 7,365
Stockholders' equity:
Common stock, $.01 par value. Authorized 2,000,000 shares;
issued and outstanding 1,000,000 shares at March 31,
1999 and December 31, 1997.............................. 10 10
Additional paid-in capital................................ 90 90
Retained earnings (deficit)............................... (7,050) 3,049
Accumulated other comprehensive income.................... 25 56
-------- --------
Total stockholders' equity (deficit)............... (6,925) 3,205
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)........................................ $178,231 $124,661
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
27
<PAGE> 30
AQUA-CHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS; EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRE-BUY-OUT
POST-BUY-OUT BASIS OF ACCOUNTING BASIS OF ACCOUNTING
---------------------------------------- ---------------------------
YEAR ENDED JANUARY 1 TO AUGUST 1 TO JANUARY 1 TO YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, JULY 31, DECEMBER 31,
1999 1998 1997 1997 1996
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales......................... $220,404 $36,806 $91,541 $99,618 $199,552
Cost of goods sold................ 169,260 27,522 66,333 73,656 153,446
-------- ------- ------- ------- --------
Gross margin............ 51,144 9,284 25,208 25,962 46,106
Costs and expenses:
Selling, general and
administrative............... 43,791 8,910 17,136 23,323 34,446
Restructuring charges........... 5,881 -- -- -- 5,038
-------- ------- ------- ------- --------
49,672 8,910 17,136 23,323 39,484
-------- ------- ------- ------- --------
Operating income.................. 1,472 374 8,072 2,639 6,622
Other income (expense):
Interest income................. 500 148 202 450 464
Interest expense................ (12,842) (1,463) (2,559) (753) (1,448)
Other, net...................... 62 (69) 57 110 (806)
-------- ------- ------- ------- --------
(12,280) (1,384) (2,300) (193) (1,790)
-------- ------- ------- ------- --------
Income (loss) before income taxes,
and extraordinary item minority
interest........................ (10,808) (1,010) 5,772 2,446 4,832
Income tax expense (benefit)...... (3,919) (337) 2,289 421 507
Minority interest in earnings of
consolidated subsidiary......... 300 72 174 171 231
-------- ------- ------- ------- --------
Net income (loss) before
extraordinary item.... (7,189) (745) 3,309 1,854 4,094
Extraordinary item, net of tax
benefit of $840................. 1,260 -- -- -- --
-------- ------- ------- ------- --------
Net income (loss)....... $ (8,449) $ (745) $ 3,309 $ 1,854 $ 4,094
======== ======= ======= ======= ========
Preferred stock dividends......... 750 155 260 -- --
-------- ------- ------- ------- --------
Net income (loss)
applicable to
common................ $ (9,199) $ (900) $ 3,049 $ 1,854 $ 4,094
======== ======= ======= ======= ========
PER SHARE DATA:
Basic net income (loss) per share
before extraordinary item....... $ (7.94) $ (0.90) $ 3.05 N.A. N.A.
======== ======= =======
Basic net income (loss) per
share........................... $ (9.20) $ (0.90) $ 3.05 N.A. N.A.
======== ======= =======
Diluted net income (loss) per
share before extraordinary
item............................ $ (7.94) $ (0.90) $ 2.59 N.A. N.A.
======== ======= =======
Diluted net income (loss) per
share........................... $ (9.20) $ (0.90) $ 2.59 N.A. N.A.
======== ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
28
<PAGE> 31
AQUA-CHEM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL RETAINED COMPREHENSIVE COMPREHENSIVE
------------------ PAID-IN EARNINGS INCOME INCOME
SHARES AMOUNT CAPITAL (DEFICIT) (LOSS) (LOSS)
--------- ------ ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PRE-BUY-OUT BASIS OF ACCOUNTING
Balance at December 31, 1995.... 1,300 $ 1 $ 36,924 $ 351 $ (640) $ --
Net income.................... -- -- -- 4,094 -- 4,094
Translation adjustment........ -- -- -- -- (770) (770)
-------
Total................. $ 3,324
--------- --- -------- ------- ------- =======
Balance at December 31, 1996.... 1,300 $ 1 $ 36,924 $ 4,445 $(1,410)
Net income.................... -- -- -- 1,854 -- $ 1,854
Translation adjustment........ -- -- -- -- (404) (404)
-------
Total................. $ 1,450
--------- --- -------- ------- ------- =======
Balance at July 31, 1997........ 1,300 $ 1 $ 36,924 $ 6,299 $(1,814)
========= === ======== ======= =======
POST-BUY-OUT BASIS OF ACCOUNTING
Balance at July 31, 1997........ 1,300 $ 1 $ 36,924 $ 6,299 $(1,814)
Cancellation of former equity
and elimination of retained
earnings and cumulative
translation adjustment..... (1,300) (1) (36,924) (6,299) 1,814
Issuance of new common
stock...................... 1,000,000 10 90 -- --
Preferred stock dividends
accrued.................... -- -- -- (260) --
Net income.................... -- -- -- 3,309 -- $ 3,309
Translation adjustment........ -- -- -- -- 56 56
-------
Total................. $ 3,365
--------- --- -------- ------- ------- =======
Balance at December 31, 1997.... 1,000,000 $10 $ 90 $ 3,049 $ 56
Preferred stock dividends
accrued.................... -- -- -- (155) --
Net loss...................... -- -- -- (745) -- $ (745)
Translation adjustment........ -- -- -- -- 25 25
-------
Total................. $ (720)
--------- --- -------- ------- ------- =======
Balance at March 31, 1998....... 1,000,000 $10 $ 90 $ 2,149 $ 81
Preferred stock dividends
accrued.................... -- -- -- (750) --
Net loss...................... -- -- -- (8,449) -- $(8,449)
Translation adjustment........ -- -- -- -- (56) (56)
-------
Total................. $(8,505)
--------- --- -------- ------- ------- =======
Balance at March 31, 1999....... 1,000,000 $10 $ 90 $(7,050) $ 25
========= === ======== ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
29
<PAGE> 32
AQUA-CHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRE-BUY-OUT
POST-BUY-OUT BASIS OF ACCOUNTING BASIS OF ACCOUNTING
---------------------------------------- ---------------------------
YEAR ENDED JANUARY 1 TO AUGUST 1 TO JANUARY 1 TO YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, JULY 31, DECEMBER 31,
1999 1998 1997 1997 1996
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ (8,449) $ (745) $ 3,309 $ 1,854 $ 4,094
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization.................. 5,416 705 1,284 1,690 2,984
Deferred tax (benefit) expense................. (3,302) 1,007 (1,784) -- --
Minority interest in earnings of consolidated
subsidiary................................... 300 72 174 171 231
Extraordinary loss, after tax.................. 1,260 -- -- -- --
Restructuring charge, net of cash expended of
$450 and $3,908, respectively................ 5,431 -- -- -- 1,130
Increase (decrease) in cash due to changes in:
Accounts receivable.......................... (4,765) 9,031 (4,852) 5,166 54
Revenues in excess of billings............... (5,114) 428 3,096 (2,881) (273)
Inventories.................................. 9,768 (3,595) 3,473 (1,948) 8,463
Prepaid expenses and other current assets.... (1,093) 138 (332) (623) (57)
Accounts payable -- trade.................... 2,579 (536) (931) 1,969 212
Accounts payable -- other.................... 1,540 (2,816) 674 (1,743) (3,415)
Billings in excess of revenues............... (4,958) (2,489) 1,624 2,250 (4,489)
Accrued expenses and other current
liabilities................................ (1,185) (7,374) 3,800 (999) (250)
Other, net................................... (294) (382) (224) (49) (632)
-------- ------- -------- ------- -------
Total adjustments.......................... 5,583 (5,811) 6,002 3,003 3,958
-------- ------- -------- ------- -------
Net cash provided by (used in) operating
activities....................................... (2,866) (6,556) 9,311 4,857 8,052
Cash flows from investing activities:
Management Buy-Out of Aqua-Chem, Inc. ........... -- -- (52,102) -- --
Purchase of National Dynamics Corporation........ (48,500) -- -- -- --
Proceeds from sales of property, plant and
equipment and other assets..................... 1,057 11 2,000 73 203
Additions to property, plant and equipment....... (3,187) (584) (1,197) (2,195) (2,789)
Additions to intangibles......................... (1,299) -- (50) (270) --
Proceeds from notes receivable................... 100 -- 650 1,511 1,561
-------- ------- -------- ------- -------
Net cash used in investing activities.............. (51,829) (573) (50,699) (881) (1,025)
Cash flows from financing activities:
Issuance of Notes................................ 125,000 -- -- -- --
Proceeds from debt............................... -- -- 65,573 118 2,232
Net principal payments on debt................... (60,063) (51) (26,016) (112) (740)
Issuance of common stock......................... -- -- 100 -- --
Issuance of warrants............................. -- -- 433 -- --
Issuance of preferred stock...................... -- -- 2,655 -- --
Redemption of Series A Preferred Stock........... (3,000) -- -- -- --
Deferred financing costs......................... (6,159) -- (2,030) -- --
Dividends paid................................... (341) -- -- -- --
-------- ------- -------- ------- -------
Net cash provided by (used in) financing
activities....................................... 55,437 (51) 40,715 6 1,492
Net increase (decrease) in cash and cash
equivalents...................................... 742 (7,180) (673) 3,982 8,519
Cash and cash equivalents at beginning of period... 4,756 11,936 12,609 8,627 108
-------- ------- -------- ------- -------
Cash and cash equivalents at end of period......... $ 5,498 $ 4,756 $ 11,936 $12,609 $ 8,627
======== ======= ======== ======= =======
Cash paid (received) during the period for:
Interest......................................... $ 8,843 $ 1,427 $ 2,513 $ 658 $ 1,521
======== ======= ======== ======= =======
Taxes............................................ $ 218 $ 1,825 $ 1,214 $ 11 $ (123)
======== ======= ======== ======= =======
Details of Acquisition of National Dynamics
Corporation and Management Buy-Out:
Fair value of assets acquired.................... $ 38,487 -- $116,058 -- --
Goodwill......................................... 27,351 -- 9,689 -- --
Liabilities assumed.............................. (17,338) -- (69,196) -- --
Issuance of Series A Cumulative Preferred
Stock.......................................... -- -- (4,449) -- --
-------- ------- -------- ------- -------
Cash paid for assets............................. $ 48,500 $ -- $ 52,102 $ -- $ --
======== ======= ======== ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
30
<PAGE> 33
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS; EXCEPT PER SHARE DATA)
NOTE 1: MANAGEMENT BUY-OUT AND NDC ACQUISITION
On July 31, 1997, Aqua-Chem, Inc. ("OLDCO") entered into a definitive
merger agreement with A-C Acquisition Corp. ("A-C Acquisition"), a 100% owned
subsidiary of Rush Creek LLC ("Rush Creek"). Rush Creek is a Limited Liability
Company owned by certain management of OLDCO and Whitney Equity Partners, L.P.
Also on July 31, 1997, pursuant to the merger, A-C Acquisition Corp. acquired
the assets of OLDCO (the "Management Buy-Out") for $125,747, which included
$69,196 of liabilities assumed and $5,000 of Series A Cumulative Preferred Stock
issued to the sellers. The amount paid or assumed does not include contingent
consideration attached to the Series B Cumulative Preferred Stock to be paid to
the sellers based on cumulative earnings of certain operations of OLDCO
subsequent to the Management Buy-Out. Maximum additional consideration is $7,500
and will be settled as part of the Series B Cumulative Preferred Stock as
discussed in Note 10.
Concurrently with the Management Buy-Out, A-C Acquisition amended its
certificate of incorporation to change its name to Aqua-Chem, Inc., (hereinafter
referred to as "Aqua-Chem"). The Management Buy-Out was accounted for using the
purchase method of accounting. The total purchase cost was allocated first to
the identified tangible and intangible assets and liabilities of OLDCO based
upon their respective fair values, with the remainder of $9,689 being allocated
to goodwill, which will be amortized on a straight-line basis over 40 years.
Prior to the Management Buy-Out, OLDCO was an 80% owned subsidiary of
Lyonnaise American Holding, Inc.
On June 23, 1998, Aqua-Chem acquired substantially all the assets of
National Dynamics Corporation ("NDC") for $65,838, which includes $17,338 of
liabilities assumed and now conducts NDC's former operations through its
National Dynamics Division ("National Dynamics"). The acquisition was accounted
for using the purchase method of accounting. The total purchase cost was
allocated first to identified tangible assets and liabilities based upon their
respective fair values, with the remainder of $27,351 being allocated to
goodwill, which will be amortized on a straight-line basis over 40 years. The
financial statements reflect the preliminary estimates of allocating purchase
price and may be revised at a later date. The Company does not expect the final
purchase price allocation to be materially different from preliminary estimates.
The following information presents unaudited pro forma condensed
consolidated statements of operations assuming OLDCO had been acquired by
Aqua-Chem as of January 1, 1996 and that the acquisition of NDC occurred as of
January 1, 1997. Such information includes adjustments to reflect additional
interest expense and depreciation expense, amortization of goodwill and other
intangibles and a reduction of other expenses due to Management Buy-Out related
compensation payments being made by OLDCO.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1 TO YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales........................... $230,032 $49,451 $249,265 $199,552
Loss before extraordinary item (8,073) -- -- --
Net income (loss) applicable to
common shares..................... (10,087) (898) 3,737 (1,371)
Basic earnings (loss) per common
share............................. (10.09) (0.90) 3.74 N.A.
Diluted earnings (loss) per common
share............................. (10.09) (0.90) 3.18 N.A.
</TABLE>
The above pro forma financial information is prepared in accordance with
generally accepted accounting principles and is not necessarily indicative of
either the results of operations that would have occurred had the
31
<PAGE> 34
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management Buy-Out or the acquisition of NDC been effective at the beginning of
the periods presented or of future operations of Aqua-Chem.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements for the period from January 1, 1997
to July 31, 1997 and for the year ended December 31, 1996, were prepared using
OLDCO's historical basis of accounting (the "pre-Buy-Out basis of accounting").
The consolidated financial statements for the year ended March 31, 1999 and the
periods January 1, 1998 to March 31, 1998 and August 1, 1997 to December 31,
1997 were prepared under a new basis of accounting that reflects the fair values
of assets acquired and liabilities assumed, the related financing costs and all
debt incurred in connection with the acquisition of OLDCO by Aqua-Chem (the
"post-Buy-Out basis of accounting"). Accordingly, the accompanying financial
statements are not comparable in all material respects since those financial
statements report financial position, results of operations, and cash flows of
two separate entities.
(b) Consolidation Policy and Use of Estimates
The consolidated financial statements include the accounts of Aqua-Chem and
all of its majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
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, liabilities and the
disclosure of commitments and contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(c) Inventories
Inventories are stated at cost determined on the first-in, first-out (FIFO)
basis. The resulting inventory values are not in excess of market. Inventory
cost includes material, labor, burden, and engineering.
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1997
--------- ------------
<S> <C> <C>
Raw materials and work-in-process........................... $20,859 $16,963
Finished goods.............................................. 5,070 3,851
------- -------
Total Inventories................................. $25,929 $20,814
======= =======
</TABLE>
(d) Property, Plant and Equipment
Prior to August 1, 1997, property, plant and equipment was carried at cost,
less allowances for depreciation and adjustments to net realizable value, and
included expenditures which substantially increased the existing useful lives of
plant and equipment. Depreciation of plant and equipment was provided over the
estimated useful lives of the respective assets using accelerated methods for
both financial statement and income tax purposes.
Effective with the Management Buy-Out, property, plant, and equipment were
adjusted to estimated fair values and are being depreciated on a straight-line
basis. The lives used for depreciation calculations are as follows: 20 years for
buildings and building improvements; 3 to 15 years for machinery and equipment;
and 3 to 10 years for furniture and fixtures. Leasehold improvements are
depreciated over the term of the related
32
<PAGE> 35
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lease. Depreciation expense totaled $4,382, $590, $984, $1,622, and $2,865, for
the year ended March 31, 1999, the period January 1 to March 31, 1998, the
period August 1 to December 31, 1997, the period January 1 to July 31, 1997, and
the year ended December 31, 1996, respectively.
(e) Goodwill and Intangible Assets
Goodwill is being amortized on a straight-line basis over 40 years. At
March 31, 1999, and December 31, 1997, goodwill totaled $36,007, and $9,467,
respectively, net of accumulated amortization of $1,033 and $222, respectively.
Amortization expense totaled $747, $286, and $222, for the year ended March 31,
1999, the period January 1 to March 31, 1998, and the period August 1 to
December 31, 1997, respectively.
Aqua-Chem continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, Aqua-Chem uses an estimate of the undiscounted cash flows
over the remaining life of the goodwill in measuring whether the goodwill is
recoverable.
Prior to August 1, 1997, intangible assets, principally licenses and
technology, were carried at cost, less allowances for amortization. Amortization
of intangible assets was provided on the straight-line basis over the estimated
useful lives of the respective asset.
Effective with the Management Buy-Out, intangible assets were adjusted to
estimated fair values and are being amortized on a straight-line basis over
estimated useful lives ranging from 5 to 17 years. At March 31, 1999 and
December 31, 1997, intangibles totaled $1,738 and $707, respectively, net of
accumulated amortization of $301 and $51, respectively. Amortization expense
totaled $250, $33, $51, $68, and $119, for the year ended March 31, 1999, for
the period January 1 to March 31, 1998, for the period August 1 to December 31,
1997, for the period January 1 to July 31, 1997, and the year ended December 31,
1996, respectively.
(f) Income Taxes
Aqua-Chem accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. In assessing the
realizability of deferred tax assets, Aqua-Chem considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the years in which those temporary
differences become deductible. Aqua-Chem considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment.
Prior to the Management Buy-Out, Aqua-Chem filed a consolidated United
States corporate income tax return with Lyonnaise American Holding,
Inc.(Parent). The tax liability was calculated consistent with the provisions of
a 1984 tax allocation agreement with the Parent which provided for the
allocation of income tax expense (benefit) based principally on a consolidated
return basis.
(g) Revenue Recognition
Aqua-Chem recognizes revenue utilizing the completed contract method of
accounting, except for certain contracts meeting the criteria for percentage of
completion revenue recognition under Statement of
33
<PAGE> 36
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Position ("SOP") No. 81-1. For those contracts under the completed contract
method, revenue is recognized upon shipment of the finished product to the
customer. Under the percentage of completion method, earned revenue is based on
the percentage that incurred costs to date bear to estimates of total costs. The
cumulative impact of revisions in total cost estimates during the progress of
work is reflected in the year in which these changes become known. Earned
revenue reflects the original contract price adjusted for agreed upon change
order revenue, if any. Losses expected to be incurred on jobs in process, after
consideration of estimated recoveries on change orders, are charged to
operations as soon as such losses are known. Progress billings in accounts
receivable are currently due. Estimated revenues in excess of progress billings
and billings in excess of estimated revenues are disclosed in Note 4.
Aqua-Chem has numerous contracts that are in various stages of completion.
Such contracts require estimates to determine the appropriate cost and revenue
recognition. Aqua-Chem has a substantial history of making reasonably dependable
estimates of the extent of progress towards completion, contract revenues and
contract costs. However, current estimates may be revised as additional
information becomes available.
(h) Retainages
Retainages are unpaid amounts due in accordance with the specific terms of
boiler contracts. Certain contracts provide for a percentage of the total
billing price to be retained by the customer until final acceptance of the
product. The amount of retainages included in Aqua-Chem's accounts receivable
balance was $2,241 and $1,485 at March 31, 1999 and December 31, 1997,
respectively.
(i) Foreign Currency Translation
All assets and liabilities of foreign subsidiaries are translated at the
exchange rate prevailing at the balance sheet date and all income and expense
accounts are translated at the average exchange rate in effect during the year.
Translation adjustments are accumulated as a component of accumulated other
comprehensive income (loss) or directly to the consolidated statements of
operations for those countries whose currency has been classified as highly
inflationary. Foreign exchange transaction gains(losses) were not material for
all periods presented in the consolidated statement of operations.
(j) Commissions Payable
Aqua-Chem's domestic and international sales representatives sell products
on a commission basis. The related commissions payable were $2,664 and $2,580 at
March 31, 1999 and December 31, 1997, respectively, and are included in accounts
payable-other.
(k) Start-Up Accrual
Included in the sales price of Aqua-Chem's products is an estimated future
cost to prepare the product for use. These future costs, referred to as start-up
costs, are accrued by Aqua-Chem at the time of sale. When the customer is ready
for start-up, the service is requested through the sales representative who
performs the necessary work to prepare the product for use. The sales
representative then bills Aqua-Chem for the cost of the work performed. At March
31, 1999 and December 31, 1997, Aqua-Chem had accrued $3,375 and $3,751,
respectively, for future start-up costs, which are included in accrued expenses.
(l) Warranty Costs
Aqua-Chem accrues estimated warranty costs at the same time revenues are
recognized. Reserves for warranty costs were $3,924 and $3,646 at March 31, 1999
and December 31, 1997, respectively, and are included in accrued expenses.
34
<PAGE> 37
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(m) Research and Development
Research and development costs are expensed as incurred and are included in
selling, general, and administrative expenses. Research and development expense
totaled $2,746, $484, $872, $1,305, and $2,244, for the year ended March 31,
1999, the period January 1 to March 31, 1998, the period August 1 to December
31, 1997, the period January 1 to July 31, 1997, and the year ended December 31,
1996, respectively.
(n) Advertising
Advertising costs are expensed as incurred and are included in selling,
general and administrative expenses. Advertising expense totaled $1,042, $300,
$392, $625, and $856, for the year ended March 31, 1999, the period January 1 to
March 31, 1998, the period August 1 to December 31, 1997, the period January 1
to July 31, 1997, and the year ended December 31, 1996, respectively.
