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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, 2003
( ) 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
835 NORTH CASSADY AVENUE
COLUMBUS, OHIO 43219
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (614) 258-9501
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 None
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. ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes ( ) No (X)
As of November 30, 2003 the aggregate market value of Waterlink's voting Common
Stock held by non-affiliates of Waterlink was approximately $709,000.
As of November 30, 2003 there were 19,665,149 shares of the registrant's Common
Stock, $.001 par value outstanding.
PART I
ITEM 1. BUSINESS
GENERAL
Waterlink is an international provider of integrated water and air
purification solutions for both industrial and municipal customers. Our
principal executive offices are located at 835 North Cassady Avenue, Columbus,
Ohio 43219 and our telephone number is (614) 258-9501.
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, having made 13 acquisitions. 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.
As of September 30, 2003 the remaining operations of Waterlink are the
entities that comprised what had previously been reported as the specialty
products division. Accordingly, the operations of all divisions except for the
specialty products operations are reported as discontinued operations for each
period presented. A brief description of the operations that comprise
Waterlink's continuing operations follows.
The specialty products operations and their predecessors have
specialized in the development and production of highly sophisticated activated
carbons for more than 80 years. The worldwide and domestic headquarters are
located in Columbus, Ohio. Approximately seventy percent of Waterlink's net
sales are generated from the United States, with the remaining thirty percent
generated from our facility in Lancashire, England. Activated carbon is used to
purify air, water and gases by retaining impurities in carbon granules.
Waterlink 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
- 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 products and systems are sold using a combination of direct sales
and sales representatives.
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BANKRUPTCY CONSIDERATIONS
On June 27, 2003 (the "Petition Date"), Waterlink and four of its
direct, wholly owned subsidiaries (collectively, the "Debtors") filed voluntary
petitions for relief under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). The bankruptcy cases are being jointly
administered under Case No. 03-11989 (the "Chapter 11 Cases").
The Debtors continue to operate their businesses as
"debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code, the Federal
Rules of Bankruptcy Procedure and applicable court orders. In general, as
debtors-in-possession, the Debtors are authorized under the Bankruptcy Code to
continue to operate as an ongoing business, but may not engage in transactions
outside the ordinary course of business without the prior approval of the
Bankruptcy Court. All vendors are being paid for all goods furnished and
services provided after the Petition Date. However, under Section 362 of the
Bankruptcy Code, the filing of the bankruptcy petition automatically stays most
actions against a debtor, including most actions to collect pre-petition
indebtedness or to exercise control over the property of the debtor's estate.
The Debtors are currently funding their operations through the use of
cash collateral pursuant to order entered by the Bankruptcy Court pursuant to
Section 363 of the Bankruptcy Code. The Debtors believe that the use of cash
collateral will support current operations and satisfy all current customer
needs. The Debtors currently have authority to use cash collateral until January
30, 2004.
Pursuant to an order entered in the Chapter 11 Cases, the Debtors have
employed NatCity Investments, Inc. to act as their investment bankers to assist
the Debtors in the investigation and consideration of their strategic
alternatives. Among the strategic alternatives investigated and considered by
the Debtors is the possibility of a sale of all or substantially all of their
assets either through a motion or the confirmation of a plan.
The United States Trustee for the District of Delaware (the "U.S.
Trustee") has appointed an Official Committee of Unsecured Creditors (the
"Creditors' Committee"). The Creditors' Committee and its legal representatives
have a right to be heard on all matters that come before the Bankruptcy Court
with respect to the Debtors.
As of December 11, 2003, Waterlink and its wholly-owned operating
subsidiary, Barnebey Sutcliffe Corporation, executed an agreement with Barnebey
Acquisition Corp. (the "Buyer"), a newly formed Delaware corporation affiliated
with The Compass Group International, LLC, for the Buyer to purchase
substantially all of the assets and business operations of Waterlink, including
the operations of Barnebey Sutcliffe Corporation and the subsidiaries of the
Company in the United Kingdom (the "Purchase Agreement"). The Purchase Agreement
provides for total cash consideration of approximately $25,750,000, subject to
certain pre-closing and post-closing adjustments, and the assumption by the
Buyer of certain liabilities of Waterlink. On December 16, 2003, Debtors
received a $5,000,000 deposit contemplated by the Purchase Agreement. The
proposed purchase is subject to the terms and conditions of the Purchase
Agreement, and the purchase price is subject to certain adjustments required
under the Purchase Agreement, which includes a provision for a working capital
adjustment. Waterlink anticipates that all of the proceeds of the transaction
that it receives will be used to partially satisfy the claims of creditors.
On December 16, 2003, the Debtors' filed a motion with the Bankruptcy
Court, requesting that the Bankruptcy Court approve the proposed sale pursuant
to the Purchase Agreement and establish bidding procedures and a date and time
for conducting an auction to determine if there are higher or better offers for
Waterlink's assets and business. There can be no assurance that the Bankruptcy
Court will approve the proposed transaction reflected in the Purchase Agreement,
or that final documentation will be reached on terms satisfactory to all
parties. Subject to receipt of the Bankruptcy Court's approval and the
satisfaction of other pre-closing conditions, Waterlink expects the transaction
to close in the first quarter of 2004. Waterlink anticipates that all of the
proceeds from the transaction will be used to partially satisfy the claims of
its creditors.
The Bankruptcy Code provides special treatment for collective
bargaining agreements ("CBAs"). In particular, Section 1113(c) of the Bankruptcy
Code permits Waterlink to move to reject its collective bargaining agreements if
Waterlink first satisfies a number of statutorily prescribed substantive and
procedural prerequisites and obtains the Bankruptcy Court's approval of the
rejection. After bargaining in good faith and sharing relevant information with
its unions, a debtor must make proposals to modify its existing CBAs based on
the most complete and reliable information available at the time. The
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proposed modifications must be necessary to permit the reorganization of the
debtor and must ensure that all the affected parties are treated fairly and
equitably relative to the creditors and the debtor. Ultimately, rejection is
appropriate if the unions refuse to agree to the debtor's necessary proposals
"without good cause" and the balance of the equities favors rejection. See
"Employees" below under this Item 1.
There can be no assurance that the Creditors' Committee or the Debtors'
secured creditors will support the Debtors' positions with respect to the
Purchase Agreement or otherwise. Disagreements among the Debtors, the Creditors'
Committee and the Debtors' secured creditors could protract the Chapter 11
Cases, negatively impact the Debtors' ability to operate during the Chapter 11
Cases and delay the conclusion of the Chapter 11 Cases.
In order to successfully exit Chapter 11, the Debtors will need to
propose, and obtain confirmation by the Bankruptcy Court of, a plan that
satisfies the requirements of the Bankruptcy Code. A plan could resolve, among
other things, the Debtors' pre-petition obligations, set forth the revised
capital structure of the newly reorganized entity and provide for its corporate
governance subsequent to exit from bankruptcy protection. The timing and filing
of a plan of reorganization by Waterlink will depend on the timing and outcome
of numerous other ongoing matters in the Chapter 11 Cases, including the sale of
assets contemplated in the proposed Purchase Agreement. At this time, it appears
unlikely that the Debtors will emerge from Chapter 11 protection. The likely
outcome of these Chapter 11 Cases is that the sale of assets to the Buyer or the
maker of a higher or better offer will be consummated. There can be no assurance
at this time that a plan will be filed in the Chapter 11 Cases, confirmed by the
Bankruptcy Court, or that any such plan will be implemented successfully.
At this time, it is not possible to predict with certainty the effect
of the bankruptcy process on Waterlink's business or whether and when Waterlink
may emerge from Chapter 11 protection. The rights and claims of various
creditors and security holders may be determined by a plan as well. No assurance
can be given as to what values, if any, will be ascribed in the bankruptcy
proceedings to each of these constituencies, and it is likely that Waterlink's
equity or other securities will be restructured in a manner that will reduce
substantially or eliminate any remaining value. Accordingly, Waterlink urges
that appropriate caution be exercised with respect to existing and future
investments in any of such securities.
