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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended September 30, 2000
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period From to
Commission file number 1-13041
WATERLINK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1788678
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4100 HOLIDAY STREET N.W. SUITE 201
CANTON, OHIO 44718
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (330) 649-4000
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 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. [ ]
As of November 30, 2000 the aggregate market value of Waterlink's voting Common
Stock held by non-affiliates of Waterlink was approximately $5,656,000.
As of December 15, 2000 there were 19,659,694 shares of the registrant's Common
Stock, $.001 par value outstanding.
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PART I
ITEM 1. BUSINESS
GENERAL
Waterlink is an international provider of integrated water purification
and wastewater treatment solutions, treating process water and wastewater for
its industrial customers, and drinking water and wastewater for its municipal
customers. Waterlink designs, assembles and sells water and wastewater treatment
products and provides related services to companies and municipalities to treat
their water and wastewater.
Waterlink was incorporated in Delaware on December 7, 1994 to participate
in the consolidation of the highly fragmented water purification and wastewater
treatment industry. Waterlink grew rapidly through acquisitions from 1995
through 1998. To date Waterlink has made 13 acquisitions, targeting businesses
in two principal markets (wastewater and pure water treatment) and in two
geographic areas (United States and Europe). Our principal executive offices are
located at 4100 Holiday Street N.W., Suite 201, Canton, Ohio 44718 and our
telephone number is (330) 649-4000.
DIVISIONAL FORMAT
Waterlink is organized under a divisional format for efficient centers of
product expertise and geographic experience, to better serve Waterlink's
customers and independent marketing representatives. As of September 30, 2000
Waterlink operated within the following four divisions:
- the Specialty Products Division
- the Separations Division
- the European Water and Wastewater Division
- the Pure Water Division
As of the end of fiscal 2000 Waterlink decided to exit its biological
wastewater treatment division. In September 2000 Waterlink sold all of the
outstanding shares of two of its subsidiaries, Aero-Mod Incorporated and
Waterlink Operational Services, Inc. in a single transaction. Both of the
companies were part of the biological wastewater treatment division. The
remaining operating companies within the division are being held for sale or
disposal. Accordingly, the operations of the biological wastewater treatment
division are reported as discontinued operations for each period presented.
The four divisions that comprise the continuing operations of Waterlink
are described below.
SPECIALTY PRODUCTS DIVISION
The specialty products division and its predecessors have specialized in
the development and production of highly sophisticated activated carbons for
more than 80 years. Activated carbon is used to purify air, water and gases by
retaining impurities in carbon granules. The division is a worldwide supplier of
activated carbon for liquid, air and gas filtration systems and is a leading
manufacturer of specialty impregnated carbons used in applications where the
capacity of activated carbons can be significantly increased. A full range of
activated carbons manufactured from coconut shell, coal, wood, along with other
adsorbents such as modified clay media, bone char, and anthracite are offered
for use in:
- adsorption equipment, both standard and custom configurations,
primarily for separation of solvents from air
- bioreactors and bioscrubbers in which contaminants are destroyed using
biological microbes
- corrosive gas control systems to protect expensive electronic operated
controls
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- distillation equipment for separation applications
- systems that control emissions from volatile organic compounds
- area filtration systems for the removal of both vapor phase and
particulate contaminants
- indoor air quality systems
- odor control systems
- soil vapor extraction systems
- solvent recovery systems engineered and installed on a turn-key basis,
to recover valuable solvents
The specialty products division's products and systems are sold worldwide
using a combination of direct sales and sales representatives. For the year
ended September 30, 2000, net sales for this division were approximately $64.7
million.
SEPARATIONS DIVISION
The separations division sells equipment and engineered systems employing
physical and chemical separation technology. Its markets are municipal water and
wastewater as well as industrial process water and wastewater. The separations
division's products include the following:
- Hycor(R) screening, conveying, dewatering and screenings/grit washing
equipment. Dewatering is the process of reducing or eliminating
moisture content. These products operate on the principle of
liquid/solid gravity separation and are used to improve water and
wastewater processes, minimize waste, reduce disposal volumes and
provide for water recovery and reuse.
- Nordic Water(TM) continuous sand filters, inclined plate clarifiers and
sludge removal equipment. These products offer a wide range of
capabilities including tertiary polishing filters, used to remove fine
particles, nitrates and phosphates in wastewater, solutions for high
turbidity, or cloudiness, in municipal water treatment, advanced
settling technology and sophisticated sludge removal equipment.
- Great Lake Environmental(R) oil/water separators, inclined plate
clarifiers and dissolved air flotation systems. This product line
offers a wide range of equipment from the basic separation and removal
of oil droplets from water to systems that remove suspended solids and
emulsified oil from continuous flows.
- Lanco Environmental(TM) filter presses, clarifiers and sludge dryers.
Primarily serving the industrial market, this equipment is designed for
the efficient dewatering of effluent and sludges from specialized
industrial processes.
The separations division sells its products and systems primarily in
North America through a network of independent manufacturers representatives.
For the year ended September 30, 2000, net sales for the division were
approximately $36.3 million.
EUROPEAN WATER AND WASTEWATER DIVISION
The European water and wastewater division provides products and systems
similar to the separations division but focusing specifically on the European
and Asian municipal and industrial markets.
The European water and wastewater division, with principal locations in
Sweden, Germany and the United Kingdom, offers its products under various
proprietary names, including:
- Dynasand(TM) continuous sand filters
- Lamella(TM) separators
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- Zickert(TM) bottom scrapers
- Noxon(TM) centrifuges
- MEVA(TM) fine screens
The products are sold separately or as an engineered turn-key solution.
For the year ended September 30, 2000, net sales for the division were
approximately $40.8 million.
PURE WATER DIVISION
The pure water division sells products and solutions to the residential,
municipal and industrial water and process water markets through our Waterlink
Technologies, Inc. and C'treat Offshore, Inc. companies.
Waterlink Technologies is an international provider of membrane based
solutions focusing on:
- membrane technology with standard reverse osmosis system solutions
which can treat tap water to sea water for the production of high
purity water
- nanofiltration systems, which can be used to decolor, soften and remove
harmful pathogenic organisms
- desalination systems for the purification of sea water to drinking
water for resorts, municipal and governmental installations
- custom engineered microfiltration systems that can be used for the
clarification and removal of harmful organisms from surface water as
well as pre-treatment for other membrane technology in wastewater
applications
- custom designed ultra pure water treatment systems for the power,
electronic and pharmaceutical industries
- the manufacture of pleated membrane sediment filtration cartridges
which are used for removal of suspended solids
- the distribution of other major lines of filter housings, filters and
components
C'treat is a provider of reverse osmosis desalination equipment and
services to the worldwide energy industry. C'treat equipment provides fresh
water for offshore drilling rigs and production platforms. C'treat enjoys a
significant market presence through a sales organization that includes
representatives and technical licensees in 12 countries. For the year ended
September 30, 2000, net sales for the pure water division were approximately
$17.7 million.
OPERATING AND SALES STRATEGY
Waterlink has adopted a decentralized approach to the operational
management of our divisions. While functions such as strategic planning,
financial reporting, treasury, communications and risk management are
centralized in Waterlink's corporate headquarters, local management at each of
our divisions is primarily responsible for the day-to-day operation of the
division's business.
We sell our systems, equipment and services primarily through
approximately 90 direct sales personnel and approximately 270 independent sales
organizations. Waterlink also sells through licensees, principally in the
Asia-Pacific region as well as in Europe. To a lesser extent, Waterlink sells
through water treatment distributors, which take title to equipment for resale
to the end-user. Waterlink seeks to have a single sales organization within a
particular market in order to foster a close relationship with its sales
representatives and present a cohesive image to the marketplace. The independent
sales representatives typically will identify sales opportunities, and then work
together as a team with Waterlink's direct sales force, which has greater
technical and product knowledge, to complete the sale and service the customer.
Waterlink's direct sales force generally plays a more primary role in sales of
Waterlink's design/build solutions.
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While we have received contract awards in excess of $5 million, Waterlink
is primarily focusing its marketing efforts on contract awards of up to
approximately $4 million. We believe that competition is fiercer for larger
contract awards and the timing of these awards is more unpredictable.
COMPETITION
Despite an accelerating trend toward consolidation, the water
purification and wastewater treatment industry remains fragmented and highly
competitive due to the large number of competitors within each product area.
Waterlink has a significant number of competitors, including a number of
integrated suppliers and equipment manufacturers, some of which are larger and
have greater resources than Waterlink. We believe that success in this market is
based on the ability to offer appropriate technology, influence specifications,
have strong distribution, maintain respect within the consulting and engineering
community, finance and bond projects awarded, provide timely delivery, and
maintain a reputation for service and parts support after the sale.
Additionally, in the municipal arena, the ability to meet bid specifications and
to set pricing are often primary considerations. Waterlink believes that its
technologies and cost structures as well as its strong local presence in
international markets enable it to compete effectively against these companies,
however, our poor financial performance has hurt our competitive position to
finance and bond large projects.
Waterlink's primary competitors include operating subsidiaries of
Vivendi, including Compagnie Generale des Eaux and U.S. Filter Corporation; Suez
de Lyonaise des Eaux; Calgon Carbon Corporation; Parkson Corporation; Ionics,
Incorporated; Alpha Laval and Humbolt KHD.
STRATEGIC ALTERNATIVE PROCESS
In May 2000 Waterlink announced that its board of directors had
instructed management to explore various strategic alternatives that could
maximize our shareholders' investment in Waterlink. To assist us in this process
we engaged Banc of America Securities LLC and we are exploring various
alternatives, which include the sale of all or part of Waterlink. While we are
currently in discussions with various parties regarding the potential sale of
our divisions, at this time we can give no assurance that these sales will be
successful, or what businesses Waterlink will retain, if any.
CUSTOMERS
Waterlink markets its products and services to two primary categories of
customers: industrial users that require water for their manufacturing processes
and treat their wastewater and municipal customers that produce drinking water
and treat wastewater. Waterlink has a diverse customer base, with no customer
representing 10% or more of Waterlink's sales for the year ended September 30,
2000.
Waterlink's industrial customers include many "Fortune 500" companies and
their counterparts outside of the United States. Industries served include the
pharmaceutical, electronic and microelectronic, pulp and paper, chemical,
petrochemical, food, beverage, printing, automotive and other heavy
manufacturing industries. For the year ended September 30, 2000 approximately
73.0% of Waterlink's net sales from continuing operations were derived from
industrial sales.
The municipal market is highly competitive. Municipal markets in the
United States and western Europe are more regulatory driven than municipal
markets in other regions. Waterlink focuses its efforts on smaller municipal
projects, which Waterlink believes its product lines are best suited to serve.
Waterlink believes that the municipal business is important to its overall
success because of its large market size. For the year ended September 30, 2000
approximately 27.0% of Waterlink's net sales from continuing operations were
derived from municipal sales.
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BACKLOG FROM CONTINUING OPERATIONS
Total backlog from continuing operations as of September 30, 2000 was
$46.0 million as compared to total backlog from continuing operations of $48.2
million at September 30, 1999. Waterlink had a backlog, consisting of written
purchase orders for capital goods equipment of $35.0 million as of September 30,
2000 as compared to $41.0 million as of September 30, 1999. The decrease in
backlog compared to the prior year was primarily due to a $5.8 million reduction
in backlog within our European water and wastewater division. This decrease has
come primarily from our business in the United Kingdom due to the prior year
having a large project in backlog and from soft market conditions. In addition,
at September 30, 2000, Waterlink had $11.0 million of firm commitments to
purchase recurring revenue products, principally from our specialty products
division, as compared to $7.2 million as of September 30, 1999. Waterlink
expects that a significant portion of our backlog at the beginning of a fiscal
year will be filled during that year. Backlog, and therefore sales, may vary
from quarter to quarter as a result of large projects being booked during any
quarter and varying project delivery schedules. In addition, the orders have
varying delivery schedules and Waterlink's backlog as of any particular date may
not be representative of actual net sales for any succeeding period.
PROCESS AND PRODUCT WARRANTY AND PERFORMANCE GUARANTEES
Consistent with industry practices, we generally offer a warranty on
finished products for one year or in some cases 18 months from sale and 12
months from installation. The costs associated with warranty expense have not
been material. In connection with providing certain products and design/build
services to our customers, Waterlink is sometimes required to guarantee that our
products or services will attain specified levels of quality or performance. If
a product fails to perform according to a warranty, or a project fails to attain
the guaranteed level of quality, and if we are unable to effect a satisfactory
replacement or cure within the prescribed period of time, Waterlink could incur
financial penalties, in the form of liquidated damages, or could be required to
remove and replace the equipment or repeat the service in order to meet the
specifications. To date, Waterlink has not incurred any material payment or
other obligations pursuant to such performance guarantees.
RAW MATERIAL AND SUPPLIES
The raw materials and components used in Waterlink's products are
commonly available commodities such as stainless steel, carbon steel, plastic,
tubing, wiring, electrical components, pumps, valves, compressors, pressure
vessels, oleophilic media, reverse osmosis membranes and sand. Waterlink's
systems are fabricated from these materials and assembled together with products
bought from other companies to form an integrated system. In addition, the
specialty products division is dependent on the importation of coconut shell
carbon from Asia and the supply of coal based carbon from domestic and Asian
sources. Waterlink is not dependent upon any single supplier, and if any
supplier were to become unable to perform, Waterlink believes a substitute
source could readily be found. Waterlink attempts to pass on price increases for
raw materials and components to its customers as market conditions allow.
Waterlink is not a party to any material long-term fixed price supply contracts.
GOVERNMENT REGULATION
Federal, state, local and foreign environmental laws and regulations
necessitate substantial expenditures and compliance with water quality standards
by generators of wastewater and wastewater by-products and impose liabilities on
such entities for noncompliance. Environmental laws and regulations and their
enforcement are, and will continue to be, a significant factor affecting the
marketability of the solutions, systems and equipment provided by Waterlink.
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Many of the countries in which Waterlink operates or in which our
customers are located, including the United States, countries in western Europe,
Latin America, and the Asia-Pacific region, have adopted requirements that
govern water quality, wastewater treatment, and wastewater by-products and the
solutions, systems and equipment provided by Waterlink. These requirements and
their enforcement vary by country, but in general establish water quality, use
and disposal standards, set wastewater effluent discharge limits, and prescribe
standards for the protection of human health and safety and the environment. In
each country, Waterlink monitors the status and impact of local environmental
regulation and enforcement as it relates to the marketability of the solutions,
systems and equipment provided by Waterlink.
Any changes in applicable environmental standards and requirements or
their enforcement may affect the operations of Waterlink by imposing additional
regulatory compliance costs on Waterlink's customers, requiring the modification
of and/or affecting the market for Waterlink's solutions, systems and equipment.
To the extent that demand for Waterlink's solutions, systems and equipment is
created by the need to comply with these enhanced standards and requirements or
their enforcement, any modification of the standards and requirements or their
enforcement may reduce demand, thereby adversely affecting Waterlink's business
prospects. Conversely, changes in applicable environmental laws imposing
additional regulatory compliance standards and requirements or causing stricter
enforcement of these laws or regulations could increase the demand for
Waterlink's systems, equipment and services.
PATENTS, TRADEMARKS AND LICENSES
We currently own a number of United States and foreign patents, and
registrations for United States service marks and trademarks. While each is of
value, Waterlink generally does not consider any of them to be material to our
business, although, as Waterlink has grown and its presence has been extended,
our Waterlink(SM) mark has become more widely known.
EMPLOYEES
At September 30, 2000, Waterlink had approximately 643 employees at our
various locations. Approximately 55 people are covered under collective
bargaining agreements in the United States. All of Waterlink's hourly employees
in Europe are covered by collective bargaining agreements. We believe that our
relationship with our employees is good.
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ITEM 2. PROPERTIES
We lease our corporate offices, consisting of approximately 7,000 square
feet located in Canton, as well as a 1,100 square foot sales office leased in
Santiago, Chile. In addition, our subsidiaries own or lease facilities for
office space and manufacturing as follows:
- Specialty Products Division
- Columbus, Ohio (own)
- Napa and Santa Fe Springs, California (lease)
- Addison, Illinois (lease)
- Sulphur, Louisiana (lease)
- Worcester, Massachusetts (lease)
- Sparks, Nevada (lease)
- Downington, Pennsylvania (lease)
- Morgantown, West Virginia (lease)
- Lancashire, England (lease)
- Separations Division
- Lake Bluff, Illinois (lease)
- Grand Rapids, Michigan (lease)
- European Water and Wastewater Division
- Cambridgeshire, England (own)
- Fjaras, Sweden (own)
- Nynashamn, Mariestad and Frolunda, Sweden (lease)
- Neuss-Grimlinghausen, Germany (lease)
- Vanda, Finland (lease)
- Pure Water Division
- Clearwater and West Palm Beach, Florida (lease)
- The Woodlands, Texas (lease)
The expiration dates for these leased properties range from February 2001
to March 2011. We believe that each of our facilities is in adequate condition
and will continue to remain suitable for its current purpose. We may add
improvements to the properties listed above. We anticipate using our properties
for purposes consistent with their present use. In the event any of the
facilities becomes unavailable upon termination of the existing lease, we
believe we would be able to find a suitable alternative facility without any
significant adverse impact to our operations or us. We believe our properties
are adequately covered by insurance.
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ITEM 3. LEGAL PROCEEDINGS
From time to time in the normal course of our business, we become a party
to litigation. Most of this litigation involves claims for personal or
employment related injury or property damage incurred in connection with our
operations. We are not a party to any material litigation and believe that none
of our litigation will have a material adverse effect on our business or
financial results.
On March 31, 2000, Bartow Ethanol of Florida, LC filed suit against
Waterlink in the Court of Common Pleas, Cuyahoga, County, Ohio, Case No.
4015353. The suit arose out of Waterlink's sale of a biological treatment system
to Bartow in 1998. Essentially, Bartow claimed that Waterlink breached the sale
contract by failing to timely provide a properly functioning biological
treatment system. Bartow also claimed that Waterlink misrepresented its ability
to complete the system on time, among other things. Bartow sought compensatory,
consequential and punitive damages totaling $31,150,000, plus attorneys' fees
and costs in an unspecified amount. In a counterclaim, Waterlink alleged that
Bartow owed Waterlink pursuant to the contract approximately $1,024,000 for the
system. An agreement between Waterlink and Bartow was reached providing for
Bartow dismissing its suit against Waterlink and Waterlink dismissing its
counterclaim against Bartow. As a result of Bartow Ethanol of Florida filing for
protection under Chapter 11 of the federal bankruptcy code, this agreement must
be approved by the bankruptcy court before it becomes effective. No assurance
can be given that such approval will be obtained.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common stock is listed on The New York Stock Exchange under the
symbol "WLK". The following table sets forth the high and low composite sales
prices as reported on the NYSE for the fiscal quarters indicated.