(o) Cash Equivalents
For purposes of the consolidated statements of cash flows, Aqua-Chem
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
(p) Fair Value of Financial Instruments
The carrying amounts of financial instruments approximate fair value due to
the short maturity of these instruments unless otherwise stated. The carrying
amounts of the long-term debt and short-term borrowings approximate fair value
because their stated interest rates approximate current rates for similar
instruments with similar maturities as of March 31, 1999 and December 31, 1997.
(q) New Accounting Pronouncements
Effective December 31, 1997, Aqua-Chem adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
This statement establishes standards for reporting and display of comprehensive
income which includes foreign currency translation adjustments accounted for
under SFAS No. 52. SFAS No. 130 requires that an enterprise classify items of
other comprehensive income by their nature in a financial statement for the
period in which they are recognized. Aqua-Chem has chosen to disclose
comprehensive income in the Consolidated Statement of Stockholders' Equity.
Accumulated other comprehensive income at March 31, 1999 and December 31, 1997
is comprised of only foreign currency translation adjustments. Prior years have
been restated to conform to the SFAS No. 130 requirements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement must be adopted no later than April 1, 2001,
although earlier application is permitted. The Company is currently evaluating
the impact of adopting SFAS No. 133 but does not expect the impact to be
material to its financial position or results of operations.
Effective April 1, 1998, the Company adopted SOP No. 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." The
adoption of this statement did not have an effect on the Company's financial
position or results of operations.
The Company will adopt SOP No. 98-5, "Reporting on the Costs of Start-Up
Activities," effective April 1, 1999. The Company believes that the adoption of
this statement will have no effect on the Company's financial position or
results of operations.
35
<PAGE> 38
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(r) Reclassifications
Certain 1997 and 1996 amounts as originally reported have been reclassified
to conform with the 1999 presentation.
(s) Extraordinary Item
On June 23, 1998, Aqua-Chem issued $125,000 of senior subordinated notes.
Proceeds from this offering were used, in part, to repay the secured term loan
and subordinated debt issued in conjunction with the Management Buy-Out.
As a result of the repayment of the aforementioned borrowings, Aqua-Chem
recorded a $1,260 extraordinary, after-tax charge for the write-off of
unamortized deferred financing fees established at the time of the Management
Buy-Out in July, 1997.
(t) Change in Fiscal Year
On December 30, 1998, Aqua-Chem elected to change the date of its fiscal
year-end to March 31. As a result, a transition period for the three months
ended March 31, 1998 and the three months ended March 31, 1997 (unaudited), was
previously reported on a transition report on Form 10-Q. The three months ended
March 31, 1998 have been included in Aqua-Chem's Consolidated Statement of
Operations.
The following is condensed unaudited operating results for the three months
ended March 31, 1997:
<TABLE>
<S> <C>
Net sales................................................. $34,972
Costs of goods sold....................................... 26,276
-------
Gross margin.............................................. 8,696
Selling, general and administrative expenses.............. 8,427
-------
Operating income.......................................... 269
Other expense............................................. (107)
-------
Earnings before income taxes and minority interest........ 162
Income tax expense........................................ 48
Minority interest......................................... 55
-------
Net income................................................ $ 59
=======
</TABLE>
NOTE 3: RESTRUCTURING CHARGES
1996 Restructuring Program
During 1996, Aqua-Chem adopted a restructuring plan ("1996 Plan") focused
on improving overall performance and profitability. The 1996 Plan included an
early retirement program for 47 salaried individuals and certain organizational
changes within its operating units. As a result, a restructuring charge of
$5,038 was recorded in 1996.
36
<PAGE> 39
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of restructuring activity for the 1996 Plan is as follows:
<TABLE>
<CAPTION>
1996 ACTIVITY 1997 ACTIVITY
------------------------------------- -------------------------
BALANCE AT BALANCE AT
INITIAL DECEMBER 31, JULY 31,
CHARGES EXPENDITURES 1996 EXPENDITURES 1997
------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Employee termination
benefits................... $3,045 $(1,915) $1,130 $(588) $542
Professional services........ 1,993 (1,993) -- -- --
------ ------- ------ ----- ----
Total restructuring
reserve.......... $5,038 $(3,908) $1,130 $(588) $542
====== ======= ====== ===== ====
</TABLE>
1998 Restructuring Program
On June 25, 1998 the Board of Directors approved a plan of closure for the
Greenville, Mississippi facility ("1998 Plan"). As a result, the Company
recorded a restructuring charge of $4,720 to operations in June 1998. The 1998
Plan will result in the elimination of 149 positions and closure of the facility
within approximately one year from the date of approval. The majority of the
work currently performed at the facility will be transferred to other Company
facilities while the remainder will be outsourced.
An analysis of Aqua-Chem, Inc.'s 1998 Plan is summarized in the table
below:
<TABLE>
<CAPTION>
BALANCE AT
1998 RESERVES MARCH 31,
PLAN UTILIZED 1999
------ -------- ----------
<S> <C> <C> <C>
Writedown of property, plant and equipment.............. $2,900 $(2,900) $ --
Employee termination payments........................... 955 (129) 826
Costs related to closing the existing facility.......... 865 -- 865
------ ------- ------
Total Restructuring........................... $4,720 $(3,029) $1,691
====== ======= ======
</TABLE>
The $2,900 write down of assets represents the estimated impairment of
assets at the Greenville facility as a direct result of the Company's decision
to close this facility. The impairment write down was based upon the estimated
fair value of the assets at the date of commitment as compared to their carrying
values.
The $955 of employee termination payments represents the employee cash
severance costs to reduce personnel as a result of the closure of the Greenville
facility. These termination payments include the cost of severance and
contractual benefits in accordance with collective bargaining arrangements and
Company policy.
The remaining charge includes facility exit costs, such as employee costs
associated with the plant closure that will be incurred after operations cease
and the write-off of other plant-related assets not included in property, plant
and equipment.
Management believes the restructuring reserve balance of $1,691 at March
31, 1999, is adequate to carry out all activities under the 1998 Plan, and the
Company anticipates that all actions will be completed by the second quarter of
fiscal 2000.
1999 Restructuring Program
In January 1999, Aqua-Chem recognized a restructuring charge of $1,161
("1999 Plan"). The charge for the 1999 Plan consists of employee termination
payments associated with the termination of 35 personnel. These termination
payments include the cost of severance and outplacement services. As of March
31, 1999, the Company had payments of $321 against this reserve. Management
believes that the remaining balance of
37
<PAGE> 40
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$840 at March 31, 1999, is adequate to carry out all activities under the 1999
Plan, and the Company anticipates that all actions will be completed by the
second quarter of fiscal 2000.
The Company expects to fund the cash requirements of the 1998 and 1999
Plans with cash flows from operations and if necessary additional borrowings
under the Company's existing revolving credit facility. The specific
restructuring measures and associated estimated costs were based on management's
best business judgment under prevailing circumstances. If future events warrant
changes to the reserve, such adjustments will be reflected as "Restructuring
charges" in the applicable statement of operations.
NOTE 4: CONTRACTS IN PROGRESS
Components of contracts in progress, the majority of which are accounted
for under the percentage of completion method of revenue recognition, are as
follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1997
--------- ------------
<S> <C> <C>
REVENUES IN EXCESS OF BILLINGS
Costs and estimated earnings.............................. $115,873 $76,996
Billings.................................................. 106,119 71,928
-------- -------
$ 9,754 $ 5,068
======== =======
BILLINGS IN EXCESS OF REVENUES
Billings.................................................. $ 45,283 $29,139
Costs and estimated earnings.............................. 40,703 23,485
-------- -------
$ 4,580 $ 5,654
======== =======
</TABLE>
All receivables on contracts in progress are considered to be collectible
within twelve months. At March 31, 1999 and December 31, 1997, no cumulative
losses on contracts are estimated or accrued.
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1997
--------- ------------
<S> <C> <C>
Land and land improvements.................................. $ 3,067 $ 1,872
Buildings and building improvements......................... 14,528 9,715
Leasehold improvements...................................... 7 1,120
Machinery and equipment..................................... 19,610 15,700
Furniture and fixtures...................................... 4,163 4,058
------- -------
41,375 32,465
Less: accumulated depreciation.............................. (5,085) (910)
------- -------
$36,290 $31,555
======= =======
</TABLE>
NOTE 6: LEASES
Aqua-Chem leases its corporate offices under a fifteen year operating lease
with two five-year renewal options. The building was previously owned by a
partnership in which Aqua-Chem had a limited interest.
38
<PAGE> 41
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The future minimum payments under all noncancellable operating leases with
initial or remaining terms in excess of one year are as follows:
<TABLE>
<S> <C>
2000....................................................... $1,727
2001....................................................... 1,254
2002....................................................... 1,152
2003....................................................... 1,018
2004....................................................... 970
Thereafter................................................. 2,093
------
Total minimum rental commitments................. $8,214
======
</TABLE>
Total rent expense for all operating leases was $1,689, $312, $632 and $891
for the year ended March 31, 1999, the period January 1 to March 31, 1998, the
period from August 1, 1997 to December 31, 1997, and for the period from January
1, 1997 to July 31, 1997, respectively. Total rent expense for all operating
leases for the year ended December 31, 1996 was $1,292.
NOTE 7: REVOLVING CREDIT FACILITY
Aqua-Chem has a $45,000 secured revolving credit facility. Borrowings under
this facility are made in the form of revolving credit notes. These notes bear
interest at a rate of either eurocurrency plus a factor as defined in the
agreement, prime, or federal funds rate plus 100 basis points. The revolving
credit agreement will terminate June 23, 2003. The facility is secured by the
assets of the Company. At March 31, 1999 and December 31, 1997 there were no
borrowings outstanding. Among other restrictions, the credit agreement contains
covenants relating to financial ratios and other limitations, as defined by the
agreement. As of March 31, 1999, the Company was in compliance with these
covenants.
NOTE 8: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1997
--------- ------------
<S> <C> <C>
Unsecured Senior Subordinated Notes......................... $125,000 $ --
Secured term loan........................................... -- 39,000
Subordinated debt........................................... -- 21,000
Less: Unamortized portion of original issue discount........ -- (427)
Note payable................................................ -- 118
-------- -------
Total long-term debt........................................ 125,000 59,691
Less: Current maturities.................................... -- (1,055)
-------- -------
Long-term debt.................................... $125,000 $58,636
======== =======
</TABLE>
On June 23, 1998 Aqua-Chem issued $125,000 in unsecured senior subordinated
notes. The notes carry an interest rate of 11 1/4% and are due July 1, 2008.
Interest is payable semi-annually beginning January 1, 1999. Proceeds from the
notes were used to repay Aqua-Chem's existing debt, to redeem $3,269 of
Aqua-Chem's Series A Preferred Stock, to acquire substantially all of the assets
of NDC, to pay the accrued interest and dividends, fees and expenses associated
with the foregoing, and for general coporate purposes.
The secured term loan which bore interest at the eurocurrency rate (6.425%
at December 31, 1997) plus 1.825%, and the subordinated debt which bore interest
at 10.5%, were repaid with the proceeds from the issuance of the senior
subordinated notes.
39
<PAGE> 42
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the minimum annual principal repayments of long-term debt at
March 31, 1999, is as follows:
<TABLE>
<S> <C>
2000..................................................... $ --
2001..................................................... --
2002..................................................... --
2003..................................................... --
2004..................................................... --
Thereafter............................................... 125,000
--------
$125,000
========
</TABLE>
NOTE 9: INCOME TAXES
The sources of income (loss) before income taxes and minority interest were
as follows:
<TABLE>
<CAPTION>
PRE-BUY-OUT
POST-BUY-OUT BASIS OF ACCOUNTING BASIS OF ACCOUNTING
---------------------------------------- ---------------------------
YEAR ENDED JANUARY 1 TO AUGUST 1 TO JANUARY 1 TO YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, JULY 31, DECEMBER 31,
1999 1998 1997 1997 1996
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
U.S. sources...................... $(12,108) $(1,477) $5,058 $1,661 $3,535
Foreign sources................... 1,300 467 714 785 1,297
-------- ------- ------ ------ ------
Income (loss) before income taxes
and minority interest........... $(10,808) $(1,010) $5,772 $2,446 $4,832
======== ======= ====== ====== ======
</TABLE>
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
PRE-BUY-OUT
POST-BUY-OUT BASIS OF ACCOUNTING BASIS OF ACCOUNTING
---------------------------------------- ---------------------------
YEAR ENDED JANUARY 1 TO AUGUST 1 TO JANUARY 1 TO YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, JULY 31, DECEMBER 31,
1999 1998 1997 1997 1996
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current:
United States................... $(1,296) $(1,371) $ 3,258 $ -- $109
Foreign......................... 473 265 215 271 310
State........................... 206 (238) 600 150 88
------- ------- ------- ---- ----
Total current........... (617) (1,344) 4,073 421 507
Deferred:
United States................... (2,741) 854 (1,507) -- --
Foreign......................... -- -- -- -- --
State........................... (561) 153 (277) -- --
------- ------- ------- ---- ----
Total deferred.......... (3,302) 1,007 (1,784) -- --
------- ------- ------- ---- ----
Total income tax
provision (benefit)... $(3,919) $ (337) $ 2,289 $421 $507
======= ======= ======= ==== ====
</TABLE>
40
<PAGE> 43
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total income tax provision (benefit) differs from amounts derived from
applying the Federal statutory income tax rate to income (loss) before income
taxes and minority interest, as set forth in the following table.
<TABLE>
<CAPTION>
POST-BUY-OUT BASIS OF ACCOUNTING
-----------------------------------------------------------------
YEAR ENDED JANUARY 1 TO AUGUST 1 TO
MARCH 31, MARCH 31, DECEMBER 31,
1999 1998 1997
------------------- ------------------- -------------------
TAX TAX TAX
EXPENSE EXPENSE EXPENSE
(BENEFIT) PERCENT (BENEFIT) PERCENT (BENEFIT) PERCENT
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit)
at Federal
statutory rate..... $(3,675) (34.0)% $(344) (34.0)% $1,962 34.0%
Impact of foreign
subsidiary income
and tax rates...... 32 0.3 107 10.6 (27) (0.5)
Change in valuation
allowance.......... -- -- -- -- -- --
State income taxes,
net of Federal
income tax
benefit............ (364) (3.4) (56) (5.5) 215 3.7
Management Buy-Out
goodwill
amortization....... 31 0.3 11 1.0 78 1.4
Other................ 57 0.5 (55) (5.5) 61 1.1
------- ----- ----- ----- ------ ----
Total income tax
expense
(benefit)..... $(3,919) (36.3)% $(337) (33.4)% $2,289 39.7%
======= ===== ===== ===== ====== ====
<CAPTION>
PRE-BUY-OUT
BASIS OF ACCOUNTING
------------------------------------------
JANUARY 1 TO YEAR ENDED
JULY 31, DECEMBER 31,
1997 1996
------------------- -------------------
TAX TAX
EXPENSE EXPENSE
(BENEFIT) PERCENT (BENEFIT) PERCENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Tax expense (benefit)
at Federal
statutory rate..... $832 34.0% $ 1,643 34.0%
Impact of foreign
subsidiary income
and tax rates...... 4 0.2 (131) (2.7)
Change in valuation
allowance.......... (604) (24.7) (1,196) (24.7)
State income taxes,
net of Federal
income tax
benefit............ 150 6.1 88 1.8
Management Buy-Out
goodwill
amortization....... -- -- -- --
Other................ 39 1.6 103 2.1
---- ----- ------- -----
Total income tax
expense
(benefit)..... $421 17.2% $ 507 10.5%
==== ===== ======= =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1997
--------- ------------
<S> <C> <C>
Deferred tax assets
Inventory................................................. $ 728 $ 289
Employee benefits......................................... 2,912 3,029
Litigation settlements.................................... 142 1,558
Start-up and warranty expenses............................ 1,773 743
Restructuring charges..................................... 2,243 481
Net operating loss carryforward........................... 2,324 --
Other..................................................... 1,213 970
------- ------
Total deferred tax assets......................... 11,335 7,070
Deferred tax liabilities
Contract related transactions............................. (484) (112)
Property, plant and equipment............................. (794) (494)
Other..................................................... (315) (141)
------- ------
Total deferred tax liabilities.................... (1,593) (747)
------- ------
Net deferred tax asset............................ $ 9,742 $6,323
======= ======
</TABLE>
41
<PAGE> 44
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The classification of the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1997
--------- ------------
<S> <C> <C>
Current deferred tax asset.................................. $6,438 $4,237
Long-term deferred tax asset................................ 3,304 2,086
------ ------
Net deferred tax asset............................ $9,742 $6,323
====== ======
</TABLE>
A portion of the tax loss incurred for the year ended March 31, 1999 will
result in a refund of prior taxes paid. Accordingly, a refund receivable of
$1,324 has been recorded within prepaid expenses and other current assets at
March 31, 1999.
During 1995, Aqua-Chem incurred a net operating loss for tax purposes. Due
to a January 1996 modification to the existing tax allocation agreement between
Aqua-Chem and the former owners, a carryback of the loss would not have resulted
in a refund of cash to Aqua-Chem. Accordingly, Aqua-Chem elected to carry the
tax loss forward and a valuation allowance was established. During the period
January 1, 1997 through July 31, 1997 and the year ended December 31, 1996,
Aqua-Chem had sufficient income to realize the value of a portion of the net
operating loss. Accordingly, the valuation reserve was reduced in both periods
by the amount of the benefit realized.
The Company has a tax loss carryforward of $5,800 for Federal income tax
purposes which expires in 2019. For state income tax purposes, the Company has
tax loss carryforwards in varying amounts ranging from $82 to $3,272 in the
states in which it has significant operations. These loss carryforwards expire
in years ranging from 2004 to 2019.
NOTE 10: STOCKHOLDERS' EQUITY AND PREFERRED STOCK WITH MANDATORY REDEMPTION
PROVISIONS
As of March 31, 1999, Aqua-Chem had 2,006,260 shares of authorized capital
stock, itemized by class and series as follows:
(i) 2,000,000 shares of Common Stock, par value $.01 per share, with
1,000,000 shares issued and outstanding;
(ii) 6,260 shares of Preferred Stock, par value $.01 per share,
divided into the following series:
(a) 130 shares of Series A Cumulative Preferred Stock, par value
$0.01 per share with 52 shares issued and outstanding.
(b) 130 shares of Series B Cumulative Preferred Stock, par value
$0.01 per share, with 130 shares issued and outstanding.
(c) 6,000 shares of Series C Cumulative Preferred Stock, par value
$.01 per share, with 2,755 shares issued and outstanding.
The Company formerly had 130 shares of Series A Preferred outstanding, and
used approximately $3.1 million of the proceeds of the subordinated debt
offering to redeem 78 of such shares. The remaining 52 shares of Series A
Preferred will remain outstanding subject to redemption as follows: one-half
(26) of such shares will be redeemed (at a redemption price of $1 million plus
accrued dividends, if any) on August 1, 2000 and the remainder will be redeemed
(at a redemption price of $1 million plus accrued dividends, if any) on August
1, 2001. Under the Company's Certificate of Incorporation (the "Certificate"),
holders of the outstanding nonvoting Series A Preferred are entitled to receive
cumulative cash dividends of $577 per share per quarter beginning August 1,
1998. Holders of Preferred A have the right to require the Company to redeem
Series A Preferred at an aggregate redemption price of $2 million plus accrued
dividends
42
<PAGE> 45
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) simultaneous with the occurrence of an "overall ownership shift," "employee
ownership shift" or "asset shift" (each as defined in the Certificate); or (ii)
within the 120 day period following an initial public offering of the Company's
equity securities. The Company may call the outstanding shares at any time at
the redemption price of $38,462 per share plus accrued dividends. As the
Preferred A carries a below market dividend rate of 6%, Aqua-Chem recorded the
Preferred A at a discount. Aqua-Chem is accreting the discount over the term of
the Series A Preferred with the accretion charged to retained earnings. The
carrying value, including accretion and dividends, of the Series A Preferred at
March 31, 1999 and December 31, 1997, is $1,839 and $4,594 respectively.
Holders of the nonvoting Series B Cumulative Preferred Stock ("Preferred
B") are entitled to receive cumulative cash dividends of $1,538 per share per
year beginning August 1, 1997 payable at redemption. The redemption price of the
Preferred B shall be the "Normal Redemption Price," which shall generally be
based upon Aqua-Chem's Water Technologies' cumulative earnings before taxes for
the period 1997 through 2001. The redemption price is modified in the event that
prior to December 31, 2001, either (i) Water Technologies is sold to an
unrelated third party; or (ii) there occurs an initial public offering of the
Company's equity securities; or (iii) there occurs an "overall ownership shift,"
"employee ownership shift" or "asset shift" (each as defined in the
Certificate). The maximum redemption price, under any circumstance, shall be
$7,500. Holders of Preferred B generally shall have the right to require the
Company to redeem the Series Preferred B at the applicable redemption price plus
accrued dividends (i) simultaneous with the occurrence of an "overall ownership
shift" (as defined by the Certificate); (ii) within the 120 day period following
an initial public offering of Aqua-Chem's equity securities; (iii) within the
120 day period following a refinancing and retirement of the existing
subordinated debt; or (iv) July 31, 2004. The holders of the Series B Preferred
elected not to require that the Series B Preferred be redeemed in connection
with the subordinated debt offering. The carrying value of the Series B
Preferred is zero at March 31, 1999, as the redemption value is contingent upon
future events.
