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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 March 31, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ ] No |X|
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 -19,665,149 shares outstanding as of April 30,
2003
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INDEX
WATERLINK, INC. AND SUBSIDIARIES
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 2002 and
March 31, 2003 3 - 4
Consolidated statements of operations - Three months ended March 31,
2002 and 2003; Six months ended
March 31, 2002 and 2003 5
Consolidated statements of cash flows - Six months
ended March 31, 2002 and 2003 6
Notes to consolidated financial statements 7 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 18
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Certifications 21 - 22
2
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-UNAUDITED
September 30, March 31,
2002 2003
------------- -----------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 2,530 $ 1,986
Trade accounts receivable, net 11,210 11,711
Inventories 10,528 9,592
Costs in excess of billings 1,783 851
Other current assets 1,130 752
Net assets of discontinued operations 640 390
------- -------
Total current assets 27,821 25,282
Property, plant and equipment, at cost:
Land, buildings and improvements 1,626 1,689
Machinery and equipment 6,538 7,086
Office equipment 717 810
------- -------
8,881 9,585
Less accumulated depreciation 3,723 4,173
------- -------
5,158 5,412
Other assets:
Goodwill 24,250 3,730
Other assets 85 125
Net assets of discontinued operations 2,170 2,170
------- -------
26,505 6,025
------- -------
Total assets $59,484 $36,719
======= =======
See notes to consolidated financial statements
3
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-UNAUDITED (CONTINUED)
September 30, March 31,
2002 2003
-------------- -------------
(In thousands,
except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 6,848 $ 5,087
Accrued expenses 5,988 6,148
Billings in excess of cost 232 1,218
Accrued income taxes 313 309
Current debt obligations 39,674 38,319
--------- ---------
Total current liabilities 53,055 51,081
Accrued pension costs 3,787 3,815
Shareholders' equity (deficit):
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, 2002 and 19,665,149 shares
at March 31, 2003 20 20
Additional paid-in capital 92,174 92,174
Accumulated other comprehensive loss (6,314) (6,323)
Accumulated deficit (83,238) (104,048)
--------- ---------
Total shareholders' equity (deficit) 2,642 (18,177)
--------- ---------
Total liabilities and shareholders' equity $ 59,484 $ 36,719
========= =========
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 Six Months Ended
March 31, March 31,
2002 2003 2002 2003
-------- -------- -------- --------
(In thousands, except per share data)
Net sales $ 16,143 $ 15,768 $ 31,023 $ 30,063
Cost of sales 12,353 12,277 23,878 23,432
-------- -------- -------- --------
Gross profit 3,790 3,491 7,145 6,631
Selling, general and
administrative expenses 2,461 2,496 5,057 5,038
Amortization 158 -- 316 --
-------- -------- -------- --------
Operating income 1,171 995 1,772 1,593
Other expense:
Interest expense (902) (826) (1,862) (1,696)
Amortization of financing costs (117) (56) (376) (132)
Other items-net (22) (1) (41) 2
-------- -------- -------- --------
Income (loss) before income taxes 130 112 (507) (233)
Income taxes 3 55 6 77
-------- -------- -------- --------
Income (loss) from continuing operations 127 57 (513) (310)
Loss from discontinued operations (120) -- (219) --
-------- -------- -------- --------
Loss before cumulative effect of
accounting change 7 57 (732) (310)
Cumulative effect of accounting change -- -- -- (20,500)
-------- -------- -------- --------
Net income (loss) $ 7 $ 57 $ (732) $(20,810)
======== ======== ======== ========
Per share data:
Basic and assuming dilution:
Continuing operations $ 0.01 $ 0.00 $ (0.03) $ (0.02)
Discontinued operations (0.01) -- (0.01) --
Cumulative effect of accounting change -- -- -- (1.04)
-------- -------- -------- --------
$ 0.00 $ 0.00 $ (0.04) $ (1.06)
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 19,660 19,664 19,660 19,662
Assuming dilution 20,111 20,092 19,660 19,662
See notes to consolidated financial statements
5
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
Six Months Ended
March 31,
2002 2003
----------- -----------
(In thousands)
OPERATING ACTIVITIES
Loss from continuing operations $ (513) $ (310)
Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 1,151 567
Deferred income taxes -- 47
Changes in working capital:
Accounts receivable 453 (468)
Inventories 890 957
Costs in excess of billings (341) 938
Other assets (65) 440
Accounts payable (1,449) (1,792)
Accrued expenses (64) (65)
Billings in excess of cost 37 985
Accrued income taxes (67) (5)
------- -------
Net cash provided by operating activities 32 1,294
INVESTING ACTIVITIES
Proceeds from sale of divisions 66 250
Purchases of equipment (233) (672)
------- -------
Net cash used by investing activities (167) (422)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 422 189
Payments on long-term borrowings (591) (1,543)
------- -------
Net cash used by financing activities (169) (1,354)
Effect of exchange rate changes on cash (49) 23
------- -------
Cash flows used by continuing operations (353) (459)
Cash flows used in discontinued operations (867) (85)
------- -------
Decreases in cash and cash equivalents (1,220) (544)
Cash and cash equivalents at beginning of period 1,646 2,530
------- -------
Cash and cash equivalents at end of period $ 426 $ 1,986
======= =======
See notes to consolidated financial statements
6
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(INFORMATION AS OF MARCH 31, 2003 AND FOR THE THREE AND SIX -MONTH PERIODS
ENDED MARCH 31, 2002 AND 2003 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 six-month periods ended March
31, 2003 are not necessarily indicative of the results that may be expected for
the fiscal year ending September 30, 2003. 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,
2002.