Pursuant to the Bankruptcy Code, the Debtors have filed schedules with
the Bankruptcy Court setting forth the assets and liabilities of the Debtors as
of the Petition Date. Differences between amounts recorded by the Debtors and
claims filed by creditors will be investigated and resolved as part of the
Chapter 11 Cases. A deadline for filing proofs of claim has been established.
However, the ultimate number and allowed amounts of such claims are not
presently known.
Under Section 365 of the Bankruptcy Code, the Debtors may assume, assume
and assign, or reject certain executory contracts and unexpired leases,
including leases of real property, subject to the approval of the Bankruptcy
Court and certain other conditions. In general, rejection of an unexpired lease
or executory contract is treated as a pre-petition breach of the lease or
contract in question. Subject to certain exceptions, this rejection relieves the
Debtors of performing their future obligations under that lease or contract but
entitles the lessor or contract counterparty to a pre-petition general unsecured
claim for damages caused by the deemed breach.
Counterparties to these rejected contracts or leases may file proofs of
claim against the Debtors' estate for such damages. Waterlink is unable to
project the magnitude of these claims with any degree of certainty at this time.
Generally, the assumption of an executory contract or unexpired lease
requires a debtor to cure most existing defaults under such executory contract
or unexpired lease.
OPERATING AND SALES STRATEGY
The corporate headquarters for Waterlink were relocated to Columbus,
Ohio in November 2001 and are located within the main facility of Barnebey
Sutcliffe Corporation. We sell our consumable products, equipment, services and
engineered systems primarily through direct sales personnel. In the United
States, Waterlink strives to have locations close to our customers and centers
of business by means of our locations throughout the country. In England the
sales force is centralized and reaches its customers through travel.
Approximately seventy-five percent of Waterlink's revenue is recurring
in nature in the form of carbons, related carbon services, and sales of standard
equipment; with the remaining twenty-five percent being generated from the sale
of engineered
-4-
equipment and systems. While we have received contract awards for engineered
systems in excess of $3 million, Waterlink is primarily focusing its marketing
efforts with regard to engineered systems on contract awards approximating $2
million. We believe that competition is fiercer for larger contract awards and
the timing of these awards is more unpredictable.
COMPETITION
Despite some large competitors, the market for activated carbons
remains fragmented and highly competitive due to the large number of competitors
within each product and geographic area. Waterlink has a significant number of
competitors, the majority of which are specific to certain products and regions,
but some competitors are larger and have greater resources than Waterlink. We
believe that success in our market is based on the ability to offer appropriate
products, services and technical support for our recurring revenue products; and
by providing cost-effective, reliable engineered systems that meet customer
specifications. On the average, over 95% of our business is with industrial
customers. In the municipal arena, the ability to meet bid specifications and
the ability to set pricing are often primary considerations. In addition, our
highly leveraged financial condition has hurt our competitive position to
finance and bond large projects, especially with municipalities.
Waterlink's primary competitors include operating subsidiaries of
Vivendi, including Compagnie Generale des Eaux and U.S. Filter Corporation,
Calgon Carbon Corporation and Norit America.
CUSTOMERS
Waterlink markets its products and services primarily to industrial
customers. Waterlink's industrial customers include many "Fortune 500" companies
and their counterparts outside of the United States. Industries served include
the point-of-use/point-of-entry consumer business, chemical processing,
remediation, electronic and microelectronic, food, beverage, printing, and other
manufacturing industries. For the year ended September 30, 2003, approximately
96.3% of Waterlink's net sales from continuing operations were derived from
industrial sales. The percentage of net sales to industrial customers was
approximately 97.9% in 2002 and 96.6% in 2001.
The municipal market is highly competitive, and municipal markets in
the United States are more regulatory driven than municipal markets in other
regions. Although Waterlink has products and services that could address this
market, our financial condition and the ability to obtain performance bonds for
projects has precluded us from obtaining large municipal contracts. For the year
ended September 30, 2003, approximately 3.7% of Waterlink's net sales from
continuing operations were derived from municipal sales. The percentage of net
sales to municipal customers was approximately 2.1% in 2002 and 3.4% in 2001.
BACKLOG FROM CONTINUING OPERATIONS
Total backlog from continuing operations as of September 30, 2003 was
$13.0 million as compared to total backlog from continuing operations of $15.2
million at September 30, 2002. At September 30, 2003, Waterlink had $9.6 million
of firm commitments to purchase recurring revenue products, as compared to $13.0
million as of September 30, 2002. In addition, Waterlink had a backlog,
consisting of written purchase orders for capital goods equipment of $3.4
million as of September 30, 2003 as compared to $2.2 million as of September 30,
2002. 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
engineered systems for one year or in some cases 18 months from sale and 12
months from installation for product and workmanship. No process or performance
guarantees are made. In addition, we warrant that carbons and other consumable
products meet customer specifications. The costs associated with warranty
expense have not been material.
-5-
RAW MATERIAL AND SUPPLIES
Waterlink 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. The raw materials and
components used in Waterlink's engineered systems are commonly available
commodities such as stainless steel, carbon steel, plastic, tubing, wiring,
electrical components, pumps, valves, compressors, and pressure vessels.
Waterlink's systems are fabricated from these materials and assembled together
with products bought from other companies to form an integrated system.
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 products and equipment provided by Waterlink.
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. 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.
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 products and equipment. To the
extent that demand for Waterlink's products 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 products
and equipment.
PATENTS, TRADEMARKS AND LICENSES
We currently own a number of registrations for United States service
marks and trademarks and two patents in England. While each is of value,
Waterlink generally does not consider any of them to be material to our
business.
EMPLOYEES
At September 30, 2003, Waterlink had approximately 244 employees at our
various locations. Approximately 54 employees are covered under collective
bargaining agreements in the United States, which expired at midnight on October
31, 2003. Waterlink has negotiated a new collective bargaining agreement with
its employees, subject to final approval of the ultimate acquirer of the
business as referred to in "Bankruptcy Considerations" referred to above. There
can be no assurance that such approval will be obtained. We believe that our
relationship with our employees is good.
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ITEM 2. PROPERTIES
The corporate office of Waterlink is located within the Columbus, Ohio
facility of Barnebey Sutcliffe Corporation. We also lease approximately 1,000
square feet located in Canton, Ohio. Our subsidiaries own or lease facilities
for office space and manufacturing as follows:
- Barnebey Sutcliffe Corporation - United States
- Columbus, Ohio (own)
- Santa Fe Springs, California (lease)
- Addison, Illinois (lease)
- Sulphur, Louisiana (lease)
- Worcester, Massachusetts (lease)
- Sparks, Nevada (lease)
- Downington, Pennsylvania (lease)
- Morgantown, West Virginia (lease)
- Charlotte, NC (lease)
- Prineville, Oregon (lease)
- Sutcliffe Speakman Limited - England
- Lancashire, England (lease)
The expiration dates for these leased properties range from one-month
notice to June 2008 in the United States, with the lease for the facility in
England expiring in September 2018. 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. We believe our properties are
adequately covered by insurance.
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.
As discussed in Item 1 above, on the Petition Date, Waterlink and four
of its direct, wholly owned subsidiaries filed voluntary petitions for relief
under the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases are
being jointly administered under Case No. 03-11989. As debtors-in-possession,
the Debtors are authorized under the Bankruptcy Code to continue to operate as
an ongoing business, but may not engage in transactions outside the ordinary
course of business without the prior approval of the Bankruptcy Court. As of the
Petition Date, virtually all pending litigation was stayed, and absent further
order of the Bankruptcy Court, no party, subject to certain exceptions, may take
any action, again subject to certain exceptions, to recover on pre-petition
claims against the Debtors. In addition, the Debtors may reject pre-petition
executory contracts and unexpired lease obligations, and parties affected by
these rejections may file claims with the Bankruptcy Court. At this time, it is
not possible to predict with certainty the outcome of the Chapter 11 Cases or
their effect on Waterlink's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-7-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common stock is listed on the OTC Bulletin Board under the symbol
"WLKNQ". The following table sets forth the high and low composite sales prices
for the fiscal quarters indicated. These quotations may reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.