Holders of Series C Preferred Stock are entitled to receive quarterly
dividends at the rate of 10.17% per year on the original issue price per share
($964) beginning on August 1,1997. Holders of Series C Preferred generally shall
have the right to require the Company to redeem all or any part of Series C
Preferred at a price equal to $1,000 per share, plus accrued dividends upon (i)
an "overall ownership shift,"employee ownership shift," or "asset shift" (each
as defined by the Certificate); (ii) within the 120-day period following an
initial public offering; or (iii) July 31, 2005. Any time after July 31, 2004,
the Company may call the outstanding shares at the redemption price of $1,000
per share plus accrued dividends. Holders of the Series C Preferred are entitled
to voting rights equivalent to the rights of one share of common stock. As the
redemption price of $1,000 per share exceeds the original issue price of $964,
Aqua-Chem recorded the Series C Preferred at a discount. Similar to the Series A
Preferred, the Company is accreting the discount over the term of the Series C
Preferred with the accretion charged to retained earnings. The carrying value,
including dividends, of the Series C Preferred at March 31, 1999 and December
31, 1997, is $3,105 and $2,771, respectively.
NOTE 11: STOCK OPTIONS
Aqua-Chem has two stock option plans, the Aqua-Chem, Inc. 1997 Stock Option
Plan (as amended and restated, the "1997 Stock Option Plan") and the Aqua-Chem,
Inc. 1998 Stock Option Plan (the "1998 Stock Option Plan"). Aqua-Chem accounts
for these plans under APB Opinion No. 25.
The 1997 Stock Option Plan provides for the granting to key employees, from
time to time, of non-statutory stock options to purchase up to an aggregate of
61,919 shares of Common Stock of Aqua-Chem at exercise prices to be determined
in accordance with the provisions of the 1997 Stock Option Plan. The 1997 Stock
Option Plan provides that between 10% and 20% of the aggregate number of shares
of Common Stock underlying each series of options shall vest each year on the
anniversary of the date of the grant, provided that in the prior fiscal year (i)
the option holder completed at least twelve consecutive months of service (as
43
<PAGE> 46
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
defined in the 1997 Stock Option Plan), and (ii) the Company attained 80% to
100% of a specified target of EBITDA (as defined therein)($18.3 million in the
current year, subject to adjustment in the event of certain extraordinary
activities, (the "EBITDA Goal")). In the event that an installment does not vest
on an anniversary date because the EBITDA Goal is not met, such installment
shall vest on the next succeeding anniversary date as to which (i) the option
holder has completed at least twelve consecutive months of service, and (ii) the
Company met the EBITDA Goal by a cumulative amount greater than or equal to the
prior cumulative EBITDA shortfalls. Notwithstanding the foregoing, options
granted under the 1997 Stock Option Plan shall vest automatically on the seventh
anniversary of the date of the grant regardless of performance criteria. The
option agreement for certain employees provide the opportunity for accelerated
vesting in the event of the achievement of certain Division goals. As of March
31, 1999, there were 48,167 options granted at an exercise price of $3.75 per
share under the 1997 Stock Option Plan.
On August 4, 1998 the Board adopted the 1998 Stock Option Plan which
provides for the grant to key advisors, consultants, and employees, from time to
time, of non-statutory stock options to purchase up to an aggregate of 61,919
shares of Common Stock at exercise prices to be determined in accordance with
the provisions of the 1998 Stock Option Plan. Options granted under the 1998
Stock Option Plan shall vest on the seventh anniversary of the date of grant,
but may be accelerated subject to the terms of a written agreement entered into
between the Company and the optionee at the time of the grant. As of March 31,
1999, 15,740.40 shares at an exercise price of $5.00 share were granted.
All options granted under the 1997 and 1998 Stock Option Plans were made
during the year ended March 31, 1999 at exercise prices that approximate fair
market value of the stock. Thus no compensation expense has been recorded by the
Company. None of the options are exercisable as of March 31, 1999 and no options
have been forfeited. The weighted-average exercise price was $4.05 at March 31,
1999 with a maximum term of ten years.
Under separate agreements from the 1997 Plan and the 1998 Plan, the option
to purchase 1,725 shares of common stock have been granted to two directors of
Aqua-Chem. Under the terms of the agreements, the option to purchase 600 shares
vests one year from the effective date of the grant, with the remaining 1,125
options vesting at a rate of 225 per year commencing on December 31, 1998 and
continuing through December 31, 2002. These options allow the holder to purchase
common stock of Aqua-Chem at $3.75 per share, which does not differ
significantly from fair market value. As of March 31, 1999, no options were
exercised.
The proforma effect of currently recognizing the fair market value of all
options granted is not material to the consolidated financial statements.
NOTE 12: COMMON STOCK PURCHASE WARRANTS
The holders of the subordinated notes payable (see Note 9) also received
warrants, whereby they can acquire, at any time through July 31, 2007, in total,
176,471 shares of Aqua-Chem's common stock. The exercise price issuable upon
exercise of the warrants is $.01 per share of stock, with adjustments made to
prevent dilution in the event of any changes in capitalization of Aqua-Chem.
After July 31, 2002, there are put and call features that may require
Aqua-Chem to purchase all or any part of the warrants or the common stock
obtained by the exercise of such warrants at the higher of a price determined in
the agreement or the fair market value of the Company's stock. During the year
ended March 31, 1999, no warrants were exercised.
The warrants are recorded within other long-term liabilities at their
approximate fair value.
44
<PAGE> 47
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13: EMPLOYEE BENEFIT PLANS AND POSTRETIREMENT BENEFITS
Defined Benefit and Postretirement Benefit Plans
Aqua-Chem maintains a defined benefit pension plan covering substantially
all union employees of the National Dynamics. The benefits are based on years of
service and the employee's compensation during the last five years of
employment. The Company's funding policy is to contribute amounts necessary to
satisfy the funding requirements as prescribed by laws and regulations. Plan
assets consist primarily of investments in investment-grade corporate loans with
maturities of five to ten years. Effective March 31, 1999, Aqua-Chem adopted
SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits."
Aqua-Chem maintains unfunded health care plans covering certain eligible
retirees and employees. The estimated costs of postretirement benefits,
principally health care, are accrued over the period the benefits are earned.
Aqua-Chem's policy is to fund postretirement benefits as incurred.
The following assumptions were utilized in determining the funded status of
Aqua-Chem's defined benefit pension plan:
<TABLE>
<S> <C>
Weighted-average discount rate.............................. 6.0%
Rate of increase in future compensation..................... 4.9%
Weighted-average, long-term rates of return on plan
assets.................................................... 7.5%
</TABLE>
The following assumptions were utilized in determining the funded status of
Aqua-Chem's post retirement health plan:
<TABLE>
<CAPTION>
POST-BUY-OUT BASIS PRE-BUY-OUT BASIS
OF ACCOUNTING OF ACCOUNTING
---------------------------------------- ---------------------------
YEAR ENDED JANUARY 1 TO AUGUST 1 TO JANUARY 1 TO YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, JULY 31, DECEMBER 31,
1999 1998 1997 1997 1996
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Weighted-average discount rate.... 7.5% 7.5% 7.5% 7.5% 7.5%
Rate of increase in future
compensation.................... 4.5% 4.5% 4.5% 4.5% 4.5%
</TABLE>
45
<PAGE> 48
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DEFINED BENEFIT PLAN POSTRETIREMENT HEALTH PLAN
-------------------- --------------------------
MARCH 31, MARCH 31, DECEMBER 31,
1999 1999 1997
-------------------- ---------- -------------
<S> <C> <C> <C>
Changes in benefit obligations:
Actuarial present value of benefit obligation at
date of NDC Acquisition (defined benefit plan)
and at the beginning of the period
(postretirement health plan), respectively...... $1,430 $4,516 $5,501
Service cost....................................... 97 16 15
Interest cost...................................... 72 379 342
Gross benefits paid................................ (10) (330) (515)
Actuarial (gain) loss.............................. (12) -- 13
------ ------ ------
Actuarial present value of benefit obligation at
end of period................................... 1,577 4,581 5,356
Change in plan assets
Plan assets at fair value at date of NDC
Acquisition..................................... 929 -- --
Actual return on plan assets....................... 67 -- --
Employer contributions............................. 189 -- --
Gross benefits paid................................ (10) -- --
------ ------ ------
Plan assets at fair value at end of period......... 1,175 -- --
Plan assets less than total benefit obligation....... 402 4,581 5,356
Unrecognized prior service cost.................... -- -- (698)
------ ------ ------
Net liability recognized at end of year............ 402 4,581 4,658
====== ====== ======
</TABLE>
The liability above is recognized in the accompanying Consolidated Balance
Sheets within Other Long-Term Liabilities.
The components of the net periodic benefit costs of Aqua-Chem's defined
benefit and post-retirement health plan are as follows:
<TABLE>
<CAPTION>
DEFINED BENEFIT
PLAN POSTRETIREMENT HEALTH PLAN
--------------- ----------------------------------------------------------------------
PRE-BUY-OUT BASIS OF
POST-BUY-OUT BASIS OF ACCOUNTING ACCOUNTING
---------------------------------------- ---------------------------
YEAR ENDED YEAR ENDED JANUARY 1 TO AUGUST 1 TO JANUARY 1 TO YEAR ENDED
MARCH 31, MARCH 31, MARCH 31, DECEMBER 31, JULY 31, DECEMBER 31,
1999 1999 1998 1997 1997 1996
--------------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost:
Service cost............... $ 97 $ 16 $ 4 $ 6 $ 9 $ 24
Interest cost.............. 72 379 89 139 203 500
Expected return on
assets.................. (74) -- -- -- -- --
Amortization of transition
obligation.............. -- -- -- -- 248 426
Amortization of
unrecognized gain....... -- -- 3 -- (140) (75)
---- ---- --- ---- ----- ----
Net periodic benefit
cost.................... $ 95 $395 $96 $145 $ 320 $875
==== ==== === ==== ===== ====
</TABLE>
46
<PAGE> 49
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the 1996 restructuring plan and the related early retirement
program, Aqua-Chem incurred a curtailment charge of $387, which is included in
the restructuring charges in the year ended December 31, 1996 consolidated
statement of operations.
The weighted-average assumed health care cost trend rate used in
determining the March 31, 1999 and December 31, 1997 accumulated postretirement
benefit obligation was 7.5% declining 1% per year to 5.5% in 2002 and
thereafter.
Increasing the assumed health care cost trend rate by one percentage point
would increase the total accumulated postretirement benefit obligation as of
March 31, 1999, by approximately $300, and would increase the aggregate of the
service cost and interest cost components of the net postretirement benefit cost
by approximately $25 in fiscal 1999. Decreasing the assumed health care cost
trend rate by one percentage point would decrease the total accumulated
postretirement benefit obligation as of March 31, 1999, by approximately $75,
and would decrease the aggregate of the service cost and interest cost
components of the net postretirement benefit cost by approximately $20 in fiscal
1999.
Aqua-Chem is also required to make payments to certain pension and employee
benefit funds, some of which are not controlled or administered by Aqua-Chem and
certain foreign subsidiary maintained government-mandated pension plans. Pension
expense of these plans for the year ended March 31, 1999, the three months ended
March 31, 1998, the period August 1 to December 31, 1997 and the period January
1 to July 31, 1997, and for the year ended December 31, 1996 was $365, $22,
$189, $140, and $266, respectively.
Defined Contribution Plans
Aqua-Chem maintains a defined contribution retirement plan which includes a
401(k) savings plan. Substantially all employees who are not members of
collective bargaining groups or employees of National Dynamics are eligible to
participate. Aqua-Chem's retirement contribution equals 4% of eligible
compensation while 401(k) contributions equal 50% of employee contributions to a
maximum Aqua-Chem contribution of 3%. Under provisions of the 401(k) savings
plan, employees may voluntarily contribute a maximum of 17% of eligible
compensation.
Aqua-Chem also maintains a defined contribution retirement plan covering
substantially all nonunion employees of the Company's National Dynamics
Division. Participants may contribute up to 15% of their pay in pretax dollars.
The Company made a matching contribution of 50% of each participant's
contributions, up to 5% of pay since the date of the NDC Acquisition. This
discretionary matching contribution by the Company may vary from year to year.
Vesting in Company contributions is 100% after five years in the plan.
For the year ended March 31, 1999, the three months ended March 31, 1998,
the period August 1, 1997 to December 31, 1997, the period January 1, 1997 to
July 31, 1997, and the year ended December 31, 1996, Aqua-Chem contributed
$1,767, $406, $675, $910 and $1,462, respectively, to these plans.
NOTE 14: SEGMENT INFORMATION
In 1999, Aqua-Chem adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". Aqua-Chem's reportable business segments
are:
Boiler: consists of packaged firetube, commercial and industrial
watertube boilers, burners and aftermarket parts.
Water Technologies: consists of water purification and desalination
systems.
Other: includes the operations of the corporate office, interest
expense on Aqua-Chem's current and long-term debt obligations, interest
income, and any eliminating entries.
47
<PAGE> 50
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aqua-Chem's reportable segments are strategic business units that offer
different products and services. They are managed differently as each business
requires different technology and marketing strategies. The Boiler segment
includes both the operating segments of Cleaver-Brooks and National Dynamics due
to their similarity in products and services, production processes, type of
customer, and the methods used to distribute their products.
Aqua-Chem markets its products through a network of sales representatives,
distributors and an international direct sales force while maintaining
manufacturing facilities in the United States, Canada, and Mexico.
Aqua-Chem does not have any customers who represent 10% or more of
consolidated sales.
<TABLE>
<CAPTION>
PRE-BUY-OUT
POST-BUY-OUT BASIS OF ACCOUNTING BASIS OF ACCOUNTING
---------------------------------------- ---------------------------
YEAR ENDED JANUARY 1 TO AUGUST 1 TO JANUARY 1 TO YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, JULY 31, DECEMBER 31,
SEGMENT 1999 1998 1997 1997 1996
- ------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales:
Boiler.......................... $186,085 $ 28,112 $ 73,974 $ 80,868 $155,527
Water Technologies.............. 34,319 8,694 17,567 18,750 44,025
-------- -------- -------- -------- --------
Total................... $220,404 $ 36,806 $ 91,541 $ 99,618 $199,552
======== ======== ======== ======== ========
Income (loss) before income taxes,
minority interest and
extraordinary item:
Boiler.......................... $ 4,113 $ 639 $ 7,632 $ 4,380 $ 7,797
Water Technologies.............. (515) 41 1,468 78 803
Other........................... (14,406) (1,690) (3,328) (2,012) (3,768)
-------- -------- -------- -------- --------
Total................... $(10,808) $ (1,010) $ 5,772 $ 2,446 $ 4,832
======== ======== ======== ======== ========
Depreciation and amortization:
Boiler.......................... $ 3,709 $ 434 $ 794 $ 1,222 $ 2,178
Water Technologies.............. 1,170 169 222 297 486
Other........................... 537 102 268 171 320
-------- -------- -------- -------- --------
Total................... $ 5,416 $ 705 $ 1,284 $ 1,690 $ 2,984
======== ======== ======== ======== ========
Restructuring charge:
Boiler.......................... $ 5,340 $ -- $ -- $ -- $ 2,036
Water Technologies.............. 158 -- -- -- 710
Other........................... 383 -- -- -- 2,292
-------- -------- -------- -------- --------
Total................... $ 5,881 $ -- $ -- $ -- $ 5,038
======== ======== ======== ======== ========
Total assets:
Boiler.......................... $122,405 $ 70,520 $ 71,803 $ 61,898 $ 65,710
Water Technologies.............. 30,684 25,084 25,143 23,369 21,301
Other........................... 25,142 14,646 27,715 18,872 13,989
-------- -------- -------- -------- --------
Total................... $178,231 $110,250 $124,661 $104,139 $101,000
======== ======== ======== ======== ========
</TABLE>
48
<PAGE> 51
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PRE-BUY-OUT
POST-BUY-OUT BASIS OF ACCOUNTING BASIS OF ACCOUNTING
---------------------------------------- ---------------------------
YEAR ENDED JANUARY 1 TO AUGUST 1 TO JANUARY 1 TO YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, JULY 31, DECEMBER 31,
SEGMENT 1999 1998 1997 1997 1996
- ------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Capital expenditures:
Boiler.......................... $ 2,456 $ 109 $ 337 $ 567 $ 2,339
Water Technologies.............. 328 87 188 1,240 265
Other........................... 403 388 672 388 185
-------- -------- -------- -------- --------
Total................... $ 3,187 $ 584 $ 1,197 $ 2,195 $ 2,789
======== ======== ======== ======== ========
Information by region is as
follows:
Net sales (based on customer
destination):
United States................ $168,764 $ 20,379 $ 63,819 $ 63,157 $130,033
Canada....................... 12,181 4,931 8,993 11,704 16,741
Latin America................ 21,518 6,416 8,575 5,300 14,820
Far East..................... 10,459 1,477 3,784 11,193 19,081
Others....................... 7,482 3,603 6,370 8,264 18,877
-------- -------- -------- -------- --------
Total................... $220,404 $ 36,806 $ 91,541 $ 99,618 $199,552
======== ======== ======== ======== ========
Long-lived assets:
United States................ $ 34,192 $ 29,575 $ 29,534 $ 20,251 $ 19,767
Canada....................... 1,323 1,206 1,229 1,301 1,324
Mexico....................... 775 787 792 797 775
-------- -------- -------- -------- --------
Total................... $ 36,290 $ 31,568 $ 31,555 $ 22,349 $ 21,866
======== ======== ======== ======== ========
</TABLE>
NOTE 15: COMMITMENTS AND CONTINGENCIES
Aqua-Chem and its subsidiaries are involved in legal proceedings, claims
and litigation arising in the ordinary course of business. These claims arise
from a variety of factors, including suits alleging personal injury related to
the use and exposure to certain of Aqua-Chem's products (see the "Legal
Proceedings" section of this Form 10-K for further information). The Company has
successfully resolved most closed claims and cases without payment and is
vigorously defending open claims, and believes that it has strong defenses to
all claims brought to date. Although Aqua-Chem believes the costs and
liabilities associated with these matters will not have a material adverse
effect on their results of operations or financial condition, there can be no
assurances to this effect.
In the ordinary course of business, Aqua-Chem is contingently liable for
performance under letters of credit totaling approximately $3,700 and $3,900 at
March 31, 1999 and December 31, 1997. Management does not expect any material
losses to result from these off-balance sheet instruments, and, therefore,
values of these instruments at zero.
Under the terms of the purchase agreement for the NDC Acquisition,
Aqua-Chem is contractually obligated to perform certain post-sale product work,
such as warranty, for pre-acquisition sales on behalf of the sellers. The costs
incurred by Aqua-Chem are billed to the sellers as the work is incurred. As of
March 31, 1999, Aqua-Chem had recorded a receivable from the sellers of $902 for
services performed which is included in other assets.
As the sellers have retained the contractual liability for post-sale
product obligations for pre-acquisition sales, the accompanying consolidated
balance sheets do not reflect a liability for the future costs to be incurred by
Aqua-Chem for performance of their obligation under the terms of the purchase
agreement.
49
<PAGE> 52
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16: EARNINGS (LOSS) PER SHARE
At December 31, 1997, Aqua-Chem adopted SFAS No. 128, "Earnings per Share"
for all periods presented. The new standard simplified the computation of
earnings per share (EPS) and provides improved comparability with international
standards. SFAS No. 128 replaces primary EPS with "Basic" EPS, which excludes
dilution and is computed by dividing net earnings or (loss) by the
weighted-average number of common shares outstanding for the period. "Diluted"
EPS is computed similarly to primary EPS by reflecting the potential dilution
that occurs if securities or other contracts to issue common stock were
exercised or converted to common stock or resulted in the issuance of common
stock that then shared in the earnings. The following reconciles the numerators
and denominators of the basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1 TO AUGUST 1 TO
MARCH 31, MARCH 31, DECEMBER 31,
1999 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net Income (loss) before extraordinary
item..................................... $ (7,189) $ ( 745) $ 3,309
Less: Preferred Stock Dividends............. 750 155 260
---------- ---------- ----------
Income (loss) after Preferred Stock
dividends and before extraordinary item
applicable to common..................... $ (7,939) $ (900) $ 3,049
========== ========== ==========
Weighted Average Number of Shares............. 1,000,000 1,000,000 1,000,000
========== ========== ==========
Basic Earnings (Loss) Per Share before
extraordinary item.......................... $ (7.94) $ (0.90) $ 3.05
========== ========== ==========
Diluted Earnings (Loss) Per Share:
Income (loss) after Preferred Stock
dividends and before extraordinary item
applicable to common..................... $ (7,939) $ (900) $ 3,049
========== ========== ==========
Weighted Average Number of Shares -- Basic.... 1,000,000 1,000,000 1,000,000
Effect of Dilutive Securities:
Warrants.................................... --(a) --(a) 176,471
Options..................................... --(a) --(a) N.A.
---------- ---------- ----------
Weighted Average Number of Shares --Diluted... 1,000,000 1,000,000 1,176,471
========== ========== ==========
Diluted Earnings (Loss) Per Share before
extraordinary item.......................... $ (7.94) $ (0.90) $ 2.59
========== ========== ==========
</TABLE>
- ---------------
(a) The warrants and options are excluded from the calculation since they would
be antidilutive.
