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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended June 30, 2002
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number 1-13041
WATERLINK, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 34-1788678
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
---------------------------------
835 North Cassady Avenue
Columbus, Ohio 43219
(Address of Principal Executive Offices)
(Zip Code)
---------------------------------
614-258-9501
(Registrant's Telephone Number, Including Area Code)
----------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value -19,659,694 shares outstanding as of July 31, 2002
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INDEX
WATERLINK, INC. AND SUBSIDIARIES
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 2001 and
June 30, 2002 3 - 4
Consolidated statements of operations - Three months
ended June 30, 2001 and 2002; Nine months ended
June 30, 2001 and 2002 5
Consolidated statements of cash flows - Nine months
ended June 30, 2001 and 2002 6
Notes to consolidated financial statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-UNAUDITED
September 30, June 30,
2001 2002
--------------- ----------------
ASSETS (In thousands)
Current assets:
Cash and cash equivalents $ 1,646 $ 1,770
Trade accounts receivable, net 11,987 12,010
Inventories 10,443 9,662
Costs in excess of billings 1,648 1,246
Other current assets 890 1,159
Net assets of discontinued operations 15,831 1,640
--------------- ----------------
Total current assets 42,445 27,487
Property, plant and equipment, at cost:
Land, buildings and improvements 1,512 1,539
Machinery and equipment 5,935 6,508
Office equipment 606 631
--------------- ----------------
8,053 8,678
Less accumulated depreciation 2,685 3,423
--------------- ----------------
5,368 5,255
Other assets:
Goodwill, net 24,320 24,194
Other assets 617 601
Net assets of discontinued operations - 2,170
--------------- ----------------
24,937 26,965
--------------- ----------------
Total assets $ 72,750 $ 59,707
=============== ================
See notes to consolidated financial statements
3
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-UNAUDITED (CONTINUED)
September 30, June 30,
2001 2002
--------------- ----------------
(In thousands,
LIABILITIES AND SHAREHOLDERS' EQUITY except share data)
Current liabilities:
Accounts payable-trade $ 6,839 $ 5,761
Accrued expenses 7,659 6,975
Billings in excess of cost 400 1,023
Accrued income taxes 304 262
Current portion of long-term debt 51,930 40,392
--------------- ----------------
Total current liabilities 67,132 54,413
Accrued pension costs 1,418 1,418
Shareholders' equity:
Preferred Stock, $.001 par value, 10,000,000 shares
authorized, none issued and outstanding - -
Common Stock, voting, $.001 par value,
authorized - 40,000,000 shares,
issued and outstanding - 19,659,694 shares
at September 30, 2001 and June 30, 2002 20 20
Additional paid-in capital 92,174 92,174
Accumulated other comprehensive loss (5,141) (4,508)
Accumulated deficit (82,853) (83,810)
--------------- ----------------
Total shareholders' equity 4,200 3,876
--------------- ----------------
Total liabilities and shareholders' equity $ 72,750 $ 59,707
=============== ================
See notes to consolidated financial statements
4
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2002 2001 2002
---------------- ---------------- ---------------- ---------------
(In thousands, except per share data)
Net sales $ 17,171 $ 16,107 $ 46,405 $ 47,130
Cost of sales 13,232 12,326 36,199 36,204
---------------- ---------------- ---------------- ---------------
Gross profit 3,939 3,781 10,206 10,926
Selling, general and
administrative expenses 2,666 2,454 7,885 7,511
Amortization 160 160 481 476
---------------- ---------------- ---------------- ---------------
Operating income 1,113 1,167 1,840 2,939
Other expense:
Interest expense (1,063) (923) (2,912) (2,784)
Amortization of financing costs (231) (127) (1,254) (503)
Other items-net (66) (25) (160) (66)
---------------- ---------------- ---------------- ---------------
Income (loss) before income taxes (247) 92 (2,486) (414)
Income taxes - 3 - 9