2. DISCONTINUED OPERATIONS
In May 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 will not be any
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 the Pure Water Division have
been presented within 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. Information regarding discontinued operations for the
three and six-month periods ended March 31, 2002 is presented below (in
thousands):
Three Six
Months Months
Ended Ended
March 31, 2002
------------------------------
Net sales $ 3,342 $ 6,871
Operating income 115 243
Allocated interest expense (235) (462)
Income tax expense - -
------------------------------
Loss from operations $ (120) $ (219)
==============================
7
The remaining escrows and holdbacks related to the sale of the Pure
Water Division have been classified either as current or long-term assets on the
consolidated balance sheets at September 30, 2002 and March 31, 2003 based on
the anticipated timing of their release.
3. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In June 2001 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142 (SFAS No. 142),
"Goodwill and Other Intangible Assets". This statement requires that goodwill
and intangible assets deemed to have an indefinite life not be amortized.
Instead of amortizing goodwill and intangible assets deemed to have an
indefinite life, the statement requires a test for impairment to be performed
annually, or immediately if conditions indicate that such impairment could
exist. The Company adopted the provisions of SFAS No. 142 effective October 1,
2002, and as a result, no longer records goodwill amortization, which was
$158,000 and $316,000 for the three and six-months ended March 31, 2002,
respectively.
During the quarter ended December 31, 2002, the Company completed the
initial goodwill impairment review as required under SFAS No. 142 and determined
that an impairment condition did exist. Using a discounted cash flow analysis
prepared by management, supported by an independent assessment of what a market
comparable valuation might be, the Company determined it was necessary to reduce
the balance of goodwill at October 1, 2002 by $20,500,000.
Had we accounted for goodwill under SFAS No. 142 for all periods
presented, our results from continuing operations and related per share amounts
would have been as follows (in thousands, except per share data):
Three Months Ended Six Months Ended
March 31, March 31,
2002 2003 2002 2003
--------------------------------------------------
Reported income (loss) from continuing operations $ 127 $ 57 $ (513) $ (310)
Add back goodwill amortization 158 -- 316 --
--------------------------------------------------
Adjusted income (loss) from continuing operations $ 285 $ 57 $ (197) $ (310)
==================================================
Reported income (loss) per share from continuing
operations $ 0.01 $ 0.00 $ (0.03) $ (0.02)
Add back goodwill amortization 0.01 -- 0.02 --
--------------------------------------------------
Adjusted income (loss) per share from
continuing operations $ 0.02 $ 0.00 $ (0.01) $ (0.02)
==================================================
There was no income tax effect related to the elimination of goodwill
amortization, since goodwill amortization with regard to the reporting units is
non-deductible for income tax purposes based on the nature of the acquisition.
Per share amounts for basic and assuming dilution are identical, as all common
stock equivalents are anti-dilutive for both periods presented.