50
<PAGE> 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the directors
and executive officers of the Company. Each director is elected for a one year
term or until such person's successor is duly elected and qualified. The
Company's by-laws provide for six directors. The Board is currently comprised of
four directors; there is one vacancy on the Board to be designated by Management
(as defined) and one vacancy to be designated by J. H. Whitney & Co.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jeffrey A. Miller..................... 48 President, Chief Executive Officer and
Director (Chairman of the Board)
Donna P. Chapman...................... 51 Vice President, Human Resources
Robert D. Endacott.................... 55 Vice Chairman
James A. Feddersen.................... 54 Secretary
James H. Fordyce...................... 40 Director
James W. Hook......................... 62 Director
Daniel J. Johnson..................... 49 Corporate Vice President
President -- Water Technologies Division
James A. Kettinger.................... 41 Senior Vice President and Chief Financial
Officer
William P. Killian.................... 64 Director
Charles J. Norris..................... 52 Vice President and Chief Information Officer
Daniel B. Teich....................... 52 Corporate Vice President
President -- National Dynamics Division
Ronald G. Thimm....................... 43 Treasurer
</TABLE>
Jeffrey A. Miller has served as President and Chief Executive Officer of
the Company since July 1996 and assumed the role of Chairman of the Board in
August, 1997. Prior to joining the Company, Mr. Miller had undertaken permanent
and interim Chief Executive Officer and Chief Operating Officer assignments for
various major industrial companies, including serving as interim President and
Chief Operating Officer of Donnelly Corporation (an automotive supplier) from
October, 1995 to May, 1996, performing various independent consulting and
interim management positions from June, 1993 to October, 1995, and serving as
Group Vice President of the Automotive Products Group of Aeroquip Corporation
(an automotive supplier) from August, 1992 to June, 1993. Mr. Miller also spent
19 years in numerous managerial and executive positions within various business
groups of The General Electric Company, including transportation systems
(locomotives, transit cars, transit equipment), major appliances, mining, oil
well drilling, industrial electronics, industrial controls, factory automation
and automotive.
Donna P. Chapman has served as Vice President, Human Resources since
December 1998. Prior to joining the Company, Ms. Chapman served in a similar
role at General Signal Corporation from 1996 to 1998. From 1989 to 1996, Ms.
Chapman held a variety of human resource positions with the Mead Corporation.
Robert D. Endacott has served as Vice Chairman since January, 1999. Prior
to joining the Company, Mr. Endacott was a founding member of CMR Partners LLC,
a privately held investment and merchant-banking firm based in Miami, Florida
since 1996. From 1992 until 1996 he served as Managing Director of the Armand
Group, Inc., a Chicago-based investment banking firm. See "Certain Relationships
and Related Transactions".
51
<PAGE> 54
James A. Feddersen has served as Secretary of the Company since 1990. Mr.
Feddersen is a shareholder of the law firm of Whyte Hirschboeck Dudek S.C.,
which he joined in 1973. See "Certain Relationships and Related Transactions".
James H. Fordyce has served as a Director of the Company since August,
1997. Mr. Fordyce is a general partner of J. H. Whitney & Co., a private equity
and mezzanine capital investment firm, which he joined in 1996. Mr. Fordyce
serves on the board of directors of several private companies. Mr. Fordyce was
Senior Vice President of Heller Financial, Inc., a commercial finance firm, from
1988 to 1996.
James W. Hook has served as a Director of the Company since January, 1998.
Mr. Hook has been a professor at the Robert J. McCormick School of Engineering
at Northwestern University since 1992. Mr. Hook served as consultant to
MascoTech, Inc. from 1992 to 1996.
Daniel J. Johnson has served as the President of Water Technologies since
September 1997. Prior to joining the Company, Mr. Johnson served as Vice
President and General Manager of MagneTek Corporation -- Power Electronics and
Drives Division from 1995 to 1997, as MagneTek's Division Vice
President -- Operations from 1994 to 1995, and as Vice president of MagneTek's
Engineered Systems Business Unit from 1991 to 1994.
James A. Kettinger joined the Company in May, 1999 as Senior Vice President
and Chief Financial Officer. Mr. Kettinger previously served as President of
Corporate Financial Outsource, LLC, providing general and financial management
consulting from 1996 until joining the Company. Mr. Kettinger has also served in
senior financial management positions for Emmpak Foods, Inc., Tulip Corporation
and Terex Corporation and provided client service while employed by Price
Waterhouse from 1980 to 1996.
William P. Killian has served as a Director of the Company since 1993. Mr.
Killian has served as Vice President -- Corporate Development and Strategy at
Johnson Controls, Inc., a global manufacturer of automotive systems and
controls, since 1987. Mr. Killian is also a director of Gehl Company and Q.E.P.
Company, Inc.
Charles J. Norris has served as Vice President and Chief Information
Officer of the Company since 1996. Prior to joining the Company, Mr. Norris
spent 16 years at Norris Systems Group, Inc., a business systems consulting
company founded and owned by Mr. Norris.
Daniel B. Teich has served as President of the Company's National Dynamics
Division since he joined the Company in August, 1998. From January, 1997 until
he joined the Company, Mr. Teich served as the President of Ransomes America.
During 1996 Mr. Teich served as Managing Director of Pitney Bowes Management
Services Canada, Inc., and from 1993 to 1995 Mr. Teich served as the President
of Monarch Marketing Systems, Inc. On May 19, 1999 the Company announced that
Mr. Teich was resigning effective July 2, 1999 to become President and CEO of a
Kansas City, KS manufacturing firm.
Ronald G. Thimm has served as Treasurer of the Company since 1990, and as
Assistant Treasurer from 1981 to 1990.
Michael R. Stone resigned as a Director of the Company on April 8, 1999.
Mr. Stone served as a Director of the Company since August, 1997. Mr. Stone is a
general partner of J. H. Whitney & Co., a private equity and mezzanine capital
investment firm, which he joined in 1989.
DIRECTOR COMPENSATION
Directors of the Company, other than Messrs. Hook and Killian, receive no
compensation for their services as directors. The Company has entered into
written agreements with Messrs. Hook and Killian with regard to compensation for
their services as directors.
In accordance with the agreement entered into between the Company and Mr.
Killian on December 17, 1997, effective August 1, 1997, for so long as Mr.
Killian remains a director of the Company, the Company will pay him $2,500 on
the first day of February, April, July and November each year, regardless of the
number of meetings held or attended. In addition, the Company agreed to grant
Mr. Killian an option to
52
<PAGE> 55
purchase 600 shares of Common Stock of the Company at a price of $3.75 per share
on August 1 of each year, for so long as Mr. Killian remains a director. Each
option granted to Mr. Killian under this agreement vests and becomes fully
exercisable on July 31 of the year subsequent to the date of grant and, if not
previously exercised, expires and terminates on August 1, 2007; provided,
however, that in the event of a Stock Sale, Reorganization or Termination, as
those terms are defined in the December 17, 1997 Agreement, the option may
expire and terminate prior to such date.
In accordance with the agreement entered into between the Company and Mr.
Hook on February 19, 1998, effective January 23, 1998, the Company paid Mr. Hook
a one-time fee of $20,000 upon his acceptance of such agreement and, for so long
as Mr. Hook remains a director of the Company, the Company will pay him $2,500
on the first day of February, April, July and November each year, regardless of
the number of meetings held or attended. In addition, the Company granted Mr.
Hook an option to purchase 1,125 shares of Common Stock of the Company at a
price of $3.75 per share, which vest and become fully exercisable at the rate of
225 shares per year commencing on December 31, 1998 through and including
December 31, 2002, and which, if not previously exercised, expires and
terminates on February 11, 2008; provided, however, that in the event of a Stock
Sale, Reorganization or Termination, as those terms are defined in the February
19, 1998 agreement, the option may expire and terminate prior to such date.
The options granted to Messrs. Killian and Hook pursuant to their
compensation agreements with the Company are non-statutory options that are not
part of Aqua-Chem's employee Stock Option Plan and are non-transferable, except
through inheritance. Any stock acquired by Messrs. Killian or Hook pursuant to
such options is subject to certain put-call provisions in the event of death or
disability and to a right of first refusal of the Company in the event of any
sale, transfer or other disposition of such stock.
53
<PAGE> 56
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid by the
Company in the fiscal year ended December 31, 1996 and in the twelve months
ended December 31, 1997 and December 31, 1998, to the Company's Chief Executive
Officer and to each of the Company's four other most highly compensated
executive officers as of December 31, 1998 (collectively, including the Chief
Executive Officer, the "Named Executive Officers"). At December 30, 1998, the
Company changed its year end to March 31, 1999. Also included in the following
table is the cash and other compensation paid by the Company for the twelve
months ended March 31, 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(A)
------------------------------------------------- SECURITIES
ALL OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(B) COMPENSATION(C) OPTIONS
- --------------------------- ---- -------- -------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Jeffrey A. Miller.................. 1999(i) $487,500 -- $ 48,061 44,167
Chairman of the Board, Chief 1998 511,569 -- 41,950 44,167
Executive Officer, President 1997(d)(e) 182,736 $304,712 8,189 --
1996(e) -- -- -- --
J. Scott Barton(f)................. 1999(i) $169,336 $ 53,961 $ 10,622 --
Former Vice President, Chief 1998 169,337 -- 87,041 --
Financial Officer 1997(d) 148,086 82,571 96,420 --
1996 124,578 45,351 14,187 --
Rand E. McNally(g)................. 1999(i) $138,470 -- $ 9,055 --
Former Executive Vice President, 1998 192,320 -- 106,726 --
General Manager -- Cleaver-Brooks 1997(d) 182,226 $ 79,528 99,350 --
1996 145,018 61,285 11,588 --
Charles J. Norris.................. 1999(i) $110,000 -- $ 8,912 --
Vice President, Chief Information 1998 111,540 -- 34,341 --
Officer 1997(d) 101,478 $ 34,804 31,534 --
1996 84,320 27,123 3,942 --
Daniel J. Johnson.................. 1999(i) $160,014 $ 41,763 $ 12,438 4,000
President -- Water Technologies 1998 166,169 41,763 6,122 4,000
1997(d) 49,235 -- 494 --
1996 -- -- -- --
Daniel B. Teich(h)................. 1999(i) $140,193 -- $ 3,115 15,470
President -- National Dynamics 1998 88,270 -- -- 15,470
1997(d) -- -- -- --
1996 -- -- -- --
Ronald G. Thimm.................... 1999(i) $ 99,176 -- $ 2,992 --
Treasurer 1998 99,454 -- 9,256 --
1997(d) 89,606 $ 30,977 7,883 --
1996 86,310 27,123 6,541 --
</TABLE>
- ---------------
(a) Certain personal benefits provided by the Company to the Named Executive
Officers are not included in the table as permitted by regulations of the
Commission because the aggregate amount of such personal benefits for each
Named Executive Officer in each year reflected in the table did not exceed
the lesser of $50,000 or 10% of the sum of such officer's salary and bonus
in such year.
(b) Bonuses are reported for the year or period in which earned, although the
bonuses were paid after the end of the year or period shown.
54
<PAGE> 57
(c) "All Other Annual Compensation" includes the following:
<TABLE>
<CAPTION>
MILLER(J) BARTON MCNALLY NORRIS JOHNSON TEICH THIMM
--------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Company match under
Aqua-Chem's 401(k) savings
plan........................ 1999 $ 4,511 $ 3,381 $ 1,029 $ -- $4,430 $3,115 $2,992
1998 4,800 4,800 4,800 -- 4,514 -- 4,492
1997 -- 4,750 4,750 -- -- -- 2,870
1996 -- 4,069 4,750 -- -- -- 2,589
Life insurance premium
payments.................... 1999 $17,880 $ 841 $ 8,026 $ 3,197 $1,608 $ -- $ 95
1998 17,880 841 8,026 3,197 1,608 -- 95
1997 292 10,270(y) 700 390 494 -- 344
1996 -- 5,135 838 488 -- -- 500
Company Retirement Plan
contribution................ 1999 $ 6,400 $ 6,400 $ -- $ 5,715 $6,400 $ -- $5,217
1998 -- 6,400 6,400 6,144 -- -- 4,669
1997 -- 6,400 6,400 6,144 -- -- 4,669
1996 -- 4,983 6,000 3,454 -- -- 3,452
"Change In Control"
bonus(z).................... 1998 $ -- $75,000 $87,500 $25,000 $ -- $ -- $ --
1997 -- 75,000 87,500 25,000 -- -- --
</TABLE>
- ---------------
(y) The premiums paid for Mr. Barton's policy in calendar 1997 were for two
years of coverage.
(z) See "Employment Agreements," below.
(d) Represents aggregate compensation for the twelve months ended December 31,
1997 (combining the seven-month fiscal year ended July 31, 1997 and the
five months ended December 31, 1997).
(e) Mr. Miller became President and Chief Executive Officer pursuant to an
Interim Management Agreement (the "Management Agreement"), dated July 8,
1996, as amended, between the Company and J. Miller Management, Inc.
("JMM"). Amounts paid by the Company under the Management Agreement were
paid to JMM and Mr. Miller was separately compensated by JMM. Mr. Miller
served as President and Chief Executive Officer pursuant to the Management
Agreement until July 31, 1997, when he became employed by the Company. See
"Certain Relationships and Related Transactions."
(f) Mr. Barton served as the Company's Vice President of Finance and Chief
Financial Officer from March, 1994, until his resignation on February 19,
1999. In addition to the compensation listed above Mr. Barton is receiving
severance payments of $14,583 monthly for the 18 months following his
resignation.
(g) Mr. McNally served as the Company's Executive Vice President and General
Manager -- Cleaver-Brooks Division from November, 1994, until his
resignation on November 17, 1998. In addition to the compensation listed
above Mr. McNally is receiving severance payments of $16,668 monthly for
the 12 months following his resignation.
(h) On May 19, 1999 the Company announced Mr. Teich's resignation as
President -- National Dynamics, effective July 2, 1999.
(i) This period includes nine months of compensation included in the "1998" due
to the change in fiscal year end to March 31, as of December 30, 1998.
(j) Mr. Miller's "All Other Annual Compensation" includes travel and lodging
reimbursements of $19,270, $19,270 and $7,897 for 1999, 1998 and 1997,
respectively.
55
<PAGE> 58
OPTIONS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ------------------------------------------------------------------------------------ ---------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTION
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES OR BASE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#) YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------ ----------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Miller............... 44,167 67.3% $3.75 9/08 --(a) $36,217
Daniel J. Johnson............... 4,000 6.1 3.75 9/08 --(a) 3,280
Daniel B. Teich................. 15,470 23.6 5.00 9/08 --(a) 16,862
</TABLE>
(a) A five percent increase in value over the term of the options would produce
a realizable value less than the exercise price.
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUT
-----------------------------
NAME SHARES(A) PERIOD UNTIL PAYOUT THRESHOLD TARGET MAXIMUM
- ---- --------- ------------------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Daniel J. Johnson............. 3,264 Portion payable 6/99 to 6/02 $0 $90,246 N.A.
Charles J. Norris............. 1,479 Portion payable 6/99 to 6/02 $0 $40,912 N.A.
Ronald G. Thimm............... 1,506 Portion payable 6/99 to 6/02 $0 $41,603 N.A.
</TABLE>
(a) These shares were awarded under the Phantom Stock Plan.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with all of the Executive Officers
currently employed by the Company except Ms. Chapman, Mr. Kettinger and Mr.
Thimm. Employment agreements for Ms. Chapman and Mr. Kettinger are currently
being negotiated but have not yet been finalized and executed. These agreements
govern the compensation, benefits and treatment upon termination under various
circumstances, including voluntary termination by either party or termination by
reason of retirement, death or disability.
Compensation under these employment agreements includes a base salary plus
a bonus calculated under the Company's management incentive program as a
percentage of the executive's base salary. Each Named Executive Officer is
entitled to participate in all employee benefit plans made available to the
Company's senior executive officers, including, without limitation, medical,
disability, life insurance, retirement and management incentive plans. The
employment agreements for the Named Executive Officers provide for additional
benefits, such as club membership, vacation, auto allowance and supplemental
life insurance. The employment agreement of Mr. Norris provides for a bonus
calculated as a percentage of base salary (50%) in the event of a Change In
Control, as that term is defined in his employment agreement. In connection with
the Management Buy-Out, in July 1997 Mr. Norris was awarded a bonus of $50,000,
pursuant to such Change In Control provision. Mr. Barton, the Company's former
Vice President and Chief Financial Officer, Mr. Bruce Dickson, the Company's
former Vice President of Human Resources, and Mr. McNally, the Company's former
Executive Vice President and General Manager -- Cleaver-Brooks, also received
Change In Control bonuses of $150,000, $55,000 and $175,000, respectively. Mr.
Barton resigned February 19, 1999, Mr. Dickson died in April, 1998, and Mr.
McNally resigned on November 17, 1998. One-half of the amount of each Named
Executive Officer's Change In Control bonus was paid in August 1997 and is
reflected in the Summary Compensation Table under "All Other Compensation."
Payment of the remaining one-half was contingent upon continued employment with
Aqua-Chem for a period of six months following the Change In Control, was paid
to the Named Executive Officers on February 1, 1998 and is also reflected in the
Summary Compensation Table under "All Other Compensation."
Each employment agreement continues indefinitely until terminated as
provided in the agreement, except for Mr. Miller's employment agreement which is
for a six year term expiring on July 31, 2003, unless
56
<PAGE> 59
terminated prior to the end of such term as provided in the agreement. Each
employment agreement may be terminated by either the Company or the executive at
any time by giving notice as required under the agreement; provided, however,
that under certain conditions the executive may be entitled to certain severance
benefits as described in that executive's individual agreement. Each agreement
also imposes certain confidentiality obligations on the executive and places
restrictions on the executive's involvement in activities that may compete with
the Company and on engaging fellow employees both during employment and
following termination. Violation of such provisions, or other termination for
cause, as defined in the agreements, may result in forfeiture of severance and
other benefits that may otherwise accrue.
RETIREMENT AND SAVINGS PROGRAMS
The Company maintains a defined contribution retirement plan which includes
a 401(k) savings plan. Substantially all employees who are not members of
collective bargaining groups are eligible to participate. The Company's
retirement contribution equals 4% of eligible compensation to certain employee
groups while 401(k) contributions equal 50% of employee contributions to a
maximum Company contribution of 3% of eligible compensation. Under provisions of
the 401(k) savings plan, employees may voluntarily contribute a maximum of 17%
of eligible compensation.
In connection with the NDC Acquisition, the Company assumed the sponsorship
of the National Dynamics Corporation 401(k) Plan and the National Dynamics
Corporation Union Pension Plan that were previously maintained by NDC, for the
benefit of employees of the Company's National Dynamics Division.
The Company also maintains employee incentive plans covering substantially
all employees who are not members of collective bargaining groups. The Company's
contribution to these plans is based upon defined levels of profitability.
The Company maintains unfunded health care plans covering certain eligible
retirees and employees. The estimated costs of postretirement benefits,
principally health care, are accrued over the period the benefits are earned.
The Company's policy is to fund postretirement benefits as incurred.
MANAGEMENT INCENTIVE PLANS
On November 15, 1996, the Company adopted the Aqua-Chem, Inc. Management
Incentive Plan (the "Management Incentive Plan").
The Management Incentive Plan was implemented to provide an incentive to
motivate and reward key management eligible employees for achievement of
short-term results. The incentive payment to participants is calculated through
a formula that utilizes Return On Net Assets, or RONA (subject to adjustment in
the event of certain extraordinary charges, such as acquisitions, divestitures
and/or major new strategic initiatives) as the critical financial performance
measure. Participation is limited to selected senior level employees from each
of the business units and at the corporate level. An Administrative Committee is
responsible for administration of the Management Incentive Plan (including
selection of participants, setting individual incentive opportunity ranging from
10% to 100% of the participant's annual salary, setting financial targets, and
evaluation of performance), subject to the review and final approval of the
Compensation Committee of the Board.
STOCK OPTION PLANS
In connection with the Management Buy-Out, the Company adopted the
Aqua-Chem, Inc. 1997 Stock Option Plan (as amended and restated, the "1997 Stock
Option Plan"), which provides for the grant to key employees, from time to time
of non-statutory stock options to purchase up to an aggregate of 61,919 shares
of Common Stock of Aqua-Chem at exercise prices to be determined in accordance
with the provisions of the 1997 Stock Option Plan. The 1997 Stock Option Plan
provides that between 10% and 20% of the aggregate number of shares of Common
Stock underlying each series of options shall vest each year on the anniversary
of the date of the grant, provided that in the prior fiscal year (i) the option
holder completed at least twelve consecutive Months of Service (as defined in
the 1997 Stock Option Plan), and (ii) the Company attained
57
<PAGE> 60
80% to 100% of a specified target of EBITDA (as defined therein) ($18.3 million
in the current year, subject to adjustment in the event of certain extraordinary
activities, such as the NDC Acquisition (the "EBITDA Goal")). In the event that
an installment does not vest on an anniversary date because the EBITDA Goal is
not met, such installment shall vest on the next succeeding anniversary date as
to which (i) the option holder has completed at least twelve consecutive Months
of Service, and (ii) the Company met the EBITDA Goal by a cumulative amount
greater than or equal to the prior cumulative EBITDA shortfalls. Notwithstanding
the foregoing, options granted under the 1997 Stock Option Plan shall vest
automatically on the seventh anniversary of the date of the grant regardless of
performance criteria. The option agreement for certain employees provide the
opportunity for accelerated vesting in the event of the achievement of certain
Division goals.
On August 4, 1998 the Board adopted the Aqua-Chem, Inc. 1998 Stock Option
Plan (the "1998 Stock Option Plan") which provides for the grant to key
advisors, consultants and employees, from time to time, of non-statutory stock
options to purchase up to an aggregate of 61,919 shares of Common Stock at
exercise prices to be determined in accordance with the provisions of the 1998
Stock Option Plan. Options granted under the 1998 Stock Option Plan shall vest
on seventh anniversary of the date of grant, but may be accelerated subject to
the terms of a written agreement entered into between the Company and the
optionee at the time of the grant.
PHANTOM STOCK PLAN
On January 23, 1998, the Board approved the Aqua-Chem, Inc. 1998 Phantom
Stock Plan (the "Phantom Stock Plan"), effective April 1, 1998.