HIGH LOW
---- ---
Fiscal Year ended September 30, 2002
First Quarter............................................................... $ 0.26 $ 0.12
Second Quarter.............................................................. 0.18 0.085
Third Quarter............................................................... 0.17 0.035
Fourth Quarter.............................................................. 0.09 0.0375
Fiscal Year ended September 30, 2003
First Quarter............................................................... $ 0.105 $ 0.015
Second Quarter.............................................................. 0.17 0.075
Third Quarter............................................................... 0.09 0.017
Fourth Quarter.............................................................. 0.07 0.014
HOLDERS
The number of holders of record of our common stock as of November 30,
2003 was approximately 251.
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.
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EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
------------- -------------------- -------------------- -------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 1,273,682 $ 0.97 1,289,500
Equity compensation plans not
approved by security holders 203,000 $ 0.06 -
--------- ---------
Total 1,476,682 $ 0.85 1,289,500
========= =========
With regard to the 203,000 securities issued without the approval of
security holders, all are warrants to purchase shares of common stock. Specific
information with regard to each issuance is presented below:
- On January 20, 2000, 3,000 warrants to purchase common stock
were issued to CID Equity Partners V, LP in lieu of an equal
amount of stock options which would have been issued pursuant
to Waterlink's 1997 Non-Employee Director Stock Option Plan to
John T. Hackett, then a Managing General Partner of CID Equity
Partners, L.P., upon Mr. Hackett's election to Waterlink's
board of directors.
- On May 2, 2000, 100,000 warrants to purchase shares of common
stock were issued to Bank of America, N.A., in connection with
the eighth amendment to Waterlink's senior credit facility.
- On January 18, 2001, 50,000 warrants to purchase shares of
common stock were issued to each of Brantley Venture Partners
III, LP and CID Equity Partners V, LP, in connection with
subordinated indebtedness issued to each of them on the amount
of $500,000.
In each case, the warrants expire five years after issuance.
RECENT SALES OF UNREGISTERED SECURITIES
There were no sales of unregistered securities during the fiscal year
ended September 30, 2003.
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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, 2003 have been derived
from Waterlink's audited financial statements with reclassifications made to
reflect discontinued operations as presented below. 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
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $ 66,858 $ 64,054 $ 65,553 $ 64,775 $ 58,188
Cost of sales................................... 51,405 48,701 51,150 48,970 43,460
-------- -------- -------- -------- --------
Gross profit.................................... 15,453 15,353 14,403 15,805 14,728
Selling, general and
administrative expenses....................... 10,036 9,840 10,566 12,013 10,918
Special charges(1).............................. -- -- 2,560 -- 456
Amortization expense............................ 553 850 530 485 627
-------- -------- -------- -------- --------
Operating income (loss)......................... 4,864 4,663 747 3,307 2,727
Other income (expense):
Interest expense(2).......................... (2,508) (3,712) (3,992) (3,997) (4,477)
Amortization of loan fees ................... (282) (642) (1,386) (401) (305)
Bankruptcy related expenses.................. (1,034) -- -- -- --
Other items--net............................. 3 (66) (267) 45 34
-------- -------- -------- -------- --------
Income (loss) before income taxes............... 1,043 243 (4,898) (1,046) (2,021)
Income taxes.................................... 425 94 12 386 674
-------- -------- -------- -------- --------
Income (loss) from continuing operations........ 618 149 (4,910) (1,432) (2,695)
Discontinued operations:
Loss from discontinued operations............ -- (534) (592) (20,773) (1,487)
Loss on disposal of discontinued operations.. -- -- (17,475) (16,151) --
-------- -------- -------- -------- --------
Income (loss) before cumulative effect 618 (385) (22,977) (38,356) (4,182)
of accounting change..........................
Cumulative effect of accounting change.......... (20,500) -- -- -- --
-------- -------- -------- -------- --------
Net loss........................................ $(19,882) $ (385) $(22,977) $(38,356) $ (4,182)
======== ======== ======== ======== ========
Earnings (loss) per common share:
Basic:
Continuing operations...................... $ 0.03 $ 0.01 $ (0.25) $ (0.08) $ (0.21)
Discontinued operations.................... -- (0.03) (0.92) (1.91) (0.12)
Cumulative effect of accounting change..... (1.04) -- -- -- --
-------- -------- -------- -------- --------
Net loss................................... $ (1.01) $ (0.02) $ (1.17) $ (1.99) $ (0.33)
======== ======== ======== ======== ========
Earnings (loss) per common share:
Diluted:
Continuing operations...................... $ 0.03 $ 0.01 $ (0.25) $ (0.08) $ (0.21)
Discontinued operations.................... -- (0.03) (0.92) (1.91) (0.12)
Cumulative effect of accounting change..... (1.02) -- -- -- --
-------- -------- -------- -------- --------
Net loss................................... $ (0.99) $ (0.02) $ (1.17) $ (1.99) $ (0.33)
======== ======== ======== ======== ========
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Weighted average common shares outstanding:
Basic .................... 19,664 19,660 19,660 19,299 12,556
Diluted .................. 20,022 20,062 19,660 19,299 12,556
SEPTEMBER 30,
-------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit) (3).... $(22,173) $(23,823) $(24,146) $(19,365) $ 7,071
Total assets (4)................. 37,252 56,674 56,378 60,699 63,623
Total debt....................... 38,870 39,674 51,930 71,139 85,829
Shareholders' equity (deficit)... (16,853) 2,642 4,200 23,981 49,986
(1) Waterlink incurred special charges relating to continuing operations as
follows:
- During the year ended September 30, 1999, Waterlink incurred
special charges of $456,000, or $0.04 per share, for
continuing costs associated with the implementation of
Waterlink's 1999 plan, primarily related to termination
benefits.
- During the year ended September 30, 2001, Waterlink incurred
special charges of $2,560,000, or $0.13 per share, related to
the closing of its corporate office, primarily related to
termination benefits.
(2) Interest expense for the years ended September 30, 1999, 2000 and 2001
include financing charges of $870,000, or $0.07 per share, $217,000, or
$0.01 per share, and $87,000, or $0.00 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. No interest expense has been recorded
in connection with Waterlink's senior credit facility in the United
States or any of our subordinated notes since the bankruptcy proceeding
began on June 27, 2003.
(3) At September 30, 2000 Waterlink was in violation of certain of its
financial covenants with respect to its senior credit facility.
Accordingly, the entire balance of the senior credit facility was
classified as current at September 30, 2000. Based on certain
conditions of Waterlink's senior credit facility and other indebtedness
that could accelerate the maturity date of such indebtedness, all debt
was classified as current at September 30, 2002 and 2001. Based on the
maturity date of October 1, 2003, all debt was classified as current at
September 30, 2003.
(4) Total assets exclude net assets of discontinued operations for all
periods presented.
-11-
ITEM 7. 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 to participate in the
consolidation of the highly fragmented water purification and wastewater
treatment industry. Waterlink grew rapidly through acquisitions from 1995
through 1998, having made 13 acquisitions. 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. Waterlink's continuing operations
are comprised of what was formerly referred to as the specialty products
division.
CHAPTER 11 CASES
On the Petition Date, the Debtors filed voluntary petitions for relief
under the Bankruptcy Code in the Bankruptcy Court. For further details regarding
the Chapter 11 Cases, see "Bankruptcy Considerations" under Item 1. Waterlink
also sought, and was granted, authority to use certain cash collateral to
support current operations and satisfy customer needs. Waterlink has remained in
possession of its assets and properties, and it has continued to operate its
business and manage its properties as "debtor-in-possession" pursuant to
Sections 1107(a) and 1108 of the Bankruptcy Code. The Debtors are currently
funding their operations through the use of cash collateral pursuant to Order
entered by the Bankruptcy Court pursuant to Section 363 of the Bankruptcy Code.