8
4. INVENTORIES
Inventories consisted of the following (in thousands):
September 30, March 31,
2002 2003
---------------------------------------
Raw materials and supplies $ 6,279 $ 6,143
Work in process 203 296
Finished goods 4,046 3,153
---------------------------------------
$ 10,528 $ 9,592
=======================================
5. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is as
follows (in thousands):
September 30, March 31,
2002 2003
---------------------------------------
Contract costs incurred to date $ 20,664 $ 10,666
Estimated profits 8,753 4,578
---------------------------------------
Contract revenue earned to date 29,417 15,244
Less billings to date 27,866 15,611
---------------------------------------
Costs and estimated earnings in excess of
(less than) billings, net $ 1,551 $ (367)
=======================================
The above amounts are included in the accompanying consolidated balance
sheets as follows (in thousands):
September 30, March 31,
2002 2003
---------------------------------------
Costs in excess of billings $ 1,783 $ 851
Billings in excess of cost (232) (1,218)
---------------------------------------
$ 1,551 $ (367)
=======================================
6. CAPITALIZATION
Debt obligations consisted of the following (in thousands):
September 30, March 31,
2002 2003
-----------------------------------------
Senior credit facility with a group of banks $36,424 $34,881
Revolving facility in England with a bank - 188
Subordinated notes to related parties 1,000 1,000
Convertible subordinated notes payable to former
shareholders of acquired business 2,250 2,250
-----------------------------------------
$39,674 $38,319
=========================================
9
The Company's senior credit facility is with Bank of America, NA, as
agent, and with five other participating banks. Effective October 1, 2002, the
Company entered into an amendment to its senior credit facility that extended
the maturity date of the facility from October 1, 2002 to October 1, 2003,
assuming the Company maintains a certain level of earnings before interest and
taxes and maintains certain balance sheet ratios through September 30, 2003. The
amendment also requires the Company to present to the senior lenders on or
before June 30, 2003 a plan to repay the senior debt obligations. Concurrent
with the amendment to the senior credit facility, the maturity dates of all
subordinated notes payable were extended until October 15, 2003.
In December 2002, Sutcliffe Speakman Limited, Waterlink's wholly-owned
operating subsidiary in England, entered into a credit facility with The Royal
Bank of Scotland, with availability based on a percentage of eligible accounts
receivable, with a maximum borrowing amount of 1,250,000 pounds sterling. In
connection with this facility, certain accounts receivable in England were
pledged as collateral. In connection with entering into this credit facility,
Waterlink remitted $1 million of the proceeds to our senior bank group as
required by the October 1, 2002 amendment to the senior credit facility.
The comprehensive loss for the three months ended March 31, 2002 and
2003 was $327,000 and $222,000, respectively. The comprehensive loss for the six
months ended March 31, 2002 and 2003 was $1,293,000 and $20,819,000,
respectively. The only significant component of comprehensive income or loss,
other than net income or loss, was the effect of foreign currency translation
adjustments.
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 6, all of Waterlink's outstanding debt obligations are classified as
current liabilities, causing a working capital deficiency of $25,799,000. 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. The Company's continuation
as a going concern is dependent on its ability to: generate sufficient cash
flows to operate its business; meet its debt covenant requirements; and develop
and execute a plan to repay the senior credit facility obligations on or prior
to the maturity date. At this time, Waterlink can give no level of assurance
that we will be successful in developing and executing a plan to repay the
senior credit facility on or prior to the maturity date. If we are unable to
successfully satisfy requisite conditions and to repay 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 senior lenders could
declare that all borrowings under the senior credit facility are then
immediately due and payable. In such event, Waterlink would need to examine all
alternatives, including, without limitation, possible protection under the
bankruptcy laws.
10
8. EARNINGS PER SHARE
The following table sets forth the computation of weighted average
common shares outstanding, basic and assuming dilution, for the three-month
periods ended March 31, 2002 and 2003 (in thousands):
Three Month Ended
March 31
2002 2003
-------------------------------
Average shares outstanding-basic 19,660 19,664
Effect of dilutive common stock warrants 451 428
-------------------------------
Average shares outstanding-assuming dilution 20,111 20,092
===============================
The adjustment to earnings related to cash generated from the exercise
of dilutive common stock warrants was less than $1,000 and did not impact the
computation of earnings per share for either period presented.
9. STOCK BASED COMPENSATION
The Company accounts for employee stock options using the intrinsic
value method. The Company has no current plans to change accounting methods. If
the fair value recognition provisions of SFAS No. 123, "Accounting for Stock
Based Compensation" had been applied to all stock based awards, the results
would have been (in thousands, except for per share data):
Three Months Ended Six Months Ended
March 31, March 31,
2002 2003 2002 2003
--------------------------------------------------------
PRO FORMA IMPACT OF FAIR VALUE METHOD
Reported net income (loss) $ 7 $ 57 $ (732) $(20,810)
Stock-based employee compensation determined
under fair value based method, net of taxes 109 (11) 251 (26)
--------------------------------------------------------
Pro forma net income (loss) $ 116 $ 46 $ (481) $(20,836)
========================================================
EARNINGS (LOSS) PER COMMON SHARE
Basic and assuming dilution-as reported $ 0.00 $ 0.00 $ (0.04) $ (1.06)
Basic and assuming dilution-pro forma $ 0.01 $ 0.00 $ (0.02) $ (1.06)
The fair value of each award granted was estimated using a Black Scholes
option-pricing model.