---------------- ---------------- ---------------- ---------------
Income (loss) from continuing operations (247) 89 (2,486) (423)
Discontinued operations:
Loss from discontinued operations (101) (314) (871) (534)
Loss on disposal of discontinued operations - - (17,475) -
---------------- ---------------- ---------------- ---------------
Net loss $ (348) $ (225) $ (20,832) $ (957)
================ ================ ================ ===============
Earnings (loss) per common share:
Basic and assuming dilution:
Continuing operations $ (0.01) $ 0.01 $ (0.13) $ (0.02)
Discontinued operations (0.01) (0.02) (0.93) (0.03)
---------------- ---------------- ---------------- ---------------
$ (0.02) $ (0.01) $ (1.06) $ (0.05)
================ ================ ================ ===============
Weighted average common shares outstanding-
Basic and assuming dilution 19,660 19,660 19,660 19,660
See notes to consolidated financial statements
5
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
Nine Months Ended
June 30,
2001 2002
-------------- -------------
(In thousands)
OPERATING ACTIVITIES
Loss from continuing operations $ (2,486) $ (423)
Adjustments to reconcile loss from continuing operations
to net cash (used) provided by operating activities:
Depreciation and amortization 2,476 1,725
Changes in working capital:
Accounts receivable 1,709 122
Inventories (1,128) 854
Costs in excess of billings (1,659) 417
Other assets 60 (236)
Accounts payable 44 (1,168)
Accrued expenses (3) (1,511)
Billings in excess of cost 205 619
Accrued income taxes (108) (46)
-------------- -------------
Net cash (used) provided by operating activities (890) 353
INVESTING ACTIVITIES
Proceeds from sale of divisions 16,087 12,130
Purchases of equipment (320) (501)
-------------- -------------
Net cash provided by investing activities 15,767 11,629
FINANCING ACTIVITIES
Proceeds from long-term borrowings 800 422
Proceeds from issuance of subordinated debt 1,000 -
Payments on long-term borrowings (16,794) (11,960)
-------------- -------------
Net cash used by financing activities (14,994) (11,538)
Effect of exchange rate changes on cash (41) 66
-------------- -------------
Cash flows (used) provided by continuing operations (158) 510
Cash flows from discontinued operations 93 (386)
-------------- -------------
(Decrease) increase in cash and cash equivalents (65) 124
Cash and cash equivalents at beginning of period 2,907 1,646
-------------- -------------
Cash and cash equivalents at end of period $ 2,842 $ 1,770
============== =============
See notes to consolidated financial statements
6
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(INFORMATION AS OF JUNE 30, 2002 AND FOR THE THREE AND NINE-MONTH PERIODS ENDED
JUNE 30, 2001 AND 2002 IS UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine-month periods ended June
30, 2002 are not necessarily indicative of the results that may be expected for
the year ending September 30, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2001.
2. DISCONTINUED OPERATIONS
During the fiscal year ended September 30, 2001, the Company sold three of its
five operating Divisions. The sale of the Biological Wastewater Treatment
Division was completed in December 2000, the sale of the Separations Division
was completed on February 28, 2001, and the European Water and Wastewater
Division was sold in a series of transactions during the fourth quarter of
fiscal 2001.
During the quarter ended June 30, 2002, the Company sold substantially all of
the assets of its Pure Water Division for approximately $15.6 million in cash,
$12.9 million of which was received at closing and $2.7 million of which has
either been placed in escrow or has been held back by the purchaser, subject to
reduction for any indemnification claims made on or before May 30, 2004. There
was no gain or loss recorded in connection with the sale of the Pure Water
Division until such time as all indemnification periods have expired and the
amounts have been released from escrow.
Accordingly, the results of operations for these four Divisions have been
presented within discontinued operations in the accompanying consolidated
financial statements for all periods presented.