HIGH LOW
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Fiscal Year ended September 30, 1999
First Quarter $ 5 1/4 $ 2 1/2
Second Quarter 5 5/16 3 1/2
Third Quarter 4 3/4 2 13/16
Fourth Quarter 3 1/4 2 3/8
Fiscal Year ended September 30, 2000
First Quarter $ 3 15/16 $ 2 1/4
Second Quarter 3 1/2 2 1/4
Third Quarter 3 1 11/16
Fourth Quarter 2 11/16 1 15/16
The current quoted price of the common stock is listed daily in the Wall
Street Journal in the NYSE section. The number of holders of record of our
common stock as of December 15, 2000 was approximately 237. In addition there
were approximately 2,528 shareholders whose shares are held by brokers/dealers.
DIVIDENDS
We have not paid or declared any dividends on our common stock since our
inception. We anticipate that any earnings will be retained to support the
growth of our business and will not be distributed to stockholders as dividends.
The declaration and payment of any future dividends and the amount of any
dividend will be determined by our board of directors and will depend upon our
results of operations, financial condition, cash requirements, future prospects,
limitations imposed by bank credit and debt agreements and other factors deemed
relevant by our board of directors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
Pursuant to our bank credit agreement, we may not declare or make, or
agree to declare or make, directly or indirectly, any dividends, except that we
may declare and pay dividends with respect to our capital stock payable solely
in additional shares of our common stock or options, warrants or other rights to
purchase our common stock.
RECENT SALES OF UNREGISTERED SECURITIES
During fiscal 2000, Waterlink granted Bank of America, N.A. warrants to
purchase 100,000 shares of common stock at a purchase price of $0.01 per share.
The warrants were issued in connection with a $2 million term loan commitment
entered into with Bank of America N.A. in May 2000. The warrants expire on May
2, 2005. In addition, Waterlink granted CID Equity Partners V, L.P. warrants to
purchase 3,000 shares of common stock at a purchase price of $3.125 per share.
These warrants were granted in lieu of, and on substantially the same terms as,
an equal number of stock options that were, pursuant to the terms of Waterlink's
1997 Non-Employee Director Stock Option Plan, to be granted to Mr. John T.
Hackett, managing general partner of CID Equity Partners V,
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L.P., upon his election to Waterlink's board of directors. The warrants expire
on January 20, 2010. In such transactions, Waterlink did not engage any
underwriter, broker or placement agent. In such transactions, appropriate
disclosure was provided to each investor to support Waterlink's reliance on the
exemption from registration provided by Section 4(2) of the Securities Act. In
connection with such transactions, Waterlink obtained appropriate investment
representations supporting its reliance on such exemption from registration.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of Waterlink over the last five fiscal years. The financial data presented
for the five fiscal years ended September 30, 2000 have been derived from
Waterlink's audited financial statements. The financial data includes the
operating results of each acquired business from the date of acquisition in
accordance with the purchase method of accounting.
You should read the selected historical consolidated financial data in
conjunction with, and they are qualified by, our historical consolidated
financial statements and the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contained elsewhere
in this report.
FISCAL FISCAL FISCAL FISCAL FISCAL
2000 1999 1998 1997 1996
-------- -------- -------- ------- ------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $159,576 $152,412 $113,465 $43,724 $8,293
Cost of sales(1) 110,104 105,106 76,068 28,720 4,859
-------- -------- -------- ------- ------
Gross profit 49,472 47,306 37,397 15,004 3,434
Selling, general and administrative
expenses(2) 39,073 37,327 30,135 12,991 3,709
Special charges(3) 21,444 1,810 4,236 2,630 --
Amortization expense 1,916 1,927 1,323 385 195
-------- -------- -------- ------- ------
Operating income (loss) (12,961) 6,242 1,703 (1,002) (470)
Other income (expense):
Interest expense(4) (7,415) (7,345) (3,141) (861) (292)
Other items--net (37) 20 103 311 (2)
-------- -------- -------- ------- ------
Loss before income taxes (20,413) (1,083) (1,335) (1,552) (764)
Income taxes 454 974 1,396 355 (432)
-------- -------- -------- ------- ------
Loss from continuing operations before
extraordinary item (20,867) (2,057) (2,731) (1,907) (332)
Discontinued operations(5):
Income (loss) from discontinued
operations (1,338) (2,125) (14,773) 2,664 638
Loss on disposal of discontinued
operations (16,151) -- -- -- --
Extraordinary item, net of taxes(6) -- -- -- (385) --
-------- -------- -------- ------- ------
Net income (loss) $(38,356) $ (4,182) $(17,504) $ 372 $ 306
======== ======== ======== ======= ======
Earnings (loss) per common share:
Basic:
From continuing operations $ (1.08) $ (0.16) $ (0.23) $ (0.39) $(0.23)
Discontinued operations (0.91) (0.17) (1.23) 0.54 0.44
Extraordinary item -- -- -- (0.08) --
-------- -------- -------- ------- ------
Net income (loss) $ (1.99) $ (0.33) $ (1.46) $ 0.07 $ 0.21
======== ======== ======== ======= ======
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FISCAL FISCAL FISCAL FISCAL FISCAL
2000 1999 1998 1997 1996
-------- -------- -------- ------- ------
(In thousands, except per share data)
Assuming dilution:
Continuing operations $ (1.08) $ (0.16) $ (0.23) $ (0.24) $(0.07)
Discontinued operations (0.91) (0.17) (1.23) 0.34 0.13
Extraordinary item -- -- -- (0.05) --
-------- -------- -------- ------- ------
Net income (loss) $ (1.99) $ (0.33) $ (1.46) $ 0.05 $ 0.06
======== ======== ======== ======= ======
Weighted average common shares
outstanding:
Basic 19,299 12,556 12,007 4,924 1,469
Assuming dilution 19,299 12,556 12,007 7,804 4,954
SEPTEMBER 30,
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2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
BALANCE SHEET DATA:
Working capital (deficit) (7) $(36,380) $ 34,859 $ 23,583 $13,795 $ 908
Total assets 131,545 177,794 158,162 76,772 15,863
Total debt 71,596 87,347 84,784 16,958 6,824
Redeemable preferred stock -- -- -- -- 8,500
Shareholders' equity 23,981 49,986 54,878 70,873 2,407
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(1) In connection with our 1999 plan, Waterlink decided to discontinue the
manufacturing processes for our Great Lakes subsidiary product line in favor
of utilizing subcontractors. As a result of this decision, during the year
ended September 30, 1999, Waterlink recognized $2,137,000 of costs, or $0.16
per share, comprised of $1,191,000 of cost overruns that took place on a
contractual obligation and $946,000 of inventory write downs and other
costs.
(2) For the year ended September 30, 1999, selling, general and administrative
expenses included $255,000, or $0.02 per share, relating to the write off of
costs associated with acquisition activity that ceased during the year.
(3) Waterlink incurred special charges as follows:
- During the fiscal year ended September 30, 1997, Waterlink incurred a
special charge to operations of $2,630,000, or $0.21 per share, assuming
dilution, resulting primarily from the issuance, concurrent with our
initial public offering, of a ten year option to purchase 100,000 shares of
common stock at a price of $0.10 per share to an officer of Waterlink
pursuant to terms of an employment agreement. Of this amount, approximately
$1,138,000 was non-cash and the remainder represented cash obligations
related principally to the reimbursement of income taxes resulting from the
stock option issuance.
- During the fiscal year ended September 30, 1998, Waterlink incurred special
charges of $4,236,000, or $0.35 per share. These special charges are
comprised of the following three components:
- Waterlink recorded a charge of $2,742,000, or $0.23 per share, primarily
related to termination benefits and costs associated with the exiting of
certain facilities to implement our 1999 plan.
- Waterlink incurred special charges of $1,494,000, or $0.12 per share,
primarily attributable to contractual obligations to our former chief
executive officer, who resigned in June 1998, and costs necessary to
recruit executives to Waterlink.
- During the year ended September 30, 1999, Waterlink incurred special
charges of $1,810,000, or $0.14 per share, for the following:
- Continuing costs of $1,260,000, or $0.10 per share, associated with the
implementation of Waterlink's 1999 plan, primarily related to termination
benefits and facility consolidation costs.
- Waterlink incurred additional charges of $550,000, or $0.04 per share,
related to severance benefits during 1999 related to the announced
retirement of our chairman of the board.
- During the year ended September 30, 2000, Waterlink incurred special
charges of $21,444,000, or $1.11 per share, related to the write off of
goodwill where the undiscounted cash flow of the specific operations could
not support the unamortized carrying value of the asset.
(4) Interest expense for the years ended September 30, 1999 and 2000 include
financing charges of $870,000, or $0.07 per share, and $217,000, or $0.01
per share, respectively, related to the amortization of the value assigned
to warrants issued to purchase up to 283,637 shares of common stock at an
exercise price of $0.01 per share in 1999 and 100,000 shares of common stock
at an exercise price of $0.01 in 2000.
(5) At the end of fiscal 2000 Waterlink decided to exit its biological
wastewater treatment division. Accordingly, the operations of our biological
division are reported as discontinued operations for each period presented
and the estimated loss on disposal of this division is included in fiscal
2000 operations.
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13
(6) Net income for fiscal 1997 reflects an extraordinary item. Waterlink used a
portion of the proceeds from its initial public offering to repay
substantially all of its outstanding indebtedness. In addition, concurrent
with the initial public offering Waterlink canceled a note purchase
agreement. In connection with the early retirement of certain indebtedness
and the cancellation of the note purchase agreement, Waterlink realized an
extraordinary charge of $385,000, net of taxes of $257,000, or $0.05 per
share, assuming dilution, related to the write off of unamortized debt
issuance costs and discounts associated with this indebtedness.
(7) Primarily as a result of the special charges related to the impairment of
goodwill and the loss from discontinued operations in fiscal 2000, Waterlink
is in violation of certain of our financial covenants at September 30, 2000.
Due to these covenant violations, the entire balance of the senior credit
facility is classified as current at September 30, 2000. The amount that is
classified as current resulting from this covenant violation is $60,502,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Waterlink is an international provider of integrated water purification
and wastewater treatment solutions, principally to industrial and municipal
customers. Waterlink was incorporated in Delaware on December 7, 1994 and has
grown externally by completing thirteen acquisitions.
Waterlink is organized under a divisional format for efficient centers of
product expertise and geographic experience, to better serve Waterlink's
customers and independent marketing representatives. As of September 30, 2000
Waterlink operated within the following four divisions:
- the Specialty Products Division
- the Separations Division
- the European Water and Wastewater Division
- the Pure Water Division
As of the end of fiscal 2000 Waterlink decided to exit its biological
wastewater treatment division. In September 2000, Waterlink sold all of the
outstanding shares of two of its subsidiaries, Aero-Mod Incorporated and
Waterlink Operational Services, Inc. in a single transaction. Both of the
companies were part of the biological wastewater treatment division. The
remaining operating companies within the division are being held for sale or
disposal. Accordingly, the operations of the biological wastewater treatment
division are reported as discontinued operations for each period presented.
All acquisitions have been accounted for under the purchase method of
accounting and are included in the results of operations for the period
subsequent to the effective date of acquisition. Due to the timing and magnitude
of these acquisitions, results of operations for the periods presented are not
necessarily comparable or indicative of operating results for current or future
periods.
The majority of the systems and equipment produced by Waterlink are
custom designed and take a number of months to produce. Revenues from large
contracts are recognized using the percentage of completion method of accounting
in the proportion that costs incurred bear to total estimated costs at
completion. Revisions of estimated costs or potential contract losses, if any,
are recognized in the period in which they are determined. Provisions are made
currently for all known or anticipated losses. Variations from estimated
contract performance could result in a material adjustment to operating results
for any fiscal quarter or year. Claims for extra work or changes in scope of
work are included in revenues when collection is probable. Revenues from
remaining systems and equipment sales are recognized when shipped.
In the past Waterlink has experienced quarterly fluctuations in operating
results due to the contractual nature of its business and the consequent timing
of these orders. In addition, certain of the contracts will be subject to the
customer's ability to finance, or fund from government sources, the actual costs
of completing the project as well as the ability to receive any necessary
permits to commence the project. Therefore, Waterlink expects that its future
operating results could fluctuate
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14
significantly, especially on a quarterly basis, due to the timing of the
awarding of such contracts, the ability to fund project costs, and the
recognition by Waterlink of revenues and profits. In addition, Waterlink has
historically operated with a moderate backlog. As of September 30, 2000,
Waterlink's total backlog from continuing operations was approximately $46.0
million, consisting of $35.0 million of written purchase orders for capital
goods equipment and $11.0 million of firm commitments to purchase recurring
revenue products, principally from our specialty products division. Quarterly
sales and operating results will be affected by the volume and timing of
contracts received and performed within the quarter, which are difficult to
forecast. Any significant deferral or cancellation of a contract could have a
material adverse effect on Waterlink's operating results in any particular
period. Because of these factors, Waterlink believes that period-to-period
comparisons of its operating results are not necessarily indicative of future
performances.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth for the periods indicated, statements of
operations data as a percentage of net sales:
FISCAL FISCAL FISCAL
2000 1999 1998
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 69.0 69.0 67.0
----- ----- -----
Gross profit 31.0 31.0 33.0
Selling, general and administrative expenses 24.5 24.5 26.6
Special charges 13.4 1.2 3.7
Amortization 1.2 1.2 1.2
----- ----- -----
Operating income (loss) (8.1) 4.1 1.5
Other income (expense):
Interest expense (4.7) (4.8) (2.7)
Other items -- net (0.0) 0.0 0.0
----- ----- -----
Loss before income taxes (12.8) (0.7) (1.2)
Income taxes 0.3 0.6 1.2
----- ----- -----
Loss from continuing operations (13.1) (1.3) (2.4)
Discontinued operations:
Loss from discontinued operations (0.8) (1.4) (13.0)
Loss from disposal of discontinued
operations (10.1) -- --
----- ----- -----
Net loss (24.0)% (2.7)% (15.4)%
===== ===== =====
Year Ended September 30, 2000 Compared to Year Ended September 30, 1999
Net Sales: Net sales for the year ended September 30, 2000 were
$159,576,000, an increase of $7,164,000, or 4.7%, from the prior year. Internal
growth rates at the specialty products, separations and pure water divisions
were 11.5%, 8.5% and 7.6%, respectively. The European water and wastewater
division experienced negative internal growth in US dollars of 8.2% due to
fluctuations in currency exchange rates. Absent these fluctuations in currency
exchange rates from 1999 to 2000, net sales for the European water and
wastewater division would have decreased by only 0.7%, and the consolidated
internal growth rate would have been 7.4%.
Gross Profit: Gross profit for the year ended September 30, 2000 was
$49,472,000, an increase of $2,166,000 from the prior year. Reported gross
margins were 31.0% for both 2000 and 1999. During fiscal 1999 we decided to
discontinue the manufacturing processes for our Great Lakes subsidiary
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15
product line in favor of utilizing subcontractors. As a result of this decision,
during the year ended September 30, 1999, Waterlink recognized $2,137,000 of
costs, comprised of $1,191,000 of cost overruns that took place on a contractual
obligation and $946,000 of inventory write downs and other costs. Absent the
$2,137,000 of costs associated with the exit of the Great Lakes facility, the
gross margin would have been 32.4% for the year ended September 30, 1999. The
lower gross margin in the current year as compared to the adjusted 1999 gross
margin is primarily the result of issues in the European and specialty products
divisions. In the European division, margins have been reduced by additional
contract costs recorded during fiscal 2000 and from lower margin municipal jobs.
Margins within the specialty products division were lower mainly due to the mix
of higher carbon sales that have lower overall gross margins.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the year ended September 30, 2000 were $39,073,000,
an increase of $1,746,000 from the prior year. Selling, general and
administrative expenses as a percentage of net sales were 24.5% in 2000,
unchanged from 24.5% for the prior year.
Special Charges: Special charges of $21,444,000 during the year ended
September 30, 2000 related to the write-off of goodwill at certain divisions. At
the separations division, $8,596,000 of unamortized goodwill was written off
related to the Great Lakes and Lanco product lines. In the European water and
wastewater division, all remaining unamortized goodwill at September 30, 2000
was written off. These non-cash charges were recorded based on an analysis that
indicated the undiscounted cash flows of these product lines and divisions could
not support the carrying value of the assets. Special charges of $1,810,000
during the year ended September 30, 1999 related to the following:
- Continuing costs of $1,260,000 associated with the implementation of
Waterlink's 1999 plan, primarily related to termination benefits and
facility consolidation costs.
- Additional charges of $550,000 related to severance benefits during
fiscal 1999 related to the announced retirement of our chairman of the
board.
Amortization: Amortization expense was $1,916,000 for the year ended
September 30, 2000 as compared to $1,927,000 for the year ended September 30,
1999.
Interest Expense: Interest expense was $7,415,000 for the year ended
September 30, 2000 as compared to $7,345,000 for the year ended September 30,
1999.
Income Taxes: Waterlink recorded income taxes of $454,000 on a pre-tax
loss of $20,413,000 for the year ended September 30, 2000 and income taxes of
$974,000 on a pre-tax loss of $1,083,000 for the year ended September 30, 1999.
These income taxes were recorded on earnings outside the United States and in
certain states domestically.
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Net Sales: Net sales for the year ended September 30, 1999 were
$152,412,000, an increase of $38,947,000 from the prior year. The increase was
due to the acquisition of Chemitreat Services, Inc, on March 2, 1998; of
Aquafine Engineering Services Limited and Purac Engineering Incorporated in a
single transaction on March 25, 1998; and of the specialty products division on
June 5, 1998. Waterlink experienced negative internal growth in US dollars for
the year of 10.2%, resulting primarily from significant revenues generated by
German-based sales activity in the prior year and from exchange rate
fluctuations. Waterlink measures internal growth by comparing each subsidiary's
net sales from the months subsequent to their respective acquisition dates
during the prior year to those same months in the current year.
Gross Profit: Gross profit for the year ended September 30, 1999 was
$47,306,000, an increase of $9,909,000 from the prior year due to the
acquisitions. Gross margin was 31.0% for the 1999 period
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16
as compared to 33.0% for 1998. We decided to discontinue the manufacturing
processes for our Great Lakes subsidiary product line in favor of utilizing
subcontractors. As a result of this decision, during the year ended September
30, 1999, Waterlink recognized $2,137,000 of costs, comprised of $1,191,000 of
cost overruns that took place on a contractual obligation and $946,000 of
inventory write downs and other costs. Absent the $2,137,000 of costs associated
with the exit of the Great Lakes facility, the gross margin would have been
32.4% for the year ended September 30, 1999. The adjusted gross margin of 32.4%
is lower than the 33.0% realized in 1998 primarily due to the June 1998
acquisition of the specialty products division, which historically experiences
lower margins as compared to other Waterlink divisions.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the year ended September 30, 1999 were $37,327,000,
an increase of $7,192,000 from the prior year. The increase was primarily due to
the acquisitions. Selling, general and administrative expenses as a percentage
of net sales were 24.5% in 1999 as compared to 26.6% for the prior year. This
decrease primarily reflects the costs savings realized from Waterlink's 1999
plan; as well as the impact of the June 1998 acquisition of the specialty
products division, which historically experiences a lower percentage of selling,
general and administrative expenses as a percentage of sales as compared to
other Waterlink divisions. The selling, general and administrative expenses for
the year ended September 30, 1999 were increased by a charge of $255,000 from
the write off of costs associated with acquisition activity that ceased during
the year.