While we believe that the use of cash collateral will support current operations
and satisfy all current customer needs, there can be no assurance that cash
collateral will be sufficient and it is unlikely that we would be able to obtain
other financing. The Debtors currently have authority to use cash collateral
until January 30, 2004.
As of December 11, 2003, Waterlink and its wholly-owned operating
subsidiary, Barnebey Sutcliffe Corporation, executed the Purchase Agreement with
the Buyer, for the Buyer to purchase substantially all of the assets and
business operations of Waterlink, including the operations of Barnebey
Sutcliffe Corporation and the subsidiaries of Waterlink in the United Kingdom.
On December 16, 2003, Debtors received a $5,000,000 deposit contemplated by the
Purchase Agreement. The proposed purchase is subject to the terms and conditions
of the Purchase Agreement, including purchase price adjustments. Waterlink
anticipates that all of the proceeds of the transaction will be used to
partially satisfy the claims of creditors.
On December 16, 2003, Waterlink filed a motion with the Bankruptcy
Court, requesting that the court approve the proposed sale and establish bidding
procedures and a date and time for conducting an auction to determine if there
are higher or better offers for Waterlink's assets and business. There can be no
assurance that the Bankruptcy Court will approve the proposed transaction
reflected in the Purchase Agreement, or that final documentation will be reached
on terms satisfactory to all parties. Subject to receipt of the Bankruptcy
Court's approval and the satisfaction of other pre-closing conditions, Waterlink
expects the transaction to close in the first quarter of 2004. Waterlink
anticipates that all of the proceeds of the transaction will be used to
partially satisfy the claims of creditors.
In order to successfully exit Chapter 11, the Debtors will need to
propose, and obtain confirmation by the Bankruptcy Court of, a plan that
satisfies the requirements of the Bankruptcy Code. A plan could resolve, among
other things, the Debtors' pre-petition obligations, set forth the revised
capital structure of the newly reorganized entity and provide for its corporate
governance subsequent to exit from bankruptcy protection. The timing and filing
of a plan of reorganization by Waterlink will depend on the timing and outcome
of numerous other ongoing matters in the Chapter 11 Cases, including the sale of
assets contemplated in the proposed Purchase Agreement. At this time, it appears
unlikely that the Debtors will emerge from Chapter 11 protection. The likely
outcome of these cases is that the sale of assets to the Buyer or the maker of a
higher or better offer will be consummated. There can be no assurance at this
time that a plan will be filed in the Chapter 11 Cases, confirmed by the
Bankruptcy Court, or that any such plan will be implemented successfully.
-12-
Under Section 362 of the Bankruptcy Code, the filing of a bankruptcy
petition automatically stays most actions against a debtor, including most
actions to collect pre-petition indebtedness or to exercise control over the
property of the debtor's estate. Absent an order of the Bankruptcy Court,
substantially all pre-petition liabilities are subject to settlement under the
plan of reorganization. Under Section 365 of the Bankruptcy Code, the Debtors
may assume, assume and assign, or reject certain executory contracts and
unexpired leases, including leases of real property, subject to the approval of
the Bankruptcy Court and certain other conditions. In general, rejection of an
unexpired lease or executory contract is treated as a pre-petition breach of the
lease or contract in question. Subject to certain exceptions, this rejection
relieves the Debtors of performing their future obligations under that lease or
contract but entitles the lessor or contract counterparty to a pre-petition
general unsecured claim for damages caused by the deemed breach. Section 1113(c)
of the Bankruptcy Code specifies particular treatment of collective bargaining
agreements ("CBAs") which a debtor may move to reject if the debtor first
satisfies a number of statutorily prescribed substantive and procedural
prerequisites and obtains the Bankruptcy Court's approval of the rejection. See
"Employees" under Item 1 for further information.
At this time, it is not possible to predict with certainty the effect
of the Chapter 11 Cases on Waterlink's business or whether and when it may
emerge from Chapter 11 protection. The rights and claims of various creditors
and security holders may be determined by a plan, as well. No assurance can be
given as to what values, if any, will be ascribed in the bankruptcy proceedings
to each of these constituencies, and it is likely that Waterlink's equity or
other securities will be restructured in a manner that will reduce substantially
or eliminate any remaining value. Accordingly, Waterlink urges that appropriate
caution be exercised with respect to existing and future investments in any of
such securities.
The accompanying consolidated financial statements have been prepared
in accordance with American Institute of Certified Public Accountants' Statement
of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," and on a going-concern basis, which
contemplates continuity of operations, realization of assets and satisfaction of
liabilities in the ordinary course of business. The Statements of Consolidated
Financial Position distinguish pre-petition liabilities subject to compromise
both from those pre-petition liabilities that are not subject to compromise and
from post-petition liabilities. Liabilities subject to compromise are reported
at the amounts expected to be allowed, even if they may be settled for lesser
amounts.
In addition, as a result of the Chapter 11 filing, the realization of
assets and satisfaction of liabilities, without substantial adjustments and/or
changes in ownership, are subject to uncertainty. While operating as
debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code
and subject to approval of the Bankruptcy Court or otherwise as permitted in the
ordinary course of business, the Debtors, or some of them, may sell or otherwise
dispose of assets and liquidate or settle liabilities for some amounts other
than those reflected in the consolidated financial statements. Further, a plan
in the Chapter 11 cases could materially change the amounts and classifications
in the historical consolidated financial statements.
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
-13-
critical as they can impact periodic pension expense as well as the minimum
pension liability. As shown in the consolidated statements of shareholders'
equity and discussed in note 14 to the consolidated financial statements, during
fiscal 2003 Waterlink increased the additional minimum pension liability by
$152,000 and reduced equity by the corresponding amount. At September 30, 2003,
Waterlink's pension liabilities totaled $4,184,000, of which $381,000 is
included in accrued expenses.
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 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, 2003, Waterlink's total backlog from continuing
operations was approximately $13.0 million, consisting of $9.6 million of firm
commitments to purchase carbon and related service products, and $3.4 million of
written purchase orders for capital goods 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 periods, goodwill amortization has been excluded from the
amounts for fiscal 2002 and 2001.
FISCAL FISCAL FISCAL
2003 2002 2001
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 76.9 76.0 78.0
----- ----- -----
Gross profit 23.1 24.0 22.0
Selling, general and administrative expenses 15.0 15.4 16.1
Special charges -- -- 3.9
Amortization 0.8 0.3 (0.1)
----- ----- -----
Operating income 7.3 8.3 2.1
Other income (expense):
Interest expense (3.8) (5.8) (6.1)
Amortization of loan fees (0.4) (1.0) (2.1)
Bankruptcy related expenses (1.5) -- --
Other items-net 0.0 (0.1) (0.4)
----- ----- -----
Income (loss) before income taxes 1.6 1.4 (6.5)
Income taxes 0.7 0.2 0.0
----- ----- -----
Income (loss) from continuing operations 0.9 1.2 (6.5)
Discontinued operations:
Loss from discontinued operations -- (0.8) (0.9)
Loss from disposal of discontinued operations -- -- (26.7)
----- ----- -----
Income (loss) before cumulative effect of accounting change 0.9 0.4 (34.1)
Cumulative effect of accounting change (30.6) -- --
----- ----- -----
Net loss (29.7)% 0.4% (34.1)%
===== ===== =====
-14-
Year Ended September 30, 2003 Compared to Year Ended September 30, 2002
Net Sales: Net sales for the year ended September 30, 2003 were
$66,858,000, an increase of $2,804,000, or 4.4%, from the prior year. Net sales
of carbons, related services, and standard equipment increased by 10.3% in 2003
as compared to the prior year, principally in England. This increase was
partially offset by a 14.8% decrease in sales of engineered systems and
equipment. The decrease in sales of engineered systems and equipment during
fiscal 2003 occurred in both the United States and England.
