<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- -------------------
Commission file number
--------------------------
AQUA-CHEM, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 39-1900496
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7800 NORTH 113TH STREET
P.O. BOX 421
MILWAUKEE, WISCONSIN
(Address of Principal Executive Offices)
53201
(Zip Code)
(414) 359-0600
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 14, 2000
---------------------------- ------------------------------
Common Stock, $.01 par value 1,000,000
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INDEX TO
QUARTERLY REPORT ON FORM 10-Q
OF
AQUA-CHEM, INC.
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited) 3
Consolidated Condensed Statement of Operations -
Three months ended June 30, 2000 and June 30, 1999 4
Consolidated Condensed Balance Sheet -
June 30, 2000 and March 31, 2000 5
Consolidated Condensed Statement of Cash Flows -
Three months ended June 30, 2000 and June 30, 1999 6
Notes to Consolidated Condensed Financial
Statements 7
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
Part II: OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 12
Signature Page 13
Exhibit Index 14
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
3
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AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended
June 30, June 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Net sales $57,963 $45,286
Cost of goods sold 43,490 35,834
--------------- ---------------
Gross margin 14,473 9,452
Selling, general and administrative expense 10,141 8,273
Restructuring charges - 240
--------------- ---------------
10,141 8,513
--------------- ---------------
Operating income 4,332 939
Other income (expense):
Interest income 101 53
Interest expense (3,731) (3,771)
Other, net (117) (115)
--------------- ---------------
(3,747) (3,833)
Income (loss) from continuing
operations before income
taxes and minority interest 585 (2,894)
Income tax expense (benefit) 206 (1,068)
Minority interest in earnings
Of consolidated subsidiary 88 49
--------------- ---------------
Income (loss) from continuing
operations 291 (1,875)
--------------- ---------------
Discontinued operations:
Income from discontinued
operations,net of tax expense
of $0 and $30 respectively - 49
--------------- ---------------
Net income (loss) $291 $(1,826)
--------------- ---------------
Preferred stock dividends 103 103
--------------- ---------------
Net income (loss) applicable to common $188 $(1,929)
=============== ===============
PER SHARE DATA:
Basic:
Income (loss) from continuing operations $.19 $ (1.98)
Income from discontinued operations - .05
--------------- ---------------
Income (loss) per common share $.19 $ (1.93)
=============== ===============
Diluted:
Income (loss) from continuing operations $.19 $ (1.98)
Income from discontinued operations - .05
--------------- ---------------
Income (loss) per common share $.19 $ (1.93)
=============== ===============
</TABLE>
The accompanying notes to the consolidated condensed financial statements are an
integral part of this statement.
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AQUA-CHEM, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, March 31,
ASSETS 2000 2000
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,016 $7,326
Accounts receivable, less allowances of $747
at June 30, 2000 and $830 at March 31, 2000 36,146 36,870
Revenues in excess of billings 9,627 6,939
Inventories 23,709 26,063
Deferred income taxes 6,230 6,230
Prepaid expenses and other current assets 1,697 1,727
-------------- --------------
Total current assets 89,425 85,155
Property, plant and equipment - net 31,972 32,576
Intangible assets, less accumulated amortization of
$2,884 at June 30, 2000 and $2,522 at March 31, 2000 37,011 37,373
Deferred income taxes 7,498 7,498
Other assets 6,910 6,987
-------------- --------------
TOTAL ASSETS $172,816 $169,589
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings $ - $ 500
Accounts payable
Trade 16,402 15,637
Other 5,304 5,547
Billings in excess of revenues 3,026 4,463
Compensation and profit sharing 3,926 3,509
Accrued restructuring costs 987 1,406
Accrued interest 7,032 3,591
Net liabilities of discontinued operations 3,214 3,445
Other accrued expenses 11,960 10,767
-------------- --------------
Total current liabilities 51,851 48,865
Long-term debt 125,189 125,189
Other long-term liabilities 5,475 5,399
-------------- --------------
Total other liabilities 130,664 130,588
Minority interest in a consolidated subsidiary 689 602
Preferred stock with mandatory redemption provisions 5,073 4,970
Stockholders' equity:
Common stock, $.01 par value. Authorized
2,000,000 shares; issued and outstanding
1,000,000 shares at June 30, 2000 and March 31, 2000 10 10
Additional paid-in capital 90 90
Retained earnings (deficit) (15,496) (15,684)
Accumulated other comprehensive income (loss) (65) 148
-------------- --------------
Total stockholders' equity (deficit) (15,461) (15,436)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $172,816 $169,589
============== ==============
</TABLE>
The accompanying notes to the consolidated condensed financial statements are an
integral part of this statement.
