<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
-----------------
Commission File Number 33-48432
LAYNE CHRISTENSEN COMPANY
(Exact name of registrant as specified in its charter)
Delaware 48-0920712
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 SHAWNEE MISSION PARKWAY, MISSION WOODS, KANSAS 66205
(Address of principal executive offices) (Zip Code)
(913) 362-0510
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report.)
-----------------
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 ___.
There were 11,641,192 shares of common stock, $.01 par value
per share, outstanding on November 30, 1998.
<PAGE> 2
PART I
ITEM 1. Financial Statements
<TABLE>
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
October 31, January 31,
1998 1998
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,080 $ 2,954
Customer receivables, less allowance
of $2,418 and $2,583, respectively 52,633 49,595
Costs and estimated earnings in excess of
billings on uncompleted contracts 5,945 6,777
Inventories 28,013 27,812
Deferred income taxes 10,229 9,610
Other 8,431 2,346
--------- ---------
Total current assets 108,331 99,094
--------- ---------
Property and equipment:
Land 8,823 8,851
Buildings 15,037 14,678
Machinery and equipment 154,681 143,338
--------- ---------
178,541 166,867
Less - Accumulated depreciation (90,203) (79,948)
--------- ---------
Net property and equipment 88,338 86,919
--------- ---------
Other assets:
Investment in foreign affiliates 19,603 19,456
Goodwill and other intangible assets,
at cost less accumulated amortization 30,770 32,836
Other 3,481 5,594
--------- ---------
Total other assets 53,854 57,886
--------- ---------
$ 250,523 $ 243,899
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
2
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<TABLE>
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands, except share and per share data)
<CAPTION>
October 31, January 31,
1998 1998
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 17,667 $ 20,365
Accrued compensation 11,464 10,924
Accrued insurance expense 8,532 9,059
Other accrued expenses 7,979 9,626
Billings in excess of costs and estimated
earnings on uncompleted contracts 10,663 9,459
---------- ----------
Total current liabilities 56,305 59,433
---------- ----------
Noncurrent and deferred liabilities:
Long-term debt 67,000 57,500
Deferred income taxes 3,881 5,228
Accrued insurance expense 5,316 6,019
Other 1,588 1,460
---------- ----------
Total noncurrent and deferred liabilities 77,785 70,207
---------- ----------
Contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share,
5,000,000 shares authorized, none issued and
outstanding - -
Common stock, par value $.01 per share, 30,000,000
shares authorized, 11,641,192 and 11,631,556
shares issued and outstanding, respectively 116 116
Capital in excess of par value 83,099 82,889
Retained earnings 40,762 35,614
Unrealized gain (loss) on investments (818) 250
Notes receivable from management stockholders (152) (175)
Unrecognized pension cost (454) (527)
Cumulative translation adjustment 6,120) (3,908)
---------- ----------
Total stockholders' equity 116,433 114,259
---------- ----------
$ 250,523 $ 243,899
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
<TABLE>
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
<CAPTION>
Three Months Nine Months
Ended October 31, Ended October 31,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Net service revenues $ 69,235 $ 83,135 $ 203,769 $ 192,242
Net product sales 5,216 7,200 17,709 23,526
--------- -------- --------- ---------
Total 74,451 90,335 221,478 215,768
--------- -------- --------- ---------
Cost of revenues (exclusive
of depreciation shown below):
Cost of service revenues 49,440 59,662 144,816 138,677
Cost of product sales 4,091 5,286 13,673 17,094
--------- -------- --------- ---------
Total 53,531 64,948 158,489 155,771
--------- -------- --------- ---------
Gross profit 20,920 25,387 62,989 59,997
Selling, general and
administrative expenses 11,938 12,152 35,877 33,599
Depreciation and amortization 5,627 4,718 16,381 10,419
--------- -------- --------- ---------
Operating income 3,355 8,517 10,731 15,979
Other income (expense):
Equity in earnings (loss)
of foreign affiliates (985) 585 799 2,383
Interest (1,257) (1,218) (3,760) (2,564)
Other, net 1,078 (15) 1,105 (80)
--------- -------- --------- ---------
Income before income taxes 2,191 7,869 8,875 15,718
Income tax expense 1,054 2,990 3,727 5,973
--------- -------- --------- ---------
Net income $ 1,137 $ 4,879 $ 5,148 $ 9,745
========= ======== ======== =========
Basic earnings per share $ .10 $ .44 $ .44 $ 1.01
========= ======== ======== =========
Diluted earnings per share .10 $ .42 $ .43 $ .97
========= ======== ======== =========
Weighted average number of
common and dilutive equiv-
alent shares outstanding:
Weighted average shares
outstanding 11,641,000 11,092,000 11,638,000 9,622,000
Dilutive stock options 127,000 448,000 272,000 414,000
---------- ---------- ---------- ----------
11,768,000 11,540,000 11,910,000 10,036,000
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
<TABLE>
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
<CAPTION>
Nine Months
Ended October 31,
-------------------
1998 1997
-------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 5,148 $ 9,745
Adjustments to reconcile net income to cash
from operations:
Depreciation and amortization 16,381 10,419
Deferred income taxes (1,893) 1,093
Equity in earnings of foreign affiliates (799) (2,383)