Gross Profit: Gross profit for the year ended September 30, 2003 was
$15,453,000, an increase of $100,000 from the prior year due to the increase in
net sales. The gross margin for 2003 was 23.1% as compared to 24.0% in the prior
year. The gross margin decrease in 2003 is the result of product mix as compared
to the prior year.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the year ended September 30, 2003 were $10,036,000,
an increase of $196,000, or 2.0%, from the prior year. This increase reflects
$375,000 of costs recorded at the corporate office with regard to professionals
engaged to assist the Company with the evaluation of its financial alternatives
with regard to its leverage situation. Selling, general and administrative
expenses as a percentage of net sales were 15.0% in 2003 as compared to 15.4%
for the prior year.
Interest Expense: Interest expense for the year ended September 30,
2003 was $2,508,000, as compared to $3,712,000 in the prior year. This decrease
is due to the fact that interest on senior indebtedness and subordinated notes
in the United States stopped being accrued on June 27, 2003, the date of
Waterlink's bankruptcy filing. In addition there was also a decrease through the
first nine months of the fiscal year due to lower interest rates in the current
year as well as principal reductions made during fiscal 2003.
Amortization of Financing Costs: Amortization of financing costs for
the year ended September 30, 2003 was $282,000 as compared to $642,000 for the
prior year. These amounts vary based on the amounts associated with and timing
of amendment fees related to amendments of the senior credit facility in the
United States.
Income Taxes: Waterlink recorded income taxes of $425,000 on pre-tax
income of $1,043,000 for the year ended September 30, 2003, which represented
current state income taxes on domestic earnings and deferred tax on earnings in
England. For the year ended September 30, 2002, state income taxes of $94,000
were recorded on a pre-tax income of $243,000.
Year Ended September 30, 2002 Compared to Year Ended September 30, 2001
Net Sales: Net sales for the year ended September 30, 2002 were
$64,054,000, a decrease of $1,499,000, or 2.3%, from the prior year. Net sales
of carbons, related services, and standard equipment increased by 4.4% in 2002
as compared to the prior year, principally in England. This increase was more
than offset by a 19.0% decrease in engineered systems and equipment. The
decrease in sales of engineered systems and equipment during fiscal 2002
occurred in both the United States and England.
Gross Profit: Gross profit for the year ended September 30, 2002 was
$15,353,000, an increase of $950,000 from the prior year despite the decrease in
sales. The gross margin for 2002 was 24.0% as compared to 22.0% in the prior
year. The increase in gross margin in 2002 resulted from sales of carbon and
related services in fiscal 2002 being weighted more toward specialized carbons
as compared to the prior year.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the year ended September 30, 2002 were $9,840,000, a
decrease of $7264,000, or 6.9%, from the prior year. This decrease is primarily
due to cost reductions in the corporate office. Selling, general and
administrative expenses as a percentage of net sales were 15.4% in 2002 as
compared to 16.1% for the prior year, which reflects the decrease in expense.
Interest Expense: Interest expense for the year ended September 30,
2002 was $3,712,000, as compared to $3,992,000 in the prior year. This decrease
reflects lower interest rates in the current year as well as $1,425,000 of term
payments made during fiscal 2002. In addition, interest expense for 2001
included non-cash charges related to amortization of expense recognized in
connection with the issuance of common stock warrants of $87,000.
-15-
Amortization of Financing Costs: Amortization of financing costs for
the year ended September 30, 2002 was $642,000 as compared to $1,386,000 for the
prior year. The amount in 2001 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. By subsequent amendments, the
senior credit facility has been extended to October 1, 2003.
Income Taxes: Waterlink recorded income taxes of $94,000 on pre-tax
income of $243,000 for the year ended September 30, 2002, which represented
state income taxes on domestic earnings. For the year ended September 30, 2001,
state income taxes of $12,000 were recorded on a pre-tax loss of $4,898,000.
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. 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 September 30, 2003, Waterlink has recorded $2,217,000
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 disposal 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. During fiscal 2003 Waterlink paid approximately $205,000
relating to these severance obligations. At September 30, 2003, approximately
$1,241,000 remained accrued for severance obligations relating to two of these
individuals. Due to Waterlink's bankruptcy filing, no payments have been made
on these obligations subsequent to June 27, 2003. These obligations remain
stayed, pending the resolution of Waterlink's bankruptcy case.
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.
For the year ended September 30, 2003, net cash provided by continuing
operating activities was $1,952,000 and purchases of equipment totaled
$1,214,000. During fiscal 2003 Waterlink realized proceeds totaling $250,000
from the final holdback relating to the sale of certain operations in Europe.
These proceeds were used to repay senior indebtedness as required by our senior
credit facility.
The consolidated financial statements of Waterlink 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
-16-
financial statements, Waterlink has incurred net losses of $22,977,000 in 2001,
$385,000 in 2002 and $19,882,000 in 2003. Waterlink filed for bankruptcy on June
27, 2003 and at September 30, 2003 had a working capital deficiency of
$23,173,000. In addition, Waterlink has signed a definitive agreement, subject
to final Bankruptcy Court approval, to sell substantially all its operating
assets. These factors raise substantial doubt about Waterlink's ability to
continue as a going concern for a reasonable period of time. The consolidated
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.
Credit Availability
As of September 30, 2003, Waterlink's credit facilities were comprised
of (1) a $34,681,000 domestic senior credit facility with Bank of America, NA,
as agent, which expired on October 1, 2003, and (2) a 1,250,000 pounds sterling
revolving credit facility in England with The Royal Bank of Scotland. At
September 30, 2003 there were no borrowings available under the domestic senior
credit facility in the United States and approximately $984,000 of borrowings
available in England with The Royal Bank of Scotland.
Since the filing of the Chapter 11 cases, Waterlink has not made any
interest or principal payments under the domestic senior credit facility. The
maturity date of this facility was October 1, 2003. Any future credit
availability, if any, would be based on orders approved by the bankruptcy court.
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 $939,000 at September 30, 2003.
The terms of the credit facilities restrict or prohibit Waterlink from
taking many actions, including paying dividends and incurring or assuming other
indebtedness or liens. Waterlink's obligations under the domestic senior credit
facility are secured by liens on a substantial portion 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.
The Debtors are currently funding their operations through the use of
cash collateral pursuant to an order entered by the Bankruptcy Court pursuant to
Section 363 of the Bankruptcy Code. While we believe that the use of cash
collateral will support current operations and satisfy all current customer
needs, there can be no assurance that cash collateral will be sufficient and it
is unlikely that we would be able to obtain other financing. The Debtors
currently have authority pursuant to the order to use cash collateral until
January 30, 2004.
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
$346,000 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, 2003. 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. Based on the bankruptcy proceedings that commenced
on June 27, 2003, no amounts for interest on the domestic facility were expensed
or paid subsequent to that date.
Waterlink occasionally has exposure to currency rate fluctuations
related primarily to the purchases of inventory and the collection of accounts
receivable. In these situations Waterlink utilizes a limited number of foreign
exchange instruments, primarily forward contracts, to manage this exposure.
Waterlink had no significant hedging contracts outstanding at September 30,
2003.
-17-
Impact of Recently Issued Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No.146, "Accounting
for Costs Associated with Exit or Disposal Activities", provides guidance on the
recognition and measurement of liabilities for cost associated with exit or
disposal activities. The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002. The adoption of
SFAS No.146 did not have a material effect on the Company's consolidated
financial statements.