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AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended
June 30, June 30,
2000 1999
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $291 $ (1,826)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,601 1,450
Minority interest in earnings of consolidated
subsidiary 88 49
(Income) Loss from discontinued operations, net - (49)
Restructuring charges, net of cash expended of $419
and $1,021, respectively (419) (781)
Increase (decrease) in cash due to changes in:
Accounts receivable 724 (523)
Revenues in excess of billings (2,688) (271)
Inventories 2,354 1,583
Prepaid expenses and other current assets 30 (504)
Accounts payable--trade 765 (6,073)
Accounts payable--other (243) 443
Billings in excess of revenues (1,437) 566
Accrued expenses and other current liabilities 4,820 2,285
Other, net (54) (728)
--------------- ----------------
Total adjustments 5,541 (2,553)
--------------- ----------------
Net cash provided by (used in) operating activities 5,832 (4,379)
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment 6 1,192
Additions to property, plant and equipment (648) (1,092)
--------------- ----------------
Net cash provided by (used in) investing activities (642) 100
Cash flows from financing activities:
Net change in short-term borrowings (500) -
--------------- ----------------
Net cash provided by (used in) financing activities (500) -
Net increase (decrease) in cash and cash equivalents 4,690 (4,329)
Cash and cash equivalents at beginning of period 7,326 5,498
--------------- ----------------
Cash and cash equivalents at end of period $12,016 $1,169
=============== ================
Cash paid during the period for:
Interest $- $-
Taxes - 22
</TABLE>
The accompanying notes to the consolidated condensed financial statements are an
integral part of this statement.
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AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT AS NOTED)
In the opinion of Management, the accompanying unaudited financial statements of
Aqua-Chem, Inc. contain all adjustments which are of a normal recurring nature
necessary to present fairly the financial position as of June 30, 2000, and the
results of operations and cash flows for the periods indicated. Interim
financial results are not necessarily indicative of operating results for an
entire year. Certain notes and other information have been condensed or omitted
from these interim consolidated condensed financial statements. Therefore, these
statements should be read in conjunction with the Aqua-Chem, Inc. Consolidated
Financial Statements as of March 31, 2000 and 1999, respectively.
(1) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
-------------- ----------------
<S> <C> <C>
Raw materials and work-in-process $18,126 $20,813
Finished goods 5,583 5,250
-------------- ----------------
Total inventories $23,709 $26,063
============== ================
</TABLE>
(2) Revolving Credit Facility
Aqua-Chem has a $45,000 secured revolving credit facility with three
major banks. Borrowings under this facility are made in the form of
revolving credit notes. These notes bear interest at a rate of either
prime or a Euro currency-based rate as defined in the facility. The
revolving credit agreement will terminate July 1, 2003. The facility is
secured by substantially all of the assets of the Company. Outstanding
borrowings totaled $0 and $500 at June 30, 2000 and March 31, 2000,
respectively. The amount available under the facility is reduced by
revolver usage, outstanding letters of credit, and certain reserves as
defined in the facility. At June 30, 2000, availability under this line
totaled $40.7 million. Among other restrictions, the credit agreement
contains covenants relating to financial ratios and other limitations,
as defined by the agreement. As of June 30, 2000, the Company was in
compliance with the covenants contained in the agreement.
(3) Restructuring Reserves
As of March 31, 2000, the Company's restructuring reserves totaled
$1,406. During the first quarter of Fiscal 2001, the Company utilized
$419 of these reserves primarily for severance and related termination
costs leaving a balance of $987 at June 30, 2000.
(4) Discontinued Operations
During the fourth quarter of Fiscal 2000, the Company decided to exit
its Seawater and Industrial Business (the "S&I Business") and has
adjusted its reporting for all periods to reflect this business as a
discontinued operation.
The Company intends to complete all active contracts of the S&I
Business and to fulfill its commitments for warranty service, payments
to vendors, and all other appropriate liabilities. While the Company
intends to fulfill those commitments of the S&I Business within one
year, management is pursuing other, more cost effective, strategic
alternatives, including opportunities to sell all or part of the
discontinued business. No assurances can be given that any such
alternatives will be consummated.
In accordance with its treatment of the S&I Business as a discontinued
operation,
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the Company has separately delineated the net liabilities and net
operating results of the S&I Business on its Consolidated Condensed
Financial Statements. The following tables present certain additional
financial information with respect to the S&I Business:
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended
June 30, June 30,
2000 1999
---------------- -----------------
<S> <C> <C>
Net sales $1,522 $4,355
Cost of goods sold 1,281 3,216
------------- -----------------
Gross margin 241 1,139
Selling, general and administrative expenses 907 1,060
------------- -----------------
Operating Income (loss) (666) 79
Income tax expense - 30
------------- -----------------
Net Income (loss) $(666) $49
============= =================
</TABLE>
The Company charged the net pre-tax loss of $666 incurred by the S&I
Business during the quarter ended June 30, 2000 against the reserves
established at March 31, 2000 to provide for the orderly exit from the
S&I Business.