7
The Company allocates interest expense to its discontinued operations based on
the expected net proceeds from the sale of its assets. Information regarding
discontinued operations for each period is presented below (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2002 2001 2002
------------------------------------------------
Net sales $ 13,534 $ 2,240 $ 52,375 $ 9,125
Operating income (loss) 225 (156) 1,083 88
Allocated interest expense (326) (158) (1,954) (622)
------------------------------------------------
Loss from operations (101) (314) (871) (534)
Loss on disposal - - (17,475) -
------------------------------------------------
$ (101) $ (314) $ (18,346) $ (534)
================================================
The remaining escrows and holdbacks related to the sale of the aforementioned
divisions have been classified either as current or long-term assets on the
consolidated balance sheets at September 30, 2001 and June 30, 2002 based on the
anticipated timing and anticipated amount of net proceeds related to the sales.
3. INVENTORIES
Inventories consisted of the following (in thousands):
September 30, June 30,
2001 2002
-------------------------------------
Raw materials and supplies $ 5,064 $ 5,274
Work in process 166 151
Finished goods 5,213 4,237
-------------------------------------
$ 10,443 $ 9,662
=====================================
4. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is as
follows (in thousands):
September 30, June 30,
2001 2002
-------------------------------------
Contract costs incurred to date $ 23,073 $ 17,949
Estimated profits 9,287 7,556
-------------------------------------
Contract revenue earned to date 32,360 25,505
Less billings to date 31,112 25,282
-------------------------------------
Costs and estimated earnings in
excess of billings, net $ 1,248 $ 223
=====================================
8
The above amounts are included in the accompanying consolidated balance sheets
as follows (in thousands):
September 30, June 30,
2001 2002
-------------------------------------
Costs in excess of billings $ 1,648 $ 1,246
Billings in excess of cost (400) (1,023)
-------------------------------------
$ 1,248 $ 223
=====================================
5. CAPITALIZATION
Long-term obligations consisted of the following (in thousands):
September 30, June 30,
2001 2002
-----------------------------
Long-term debt:
Revolving credit facility with a
group of banks $35,513 $35,935
Term note payable to a group
of banks 13,167 1,207
Subordinated notes to related parties 1,000 1,000
Convertible subordinated notes payable
to former shareholders of C'treat 2,250 2,250
----------------------------
51,930 40,392
Less current maturities 51,930 40,392
----------------------------
$ - $ -
============================
The Company's Senior Credit Facility is with Bank of America National Trust &
Savings Association as agent, with five other participating banks. Effective as
of January 15, 2002, the Company entered into an amendment to its Senior Credit
Facility that extended the maturity date of the facility from January 15, 2002
to October 1, 2002, assuming the Company maintains a certain level of earnings
before interest, taxes, depreciation and amortization, and maintains certain
balance sheet ratios through September 30, 2002.
Concurrent with the amendment to the Senior Credit Facility, the maturity dates
of all convertible subordinated notes payable were extended until October 15,
2002.
The comprehensive loss for the three months ended June 30, 2001 was $538,000 and
the comprehensive income for the three months ended June 30, 2002 was $969,000.
The comprehensive loss for the nine months ended June 30, 2001 and 2002 was
$15,867,000 and $324,000, respectively. The only significant component of
comprehensive income or loss, other than net income or loss, is the effect of
foreign currency translation adjustments.
9
6. SEGMENT INFORMATION
Historically the Company's reportable segments were its five operating
Divisions. As described in Note 2 the Company has sold all of its operating
divisions with the exception of its Specialty Products Division. Accordingly,
Waterlink now has only one reportable segment for all periods presented.
7. 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 indicated in Note 5, all of
Waterlink's outstanding debt obligations are due in October 2002. As such, at
June 30, 2002 Waterlink has classified outstanding debt obligations totaling
$40,392,000 as current liabilities, causing a working capital deficiency of
$26,926,000. This raises substantial doubt about Waterlink's ability to continue
as a going concern for a reasonable period of time. 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 Waterlink be unable to continue as a going concern. Waterlink's
continuation as a going concern is dependent on its ability to negotiate
extended repayment terms with its senior lenders or refinance its debt
obligations entirely. These negotiations are ongoing, and no assurance can be
given as to whether a satisfactory further amendment to the senior credit
facility will be obtained from our senior bank group. If we are unable to
negotiate such further amendment to the senior credit facility, then Waterlink
would be in default at that time under the terms of the credit agreement. If
there is such an event of default the lenders could declare that all borrowings
under the credit agreement are then 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.