The objective of the Phantom Stock Plan is to provide certain senior level
executives and officers with the opportunity to share in future increases in the
value of the Company's Common Stock. The Board (or a committee appointed by the
Board) selects participants and determines the number of shares of phantom stock
to be awarded to each participant. Participants who remain employed by the
Company as of the scheduled payment dates (with certain exceptions) become
entitled to receive the value of their phantom stock awards for that year if a
specified percentage of the EBITDA goal (as specified in the Phantom Stock Plan)
is attained (90% in the current year, subject to decrease in future years). The
value of a participant's phantom stock is determined by multiplying the number
of shares of phantom stock initially awarded to the participant that year by the
value of a share of Common Stock determined in accordance with a formula set
forth the Phantom Stock Plan which is based a multiple of Actual EBITDA with
certain balance sheet adjustments. Two-thirds of the value of a participant's
phantom stock award is scheduled to be paid in the June following the end of the
period to which the award relates, with the remaining third to be paid in the
June of the subsequent year. Regardless of the foregoing, in the event that the
amount that would have been paid out at the end of the 1998 or 1999 calendar
years under the Executive Management Incentive Plan is greater than the amount
payable under the Phantom Stock Plan as of June immediately following the end of
the twelve-month period to which the award relates (i.e. two-thirds of the total
value of the award), then the participant shall be entitled to the amount that
would have been payable under the Executive Management Incentive Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
Series A and Series B Preferred. The Company's Series A Preferred and
Series B Preferred are owned as follows:
<TABLE>
<CAPTION>
SERIES A PREFERRED SERIES B PREFERRED
-------------------- --------------------
NUMBER PERCENT NUMBER PERCENT
OF SHARES OF CLASS OF SHARES OF CLASS
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Lyonnaise American Holding, Inc....... 41.6 80.0% 104 80.0%
Gestra Corporation, N.V............... 10.4 20.0% 26 20.0%
</TABLE>
58
<PAGE> 61
Common and Series C Preferred. All (100%) of the outstanding shares of
Common and Series C Preferred are held by Rush Creek LLC ("Rush Creek").
Pursuant to the Operating Agreement of Rush Creek, shares of Common and Series C
Preferred (and, in the case of the Whitney Subordinated Debt Fund, L.P., the
Warrant) are allocated to each member's account. The following table sets forth
the beneficial ownership as of the date of this filing of the outstanding Common
and Series C Preferred by (i) each person who is known to the Company to be the
beneficial owner of five percent or more of the outstanding classes shown; (ii)
each director; (iii) each of the Named Executive Officers; and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SERIES C
COMMON STOCK PREFERRED STOCK TOTAL VOTING POWER
----------------------- ----------------------- ----------------------
NUMBER OF NUMBER OF
SHARES PERCENT SHARES PERCENT NUMBER PERCENT
BENEFICIALLY OF BENEFICIALLY OF OF OF
OWNED(A) CLASS(B) OWNED(A) CLASS(B) VOTES(C) VOTES(B)(E)
------------ -------- ------------ -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Whitney Equity Partners, L.P.(d).... 510,000 51.0% 1,743 63.3% 511,743 51.0%
Jeffrey A. Miller(f)(g)............. 449,202 44.9 928 33.7 450,130 44.9
James H. Fordyce(f)................. -- -- -- -- -- --
William Killian(h).................. 8,166 * 17 * 8,183 *
Robert D. Endacott(i)............... 8,166 * 17 * 8,183 *
Charles Norris(j)................... 16,300 1.6 34 1.2 16,334 1.6
All directors and executive officers
as a group (consisting of 12
persons).......................... 490,000 49.0 1,012 36.7 490,012 49.0
</TABLE>
- ---------------
(a) "Beneficial ownership" is defined under regulations of the Commission as
the power directly or indirectly, through any contract, arrangement,
understanding, relationship, or otherwise to vote (or direct the voting of)
or dispose of (or direct the disposition of) stock, including stock of
which an individual has the right to acquire beneficial ownership (as
defined) within 60 days. In the above table, beneficial ownership reflects
the number of shares of Common or Series C Preferred allocated to the Rush
Creek capital account of the entity and individual members shown.
Fractional shares are not shown in the table, rather, the numbers of shares
are rounded to the nearest whole share.
(b) Asterisk (*) denotes less than 1%.
(c) Voting power is combined because each share of Common and each share of
Series C Preferred has one (1) vote per share.
(d) 177 Broad Street, Stamford, Connecticut 06901. Whitney Equity Partners,
L.P. ("WEP") has 510,000 shares of Common and 1,743 shares of Series C
Preferred allocated to its Rush Creek capital account. WEP is a manager of
Rush Creek (see Note (f)).
(e) 177 Broad Street, Stamford, Connecticut 06901. The Whitney Subordinated
Debt Fund, L.P., a fund managed by J. H. Whitney & Co. ("WSDF") owns a
Warrant to purchase up to 176,471 shares of Common Stock at $.01 per share
allocated to its Rush Creek capital account. WSDF is a manager of Rush
Creek (see Note (f)). If the Warrant were exercised in full, the voting
power (with respect to allocated shares of Series C Preferred and Common)
of all other entities, individuals, and the group listed in the above table
would be diluted, with the resulting voting percentages as follows:
<TABLE>
<CAPTION>
RESULTING
VOTING POWER
ASSUMING
BENEFICIAL OWNER EXERCISE OF WARRANT
---------------- -------------------
<S> <C>
WEP............. 43.4%
WSDF............ 15.0
Jeffrey A.
Miller (see
Note (g),
below)........ 38.2
Charles Norris
(see Note (j),
below)........ 1.4
All directors
and executive
officers as a
group
(consisting of
12 persons)... 41.6
</TABLE>
59
<PAGE> 62
(f) There are four managers of Rush Creek: WEP, WSDF, and Messrs. Miller and
Fordyce. As managers of Rush Creek, these entities and individuals may be
deemed to share voting and dispositive power with respect to all (100%, or
1,000,000 shares) of Common and all (100%, or 2,755 shares) Series C
Preferred held by Rush Creek. Each such individual or entity disclaims
beneficial ownership with respect to all 1,000,000 shares of Common and all
2,755 shares of Series C Preferred other than those shares set forth
opposite their respective names in the above table; in addition, Mr. Miller
further disclaims beneficial ownership with respect to certain of the
shares set forth opposite his name in the above table. See Note (g), below.
(g) These shares are beneficially owned by two entities controlled by Mr.
Miller. The Jeffrey A. Miller Family LLC ("Miller LLC") is a limited
liability company of which Jeffrey A. Miller is the manager and sole voting
member. The Miller LLC is a member of Rush Creek and has 130,001 shares of
Common and 269 shares of Class C Preferred allocated to its Rush Creek
capital account. The Jeffrey A. Miller Trust u/a/d/ May 10, 1997 ("Miller
Trust") is a revocable trust of which Jeffrey A. Miller is the grantor,
beneficiary, and trustee. The Miller Trust is a member of Rush Creek and
has 319,201 shares of Common and 659 shares of Series C Preferred allocated
to its Rush Creek capital account.
(h) Mr. Killian is a member of Rush Creek and has 8,166 shares of Common and 17
shares of Series C Preferred allocated to his Rush Creek capital account.
(i) Mr. Endacott is a member of Rush Creek and has 8,166 shares of Common and
17 shares of Series C Preferred allocated to his Rush Creek capital
account.
(j) These shares are beneficially owned by two entities controlled by Mr.
Norris. The Charles J. Norris Family LLC ("Norris LLC") is a limited
liability company of which Mr. Norris is the manager and sole voting
member. The Norris LLC is a member of Rush Creek and has 3,260 shares of
Common and 7 shares of Series C Preferred allocated to its Rush Creek
capital account. The Charles Norris Trust u/a/d/ November 21, 1997 ("Norris
Trust") is a revocable trust of which Mr. Norris is the grantor,
beneficiary, and trustee. The Norris Trust is a member of Rush Creek and
has 13,040 shares of Common and 27 shares of Series C Preferred allocated
to its Rush Creek capital account.
VOTING AGREEMENT
Pursuant to a Stockholders' and Members' Agreement among the stockholders
of the Company and the Members of Rush Creek, the parties thereto have agreed to
vote to elect a six-member board of directors consisting of (i) two directors
designated by J. H. Whitney & Co. (or WEP and WSDF) (currently, Mr. Fordyce and
one vacancy); (ii) two directors designated by certain senior executive officers
of the Company ("Management") (currently, Mr. Miller; and one vacancy); and
(iii) two independent directors who are agreeable to each of J. H. Whitney & Co.
and Management (currently, Messrs. Hook and Killian). The Stockholders' and
Members' Agreement further provides that, in the event of a material breach of
certain documents entered into by the parties in connection with the Management
Buy-Out ("Transaction Documents"), the parties agree to increase the number of
directors to nine and to elect three additional directors designated by J. H.
Whitney & Co. (or WEP and WSDF). Each Member of Rush Creek, other than WSDF,
currently has one vote per Membership Unit. However, pursuant to the Rush Creek
Operating Agreement, the Membership Units of Rush Creek are designated as either
"Institutional Investor Membership Units" (which includes the Membership Units
held by WEP and WDSF) or "Management Membership Units" (which includes the
Membership Units held by the Miller LLC, the Miller Trust, the Norris LLC, and
the Norris Trust). The election of the Managers of Rush Creek is subject to a
provision of the Operating Agreement which requires that two managers shall be
elected by a majority of the Institutional Investor Membership Units and two
managers shall be elected by a majority of the Management Membership Units. The
Operating Agreement further provides that, in the event of a material breach of
a Transaction Document, one additional manager shall be designated by a majority
of the Institutional Investor Membership Units.
60
<PAGE> 63
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT
The Company entered into an Interim Management Agreement ("Management
Agreement") with J. Miller Management, Inc. ("JMM") dated July 8, 1996, pursuant
to which the Company engaged JMM to provide the services of Mr. Miller as the
Company's President and Chief Executive Officer. Mr. Miller is the President and
co-owner of JMM. The Management Agreement provided that Mr. Miller would serve
as Interim Chief Executive Officer, provide management services and expertise to
the Company, and manage the operations of the Company, commencing on July 8,
1996. The Management Agreement was terminable at will by either party; however,
if the Company were to have terminated the Management Agreement without cause it
would have been liable for all compensation due thereunder. If the Company were
to have terminated the Management Agreement with cause (including Mr. Miller's
failure to obtain government security clearance) it would have been liable only
for accrued obligations through the date of termination.
The Management Agreement was terminated on July 31, 1997 when Mr. Miller
became employed by, and entered into an employment agreement with, the Company
(see "Management -- Employment Agreements"). The total cost to the Company for
Mr. Miller's services under the Management Agreement for 1997 was approximately
$1,514,000, including incentive compensation of approximately $267,000 and a
Sale Bonus of $861,000. The total cost to the Company for Mr. Miller's services
under the Management Agreement for 1996 was approximately $286,000.
OTHER
Two of the directors of the Company (Messrs. Fordyce and Miller) are
managers of Rush Creek, which holds 100% of the Common and Series C Preferred
Stock of the Company. One of the directors of the Company (Mr. Fordyce) is a
general partner of J. H. Whitney & Co., which manages Whitney Equity Partners,
L.P., a principal owner of Rush Creek. See "Capital Stock and Principal
Stockholders -- Principal Stockholders." The Company has agreed to pay J. H.
Whitney & Co. a monitoring fee of $50,000 annually on the first business day of
each year commencing in 1998, and an annual recognition fee of $25,000, also
commencing in 1998. In exchange for these fees, J.H. Whitney & Co. performs
financial and strategic investment advisory services for the Company. The
recognition fee is accrued annually and will become payable upon the occurrence
of an initial public offering or an "Organic Transaction" (as defined in the
Certificate to include a sale of substantially all the assets of the Company or
a merger of the Company or other similar transaction) or an initial public
offering of the Company's securities.
James A. Feddersen, Secretary of Aqua-Chem, is a shareholder in the law
firm of Whyte Hirschboeck Dudek S.C., which performs legal services for
Aqua-Chem. Through Rush Creek, Mr. Feddersen owns approximately 8,166 shares, or
approximately 0.8% of the outstanding Common Stock and approximately 17 shares,
or approximately 0.6%, of the outstanding Series C Preferred Stock. See "Capital
Stock and Principal Stockholders -- Common and Series C Preferred" and "Legal
Matters." For fiscal year ended March 31, 1999, the Company paid $1,439,046 in
fees to Whyte Hirschboeck Dudek S.C.
Robert D. Endacott, Vice Chairman of Aqua-Chem, was a founding member of
CMR Partners, LLC, ("CMR") which provided consulting services to the Company
since 1997. Through Rush Creek, Mr. Endacott owns approximately 8,166 shares, or
approximately 0.8% of the outstanding Common Stock and approximately 17 shares,
or approximately 0.6%, of the outstanding Series C Preferred Stock. See "Capital
Stock and Principal Stockholders -- Common and Series C Preferred" During the
fiscal year ended March 31, 1999 CMR was paid a retainer fee totaling $175,500.
Subsequent to March 31, 1999, and prior to Mr. Endacott joining the Company as
an employee on June 1, 1999, CMR was paid retainer fees totaling $30,000. CMR
was paid a success fee in connection with the NDC Acquisition of $377,500.
Beginning June 1, 1999, Mr. Endacott will receive a salary of $13,500 per month,
but will not be eligible for any of the Company benefits.
61
<PAGE> 64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS INCLUDED IN ITEM 8
See "Index to Financial Statements of Aqua-Chem, Inc." set forth in Item 8,
"Financial Statements and Supplementary Data."
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE INCLUDED IN ITEM 14
Schedule of the Company and Consolidated Subsidiaries
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Schedule II Valuation and qualifying accounts for the year ended March
31, 1999, the three months ended March 31, 1998, the five
months ended December 31, 1997, the seven months ended July
31, 1997 and the year ended December 31, 1996............... 63
SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE
Schedule I Condensed financial information of registrant...............
Schedule III Real estate and accumulated depreciation....................
Schedule IV Mortgage loans on real estate...............................
Supplemental Information Concerning Property -- Casualty....
Schedule V Insurance Operations........................................
</TABLE>
62
<PAGE> 65
AQUA-CHEM, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------
BALANCE CHARGED CHARGED
AT TO COSTS TO BALANCE
BEGINNING AND OTHER AT END
OF PERIOD EXPENSES ACCOUNT DEDUCTIONS OF PERIOD
--------- -------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts receivable:
April 1 to March 31, 1999.................. $548 $ 27 $300(a) $ 27 $ 848
==== ==== ==== ==== =========
January 1 to March 31, 1998................ $638 $ 74 $ -- $164 $ 548
==== ==== ==== ==== =========
August 1 to December 31, 1997.............. $684 $ 28 $ -- $ 74 $ 638
==== ==== ==== ==== =========
January 1 to July 31, 1997................. $659 $136 $ -- $111 $ 684
==== ==== ==== ==== =========
Year ended December 31, 1996............... $596 $205 $ -- $142 $ 659
==== ==== ==== ==== =========
</TABLE>
- ---------------
(a) Reflects the balance acquired as a result of the acquisition of National
Dynamics Corporation.
REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on January 12, 1999 regarding a
change in fiscal year. No financial statements were filed with such report.
EXHIBITS
A list of the exhibits included as part of this Form 10-K is set forth in
the Index to Exhibits that immediately precedes such exhibits, which is
incorporated herein by reference.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The company has not sent and does not intend to send any annual report or
proxy material to security holders.
63
<PAGE> 66
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Aqua-Chem, Inc.
has duly caused this Registration Statement on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Milwaukee,
State of Wisconsin, on this 29th day of June, 1999.
By:
----------------------------------
Name: James A. Kettinger
Title: Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and as of the date indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
Principal Executive Officer:
President and Chief Executive Officer
- -----------------------------------------------------
Jeffrey A. Miller
Principal Financial and Accounting Officer:
Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer
James A. Kettinger
Board of Directors:
Director (Chairman of the Board)
- -----------------------------------------------------
Jeffrey A. Miller
Director
- -----------------------------------------------------
James H. Fordyce
Director
- -----------------------------------------------------
James W. Hook
Director
- -----------------------------------------------------
William P. Killian
</TABLE>
64
<PAGE> 67
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1(1) -- Asset Purchase Agreement dated May 28, 1998 among
Aqua-Chem, Inc., National Dynamics Corporation, and
certain shareholders of National Dynamics Corporation
3.1(1) -- Aqua-Chem, Inc. Certificate of Incorporation
(incorporating amendments)
3.2(1) -- Aqua-Chem, Inc. Bylaws
4.1(1) -- Indenture of Trust dated June 23, 1998 between Aqua-Chem,
Inc. and United States Trust Company of New York, as
Trustee
4.2(1) -- Form of Aqua-Chem, Inc. 11 1/4% Senior Subordinated Note
Due 2008, to be issued in the Exchange Offer
4.3(1) -- Form of Aqua-Chem, Inc. 11 1/4% Senior Subordinated Note
Due 2008 issued on June 23, 1998
4.4(1) -- Common Stock Purchase Warrant dated July 31, 1997
9.1(1) -- Stockholders' and Members' Agreement dated July 31, 1997
among the Stockholders of Aqua-Chem, Inc. and the Members
of Rush Creek, LLC
10.1(1) -- Credit Agreement dated June 23, 1998 among Aqua-Chem,
Inc. and Comerica Bank
10.2(1) -- Registration Rights Agreement dated June 18, 1998 among
Aqua-Chem, Inc., Credit Suisse First Boston Corporation,
and Bear, Stearns & Co. Inc.
10.3(1) -- Employment Agreement dated July 31, 1997 between
Aqua-Chem, Inc. and Jeffrey A. Miller, as amended
10.4(1) -- Employment Agreement dated February 5, 1997 between
Aqua-Chem, Inc. and Rand E. McNally, as amended
10.5(1) -- Employment Agreement dated January 20, 1997 between
Aqua-Chem, Inc. and J. Scott Barton, as amended
10.6(1) -- Employment Agreement dated January 7, 1997 between
Aqua-Chem, Inc. and Charles J. Norris, as amended
10.7(1) -- Employment Agreement dated September 1, 1997 between
Aqua-Chem, Inc. and Daniel L. Johnson, as amended
10.8(1) -- Interim Management Agreement dated July 8, 1996 between
Aqua-Chem, Inc., J. Miller Management, Inc. and Jeffery
A. Miller
10.9(1) -- Aqua-Chem, Inc. 1997 Stock Option Plan Amended and
Restated
10.10(1) -- Aqua-Chem, Inc. Management Incentive Plan approved
November 15, 1996
10.11(1) -- Aqua-Chem, Inc. Executive Management Incentive Plan
approved November 15, 1996
10.12(1) -- Aqua-Chem, Inc. 1998 Phantom Stock Plan
10.13(1) -- Amendment to Interim Management Agreement between
Aqua-Chem, Inc., J. Miller Management, Inc. and Jeffrey
A. Miller
10.14(1) -- Aqua-Chem, Inc. 11 1/4% Senior Subordinated Notes Due
2008, Purchase Agreement dated June 18, 1998
10.15(1) -- Consulting Agreement with Verlyn Westra dated June 19,
1998
10.17(1) -- Amended and Restated Securities Purchase Agreement dated
December 5, 1997 by and among Rush Creek, LLC, A-C
Acquisition Corp., CB-Kramer Sales and Service, Inc.,
Whitney Subordinated Debt Fund, LP, and Whitney Equity
Partners, LP
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.18(1) -- First Amendment and Consent Agreement dated June 23,
1998, by and among Rush Creek, LLC, A-C Acquisition
Corp., CB-Kramer Sales and Service, Inc., Whitney
Subordinated Debt Fund, LP, and Whitney Equity Partners,
LP
10.19(1) -- Letter Agreement with William P. Killian dated December
17, 1997
10.20(1) -- Letter Agreement with James W. Hook dated February 11,
1998
10.21(1) -- Agreement and Plan of Reorganization dated July 31, 1997
among Lyonnaise American Holding, Inc., Gestra
Corporation N.V., Rush Creek LLC, Aqua-Chem, Inc., A-C
Acquisition Corp. and Jeffrey A. Miller
[OMITTED PROVISIONS SUBJECT TO CONFIDENTIAL TREATMENT BY
ORDER OF THE SECURITIES AND EXCHANGE COMMISSION]
10.22(1) -- Amendment dated June 22, 1998 to Agreement and Plan of
Reorganization among Lyonnaise American Holding, Inc.,
Gestra Corporation N.V., Rush Creek LLC, Aqua-Chem, Inc.,
A-C Acquisition Corp. and Jeffrey A. Miller
[OMITTED PROVISIONS SUBJECT TO CONFIDENTIAL TREATMENT BY
ORDER OF THE SECURITIES AND EXCHANGE COMMISSION]
10.23(1) -- Employment Agreement dated August 13, 1998 between
Aqua-Chem, Inc. and Daniel B. Teich
10.24(1) -- Aqua-Chem, Inc. 1998 Stock Option Plan
10.26 -- Stock Option Agreement dated September 9, 1998 between
Aqua-Chem, Inc. and Daniel J. Johnson
10.28 -- Stock Option Agreement dated September 9, 1998 between
Aqua-Chem, Inc. and Jeffrey A. Miller
10.29 -- Stock Option Agreement dated September 18, 1998 between
Aqua-Chem, Inc. and Daniel B. Teich
10.30 -- Severance Agreement dated December 29, 1998 between
Aqua-Chem, Inc. and Rand E. McNally
10.31 -- Severance Agreement dated February 8, 1999 between
Aqua-Chem, Inc. and J. Scott Barton
10.32 -- Second Amendment to Credit Agreement dated June 23, 1998
among Aqua-Chem, Inc. and Comerica Bank
16.1(1) -- Letter regarding change in Certifying Accountant
21.1(1) -- Subsidiaries of the Registrant
23.1(1) -- Consent of Arthur Andersen LLP
23.2(1) -- Consent of KPMG Peat Marwick LLP, Milwaukee, Wisconsin
24.1(1) -- Powers of Attorney of Directors and Officers of
Aqua-Chem, Inc.