(5) Segment Information
Aqua-Chem's reportable business segments are:
Boiler Group: consists of packaged firetube, commercial and
industrial watertube boilers, burners and aftermarket parts.
F&M Business: 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.
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.
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended
June 30, June 30,
Segment 2000 1999
---------------- ----------------
<S> <C> <C>
Net sales:
Boiler Group $53,817 $40,050
F&M Business 4,146 5,236
---------------- ----------------
Total $57,963 $45,286
================ ================
Income (loss) before income taxes,
minority interest and extraordinary item:
Boiler Group $ 5,500 $ 1,386
F&M Business (782) (77)
Other (4,133) (4,203)
---------------- ----------------
Total $ 585 $(2,894)
================ ================
</TABLE>
(6) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging
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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.
(7) Accumulated Comprehensive Income
Accumulated other comprehensive income consists solely of cumulative
translation adjustments as of June 30, 2000 and March 31, 2000, as
follows:
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
-------------- ----------------
<S> <C> <C>
Cumulative translation adjustment $(65) $148
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF AQUA-CHEM
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the consolidated condensed financial
statements of the Company appearing elsewhere in this document.
RESULTS OF OPERATIONS
Net sales and gross margins for the Boiler Group and the F&M Business
for the periods indicated is listed below. These amounts exclude activity
associated with the S&I Business.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
------------- ----------------
(dollars in millions)
<S> <C> <C>
Net sales:
Boiler Group $53.8 $40.1
F&M Business 4.2 5.2
------------- ----------------
Total $58.0 $45.3
============= ================
Gross Margin:
Boiler Group $14.4 $8.5
F&M Business .1 1.0
------------- ----------------
Total $14.5 $9.5
============= ================
</TABLE>
THREE MONTHS ENDED June 30, 2000 COMPARED TO THREE MONTHS ENDED June 30, 1999
Net Sales. Net sales from continuing operations for the quarter ended
June 30, 2000 increased $13.7 million (28.0%) to $58.0 million from $45.3
million for the comparable period of Fiscal 2000. Boiler Group revenue grew
$13.7 million due to increased shipments of premium firetube boilers, industrial
watertube boilers, and energy recovery systems. Net sales from the F&M Business
declined $1.0 million due to lower revenue from its military product lines.
Gross Margin. Gross margin increased $5.0 million (53.1%) to $14.5
million from $9.5 million. The gross margin percentage increased 4.1 percentage
points to 25.0% from 20.9% for the comparable period during Fiscal 2000. The
Boiler Group's Fiscal 2000 gross margin percentage increased 5.6 percentage
points to 26.7% due to a sales mix weighted more heavily to higher margin
boilers and related equipment and after market product and services. In
addition, the quarter ended June 30, 1999 was impacted by manufacturing
inefficiencies associated with the Boiler Group's closure of its Greenville, MS
facility. F&M Business' gross margin percentage decreased 17.6 percentage points
to 1.9% primarily
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as a result of manufacturing disruption associated with the removal of the
deaerator product line from its Knoxville, TN facility combined with lower
overall production at that facility resulting from the aforementioned transfer
of the deaerator line as well as lower volume of the traditional F&M Business'
products resulting from soft markets.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased $1.9 million (22.6%) to $10.1 million from
$8.3 million for the comparable period during Fiscal 2000. The increase is due
primarily to higher commission cost related to the higher Boiler Group sales
volume and mix favoring higher margin product, which typically carry higher
commission rates, and to increased expense associated with performance-based
compensation resulting from improved operating results.
Restructuring. During the first quarter of Fiscal 2000, the Company
recorded a $.2 million restructuring charge related to employee termination
payments and related outplacement services. The Company recorded no
restructuring charges during the first quarter of Fiscal 2001.
Operating Income. For the reasons set forth above, operating income
increased $3.4 million to $4.3 million from $.9 million for the comparable
period during Fiscal 2000.
Other Income (Expense). Other Income (Expense) for the first quarter of
Fiscal 2001 was an expense of $3.7 million as compared to an expense of $3.8
million during the comparable period during Fiscal 2000. Interest expense
totaled $3.7 million and $3.8 million during the first quarters of Fiscal 2001
and Fiscal 2000, respectively.
Discontinued Operations. During the first quarter of Fiscal 2000, the
Company recognized pretax income of $.1 million on its S&I Business. During the
fourth quarter of Fiscal 2000, the Company recorded a pre-tax charge of $4.2
million related to its decision to exit the S&I Business, including a reserve
for anticipated operating losses during Fiscal 2001. As a result, during the
first quarter of Fiscal 2001, the Company recognized no income or loss
associated with the S&I Business. See Note 4 to the Consolidated Condensed
Financial Statements for further information.