10
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
WATERLINK, INC. AND SUBSIDIARIES
OVERVIEW
Waterlink is an international provider of integrated water and air
purification solutions for both industrial and municipal customers. Waterlink
was incorporated in Delaware on December 7, 1994. The continuing operations of
Waterlink are comprised of the Specialty Products Division.
Waterlink considers its accounting policy regarding revenue recognition on
long-term contracts to be a critical accounting policy. The majority of revenue
relates to carbon sales and services and is recognized when title passes upon
shipment. The systems and equipment produced by Waterlink are custom designed
and can take a number of months to produce. Revenues from systems and equipment
contracts are recognized using the percentage of completion method of accounting
in the proportion that costs incurred bear to total estimated costs at
completion. Waterlink believes that this method of accounting best measures
revenue earned as progress is made toward completion of the contract. Revisions
of estimated costs 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.
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, 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 June 30, 2002, Waterlink's
total backlog from continuing operations was approximately $19.4 million,
consisting of $14.2 of firm commitments to purchase carbon and related services
and $5.2 million of written purchase orders for systems and equipment. 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.
11
RESULTS OF CONTINUING OPERATIONS
The following table sets forth for the periods indicated, statements of
operations data as a percentage of net sales:
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2002 2001 2002
------------- -------------- ------------ ------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 77.1 76.5 78.0 76.9
------------- -------------- ------------ ------------
Gross profit 22.9 23.5 22.0 23.1
Selling, general and administrative expenses 15.5 15.2 17.0 15.9
Amortization 0.9 1.0 1.0 1.0
------------- -------------- ------------ ------------
Operating income 6.5 7.3 4.0 6.2
Other expense:
Interest expense (6.2) (5.7) (6.3) (5.9)
Amortization of financing costs (1.3) (0.8) (2.7) (1.1)
Other items - net (0.4) (0.2) (0.3) (0.1)
------------- -------------- ------------ ------------
Income (loss) before income taxes (1.4) 0.6 (5.3) (0.9)
Income taxes - 0.0 - 0.0
------------- -------------- ------------ ------------
Income (loss) from continuing operations (1.4) 0.6 (5.3) (0.9)
Discontinued operations:
Loss from discontinued operations (0.6) (2.0) (1.9) (1.1)
Loss from disposal of
discontinued operations - - (37.7) -
------------- -------------- ------------ ------------
Net loss (2.0)% (1.4)% (44.9)% (2.0)%
============= ============== ============ ============
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Net Sales: Net sales for the three months ended June 30, 2002 were $16,107,000,
a decrease of $1,064,000, or 6.2%, from the $17,171,000 in net sales reported in
the comparable prior period. Domestic sales decreased by 11.1% as compared to
the prior year, primarily related to capital equipment system sales. System
sales for the prior year were strong due to progress made during that quarter on
a large contract that was delayed during the first half of fiscal 2001. In
addition, systems sales for the current year quarter were below normal levels as
a result of a general slowdown in capital equipment orders in reaction to the
events of September 11, 2001. The decrease in domestic sales was partially
offset by a 15.7% increase in sales of carbon and from related services in
England.
Gross Profit: Gross profit for the three months ended June 30, 2002 was
$3,781,000, a decrease of $158,000 from the comparable prior period due to the
decrease in net sales. The gross margin was 23.5% for the three months ended
June 30, 2002 as compared to 22.9% for the comparable
12
prior period. The increase in the gross margin was primarily attributable to an
increase in sales as compared to the prior year of more specialized carbons,
which carry higher sales prices.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the three months ended June 30, 2002 were
$2,454,000, a decrease of $212,000, or 8.0%, from the comparable prior period.
This decrease is the result of the consolidation of the corporate headquarters
into the Specialty Products Division that occurred effective November 1, 2001,
partially offset by higher insurance and other costs. Selling, general and
administrative expenses as a percentage of net sales were 15.2% for the three
months ended June 30, 2002 as compared to 15.5% for the comparable prior period.