11
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 Barnebey Sutcliffe Corporation in the United States,
Sutcliffe Speakman Limited in England, and the corporate office.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
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.
Retirement Plans
Waterlink sponsors two defined benefit pension plans that cover
substantially all of our employees. The accounting for pensions is determined by
standardized accounting and actuarial methods that include critical assumptions;
which include discount rates, expected return on plan assets and future
compensation increases. Waterlink considers these assumptions to be critical as
they can impact periodic pension expense as well as the minimum pension
liability. During the year ended September 30, 2002, Waterlink increased the
additional minimum pension liability by $2,219,000 and reduced equity by the
corresponding amount. At March 31, 2003, Waterlink's accrued pension liabilities
totaled $3,815,000.
BACKLOG
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 March 31,
2003, Waterlink's total backlog from continuing operations was approximately
$17.9 million, consisting of $12.9 million of firm commitments to purchase
carbon and related services and
12
$5.0 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.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth, for the periods indicated, statements
of operations data as a percentage of net sales. In an effort to enhance
comparability between the two periods, goodwill amortization has been excluded
from the three and six-month periods ended March 31, 2002.
Three Months Ended Six Months Ended
March 31, March 31,
2002 2003 2002 2003
------------- -------------- ------------ ------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.5 77.9 77.0 77.9
------------- -------------- ------------ ------------
Gross profit 23.5 22.1 23.0 22.1
Selling, general and administrative expenses 15.3 15.8 16.3 16.8
------------- -------------- ------------ ------------
Operating income 8.2 6.3 6.7 5.3
Other expense:
Interest expense (5.6) (5.2) (6.0) (5.6)
Amortization of financing costs (0.7) (0.4) (1.2) (0.5)
Other items - net (0.1) (0.0) (0.1) 0.0
------------- -------------- ------------ ------------
Income (loss) before income taxes 1.8 0.7 (0.6) (0.8)
Income taxes 0.0 0.3 - 0.2
------------- -------------- ------------ ------------
Income (loss) from continuing operations 1.8 0.4 (0.6) (1.0)
Discontinued operations (0.8) - (0.7) -
------------- -------------- ------------ ------------
Income (loss) before cumulative effect of
accounting change 1.0 0.4 (1.3) (1.0)
Cumulative effect of accounting change - - - (68.2)
------------- -------------- ------------ ------------
Net income (loss) 1.0% 0.4% (1.3)% (69.2)%
============= ============== ============ ============
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Net Sales: Net sales for the three months ended March 31, 2003 were $15,768,000,
a decrease of $375,000, or 2.3%, from the $16,143,000 in net sales reported in
the comparable prior period. On a consolidated basis, sales of carbons and
related services increased by 6.8%, represented by a 59.5% increase in England
that was partially offset by a 7.2% decrease in the United States. This overall
growth in sales of carbon and related services was more than offset by a 38.6%
decrease in sales of capital equipment. Sales of capital equipment were down in
both the United States and England as compared to the prior year. Sales of
capital equipment were impacted by the lack of spending in the marketplace.
During the quarter ended March 31, 2003, orders totaling over $4.9 million were
received for capital equipment items, which increased backlog for capital
equipment to $5.0 at March 31, 2003.
13
Gross Profit: Gross profit for the three months ended March 31, 2003 was
$3,491,000, a decrease of $299,000 from the comparable prior period, due to the
decrease in net sales and a reduction in the gross margin from 23.5% to 22.1%.
The decrease in the gross margin reflects product mix and the classification of
certain manufacturing costs as compared to the prior year quarter.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the three months ended March 31, 2003 were
$2,496,000, an increase of $35,000, or 1.4%, from the comparable prior period.
Selling, general and administrative expenses as a percentage of net sales were
15.8% for the three months ended March 31, 2003 as compared to 15.3% for the
comparable prior period.
Interest Expense: Interest expense for the three months ended March 31, 2003 was
$826,000, a decrease of $76,000 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 $56,000 for
the three months ended March 31, 2003 and $117,000 for the three months ended
March 31, 2002. The amount in the prior year period reflects the amortization of
fees relating to two separate bank amendments entered into from September 30,
2001 to March 31, 2002.