Special Charges: Special charges of $1,810,000 during the year ended
September 30, 1999 related to the following:
- Continuing costs of $1,260,000 associated with the implementation of
Waterlink's 1999 plan, primarily related to termination benefits and
facility consolidation costs.
- Additional charges of $550,000 related to severance benefits during
fiscal 1999 related to the announced retirement of our chairman of the
board.
During 1998 Waterlink incurred special charges of $4,236,000 related to
the following:
- Waterlink recorded a charge of $2,742,000 primarily related to
termination benefits and costs associated with the exiting of certain
facilities to implement our 1999 plan.
- Waterlink incurred special charges of $1,494,000, primarily attributable
to contractual obligations to our former chief executive officer, who
resigned in June 1998, and costs necessary to recruit executives to
Waterlink.
Amortization: Amortization expense for the year ended September 30, 1999
was $1,927,000, an increase of $604,000 from the prior year. The increase was
primarily due to the additional goodwill resulting from the fiscal 1998
acquisitions.
Interest Expense: Interest expense for the year ended September 30, 1999
was $7,345,000, an increase of $4,204,000 from the prior year primarily due to
increased borrowings related to Waterlink's fiscal 1998 acquisitions. Interest
expense for 1999 includes a primarily non-cash financing charge of $870,000
related to the amortization of the value assigned to warrants issued to purchase
up to 283,637 shares of common stock at an exercise price of $0.01 per share.
Income Taxes: Waterlink recorded income taxes of $974,000 on a pre-tax
loss of $1,083,000 for the year ended September 30, 1999 and income taxes of
$1,396,000 on a pre-tax loss of $1,335,000 for the year ended September 30,
1998. These income taxes were recorded on earnings outside the United States and
in certain states domestically.
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17
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Waterlink's primary sources of liquidity have been:
- borrowings available under credit facilities
- net proceeds from the sale of Waterlink's common and preferred stock
- issuance of common stock and seller financing incurred in connection
with Waterlink's completed acquisitions
- cash flow from certain profitable acquisitions
Historically, Waterlink's primary uses of capital have been:
- the funding of its acquisition program
- working capital requirements including the funding for growth at
certain acquisitions
- the funding required for certain under-performing acquisitions
In May 2000 Waterlink announced that its board of directors had
instructed management to explore various strategic alternatives that could
maximize our shareholders' investment in Waterlink. To assist us in this process
we engaged Banc of America Securities LLC and we are exploring various
alternatives, which include the sale of all or part of Waterlink. While we are
currently in discussions with various parties regarding the potential sale of
our divisions, at this time we can give no assurance that these sales will be
successful, or what businesses Waterlink will retain, if any.
Waterlink does not currently anticipate making significant capital
investments in plant and equipment because of our efforts to partner with
vendors who manufacture most of the components used in our systems and equipment
as well as our current financial position.
For the year ended September 30, 2000, net cash used by operating
activities was $1,860,000, which was primarily the result of a $6,513,000
increase in working capital, the most significant part of which came from a
reduction in accounts payable, reflecting part of the use of proceeds from the
fiscal 2000 common stock offering. During fiscal 2000 Waterlink sold 6,355,493
shares of common stock that generated net proceeds of $16,346,000 and made
payments on long-term borrowings totaling $15,300,000. These net financing
activities, coupled with selling three subsidiaries for $3,900,000, funded
operations during fiscal 2000, as well as purchases of equipment totaling
$1,409,000 and cash outlays related to the purchases of businesses of $519,000.
Credit Availability. As of September 30, 2000, Waterlink's credit
facilities are comprised of (1) a $69,702,000 domestic facility with Bank of
America National Trust & Savings Association as agent, which expires on May 19,
2003, (2) a $2,000,000 additional term loan commitment as described below, and
(3) separate facilities aggregating approximately $4,750,000 at three of its
overseas subsidiaries. The credit facilities will be utilized to primarily fund
operating activities of Waterlink.
In May 2000 Waterlink entered into an amendment to our senior credit
facility that waived certain financial covenants that were not met at March 31,
2000, assuming Waterlink realizes certain levels of earnings before interest and
taxes through December 31, 2000. Primarily as a result of the special charges
related to the impairment of goodwill and the loss from discontinued operations,
Waterlink is in violation of certain of its financial covenants at September 30,
2000, which have created an event of default under the facility. Without a
waiver of this default and an amendment to our senior credit facility, an
infusion of additional capital, or the sale of significant assets, Waterlink
would not be able to meet its scheduled obligations under the senior credit
facility. We are currently in discussions with our senior bank group regarding
this default. No assurance can be given as to whether a satisfactory waiver of
the default and an amendment to the senior credit facility will be obtained from
our senior bank group. If we are unable to negotiate a satisfactory waiver of
the default or amendment to the senior credit facility, then Waterlink would be
in default under the terms of the credit
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18
agreement. If there is an event of default the lenders could declare that all
borrowings under the credit agreement are immediately due and payable. Since we
would be unable to pay these amounts the lenders could proceed to foreclose on
their security interest, which comprises substantially all of our assets. In
such event, Waterlink would need to examine all alternatives, including, without
limitation, possible protection under the bankruptcy laws. We are currently in
discussions with potential sources of additional debt financing in an amount not
to exceed $1,000,000. No assurance can be given as to our ability to obtain such
additional financing.
In connection with our previously announced exploration of strategic
alternatives to maximize shareholder value, Waterlink is currently in
discussions with various parties regarding the potential sale of our divisions,
and at this time we can give no assurance that these assets sales will be
successful or that they will be sufficient to repay all of our existing
indebtedness. Under the terms of our senior credit facility, all net proceeds
from any asset sales must first be used to repay outstanding indebtedness under
the senior credit facility.
In addition, the May 2000 amendment provided Waterlink with an additional
$2,000,000 term loan commitment through September 29, 2000, which was
subsequently extended to and expired on November 15, 2000. In connection with
the additional $2,000,000 term loan commitment, Waterlink issued to Bank of
America warrants to purchase, in the aggregate, up to 100,000 shares of
Waterlink common stock at an exercise price of $.01 per share. The value of
these warrants totaling $217,000 is being amortized over the term of the
amendment and is included in interest expense. As of September 30, 2000, no
amounts were borrowed under the additional $2,000,000 term loan commitment. This
amendment also provides that all amounts outstanding under the domestic credit
facility will bear interest at a designated variable base rate plus one percent.
Availability for future borrowings was approximately $822,000 at
September 30, 2000, excluding the additional $2,000,000 term loan commitment
described in the preceding paragraph. Waterlink currently does not have any
additional borrowing capacity under the senior credit facility.
The credit facilities restrict or prohibit Waterlink from taking many
actions, including paying dividends and incurring or assuming other indebtedness
or liens. The banks that participate in the credit facilities also must approve
acquisitions. Waterlink's obligations under the credit facilities are secured by
liens on substantially all of Waterlink's domestic assets, including equipment,
inventory, accounts receivable and general intangibles and the pledge of most of
the stock of Waterlink's subsidiaries. Waterlink has guaranteed the payment by
our three overseas subsidiaries of their obligations under the overseas
facilities. The three overseas subsidiaries have given the lenders an assurance
that the subsidiaries would not pledge their assets to any other party.
Market Risk. Waterlink's earnings are affected by changes in interest
rates charged on our domestic facility. If the market rates for borrowings
increased by 1% on our domestic facility, the impact would be an increase to
interest expense of $685,000 with a corresponding decrease to income before
income taxes. This amount was determined by considering the impact of
hypothetical interest rates on the balance of Waterlink's domestic facility at
September 30, 2000. This analysis does not consider the effects of the overall
economic environment associated with such a change nor does it assume any change
to Waterlink's current financial structure.
Waterlink also has exposure to currency rate fluctuations related
primarily to the purchases of inventory and the collection of accounts
receivable. Waterlink continues to utilize a limited number of foreign exchange
instruments, primarily forward contracts, to manage this exposure. Waterlink had
no significant hedging contracts outstanding at September 30, 2000.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which provides a comprehensive and
consistent standard for the recognition and
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19
measurement of derivatives and hedging activities. The Statement will require,
among other things, that all derivatives be recorded on the balance sheet at
fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133", which makes SFAS No. 133 effective for Waterlink
beginning October 1, 2000. Because Waterlink's use of derivatives is not
significant, the adoption of this Statement will not have a material effect on
Waterlink's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition". SAB No. 101 provides
guidance on numerous revenue recognition issues and is effective for Waterlink
in fiscal 2001. Waterlink does not believe the effect of adopting SAB No. 101
will have a material impact on its operations or financial position.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in
this report may include forward-looking statements that involve risks and
uncertainties. While forward-looking statements are sometimes presented with
numerical specificity, they are based on variety of assumptions made by
management regarding future circumstances over which Waterlink has little or no
control. A number of important factors, including those identified in this
section as well as factors discussed elsewhere herein, could cause Waterlink's
actual results to differ materially from those in forward-looking statements or
financial information. Actual results may differ from forward-looking results
for a number of reasons, including the following:
- the success of Waterlink's exploration of strategic alternatives
- the ability to negotiate a waiver of financial covenant violations
and/or an amendment to our senior credit facility
- the ability to obtain additional credit availability to support working
capital requirements
- changes in world economic conditions, including
i. instability of governments and legal systems in countries in
which Waterlink conducts business
ii. significant changes in currency valuations
iii. recessionary environments
iv. the effects of military conflicts
- changes in customer demand and timing of orders as they affect sales
and product mix, including
i. the effect of strikes at customer's facilities
ii. variations in backlog
iii. the impact of changes in industry business cycles
iv. changes in environmental laws
- competitive factors, including
i. changes in market penetration
ii. introduction of new products by existing and new competitors
- changes in operating costs, including
i. changes in Waterlink's and its subcontractors' manufacturing
processes
ii. changes in costs associated with varying levels of
operations
iii. changes resulting from different levels of customers demands
iv. effects of unplanned work stoppages
v. changes in cost of labor and benefits
vi. the cost and availability of raw materials and energy
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20
- the cost of capital, including interest rate increases
- unanticipated litigation, claims or assessments
RISK FACTORS
We May be Unsuccessful in Negotiating a Waiver of Financial Covenant
Violations and/or an Amendment to Our Senior Credit Facility. Waterlink is in
violation of certain of its financial covenants under its senior credit facility
at September 30, 2000. We are currently in discussions with our lenders
regarding this violation. We can give no assurance a satisfactory waiver of the
violation and/or an amendment to the senior credit facility will be obtained
from our lenders. If we are unable to negotiate a satisfactory waiver of the
violation and/or an amendment to the senior credit facility, and in the absence
of other sources of funds to repay the indebtedness outstanding under the senior
credit facility, the lenders could declare that all borrowings under the senior
credit facility are immediately due and payable and could proceed to foreclose
on their security interest, which comprises substantially all of our assets. In
such event, Waterlink would need to examine all alternatives, including, without
limitation, possible protection under the bankruptcy laws.
Our Ability to Fund Operations or Provide Value to Shareholders Will be
Dependent on the Degree of Success of the Strategic Alternative Process. In May
2000 Waterlink announced that our board of directors had authorized management
to explore various strategic alternatives to maximize shareholders' value. This
strategic alternative process has involved the exploration of the sale of all or
parts of Waterlink and raising additional capital through possible debt or
equity placements. Given our high level of debt, we are unable to appropriately
fund the operations of all of our divisions. We are currently in the process of
negotiating the sale of certain of our divisions, which if successful, would
significantly reduce the size and scope of Waterlink. In addition, depending on
the amount of net proceeds and which stock or assets are sold, we may need to
obtain additional capital to be able to operate our remaining businesses, the
terms of which could result in dilution to our existing shareholders. We can
give no assurance as to the ultimate success of our strategic alternative
process.
We May Lose Our New York Stock Exchange Listing. We have a market
capitalization of $9,240,000, based on a stock price of $0.47 and 19,659,694
outstanding shares of common stock on December 15, 2000 and stockholders equity
of $23,981,000 on September 30, 2000. Currently, we fall below the New York
Stock Exchange listing requirement for market capitalization and stockholders'
equity. If our shares were not listed on the New York Stock Exchange, then we
would attempt to have the shares listed on another stock market. We can give no
assurance that we will be able to arrange for such a listing.
Our Quarterly Results of Operations Could Fluctuate Significantly Which
Could Result in Defaults Under Our Senior Credit Facility and in Volatility in
the Market Price of Our Common Stock. We need to finalize complicated contracts
and orders with our customers before we produce our revenues. Often, the timing
of those contracts and orders is also subject to our customers receiving
financing, various permits and other aspects outside our control. A delay in
finalizing any of these contracts could have a significant negative impact on
our operating results in any fiscal quarter. We believe that period-to-period
comparisons of our operating results are not necessarily meaningful and should
not necessarily be relied upon as indicators of our future performance. If we
are able to successfully negotiate an amendment to our senior credit facility or
a waiver of our covenant violation thereunder as of September 30, 2000, there
will likely be some form of financial covenant that will be based on our monthly
operating performance. Given the fluctuations in our operating results, this
could result in our needing to negotiate further amended terms or being in
default of our senior credit facility. Also, these fluctuations in our quarterly
results could lead to our failure to meet expectations of securities analysts
and investors and could seriously harm the market price of our common stock.
Quarterly operating results have varied significantly in the past and will
likely vary significantly in the future.
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21
Our Substantial Amount of Debt Could Limit Our Growth and Imposes
Restrictions on Our Business. We have incurred substantial indebtedness. Our
level of debt and our recent operating performance, including the impact of
special charges and the loss from discontinued operations to our income, limit
our ability to:
- obtain additional financing to fund our strategy, capital expenditures,
acquisitions and other general corporate purposes;
- use operating cash flow in other areas of our business since we must
dedicate a substantial portion of these funds to pay interest and
retire debt; and
- react to changing market conditions and economic downturns.
At September 30, 2000, our total indebtedness was $71,596,000. Our debt
agreements contain numerous financial and operating covenants that limit our
discretion which respect to certain business matters. These covenants place
significant restrictions on, among other things, our ability to:
- incur additional indebtedness, both under the bank credit agreement and
other debt agreements;
- merge or consolidate with other entities;
- repay our obligations; and
- pay dividends and other distributions.
Availability for future borrowings was approximately $822,000 at
September 30, 2000, excluding the additional $2,000,000 term loan commitment
previously described. Waterlink currently does not have any additional borrowing
capacity under the senior credit facility.
The Demand for Our Products is Cyclical. Much of our water purification
and wastewater equipment requires significant capital expenditures by our
customers. As such, the timing of customer purchases from us is affected by
various economic factors, including interest rate and business cycle
fluctuations, the timing and process of government funding and the setting of
rates by regulators, all of which are beyond our control. The cyclical nature of
capital equipment sales could have an adverse affect on our revenues and
profitability in general and on our revenues and profitability in any particular
quarterly financial reporting period.
Our Industry is Highly Competitive. Our industry, the water purification
and wastewater treatment industry, is fragmented and highly competitive due to
the large number of businesses within certain product areas. We compete with
many companies, several of which have greater market penetration, depth of
product line, resources and access to capital, which could be competitive
advantages in securing projects. While we believe we are well positioned to
deliver technology and services at a fair price, some of our competitors have
developed product and service integration capabilities beyond our current scope.
We are Dependent on Key Personnel. Our business depends on our ability to
hire and retain our executive officers and senior management. Our business could
be adversely affected if for any reason any of our executive officers or senior
managers cease to be employed by us. In addition, we will be dependent on the
senior managers of any significant businesses we may acquire in the future and
on our ability to attract and retain qualified managers to support our internal
expansion.
The Current Members of Our Board of Directors and Management Own
Approximately 24.4% of Our Common Stock and Can Exercise Significant Influence
over Our Affairs. Also, Several Institutional Investors Own Substantial
Percentages of Our Common Stock. At November 30, 2000, our current directors and
management own or control, in the aggregate, approximately 24.4% of our common
stock. In addition, several large institutional investors own or control a
significant percentage of our common stock. Accordingly, these individuals and
institutional investors, if acting together or
- 21 -
22
even alone, can exercise significant influence over our affairs including the
election of our directors, appointment of our management and approval of actions
requiring the approval of our stockholders, which may include the adoption of
amendments to our certificate of incorporation, the approval of mergers or sales
of all or substantially all our assets, and similar items. The concentration of
voting power of these stockholders, if they act together, could, under certain
circumstances, have the effect of delaying or preventing a change in control of
Waterlink.
Our Foreign Operations Are Subject to Political and Economic Risks and We
May Be Adversely Affected by Foreign Currency Fluctuation. We sell a substantial
proportion of our systems, equipment and services in Western Europe, Latin
America and other regions outside the United States. Also, a number of our
divisions operate outside of the United States. Our net sales outside the United
States were approximately 45.0% of our net sales for the year ended September
30, 2000. Political, economic, regulatory and social conditions in foreign
countries in which we operate may change. Risks associated with sales and
operations in foreign countries include risks of:
- war
- expropriation or nationalization of assets
- renegotiation or nullification of existing contracts
- changing political conditions
- changing laws and policies affecting trade, taxation and investment
- overlap of different tax structures
- the general hazards associated with the assertion of sovereignty over
certain areas in which operations are conducted
Because our reporting currency is the United States dollar, our
operations outside the United States sometimes face the additional risks of
fluctuating currency values and exchange rates, hard currency shortages and
controls on currency exchange. We are subject to the impact of foreign currency
fluctuations and exchange rate charges on our reporting for results from those
operations in our financial statements.
We May Be Subject to Liability Under Environmental Laws. In the United
States, the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, and comparable state laws, impose liability without fault
for the releases of hazardous substances into the environment. Potentially
responsible parties include (a) owners and operators of a site, (b) parties
which create the hazardous substances released at a site, and (c) parties which
arrange for the transportation or disposal of hazardous substances. We could
face claims by governmental authorities, private individuals and other persons
alleging that hazardous substances were released during the treatment process or
from the use or disposal of end products and by-products of the treatment
process in violation of law. We are also subject to environmental laws in
countries outside the United States where we operate or in which our customers
are located. These requirements and their enforcement may vary by country but in
general prescribe standards for the protection of human health, safety and the
environment.
Changes in Environmental Laws Could Affect Our Business. Federal, state,
local and foreign environmental laws and regulations impose substantial
standards for properly purifying water and treating wastewater, and impose
liabilities for noncompliance. Environmental laws and regulations are, and will
continue to be, a significant factor affecting our ability to sell our
solutions, systems and equipment. To the extent that demand for our solutions,
systems and equipment is created by the need to comply with environmental laws
and regulations, any modification of the standards imposed by these laws and
environmental laws and regulations may reduce demand for our products and
services, thereby adversely affecting our business and prospects.