25.1(1) -- Statement of Eligibility of United States Trust Company
of New York as Trustee under the Indenture on Form T-1
under the Trust Indenture Act of 1939, as amended
27.1 -- Financial Data Schedule (12 months ended 3/31/99)
</TABLE>
- ---------------
(1) Previously filed as an exhibit to registration statement on Form S-4 dated
January 5, 1999.
<PAGE> 1
EXHIBIT 10.26
AQUA-CHEM, INC.
AMENDED AND RESTATED
1997 STOCK OPTION PLAN
NON-STATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT, made and entered into as of the 9th day of September,
1998, by and between AQUA-CHEM, INC., a Delaware corporation (the
"Corporation"), and Daniel J. Johnson (the "Optionee").
WITNESSETH:
WHEREAS, the Corporation has adopted the Aqua-Chem, Inc. Amended and
Restated 1997 Stock Option Plan ("Plan"), the terms of which, to the extent not
stated herein, are specifically incorporated by reference in this Agreement; and
WHEREAS, one of the purposes of the Plan is to permit the granting of
options to purchase shares of the Corporation's common Stock, $.01 par value
("Common Stock"), to certain key employees of the Corporation and its
affiliates; and
WHEREAS, the Optionee is employed by the Corporation in a key capacity,
and the Corporation desires the Optionee to remain in such employ, and to
provide him with the opportunity to acquire Common Stock in order to increase
his incentive and personal interest in the welfare of the Corporation.
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements herein set forth, the parties hereby mutually covenant and agree
as follows:
1. GRANT OF OPTION. Subject to the terms and conditions of the Plan
and this Agreement, the Corporation grants to the Optionee an option ("Option")
to purchase from the Corporation all or any part of the aggregate amount of Four
Thousand (4,000) shares of Common Stock (the "Optioned Shares"). The Option is
intended to and shall constitute a non-statutory stock option ("Non-statutory
Option") and shall not constitute or be treated as an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended ("Code"). Unless terminated earlier in accordance with the Plan to the
extent not exercised, this Option shall terminate and expire ten (10) years
after the date of grant. The Options granted hereunder shall be subject to the
vesting provisions set forth on Schedule A attached hereto.
2. OPTION PRICE. The price to be paid for the Optioned Shares shall
be Three and 75/100 Dollars ($3.75) per share.
<PAGE> 2
3. DESIGNATION OF BENEFICIARY. Subject to the Optionee's right to
revoke or change such designation in accordance with Section 7.3 of the Plan and
subject to the other terms and conditions thereof, the person whose name appears
on the signature page hereof after the caption "Beneficiary" or any successor
designated by the Optionee in accordance therewith shall be entitled to exercise
the Option, to the extent it is exercisable, after the death of the Optionee.
4. PUT RIGHT. In the event Optionee's employment by the Corporation
is terminated for any reason whatsoever, whether voluntarily, involuntarily,
with cause or without cause, Optionee shall, for a period of ninety (90) days
thereafter, have the right to require the Corporation to purchase all or any
portion of the Common Stock owned by the Optionee at the Market Price (as
determined under Section 5.4 of the Plan). Optionee shall exercise his put right
by delivering written notice to the Corporation within such period. The
Corporation and Optionee shall consummate the transaction (the "Closing") on a
date (the "Closing Date") and at a time mutually acceptable to Corporation and
Optionee, but in no event later than thirty (30) days following the date of the
Optionee's notice of exercise of the put right. The Corporation shall pay the
aggregate Market Price in cash at Closing, or, at its discretion, the
Corporation may elect to pay the Market Price in five (5) equal annual
installments commencing on the Closing Date and on each of the next four
subsequent anniversary dates thereof (each such date shall be referred to as a
"Redemption Date"). The outstanding balance owed pursuant to the Corporation's
payment obligation hereunder shall accrue interest at a rate equal to the prime
rate on the Closing Date (thereafter adjusted annually to the prime rate in
effect on the first business day of each calendar year) as published in the
Midwest edition of the Wall Street Journal or any successor publication.
Notwithstanding the Corporation's foregoing obligation to redeem
Optionee's Common Stock, if the funds of the Corporation legally available for
the redemption of Optionee's Common Stock are insufficient to redeem the total
number of shares required to be redeemed pursuant to this Section 4 on any
Redemption Date, those funds which are legally available for the Corporation
shall be used to redeem the maximum possible number of shares to be redeemed on
the Redemption Date. In such event, the shares of Optionee's Common Stock not
redeemed shall remain outstanding. The balance of the shares required to be
redeemed on any such Redemption Date, but not redeemed, shall be added to the
number of shares required to be redeemed on the next following Redemption Date
and shall be redeemed on that date, subject to provisions of this Section 4.
5. ADJUSTMENTS IN CHANGES IN CAPITALIZATION. In the event the
Corporation issues a dividend or other distribution (whether in the form of
cash, stock or other property), engages in a recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of Common Stock or other securities of the
Corporation, issuance of warrants or other rights to purchase Common Stock or
other securities of the Corporation, or other similar corporate transaction or
event that effects the Common Stock such that an adjustment is determined by the
Board to be appropriate in order to prevent dilution
-2-
<PAGE> 3
or enlargement of benefits or potential benefits intended to be made available
under the Plan, then the Board may, in such a manner as it may deem equitable,
adjust any or all of the (i) number and type of awards of stock subject to the
Plan and which thereafter may be the subject of awards under the Plan; (ii)
number and type of stock subject to outstanding awards; and (iii) grant,
purchase or exercise price with respect to any award, or, if deemed appropriate,
make provision for a cash payment to the holder of an outstanding award.
6. INTERPRETATION BY COMMITTEE. As a condition of the granting of the
Option, the Optionee agrees, for himself and his legal representatives or
guardians, that this Agreement shall be interpreted by the Committee and that
any interpretation by the Committee of the terms of this Agreement and any
determination made by the Committee pursuant to this Agreement shall be final,
binding and conclusive.
7. EXECUTION IN COUNTERPARTS. This Agreement may be executed by the
parties hereto in counterparts, each of which shall be deemed to be an original,
but all such counterparts shall constitute one and the same instrument, and all
signatures need not appear on any one counterpart.
IN WITNESS WHEREOF, the parties have executed this agreement as of the
day and year first above written.
AQUA-CHEM, INC.
("CORPORATION")
By: Jeffrey A. Miller
---------------------------------------
Jeffrey A. Miller
Title: Chairman & CEO
Daniel J. Johnson
-------------------------------------------
Daniel J. Johnson , Optionee
--------------
Beneficiary: Merry Noel Johnson
-----------------------------
Address of Beneficiary: 13120 Wrayburn Rd.
------------------
Elm Grove, WI 53122
------------------------------------------
Beneficiary's Tax Identification
No.:
-------------------------------------
-3-
<PAGE> 4
SCHEDULE A
ACCELERATED VESTING SCHEDULE
The Options granted hereunder shall, subject to the continuing
employment requirements of the Plan, be eligible for accelerated vesting at the
rate of 800 per year as hereinafter set forth provided that the Operations Goal
is achieved for the year in question. The Operations Goal will be measured in
terms of the annual achievement of the projected Water Tech EBITDA as
hereinafter set forth:
FYE March 31, 1999 $3,359,000
FYE March 31, 2000 $5,152,000
FYE March 31, 2001 $5,924,000
FYE March 31, 2002 $7,915,000
FYE March 31, 2003 $9,231,000
If in any of the above referenced years at least 80% of the Water Tech
projected EBITDA for such year is not in fact earned, no vesting will occur for
such year. As actual Water Tech EBITDA for any year increases from 80% to 100%
or more of projected Water Tech EBITDA, the percentage of Options actually
vesting on March 31 of such year will increase from 400 (50% of the eligible
800) to 800 (100% of the eligible 800). If on March 31 of any of the above
referenced years any of the Options eligible to vest on March 31 of such year
(or March 31 of any prior year) have not vested in full due to the failure to
achieve the projected Water Tech EBITDA in the current year (or any prior year),
then any such Options shall nevertheless again be eligible to vest on March 31
of such current year provided that cumulative Water Tech EBITDA for the current
year and all prior years is at least 80% of cumulative projected Water Tech
EBITDA. As actual cumulative Water Tech EBITDA increases from 80% to 100% or
more of cumulative projected Water Tech EBITDA as of a given March 31, the
percentage of the Options (that have not vested due to shortfalls in actual
annual Water Tech EBITDA) vesting on March 31 of such year will increase from
50% to 100%. The Board shall have the right to adjust the Operations Goal in the
event of any acquisitions or divestitures relating to the Water Tech Division or
the occurrence of any other events which, in the judgment of the Board,
equitably require that such an adjustment be made.
<PAGE> 1
Exhibit 10.28
AQUA-CHEM, INC.
1997 STOCK OPTION PLAN
NON-STATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT, made and entered into as of the 9th day of September,
1998, by and between AQUA-CHEM, INC., a Delaware corporation (the
"Corporation"), and Jeffrey A. Miller (the "Optionee").
WITNESSETH:
WHEREAS, the Corporation has adopted the Aqua-Chem, Inc. Amended and
Restated 1997 Stock Option Plan ("Plan"), the terms of which, to the extent not
stated herein, are specifically incorporated by reference in this Agreement; and
WHEREAS, one of the purposes of the Plan is to permit the granting of
options to purchase shares of the Corporation's common Stock, $.01 par value
("Common Stock"), to certain key employees of the Corporation and its
affiliates; and
WHEREAS, the Optionee is employed by the Corporation in a key capacity,
and the Corporation desires the Optionee to remain in such employ, and to
provide him with the opportunity to acquire Common Stock in order to increase
his incentive and personal interest in the welfare of the Corporation.
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements herein set forth, the parties hereby mutually covenant and agree
as follows:
1. GRANT OF OPTION. Subject to the terms and conditions of the Plan
and this Agreement, the Corporation grants to the Optionee an option ("Option")
to purchase from the Corporation all or any part of the aggregate amount of
forty-four thousand one hundred sixty seven (44,167) shares of Common Stock (the
"Optioned Shares"). The Option is intended to and shall constitute a
non-statutory stock option ("Non-statutory Option") and shall not constitute or
be treated as an incentive stock option within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended ("Code"). Unless terminated earlier in
accordance with the Plan to the extent not exercised, this Option shall
terminate and expire ten (10) years after the date of grant. The
<PAGE> 2
Options granted hereunder shall be subject to the vesting provisions set forth
on Schedule A attached hereto.
2. OPTION PRICE. The price to be paid for the Optioned Shares shall be
Three and 75/100 Dollars ($3.75) per share.
3. DESIGNATION OF BENEFICIARY. Subject to the Optionee's right to
revoke or change such designation in accordance with Section 7.3 of the Plan and
subject to the other terms and conditions thereof, the person whose name appears
on the signature page hereof after the caption "Beneficiary" or any successor
designated by the Optionee in accordance therewith shall be entitled to exercise
the Option, to the extent it is exercisable, after the death of the Optionee.
4. ADJUSTMENTS IN CHANGES IN CAPITALIZATION. In the event the
Corporation declares a stock dividend, engages in a recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation, split-up,
spin-off, combination, repurchase or exchange of Common Stock or other
securities of the Corporation, or other similar corporate transaction or event
that effects the Common Stock such that an adjustment is determined by the Board
to be appropriate in order to prevent dilution or enlargement of benefits or
potential benefits intended to be made available under the Plan, then the Board
may, in such a manner as it may deem equitable, adjust any or all of the (i)
number and type of awards of stock subject to the Plan and which thereafter may
be the subject of awards under the Plan; (ii) number and type of stock subject
to outstanding awards; and (iii) grant, purchase or exercise price with respect
to any award, or, if deemed appropriate, make provision for a cash payment to
the holder of an outstanding award.
5. INTERPRETATION BY COMMITTEE. As a condition of the granting of the
Option, the Optionee agrees, for himself and his legal representatives or
guardians, that this Agreement shall be interpreted by the Committee and that
any interpretation by the Committee of the terms of this Agreement and any
determination made by the Committee pursuant to this Agreement shall be final,
binding and conclusive.
6. EXECUTION IN COUNTERPARTS. This Agreement may be executed by the
parties hereto in counterparts, each of which shall be deemed to be an original,
but all such counterparts shall constitute one and the same instrument, and all
signatures need not appear on any one counterpart
-2-
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this agreement as of the
day and year first above written.
AQUA-CHEM, INC.
("CORPORATION")
By: Jeffrey A. Miller
--------------------------------
Title: Chairman and CEO
-----------------------------
By: Jeffrey A. Miller
-------------------------------
Jeffrey A. Miller
Beneficiary: Jeffrey A. Miller
-----------------------
Trust, U/A/D 5/10/97
-----------------------------------
Address of Beneficiary:
------------
31403 Sleepy Hollow Ln.
-----------------------------------
Beverly Hills, MI 48025
-----------------------------------
Beneficiary's Social Security
No.:
-------------------------------
-3-
<PAGE> 4
SCHEDULE A
ACCELERATED VESTING SCHEDULE
The Options granted hereunder shall, subject to the continuing
employment requirements of the Plan, be eligible for accelerated vesting at the
rate of 8,833.4 per year as hereinafter set forth provided that the Operations
Goal is achieved for the year in question. The Operations Goal will be measured
in terms of the annual achievement of the projected Aqua-Chem EBITDA as
hereinafter set forth:
FYE March 31, 1999 $23,569,000
FYE March 31, 2000 $33,793,000
FYE March 31, 2001 $38,975,000
FYE March 31, 2002 $46,255,000
FYE March 31, 2003 $51,825,000
If in any of the above-referenced years at least 80% of the Aqua-Chem
projected EBITDA for such year is not in fact earned, no vesting will occur for
such year. As actual Aqua-Chem EBITDA for any year increases from 80% to 100% or
more of projected Aqua-Chem EBITDA, the percentage of Options actually vesting
on March 31 of such year will increase from 4,416.7 (50% of the eligible
8,833.4) to 8,833.4 (100% of the eligible 8,833.4). If on March 31 of any of the
above-referenced years any of the Options eligible to vest on March 31 of such
year (or March 31 of any prior year) have not vested in full due to the failure
to achieve the projected Aqua-Chem EBITDA in the current year (or any prior
year), then any such Options shall nevertheless again be eligible to vest on
March 31 of such current year provided that cumulative Aqua-Chem EBITDA for the
current year and all prior years is at least 80% of cumulative projected
Aqua-Chem EBITDA. As actual cumulative Aqua-Chem EBITDA increases from 80% to
100% or more of cumulative projected Aqua-Chem EBITDA as of a given March 31,
the percentage of the Options (that have not vested due to shortfalls in actual
annual Aqua-Chem EBITDA) vesting on March 31 of such year will increase from 50%
to 100%. The Board shall have the right to adjust the Operations Goal in the
event of any acquisitions or divestitures relating to Aqua-Chem or the
occurrence of any other events which, in the judgment of the Board, equitably
require that such an adjustment be made.
<PAGE> 1
EXHIBIT 10.29
AQUA-CHEM, INC.
1998 STOCK OPTION PLAN
NON-STATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT, made and entered into as of the 18th day of September,
1998, by and between AQUA-CHEM, INC., a Delaware corporation (the
"Corporation"), and Daniel B. Teich (the "Optionee").
WITNESSETH:
WHEREAS, the Corporation has adopted the Aqua-Chem, Inc. 1998 Stock
Option Plan ("Plan"), the terms of which, to the extent not stated herein, are
specifically incorporated by reference in this Agreement; and
WHEREAS, one of the purposes of the Plan is to permit the granting of
options to purchase shares of the Corporation's common Stock, $.01 par value
("Common Stock"), to certain key employees of the Corporation and its
affiliates; and
WHEREAS, the Optionee is employed by the Corporation in a key capacity,
and the Corporation desires the Optionee to remain in such employ, and to
provide him with the opportunity to acquire Common Stock in order to increase
his incentive and personal interest in the welfare of the Corporation.
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements herein set forth, the parties hereby mutually covenant and agree
as follows:
1. GRANT OF OPTION. Subject to the terms and conditions of the Plan
and this Agreement, the Corporation grants to the Optionee an option ("Option")
to purchase from the Corporation all or any part of the aggregate amount of
fifteen thousand seven hundred forty and four-tenths (15,740.40) shares of
Common Stock (the "Optioned Shares"). The Option is intended to and shall
constitute a non-statutory stock option ("Non-statutory Option") and shall not
constitute or be treated as an incentive stock option within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended ("Code"). Unless
terminated earlier in accordance with the Plan to the extent not exercised, this
Option shall terminate and expire ten (10) years after the date of grant. The
Options granted hereunder shall be subject to the vesting provisions set forth
on Schedule A attached hereto.
2. OPTION PRICE. The price to be paid for the Optioned Shares shall
be $5.00 per share.
<PAGE> 2
3. DESIGNATION OF BENEFICIARY. Subject to the Optionee's right to
revoke or change such designation in accordance with Section 7.3 of the Plan and
subject to the other terms and conditions thereof, the person whose name appears
on the signature page hereof after the caption "Beneficiary" or any successor
designated by the Optionee in accordance therewith shall be entitled to exercise
the Option, to the extent it is exercisable, after the death of the Optionee.
4. PUT RIGHT. In the event Optionee's employment by the Corporation
is terminated for any reason whatsoever, whether voluntarily, involuntarily,
with cause or without cause, Optionee shall, for a period of ninety (90) days
thereafter, have the right to require the Corporation to purchase all or any
portion of the Common Stock owned by the Optionee at the Market Price (as
determined under Section 5.4 of the Plan). Optionee shall exercise his put right
by delivering written notice to the Corporation within such period. The
Corporation and Optionee shall consummate the transaction (the "Closing") on a
date (the "Closing Date") and at a time mutually acceptable to Corporation and
Optionee, but in no event later than thirty (30) days following the date of the
Optionee's notice of exercise of the put right. The Corporation shall pay the
aggregate Market Price in cash at Closing, or, at its discretion, the
Corporation may elect to pay the Market Price in three (3) equal annual
installments commencing on the Closing Date and on each of the next two
subsequent anniversary dates thereof (each such date shall be referred to as a
"Redemption Date"). The outstanding balance owed pursuant to the Corporation's
payment obligation hereunder shall accrue interest at a rate equal to the prime
rate on the Closing Date (thereafter adjusted annually to the prime rate in
effect on the first business day of each calendar year) as published in the
Midwest edition of the Wall Street Journal or any successor publication. To the
extent Optionee exercised his Options under Article 7 of the Plan based on the
termination of his employment, employee shall be entitled to offset payment of
any exercise due under the Options against the Corporation's obligations to pay
the aggregate Market Price for the redemption.
Notwithstanding the Corporation's foregoing obligation to redeem
Optionee's Common Stock, if the funds of the Corporation legally available for
the redemption of Optionee's Common Stock are insufficient to redeem the total
number of shares required to be redeemed pursuant to this Section 4 on any
Redemption Date, those funds which are legally available for the Corporation
shall be used to redeem the maximum possible number of shares to be redeemed on
the Redemption Date. In such event, the shares of Optionee's Common Stock not
redeemed shall remain outstanding. The balance of the shares required to be
redeemed on any such Redemption Date, but not redeemed, shall be added to the
number of shares required to be redeemed on the next following Redemption Date
and shall be redeemed on that date, subject to provisions of this Section 4.
For a period of two years following a Change In Control (as defined in
the Employment Agreement between the Corporation and the Optionee dated August
__, 1998 (the "Employment Agreement")) in which the Present Common Stock Owners
(as defined in the Employment Agreement) continue to own more than 20% of the
Common Stock (or comparable Equity Interest) of the Corporation or its successor
or any transferee of substantially all of its assets, Optionee shall not have
the right to require the Corporation to purchase pursuant to this Section 4 any
shares of Common Stock which were acquired upon the exercise of any Option that
vests solely on account of such Change In Control unless Optionee's employment
is terminated for any reason other than Optionee's voluntary resignation without
Good Reason. If Optionee's employment is terminated during such two year period
for a reason other than voluntary resignation without Good Reason, (i.e., on
account of Optionee's death or disability, or by the Corporation, with or
without cause, or by voluntary resignation by the Optionee for Good Reason)
Optionee shall have the right to require the Corporation to purchase all of his
shares of Common Stock in accordance with this Section 4. The restrictions on
Optionee's Put Right as set forth in this paragraph shall not apply to any
Common Stock acquired by Optionee pursuant to the exercise of an Option that, as
of the desired date of exercise of the Put would, notwithstanding the Change In
Control, nevertheless, have become vested and exercisable under any provision of
the Plan or this Agreement or any provision, other than Section VI of Schedule A
to this Agreement.
5. ADJUSTMENTS IN CHANGES IN CAPITALIZATION. In the event the
Corporation issues a dividend or other distribution (whether in the form of
cash, stock or other property), engages in a recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of Common Stock or other securities of the
Corporation, issuance of warrants or other rights to purchase Common Stock or
other securities of the Corporation, or other similar corporate transaction or
event that effects the Common Stock such that an adjustment is determined by the
Board to be appropriate in order to prevent dilution
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<PAGE> 3
or enlargement of benefits or potential benefits intended to be made available
under the Plan, then the Board may, in such a manner as it may deem equitable,
adjust any or all of the (i) number and type of awards of stock subject to the
Plan and which thereafter may be the subject of awards under the Plan; (ii)
number and type of stock subject to outstanding awards; and (iii) grant,
purchase or exercise price with respect to any award, or, if deemed appropriate,
make provision for a cash payment to the holder of an outstanding award.
6. INTERPRETATION BY COMMITTEE. As a condition of the granting of the
Option, the Optionee agrees, for himself and his legal representatives or
guardians, that this Agreement shall be interpreted by the Committee and that
any interpretation by the Committee of the terms of this Agreement and any
determination made by the Committee pursuant to this Agreement shall be final,
binding and conclusive.