Dividends received from foreign affiliates 652 756
(Gain) loss from disposal of property and
equipment (1,282) 97
Changes in current assets and liabilities
(exclusive of effects of acquisitions):
(Increase) decrease in customer receivables 455 (12,952)
(Increase) decrease in cost and estimated
earnings in excess of billings on
uncompleted contracts 808 (2,590)
(Increase) in inventories (290) (1,420)
(Increase) decrease in other current assets (4,822) 166
(Decrease) in accounts payable and
accrued expenses (10,709) (625)
Increase in billings in excess of costs and
estimated earnings on uncompleted contracts 1,383 6,262
Other, net 663 (709)
------- -------
Cash from operating activities 5,695 7,859
------- -------
Cash flow from investing activities:
Additions to property and equipment (13,097) (15,890)
Proceeds from disposal of property and equipment 3,833 738
Acquisitions of businesses, net of cash acquired (6,293) (53,942)
Purchase of available for sale investments (324) -
Investment in foreign affiliates - (19)
------- -------
Cash used in investing activities (15,881) (69,113)
------- -------
Cash flow from financing activities:
Net borrowings under revolving facility 9,500 26,000
Repayments of long-term debt - (5,870)
Payments on notes receivable from management
stockholders 23 24
Issuance of common stock - 43,510
Debt issuance costs - (725)
------- -------
Cash from financing activities 9,523 62,939
------- -------
Effects of exchange rate changes on cash 789 -
------- -------
Net increase in cash and cash equivalents 126 1,685
Cash and cash equivalents at beginning of period 2,954 1,697
------- -------
Cash and cash equivalents at end of period $ 3,080 $ 3,382
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
5
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LAYNE CHRISTENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies and Basis of Presentation
The consolidated financial statements include the accounts of
Layne Christensen Company and its subsidiaries (together, the
Company), all of which are wholly owned. All significant
intercompany transactions have been eliminated. Investments in
affiliates (33% to 50% owned) in which the Company exercises
influence over operating and financial policies are accounted for
on the equity method. The unaudited consolidated financial
statements should be read in conjunction with the consolidated
financial statements of the Company for the year ended January
31, 1998 as filed in its Annual Report on Form 10-K.
The accompanying unaudited consolidated financial statements
include all adjustments (consisting only of normal recurring
accruals) which, in the opinion of management, are necessary for
a fair presentation of financial position, results of operations
and cash flows. Results of operations for interim periods are
not necessarily indicative of results to be expected for a full
year.
Earnings per common share are based upon the weighted average
number of common and dilutive equivalent shares outstanding.
Options to purchase common stock are included based on the
treasury stock method for dilutive earnings per share, except
when their effect is antidilutive.
The amounts paid for income taxes and interest are as follows (in
thousands):
Nine Months Ended October 31,
-----------------------------
1998 1997
----------- -----------
Income taxes $5,800 $4,405
Interest 3,686 2,730
During the first quarter of fiscal 1999, the Company issued 9,636
shares of common stock and 22,688 stock options to employees
related to fiscal 1998 compensation awards. The total value of
these awards was approximately $210,000, which was accrued at
January 31, 1998.
2. Acquisitions
On March 26, 1998, the Company completed a transaction to
purchase certain assets of Hydro Group, Inc., a New Jersey-based
drilling contractor (the "Hydro Acquisition") for approximately
$6,293,000 in cash. The acquisition has been accounted for using
the purchase method of accounting and accordingly, the operations
of Hydro Group, Inc. have been included from the date of
acquisition. Had this acquisition taken place as of February 1,
1998, pro forma operating results would not have been
significantly different from those reported.
6
<PAGE> 7
The purchase price was allocated as follows (in thousands of
dollars):
Property and equipment $7,167
Working capital (874)
------
Total purchase price, net of cash acquired $6,293
======
3. Inventories
The Company values inventories at the lower of cost (first-in,
first-out) or market (in thousands):
As of
----------------------
October 31, January 31,
1998 1998
--------- ---------
Raw materials $ 1,770 $ 1,552
Work in process 1,685 1,673
Finished products, parts and supplies 24,558 4,587
--------- ---------
Total $ 28,013 $ 27,812
========= =========
4. Debt
During May, 1998, the Company entered into an interest rate swap
agreement (the "Swap Agreement") with Bank of America National
Trust and Savings Association. The Swap Agreement, which
effectively fixes the interest rate at 5.965%, plus the margin
(currently .5%) as defined in the Company's credit agreement, on
$25,000,000 of the Company's outstanding indebtedness under its
credit agreement, calls for quarterly interest payments which
commenced on August 15, 1998. The Swap Agreement will terminate
in May, 2002.
5. Comprehensive Income
Effective February 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" which requires prominent disclosure of comprehensive
income. Comprehensive income for the nine months ended October
31, 1998 and 1997 was $1,941 and $9,013, respectively.