Six Months Ended March 31. 2003 Compared to Six Months Ended March 31, 2002
Net Sales: Net sales for the six months ended March 31, 2003 were $30,063,000, a
decrease of $960,000, or 3.1%, from the $31,023,000 in net sales reported in the
comparable prior period. On a consolidated basis, sales of carbons and related
services increased by 5.7%, represented by a 52.0% increase in England that was
partially offset by a 6.7% decrease in the United States. This overall growth in
sales of carbon and related services was more than offset by a 34.4% decrease in
sales of capital equipment. Sales of capital equipment were down in both the
United States and England as compared to the prior year. Sales of capital
equipment were impacted by the lack of spending in the marketplace. During the
quarter ended March 31, 2003, orders totaling over $4.9 million were received
for capital equipment items, which increased backlog for capital equipment to
$5.0 at March 31, 2003.
Gross Profit: Gross profit for the six months ended March 31, 2003 was
$6,631,000, a decrease of $514,000 from the comparable prior period, due to the
decrease in net sales and a reduction in the gross margin from 23.0% to 22.1%.
The decrease in the gross margin reflects product mix and the classification of
certain manufacturing costs as compared to the prior year quarter.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the six months ended March 31, 2003 were $5,038,000,
a decrease of $19,000, or 0.4%, from the comparable prior period. Selling,
general and administrative expenses as a percentage of net sales were 16.8% for
the three months ended March 31, 2003 as compared to 16.3% for the comparable
prior period.
Interest Expense: Interest expense for the six months ended March 31, 2003 was
$1,696,000, a decrease of $166,000 from the comparable prior period. This
decrease reflects both a decrease in interest rates and principal reductions
made over the last year.
14
Amortization of Financing Costs: Amortization of financing costs was $132,000
for the six months ended March 31, 2003 and $376,000 for the six months ended
March 31, 2002. The amount in the prior year period reflects the amortization of
fees relating to two separate bank amendments entered into from September 30,
2001 to March 31, 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 acquisitions
- 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.
At March 31, 2003, Waterlink has recorded $2,560,000 of net assets of
discontinued operations that represents amounts either placed in escrow or held
back by the purchaser of the pure water division. These assets are subject to
reduction for indemnification claims made on or before May 30, 2004.
In September 2001 the Board of Directors of Waterlink determined the
corporate office should be relocated to its Columbus, Ohio facility. This
consolidation resulted in personnel reductions and the disposition of certain
fixed assets. Accordingly, Waterlink recorded a special charge of $2,560,000 in
2001 relating to severance obligations to eight individuals and the write-off of
certain fixed assets. At March 31, 2003, approximately $1,300,000 remains
accrued for severance obligations relating to two of these individuals and is
currently being paid at a rate of approximately $24,000 per month.
Waterlink does not currently anticipate making significant capital
investments in plant and equipment because we believe our current businesses do
not require such investments as well as our current financial position.
15
For the six months ended March 31, 2003, net cash provided by operating
activities was $1,294,000 and purchases of equipment totaled $672,000. During
the six months ended March 31, 2003, Waterlink collected $250,000 of proceeds
related to the sale of the European water and wastewater division that was
previously held back. This entire amount was remitted to our senior lenders as
required by the domestic senior credit facility.
Credit Availability
As of March 31, 2003, Waterlink's credit facilities were comprised of
(1) a $34,881,000 domestic senior credit facility with Bank of America, NA, as
agent, which expires on October 1, 2003, (2) a 1,250,000 pounds sterling
revolving credit facility in England with The Royal Bank of Scotland, and (3) a
$200,000 credit facility for our operating subsidiary in England with Bank of
America to support duty bonds and other similar instruments. The credit
facilities will be utilized primarily to fund operating activities of Waterlink.
At March 31, 2003 there were no borrowings available under the domestic senior
credit facility in the United States and approximately $1,615,000 of borrowings
available in England with The Royal Bank of Scotland.
Effective October 1, 2002, Waterlink entered into an amendment to our
domestic senior credit facility that extended the maturity date of the facility
from October 1, 2002 to October 1, 2003, assuming Waterlink maintains a certain
level of earnings before interest and taxes and maintains certain balance sheet
ratios through September 30, 2003. The amendment also requires Waterlink to
present to the senior lenders on or before June 30, 2003 a plan to repay the
senior debt obligations, as well as additional strategic milestone obligations
arising on or before July 31, 2003 and August 31, 2003 relating to said plan.