- 22 -
23
Our Business is Subject to Potential Warranty and Performance Guarantee
Claims. Some of our customers require us to guarantee that our services and
products will be of a specified level of quality or performance. If a product or
service fails to attain that level of quality or performance, we could incur
significant financial penalties.
Provisions of Our Corporate Documents Could Delay or Prevent a Change in
Control of Waterlink. Our certificate of incorporation and bylaws contain
certain provisions which may have anti-takeover effects and may discourage,
delay, or prevent a takeover attempt that a stockholder might consider in his
best interest. These documents allow our board of directors to authorize the
issuance of preferred stock, which could adversely affect the voting and other
rights of the holders of our common stock, provide that our directors are
classified into three classes with staggered terms, and contain a "fair price
provision" which imposes restrictions in the event of certain business
combinations.
ITEM 7(a). QUALITATIVE AND QUANTITATIVE DISCLOSURES REGARDING MARKET RISK
The disclosures required under this item are included in Management's
Discussion and Analysis of Financial Condition and Results of Operations on page
18.
- 23 -
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED SEPTEMBER 30, 2000
CONTENTS
PAGE
----
Report of Independent Auditors.............................. 25
Consolidated Balance Sheets at September 30, 2000 and
1999...................................................... 26
Consolidated Statements of Operations for the years ended
September 30, 2000, 1999 and 1998......................... 28
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 2000, 1999 and 1998............. 29
Consolidated Statements of Cash Flows for the years ended
September 30, 2000, 1999 and 1998......................... 30
Notes to Consolidated Financial Statements.................. 31
- 24 -
25
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Waterlink, Inc.
We have audited the accompanying consolidated balance sheets of
Waterlink, Inc. and subsidiaries as of September 30, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial position of
Waterlink, Inc. and subsidiaries at September 30, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 2000, in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements for 2000 have been
prepared assuming that the Company will continue as a going concern. As more
fully described in Note 3, the Company has incurred recurring operating losses
and has not complied with certain financial covenants of its Senior Credit
Facility. Noncompliance with these covenants has caused $60,502,000 of debt to
be classified as current, creating a working capital deficiency. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to these matters are also described
in Note 3. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that might result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
Canton, Ohio
November 7, 2000
- 25 -
26
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30,
--------------------
2000 1999
-------- --------
(In thousands,
except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 2,917 $ 1,813
Trade accounts receivable, less allowance of $831 in 2000
and
$1,310 in 1999 29,054 31,465
Other receivables 1,863 1,903
Inventories 18,397 21,330
Costs in excess of billings 14,362 12,613
Other current assets 3,193 2,739
Net assets of discontinued operations 49 7,916
-------- --------
Total current assets 69,835 79,779
Property, plant and equipment, at cost:
Land, building and improvements 3,200 2,805
Machinery and equipment 7,748 8,152
Office equipment 2,859 2,523
-------- --------
13,807 13,480
Less accumulated depreciation 3,732 2,259
-------- --------
10,075 11,221
Other assets:
Goodwill, net of amortization of $3,300 in 2000 and $3,699
in 1999 47,916 72,475
Patents, net of amortization of $233 in 2000 and $184 in
1999 503 556
Other assets 3,216 3,374
Net assets of discontinued operations -- 10,389
-------- --------
51,635 86,794
-------- --------
Total assets $131,545 $177,794
======== ========
The accompanying notes are an integral part of these statements.
- 26 -
27
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30,
--------------------
2000 1999
-------- --------
(In thousands,
except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade $ 15,514 $ 20,972
Accrued expenses 17,516 12,859
Additional purchase consideration payable -- 298
Billings in excess of cost 1,314 3,895
Accrued income taxes 531 1,088
Deferred income taxes 143 160
Current portion of long-term obligations 71,197 5,648
-------- --------
Total current liabilities 106,215 44,920
Long-term obligations:
Long-term debt 399 78,449
Convertible subordinated notes -- related parties -- 3,250
Other 950 1,189
-------- --------
1,349 82,888
Shareholders' equity:
Preferred Stock, $.001 par value, authorized -- 10,000,000
shares, none issued and outstanding -- --
Common Stock, voting, $.001 par value,
authorized -- 40,000,000 shares, issued and
outstanding -- 19,659,694 shares in 2000 and 12,635,861
shares in 1999 20 13
Additional paid-in capital 92,087 73,781
Accumulated other comprehensive loss (8,250) (2,288)
Accumulated deficit (59,876) (21,520)
-------- --------
Total shareholders' equity 23,981 49,986
-------- --------
Total liabilities and shareholders' equity $131,545 $177,794
======== ========
The accompanying notes are an integral part of these statements.
- 27 -
28
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands, except per share data)
Net sales $159,576 $152,412 $113,465
Cost of sales 110,104 105,106 76,068
-------- -------- --------
Gross profit 49,472 47,306 37,397
Selling, general and administrative expenses 39,073 37,327 30,135
Special charges 21,444 1,810 4,236
Amortization 1,916 1,927 1,323
-------- -------- --------
Operating income (loss) (12,961) 6,242 1,703
Other income (expense):
Interest expense (7,415) (7,345) (3,141)
Other items -- net (37) 20 103
-------- -------- --------
Loss before income taxes (20,413) (1,083) (1,335)
Income taxes 454 974 1,396
-------- -------- --------
Loss from continuing operations (20,867) (2,057) (2,731)
Discontinued operations:
Loss from operations of Biological Division, less
income taxes of $59 in 1999 and $72 in 1998 (1,338) (2,125) (14,773)
Loss on disposal of Biological Division, including
provision of $832 for operating losses during
phase-out period (16,151) -- --
-------- -------- --------
Net loss $(38,356) $ (4,182) $(17,504)
======== ======== ========
Per share data:
Loss per common share -- basic and assuming
dilution:
Continuing operations $ (1.08) $ (0.16) $ (0.23)
Discontinued operations (0.91) (0.17) (1.23)
-------- -------- --------
$ (1.99) $ (0.33) $ (1.46)
======== ======== ========
Weighted average common shares outstanding:
Basic and assuming dilution 19,299 12,556 12,007
The accompanying notes are an integral part of these statements.
- 28 -
29
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL INCOME (LOSS) DEFICIT EQUITY
------ ---------- ------------- ----------- -------------
(In thousands, except share data)
YEAR ENDED SEPTEMBER 30, 1998
Balance at October 1, 1997 $12 $ 70,739 $ (44) $ 166 $ 70,873
Net loss (17,504) (17,504)
Foreign currency translation
adjustments 275 275
---------
Comprehensive loss (17,229)
Exercise of 275,966 stock
options and warrants 912 912
Issuance of 42,384 shares in
connection with the employee
stock purchase plan 396 396
Issuance of 928 shares in
connection with acquisitions 16 16
Other (90) (90)
--- -------- -------- ---------- ---------
Balance at September 30, 1998 12 71,973 231 (17,338) 54,878
YEAR ENDED SEPTEMBER 30, 1999
Net loss (4,182) (4,182)
Foreign currency translation
adjustments (2,519) (2,519)
---------
Comprehensive loss (6,701)
Conversion of subordinated
notes for 410,257 shares 1 999 1,000
Issuance of warrants in
connection with guaranty of
senior indebtedness 820 820
Other (11) (11)
--- -------- -------- ---------- ---------
Balance at September 30, 1999 13 73,781 (2,288) (21,520) 49,986
YEAR ENDED SEPTEMBER 30, 2000
Net loss (38,356) (38,356)
Foreign currency translation
adjustments (5,962) (5,962)
---------
Comprehensive loss (44,318)
Sale of 6,300,000 shares of
Common Stock 6 16,216 16,222
Conversion of subordinated
notes for 275,230 shares 750 750
Issuance of 393,110 shares in
connection with an
acquisition 1 999 1,000
Issuance of 55,493 shares in
connection with the employee
stock purchase plan 124 124
Issuance of warrants in
connection with the issuance
of a senior term loan 217 217
--- -------- -------- ---------- ---------
Balance at September 30, 2000 $20 $ 92,087 $ (8,250) $ (59,876) $ 23,981
=== ======== ======== ========== =========
The accompanying notes are an integral part of these statements.
- 29 -
30
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
-------------------------------
2000 1999 1998
-------- ------- --------
(In thousands)
OPERATING ACTIVITIES
Loss from continuing operations $(20,867) $(2,057) $ (2,731)
Adjustments to reconcile loss from continuing
operations to net cash (used) provided by operating
activities:
Non-cash portion of special charges 21,444 1,753 94
Deferred income taxes 293 542 667
Depreciation 1,866 1,614 1,153
Amortization 1,917 1,927 1,323
Changes in working capital:
Accounts receivable 169 (6,176) 4,046
Inventories 1,978 (3,185) (1,608)
Cost in excess of billings (2,815) (349) (6,114)
Refundable income taxes - 840 (205)
Other assets (382) 1,250 (4,738)
Accounts payable (4,278) 7,674 417
Accrued expenses 1,713 (1,123) 1,133
Billings in excess of cost (2,482) 666 (2,206)
Accrued income taxes (416) (152) 152
-------- ------- --------
Net cash (used) provided by operating activities (1,860) 3,224 (8,617)
INVESTING ACTIVITIES
Purchases of equipment (1,409) (1,514) (1,934)
Proceeds from sale of subsidiaries 3,900 - -
Purchases of subsidiaries, net of cash acquired (519) (2,240) (53,430)
-------- ------- --------
Net cash provided (used) in investing activities 1,972 (3,754) (55,364)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 300 5,279 64,590
Payments on long-term borrowings (15,300) (2,402) (27)
Proceeds from sale of Common Stock 16,346 - 1,308
-------- ------- --------
Net cash provided by financing activities 1,346 2,877 65,871
Effect of exchange rate changes on cash 87 (1,482) (18)
-------- ------- --------
Cash flows provided by continuing operations 1,545 865 1,872
Cash flows (used in) discontinued operations (441) (2,927) (674)
-------- ------- --------
Increase (decrease) in cash and cash equivalents 1,104 (2,062) 1,198
Cash and cash equivalents at beginning of year 1,813 3,875 2,677
-------- ------- --------
Cash and cash equivalents at end of year $ 2,917 $ 1,813 $ 3,875
======== ======= ========
The accompanying notes are an integral part of these statements.
- 30 -
31
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Waterlink, Inc. and its wholly-owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated upon consolidation.
FISCAL YEAR END -- The Company's fiscal year ends on September 30th.
References in the notes to the financial statements to the years 2000, 1999 and
1998 refer to the fiscal years ended September 30, 2000, 1999 and 1998,
respectively.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
CONTRACTS AND REVENUE RECOGNITION -- The majority of the Company's
systems and equipment are custom designed and take a number of months to
produce. Revenues from large contracts are recognized using the percentage of
completion method of accounting in the proportion that costs bear to total
estimated costs at completion. Revisions of estimated costs or potential
contract losses are recognized in the period in which they are determined.
Provisions are made currently for all known or anticipated losses. Variations
from estimated contract performance could result in a material adjustment to
operating results for any fiscal quarter or year. Claims for extra work or
changes in scope of work are included in revenues when collection is probable.
Contract costs include all material and labor costs, as well as
applicable overheads related to contract performance. General and administrative
expenses are charged to expense as incurred.
Revenues from the remaining equipment and product sales are recognized
when shipped.
INVENTORIES -- Inventories are valued at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
equivalents, trade receivables and notes receivable. The Company places its cash
equivalents with major financial institutions.
Concentrations of credit risk with respect to trade receivables are
limited due to the Company's large number of customers and their dispersion
across many different regions and industries. The Company grants credit to
customers based on an evaluation of their financial condition and collateral is
generally not required. Losses from credit sales are provided for in the
financial statements and have historically been within management's
expectations.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is valued
at cost. Expenditures for repairs and maintenance are charged to operations as
incurred, while expenditures for additions and improvements are capitalized.
Depreciation is computed principally using the straight-line method over the
estimated useful lives of assets. The useful lives range from 30 to 40 years for
building and improvements; 5 to 10 years for machinery and equipment and 3 to 7
years for office equipment.
GOODWILL -- Goodwill represents costs in excess of net assets of acquired
businesses, which are amortized using the straight-line method over a period of
40 years. The Company evaluates the realizability of goodwill based on the
undiscounted cash flows of the applicable businesses acquired
- 31 -
32
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
over the remaining amortization period. Should the review indicate that goodwill
is not recoverable, the Company's carrying value of goodwill would be reduced by
the estimated shortfall of the cash flows. In addition, the Company assesses
long-lived assets for impairment under Financial Accounting Standards Board's
(FASB) Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of." Under those rules,
goodwill associated with assets acquired in a purchase business combination is
included in impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable (see Note
9).
FOREIGN CURRENCY TRANSLATION -- Assets and liabilities of subsidiaries
are translated at the rate of exchange in effect on the balance sheet date;
income and expenses are translated at the average rates of exchange prevailing
during the year. The related translation adjustments are reflected in
accumulated other comprehensive loss in shareholders' equity. Accumulated other
comprehensive loss consists entirely of foreign currency translation adjustments
in all periods presented. Foreign currency gains and losses resulting from
transactions are included in the results of operations and amounted to a net
loss of $35,000 in 2000, and net gains of $205,000 in 1999 and $87,000 in 1998.
LOSS PER SHARE -- Loss per share is computed by dividing the net loss by
the weighted-average number of common shares outstanding during the year. Loss
per share -- assuming dilution is computed by dividing the net loss by the
weighted-average number of common shares outstanding adjusted for any dilutive
impact of potential common shares for options, warrants and convertible
subordinated debt. Because the Company recognized losses for all periods
presented, the effect of outstanding common stock equivalents are anti-dilutive
and have therefore been excluded from the computation of loss per share-assuming
dilution.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1998, the FASB
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The Statement
will require, among other things, that all derivatives be recorded on the
balance sheet at fair value. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133", which makes SFAS No. 133 effective
for the Company beginning October 1, 2000. Because the Company's use of
derivatives is not significant, the adoption of this Statement will not have a
material effect on the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition". SAB No. 101 provides
guidance on numerous revenue recognition issues and is effective for the Company
in fiscal 2001. The Company does not believe the effect of adopting SAB No. 101
will have a material impact on its operations or financial position.
RECLASSIFICATIONS -- Certain amounts reported in the 1999 and 1998
financial statements have been reclassified to conform to the 2000 presentation.
- 32 -
33
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
2. DISCONTINUED OPERATIONS
In September 2000, the Company sold its Aero-Mod Incorporated and
Waterlink Operational Services, Inc. subsidiaries, both of which were part of
the Company's Biological Wastewater Treatment Division ("Biological Division"),
in a single transaction for $3,600,000 cash. On November 7, 2000, the Board of
Directors of the Company approved a plan to sell or liquidate the remaining
assets of the Biological Division, which is principally comprised of its
operations in Fall River, Massachusetts. Given the Board of Directors' decision
to exit the division, the results of operations for the Biological Division have
been presented as discontinued operations in the accompanying consolidated
financial statements for all periods presented. The Company allocates interest
expense to its discontinued operations based on the expected net proceeds from
the sale of its assets. The amount of interest allocated to the Biological
Division and included in the operating loss from discontinued operations was
$383,000 in 2000, $299,000 in 1999 and $289,000 in 1998. The loss from
discontinued operations for each period is presented below.
2000 1999 1998
--------- ------- --------
(In thousands)
Net sales $ 17,207 $17,757 $ 21,702
Operating loss (1,338) (2,066) (14,701)
Income tax expense -- 59 72
--------- ------- --------
Loss from operations (1,338) (2,125) (14,773)
Estimated loss on disposal (16,151) - -
--------- ------- --------
$ (17,489) $(2,125) $(14,773)
========= ======= ========
The net assets of the Biological Division have been classified as a
current asset on the consolidated balance sheet at September 30, 2000 based on
the anticipated net proceeds related to the sale of the remaining assets of
$49,000. In addition, accrued expenses includes a reserve of $832,000 for
estimated operating losses during the phase-out period. The net assets of the
Biological Division at September 30, 1999 have been classified as a either
current or non-current based on the timing of recoverability, the components of
which are as follows (in thousands):
Current assets $15,517
Current liabilities (5,031)
Current portion of long-term debt (2,570)
-------
Net current assets 7,916
Property, plant and equipment, net 913
Intangible assets 6,062
Other 3,414
-------
Long-term assets 10,389
-------
$18,305
=======
3. GOING CONCERN CONSIDERATIONS
The accompanying consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements, the Company incurred losses from
- 33 -
34
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
continuing operations of $20,867,000 in 2000, $2,057,000 in 1999 and $2,731,000
in 1998. As a result of the operating results for 2000 the Company is in
violation of certain of its financial covenants under its Senior Credit
Facility. These covenant violations have created an event of default under the
Senior Credit Facility. Accordingly, all amounts currently outstanding under the
Senior Credit Facility have been classified as a current liability in the
consolidated balance sheet at September 30, 2000. This debt reclassification
creates a working capital deficiency of $36,380,000 at September 30, 2000 and
raises substantial doubt about the Company's ability to continue as a going
concern for a reasonable period of time. The Company is in the process of
discussing amendments to its Senior Credit Facility with the objective of
allowing the Company to operate while it continues with its previously announced
strategic alternative process, which is discussed in further detail below. At
this time, the Company can give no level of assurance that it will be able to
negotiate amendments to its Senior Credit Facility or what terms and conditions
will be required from its lenders.
In May 2000, the Board of Directors authorized management of the Company
to explore all strategic alternatives that could maximize shareholder value,
including the sale of certain of its divisions or the entire Company. The
Company is currently in discussions with parties regarding the possible sale of
certain or all of its divisions. At this time, the Company can give no level of
assurance that it will be successful in selling any of its divisions or the
Company as a whole.
The financial statements do not include any adjustments relating to the
recoverability and classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company's continuation as a going concern is dependent on
its ability to successfully negotiate amendments to the terms of its Senior
Credit Facility and generate sufficient cash flows to operate its business.
4. ACQUISITIONS
During fiscal 1998, the Company completed three acquisitions. On March 2,
1998, the Company purchased Chemitreat Services, Inc. ("C'treat"), which designs
and manufactures pure watermakers for use in the global offshore energy
industry, for approximately $6,000,000. The purchase price consisted of
$2,750,000 in cash, $2,250,000 in convertible subordinated notes, and 393,110
shares of Common Stock valued at $2.54 per share. With regard to the total
purchase price, $1,500,000 was in the form of additional purchase price
consideration based on the achievement of specified operating results. On March
25, 1998, the Company acquired Aquafine Engineering Services Limited ("AES") and
Purac Engineering Incorporated ("Purac") in a single transaction for
approximately $7,572,000 in cash. AES designs and manufactures industrial and
municipal water and wastewater systems and solutions principally for the United
Kingdom market. Purac designs water and wastewater systems principally for the
United States municipal market. On June 5, 1998, the Company acquired Barnebey &
Sutcliffe Corporation ("Barnebey"), Sutcliffe Speakman Carbons Limited
("Carbons") and Sutcliffe Croftshaw Limited ("Croftshaw") in a single
transaction for approximately $45,000,000 in cash. Barnebey is located in the
United States and Carbons and Croftshaw are located in the United Kingdom. These
three companies ("Specialty Products Division") design, manufacture and market
products and services utilizing activated carbon for separation, concentration
and purification of water, liquid and gases. The aggregate purchase price of the
1998 acquisitions includes approximately $34,647,000 of goodwill
(C'treat--$5,536,000; AES/Purac--$2,985,000; and Specialty Products
Division--$26,126,000), which is being amortized on a straight-line basis over
40 years. During fiscal 2000, the Company determined that the goodwill
associated with the acquisition of AES
- 34 -
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WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
was permanently impaired. As a result, the unamortized balance of AES goodwill
of $1,965,000 at September 30, 2000 was written off as part of the special
charges to operations discussed in Note 9.