Comprehensive income includes net income, unrealized gains or
losses on the Company's available for sale securities, minimum
pension liability adjustments and foreign currency cumulative
translation adjustment for the periods presented.
6. Contingencies
The Company's drilling activities involve certain operating
hazards that can result in personal injury or loss of life,
damage and destruction of property and equipment, damage to the
surrounding areas, release of hazardous substances or wastes and
other damage to the environment, interruption or suspension of
drill site operations and loss of revenues and future business.
The magnitude of these operating risks is amplified when the
Company, as is frequently the case, conducts a project on a
fixed-price, "turnkey" basis where the Company delegates certain
functions to subcontractors but remains responsible to the
customer for the subcontracted work. In addition, the Company is
exposed to potential
7
<PAGE> 8
liability under foreign, federal, state and local laws and
regulations, contractual indemnification agreements or otherwise
in connection with its provision of services and products.
Litigation arising from any such occurrences may result in the
Company's being named as a defendant in lawsuits asserting large
claims. Although the Company maintains insurance protection that
it considers economically prudent, there can be no assurance that
any such insurance will be sufficient or effective under all
circumstances or against all claims or hazards to which the
Company may be subject or that the Company will be able to
continue to obtain such insurance protection. A successful claim
for damage resulting from a hazard for which the Company is not
fully insured could have a material adverse effect on the
Company. In addition, the Company does not maintain political
risk insurance or business interruption insurance with respect to
its foreign operations.
The Company is involved in various matters of litigation, claims
and disputes which have arisen in the ordinary course of the
Company's business. While the resolution of any of these matters
may have an impact on the financial results for the period in
which the matter is resolved, the Company believes that the
ultimate disposition of these matters will not, in the aggregate,
have a material adverse effect upon its business or consolidated
financial position, results of operations or cash flows.
===============================================
8
<PAGE> 9
ITEM 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Cautionary Language Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Exchange Act of 1934. Such statements are indicated
by words or phrases such as "anticipate," "estimate," "project,"
"believe," "intend," "expect," "plan" and similar words or
phrases. Such statements are based on current expectations and
are subject to certain risks, uncertainties and assumptions,
including but not limited to Year 2000 compliance issues,
prevailing prices for various metals, unanticipated slowdowns in
the Company's major markets, the impact of competition, the
effectiveness of operational changes expected to increase
efficiency and productivity, worldwide economic and political
conditions and foreign currency fluctuations that may affect
worldwide results of operations. Should one or more of these
risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially
and adversely from those anticipated, estimated or projected.
These forward-looking statements are made as of the date of this
filing, and the Company assumes no obligation to update such
forward-looking statements or to update the reasons why actual
results could differ materially from those anticipated in such
forward-looking statements.
Results of Operations
The Company substantially consummated the acquisition of Stanley
Mining Services Pty Limited (the "Stanley Acquisition"), a
mineral exploration drilling company with operations in Australia
and Africa, at the end of July 1997. Stanley has been reflected
in Layne Christensen's results of operations beginning in the
third quarter ending October 31, 1997. The Stanley Acquisition
was accounted for using the purchase method of accounting, and
will have a significant effect on Layne Christensen's future
operations and on comparisons of year-to-date income and expense
items in relation to the first nine months of fiscal 1998. Among
other things, the Company has incurred a substantial increase in
long-term debt and goodwill and will incur a substantial increase
in interest expense and goodwill amortization in future periods.
The following table presents, for the periods indicated, the
percentage relationship which certain items reflected in the
Company's consolidated statements of income bear to revenues and
the percentage increase or decrease in the dollar amount of such
items period to period.
9
<PAGE> 10
<TABLE>
<CAPTION>
Three Months Nine Months Period-to
Ended October 31, Ended October 31, Period Change
---------------- ---------------- --------------
1998 1997 1998 1997 Three Nine
------- ------- ------- ------- Months Months
Revenues: ------- ------
<S> <C> <C> <C> <C> <C> <C>
Water well drilling
and maintenance 49.6% 35.7% 47.4% 43.1% 14.5% 12.8%
Mineral exploration
drilling 26.3 29.6 28.4 25.0 (26.7) 16.8
Geotechnical drilling 9.3 20.4 8.9 14.6 (62.6) (37.1)
Environmental drilling 7.8 6.3 7.3 6.4 2.1 16.1
----- ----- ----- -----
Total service revenues 93.0 92.0 92.0 89.1 (16.7) 6.0
Product sales 7.0 8.0 8.0 10.9 (27.6) (24.7)
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% (17.6) 2.6
===== ===== ===== =====
Cost of revenues:
Cost of service revenues 71.4% 71.8% 71.1% 72.1% (17.1) 4.4
Cost of product sales 78.4 73.4 77.2 72.7 (22.6) (20.0)
----- ----- ----- -----
Total cost of revenues 71.9 71.9 71.6 72.2 (17.6) 1.7
----- ----- ----- -----
Gross profit 28.1 28.1 28.4 27.8 (17.6) 5.0
Selling, general and
administrative expenses 16.0 13.5 16.2 15.6 (1.8) 6.8
Depreciation and
amortization 7.6 5.2 7.4 4.8 14.5 50.5
----- ----- ----- -----
Operating income 4.5 9.4 4.8 7.4 (60.6) (32.8)
Other income (expense):
Equity in earnings (loss)
of foreign affiliates (1.3) 0.6 0.4 1.1 * (66.5)
Interest (1.7) (1.3) (1.7) (1.2) 3.2 46.6
Other, net 1.4 0.0 0.5 0.0 * *
----- ----- ----- -----
Income before income
taxes 2.9 8.7 4.0 7.3 (72.2) (43.5)
Income tax expense 1.4 3.3 1.7 2.8 (64.7) (37.6)
----- ----- ----- -----
Net income 1.5% 5.4% 2.3% 4.5% (76.7) (47.2)
===== ===== ===== =====
- -------------------
* Not meaningful.