7. EXECUTION IN COUNTERPARTS. This Agreement may be executed by the
parties hereto in counterparts, each of which shall be deemed to be an original,
but all such counterparts shall constitute one and the same instrument, and all
signatures need not appear on any one counterpart.
IN WITNESS WHEREOF, the parties have executed this agreement as of the
day and year first above written.
AQUA-CHEM, INC.
("CORPORATION")
By: Jeffrey A. Miller
---------------------------------------
Jeffrey A. Miller
Title: Chairman & CEO
Daniel B. Teich
-------------------------------------------
Daniel B. Teich , Optionee
--------------
Beneficiary: Diane E. Teich
-----------------------------
Address of Beneficiary: 387250 177th Ave.
------------------
Omaha, NE 68130
------------------------------------------
Beneficiary's Tax Identification
No.:
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<PAGE> 4
SCHEDULE A
ACCELERATED VESTING SCHEDULE
I. ALLOCATION OF OPTIONS.
For accelerated vesting purposes, 1514.23 of the 1998 Options (9.62% of
the total 1998 Options) shall be deemed to be SIGNING OPTIONS, 9231.75 of the
1998 Options (58.65% of the total 1998 Options) shall be deemed to be OPERATIONS
OPTIONS, 1361.54 of the 1998 Options (8.65% of the total 1998 Options) shall be
deemed to be TRANSITION OPTIONS and 3632.89 of the 1998 Options (23.08% of the
total 1998 Options) shall be deemed to be GROWTH OPTIONS. The accelerated
vesting of the Signing Options is dependent upon only the continued employment
of Mr. Teich as hereinafter set forth. The accelerated vesting of the Growth
Options is dependent upon the achievement of the Growth Goals as hereinafter set
forth and on his being employed on the March 31 immediately thereafter. The
accelerated vesting of the Operations Options and Transition Options are
dependent upon both (i) the continued employment of Mr. Teich as hereinafter
set forth and (ii) the achievement of the Operations Goal and Transition Goal as
hereinafter set forth.
II. CONTINUED EMPLOYMENT REQUIREMENT.
302.85 of the Signing Options (20% of the total Signing Options) shall
vest and become exercisable on March 31 of 1999, 2000, 2001, 2002 and 2003,
provided only that Mr. Teich is employed by the Company on the scheduled vesting
date.
1846.35 of the Operations Options (20% of the total Operations
Options) shall become eligible for accelerated vesting on March 31 of 1999,
2000, 2001, 2002 and 2003, provided that Mr. Teich is employed by the Company on
the scheduled vesting date, with the number of Operations Options actually
vesting on March 31 of any of the above years dependent upon the level of
achievement of the Operations Goal (as hereinafter defined).
272.31 of the Transition Options (20% of the total Transition Options)
shall become eligible for accelerated vesting on March 31 of 1999, 2000, 2001,
2002 and 2003, provided that Mr. Teich is employed by the Company on the
scheduled vesting date, with the number of Transition Options actually vesting
on March 31 of any of the above years dependent upon the date of achievement of
the Transition Goal (as hereinafter defined).
A portion of the Growth Options (depending upon the size of completed
"Qualified Acquisitions" (as hereinafter defined) and the level of achievement
of "Projected EBITDA" (as hereinafter defined)) shall become eligible for
accelerated vesting on March 31 of each year, provided that Mr. Teich is
employed by the Company on the scheduled vesting date.
<PAGE> 5
III. OPERATIONS GOAL.
The Operations Goal will be measured in terms of the annual
achievement of the projected ND EBITDA as hereinafter set forth:
FYE March 31, 1999 $7,609,000
FYE March 31, 2000 $9,658,000
FYE March 31, 2001 $10,847,000
FYE March 31, 2002 $12,190,000
FYE March 31, 2003 $13,860,000
If in any year at least 80% of ND projected EBITDA is not in fact
earned, no vesting will occur for such year. As actual ND EBITDA for any year
increases from 80% to 100% or more of projected ND EBITDA, the percentage of the
Operations Options actually vesting on March 31 of such year will increase from
10% (50% of the eligible 20%) to 20% (100% of the eligible 20%). If on March 31
of any of the above referenced years any of the Operations Options eligible to
vest on March 31 of such year (or March 31 of any prior year) have not vested in
full due to the failure to achieve the projected ND EBITDA in the current year
(or any prior year), then any such Operations Options shall nevertheless again
be eligible to vest on March 31 of such current year (subject to the continued
employment requirement) provided that cumulative ND EBITDA for the current year
and all prior years is at least 80% of cumulative projected ND EBITDA. As actual
cumulative ND EBITDA increases from 80% to 100% or more of cumulative projected
ND EBITDA as of a given March 31, the percentage of the Operations Options (that
have not vested due to shortfalls in actual annual ND EBITDA) vesting on March
31 of such year will increase from 50% to 100%.
IV. TRANSITION GOAL.
The Transition Goal will be measured in terms of the date upon which
the transfer of Cleaver-Brooks production from Greenville, Mississippi to the
ND facilities in Lincoln, Nebraska has been successfully completed.
The percentage of the Transition Options actually vesting on March 31
of any of the above referenced years is dependent upon a one time event, the
date of achieving the Transition Goal. If the Transition Goal has not been met
by July 1, 1999, none of the Transition Options will ever vest. As the date of
the accomplishment of the Transition Goal moves earlier in time, from June 30,
1999 to January 1, 1999 (or earlier), the vesting percentage of the Transition
Options actually vesting on March 31 of any of the above referenced years
increases from 10% (50% of the eligible 20%) at June 30, 1999 to 30% (150% of
the eligible 20%) at January 1, 1999 (or earlier).
2
<PAGE> 6
V. GROWTH GOALS.
The Growth Goals will be measured in terms of (i) the completion of
future acquisitions (which shall be subject to the approval of the AQM Board in
its sole discretion) for which you may be designated by the AQM Board (in its
sole discretion) to have subsequent management responsibility after closing
("Qualifying Acquisitions") and (ii) the subsequent achievement of the EBITDA
projections relating to a Qualifying Acquisition for the three year period
following the date of consummation as presented to the AQM Board at the time of
its final approval of the Qualifying Acquisition (the "EBITDA Projections" or,
for any particular year, "Projected EBITDA"). The vesting of 10% of the Growth
Options shall be dependent only upon the completion of Qualifying Acquisitions.
The vesting of 90% of the Growth Options shall be dependent upon the subsequent
achievement of the EBITDA Projections.
The number of Growth Options eligible for vesting will initially be
dependent upon the size of the Qualifying Acquisition(s) completed from August
1, 1998 through March 31, 2003 (measured in terms of the target company's net
sales for its year ending on or immediately prior to the date of acquisition) as
compared to $100 million. For example, (i) if on February 28, 1999 a Qualifying
Acquisition is completed and the target company's sales were $60 million for
its fiscal year immediately preceding the date of acquisition, 60% of the Growth
Options would be eligible for vesting and (ii) if on February 28, 2000 a second
Qualifying Acquisition is completed and the target company(s) sales were $30
million for its fiscal year immediately preceding the date of acquisition an
additional 30% of the Growth Options would be eligible for vesting.
Of the total Growth Options eligible for vesting on account of the
completion of a Qualifying Acquisition (as determined under the preceding
paragraph), 10% shall vest immediately on the March 31 following the date of
completion of the acquisition provided that you are employed on that date.
Accordingly, under example (i) above 6% of the Growth Options shall completely
vest on the March 31, 1999 and under example (ii) above 3% of Growth Options
shall vest completely vest on March 31, 2000.
The actual vesting of the remaining 90% of the Growth Options eligible
for vesting as the result of a Qualifying Acquisition will be dependent upon
the level of actual annual achievement of the EBITDA Projections (during the
three year period following the date of consummation of the acquisition) as set
forth in the presentation to the AQM Board at the time of its final approval of
the Qualifying Acquisition and will be eligible for vesting at the rate of 30%
per year during such three year period. If in any year during such three year
period at least 80% of Projected EBITDA for such year is not in fact earned, no
vesting will occur for such year. As actual EBITDA for any year during such
three year period increases from 80% to 100% or more of Projected EBITDA for
such year, the percentage of the Growth Options actually vesting will increase
from 50% to 100%. Accordingly, under example (i) above, assuming that (a) 80% of
Projected EBITDA is achieved for the first year, 9% of the Growth Options (60% x
30% x 50%) would vest on March 31, 2000, (b) 90% of Projected EBITDA is achieved
for the second year, 13.5% of the Growth Options (30% x 60% x 75%) would vest on
March 31, 2001 and (c) 100% of Projected EBITDA is achieved for
3
<PAGE> 7
the third year 18% of the Growth Options (30% x 60% x 100%) would vest on March
31, 2002. The vesting is, of course, dependent upon your being employed on the
particular March 31 the vesting is scheduled to occur.
If with respect to any Qualifying Acquisition, on any March 31 during
the three year period following such Qualifying Acquisition, any of the Growth
Options eligible to vest on March 31 of such year (or March 31 of any prior
year) have not vested in full due to the failure to achieve the Projected EBITDA
in the current year (or any prior year), then any such Growth Options shall
nevertheless again be eligible to vest on March 31 of such current year provided
that cumulative actual EBITDA for the current year and all prior years is at
least 80% of cumulative Projected EBITDA and as actual cumulative EBITDA
increases from 80% to 100% or more of cumulative Projected EBITDA, the
percentage of the Growth Options that have not vested due to shortfalls in
actual annual EBITDA will increase from 50% to 100%.
VI. CHANGE IN CONTROL.
Except as hereinafter set forth in this Section VI, provided that Mr.
Teich is employed by the Company on the date of execution of a definitive
agreement that contemplates a transaction, the consummation of which would
constitute a Change In Control (as defined in the Employment Agreement between
the Company and Mr. Teich dated as of August __, 1998 (the "Employment
Agreement")) then, subject to the consummation of such transaction as set forth
in the definitive agreement, all 1998 Options shall become fully vested and
immediately exercisable. Notwithstanding anything to the contrary herein, if the
Change In Control results in the Present Common Stock Owners (as defined in the
Employment Agreement) continuing to own more than 20% of the Common Stock (or
comparable equity interest) of the Company or its successor or any transferee of
substantially all of the assets of the Company, all of the 1998 Options shall
become immediately exercisable on the earlier of (i) the second anniversary of
the date of consummation of such Change In Control provided that during such two
year period Mr. Teich's employment has not been terminated by his resignation
other than for Good Reason (as defined in the Employment Agreement) or (ii) the
date of Mr. Teich's termination of employment on account of death, disability or
by the Corporation, with or without cause, or by voluntary resignation by Mr.
Teich for Good Reason.
4
<PAGE> 1
EXHIBIT 10.30
AGREEMENT AND RELEASE
THIS AGREEMENT is made this 29th day of December, 1998, by and between
RAND E. McNALLY ("McNally") and AQUA-CHEM, INC. (the "Company").
WHEREAS, McNally and the Company are parties to an Employment Agreement
dated as of February 5, 1997 and an Amendment, Assignment and Consent to
Assignment of Employment Agreement dated July 31, 1997 (together, the
"Employment Agreement").
WHEREAS, McNally and the Company have agreed that McNally's employment
with the Company terminated for Good Reason, as defined in the Employment
Agreement, on November 13, 1998 (the "Effective Date"); and
WHEREAS, McNally and the Company desire to resolve all aspects of the
employment relationship between them, provide for the payment of certain
compensation and benefits to McNally after the Effective Date, and reduce their
agreement to writing.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, the sufficiency of which is hereby acknowledged, the parties agree as
follows:
1. TERMINATION OF EMPLOYMENT. The Company and McNally mutually
acknowledge and agree that McNally's employment with the Company was terminated
by McNally as of the Effective Date for Good Reason, as defined in the
Employment
<PAGE> 2
Agreement.
2. COMPENSATION AND BENEFITS. Subject to McNally's compliance with
the terms hereof, and subject to McNally not exercising his revocation right
under the Section hereof entitled "Right to Revoke," the Company agrees to
provide the following compensation and benefits to McNally:
2.1 SEVERANCE PAY. During the period of twelve (12) months
following the Effective Date, the Company shall make a total
of twenty-seven (27) bi-weekly severance payments to McNally
(the first payment in the amount of $3,846.40 followed by 25
payments in the amount of $7,692.80 with a final payment in
the amount of $3,846.40); provided, however, that if at the
end of such twelve (12) month period McNally, despite
continuing good faith and reasonable efforts, has been unable
to obtain employment (including self-employment), the
bi-weekly payments will be continued until he obtains
employment (including self-employment) for up to an additional
six (6) months. The payments shall be made in accordance with
the Company's normal payroll practices and shall be subject to
withholding as required by law.
2.2 INCENTIVE COMPENSATION. Notwithstanding the termination of
his employment, McNally shall be paid an amount equal to (a)
seven-twelfths (7/12) of the amount, if any, which McNally
would have
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<PAGE> 3
been entitled to receive pursuant to the Aqua-Chem, Inc.
Phantom Stock Plan for the fiscal year ending March 31, 1999,
and (b) ten-fifteenths (10/15) of the amount, if any, which
McNally would have been entitled to receive for the fifteen
(15) month period ending March 31, 1999 pursuant to the
Aqua-Chem, Inc. Management Incentive Plan, with both such
amounts subject to withholding as required by law and to be
paid at such time as such payments are made to the other
executives of the Company. The Company agrees to provide
McNally with information concerning the basis of the
calculation of the above payments and to certify that payments
to other employees covered by such plans were calculated on
the same basis.
2.3 HEALTH AND DENTAL INSURANCE. If McNally exercises his COBRA
rights with respect to medical and dental insurance, McNally
shall be entitled to receive such coverage for the twelve (12)
month period following the Effective Date (or, up to eighteen
(18) months following the Effective Date if McNally has been
unable to obtain employment or become self-employed) at a cost
equal to the amount paid by then current employees of the
Company for such coverage.
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<PAGE> 4
2.4 OUTPLACEMENT SERVICES. McNally shall be furnished with
outplacement services with such firm as the Company then
utilizes as may be necessary for a period of up to twelve (12)
months following the Effective Date paid for by the Company;
provided, however, the cost of such services shall not exceed
$15,000 in total.
2.5 COMPANY AUTOMOBILE, PERSONAL COMPUTER AND LIFE INSURANCE.
McNally shall be permitted to use his leased Company
automobile for forty-five (45) days following the Effective
Date and during such period, shall have the right to purchase
such car from the leasing company at the price specified in
the lease. McNally shall be permitted to use the Company's
personal computer furnished by the Company for his use until
the earlier of such time as he obtains other employment or
eighteen (18) months after the Effective Date. McNally may
retain the cellular telephone furnished to him by the Company,
but shall open his own account and the Company shall not be
responsible for any cellular phone charge or separate fax
telephone charges after the Effective Date. The Company hereby
acknowledges and agrees that McNally owns Zurich Kemper Life
Insurance Policy No. FL0440461 and Northwestern Mutual Life
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<PAGE> 5
Insurance Policy No. 14514274.
3. DEDUCTIONS. The Company shall deduct from payments made under this
Agreement any federal, state or local withholdings or other taxes or charges
which the Company is from time to time required to deduct under applicable law,
and all amounts payable to McNally under this Agreement are stated herein before
any such deduction(s).
4. RELEASES. In consideration of the Company's agreement to provide
the compensation and benefits described in subsections 2.1 through 2.5, McNally,
an adult individual, for himself, his heirs, personal representatives,
successors and assigns, does hereby remise, release and forever discharge the
Company and all of its past, present and future officers, directors, agents,
employees, shareholders, partners, employee benefit plans, insurers, attorneys,
divisions, parent corporations, subsidiary corporations, affiliated
corporations, successors, assigns and all persons acting by, through, under or
in concert with any of them (such entities and individuals are referred to
hereinafter collectively as the "Released Parties") of and from any and all
manner of action or actions, cause or causes of action, suits, debts, covenants,
contracts, agreements, judgments, executions, claims, demands and expenses
(including attorneys' fees and costs) whatsoever in law or equity, whether known
or unknown, which he has had, now has or may have against the Released Parties,
or any of them, for or by reason of any transaction, matter, event, cause or
thing whatsoever occurring prior to
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<PAGE> 6
or on the date of this Agreement, whether based on tort, express or implied
contract, or any federal, state or local law, statute or regulation,
specifically including but not limited to (i) any and all claims arising out of
or related to any employment, change in control or other agreement (whether oral
or written) between McNally and the Company, including but not limited to the
Employment Agreement; and (ii) any and all claims arising out of or related to
McNally's employment with the Company, including but not limited to claims
under the Wisconsin Family and Medical Leave Act, the Federal Family and Medical
Leave Act, the Wisconsin Fair Employment Act, Title VII of the Civil Rights Act
of 1964, as amended, the Age Discrimination in Employment Act of 1967, as
amended, the Americans With Disabilities Act, the Civil Rights Act of 1991, and
the Employee Retirement Income Security Act, as amended. Nothing in the waiver
or release set forth in this subsection shall be construed to constitute any
waiver or release by McNally of any rights or claims under this Agreement or any
existing rights to indemnification. In consideration of the performance by
McNally of the provisions of this Agreement and Release, the Released Parties
hereby remise, release and forever discharge McNally from any and all manner of
action or actions, cause or causes of action, suits, debts, covenants,
contracts, agreements, judgements, executions, claims, demands and expenses
(including attorneys' fees and costs) which each has or has had against him
other than any rights or claims under this Agreement.
5. ENTIRE AGREEMENT. This Agreement supersedes all other agreements
or
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<PAGE> 7
understandings (whether oral or written) between McNally and the Company and
constitutes the entire agreement of the parties. McNally acknowledges and agrees
that the compensation and benefits stated above constitute the sole liability of
the Company to him and that he shall have no right to receive any other
compensation or benefits of any kind. Nothing in this Agreement and Release is
intended to or shall affect McNally's rights or obligations under the Rush Creek
Stock & Membership Unit Restriction and Repurchase Agreement, which shall remain
in full force and effect provided, however, that upon the consummation of the
transactions contemplated by the Assignment and Transfer attached hereto
(including payment in full of all amounts due thereunder), both McNally and the
Released Parties shall be forever released and discharged from any and all
obligations and/or liabilities under the Rush Creek Stock & Membership Unit
Restriction and Repurchase Agreement.
6. AGREEMENTS NOT TO SUE. Except as provided by law, both the
Released Parties and McNally agree not to initiate or cause to be initiated any
federal, state or local lawsuit or to commence any federal, state or local
administrative action, investigation or proceeding of any kind against McNally
or the Released Parties, or any of them, based on any transaction, matter, cause
or thing occurring prior to or on the date of this Agreement.
7. WAIVER OF EMPLOYMENT. McNally agrees not to apply for or otherwise
seek employment at any time in the future with the Company, or any of its
divisions,
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<PAGE> 8
subsidiaries or affiliated entities.
8. RESTRICTIONS.
8.1 McNally acknowledges and agrees that the business of the
Cleaver-Brook Division (the "Division") of the Company is by
its nature international, the Company's business and customer
contacts have been established and maintained at great
expense, McNally, by virtue of his position with the Company,
has been privy to the Company's most confidential business
plans and strategies which, without the restrictions
hereinafter set forth, would enable McNally to compete
unfairly with the Company and, accordingly, such restrictions
are reasonable and necessary to protect the legitimate
interests of the Company. As a result, and in order to induce
the Company to enter into this Agreement and to provide the
benefits described in this Agreement, McNally agrees to the
restrictions set forth in this Section.
8.2 McNally hereby covenants and agrees that for a period of
twelve (12) months following the Effective Date he will not,
directly or indirectly, in any capacity whatsoever (whether as
an employee,
-8-
<PAGE> 9
officer, director, consultant, partner, member, joint
venturer, agent, representative or otherwise) provide service,
advice or assistance of any nature to or acquire an ownership
interest in (or acquire the right to acquire an ownership
interest in) a Competing Business (as hereinafter defined). A
"Competing Business" shall mean and be limited to any
business, regardless of the form of organization, which (i) is
engaged in the design, manufacture and/or sale of products
which are similar in design or function to and otherwise
compete with the products which were under design by the
Division or included in the Division's product lines during
the twelve (12) month period preceding the Effective Date
(hereinafter referred to as "Competing Products") and which
(ii) sells, attempts to sell or markets (or during the twelve
(12) month period preceding the Effective Date sold, attempted
to sell or marketed) any Competing Products within the United
States and/or any foreign country within which, during the
twelve (12) month period preceding the Effective Date, the
Division sold any of its products (or was a party to an
executory contract for the sale of any of its products),
attempted to sell, or marketed any of its products other than
by means of general advertising.
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<PAGE> 10
Notwithstanding the preceding, McNally shall not be prohibited
from (i) acquiring less than five percent (5%) of the stock of
any publicly traded company which may be engaged in a
Competing Business, or (ii) being employed by or otherwise
providing services to a company which, among its various
businesses, is engaged in a Competing Business provided that
McNally is not directly or indirectly involved in any capacity
whatsoever in such Competing Business.
8.3 McNally hereby covenants and agrees that, for a period of
twelve (12) months following the Effective Date, he shall not
directly or indirectly, on behalf of himself or any other
person, entity, or business, employ or engage the services of
or seek to employ or engage the services of any person
employed by the Division or any agent who represents the
Division during the period of six (6) months prior to the
Effective Date, or otherwise encourage or entice any such
person to terminate or diminish their relationship with the
Division. If someone resigns from or is terminated by the
Company during such twelve month period, McNally may hire such
person provided that he obtains a written release from the
Company, which release shall be promptly granted by the
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<PAGE> 11
Company provided that McNally has not encouraged or enticed such
person to terminate the relationship with the Company. McNally
is not restrained from responding to reference requests
respecting Aqua-Chem employees and is not obligated to notify
Aqua-Chem of such requests.