All of the acquisitions were accounted for as purchases. The consolidated
statements of operations of the Company include the results of operations of the
acquired businesses for the period subsequent to the effective date of these
acquisitions.
5. INVENTORIES
Inventories consisted of the following:
SEPTEMBER 30,
-------------------
2000 1999
-------- -------
(In thousands)
Raw materials and supplies $ 12,039 $12,120
Work in process 907 4,015
Finished goods 5,451 5,195
-------- -------
$ 18,397 $21,330
======== =======
6. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is
as follows:
SEPTEMBER 30,
-------------------
2000 1999
-------- -------
(In thousands)
Contract costs incurred to date $ 53,866 $58,073
Estimated profits 22,033 20,579
-------- -------
Contract revenue earned to date 75,899 78,652
Less billings to date 62,851 69,934
-------- -------
Cost and estimated earnings in excess of billings, net $ 13,048 $ 8,718
======== =======
The above amounts are included in the accompanying consolidated balance
sheet as:
SEPTEMBER 30,
-------------------
2000 1999
-------- -------
(In thousands)
Costs in excess of billings $ 14,362 $12,613
Billings in excess of costs (1,314) (3,895)
-------- -------
$ 13,048 $ 8,718
======== =======
Amounts receivable include retainage which has been billed, but is not
due pursuant to retainage provisions in construction contracts until completion
of performance and acceptance by the customer. This retainage aggregated
$2,168,000 at September 30, 2000 and $1,862,000 at September 30, 1999.
Substantially all retained balances are collectible within one year.
- 35 -
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WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
7. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
SEPTEMBER 30,
-------------------
2000 1999
-------- -------
(In thousands)
LONG-TERM DEBT
Senior Credit Facility with a group of banks, due May
19, 2003, consisting of a revolving credit
facility and a term loan with quarterly payments
of $2,000,000 in December 2000, increasing to
$2,500,000 in December 2001, with the balance due
in May 2003. Interest is payable quarterly at
variable rates (10.5% at September 30, 2000):
Revolving credit facility $ 34,800 $32,269
Term loan 33,702 48,836
Other notes payable to various parties 844 1,392
CONVERTIBLE SUBORDINATED NOTES - RELATED PARTIES
Note payable to former shareholders of C'treat, due
March 2, 2001. Interest accrues at 5.54% per annum
and is payable on a quarterly basis 2,250 2,250
Note payable to former shareholders of Meva -- 1,600
Note payable to a former shareholder of Hycor -- 1,000
-------- -------
71,596 87,347
Less current maturities 10,695 5,648
Less debt subject to covenant violations (Note 3) 60,502 --
-------- -------
$ 399 $81,699
======== =======
The Company's Senior Credit Facility is with Bank of America National
Trust & Savings Association as agent, with five other participating banks. In
May 2000, the Company entered into an amendment to its Senior Credit Facility,
which waived certain financial covenants that were not met at March 31, 2000,
assuming the Company realizes certain levels of earnings before interest and
taxes through December 31, 2000. The Company is in violation of certain of its
financial covenants at September 30, 2000, primarily as a result of the special
charges related to the impairment of goodwill (see Note 9) and the loss from
discontinued operations. Due to these covenant violations, the entire balance of
the Senior Credit Facility is classified as current at September 30, 2000.
In addition, the May 2000 amendment provided Waterlink with an additional
$2,000,000 term loan commitment through September 29, 2000, which was extended
through November 15, 2000. In connection with the additional $2,000,000 term
loan commitment, Waterlink issued to Bank of America warrants to purchase, in
the aggregate, up to 100,000 shares of Waterlink common stock at an exercise
price of $.01 per share. The value of these warrants totaling $217,000 is being
amortized over the term of the amendment and is included in interest expense.
Depending on the amount, if any, Waterlink borrows under the additional
$2,000,000 term loan commitment, up to an additional 100,000 warrants to
purchase shares of Waterlink common stock could be issued under the same terms
and conditions. As of September 30, 2000, no amounts have been borrowed under
the additional $2,000,000 term loan commitment. This amendment also provides
that all amounts
- 36 -
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WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
outstanding under the domestic credit facility will bear interest at a
designated variable base rate plus one percent. The Company also has in place
three separate overseas facilities with the same group of banks with no
outstanding borrowings at September 30, 2000.
The Senior Credit Facility restricts or prohibits the Company from taking
many actions, including paying dividends and incurring or assuming other
indebtedness or liens. The Company's obligations under the senior credit
facility are secured by liens on substantially all of the Company's domestic
assets, including equipment, inventory, accounts receivable and general
intangibles and the pledge of most of the stock of the Company's subsidiaries.
The Company has guaranteed the payment by its three overseas subsidiaries of
their obligations under the overseas facilities. The three overseas subsidiaries
have given the banks an assurance that the subsidiaries would not pledge their
assets to any other party.
At September 30, 2000, approximately $2,822,000 was available for future
borrowings under the domestic credit facility, including the $2,000,000 term
loan commitment.
During October 1999, the Company sold 6,300,000 shares of Common Stock in
a public offering to certain investors. The aggregate net proceeds of
$16,222,000 were used to repay a portion of its outstanding indebtedness. In
October 1999, the $1,600,000 balance of a convertible subordinated note was paid
in cash. Also during October 1999, $750,000 of the $1,000,000 balance
outstanding of a convertible subordinated note was converted in exchange for
275,230 shares of Common Stock, with the remaining principal being paid in cash.
In connection with various financing activities, the Company has issued
warrants to purchase shares of Common Stock, 739,137 of which are outstanding at
September 30, 2000. The warrants carry exercise prices ranging from $0.01 to
$4.50 with expiration dates ranging from February 2002 to May 2005.
The conversion rate on the convertible subordinated notes payable to the
former shareholders of C'treat to Common Stock is $15.63 per share.
Future maturities of long-term obligations for the five years subsequent
to September 30, 2000 are: 2001--$71,197,000; 2002--$71,000; 2003--$76,000,
2004--$77,000 and 2005--$84,000.
8. LEASES
The Company leases certain facilities and equipment under operating
leases, some of which are with entities controlled by former shareholders of
certain acquired businesses. Rent expense totaled $1,961,000 in 2000, $2,106,000
in 1999 and $1,832,000 in 1998. Related party rent expense included in these
totals amounted to $385,000 in 2000, $379,000 in 1999 and $686,000 in 1998.
Aggregate
- 37 -
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WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
future minimum lease payments under noncancelable operating leases at September
30, 2000 are as follows:
RELATED
PARTY OTHER
LEASES LEASES TOTAL
------- ------ ------
(In thousands)
2001 $ 612 $1,180 $1,792
2002 269 922 1,191
2003 294 600 894
2004 330 248 578
2005 338 165 503
Thereafter 2,332 293 2,625
------ ------ ------
$4,175 $3,408 $7,583
====== ====== ======
9. SPECIAL CHARGES
The Company incurred special charges primarily relating to impairment of
long-lived assets, severance and contractual obligations to former executives,
and other exit costs as follows:
2000 1999 1998
-------- ------ -------
(In thousands)
Continuing Operations:
Impairment of long-lived assets $ 21,444
Costs associated with the 1999
Strategic Operating Plan -- $1,260 $ 2,742
Contractual obligations to former
executive officers -- 550 1,494
-------- ------ -------
21,444 1,810 4,236
Discontinued Operations:
Impairment of long-lived assets -- 1,300 17,284
Costs associated with 1999 Strategic
Operating Plan -- 733 116
-------- ------ -------
-- 2,033 17,400
-------- ------ -------
$ 21,444 $3,843 $21,636
======== ====== =======
During the fourth quarter of fiscal 2000 the Company evaluated the
recoverability of all of its long-lived assets, including intangible assets, on
a divisional and product line basis. This analysis compared the undiscounted
cash flows of these divisions and product lines to the current carrying value of
the assets. As a result of this analysis, the unamortized balance of intangible
assets at September 30, 2000 was written-off for two product lines within the
Separations Division and all of the intangible assets within the European Water
and Wastewater Division were also written off. For segment reporting purposes,
the Separations Division and the European Water and Wastewater Division includes
$8,596,000 and $12,848,000 of special charges, respectively.
Initiated in late fiscal 1998 as part of its 1999 Strategic Operating
Plan (the "1999 Plan"), the Company was restructured from a holding company with
23 operating companies into five integrated
- 38 -
39
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
divisions that focus on specific market segments. The plan included costs
associated with the exiting and consolidation of certain facilities and employee
termination costs. In conjunction with the 1999 Plan, the Company reduced its
workforce by approximately 122 people, 98 of which have received, or are
currently receiving, termination benefits in accordance with Company guidelines
or local laws. In addition, seven facilities were closed or relocated.
The following table summarizes the provisions, payments and remaining
reserves associated with the 1999 Plan:
TERMINATION OTHER EXIT
BENEFITS COSTS TOTAL
----------- ---------- ------
(In thousands)
Provision in 1998 $1,076 $1,782 $2,858
Payments in 1998 (120) (480) (600)
------ ------ ------
Reserve at September 30, 1998 956 1,302 2,258
Provision in 1999 1,093 900 1,993
Payments in 1999 (1,444) (1,918) (3,362)
------ ------ ------
Reserve at September 30, 1999 605 284 889
Payments in 2000 (554) (284) (838)
------ ------ ------
Reserve at September 30, 2000 $ 51 $ -- $ 51
====== ====== ======
In conjunction with its 1999 Plan, the Company also determined that it
would exit the acquired Bioclear business. During 1998, the assets of Bioclear,
primarily related to its manufacturing facility located in Winnipeg, Canada,
were reduced to their estimated net realizable value. Accordingly, the Company
recorded a $17,284,000 non-cash charge during 1998. The Company further reduced
the estimated net realizable value of these remaining assets by $1,300,000 and
recorded this change in accounting estimate during the year ended September 30,
1999. The facility was ultimately disposed of in fiscal 2000 at its then
carrying value. For reporting purposes, the amount of impairment charges for
1999 and 1998 is included with discontinued operations.
The Company's founder and Chairman of the Board of Directors retired at
the Annual Meeting of Shareholders in January 2000. In conjunction with this
retirement, the Company recorded $550,000 in special charges in fiscal 1999
attributable to contractual obligations.
The Company also incurred a special charge during 1998 of approximately
$1,494,000 primarily attributable to contractual obligations of the Company to
its former chief executive officer, who resigned in June 1998, and costs
necessary to recruit executives to the Company.
- 39 -
40
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
10. INCOME TAXES
The provision for income taxes consists of the following:
2000 1999 1998
-------- ------- -------
(In thousands)
Current:
U.S. federal $ -- $ -- $ --
State and local 76 164 39
Foreign 85 268 690
-------- ------- -------
161 432 729
Deferred:
U.S. federal -- -- 620
Foreign 293 542 47
-------- ------- -------
293 542 667
-------- ------- -------
$ 454 $ 974 $ 1,396
======== ======= =======
Loss before income taxes consists of the following:
2000 1999 1998
--------- ------- -------
(In thousands)
United States $ (7,927) $(2,505) $(3,100)
Foreign (12,486) 1,422 1,765
--------- ------- -------
$ (20,413) $(1,083) $(1,335)
========= ======= =======
Following is the reconciliation between the provision for income taxes
and the amount computed by applying the statutory U.S. federal income tax rate
of 34% to loss before income taxes:
2000 1999 1998
-------- ------- -------
(In thousands)
(Credit) for income taxes at the statutory
federal rate $ (6,940) $ (368) $ (454)
Adjustments:
State and local income taxes 76 164 39
Non-deductible goodwill amortization 553 565 247
Special charges 7,291 -- --
Difference in rates on foreign subsidiaries (87) (33) 45
Change in valuation allowance (458) 448 1,143
Other 19 198 376
-------- ------- -------
Provision for income taxes $ 454 $ 974 $ 1,396
======== ======= =======
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
- 40 -
41
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
purposes. The tax effects of the net operating loss carryforward and temporary
differences are as follows:
2000 1999
------- -------
(In thousands)
Deferred tax assets:
Net operating loss carryforward $15,139 $15,459
Other 7,197 2,524
Valuation allowance (20,841) (16,728)
------- -------
1,495 1,255
Deferred tax liabilities:
Amortization of goodwill (924) (749)
Other (714) (666)
------- -------
(1,638) (1,415)
------- -------
Net deferred tax liability $ (143) $ (160)
======= =======
In connection with acquisitions made in 1998, the Company recorded
deferred tax asset valuation reserves as part of purchase price allocations
totaling $7,417,000 in the United Kingdom and $509,000 in the United States due
primarily to net operating loss carryforwards existing in these tax
jurisdictions. The benefit of these net operating loss carryforwards realized in
the future will be recorded as a reduction of goodwill rather than as a credit
to income tax expense during that period. The amount of income taxes recorded
which resulted in a corresponding decrease in goodwill was $310,000 in 2000,
$546,000 in 1999 and $250,000 in 1998.
For tax purposes, the Company has U.S. federal loss carryforwards of
$19,804,000 which expire in the year 2015 and foreign net operating loss
carryforwards of $22,307,000, $2,048,000 of which expire in 2006 and $20,259,000
that have no expiration date. A valuation allowance has been established for the
entire amount of these net operating loss carryforwards since the realization is
uncertain.
The Company plans to reinvest the undistributed earnings of its non-U.S.
subsidiaries. The amount of undistributed earnings considered to be indefinitely
reinvested for this purpose was approximately $5,470,000 at September 30, 2000.
Accordingly, no provisions have been made for U.S. income tax purposes on such
undistributed earnings. While the amount of any U.S. income taxes on these
undistributed earnings, if distributed in the future, is not determinable, it is
expected that they would be reduced by the utilization of tax credits or
deductions. A distribution of these earnings would be subject to withholding
taxes.
11. STOCK OPTION PLANS
During 1998, the shareholders approved the Omnibus Incentive Plan (the
"Omnibus Plan"), which provides for compensatory equity based awards to officers
and certain other key employees of the Company. Awards may be granted for no
consideration and consist of stock options, stock awards, SARs, dividend
equivalents, other stock based awards (such as phantom stock) and performance
awards consisting of any combination of the foregoing.
- 41 -
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WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
The Company's 1995 Stock Option Plan (the "Stock Option Plan") provides
grants to officers, certain other key employees, and directors of awards
consisting of "incentive stock options" as defined under the provisions of
Section 422 of the Internal Revenue Code and non-qualified stock options. All
options granted under the Stock Option Plan expire ten years after the date of
grant (see Note 12).
The Company's 1997 Non-Employee Director Stock Option Plan (the "Director
Plan") is authorized to issue up to 150,000 shares of Common Stock. Each
non-employee director is automatically granted an option to purchase 3,000
shares of Common Stock. In addition, on each anniversary date of the Director
Plan, each of the Company's then non-employee directors who have served at least
six-months shall automatically be granted an option to purchase 5,000 shares of
Common Stock. The per share exercise price of options granted under the Director
Plan will be the fair market value of the Common Stock on the date of grant.
Options granted under the Director Plan will expire ten years after the date of
grant (see Note 12).
Collectively, 2,750,000 shares of Common Stock are available for granting
of awards under the above plans at September 30, 2000.
Under the Company's Employee Stock Purchase Plan (the "Stock Purchase
Plan"), the Company is authorized to issue up to 500,000 shares of Common Stock.
Under the terms of the Stock Purchase Plan, employees can choose to have up to
20% of their annual compensation, but no more that $25,000 per year, withheld to
purchase Common Stock. The exercise price for shares subject to purchase under
options granted shall be 85% of the fair market value of the Common Stock on the
first day of the purchase period, unless otherwise determined by the
compensation committee. On the last day of the purchase period of any offering
of shares made under the Stock Purchase Plan, each outstanding option shall
automatically be exercised. At any time prior to the end of the purchase period
applicable to each offering, an employee is permitted to terminate or reduce his
or her payroll deductions, to reduce his or her options to purchase or to
withdraw all or part of the amount in his or her account. The employee has the
right to receive in cash the amount accumulated in such account. In connection
with the Stock Purchase Plan, 42,384 shares of Common Stock were issued in 1998
and 55,493 shares of Common Stock were issued in 2000. The Stock Purchase Plan
will terminate in 2007.
12. STOCK BASED COMPENSATION
It is the Company's policy to generally grant stock options for a fixed
number of shares to employees with the exercise price approximating fair value.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations and accordingly,
recognizes no compensation expense for stock options granted at fair value.
Management believes that the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting For Stock Based Compensation" ("SFAS
123"), requires use of option valuation methods that were not developed for use
in valuing employee stock options. Under APB 25, compensation expense has been
recognized for all options granted at less than the fair market value of the
Company's common shares on the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value of these options and the options granted as part of the Plan were
estimated at the date of grant using a Black-Scholes option-pricing model. The
Company
- 42 -
43
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
assumed a dividend yield rate of 0% and a weighted-average expected life of the
options of 5 years for all periods presented. The risk-free interest factor
utilized was 5.5% in 2000, 5.9% in 1999 and 6.0% in 1998. Further, the
volatility factor of the expected market price of the Company's stock was 35% in
2000, 32% in 1999 and 26% in 1998. Following is the weighted-average grant-date
fair value of options granted during 2000, 1999 and 1998 in the Stock Option
Plan using the Black-Scholes model, with the weighted average exercise price for
comparison purposes:
2000 1999 1998
---------------- ---------------- ----------------
FAIR EXERCISE FAIR EXERCISE FAIR EXERCISE
VALUE PRICE VALUE PRICE VALUE PRICE
----- -------- ----- -------- ----- --------
Stock price:
Equals exercise price $1.24 $3.10 $1.30 $ 3.35 $3.14 $ 8.98
Less than exercise price -- -- 0.75 5.00 -- --
The weighted-average grant-date fair values of the shares granted under
the Stock Purchase Plan were $1.21 during 2000 and $2.14 during 1998. No such
shares were granted during 1999.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated value of the options
is amortized to expense over the options' vesting period. The pro forma results
are not necessarily indicative of what would have occurred had the Company
adopted SFAS 123. The Company's pro forma information follows:
2000 1999 1998
----------- --------- ----------
(In thousands, except per share data)
Pro forma net loss $ (38,400) $(4,633) $(18,249)
Pro forma loss per share -- basic and assuming
dilution (1.99) (0.37) (1.52)
A summary of the Company's stock option activity and related information
follows:
2000 1999 1998
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding at beginning of
year 2,178,316 $6.59 1,884,300 $9.25 1,290,800 $8.48
Granted 663,003 3.10 442,500 3.35 825,000 8.98
Exercised -- -- -- -- (230,500) 3.96
Canceled (756,573) 9.00 (148,484) 8.39 (1,000) 12.09
--------- ----- --------- ----- --------- -----
Outstanding at end of year 2,084,746 $4.67 2,178,316 $6.59 1,884,300 $9.25
========= ===== ========= ===== ========= =====
Exercisable at end of year 836,812 $5.35 1,032,366 $7.37 754,325 $8.00
========= ===== ========= ===== ========= =====
Available for future Options 200,254 106,684 400,700
========= ========= =========
- 43 -
44
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
The following table summarizes information concerning outstanding and
exercisable options at September 30, 2000:
AVERAGE REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ----------------- ---------------- ----------- --------------
$0.10 17,500 5.5 $ 0.10 17,500 $ 0.10
$2.31 -- $3.00 75,000 9.4 2.90 -- --
$3.12 -- $4.00 1,005,085 8.6 3.27 185,250 3.70
$4.25 -- $5.12 537,161 6.8 4.79 404,063 4.72
$7.62 400,000 7.9 7.63 200,000 7.63
$11.00 -- $13.19 50,000 7.2 12.26 29,999 12.05
--------- --- ------ ------- ------
2,084,746 8.0 $ 4.67 836,812 $ 5.35
========= === ====== ======= ======
The Company has reserved 2,285,000 shares of Common Stock for the
possible exercise of outstanding stock options.