</TABLE>
RESULTS OF OPERATIONS
Revenues for the three months ended October 31, 1998 decreased
$15,884,000, or 17.6%, to $74,451,000 while revenues for the nine
months ended October 31, 1998 increased $5,710,000, or 2.6%, to
$221,478,000 from the three and nine months ended October 31,
1997, respectively.
Water well drilling and maintenance revenues increased 14.5%, to
$36,964,000, and 12.8%, to $104,912,000, for the three and nine
months ended October 31, 1998, respectively, compared to revenues
of $32,276,000 and $92,978,000 for the three and nine months
ended October 31, 1997, respectively. The increases in water
well drilling and maintenance revenues were primarily the
result of the Hydro Acquisition and, for the nine month period,
the previously announced acquisition of a Louisiana drilling
company.
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Mineral exploration drilling revenues decreased 26.7%, to
$19,570,000, and increased 16.8%, to $62,912,000, for the
three and nine months ended October 31, 1998, respectively,
from $26,716,000 and $53,851,000 for the three and nine months
ended October 31, 1997, respectively. The decrease for the
three months ended October 31, 1998 was primarily a result of
lower demand for the Company's services as a result of the
decrease in exploration and development activities conducted
by mining companies. The increase for the nine months ended
October 31, 1998 was primarily the result of the Stanley
Acquisition in July 1997 and other smaller acquisitions since
that time. Exclusive of these acquisitions, mineral exploration
revenues were down 41.7% for the nine month period ended
October 31, 1998, also a result of the decrease in exploration
and development activities noted above. Mineral exploration is
highly speculative and is influenced by a variety of factors,
including the prevailing prices for various metals that often
fluctuate widely. In this connection, the decline in the price
of various metals has continued to impact the level of mineral
exploration and development activities conducted by mining
companies and has had, and could continue to have, an adverse
effect on the Company.
Geotechnical drilling revenues decreased 62.6%, to $6,912,000,
and 37.1%, to $19,829,000, for the three and nine months ended
October 31, 1998, respectively, compared to revenues of
$18,473,000 and $31,537,000 for the three and nine months ended
October 31, 1997, respectively. Exclusive of the Company's
previously announced ground freeze project in Timmins, Ontario,
Canada which was substantially completed during the first quarter
of fiscal 1999, geotechnical drilling revenues increased 12.6%
and 47.5% for the three and nine months ended October 31, 1998,
respectively, as a result of growing demand for the Company's
services in these markets.
Environmental drilling revenues increased 2.1%, to $5,789,000,
and 16.1%, to $16,116,000, for the three and nine months ended
October 31, 1998, respectively, from $5,670,000 and $13,876,000
for the three and nine months ended October 31, 1997,
respectively. The Company believes the increases were largely
attributable to an increase in the number of larger and more
technically demanding projects.
Product sales decreased 27.6%, to $5,216,000 and 24.7%, to
$17,709,000, for the three and nine months ended October 31,
1998, respectively, from $7,200,000 and $23,526,000 for the three
and nine months ended October 31, 1997, respectively. The
decrease is attributed to the lower levels of activity in the
mining industry as previously discussed.
Gross profit as a percentage of revenues was 28.1% and 28.4% for
the three and nine months ended October 31, 1998, respectively,
compared to 28.1% and 27.8% for the same periods last year. The
increase in the gross profit as a percentage of revenues for the
nine months ended October 31, 1998, was attributed to the Company
realizing better than previously expected gross profit margins on
certain complex international projects which were finalized
during the second quarter of fiscal 1999.
11
<PAGE> 12
Selling, general and administrative expenses decreased to
$11,938,000 and increased to $35,877,000 (or 16.0% and 16.2% of
revenues, respectively) for the three and nine months ended
October 31, 1998 compared to $12,152,000 and $33,599,000 (or
13.5% and 15.6% of revenues, respectively) for the three and nine
months ended October 31, 1997. The period-to-period dollar
increase for the nine months ended October 31, 1998 is primarily
a result of the Stanley and Hydro Acquisitions partially offset
by cost reduction measures initiated by the Company during this
period.
Depreciation and amortization increased to $5,627,000 and
$16,381,000 for the three and nine months ended October 31, 1998,
respectively, compared to $4,718,000 and $10,419,000,
respectively, for the same periods last year. The increase in
depreciation and amortization was primarily a result of the
Stanley and Hydro Acquisitions and additions to property and
equipment since last year.