8.4 McNally hereby acknowledges and agrees (i) his education and
experience are such that the foregoing restrictions will not
unduly interfere with his ability to earn a livelihood, (ii) the
Company would suffer irreparable harm in the event of a violation
of such restrictions, and (iii) accordingly, in addition to any
other remedies available to it, the Company shall be entitled to
injunctive relief without the posting of bond or other collateral
and McNally shall not oppose the granting of such relief. The
Company shall be entitled to all costs, including reasonable
attorneys' fees, in enforcing such restrictions or pursuing
damages for breach.
9. CONFIDENTIAL INFORMATION. The parties agree that the Company's
customer lists, prospective customer lists, long range plans, budgets,
acquisition strategies, procedures, operations, methods of operation, pricing
information, financial performance, accounting methods, business or financial
plans or information systems, reports, techniques, formulas, marketing plans or
strategies, contemplated product
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<PAGE> 12
improvements or new product developments, computer software and programs,
information relating to inventions, discoveries, processes, machines,
manufacturers, compositions, and proprietary information and other data
relating to aspects of its business (collectively, "Confidential Information")
are established and protected at great expenses and provide the Company with
substantial competitive advantage in conducting its business. The parties
further agree that by virtue of McNally's employment with the Company, he has
had access to, and was entrusted with Confidential Information, and that the
Company would suffer great loss and injury if he would disclose this
information or use it to compete with the Company. Therefore, McNally agrees
that he will not, directly or indirectly, either individually or as an
employee, officer, agent, partner, shareholder, owner, trustee, beneficiary,
co-venturer, distributor, consultant or in any other capacity, use or disclose,
or cause to be used or disclosed, any Confidential Information, without the
Company's consent. The restrictions set forth in this Section shall have the
following duration: (1) with respect to trade secret information, the
restrictions shall remain in effect for as long as such information remains a
trade secret; (2) with respect to all other Confidential Information, the
restrictions shall remain in effect for a period of two (2) years following the
Effective Date.
10. NO ADMISSION OF LIABILITY. It is understood and agreed that this
Agreement is intended to provide for the amicable separation of McNally from
-12-
<PAGE> 13
employment with the Company and that neither this Agreement nor the furnishing
of the consideration provided for in this Agreement shall be deemed or construed
at any time or for any purpose as an admission of liability by the Released
Parties or McNally. Liability for any and all claims for relief is expressly
denied by the Released Parties or McNally.
11. NONDISCLOSURE. McNally agrees not to disclose the terms of this
Agreement to any person or entity, other than his spouse, father, tax preparer,
attorneys or accountant, without the written consent of the Company.
12. ACKNOWLEDGMENT. McNally hereby acknowledges and agrees that the
compensation and benefits provided for in this Agreement, including but not
limited to the compensation and benefits described in Section 2 above, are
greater than those to which he is entitled by any contract, employment policy or
otherwise. McNally further acknowledges that he has been advised in writing by
the Company to consult with an attorney prior to executing this Agreement, and
he has also been advised in writing by the Company that he had at least
twenty-one (21) days within which to consider this Agreement.
13. GOVERNING LAW AND FORUM. This Agreement shall be governed by and
construed under the laws of the State of Wisconsin, and any dispute arising out
of or relating to this Agreement shall be brought in a court of competent
jurisdiction in Milwaukee County, Wisconsin.
-13-
<PAGE> 14
14. SEVERABILITY. The provisions of this Agreement are severable. If, as
a result of any challenge or action initiated by or on behalf of McNally, any
provision of this Agreement is held to be void or unenforceable or contrary to
law, the Company shall have the option to either terminate the Agreement in its
entirety, in which case the Company shall be entitled to the return of all
payments previously paid hereunder, or it may require that the balance of the
Agreement nonetheless shall remain in full force and effect.
15. VOLUNTARY AGREEMENT. McNally acknowledges that he has read this
Agreement, that he is fully aware of its contents and its legal effect, that
the preceding paragraphs recite the sole consideration for this Agreement, that
all agreements and understandings between the parties are embodied and
expressed herein, and that he has been afforded ample opportunity to consider
this Agreement and enters into this Agreement freely, knowingly and without
coercion and not in reliance upon any representations or promises made by the
Company or its counsel or the Released Parties, other than those contained
herein.
16. BINDING AGREEMENT. This Agreement shall be binding upon and inure to
the benefit of McNally's personal or legal representatives and heirs and shall
be binding upon and inure to the benefit of the Company's successors and
assigns.
17. RIGHT TO REVOKE. For a period of seven (7) days following the
execution of this Agreement, McNally may revoke this Agreement, and the
Agreement shall not
-14-
<PAGE> 15
become effective or enforceable until this seven (7) day revocation period has
expired.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
AQUA-CHEM, INC.
/s/ [ILLEGIBLE] /s/ RAND E. MCNALLY
By: ___________________________ _________________________
Rand E. McNally
-15-
<PAGE> 16
ACKNOWLEDGMENT
I hereby acknowledge that prior to executing the attached Agreement and
Release ("Agreement") which contains, among other provisions, a general release
and a waiver of my rights under the Age Discrimination in Employment Act, I
have been given a period of at least twenty-one (21) days to consider the
Agreement before deciding whether or not to execute it and have been advised to
and have consulted with an attorney prior to executing the Agreement.
Dated this 29 day of December 1998.
/s/ RAND E. MCNALLY
----------------------
Rand E. McNally
<PAGE> 1
EXHIBIT 10.31
[LETTERHEAD]
February 8, 1999
Mr. J. Scott Barton
N24W30863 Fairway Court
Pewaukee, WI 53072
Dear Scott:
Based on your decision to terminate your employment with Aqua-Chem Inc. for
"good reason," enclosed is the Release to be executed by you in accordance with
Section 6(f) of the Employment Agreement.
Since the enclosed Release contains, among another provisions, a general
release and a waiver of your rights under the Age Discrimination in Employment
Act, you have a period of at least 21 days to consider the Release before
deciding whether or not to execute it. In fact, pursuant to Section 6(f) of the
Employment Agreement, you have until March 21, 1999 (which is thirty (30) days
after February 19, 1999, the agreed-upon effective date of termination) to
consider the Release. We advise you to consult with an attorney prior to
executing the Release.
In your letter of January 6, 1999, you requested that Aqua-Chem Inc. provide a
release to you and continue to indemnify you under the Company's "Directors and
Officers policies." As you know, your Employment Agreement does not include a
requirement for Aqua-Chem to provide a release to you, and Aqua-Chem has
decided not to provide a release in connection with your termination. However,
this letter confirms your continuing right to indemnification pursuant to the
provisions of Delaware law and Aqua-Chem's existing Directors and Officers
liability insurance policies and that this coverage remains in force
notwithstanding the signing of the Release.
With respect to other issues you raised regarding the proposed handling of your
severance arrangement, we provide the following information:
1. SEVERANCE. We agree that you will continue to receive payment of your
current monthly base salary (paid bi-weekly in accordance with the
Company's normal payroll practices) for a period of 18 months following the
agreed upon termination date of February 19, 1999, provided you execute the
enclosed Release as indicated above and do not revoke it during the
seven-day period following execution.
2. INCENTIVE COMPENSATION. We also agree that you are entitled to receive the
average of your annual bonus paid in FY 1997 ($45,351) and 1998 ($62,571).
The average annual bonus is $53,961. This incentive compensation will be
paid in equal installments (in accordance with the Company's normal payroll
practices) during the 18-month severance period. As with any severance pay,
this benefit is conditioned upon your timely execution of the Release (and
absence of a subsequent revocation).
3. EXECUTIVE FAIR TREATMENT PLAN. The Employment Agreement does not provide
for payment of any amount under the Executive Fair Treatment Plan. However,
subject to your execution of the Release, we have agreed to pay the amount
of $11,022 to you. This amount will be paid to you in a lump sum in
accordance with the Company's normal payroll practices.
<PAGE> 2
[AQUA-CHEM LOGO]
Mr. J. Scott Barton
February 8, 1999
Page 2
4. LIFE INSURANCE. The Company has paid to you the amount of the 1999
premiums ($5,971) for the $450,000 universal life policy, the $550,000
ten-year term policy, and the $450,000 accidental death and dismemberment
policy, which you own. Subject to your execution of the Release, you will
not be required to reimburse the Company for any portion of the 1999 premium
amount. You are solely responsible for payment of any future premium amount.
5. VACATION. The Company has determined that you are entitled to receive
payment for five (5) weeks of vacation. This will be paid to you in a lump
sum in accordance with the Company's normal payroll practices.
6. HEALTH AND DENTAL. The Employment Agreement provides for continuation of
health and dental insurance for a period of 18 months. If you elect COBRA
coverage, the cost (in an amount equal to the amount paid by then current
employees of the Company for such coverage) for the medical and dental
insurance will be withheld from severance payments to be made to you.
7. OUTPLACEMENT. We will make arrangements with Thompson Consulting for
outplacement services for a period of up to 12 months as specified in the
Employment Agreement.
8. ATHLETIC CLUB. The Employment Agreement does not provide for payment of an
athletic club membership. However, subject to your execution of the Release,
we will agree to pay your monthly dues for your current membership in an
amount not to exceed $160.81 per month through December 31, 1999 (we will
add the bi-weekly equivalent of the current monthly reimbursement to your
paychecks through December 31, 1999).
9. USE OF PC. We will agree to your use of your PC during the severance
period, provided you off-load all Company files prior to your departure.
10. PERSONNEL FILE. Your personnel file will state that you resigned effective
February 19, 1999, to pursue other interests and that your title at
resignation was Senior Vice President and CFO.
As we have agreed, the effective date of your termination will be February 19,
1999. In order to receive the severance pay and benefits provided by the terms
of your Employment Agreement, please execute the Release not later than thirty
(30) days after that date and return it to me. If you elect not to execute the
Release, you will not receive the severance pay and benefits described in the
Employment Agreement, but you will receive whatever pay and benefits (if any)
you would otherwise be entitled to receive. All payments to be made hereunder
are subject to applicable withholdings.
<PAGE> 3
[AQUA-CHEM LOGO]
Mr. J. Scott Barton
February 8, 1999
Page 3
If you agree that this letter accurately reflects the terms of our agreement,
please indicate your acceptance of these terms by signing below.
Sincerely,
/s/ JEFFREY A. MILLER
- --------------------------
Jeffrey A. Miller
Agreed and accepted this
11th day of February, 1999
/s/ J. SCOTT BARTON
- --------------------------
J. Scott Barton
<PAGE> 4
[AQUA-CHEM LOGO]
Exhibit A
GENERAL RELEASE
J. Scott Barton, (the "Executive"), for good and valuable consideration, the
receipt of which is hereby acknowledged, does hereby release and forever
discharge Aqua-Chem Inc. ("Aqua-Chem") and all of its past, present and future
officers, directors, agents, employees, attorneys, shareholders, employee
benefit plans, divisions, parent corporations, subsidiary corporation,
affiliated corporations, successors and assigns (collectively the "Released
Parties") from any and all actions, causes of action, claims, suits, debts,
covenants, contracts, demands or liabilities of any kind or character
whatsoever, whether known or unknown, which the Executive has had or now has
against the Released Parties (or any of them) related to anything occurring
prior to or on the present date.
Without limiting the generality of the foregoing, this release applies to any
claims, causes of action, demands or liabilities the Executive may have had or
now has:
1. Under the pursuant to the Age Discrimination in Employment Act, as amended.
2. Under or pursuant to Title VII of the Civil Rights Act of 1964, as amended;
the Civil Rights Act of 1991; the Wisconsin Fair Employment Act; the
Employee Retirement Income Security Act, as amended, or any other federal,
state or local statute or regulation relating to employment.
3. For libel, slander, defamation, damage to reputation, intentional or
negligent infliction of emotional distress, tortious interference with the
employment or business relationship or other tortious conduct or for
wrongful discharge or breach of contract whether express or implied.
4. Regarding any right which the Executive might have to current or future
employment with Aqua-Chem, its divisions or affiliated companies, and the
Executive affirms that he will not seek employment in the future with
Aqua-Chem, its divisions or affiliated companies.
The Executive acknowledges that he has been advised in writing (1) to consult
with an attorney prior to executing the General Release, and (2) that he had at
least twenty-one (21) days to consider this General Release prior to executing
it.
For a period of seven (7) days following the execution of this General Release,
the Executive shall have the right to revoke this General Release, and this
General Release shall not become effective or enforceable until seven (7) days
following such execution.
IN WITNESS WHEREOF, the undersigned has executed this General Release this 11th
day of February, 1999.
/s/ J. SCOTT BARTON
- ------------------------
J. Scott Barton
<PAGE> 1
EXHIBIT 10.32
May 25, 1999
Jeffrey Miller, President and CEO
AQUA-CHEM, INC.
7800 North 113th Street (zip 53224)
P.O. Box 421 (zip 53201)
Milwaukee, WI 53201
Re: Second Amendment ("Second Amendment") under the Second Amended
and Restated Aqua-Chem, Inc. Revolving Credit Agreement dated
as of June 23, 1998 (as previously amended, "Credit
Agreement") by and among Aqua-Chem, Inc. ("Company"), Comerica
Bank, as Agent (in such capacity, "Agent") and the Banks
(including Comerica Bank) from time to time signatories
thereto.
Gentlemen:
Reference is made to the Credit Agreement. Except as specifically
defined to the contrary herein, capitalized terms used in this First Amendment
shall have the meanings given them in the Credit Agreement.
The Company has requested that the Agent and the Banks amend the
definition of "Consolidated EBITDA" contained in the Credit Agreement, amend
Section 8.10 (Fixed Charge Coverage Ratio) and to make such other changes as are
necessary so as to permit any Bank to act as Issuing Bank under the Credit
Agreement.
Based on the Agent's receipt of the approval of the requisite Banks and
subject to the terms and conditions of this letter, this letter agreement will
confirm the that the Credit Agreement is hereby amended as follows:
1. Section 1 of the Credit Agreement is amended as follows:
(a) the definition of "Consolidated EBITDA" is hereby amended
by amending and restating clause (v) thereof in its entirety as
follows:
"(v) losses (or less gains) from Asset Dispositions or other
non-cash items included in the determination of net income (excluding
sales, expenses or losses related to current assets) and all
restructuring charges related to the closing of the Company's
Greenville, Mississippi manufacturing facility (as permitted
hereunder), and the restructuring charges taken in January, 1999 in an
amount up to $1,200,000, and the restructuring charges taken in April,
1999 in an amount up to $900,000";
<PAGE> 2
Jeffrey Miller, President and CEO
Aqua-Chem, Inc.
May , 1999
Page 2
2. Section 8.10 of the Credit Agreement (Fixed Charge Coverage Ratio)
is hereby amended and restated in its entirety as follows:
"Fixed Charge Coverage Ratio. Maintain, as of the end of each
fiscal quarter, for the four fiscal quarters then ended, beginning with
the fiscal quarter ending June 30, 1999, a Fixed Charge Coverage Ratio
of not less than the following amounts during the periods set forth
below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Quarter Ending Ratio
- --------------------------------------------------------------------------------
<S> <C>
June 30, 1999 1.0 to 1.0
- --------------------------------------------------------------------------------
September 30, 1999 1.0 to 1.0
- --------------------------------------------------------------------------------
December 31, 1999 1.10 to 1.0
- --------------------------------------------------------------------------------
March 31, 2000 1.15 to 1.0
- --------------------------------------------------------------------------------
June 30, 2000 and thereafter 1.25 to 1.0
- --------------------------------------------------------------------------------
</TABLE>
3. This Second Amendment shall become effective according to the terms
hereof and on such date (the Second Amendment Effective Date") as the Agent
shall have received:
(a) an Authorization of Second Amendment (in the form attached to this
Letter Amendment), in each case duly executed and delivered by each of the
Company, the Guarantors, and the requisite Banks, in form satisfactory to Agent
and the requisite Banks; and
(b) all fees and expenses due and owing on the Second Amendment
Effective Date or as agreed to among the parties, including an amendment fee for
the account of each Bank in the amount of 20 basis points on each such Bank's
Percentage of the Revolving Credit Aggregate Commitment; provided however, that
the parties agree that each Bank shall receive one half of its amendment fee on
the Second Amendment Effective Date and one half on July 15, 1999 (and the
Company acknowledges that the failure to deliver such remaining portion of the
amendment fee on July 15, 1999 shall constitute an Event of Default under the
Credit Agreement).
On the Second Amendment Effective Date, Replacement Schedule 1.1
(setting forth the alternate Pricing Matrix) attached hereto as Attachment I
shall replace existing Schedule 1.1 in its entirety.
<PAGE> 3
Jeffrey Miller, President and CEO
Aqua-Chem, Inc.
May , 1999
Page 3
This Second Amendment is limited to the specific matters described
above and shall not be deemed to be a waiver or consent to any other failure to
comply with any provision of the Credit Agreement or any other Loan Document, or
to amend or alter in any respect the term and conditions of the Credit Agreement
(including without limitation all conditions and requirements for Advances and
any financial covenants), the Notes or any of the other Loan Documents, or to
constitute a waiver or release by any of the Banks or the Agent of any right,
remedy, Default or Event of Default under the Credit Agreement or any other Loan
Documents, except as specifically set forth above. Furthermore, this Second
Amendment shall not affect in any manner whatsoever any rights or remedies of
the Banks with respect to any other non-compliance by the Company with the
Credit Agreement or the other Loan Documents whether in the nature of a Default
or an Event of Default, and whether now in existence or subsequently arising.
* * *
<PAGE> 4
Jeffrey Miller, President and CEO
Aqua-Chem, Inc.
May 25, 1999
Page 4
By signing and returning a counterpart of this letter to the Agent, the
Company acknowledges its acceptance of the terms of this letter.
Very truly yours,
COMERICA BANK, as Agent
By: Harve C. Light
------------------------
Its: Vice President
------------------------
Acknowledged and Accepted
as of May 25, 1999
AQUA-CHEM, INC.
By: Jeffrey A. Miller
-------------------------------
Its: Chairman & CEO
-------------------------------
RUSH CREEK, LLC
By: Jeffrey A. Miller
-------------------------------
Its: President
-------------------------------
CB-KRAMER SALES AND SERVICE, INC.
By: Jeffrey A. Miller
-------------------------------
Its: President
-------------------------------
<PAGE> 5
Jeffrey Miller, President and CEO
Aqua-Chem, Inc.
May , 1999
Page 5
AUTHORIZATION OF SECOND AMENDMENT
The undersigned Bank hereby consents to the amendments to the Credit Agreement
set forth in foregoing Second Amendment to Credit Agreement on the terms and
conditions set forth above.
Comerica Bank
-----------------------------------
[BANK]
By: Harve C. Light
-------------------------------
Name: Harve C. Light
Its: Vice President
-------------------------------
Date: May 24, 1999
<PAGE> 6
Jeffrey Miller, President and CEO
Aqua-Chem, Inc.
May 25, 1999
Page 5
AUTHORIZATION OF SECOND AMENDMENT
The undersigned Bank hereby consents to the amendments to the Credit Agreement
set forth in foregoing Second Amendment to Credit Agreement on the terms and
conditions set forth above.
Firstar Bank Milwaukee N.A.
-----------------------------------
[BANK]
By: Caroline V. Krider
-------------------------------
Name:
Its: Vice President
-------------------------------
Date: May 21, 1999
<PAGE> 7
Jeffrey Miller, President and CEO
Aqua-Chem, Inc.
May , 1999
Page 5
AUTHORIZATION OF SECOND AMENDMENT
The undersigned Bank hereby consents to the amendments to the Credit Agreement
set forth in foregoing Second Amendment to Credit Agreement on the terms and
conditions set forth above.
Norwest Bank Minnesota N.A.
-----------------------------------
[BANK]
By: John K. Lukaska
-------------------------------
Name:
Its: Vice President
-------------------------------
Date: May 25th, 1999
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG LLP
The Board of Directors
Aqua-Chem, Inc.:
We consent to incorporation by reference in the registration statement No.
333-60759 on Form S-4 of Aqua-Chem, Inc. of our report dated January 24, 1997,
relating to the consolidated statements of operations, stockholders' equity,
and cash flows of Aqua-Chem, Inc. and subsidiaries for the year ended December
31, 1996, and the related financial statement schedule, which report appears
in the March 31, 1999 annual report on Form 10-K of Aqua-Chem, Inc.
Milwaukee, Wisconsin
June 28, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report on the consolidated financial statements of Aqua-Chem, Inc. in this
Aqua-Chem, Inc. Form 10-K into Aqua-Chem, Inc.'s previously filed Registration
Statement on Form S-4 (No. 333-60759).
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
June 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 5,498
<SECURITIES> 0
<RECEIVABLES> 40,280
<ALLOWANCES> 848
<INVENTORY> 25,929
<CURRENT-ASSETS> 93,839
<PP&E> 41,375
<DEPRECIATION> 5,085
<TOTAL-ASSETS> 178,231
<CURRENT-LIABILITIES> 49,648
<BONDS> 125,000
4,944
0
<COMMON> 10
<OTHER-SE> (6,935)
<TOTAL-LIABILITY-AND-EQUITY> 178,231
<SALES> 220,404
<TOTAL-REVENUES> 220,966
<CGS> 169,260
<TOTAL-COSTS> 218,932
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,842
<INCOME-PRETAX> (10,808)
<INCOME-TAX> (3,919)
<INCOME-CONTINUING> (7,189)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,260)
<CHANGES> 0
<NET-INCOME> (8,897)
<EPS-BASIC> (8.90)
<EPS-DILUTED> (8.90)
</TABLE>