In November 2002, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 45, ("FIN 45") "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires a company, at the time it issues a guarantee, to
recognize an initial liability for the fair value of obligations assumed under
the guarantee and elaborates on existing disclosure requirements related to
guarantees and warranties. The initial recognition requirements of FIN 45 are
effective for guarantees issued or modified after December 31, 2002 and adoption
of the disclosure requirements are effective for the Company as of December 31,
2002. The adoption of the recognition requirements of FIN 45 did not have a
material effect on the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after September 15, 2003. The adoption of FIN 46 did not have a
material effect on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which establishes standards for how an entity that issues financial instruments
(or may be required under the terms of a financial instrument to issue its
equity shares) classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. The adoption of SFAS No. 150 did not have a material effect on the
Company's consolidated 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 impact on operations of the bankruptcy proceedings and
orders and authority of the bankruptcy court
- the ability to generate sufficient cash flows to support
working capital needs
- 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
-18-
- 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
- the cost of capital, including interest rate increases
- unanticipated litigation, claims or assessments
RISK FACTORS
Our Operations, Our Securities and Our Constituencies Are Being, and Will Be,
Affected By Our Filing For Protection Under the Bankruptcy Code
On June 27, 2003, we filed voluntary petitions for protection under the
Bankruptcy Code in the Bankruptcy Court. We continue to operate our businesses
as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code, the Federal
Rules of Bankruptcy Procedure and applicable court orders. There can be no
assurance that our customers and suppliers will continue to transact business
with us in the same manner as prior to our filing.
We are currently funding our operations through the use of cash
collateral pursuant to Order entered by the Bankruptcy Court pursuant to Section
363 of the Bankruptcy Code. While we believe that the use of cash collateral
will support current operations and satisfy all current customer needs, there
can be no assurance that cash collateral will be sufficient and it is unlikely
that we would be able to obtain other financing.
As of December 11, 2003, we executed an agreement to sell substantially
all of our assets and business operations. On December 16, 2003, we filed a
motion with the Bankruptcy Court, requesting that the court approve the proposed
sale and establish bidding procedures and a date and time for conducting an
auction to determine if there are higher or better offers for our assets and
business. There can be no assurance that the Bankruptcy Court will approve the
proposed transaction, that final documentation will be reached on terms
satisfactory to all parties or that the Creditors' Committee and our secured
creditors will support our positions with respect to the proposed transaction or
otherwise. Disagreements among the Creditors' Committee, our secured creditors
and us could protract the Chapter 11 Cases, negatively impact our ability to
operate during the Chapter 11 Cases and delay the conclusion of the Chapter 11
Cases. We anticipate that all of the proceeds of the proposed transaction that
we receive will be used to partially satisfy the claims of our creditors.
In order to successfully exit Chapter 11 protection, we will need to
propose, and obtain confirmation by the Bankruptcy Court of, a plan that
satisfies the requirements of the Bankruptcy Code. At this time, it appears
unlikely that we will emerge from Chapter 11. The likely outcome is the sale of
substantially all of our assets to the Buyer or the maker of a higher or better
offer. There can be no assurance at this time that a plan will be filed in the
Chapter 11 Cases, that such plan will be confirmed by the Bankruptcy Court, or
that any such plan will be implemented successfully.
At this time, it is not possible to predict with certainty the effect
of the Chapter 11 process on our business or whether and when we may emerge from
Chapter 11. The rights and claims of various creditors and security holders may
be determined by a plan, if any. No assurance can be given as to what values, if
any, will be ascribed in the bankruptcy proceedings to each of these
constituencies, and it is likely our equity or other securities will be
restructured in a manner that will reduce substantially or eliminate any
remaining value.
Our Industry is Highly Competitive
Our industry, the water and air purification industry, is fragmented
and highly competitive. We compete with many companies, several of which have
greater market penetration, depth of product line, resources and access to
capital, which could
-19-
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.
The Current Members of Our Board of Directors and Management Own Approximately
19.3% 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, 2003, our current directors and management own or
control, in the aggregate, approximately 19.3% 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 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, Asia and other regions outside the United States. Also, we
have one subsidiary that operates in England. Our net sales outside the United
States were approximately 36.8% of our net sales for the year ended September
30, 2003. Political, economic, regulatory and social conditions in foreign
countries in which we sell product 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.
-20-
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.
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
that 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
17.
-21-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
Reports of Independent Auditors................................................................................ 23
Consolidated Balance Sheets at September 30, 2003 and 2002..................................................... 25
Consolidated Statements of Operations for the years ended September 30, 2003,
2002 and 2001............................................................................................... 27
Consolidated Statements of Shareholders' Equity (Deficiency) for the years ended
September 30, 2003, 2002 and 2001........................................................................... 28
Consolidated Statements of Cash Flows for the years ended September 30, 2003,
2002 and 2001............................................................................................... 29
Notes to Consolidated Financial Statements..................................................................... 30
-22-
Report of Independent Auditors
To the Audit Committee of the Board of Directors and Shareholders of
Waterlink, Inc.
We have audited the accompanying consolidated balance sheet of
Waterlink, Inc. (debtor-in-possession) and subsidiaries (the "Company") as of
September 30, 2003, and the related consolidated statements of operations,
shareholders' deficiency and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides 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. (debtor-in-possession) and subsidiaries at September 30, 2003,
and the consolidated results of their operations and their cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements for 2003 have been
prepared assuming that the Company will continue as a going concern. As more
fully described in Note 4, the Company has incurred substantial losses and has a
working capital deficiency. Additionally, the Company filed for bankruptcy on
June 27, 2003 and on December 11, 2003 the Company signed a definitive
agreement, subject to final approval, to sell substantially all of its assets.
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 4. 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 these uncertainties.
/s/ Marcum & Kliegman LLP
Woodbury, NY
December 30, 2003
-23-
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Waterlink, Inc.
We have audited the accompanying consolidated balance sheet of Waterlink, Inc.
and subsidiaries as of September 30, 2002, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years in the period ended September 30, 2002. 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, 2002, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended September 30, 2002, in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements for 2002 have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 4, the Company has incurred losses and has 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 4. 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 1, 2002
-24-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Balance Sheets
SEPTEMBER 30,
2003 2002
---------------------------
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 2,666 $ 2,530
Trade accounts receivable, less allowance of $294 in 2003
and $275 in 2002 13,153 11,210
Inventories 10,111 10,528
Costs in excess of billings 1,167 1,783
Other current assets 1,032 1,130
Net assets of discontinued operations 754 640
---------------------------
Total current assets 28,883 27,821
Property, plant and equipment, at cost:
Land, building and improvements 2,111 1,626
Machinery and equipment 7,369 6,538
Office equipment 842 717
---------------------------
10,322 8,881
Less accumulated depreciation 4,785 3,723
---------------------------
5,537 5,158
Other assets:
Goodwill, net of amortization of $2,914 in 2002 3,566 24,250
Other assets 20 85
Net assets of discontinued operations - 219
---------------------------
3,586 24,554
---------------------------
Total assets $ 38,006 $ 57,533
===========================
The accompanying notes are an integral part of these statements
-25-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Balance Sheets
SEPTEMBER 30,
2003 2002
---------------------------
(In thousands, except share data)
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
Trade accounts payable $ 3,416 $ 6,848
Accrued expenses 2,515 4,577
Billings in excess of cost 839 232
Accrued income taxes 230 313
Current debt obligations 939 39,674
Liabilities subject to compromise 43,117 -
---------------------------
Total current liabilities 51,056 51,644
Accrued pension costs 3,803 3,247
Shareholders' (deficiency) 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--19,665,149 shares at September 30, 2003
and 19,659,694 shares at September 30, 2002 20 20
Additional paid-in capital 92,174 92,174
Accumulated other comprehensive loss (5,927) (6,314)
Accumulated deficit (103,120) (83,238)
---------------------------
Total shareholders' (deficiency) equity (16,853) 2,642
---------------------------
Total liabilities and shareholders' (deficiency) equity $ 38,006 $ 57,533
===========================
The accompanying notes are an integral part of these statements.