Interest Expense: Interest expense for the three months ended June 30, 2002 was
$923,000, a decrease of $140,000 from the comparable prior period. This decrease
reflects both a decrease in interest rates and principal reductions made over
the last year.
Amortization of Financing Costs: Amortization of financing costs was $127,000
for the three months ended June 30, 2002 and $231,000 for the three months ended
June 30, 2001. The amount in the 2001 period reflects the accelerated
amortization of deferred financing costs resulting from the maturity date of our
senior credit facility being moved from May 23, 2003 to October 1, 2001. Since
that time, amendments to the senior credit facility have extended the maturity
date to October 1, 2002.
Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001
Net Sales: Net sales for the nine months ended June 30, 2002 were $47,130,000,
an increase of $725,000, or 1.6%, from the $46,405,000 in net sales reported in
the comparable prior period. Domestic sales increased by 5.2% as compared to the
prior year and carbon and related service sales in England increased by 7.1% as
compared to the prior year. These increases were partially offset by a 28.9%
decrease in capital equipment system sales in England, due to the timing of
orders.
Gross Profit: Gross profit for the nine months ended June 30, 2002 was
$10,926,000, an increase of $720,000 from the comparable prior period due to the
increase in net sales and in gross margin. Gross margin was 23.1% for the nine
months ended June 30, 2002 as compared to 22.0% for the comparable prior period.
The sales mix that favorably impacted the margins for the quarterly period also
favorably impacted gross margins for the nine months ended June 30, 2002.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the nine months ended June 30, 2002 were $7,511,000,
a decrease of $374,000, or 4.7%, from the comparable prior period. This decrease
reflects the previously mentioned cost reductions within the corporate office,
partially offset by higher insurance and other costs. Selling, general and
administrative expenses as a percentage of net sales were 15.9% for the nine
months ended June 30, 2002 as compared to 17.0% for the comparable prior period,
reflecting both lower expenses and a higher sales base in the current year.
13
Interest Expense: Interest expense for the nine months ended June 30, 2002 was
$2,784,000, a decrease of $128,000 from the comparable prior period. This
decrease reflects both a decrease in interest rates and principal reductions
made over the last year.
Amortization of Financing Costs: Amortization of financing costs was $503,000
for the nine months ended June 30, 2002 and $1,254,000 for the nine months ended
June 30, 2001. The amount in the 2001 period reflects the accelerated
amortization of deferred financing costs resulting from the maturity date of our
senior credit facility being moved from May 23, 2003 to October 1, 2001. Since
that time, amendments to the senior credit facility have extended the maturity
date to October 1, 2002.
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
- net proceeds from the sale of businesses in connection with the
strategic alternative process
- issuance of common stock and seller financing incurred in connection
with Waterlink's completed acquisitions
- cash flow from certain profitable operations
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 operations
- the funding required for certain under-performing operations
- the funding of interest on borrowings and the repayment of borrowings
In May 2000 Waterlink announced that its board of directors had instructed
management to explore various strategic alternatives, including the sale of all
or part of Waterlink that could maximize our shareholders' investment in
Waterlink. To date, Waterlink has sold four of its five operating Divisions: the
Biological Division in two separate transactions in September and December 2000,
the Separations Division in February 2001, the European Water and Wastewater
Division in a series of transactions during the fourth quarter of our fiscal
year ended September 30, 2001, and the Pure Water Division in May 2002. In
accordance with the terms of our senior credit facility, the net proceeds from
all of these sales were used to repay senior indebtedness.
For the nine months ended June 30, 2002, net cash provided by operating
activities was $353,000 and purchases of equipment totaled $501,000. Cash
provided by operating activities and available cash balances funded investing
activities during the current year. Cash flows from operating activities
are expected to
14
be sufficient to fund required capital expenditures over the next twelve months,
which are expected to increase as compared to the current and prior year.
Credit Availability
As of June 30, 2002, Waterlink's credit facilities were comprised of (1) a
$37,162,000 domestic facility with Bank of America National Trust & Savings
Association as agent, which expires on October 1, 2002 and (2) a $200,000
facility within England. The credit facilities are utilized to primarily fund
operating activities of Waterlink.