13. RETIREMENT PLANS
In conjunction with the acquisition of the Specialty Products Division on
June 5, 1998, the Company acquired two defined benefit pension plans. The
Company acquired a U.K. plan, which covers substantially all of the employees of
Carbons and Croftshaw, and a U.S. plan, which covers substantially all of the
employees of Barnebey. Information pertaining to the Company's defined benefit
pension plans follows:
2000 1999
-------- -------
(In thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 9,531 $ 9,001
Service cost 437 483
Interest cost 639 604
Plan participants' contributions 97 119
Actuarial gains (138) (199)
Benefits paid (151) (298)
Foreign currency exchange rate changes (696) (179)
-------- -------
Benefit obligation at end of year $ 9,719 $ 9,531
======== =======
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45
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
2000 1999
-------- -------
(In thousands)
CHANGE IN PLAN ASSETS
Plan assets at beginning of year $ 10,747 $ 9,880
Actual return on plan assets 210 895
Company contributions 262 373
Plan participants' contributions 97 119
Benefits paid (151) (298)
Foreign currency exchange rate changes (849) (222)
-------- -------
Plan assets at end of year $ 10,316 $10,747
======== =======
FUNDED STATUS
Plan assets in excess of benefit obligations $ 597 $ 1,216
Unrecognized actuarial loss 741 224
-------- -------
Prepaid benefit cost, net $ 1,338 $ 1,440
======== =======
PREPAID (ACCRUED) BENEFIT COST
U. S. plan $ (549) $ (525)
U. K. plan 1,887 1,965
-------- -------
Net balance sheet asset at September 30 $ 1,338 $ 1,440
======== =======
2000 1999 1998
----- ----- -----
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 7.00% 7.00% 7.00%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 3.50% 3.50% 3.50%
TO to to
4.50% 4.50% 4.50%
COMPONENTS OF NET PERIODIC PENSION COST
Service cost $ 437 $ 483 $ 171
Interest cost 639 604 195
Expected return on plan assets (945) (872) (291)
Amortization of unrecognized net loss -- 30 --
----- ----- -----
Net periodic pension cost $ 131 $ 245 $ 75
===== ===== =====
Amounts applicable to the Company's pension plan with projected or
accumulated benefit obligations in excess of plan assets are:
2000 1999
------ -------
(In thousands)
Projected benefit obligation $4,093 $ 3,676
Accumulated benefit obligation 3,653 3,298
Fair value of plan assets 3,671 3,329
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46
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
In addition to the defined benefit plans acquired in the Specialty
Products Division acquisition, the Company has certain other employees, all
located in the United Kingdom, which currently participate in a defined benefit
pension plan operated and funded by their former parent company. In accordance
with an amendment to the terms of the sale and purchase agreement, these
employees will remain in the plan as deferred vested pensioners for an
undetermined period of time for their service prior to March 31, 1999. Upon
expiration of the amendment, the participants will either remain in the former
parent company plan as deferred vested pensioners or have their assets
transferred into a defined contribution pension plan funded by the Company's
U.K. operations and the plan participants. The Company does not expect to incur
any one-time obligation relating to the transfer of the plan participants into
the defined contribution plan. The Company does not expect any future funding
obligations for employees who remain in the former parent company plan to be
significant.
The Company also sponsors a defined contribution plan that covers
substantially all domestic employees. Company contributions to the Plan totaled
$100,000 in 2000, $71,000 in 1999 and $66,000 in 1998.
14. FINANCIAL INSTRUMENTS
The carrying values of cash, cash equivalents, accounts receivable and
accounts payable are a reasonable estimate of their fair value due to the
short-term nature of these instruments. Substantially all of the Company's
long-term debt obligations, except for the convertible subordinated notes --
related parties, have variable rates and cost approximates fair value at
September 30, 2000. The convertible subordinated notes -- related parties do not
have a ready market and cost is assumed to approximate fair value. The aggregate
carrying value of these notes is $2,250,000 at September 30, 2000, with an
interest rate of 5.54% and a maturity date of March 2001.
The Company uses a limited number of foreign exchange instruments,
primarily forward contracts, to manage exposure to currency rate fluctuations
primarily related to the purchases of inventory. Gains and losses incurred on
foreign exchange instruments identified as hedges are deferred and recognized in
income in the same period as the hedged transaction. The deferred gains or
losses from hedging anticipated transactions were not material to the Company's
financial condition at September 30, 2000 and 1999.
15. SEGMENT INFORMATION
Historically the Company's reportable segments were the five divisions
the Company established as part of its 1999 Strategic Operating Plan. As
described in Note 2 the Company is reporting its Biological Division as a
discontinued operation. The four divisions that comprise the continuing
operations are described below:
- The Specialty Products Division specializes in the development and
production of activated carbons used to purify air, water and gases.
The division is a worldwide supplier of activated carbon for liquid,
air and gas filtration systems and is a manufacturer of specialized
impregnated carbons. Its products include adsorption equipment,
bioreactors and bioscrubbers, corrosive gas control systems, solvent
recovery systems, and a variety of air, odor and vapor control and
filtration systems.
- 46 -
47
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
- The Separations Division sells equipment and engineered systems
employing physical and chemical separations technology in the municipal
water and wastewater market as well as in the industrial process water
and wastewater market. Its products include course and fine screening,
conveying, dewatering and screening/grit washing equipment, filter
presses, clarifiers, sludge dryers; oil/water separations equipment,
dissolved air flotation systems, continuous sand filters and inclined
plate clarifiers.
- The European Water and Wastewater Division provides products and
systems similar to the Separations Division focusing specifically on
the European, African and Asian municipal and industrial markets. Its
products include continuous sand filters, inclined plate clarifiers,
sludge scrapers, centrifuges, and fine screens.
- The Pure Water Division sells products and solutions to the
residential, municipal and industrial water and process water markets.
Its products include membrane technology using reverse osmosis systems,
nanofiltration and microfiltration systems, desalination equipment to
purify seawater, and watermakers for the offshore oil industry.
The Company evaluates the performance of each division or segment and
considers allocation of resources to it based on its revenue growth prospects,
operating income performance, and return on invested capital, or total assets.
The accounting policies of the divisions, or reporting segments, are the same as
those described in Note 1. Intersegment sales and transfers are recorded at cost
plus a stated percentage mark up, which creates intercompany profit on
intersegment sales or transfers.
The division format provides efficient centers of product expertise and
geographic experience to better serve the Company's customers and independent
marketing representatives. Each division president reports directly to and
maintains regular contact with the chief operating decision maker, the Chief
Executive Officer, to discuss operating activities, financial results, and
business plans.
The following table summarizes the Company's continuing operations by the
four divisions, or segments, and corporate.
EUROPEAN
SPECIALTY WATER AND PURE
PRODUCTS SEPARATIONS WASTEWATER WATER
DIVISION DIVISION DIVISION DIVISION CORPORATE TOTAL
--------- ----------- ---------- -------- --------- ---------
In thousands
2000
Net sales from external
customers $ 64,710 $ 36,348 $ 40,794 $ 17,724 $ 159,576
Intersegment net sales 65 100 1,442 61 $ (1,668) --
Special charges - 8,596 12,848 -- -- 21,444
Depreciation and amortization
expense 1,022 354 1,542 771 94 3,783
Segment operating income (loss) 6,957 (6,153) (12,361) 2,246 (3,650) (12,961)
Segment assets 57,008 30,926 22,661 17,208 3,693 131,496
Expenditures for fixed assets 233 695 332 91 58 1,409
-------- -------- -------- -------- -------- ---------
- 47 -
48
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
EUROPEAN
SPECIALTY WATER AND PURE
PRODUCTS SEPARATIONS WASTEWATER WATER
DIVISION DIVISION DIVISION DIVISION CORPORATE TOTAL
--------- ----------- ---------- -------- --------- ---------
In thousands
1999
Net sales from external
customers $ 58,024 $ 33,490 $ 44,433 $ 16,465 $ 152,412
Intersegment net sales 164 220 981 657 $ (2,022) --
Special charges -- 533 714 107 456 1,810
Depreciation and amortization
expense 1,472 906 797 288 78 3,541
Segment operating income (loss) 6,793 (1,047) 2,333 2,229 (4,066) 6,242
Segment assets 61,369 38,567 42,865 14,432 2,256 159,489
Expenditures for fixed assets 387 367 458 130 172 1,514
-------- -------- -------- -------- -------- ---------
1998
Net sales from external
customers $ 17,979 $ 29,342 $ 51,909 $ 14,235 $ 113,465
Intersegment net sales 367 291 1,002 8 $ (1,668) --
Special charges -- 281 842 55 3,058 4,236
Depreciation and amortization
expense 498 902 800 230 46 2,476
Segment operating income (loss) 1,761 1,446 3,231 999 (5,734) 1,703
Segment assets 57,966 42,201 41,534 12,718 5,163 159,582
Expenditures for fixed assets 293 574 743 158 166 1,934
A reconciliation of the reportable segments' operating income (loss) to
consolidated loss before income taxes follows:
2000 1999 1998
--------- ------- -------
(In thousands)
Total operating income (loss) for reportable
segments, including corporate $ (12,961) $ 6,242 $ 1,703
Interest expense (7,415) (7,345) (3,141)
Other items -- net (37) 20 103
--------- ------- -------
$ (20,413) $(1,083) $(1,335)
========= ======= =======
Net sales are reflected in the country from which the sales are made.
Information with regard to revenues and long-lived assets by geographic areas
follows:
UNITED OTHER
STATES COUNTRIES TOTAL
--------- --------- ---------
(In thousands)
2000
Net sales $ 101,640 $ 57,936 $ 159,576
Long-lived assets 46,994 14,716 61,710
1999
Net sales 90,092 62,320 152,412
Long-lived assets 55,167 32,459 87,626
1998
Net sales 55,789 57,676 113,465
Long-lived assets 57,156 34,494 91,650
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49
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
The Company did not derive more than 10% of its net sales from any
individual customer during any of the three years ended September 30, 2000.
16. SUPPLEMENTAL CASH FLOW DATA
Supplemental cash flow data is as follows:
2000 1999 1998
------ ------ ------
(In thousands)
Interest paid $7,745 $7,254 $2,626
Income taxes paid 284 1,020 979
Common Stock issued in connection with purchases of
subsidiaries 1,000 -- 16
17. CONTINGENCIES
The Company is subject to various lawsuits, claims and proceedings which
arise in the ordinary course of business. The Company accrues the cost
associated with legal matters when they become probable and reasonable
estimable. Management believes that any ultimate liability with respect to these
actions, in excess of the amount provided, will not materially affect the
Company's operations, cash flows or consolidated financial position.
On March 31, 2000, Bartow Ethanol of Florida, LC filed suit against
Waterlink. The suit arose out of Waterlink's sale of a biological treatment
system to Bartow in 1998. Essentially, Bartow claimed that Waterlink breached
the sale contract by failing to timely provide a properly functioning biological
treatment system. Bartow also claimed that Waterlink misrepresented its ability
to complete the system on time, among other things. Bartow sought compensatory,
consequential and punitive damages totaling $31,150,000, plus attorneys' fees
and costs in an unspecified amount. In a counterclaim the Company alleged that
Bartow owed the Company pursuant to the contract $1,024,000 for the system. An
Agreement between the Company and Bartow was reached providing for Bartow
dismissing its suit against the Company and the Company dismissing its
counterclaim against Bartow. As a result of Bartow filing for protection under
Chapter 11 of the federal bankruptcy code, this agreement must be approved by
the bankruptcy court before it becomes effective.
- 49 -
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Waterlink's executive officers and directors, and
persons who beneficially own more than ten percent of a registered class of
Waterlink's equity securities, to file initial reports of securities ownership
and changes in such ownership with the Securities and Exchange Commission (the
"Commission"). Such executive officers, directors and greater than ten-percent
stockholders also are required by regulations promulgated by the Commission to
furnish Waterlink with copies of all Section 16(a) forms they file with the
Commission.
To Waterlink's knowledge, based solely upon a review of such copies of
the forms furnished to Waterlink, or written representations that no such forms
were required, during the fiscal year ended September 30, 2000, its executive
officers, directors and greater than ten-percent beneficial owners complied with
all applicable Section 16(a) filing requirements.
INFORMATION RELATING TO DIRECTORS
Pursuant to Waterlink's Certificate of Incorporation and Waterlink's
By-Laws, the board of directors is divided into three classes with each director
serving a three-year term (after the initial term). The directors of Class I
(Messrs. John R. Miller and Theodore F. Savastano) hold office until the
scheduled annual meeting of stockholders which is expected to be held in 2001,
the directors of Class II (Mr. T. Scott King and Dr. R. Gary Bridge) hold office
until the scheduled annual meeting of stockholders which is expected to be held
in January 2002, and directors of Class III (Messrs. Robert P. Pinkas and John
T. Hackett) hold office until the scheduled annual meeting of stockholders which
is expected to be held in January 2003. Stockholders will elect the directors of
each Class for three-year terms at the appropriate annual meetings of
stockholders.
DIRECTORS WHOSE TERM EXPIRES IN 2001 (CLASS I)
AGE (AS OF DIRECTOR OF
NAME OF DIRECTOR NOVEMBER 30, 2000) WATERLINK SINCE
---------------- ------------------ ---------------
John R. Miller 62 1997
Theodore F. Savastano 63 1994
DIRECTORS WHOSE TERM EXPIRES IN 2002 (CLASS II)
AGE (AS OF DIRECTOR OF
NAME OF DIRECTOR NOVEMBER 30, 2000) WATERLINK SINCE
---------------- ------------------ ---------------
T. Scott King 48 1998
Dr. R. Gary Bridge 56 2000
DIRECTORS WHOSE TERM EXPIRES IN 2003 (CLASS III)
AGE (AS OF DIRECTOR OF
NAME OF DIRECTOR NOVEMBER 30, 2000) WATERLINK SINCE
---------------- ------------------ ---------------
Robert P. Pinkas 47 1994
John T. Hackett 68 2000
John R. Miller was elected to the Board in March 1997. Mr. Miller is
Chairman and Chief Executive Officer of Petroleum Partners, Inc., a company
formed to provide outsourcing services to
- 50 -
51
the petroleum industry. From 1988 to 2000, Mr. Miller was President, Chief
Executive Officer and a Director of TBN Holdings Inc., a resource recovery and
recycling company. Mr. Miller has previously served as a director and Chairman
of the Board of the Federal Reserve Bank of Cleveland and as President, Chief
Operating Officer and a director of The Standard Oil Company. Mr. Miller serves
on the Board of Directors of Eaton Corporation, a global manufacturer of highly
engineered products which serve industrial, vehicle, construction, commercial
and semi-conductor markets; and of Cambrex Corporation, a leading supplier of
specialty and fine chemicals.
Theodore F. Savastano is the founder of Waterlink and was Chairman of the
Board from its inception in December 1994 through January 2000. He served as
Chief Executive Officer of Hunter Environmental Services, Inc., a
multi-disciplined environmental company from August 1985 to January 1988 and as
Chief Executive Officer and founder of Summit Environmental Group, Inc., a full-
service environmental consulting engineering company from August 1988 to May
1994.
T. Scott King was elected President and Chief Executive Officer of
Waterlink effective June 8, 1998 and was elected to the Board on June 18, 1998.
Prior to joining Waterlink, Mr. King served as President and General Manager,
Consumer Brands Division of The Sherwin-Williams Company since February 1992.
Prior thereto, Mr. King served as Vice President, Director of Sales and
Marketing, Consumer Division since June 1987.
Dr. R. Gary Bridge was elected to serve as a Director in January 2000.
Since 1995, Dr. Bridge has been Vice President, Worldwide Market Intelligence
and Planning, of International Business Machines Corporation. For the
twenty-three years preceding 1995, Dr. Bridge was a professor of psychology at
Columbia University. From 1985 to 1995, Dr. Bridge also was President of Bridge
Group Inc., a consulting practice specializing in quantitative research.
Robert P. Pinkas, a Director since the inception of Waterlink and
Chairman of the Board since January 20, 2000, is Chairman of the Board, Chief
Executive Officer, Treasurer and a director of Brantley Capital Corporation, a
closed-end, non-diversified investment company, and Chairman of the Board, Chief
Executive Officer, Treasurer and a manager of Brantley Capital Management,
L.L.C., an investment adviser. Mr. Pinkas also serves as managing general
partner of Brantley Venture Partners, a venture capital firm that makes
investments through its various partnership funds. Mr. Pinkas founded and has
been affiliated with the Brantley entities for more than the past five years.
Additionally. Mr. Pinkas is a director of Quad Systems Corporation, Gliatech,
Inc. and Pediatric Services of America, Inc.
John T. Hackett was elected to serve as a Director in January 2000. Since
1991, Mr. Hackett has been a Managing General Partner of CID Equity Partners,
L.P., a venture capital firm. Mr. Hackett also serves as a director of Ball
Corporation, Irwin Financial Corporation, Meridian Mutual Insurance Group Inc.
and Wabash National Corporation.
INFORMATION RELATING TO NON-DIRECTOR EXECUTIVE OFFICER OF WATERLINK
Mark E. Brody, 39, a certified public accountant, joined Waterlink on
February 1, 2000 as Chief Financial Officer. Prior to joining Waterlink, Mr.