-26-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Statements of Operations
YEAR ENDED SEPTEMBER 30,
2003 2002 2001
-----------------------------------------
(In thousands, except per share data)
Net sales $ 66,858 $ 64,054 $ 65,553
Cost of sales 51,405 48,701 51,150
-----------------------------------------
Gross profit 15,453 15,353 14,403
Selling, general and administrative expenses 10,036 9,840 10,566
Special charges - - 2,560
Amortization 553 850 530
-----------------------------------------
Operating income 4,864 4,663 747
Other income (expense):
Interest expense (2,508) (3,712) (3,992)
Amortization of loan fees (282) (642) (1,386)
Bankruptcy related expenses (1,034) - -
Other items--net 3 (66) (267)
-----------------------------------------
Income (loss) before income taxes 1,043 243 (4,898)
Income taxes 425 94 12
-----------------------------------------
Income (loss) from continuing operations 618 149 (4,910)
Discontinued operations:
Loss from operations, no income tax effect - (534) (592)
Loss on disposal - - (17,475)
-----------------------------------------
Income (loss) before cumulative effect of accounting change 618 (385) (22,977)
Cumulative effect of accounting change (20,500) - -
-----------------------------------------
Net loss $ (19,882) $ (385) $ (22,977)
=========================================
Earnings (loss) per common share-basic:
Continuing operations $ 0.03 $ 0.01 $ (0.25)
Discontinued operations - (0.03) (0.92)
Cumulative effect of accounting change (1.04) - -
-----------------------------------------
$ (1.01) $ (0.02) $ (1.17)
=========================================
Earnings (loss) per common share- diluted:
Continuing operations $ 0.03 $ 0.01 $ (0.25)
Discontinued operations - (0.03) (0.92)
Cumulative effect of accounting change (1.02) - -
-----------------------------------------
$ (0.99) $ (0.02) $ (1.17)
=========================================
Weighted average common shares outstanding-
Basic 19,664 19,660 19,660
Diluted 20,022 20,062 19,660
The accompanying notes are an integral part of these statements.
-27-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Statements of Shareholders' Equity (Deficiency)
ACCUMULATED TOTAL
ADDITIONAL OTHER SHAREHOLDERS'
COMMON PAID-IN COMPREHENSIVE ACCUMULATED EQUITY
STOCK CAPITAL LOSS DEFICIT (DEFICIENCY)
---------- ---------- ------------- ----------- -------------
(In thousands, except share data)
YEAR ENDED SEPTEMBER 30, 2001
Balance at October 1, 2000 20 92,087 (8,250) (59,876) 23,981
Net loss (22,977) (22,977)
Foreign currency translation adjustments,
including $6,416 reclassification due to the
sale of the European Water and Wastewater
Division 6,004 6,004
Minimum pension liability adjustment (2,895) (2,895)
-------------
Comprehensive loss (19,868)
Issuance of warrants in connection with
the issuance of subordinated notes 87 87
---------- ---------- ------------- ----------- -------------
Balance at September 30, 2001 20 92,174 (5,141) (82,853) 4,200
YEAR ENDED SEPTEMBER 30, 2002
Net loss (385) (385)
Foreign currency translation adjustments 1,046 1,046
Minimum pension liability adjustment (2,219) (2,219)
-------------
Comprehensive loss (1,558)
---------- ---------- ------------- ----------- -------------
Balance at September 30, 2002 20 92,174 (6,314) (83,238) 2,642
YEAR ENDED SEPTEMBER 30, 2003
Net loss (19,882) (19,882)
Exercise of 5,455 common stock warrants - -
Foreign currency translation adjustments 539 539
Minimum pension liability adjustment (152) (152)
-------------
Comprehensive loss (19,495)
---------- ---------- ------------- ----------- -------------
Balance at September 30, 2003 $ 20 $ 92,174 $ (5,927) $ (103,120) $ (16,853)
========== ========== ============= =========== =============
The accompanying notes are an integral part of these statements.
-28-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Statements of Cash Flows
YEAR ENDED SEPTEMBER 30,
2003 2002 2001
-----------------------------------------
(In thousands)
OPERATING ACTIVITIES
Income (loss) from continuing operations $ 618 $ 149 $ (4,910)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Deferred income taxes 320 - -
Depreciation 949 995 1,182
Amortization 836 1,481 2,006
Changes in working capital:
Trade accounts receivable (1,713) 996 (932)
Inventories 526 43 293
Cost in excess of billings 642 (103) (1,117)
Other assets 30 (836) 142
Trade accounts payable (483) (179) 672
Accrued expenses (430) (513) 2,008
Billings in excess of cost 602 (171) (169)
Accrued income taxes 55 7 215
-----------------------------------------
Net cash provided by (used in) operating activities 1,952 1,869 (610)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (1,214) (621) (370)
Proceeds from sale of subsidiaries 250 12,780 20,360
-----------------------------------------
Net cash (used in) provided by investing activities (964) 12,159 19,990
FINANCING ACTIVITIES
Proceeds from long-term borrowings 906 422 1,713
Payments on long-term borrowings (1,743) (12,678) (20,922)
-----------------------------------------
Net cash used in financing activities (837) (12,256) (19,209)
Effect of exchange rate changes on cash 67 102 (524)
-----------------------------------------
Cash flows provided by (used in) continuing operations 218 1,874 (353)
Cash flows used in discontinued operations (82) (990) (921)
-----------------------------------------
Increase (decrease) in cash and cash equivalents 136 884 (1,274)
Cash and cash equivalents at beginning of year 2,530 1,646 2,920
-----------------------------------------
Cash and cash equivalents at end of year $ 2,666 $ 2,530 $ 1,646
=========================================
The accompanying notes are an integral part of these statements.
-29-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements
September 30, 2003
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Waterlink, Inc. and its wholly-owned subsidiaries
("Waterlink" or 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 2003, 2002 and
2001 refer to the fiscal years ended September 30, 2003, 2002 and 2001,
respectively.
DESCRIPTION OF THE BUSINESS - The Company specializes in the
development and production of activated carbons used to purify air, water and
gases. Waterlink is a supplier of activated carbon for liquid, air and gas
filtration systems and is a manufacturer of specialized impregnated carbons. Its
products include adsorbtion equipment, bioreactors and bioscrubbers, corrosive
gas control systems, solvent recovery systems, and a variety of air, odor and
vapor control and filtration systems. The Company has locations throughout the
United States as well as one in England.
CASH EQUIVALENTS - The Company considers all highly liquid investments
with a maturity date of three months or less when purchased to be cash
equivalents.
CONTRACTS AND REVENUE RECOGNITION - A portion 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 title passes upon shipment.
INVENTORIES - Inventories are valued at the lower of cost or market.
Cost is determined using the first-in, first-out method.
-30-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK - Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist
principally of cash equivalents and trade accounts 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.
LONG-LIVED ASSETS - 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 represents costs in excess of net assets of acquired
businesses. Through fiscal 2002 goodwill was amortized using the straight-line
method over a period of 40 years. Commencing October 1, 2002, goodwill is no
longer being amortized (Note 5).
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. To determine if impairment exists, the
Company compares the estimated future undiscounted cash flows from the related
long-lived assets to the net carrying amount of such assets. Once it has been
determined that an impairment exists, the carrying value of the asset is
adjusted to fair value. Factors considered in the determination of fair value
include current operating results, trends and the present value of estimated
expected future cash flows. Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" became
effective for the Company during 2003. The provisions of this statement that are
applicable to the Company were implemented on a prospective basis as of October
1, 2002, which had no material effect on the Company's financial statements.
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
-31-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
average rates of exchange prevailing during the year. The related translation
adjustments are reflected in accumulated other comprehensive loss in
shareholders' (deficiency) equity. Foreign currency gains and losses resulting
from transactions included in the results of continuing operations amounted to
losses of $39,000 in 2003 and $9,000 in 2002, and a gain of $17,000 in 2001.