Effective as of January 15, 2002 Waterlink entered into an amendment to our
senior credit facility that extended the maturity date of the senior credit
facility from January 15, 2002 to October 1, 2002, assuming Waterlink maintains
a certain level of earnings before interest, taxes, depreciation and
amortization, and maintains certain balance sheet ratios through September 30,
2002. Without an amendment to our senior credit facility that would further
extend the maturity date, an infusion of additional capital, or the sale of
significant assets, Waterlink will not be able to meet its scheduled obligations
under the senior credit facility. These negotiations are ongoing and no
assurance can be given as to whether a satisfactory further amendment to the
senior credit facility will be obtained from our senior bank group. If we are
unable to negotiate such further amendment to the senior credit facility, then
Waterlink would be in default at that time under the terms of the senior credit
facility. If there is such an event of default the lenders could declare that
all borrowings under the senior credit facility are then 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.
Waterlink had no additional borrowing capacity at June 30, 2002 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 and dispositions. 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 subsidiaries in England of their
obligations under the overseas facilities. The subsidiaries in England have
given the lenders an assurance that the subsidiaries would not pledge their
assets to any other party.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
15
Waterlink is required to apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of fiscal 2003, or as of
October 1, 2002. Application of the nonamortization provisions of Statement No.
142 is expected to result in an increase in income from continuing operations
and net income of approximately $640,000, or $0.03 per share, on an annual
basis. Waterlink will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of the adoption date and has
not yet determined what the effect of these tests will be on the earnings and
financial position of Waterlink.
In October 2001,the FASB issued SFAS No.144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This standard is effective for fiscal years
beginning after December 15, 2001, or as of October 1, 2002 for Waterlink. The
Company is assessing whether this statement will have a significant impact on
its financial statements.
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 ability to negotiate with its senior lenders amended repayment
terms and with other debt holders, additional amended repayment terms
- the ability to obtain additional credit availability to support
working capital requirements
- changes in world economic conditions, including
- instability of governments and legal systems in countries in
which Waterlink conducts business
- significant changes in currency valuations
- recessionary environments
- the effects of military conflicts
- changes in customer demand and timing of orders as they affect sales
and product mix, including
- the effect of strikes at customer's facilities
- variations in backlog
- the impact of changes in industry business cycles
- changes in environmental laws
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- competitive factors, including
- changes in market penetration
- introduction of new products by existing and new competitors
- changes in operating costs, including
- changes in Waterlink's and its subcontractors' manufacturing
processes
- changes in costs associated with varying levels of operations
- changes resulting from different levels of customers demands
- effects of unplanned work stoppages
- changes in cost of labor and benefits
- the cost and availability of raw materials and energy
- the cost of capital, including interest rate increases
- unanticipated litigation, claims or assessments
Readers are referred to the "Forward-Looking Statements" and "Risk Factors"
sections, commencing on page 16, in Waterlink's 2001 Annual Report on Form
10-K filed on January 18, 2002, which identifies important risk factors
that could cause actual results to differ from those contained in the
forward-looking statements herein.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed
by William W. Vogelhuber.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed
by Donald A. Weidig.
(b) Reports on Form 8-K.
(i) On April 9, 2002 Waterlink filed a Current Report on Form 8-K
reporting under item 5 the issuance of a press release concerning
the signing of a letter of intent to sell its Pure Water Division
and including under item 7(c) a copy of the press release.
(ii) On June 6, 2002 Waterlink filed a Current Report on Form 8-K
reporting the sale of its Pure Water Division. The report
included a description of the transaction under Item 2, the
issuance of a press release announcing the sale under Item 5, and
reported Unaudited Pro Forma Condensed Consolidated Financial
Data under Item 7.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Waterlink, Inc.
(Registrant)
By: /s/ William W. Vogelhuber
-------------------------
William W. Vogelhuber
President and Chief Executive Officer
By: /s/ Donald A. Weidig
--------------------
Donald A. Weidig
Chief Financial Officer
Dated: August 13, 2002
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