Equity in earnings (loss) of foreign affiliates was ($985,000)
and $799,000 for the three and nine months ended October 31,
1998, respectively, compared to $585,000 and $2,383,000,
respectively, for the same periods last year. The decrease from
the previous periods was primarily a result of lower exploration
and development activities conducted by mining companies in Latin
America.
Interest expense increased $39,000 and $1,196,000 for the three
and nine months ended October 31, 1998, respectively, as compared
to the three and nine months ended October 31, 1997. The
increase was a result of additional borrowings made to finance
acquisitions during the periods.
The increases in other income of $1,093,000 and $1,185,000 during
the three and nine months ended October 31, 1998, respectively,
as compared to the prior periods were primarily the result of a
gain on the sale of certain property during the three months
ended October 31, 1998.
Income taxes of $1,054,000 and $3,727,000 for the three and nine
months ended October 31, 1998, respectively, decreased from
$2,990,000 and $5,973,000, respectively, in the same periods last
year as a result of lower income before taxes compared to the
prior year. This was partially offset by an increase in the
effective tax rate to 42% during the current quarter as compared
to 38% as of October 31, 1997. The effective tax rate increased
primarily as a result of the expected effect of the Company's
international operations on the consolidated operating results.
CHANGES IN FINANCIAL CONDITION
Cash from operations was $5,695,000 for the nine months ended
October 31, 1998, compared to $7,859,000 for the same period last
year. The change in cash from operations was primarily a result
of reduced earnings during the period. Cash from operations, and
borrowings under the Company's available credit agreement, were
primarily used for additions to property and equipment of
$13,097,000, and acquisitions during the nine months ended
October 31, 1998.
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The Company believes that borrowings from its available credit
agreement and cash from operations will be sufficient for the
Company's seasonal cash requirements and to fund its budgeted
capital expenditures for at least the balance of the fiscal year.
YEAR 2000 DISCUSSION
The Year 2000 ("Y2K") problem relates to the fact that many
computer programs use only two digits to refer to a year. As a
result, many computer programs do not properly recognize a year
that begins with "20" instead of "19" (the "Y2K Issue"). The
Company believes that issues related to Y2K compliance of its
information technology ("IT") and non-information technology
("non-IT") systems should not have a material adverse impact on
its business operations or financial results. Further, the
Company believes that the estimated costs of Y2K compliance will
not be material. Other than the Company's financial reporting
systems, the nature of the Company's business is such that it is
generally not reliant upon date sensitive IT and non-IT systems.
Readiness
In the fall of 1995, the Company initiated efforts to become Y2K
compliant. These efforts included, in part, a review of six
types of IT and non-IT systems that the Company believed might be
subject to the Y2K Issue. The identified systems included
personal computers, networks, mainframes, telecommunication
equipment, automated control/manufacturing equipment and facility
security/environmental control equipment. The review conducted
by the Company evaluated the operating systems, application
software and IT and non-IT hardware used in each of the six types
of identified systems. The Company estimates that approximately
75% of its Y2K testing and remediation plan has been completed.
The Company expects to complete the balance of its Y2K testing
and remediation plan by the end of the second quarter of 1999.
In conducting its business, the Company does not rely upon a
limited number of third party vendors or customers. No single
vendor or customer accounts for more than 10% of the Company's
purchases or sales, respectively. In addition, there are
generally a number of alternative vendors from which the Company
can obtain its supplies and services. As a result, the Company
does not believe that Y2K problems experienced by third parties
will have a material adverse impact on the Company's business
operations or financial results. Nevertheless, the Company is in
the process of conducting a review of the Y2K readiness of its
major vendors (both of products and services) and customers. The
Company's belief that it will not be adversely impacted by the
Y2K readiness of third parties with which it conducts business is
based not only upon the number and diversity of its customer and
vendor base but also upon the Y2K compliance that is anticipated
to be achieved by the majority of its customers and vendors. In
light of the fact that the Company's position is based, in part,
upon information supplied by third parties, there is of necessity
an element of uncertainty in the Company's assessment.
13
<PAGE> 14
Costs
The Company is primarily relying upon internal resources to
implement its Y2K readiness plan and to upgrade and/or replace IT
and non-IT systems that the Company believes might be subject to
the Y2K Issue. Accordingly, much of the cost associated with its
Y2K efforts have been incurred through the reallocation of the
Company's internal resources. Over approximately the past two
fiscal years and through the end of its fiscal year ending
January 31, 1999, the Company estimates that it will have
expended approximately $1.5 million in allocated internal
resources and incremental costs for routine IT and non-IT
hardware and software replacements. All of these hardware and
software replacements have been Y2K compliant. The Company will
continue its routine upgrading of IT and non-IT hardware and
software during calendar 1999, all of which will also be Y2K
compliant. The estimated costs of allocated internal resources
and routine systems upgrades during the year ending January 31,
2000 will be approximately $500,000. The Company believes that
the prospective costs of Y2K compliance will not have a material
adverse impact on its financial position or results of
operations. This conclusion is based, in part, upon the
Company's belief that it will not incur significant Y2K related
costs on behalf of third parties with which the Company conducts
business. The Company expects cash flows from operations to be
sufficient to fund the costs associated with Y2K compliance.