Without an amendment to our domestic 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 payment
obligations under the domestic senior credit facility. At this time, Waterlink
can give no level of assurance that we will be successful in developing and
executing a plan to repay the domestic senior credit facility on or prior to the
maturity date. If we are unable to successfully satisfy requisite conditions and
to repay the domestic 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 senior lenders could declare that all borrowings under the credit
agreement are then immediately due and payable. In such event, Waterlink would
need to examine all alternatives, including, without limitation, possible
protection under the bankruptcy laws.
In December 2002, Sutcliffe Speakman Limited, Waterlink's wholly-owned
operating subsidiary in England, entered into a credit facility with The Royal
Bank of Scotland, with availability based on a percentage of eligible accounts
receivable, with a maximum borrowing amount of 1,250,000 pounds sterling. In
connection with this facility certain accounts receivable were pledged as
collateral. In connection with entering into this credit facility, Waterlink
remitted $1 million of the proceeds to our senior bank group as required by the
October 1, 2002 amendment to the domestic senior credit facility. The balance
outstanding on the facility with The Royal Bank of Scotland in England was
approximately $188,000 at March 31, 2003.
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 domestic senior credit facility also
must approve acquisitions and dispositions. Waterlink's obligations under the
domestic senior credit facility are secured by liens on substantially all of
16
Waterlink's domestic assets, including equipment, inventory, accounts receivable
and general intangibles and the pledge of most of the stock of Waterlink's
subsidiaries. In addition, Waterlink has guaranteed the payment by our operating
subsidiary in England of its obligations under the $200,000 facility with Bank
of America.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", and the accounting and
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
Reporting the Results of Operations for a disposal of a segment of a business.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
Waterlink adopted SFAS No. 144 as of October 1, 2002 and the adoption of SFAS
No. 144 did not have an impact on Waterlink's financial position or results from
operations.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002 and, accordingly, Waterlink can only determine prospectively the
impact, if any, SFAS No. 146 would have on Waterlink's financial position and
results of operations.
In December 2002, FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS 123
"Accounting for Stock-Based Compensation" and APB Opinion No. 28, "Interim
Financial Reporting." Companies reporting stock-based compensation on the
intrinsic value method, as does Waterlink, are now required to include in
interim financial statements, as well as annual financial statements, certain
disclosures of stock-based compensation cost and pro forma net income and
earnings per share information as if the fair value method of accounting for
stock-based compensation had been applied to all periods. SFAS No. 148's
amendment of annual disclosure requirements is effective for Waterlink's fiscal
year ending September 30, 2003, whiles its impact on interim financial
information became effective for Waterlink's quarter ended March 31, 2003. SFAS
No. 148 had no impact on consolidated net income or net worth of Waterlink upon
implementation, but did add pro forma information, which is shown in Note 9 to
the financial statements for the three and six-month periods ended March 31,
2003.
17
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 a 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 a customer's facilities
- variations in backlog
- the impact of changes in industry business cycles
- changes in environmental laws
- 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 2002 Annual Report on
Form 10-K filed on December 10, 2002, which identifies important risk factors
that could cause actual results to differ from those contained in the
forward-looking statements herein.
18
Item 4. Controls and Procedures
- --------------------------------
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of May 8, 2003, the evaluation date. Based upon the evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that, as of
the evaluation date, our disclosure controls and procedures are effective in
timely alerting them to the material information relating to us required to be
included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
- ----------------------------------------------------------
At the annual meeting of stockholders of Waterlink held on February 13, 2003,
the following directors were elected as Class III directors whose term expire in
2006:
For Against Withheld
--- ------- --------
Peter G. Kleinhenz 17,678,356 115,132 0
Robert P. Pinkas 17,678,356 115,132 0
In addition, the following directors' terms of office continued after the
meeting:
Dr. R. Gary Bridge
B. Bruce Cummings
Kenneth Ch'uan-k'ai Leung
William W. Vogelhuber
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.
None.
19
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: May 13, 2003
20
CERTIFICATIONS
I, William W. Vogelhuber, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waterlink, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
May 13, 2003
By: /s/ WILLIAM W. VOGELHUBER
-----------------------------
President and Chief Executive Officer
21
CERTIFICATIONS-(CONTINUED)
I, Donald A. Weidig, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waterlink, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
May 13, 2003
By: /s/ DONALD A. WEIDIG
------------------------
Chief Financial Officer
22