Backlog. The Company's Backlog from continuing operations as of June
30, 2000 decreased $3.5 million to $60.6 million from $64.1 million at March 31,
2000. The Boiler Group's backlog decreased $3.2 million to $55.5 million from
$58.7 million due to strong shipment volume during the quarter. The F&M
Business' backlog declined slightly to $5.1 million from $5.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $5.5 million during the
period as compared to cash used of $2.6 million during the first quarter of
Fiscal 2000. The increase of $8.1 million is attributable to improved operating
results and inventory management combined with more favorable timing of accounts
payable offset partially by increased net revenue in excess of billings
resulting from a mix of larger projects with less favorable payment terms.
Cash used in investing activities was $.6 million during the period as
compared to cash provided of $.1 million during the first quarter of Fiscal
2000. Capital spending during the period totaled $.6 million whereas capital
spending during the first quarter of Fiscal 2000 totaled $1.1 million. During
the first quarter of Fiscal 2000, the Company also received proceeds of $1.2
million related to the sale of its vacant manufacturing facility in Lebanon, PA.
Cash used in financing activities was $.5 million during the period and
related to net repayments on the Company's revolving credit facility. During the
first quarter of Fiscal 2000, there was no net cash provided by or used in
financing activities.
BORROWING AVAILABILITY AND LIMITATIONS.
The Company has a $45.0 million revolving credit facility that is
secured by substantially all assets of the Company. Under the revolving credit
facility, the Company is required to comply with covenants included in the
agreement as amended. These covenants include a requirement to maintain a
specified level of consolidated tangible net worth,
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a specified fixed charge coverage ratio, and a specified senior funded debt to
consolidated EBITDA ratio. As of June 30, 2000, under the amended revolving
credit facility, the Company was eligible to borrow $40.7 million, had no
borrowings against the facility, and had $10 million of invested cash.
Subsequent to June 30, in addition to funding normal operating matters, the
Company made a $7.0 million interest payment on its Senior Subordinated Notes
without borrowing on its line of credit. As of August 10, 2000, under the
amended revolving credit facility, the Company was eligible to borrow $41.0
million, had no borrowings against the facility, and had $6.1 million of
invested cash. The Company intends to fund future working capital, capital
expenditures and debt service requirements through cash flows generated from
operating activities and, when necessary, from borrowings under the revolving
credit facility.
At June 30, 2000 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 Company from
incurring additional debt unless the Company satisfies certain requirements
identified in the Indenture. At June 30, 2000, subject to other covenant
limitations, the Company could have incurred approximately $74.7 million of
additional indebtedness pursuant to the terms of the Indenture.
The Company expects that its cash needs for debt service under the
Indenture during the remaining three quarters of Fiscal 2001 will be
approximately $14 million. During July, the Company paid $7 million out of its
cash reserves, and the remaining $7 million is due in January 2001. Mandatory
repayments of the Company's outstanding indebtedness and mandatory redemptions
of the Company's outstanding Series A Preferred Stock subsequent to June 30,
2000 are $1 million in each of Fiscal 2001 and 2002 and $125 million thereafter.
The Company believes that its manufacturing facilities and computer
software and hardware are generally adequate to meet projected needs. During
Fiscal 2001, the Company expects to make approximately $4 million of capital
expenditures to be spent primarily at its manufacturing facilities on projects
and equipment designed to improve quality and efficiency. During the first
quarter of Fiscal 2001, the Company's capital spending totaled $.6 million.
Management believes that its existing cash resources, cash generated
from operating activities, and its 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 June 30, 2000, the Company had no material market risk exposure
(e.g., interest rate risk, foreign currency exchange rate risk or commodity
price risk).
STRATEGY
The Board of Directors of the Company has, in the past and may, from time to
time in the future, consider a variety of strategic alternatives to maximize
shareholder value for the holders of common and preferred stock, including, but
not limited to, the disposition of one or more of its business units, the
repurchase of its outstanding notes, entering into partnerships, joint
ventures, or other strategic alliances or the pursuit of acquisitions within
its industry.
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 well 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, changes in environmental laws, and
employee and labor relations.
11
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See attached Exhibit Index.
(b) There were no reports filed on Form 8-K during the quarter for which
this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AQUA-CHEM, INC. (Registrant)
Date: August 14, 2000 By: /s/ James A. Kettinger
-------------------------
James A. Kettinger
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
TO QUARTERLY REPORT ON FORM 10-Q
OF
AQUA-CHEM, INC.
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE HEREWITH
27 Financial Data Schedule X
(3 months ended June 30, 2000)
14