Risks
As the nature of the Company's business is such that it is not
generally dependent upon date sensitive data for the production
of its goods and services, the Company believes that any problems
associated with the Y2K Issue will not have a material adverse
impact on the Company's business operations or financial results.
In spite of these presumptions, the inherent uncertainty
associated with the Y2K Issue makes it impossible for the Company
to reach a definitive conclusion as to the actual impact of the
Y2K Issue on its business operations and financial results. As a
result, the Company will continue to review and update, where
necessary, its Y2K strategy and to develop Y2K contingency plans.
Further, the costs and timetables in which the Company plans to
complete the Y2K readiness activities, as well as potential
outcomes of non-compliance, are based on management's best
estimates. These estimates were derived using numerous
assumptions as to the occurrence of future events, including
actions by third parties over which the Company has no control.
Contingency Plans
The Company's Y2K efforts are ongoing and its overall plan, as
well as consideration of contingency plans where applicable, will
continue to evolve as new information becomes available.
Currently, the Company believes that internal Y2K problems,
should any occur, could be addressed through the use of
alternative resources and manual processes without a significant
interruption in the Company's business operations. Further, the
Company believes that the nature of its business does not make it
exclusively reliant upon a limited number of third party vendors
or customers. In addition, the Company believes that third party
14
<PAGE> 15
vendor Y2K problems, should any occur, could be mitigated by
utilizing alternative third party resources without adversely
impacting the Company's business operations or financial results.
15
<PAGE> 16
PART II
ITEM 1 - Legal Proceedings
NONE
ITEM 2 - Changes in Securities
NOT APPLICABLE
ITEM 3 - Defaults Upon Senior Securities
NOT APPLICABLE
ITEM 4 - Submission of Matters to a Vote of Security Holders
NONE
ITEM 5 - Other Information
NONE
ITEM 6 - Exhibits and Reports on Form 8-K
On October 29, 1998, the Company filed a Form 8-K relating
to the declaration by the Board of Directors of a dividend of one
preferred share purchase right for each share of common stock,
$.01 par value, all as more particularly set forth in a Rights
Agreement dated October 12, 1998, between the Company and
National City Bank, as Rights Agent. The report did not include
any financial statements.
The exhibits filed with or incorporated by reference in this
report are listed below:
Exhibit No. Description
4.1 Rights Agreement, dated as of October 12,
1998, between Layne Christensen Company and
National City Bank, which includes the form of
Certificate of Designations of the
Series A Junior Participating Preferred Stock
of Layne Christensen Company as Exhibit A, the
form of Right Certificate as Exhibit B and the
Summary of Rights to Purchase Preferred Shares
as Exhibit C (filed with the Company's Current
Report on Form 8-K (File No. 000-20578) as
Exhibit 4.1 and incorporated herein by
reference).
16
<PAGE> 17
10.1 Third Modification and Extension Agreement
between Parkway Partners, L.L.C. and Layne
Christensen Company dated November 3, 1998.
27(1) Financial Data Schedule.
17
<PAGE> 18
* * * * * * * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
LAYNE CHRISTENSEN COMPANY
(Registrant)
DATE: December 14, 1998 /s/A.B. Schmitt
-------------------------------
A.B. Schmitt, President
and Chief Executive Officer
DATE: December 14, 1998 /s/Jerry W. Fanska
-------------------------------
Jerry W. Fanska, Vice President
Finance and Treasurer
18
<PAGE> 19
EXHIBIT INDEX
Exhibit No. Description
4.1 Rights Agreement, dated as of October 12,
1998, between Layne Christensen Company and
National City Bank, which includes the form of
Certificate of Designations of the Series A
Junior Participating Preferred Stock of Layne
Christensen Company as Exhibit A, the form of
Right Certificate as Exhibit B and the Summary
of Rights to Purchase Preferred Shares as
Exhibit C (filed with the Company's Current
Report on Form 8-K (File No. 000-20578) as
Exhibit 4.1 and incorporated herein by
reference).
10.1 Third Modification and Extension Agreement
between Parkway Partners, L.L.C. and Layne
Christensen Company dated November 3, 1998.
27(1) Financial Data Schedule.
19
<PAGE> 1
EXHIBIT 10.1
THIRD MODIFICATION AND EXTENSION AGREEMENT
This Agreement is entered into effective as of this 3rd day
of November, 1998 between PARKWAY PARTNERS, L.L.C., a Missouri
limited liability company ("Landlord"), and LAYNE CHRISTENSEN
COMPANY (formerly known as Layne, Inc.), a Delaware corporation
("Tenant").
RECITALS:
A. Pursuant to Commercial Building Lease dated December
21, 1994 (the "Original Lease"), Landlord leased to Tenant
approximately 28,599 rentable square feet of area in the
"Commercial Building" (as defined in the Lease, it being agreed
that capitalized terms not otherwise defined herein shall have
the meanings prescribed for such terms in the Lease).