Brody served since 1999 as Executive Vice President and Chief Financial Officer
of Anthony & Sylvan Pools Corporation. Prior thereto, beginning in 1997 Mr.
Brody was Vice President - Finance for Anthony & Sylvan's former parent company,
Essef Corporation, a water treatment and swimming pool equipment company. Prior
to Essef, Mr. Brody was Vice President and Chief Financial Officer for Sudbury,
Inc., a manufacturing company, since 1987.
DIRECTOR REMUNERATION
Directors who are employees of Waterlink receive no compensation, as
such, for service as members of the Board or any committees of the Board.
- 51 -
52
Directors who are not employees of Waterlink receive an annual retainer
of $10,000, payable in equal quarterly installments. In addition, non-employee
directors receive compensation of $750 for each meeting of the Board (in excess
of the regularly scheduled meetings) or any committee of the Board attended by
them (other than with respect to any meetings of any committee on a day on which
the Board also meets), and compensation of $250 for each additional telephonic
meeting of the Board or any committee of the Board. All directors are reimbursed
for out of pocket expenses incurred in attending meetings of the Board or
committees and for other expenses incurred in their capacity as directors.
In addition, directors who are not employees of Waterlink receive for
each year of service on the Board, options under Waterlink's 1997 Non-Employee
Director Stock Option Plan (the "'Director Plan"). The per share exercise price
of options granted under the Director Plan is the fair market value of the
Common Stock on the date of grant. The exercise price of options granted under
the Director Plan is payable in cash or in shares of Common Stock valued at fair
market value at the time of exercise, or a combination of cash and shares;
however, Waterlink may establish "cashless exercise" procedures, subject to
applicable laws, rules and regulations, pursuant to which a director may
exercise an option and arrange for a simultaneous sale of the underlying Common
Stock, with the exercise price being paid from the proceeds of such sale.
Options granted under the Director Plan will expire ten years after the date of
grant, subject to earlier termination, and may be exercised as follows: 25%
after one year from the date of grant, 50% after two years from the date of
grant, 75% after three years from the date of grant and 100% after four years
from the date of grant.
Mr. Miller and Dr. Bridge were each granted an option to purchase 3,000
shares of common stock in connection with his election to the Board. In
addition, on May 23rd of each year, the anniversary of the date the Director
Plan became effective, each of Waterlink's then non-employee directors who have
served as directors for at least six months are automatically granted an option
to purchase 5,000 shares of Common Stock. Mr. Hackett was unable to receive a
grant of an option to purchase 3,000 shares of common stock in connection with
his election to the Board. In lieu thereof, Waterlink issued warrants to
purchase 3,000 shares of common stock to CID Equity Capital V, L.P., of which
Mr. Hackett is managing general partner, under substantially the same terms and
conditions as the options granted to directors under the Director Plan.
The Director Plan is administered by the Compensation Committee. The
principal terms of the option grants are set forth in the Director Plan.
Therefore, the Compensation Committee has no discretion to select which
directors receive options, the number of shares of common stock subject to
options or the exercise price of options.
ITEM 11. EXECUTIVE COMPENSATION
The following table presents information regarding compensation we paid
to our chief executive officer and our other executive officers whose salary and
bonus together exceeded $100,000 in fiscal 2000. We refer to these individuals
collectively as the "Named Executive Officers." The compensation described in
the table does not include benefits which are generally available to all
- 52 -
53
our salaried employees and perquisites and other personal benefits which do not
exceed the lesser of $50,000 or 10% of the officer's salary and bonus shown in
the table.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------------------- ------------------------------
RESTRICTED SECURITIES
NAME AND OTHER ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION AWARDS($) OPTIONS(#) COMPENSATION($)
------------------ ---- --------- -------- ------------ ---------- ---------- ---------------
T. Scott King(1) 2000 $304,667 $ -- -- -- 180,000 --
Chief Executive 1999 $300,000 $ -- -- -- 125,000 $ 1,606(5)
Officer and President 1998 $108,750 $50,000(2) -- -- 400,000 $ 1,004(5)
Mark E. Brody 2000 $123,333(3) $50,000(4) -- -- 100,000 $ 956(5)
Chief Financial
Officer 1999 -- -- -- -- -- --
1998 -- -- -- -- -- --
Theodore F.
Savastano(6) 2000 $ 66,667 $ -- -- -- -- $173,333(7)
Former Chairman of the 1999 $240,000 $ -- -- -- -- --
Board of Directors 1998 $240,000 $45,000(10) -- -- -- --
Michael J. Vantusko(8) 2000 $ 54,333 $ -- -- -- -- $ 75,833(9)
Former Chief Financial 1999 $187,500 $ -- -- -- 75,000 $ 1,757(5)
Officer 1998 $162,500 $40,000(10) -- -- 20,000 $ 1,425(5)
- ---------------
(1) The Board elected Mr. King to be our president and chief executive officer
effective June 8, 1998. Salary and other compensation for 1998 represent
amounts from June 8, 1998 through September 30, 1998. For terms of Mr.
King's compensation, see "Employment Agreements," below.
(2) Mr. King's employment agreement provided for a bonus of $50,000 upon
signing. No other bonus amount was earned by or paid to Mr. King during
fiscal 1998.
(3) The amount shown represents salary from February 1, 2000, the date Mr.
Brody began working for Waterlink through September 30, 2000. For terms of
Mr. Brody's compensation, see "Employment Agreements," below.
(4) Mr. Brody's employment agreement provided for a minimum bonus of $50,000
for the year ended September 30, 2000. No other bonus amount was earned or
paid to Mr. Brody during fiscal 2000.
(5) The amounts shown represent Waterlink "match" payment relating to our
401(k) Plan.
(6) Effective January 20, 2000, Mr. Savastano retired as chairman of the board
of directors of Waterlink. The amount shown as salary does not reflect
severance compensation to Mr. Savastano during 2000 as described in
footnote 7 below.
(7) Represents payments made in accordance with his employment agreement of May
23, 1997 and with the agreement entered into on October 25, 1999 in
connection with his retirement as chairman of the board of directors of
Waterlink effective January 20, 2000.
(8) Effective February 1, 2000, Mr. Vantusko resigned as chief financial
officer of Waterlink. The amount shown as salary does not reflect severance
compensation to Mr. Vantusko during 2000 as described in footnote 9 below.
(9) Represents payments of $75,000 made in accordance with his employment
agreement of May 23, 1997 and with the agreement entered into on January
20, 2000 in connection with his resignation chief financial officer of
Waterlink, and $833 which represents the Waterlink "match" payment relating
to our 401(k) Plan.
(10) In January 1998 bonus payments were made which represent deferred payments
in connection with our initial public offering. No other bonus amounts were
earned or paid to these individuals during fiscal 1998.
STOCK OPTION GRANTS
The following table designates each grant of stock options made to the
Named Executive Officers during fiscal 2000. The per share exercise price of
options granted under our stock option plans is the fair market value of the
Waterlink common stock on the date of grant. Waterlink has not yet granted stock
appreciation rights, or SARs. Amounts under the column heading "Potential
Realizable Value..." represent hypothetical gains that could be achieved for the
options if exercised at the end of the option term. The 5% and 10% assumed
annual rates of compounded stock price appreciation are mandated by the rules of
the SEC and do not represent our estimate or projection of future Waterlink
common stock price growth. These amounts represent assumed rates of appreciation
in the value of our common stock from the fair market value on the date of
grant. Actual gains, if any, are dependent on the actual future performance of
our common stock which will benefit all stockholders.
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54
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT
NUMBER PERCENT OF ASSUMED ANNUAL
OF TOTAL OPTIONS RATES OF STOCKS
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION
UNDERLYING EMPLOYEES OF FOR OPTION TERM
OPTIONS FISCAL BASE PRICE EXPIRATION --------------------
GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
---------- ------------- ---------- ---------- -------- --------
T. Scott King 125,000 18.9% $ 3.125 1/20/10 $245,662 $622,556
T. Scott King 55,000 8.3% $ 3.00 2/1/10 $103,768 $262,968
Mark E. Brody 100,000 15.1% $ 3.125 1/20/10 $196,530 $498,045
STOCK OPTION EXERCISES
The following table describes exercises of stock options during fiscal
2000 by each of the Named Executive Officers and their stock options outstanding
as of September 30, 2000. Waterlink has not granted stock appreciation rights.
None of the outstanding stock options are "in-the-money" since the exercise
price of all options are in excess of the market price for Waterlink common
stock on September 30, 2000.
AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL AT FISCAL
SHARES YEAR-END(#) YEAR-END($)
ACQUIRED ON VALUE EXERCISABLE(E) UNEXERCISABLE (U)
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(U) EXERCISABLE(E)
- ---- ----------- ----------- ---------------- -----------------
T. Scott King -- -- 231,250(E) --(E)
473,750(U) --(U)
Mark E. Brody -- -- --(E) --(E)
100,000(U) --(U)
Theodore F. Savastano -- -- 100,000(E) --(E)
--(U) --(U)
Michael J. Vantusko -- -- 75,000(E) --(E)
--(U) --(U)
EMPLOYMENT AGREEMENTS
Mr. King entered into an employment agreement with Waterlink in 1998,
which was subsequently amended in January 2000 and May 2000, which provides for
him to serve as president and chief executive officer for an initial term of
three years subject to automatic one-year extensions on each anniversary of the
agreement until mandatory retirement at age 65. He was paid an initial annual
base salary of $300,000, which was increased to $310,000 on January 20, 2000.
Mr. King participates in Waterlink's annual incentive bonus plan which entitles
him to earn annually an amount ranging from zero to 150% of his base salary if
performance goals established by the board of directors are achieved. He was
also paid a $50,000 signing bonus. If Mr. King's employment is terminated
without cause or if he terminates his employment for good cause, he will receive
in forty-eight semi-monthly installments an amount equal to two times the sum of
(i) his base salary in effect when terminated and (ii) a bonus payment equal to
his then current base salary. If Mr. King's employment is terminated due to a
change in control, he will receive a lump-sum amount equal to (a) two times the
sum of (i) his base salary in effect at the date of the change in control and
(ii) a bonus payment equal to his then current base salary, plus (b) $250,000.
If any of the payments payable to Mr. King under
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55
these circumstances are "excess parachute payments" for federal tax purposes,
Mr. King is to be paid an additional amount to offset any tax payable with
respect to the excess parachute payment and the additional payment. He is also
restricted from competing with Waterlink during the term of his agreement and
for 24 months following its termination. Mr. King was granted options to
purchase 400,000 shares of Waterlink common stock at $7.625, which was then the
fair value. Those options vest in four equal installments beginning on May 21,
1999 subject to acceleration.
Mr. Brody entered into an agreement with Waterlink on January 20, 2000,
which was subsequently amended in May 2000, which provides for him to serve as
chief financial officer for an initial term of two years subject to automatic
one-year extensions on each anniversary of the agreement. He is paid an annual
base salary of $185,000. Mr. Brody participates in Waterlink's annual incentive
plan which entitles him to earn annually an amount ranging from zero to 150% of
his base salary if performance goals established by the board of directors are
achieved. The bonus amount with respect to the fiscal year ended September 30,
2000 was not to be less than $50,000. If Mr. Brody's employment is terminated
without cause or if he terminates his employment for good cause, he will receive
in thirty-six semi-monthly installments an amount equal to one and one-half
times the sum of (i) his base salary in effect when terminated and (ii) a bonus
payment equal to his then current base salary. If Mr. Brody's employment is
terminated due to a change in control, he will receive a lump-sum amount equal
to (a) one and one-half times the sum of (i) his base salary in effect at the
date of the change in control and (ii) a bonus payment equal to his then current
base salary, plus (b) $125,000. If any of the payments payable to Mr. Brody
under these circumstances are "excess parachute payments" for federal tax
purposes, Mr. Brody is to be paid an additional amount to offset any tax payable
with respect to the excess parachute payment and the additional payment. He is
also restricted from competing with Waterlink during the term of his agreement
and for 18 months following its termination. Mr. Brody was granted options to
purchase 100,000 shares of Waterlink common stock at $3.125 per share, which was
then the fair value. This option vests in four equal annual installments
beginning on January 20, 2001, subject to acceleration.
In October 1999, Waterlink entered into an agreement with Theodore F.
Savastano in connection with his retirement as chairman of the board of
directors. Pursuant to the agreement, Mr. Savastano's retirement became
effective on January 20, 2000, the date of Waterlink's annual meeting of
stockholders related to the fiscal year ended September 30, 1999. The agreement
provided for Mr. Savastano (i) to receive $480,000 in forty-eight equal
semi-monthly installments (which equaled Waterlink's payment obligation pursuant
to his then existing employment agreement), (ii) to retain certain standard
executive employee medical and similar benefits through the earlier of October
31, 2002 or the date upon which Mr. Savastano commences full-time employment,
and (iii) to extend the period for which his then 100,000 fully-vested stock
options, with an exercise price of $4.40, to the second anniversary of his
retirement date, subject to certain agreed-upon volume limitations. The
agreement also requires that Mr. Savastano maintain as confidential certain
information as to which he had access during his employment with Waterlink and
restricts Mr. Savastano from competing with Waterlink for 24 months following
January 20, 2000. Previously to the aforementioned October 1999 agreement, Mr.
Savastano entered into an employment agreement with Waterlink in 1997 which
provided for him to serve as chairman of the board for an initial term of three
years subject to automatic one-year extensions on each anniversary of the
agreement until mandatory retirement at age 65, and was paid an annual base
salary of $240,000. Under that agreement, Mr. Savastano participated in
Waterlink's annual incentive bonus plan which entitled him to earn annually an
amount ranging from zero to 150% of his base salary if performance goals
established by the board of directors were achieved. Also under that agreement,
if Mr. Savastano's employment was terminated without cause or if he terminated
his employment for good cause, he would receive an amount equal to the present
value of twice the sum of his base salary in effect when terminated and the
annual bonus paid to him for that fiscal year if calculable, and if not
calculable, then the bonus paid to him with respect to the prior fiscal year. If
the payment was as a result of a change of control and the termination occurs
- 55 -
56
within one year of the change of control, the amount payable to Mr. Savastano
would be paid in a lump sum. In either event, if the amounts payable to Mr.
Savastano were "excess parachute payments" for federal tax purposes, Mr.
Savastano would be paid an additional amount to offset any taxes payable with
respect to the excess parachute payment and the additional payment. He was also
restricted from competing with Waterlink during the term of his agreement and
for 24 months following its termination.
On January 31, 2000, Waterlink entered into an agreement with Michael J.
Vantusko in connection with his resignation as chief financial officer. Pursuant
to the agreement, Mr. Vantusko's resignation became effective on February 1,
2000. The agreement provided for Mr. Vantusko to provide consulting services
through May 31, 2000, at a compensation rate equal to his then current base
salary. The agreement also provided for Mr. Vantusko (i) to retain certain
standard employee medical and similar benefits through the earlier of May 31,
2000 or the date upon which Mr. Vantusko commences full-time employment, and
(ii) to extend the period for which his then 75,000 fully-vested stock options,
with an exercise price of $4.25, to September 30, 2002. The agreement also
requires that Mr. Vantusko maintain as confidential certain information as to
which he had access during his employment with Waterlink and restricts Mr.
Vantusko from competing with Waterlink through September 30, 2000. Previous to
the aforementioned January 20, 2000 agreement, Mr. Vantusko entered into an
agreement with Waterlink in 1997 which provided for him to serve as chief
financial officer for an initial term of three years subject to automatic
one-year extensions on each anniversary of the agreement, at an annual base
salary of $150,000. Mr. Vantusko participated in Waterlink's annual incentive
plan which entitled him to earn annually an amount ranging from zero to 150% of
his base salary if performance goals established by the board of directors were
achieved. Under that agreement, if Mr. Vantusko's employment was terminated
without cause or if he terminated his employment for good cause, he would
receive an amount equal to the sum of his base salary in effect when terminated
and the annual bonus paid to him for that fiscal year if calculable, and if not
calculable, then the bonus paid to him with respect to the prior fiscal year. He
was also restricted from competing with Waterlink during the term of his
agreement and for 12 months following its termination. In 1997, Mr. Vantusko was
granted options to purchase 100,000 shares of Waterlink common stock at $11.00
per share, the initial offering price of the Waterlink common stock sold in our
initial public offering. This option vested in four equal annual installments
beginning on May 23, 1998, subject to acceleration. Effective April 1, 1999, Mr.
Vantusko's annual base salary was increased to $200,000.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee's function is, in part, to establish and
review Waterlink's arrangements and programs for compensating executive
officers, including the Named Executive Officers named in the Summary
Compensation Table. The Compensation Committee is composed entirely of directors
who are neither officers nor employees of Waterlink.
Waterlink's executive compensation program is designed to provide
competitive compensation and benefit programs that attract and retain capable
executives who are integral to the success of Waterlink, reward them for
achievement of both short-term and long-term objectives and provide them with an
economic incentive to increase stockholder value. The Compensation Committee
believes its policies are best implemented by providing compensation comprised
of separate components, all of which are designed to motivate executive
performance. These components are a salary, short-term incentive compensation
(bonus) and long-term incentive compensation (stock options). The bonuses and
stock options are in addition to executives' yearly based salaries, which are
intended to be competitive with companies which the Compensation Committee
believes are comparable to Waterlink.
In setting executive compensation practices for Waterlink, the
Compensation Committee generally compares executive compensation programs with
other companies' compensation programs for executives with similar
responsibilities and, based on that information, together with an analysis of
- 56 -
57
other relevant factors and on negotiations with the Named Executive Officers,
established levels of base salary.
The Compensation Committee administers the Bonus Plan pursuant to which
the executives of Waterlink, including the Named Executive Officers, are
entitled to earn, in each year during the term of their employment, bonuses
based upon a percentage of their base salary, subject to achievement of certain
performance goals and criteria determined by the Compensation Committee. The
percentage of an eligible executive's salary that may be earned as a bonus
pursuant to the Bonus Plan will vary depending upon the employee's position with
Waterlink but generally is not anticipated to exceed 150% of base salary. No
bonus amounts under the Bonus Plan were earned or paid during fiscal 2000, with
the exception of the $50,000 minimum bonus to Mr. Mark E. Brody in accordance
with the terms of his employment agreement.
The Compensation Committee believes that the grant of stock options
aligns the interests of Waterlink's executives with those of its stockholders.
The Compensation Committee determines the recipients of stock option grants and
the size of grants consistent with these principles, based upon the employee's
performance and position with Waterlink. During fiscal 2000, stock options were
granted to approximately 352 employees, including executive officers. As of
September 30, 2000, approximately 343 employees, including executive officers,
held stock options granted by Waterlink. All stock options granted during fiscal
2000 had an exercise price equal to the market value of common stock on the date
of grant. Generally, all stock options granted are anticipated to vest over four
years, except under limited circumstances.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
T. Scott King's compensation for fiscal 2000 was determined pursuant to
an employment agreement entered into contemporaneously with his election as
President and Chief Executive Officer of Waterlink effective June 8, 1998, as
amended on January 20, 2000 and as further amended on May 21, 2000. Mr. King's
compensation, including base salary and bonus compensation, was determined based
upon negotiation between Waterlink and Mr. King. Pursuant to Mr. King's
employment agreement, he is entitled to earn up to 150% of his base salary
pursuant to Waterlink's bonus plan.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Code generally limits the annual tax deduction for
applicable remuneration paid to Waterlink's Chief Executive Officer and certain
other highly compensated executive officers to $1,000,000. The Compensation
Committee does not believe that the applicable remuneration to be paid to
Waterlink's executives will exceed the deduction limit set by Section 162(m).