B. Pursuant to First Modification and Ratification of
Lease dated February 26, 1996 (the "First Modification"),
Landlord leased to Tenant an additional 2,235 rentable square
feet of area in the Commercial Building.
C. Pursuant to Second Modification and Ratification of
Lease Agreement dated April 28, 1997 (the "Second Modification";
the Original Lease, as modified by the First Modification and by
the Second Modification, is herein referred to as the "Lease"),
Landlord leased to Tenant an additional 2,374 rentable square
feet of area in the Commercial Building. Accordingly, on the
date of this Agreement, the Leased Premises contains 33,208
square feet of rentable area, and Tenant's Percentage of
Operating Expenses is 71.13%.
D. The parties desire to extend the term of the Lease, as
hereinafter provided.
1
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual
considerations provided herein and other considerations, the
receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
1. EXTENSION OF TERM.
(A) The term of the Lease is hereby extended from
February 29, 2000 through February 28, 2005 (the "Extended
Term").
(B) Notwithstanding that the Second Modification
demised the "Second Expansion Space" (as therein defined) to
Tenant for a term of 5 years, the parties agree that as of the
commencement of the Extended Term, the Second Expansion Space
shall be deemed leased to Tenant on the same terms and conditions
as the balance of the Leased Premises (i.e., the term shall
extend through the balance of the Extended Term, and the Minimum
Annual Rental shall be at the rate set forth in Section 2 below).
(C) The provisions of Section 7 of the Second
Modification (captioned "Buy-Out Option") are hereby deleted and
are of no further force or effect.
2. RENTABLE AREA; MINIMUM ANNUAL RENTAL.
(A) Tenant acknowledges that Landlord has had the
square footage of the Leased Premises and of the balance of the
Commercial Building remeasured by a licensed architect, and based
on such remeasurement, the parties agree that (i) the useable
area of the Leased Premises is 30,000 square feet, (ii) the
useable area of the Commercial Building is 39,054 square feet,
and (iii) Tenant's "Percentage" (as defined in Section 5(B) of
the Lease) is 76.8%. The foregoing adjustments shall become
effective as of January 1, 1999.
2
<PAGE> 3
(B) Commencing February 29, 2000, and continuing
during the Extended Term, the Minimum Annual Rental shall be
$572,838.00 per annum ($47,736.50 per month).
3. OPERATING EXPENSE ESCALATION.
(A) The parties agree that for the period between
February 29, 2000 and December 31, 2000, there shall be no
Operating Expense Escalation Charge payable by Tenant. Effective
on January 1, 2001, in addition to the Minimum Annual Rental,
Tenant shall pay the Operating Expense Escalation Charge set
forth in Section 5.B of the Lease; provided, however, during the
Extended Term, the term "Base Year Operating Expenses" shall mean
the Operating Expenses incurred during calendar year 2000.
(B) The following sentence is hereby deleted from
Section 5.B:
"Notwithstanding the prior provision, in no event shall the
Operating Expense Escalation Charge exceed an amount equal to an
annual increase greater than three and one quarter percent
(3.25%) of the Base Year Operating Expenses for the first year,
and two percent (2%) per year thereafter, on a cumulative basis."
4. LANDLORD'S WORK.
(a) Landlord shall install throughout the first floor
of the Leased Premises new carpeting selected by
Tenant and reasonably approved by Landlord, having
a materials cost (including freight and taxes, but
excluding installation costs) of not more than
$18.50 per square yard. Landlord shall pay all
labor costs associated with the foregoing,
including removal and disposal of existing
carpeting, and installation of new carpeting;
however,
3
<PAGE> 4
Tenant, at Tenant's cost, shall be responsible for
moving its antiques to facilitate such carpet
removal and installation. Tenant and Landlord
shall mutually agree upon a detailed schedule for
the work to be performed.
(b) Landlord shall install new linoleum in the mail
room, not to exceed $30.00 per square yard for
labor and materials.
(c) Landlord shall repair and refinish the parquet
floors located in the Leased Premises.
(d) Landlord shall install an ice maker in Layne's
Garden Level kitchen (SerVend M-200) and perform
the other work described as "Landlord's Work to be
Performed" on the attached Exhibit A.
The work to be performed by Landlord pursuant to this Section 4
is collectively called "Landlord's Work". Upon execution of this
Agreement, Landlord and Tenant shall cooperate to designate the
carpet to be installed pursuant to subparagraph (a) above, and
such carpet shall be ordered by Landlord within 5 days after such
designation. Except for installation of the carpet (which
Landlord shall use good faith efforts to effect within a
reasonable period of time after such carpet is received),
Landlord shall use good faith efforts to commence the balance of
Landlord's Work within a reasonable time after the execution of
this Agreement, and shall thereafter pursue the same with
reasonable diligence to completion. Without limiting the
foregoing, Landlord's Work shall be completed within 90 days
after the date of execution of this Agreement, except for the
carpet installation, which shall be completed within 90 days
after Landlord's receipt of such carpet.
4
<PAGE> 5
[5. SECTION 5 DELETED PER AGREEMENT OF LANDLORD AND TENANT]
6. RIGHT OF FIRST REFUSAL. In the event during the term
of this Lease, Landlord receives an offer from a third party to
purchase Landlord's interest in the Commercial Building Parcel
which Landlord desires to accept (the "Third Party Offer"),
Landlord shall (provided Tenant is not then in default beyond the
expiration of any applicable notice and grace period provided for
the curing of such default), furnish Tenant with a copy of such
Third Party Offer. During the 10 business day period following
Tenant's receipt of such Third Party Offer, Tenant shall have the
pre-emptive right to purchase the Commercial Building Parcel from
Landlord on the same terms and conditions as are set forth in the
Third Party Offer, except that Tenant shall acquire the
Commercial Building Parcel in its "as is" condition, without the
benefit of any so-called "due diligence period" which may be set
forth in the Third Party Offer. If Tenant timely elects to
purchase the Commercial Building Parcel, the parties shall
promptly enter into a purchase and sale agreement, and the
closing of such transaction shall be consummated on a date
selected by Tenant, but which shall occur not later than 45 days
after Tenant's receipt of the Third Party Offer. If Tenant does
not timely elect to so purchase the Commercial Building
5
<PAGE> 6
Parcel, Landlord shall be free to accept the Third Party Offer
and to consummate the sale of the Commercial Building Parcel, in
which case, the provisions of this Paragraph shall automatically
terminate and shall be of no further force or effect.
Notwithstanding the foregoing provisions of this Paragraph, in
the event of a foreclosure of any mortgage encumbering the
Commercial Building Parcel (or any deed in lieu of foreclosure),
the provisions of this Paragraph shall not be applicable to any
such foreclosure (or deed in lieu of foreclosure), however, such
provisions shall apply to any subsequent sale by the party who
purchased the property as part of a foreclosure (or deed in lieu
of foreclosure). Without triggering the foregoing right of first
refusal, Landlord shall be entitled to convey the Commercial
Building Parcel to (i) any entity controlled by, controlling or
under common control with Landlord or any principal of Landlord
(collectively, a "Landlord Affiliate"), (ii) to trusts for the
benefit of any Landlord Affiliate and/or for the benefit of any
of their respective spouses and/or lineal descendants, and (iii)
by testamentary disposition, but in each such case, the
provisions of this Paragraph shall survive any such transfer, and
shall be binding upon Landlord's successors in interest.
7. MISCELLANEOUS. The Lease, as herein amended, shall
continue in full force and effect in accordance with its terms.
The provisions of this Agreement shall inure to the benefit of
and be binding upon the parties hereto, their successors and
assigns.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE> 7
The parties have executed this Agreement effective as of the
date first above written.
PARKWAY PARTNERS, L.L.C.
By: FERRELL HOLDFNGS, L.L.C., Managing
Member
By: FERRELL HOLDINGS, INC., Manager
By: /s/ Melanie Mann
-----------------------------
Melanie Mann, Vice President
"LANDLORD"
LAYNE CHRISTENSEN COMPANY
By: /s/ Kent B. Magill
--------------------------------
Title: Kent B. Magill - Vice President
--------------------------------
7
<PAGE> 8
EXHIBIT "A"
LANDLORD'S WORK TO BE PERFORMED
FLOOR COVERING:
1. Replace cracked marble at east & west doorways off the
lobby.
2. Replace copy room & mail room floor covering
WALL COVERING:
1. Paint copy/mail room walls
2. Paint walls by reader door
3. Paint wall where file cabinet was removed in I/S
4. Paint vents in window area.
COUNTERTOP:
1. Replace countertop in board room kitchen
WATER LEAKS:
1. Repair roof leaks (will continue to work on until
identified)
WOODWORK:
1. Repair/touch-up all scratches on wood doors - (Note-will not
be able to make perfect, but can touch-up with stain so it
will be inconspicuous)
2. Clean & polish all woodwork including doors, crown molding
in executive offices, executive conference room and
boardroom (will be done by building maintenance, as
available)
3. Shim door to boardroom kitchen
ELECTRICAL:
1. Cap off/cover any exposed outlets which protrude from floor
(Delores office & under chairs in seating area)
PARKING LOT:
1. Repair all crumbling stairways in parking lot & put safety
treads strips
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 3,080
<SECURITIES> 0
<RECEIVABLES> 60,996
<ALLOWANCES> 2,418
<INVENTORY> 28,013
<CURRENT-ASSETS> 108,331
<PP&E> 178,541
<DEPRECIATION> 90,203
<TOTAL-ASSETS> 250,523
<CURRENT-LIABILITIES> 56,305
<BONDS> 67,000
0
0
<COMMON> 116
<OTHER-SE> 116,317
<TOTAL-LIABILITY-AND-EQUITY> 250,523
<SALES> 17,709
<TOTAL-REVENUES> 221,478
<CGS> 158,489
<TOTAL-COSTS> 174,870
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,760
<INCOME-PRETAX> 8,875
<INCOME-TAX> 3,727
<INCOME-CONTINUING> 5,148
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,148
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.43
</TABLE>