MEMBERS OF THE COMMITTEE
ROBERT P. PINKAS, CHAIRMAN
JOHN R. MILLER
DR. R. GARY BRIDGE
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58
PERFORMANCE GRAPH
Set forth below is a graph comparing the percentage change in the
cumulative total stockholder return of the Common Stock, the Standard and Poor's
500 Index and a peer group index constructed by Waterlink for the period since
the Common Stock commenced trading on June 25, 1997 to the fiscal year ended
September 30, 2000. The peer group index consists of: Ionics, Incorporated;
Osmonics, Inc.; and Calgon Carbon Corporation. These corporations are involved
in various aspects of the water treatment business. The graph assumes $100
invested on June 25, 1997 in Waterlink and in each of the other indices.
TOTAL RETURN TO STOCKHOLDERS
(ASSUMES $100 INVESTMENT ON 6/25/97)
[GRAPH]
6/25/97 9/30/97 9/30/98 9/30/99 9/29/00
TOTAL RETURN ANALYSIS ------- ------- ------- ------- -------
Waterlink, Inc. $100.00 $170.46 $ 25.00 $ 23.86 $ 20.45
Peer Group $100.00 $ 94.30 $ 54.33 $ 61.25 $ 49.43
S&P 500 $100.00 $107.05 $116.11 $146.41 $165.84
Source: Carl Thompson Associates www.ctaonline.com (800) 959-9677. Data from
Bloomberg Financial Markets.
* Total Return Assumes Reinvestment of Dividends (none paid by Waterlink)
Note: Companies in indices measured by Market Capitalization
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59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK OWNERSHIP
The following table sets forth the beneficial ownership of Waterlink
common stock as of November 30, 2000 by the executive officers of Waterlink,
each of the directors and nominees of Waterlink and all executive officers,
directors and nominees of Waterlink as a group, as well as by each person known
by Waterlink to be the beneficial owner of more than 5% of Waterlink common
stock. Beneficial ownership includes shares of Waterlink common stock subject to
options, warrants, rights, or similar obligations exercisable within 60 days of
the date of determination for purposes of computing the percentage of the person
or group holding such options or warrants. Except as noted, each stockholder has
sole voting power and sole investment power with respect to all shares
beneficially owned by that stockholder. The percentage computations are based on
19,659,694 shares outstanding. An asterisk indicates less than one percent of
shares outstanding.
SHARES OF
WATERLINK PERCENT
COMMON STOCK OF
NAME AND ADDRESS BENEFICIALLY SHARES
OF BENEFICIAL OWNER OWNED OWNED
------------------- ------------------- ---------
State of Wisconsin Investment Board 3,579,500(1) 18.21%
P.O. Box 7842
Madison, WI 53707
Brantley Venture Partners III, L.P. 2,404,459(2) 12.04%
20600 Chagrin Blvd
Suite 1150
Cleveland, OH 44122
T. Rowe Price Associates, Inc. 1,890,050(3) 9.61%
100 East Pratt St
Baltimore, MD 21202
CID Equity Capital V, L.P. 1,103,000(4) 5.61%
One American Square
Suite 2850
Indianapolis, IN 46282
Theodore F. Savastano 1,009,164(5)(6)(7) 5.10%
T. Scott King 330,415(6)(7) 1.66%
Mark E. Brody 25,000(7) *
Robert P. Pinkas 2,510,209(7)(8) 12.51%
John R. Miller 11,750(7) *
John T. Hackett 1,103,000(9) 5.61%
Dr. R. Gary Bridge 10,750(7) *
Michael J. Vantusko(10) 130,455(6)(7) *
All directors, nominees and executive officers as a
group (8 persons) 5,130,743(11) 24.90%
- ---------------
(1) Based on information provided by the stockholder on December 14, 2000.
(2) Includes warrants to purchase 304,459 shares of Waterlink common stock held
by Brantley Capital Corporation, an affiliate of Brantley Venture Partners
III, L.P. Robert P. Pinkas, a director of Waterlink, is managing general
partner of Brantley Venture Partners III, L.P. and has sole voting and
investment power with respect to these shares.
(3) Based on its filing on Form 13 G/A dated February 10, 2000. T. Rowe Price
Associates, Inc. has sole voting power with respect to 187,900 shares and
sole dispositive power with respect to 1,890,050 shares.
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60
(4) Includes warrants to purchase 3,000 shares of Waterlink common stock. Mr.
John T. Hackett, a director of Waterlink, is managing general partner of
CID Equity Capital V L.P.
(5) Mr. Savastano's business address is 6657 Frank Avenue, NW, North Canton,
Ohio, 44720.
(6) Includes warrants to purchase the indicated shares of Waterlink common
stock:
Theodore F. Savastano 16,364
T. Scott King 10,909
Michael J. Vantusko 5,455
(7) Includes options for the indicated option holder to purchase the indicated
shares of Waterlink common stock, which options are fully vested:
Theodore F. Savastano 100,000
T. Scott King 293,750
Mark E. Brody 25,000
Robert P. Pinkas 103,750
John R. Miller 6,750
Dr. R. Gary Bridge 750
Michael J. Vantusko 75,000
(8) Includes shares, including the 304,459 warrants referred to in footnote 2
above, which are held by Brantley Venture Partners III, L.P., of which Mr.
Pinkas is managing general partner. Mr. Pinkas's business address is 20600
Chagrin Blvd., Suite 1150, Cleveland, OH 44122.
(9) Includes shares and warrants that are held by CID Equity Capital V L.P., of
which Mr. Hackett is managing general partner. Mr. Hackett's business
address is One American Square, Suite 2850, Indianapolis, IN 46282.
(10) Effective February 1, 2000, Mr. Vantusko resigned as Chief Financial
Officer of Waterlink.
(11) Includes options to purchase 605,000 shares of common stock, which are
fully vested, and 340,187 warrants (as indicated above). Includes the
former Chief Financial Officer. If such person was excluded, the group
would consist of 7 persons and would beneficially own 5,000,288 shares of
common stock or 24.36%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following report and consolidated financial statements of Waterlink,
Inc. and Subsidiaries are included in Item 8, Part II of this report:
Report of Independent Auditors
Consolidated Balance Sheets at September 30, 2000 and 1999
Consolidated Statements of Operations for the years ended September 30,
2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended September 30,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
Financial Statements or notes thereto.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
The exhibits are set forth on the attached Exhibit Index which is
incorporated by reference. Exhibits are included only in the copies of
this Form 10-K filed with the Securities and Exchange Commission and
NYSE.
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62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Waterlink, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WATERLINK, INC.
By: /s/ T. Scott King
--------------------------------------
Its President and Chief Executive
Officer
Date: December 21, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ Robert P. Pinkas /s/ Theodore F. Savastano
- ------------------------------------------- -------------------------------------------
Robert P. Pinkas, Theodore F. Savastano,
Director and Chairman of the Board Director
Date: December 21, 2000 Date: December 21, 2000
/s/ Dr. R. Gary Bridge /s/ T. Scott King
- ------------------------------------------- -------------------------------------------
Dr. R. Gary Bridge, T. Scott King,
Director Director, President and Chief Executive
Date: December 21, 2000 Officer
Date: December 21, 2000
/s/ John T. Hackett /s/ Mark E. Brody
- ------------------------------------------- -------------------------------------------
John T. Hackett, Mark E. Brody,
Director Chief Financial Officer
Date: December 21, 2000 (and principal accounting officer)
Date: December 21, 2000
/s/ John R. Miller
- -------------------------------------------
John R. Miller,
Director
Date: December 21, 2000
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63
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
* 3.1 Form of Fifth Amended and Restated Certificate of
Incorporation of Waterlink (filed as an exhibit to
Waterlink's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, File No. 1-13041)
* 3.2 Form of Amended and Restated By-Laws of Waterlink (filed as
an exhibit to Waterlink's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1997, File No. 1-13041)
* 4.1 Form of Rights Agreement, dated as of May 23, 1997, between
Waterlink and American Stock Transfer & Trust Company (filed
as an exhibit to Waterlink's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, File No.
1-13041)
* 4.2 Amended and Restated Registration Rights Agreement, dated as
of March 6, 1997, by and among Waterlink, Brantley Venture
Partners III, L.P., Theodore F. Savastano, River Cities
Capital Fund Limited Partnership, IPP95, L.P., Environmental
Opportunities Fund, L.P., Environmental Opportunities Fund
(Cayman), L.P., Brantley Capital Corporation and National
City Capital Corporation (filed as an exhibit to Waterlink's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
* 4.3 Registration Rights Agreement, dated as of January 31, 1996,
between Waterlink and Mass Transfer Systems, Inc (filed as
an exhibit to Waterlink's Registration Statement on Form
S-1, filed April 16, 1997, Registration No. 333-25249)
* 4.4 Registration Rights Agreement, dated as of April 26, 1996,
between Waterlink and Lawrence A. Schmid (filed as an
exhibit to Waterlink's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249)
* 4.5 Registration Rights Agreement dated as of September 30,
1996, between Waterlink, Lawrence Stenger, Theresa Stenger,
Ronald Jaworski, Christine Jaworski, John Stenger, Dawn P.
Stenger, Scott Stenger, Kristie D. Stenger, Jorg
Menningmann, Michael Mudrick, Robert Young and Gary Prae
(filed as an exhibit to Waterlink's Registration Statement
on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.1 Employment Agreement, dated May 23, 1997, between Waterlink
and Theodore F. Savastano (filed as an exhibit to
Waterlink's Amendment No. 1 to Registration Statement on
Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.2 Employment Agreement, dated May 23, 1997, between Waterlink
and Michael J. Vantusko (filed as an exhibit to Waterlink's
Amendment No. 1 to Registration Statement on Form S-1, filed
May 23, 1997, Registration No. 333-25249).
*10.3 Credit Agreement, dated as of June 27, 1997, among
Waterlink, Bank of America National Trust & Savings
Association (successor by merger to Bank of America
Illinois), as agent, and for other financial institutions
party thereto (filed as an exhibit to Waterlink's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1997, File No. 1-13041)
*10.4 Credit Agreement, dated as of March 4, 1997, among
Gigantissimo 2061 AB (to be known as Waterlink (Sweden) AB),
Waterlink, as guarantor, and Bank of America National Trust
& Savings Association, London Branch (filed as an exhibit to
Waterlink's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249).
*10.5 First Amendment, dated as of June 27, 1997, to Credit
Agreement, dated March 4, 1997, among Waterlink (Sweden) AB,
Waterlink, as guarantor, and Bank of America National Trust
& Savings Association, London Branch (filed as an exhibit to
Waterlink's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, File No. 1-13041)
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64
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
*10.6 Credit Agreement, dated as of March 4, 1997, among Provista
Einhundertsechsundfunfzigste Verwaltungsgesellschaft GmbH
(to be known as Waterlink (Germany) GmbH), Waterlink, Inc.,
as guarantor, and Bank of America National Trust & Savings
Association, Frankfurt Branch (filed as an exhibit to
Waterlink's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249).
*10.7 First Amendment, dated as of June 27, 1997, to Credit
Agreement, dated March 4, 1997, among Waterlink (Germany)
GmbH, Waterlink, as guarantor, and Bank of America National
Trust & Savings Association, Frankfurt Branch (filed as an
exhibit to Waterlink's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997, File No. 1-13041)
*10.8 Common Stock Warrant Agreement, dated as of February 19,
1997, between Waterlink and Bank of America Illinois (filed
as an exhibit to Waterlink's Registration Statement on Form
S-1, filed April 16, 1997, Registration No. 333-25249).
*10.9 Waterlink's 1995 Stock Option Plan (filed as an exhibit to
Waterlink's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249).
*10.10 Warrant Agreement, dated as of March 6, 1997, among
Waterlink and each of the purchasers named therein, along
with the Form of Warrant to Purchase Common Stock, attached
thereto as Exhibit A (filed as an exhibit to Waterlink's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.11 Waterlink's 1997 Omnibus Incentive Plan (filed as an exhibit
to Waterlink's Amendment No. 1 to Registration Statement on
Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.12 Waterlink's Employee Stock Purchase Plan (filed as an
exhibit to Waterlink's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249)
*10.13 First Amendment, dated as of June 23, 1997, to Waterlink's
Employee Stock Purchase Plan (filed as an exhibit to
Waterlink's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, File No. 1-13041)
*10.14 Waterlink's 1997 Non-Employee Director Stock Option Plan
(filed as an exhibit to Waterlink's Registration Statement
on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.15 Letter Agreement among Waterlink, Inc., Bioclear Technology,
Inc. and Royal Bank of Canada dated September 24, 1997
(filed as an exhibit to Waterlink's Annual Report on Form
10-K for the fiscal year ended September 30, 1997, File No.
1-13041)
*10.16 Stock Purchase Agreement between Waterlink, Inc., and
Anglian Water Services Limited dated as of March 25, 1998
(filed as an exhibit to Waterlink's Current Report on Form
8-K, filed April 9, 1998, File No. 1-13041).
*10.17 Stock Purchase Agreement between Waterlink, Inc., and
Sutcliffe Speakman PLC dated as of June 5, 1998 (filed as an
exhibit to Waterlink's Current Report on Form 8-K, filed
June 19, 1998, File No. 1-13041).
*10.18 Amended and Restated Credit Agreement, dated as of June 27,
1997 and amended and restated as of May 19, 1998, among
Waterlink, Inc. and Bank of America National Trust and
Savings Association, as agent, Letter of Credit Issuing
Bank, and Swing Line Bank, and the other financial
institutions party hereto (filed as an exhibit to
Waterlink's Current Report on Form 8-K, filed June 19, 1998,
File No. 1-13041).
*10.19 Agreement, dated June 5, 1998, between Waterlink and Chet S.
Ross (filed as an exhibit to Waterlink's Annual Report on
Form 10-K for the fiscal year ended September 30, 1998, File
No. 1-13041).
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65
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
*10.20 Executive Employment Agreement, dated June 8, 1998, between
Waterlink and T. Scott King (filed as an exhibit to
Waterlink's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998, File No. 1-13041).
*10.21 Third Amendment, dated as of September 29, 1998, to Amended
and Restated Credit Agreement, dated as of May 19, 1998,
among Waterlink, Inc. and Bank of America National Trust and
Savings Association, as agent, and the other financial
institutions party thereto (filed as an exhibit to
Waterlink's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998, File No. 1-13041).
*10.22 Fourth Amendment, dated as of February 25, 1999, to Amended
and Restated Credit Agreement, dated as of May 19, 1998,
among Waterlink, Inc. and Bank of America National Trust and
Savings Association, as agent, and the other financial
institutions party thereto (filed as an exhibit to
Waterlink's registration statement on Form S-1 filed on
August 11, 1999, registration number 333-84985).
*10.23 Fifth Amendment, dated as of June 29, 1999, to Amended and
Restated Credit Agreement, dated as of May 19, 1998, among
Waterlink, Inc. and Bank of America National Trust and
Savings Association, as agent, and the other financial
institutions party thereto (filed as an exhibit to
Waterlink's registration statement on Form S-1 filed on
August 11, 1999, registration number 333-84985).
*10.24 Agreement dated as of April 15, 1999, among Waterlink, Inc.
and each of the current holders of warrants issued pursuant
to that certain Warrant Agreement dated as of March 6, 1997
(filed as an exhibit to Waterlink's registration statement
on Form S-1 filed on August 11, 1999, registration number
333-84985).
*10.25 Warrant Agreement dated as of July 9, 1999 among Waterlink
and each of the Warrantholders party thereto (filed as an
exhibit to Waterlink's amendment no. 1 to registration
statement on Form S-1 filed on September 23, 1999,
registration number 333-84985).
*10.26 Sixth Amendment, dated as of September 30, 1999, to Amended
and Restated Credit Agreement, dated as of May 19, 1998,
among Waterlink, Inc. and Bank of America National Trust and
Savings Association, as agent, and the other financial
institutions party. (filed as an exhibit to Waterlink's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1999, File No. 1-13041.)
*10.27 Amendment to Confirmation of Credit Facility, dated as of
October 8, 1999, among Waterlink and Royal Bank of Canada
thereto. (filed as an exhibit to Waterlink's Annual Report
on Form 10-K for the fiscal year ended September 30, 1999,
File No. 1-13041.)
*10.28 Form of securities purchase agreement between Waterlink and
certain institutional investors in connection with offering
up to 6,300,000 shares of common stock, dated October 1,
1999. (filed as an exhibit to Waterlink's Annual Report on
Form 10-K for the fiscal year ended September 30, 1999, File
No. 1-13041.)
*10.29 Agreement dated October 25, 1999, between Waterlink and
Theodore F. Savastano. (filed as an exhibit to Waterlink's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1999, File No. 1-13041.)
*10.30 Executive Employment Agreement, dated January 20, 2000,
between Waterlink and Mark E. Brody. (filed as an exhibit to
Waterlink's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2000, File No. 1-13041.)
*10.31 Amendment to Executive Employment Agreement, dated as of
January 20, 2000, between Waterlink and T. Scott King.
(filed as an exhibit to Waterlink's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2000, File No.
1-13041.)
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66
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
*10.32 Amended and Restated Credit Agreement, dated as of June 27,
1997 and amended and restated as of February 11, 2000, among
Waterlink, Inc. and Bank of America, NA, as agent, and the
other financial institutions party hereto. (filed as an
exhibit to Waterlink's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2000, File No. 1-13041.)
*10.33 Eighth Amendment, dated as of May 2, 2000, to Amended and
Restated Credit Agreement, dated as of February 11, 2000,
among Waterlink, Inc. and Bank of America, NA, as agent, and
the other financial institutions party hereto. (filed as an
exhibit to Waterlink's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2000, File No. 1-13041.)
10.34 Agreement dated January 20, 2000, between Waterlink and
Michael J. Vantusko.
10.35 Warrant Agreement dated January 20, 2000 between Waterlink,
Inc. and CID Equity Partners V, L.P.
10.36 Amendment to Executive Employment Agreement, dated as of May
19, 2000, between Waterlink and Mark E. Brody.
10.37 Amendment to Executive Employment Agreement, dated as of May
21, 2000, between Waterlink and T. Scott King.
10.38 Ninth Amendment, dated as of September 28, 2000, to Amended
and Restated Credit Agreement, dated as of February 11,
2000, among Waterlink, Inc. and Bank of America, NA, as
agent, and the other financial institutions party hereto.
21.1 List of Subsidiaries of Waterlink.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule as of and for the year ended
September 30, 2000.
- ---------------
* Incorporated herein by reference as indicated.
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