ACCUMULATED OTHER COMPREHENSIVE LOSS - At September 30, 2003
accumulated other comprehensive loss consists of a loss of $5,266,000 relating
to a minimum pension liability adjustment and a loss of $661,000 relating to
accumulated foreign currency translation adjustments. At September 30, 2002 the
accumulated other comprehensive loss consisted of a loss of $5,114,000 relating
to the minimum pension liability adjustment and a loss of $1,200,000 relating to
accumulated foreign currency translation adjustments. At September 30, 2001 the
accumulated other comprehensive loss consisted of a loss of $2,895,000 relating
to the minimum pension liability adjustment and a loss of $2,246,000 relating to
accumulated foreign currency translation adjustments.
EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per share is computed
by dividing the net income (loss) by the weighted-average number of common
shares outstanding during the year. Diluted earnings (loss) per share is
computed by dividing the net income (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. For 2003 and
2002 the dilutive securities relate to the exercise of common stock warrants
that carry an exercise price of $0.01 per share. Items excluded were 995,500
stock options, 143,954 common shares that would be issued upon the conversion of
the subordinated notes, and 3,000 common stock warrants. Due to the loss from
continuing operations in 2001 all such items that were either exercisable or
convertible into common shares were anti-dilutive.
USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America 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.
-32-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS AND SIMILAR EQUITY INSTRUMENTS - At September 30, 2003,
the Company had stock-based employee plans, which are described more fully in
Note 13. As permitted under SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", which amended SFAS No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation", the Company has elected to
continue to follow the intrinsic value method in accounting for its stock-based
employee compensation arrangements as defined by Account Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related
interpretations including FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of APB No. 25. No
stock-based employee compensation cost is reflected in operations, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net loss and net loss per share if the Company had
applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation:
2003 2002 2001
-------------------------------------------
(In thousands, except per share data)
PRO FORMA IMPACT OF FAIR VALUE METHOD
Reported net loss $ (19,882) $ (385) $(22,977)
Stock-based employee compensation determined
under fair value based method, net of taxes (48) 261 490
--------- -------- --------
Pro forma net loss $ (19,930) $ (124) $(22,487)
========= ======== ========
LOSS PER COMMON SHARE:
Basic -as reported $ (1.01) $ (0.02) $ (1.17)
Basic -pro forma $ (1.01) $ (0.01) $ (1.14)
Diluted-as reported $ (0.99) $ (0.02) $ (1.17)
Diluted-pro forma $ (1.00) $ (0.01) $ (1.14)
The fair value of these options and the options granted as part of the
various plans were estimated at the date of grant using a Black-Scholes
option-pricing model. The Company 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 5.0% in 2002 and 6.3% in
2001. Further, the volatility factor of the expected market price of the
Company's Common Stock was 42% in 2002 and 34% in 2001.
-33-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - SFAS No.146,
"Accounting for Costs Associated with Exit or Disposal Activities," provides
guidance on the recognition and measurement of liabilities for cost associated
with exit or disposal activities. The provisions of this statement are effective
for exit or disposal activities that are initiated after December 31, 2002. The
adoption of SFAS No.146 did not have a material effect on the Company's
consolidated financial statements.
In November 2002, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 45, ("FIN 45") "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires a company, at the time it issues a guarantee, to
recognize an initial liability for the fair value of obligations assumed under
the guarantee and elaborates on existing disclosure requirements related to
guarantees and warranties. The initial recognition requirements of FIN 45 are
effective for guarantees issued or modified after December 31, 2002 and adoption
of the disclosure requirements are effective for the Company as of December 31,
2002. The adoption of the recognition requirements of FIN 45 did not have a
material effect on the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
ending after March 15, 2004. The adoption of FIN 46 did not have a material
effect on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which establishes standards for how an entity that issues financial instruments
(or may be required under the terms of a financial instrument to issue its
equity shares) classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. The adoption of
-34-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
SFAS No. 150 did not have a material effect on the Company's consolidated
financial statements.
RECLASSIFICATIONS - Certain amounts reported in the 2002 and 2001 financial
statements have been reclassified to conform to the 2003 presentation.
2. VOLUNTARY PETITION TO FILE BANKRUPTCY
Bankruptcy Proceedings. On June 27, 2003 (the "Petition Date"), the
Company and four of its direct, wholly owned subsidiaries (collectively, the
"Debtors") filed voluntary petitions for relief under Chapter 11 of Title 11 of
the United States Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court"). The bankruptcy
cases are being jointly administered under Case No. 03-11989 (the "Chapter 11
Cases"). Included in the consolidated financial statements are subsidiaries that
are not party to the Chapter 11 Cases and are not Debtors.
The Debtors continue to operate their businesses as
"debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code, the Federal
Rules of Bankruptcy Procedure and applicable court orders. All vendors are being
paid for all goods furnished and services provided after the Petition Date.
However, under Section 362 of the Bankruptcy Code, the filing of the bankruptcy
petition automatically stays most actions against a debtor, including most
actions to collect pre-petition indebtedness or to exercise control over the
property of the debtor's estate.
The Debtors are currently funding their operations through the use of
cash collateral pursuant to an Order entered by the Bankruptcy Court pursuant to
Section 363 of the Bankruptcy Code. The Debtors believe that the use of cash
collateral will support current operations and satisfy all customer needs. The
Debtors currently have authority to use cash collateral until January 30, 2004.
Pursuant to an Order entered in the Chapter 11 Cases, the Debtors have
employed NatCity Investments, Inc. to act as their investment bankers to assist
the Debtors in the investigation and consideration of their strategic
alternatives. Among the strategic alternatives being investigated and considered
by the Debtors is the possibility of a sale of all or substantially all of their
assets either through a motion or the confirmation of a plan. The timing of any
of the
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Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
2. VOLUNTARY PETITION TO FILE BANKRUPTCY (CONTINUED)
foregoing actions will depend on the timing and outcome of the investigation and
consideration of strategic alternatives being performed by NatCity Investments,
Inc. and numerous other ongoing matters in the Chapter 11 Cases. The Debtors
believe that it is possible that a sale or other transaction will be presented
to the Bankruptcy Court for approval prior to the end of the calendar year (Note
19).
The United States Trustee for the District of Delaware (the "U.S.
Trustee") has appointed an Official Committee of Unsecured Creditors (the
"Creditors' Committee"). The Creditors' Committee and its legal representatives
have a right to be heard on all matters that come before the Bankruptcy Court
with respect to the Debtors.
There can be no assurance that the Creditors' Committee or the Debtors'
secured creditors will support the Debtors' positions. Disagreements among the
Debtors, the Creditors' Committee and the Debtors' secured creditors could
protract the Chapter 11 Cases, negatively impact the Debtors' ability to operate
during the Chapter 11 Cases and delay the conclusion of the Chapter 11 Cases.
In order to successfully exit Chapter 11, the Debtors will need to
propose, and obtain confirmation by the Bankruptcy Court of, a plan that
satisfies the requirements of the Bankruptcy Code. A plan would resolve, among
other things, the Debtors' pre-petition obligations, set forth the revised
capital structure of the newly reorganized entity and provide for its corporate
governance subsequent to exit from bankruptcy. The timing of filing a plan of
reorganization by the Company will depend on the timing and outcome of numerous
other ongoing matters in the Chapter 11 Cases. There can be no assurance at this
time that a plan will be filed in the Chapter 11 Cases, confirmed by the
Bankruptcy Court, or that any such plan will be implemented successfully.
At this time, it is not possible to predict accurately the effect of
the Chapter 11 process on the Company's business or when it may emerge from
Chapter 11. The rights and claims of various creditors and security holders may
be determined by the plan as well. No assurance can be given as to what values,
if any, will be ascribed in the bankruptcy proceedings to each of these
constituencies, and it is possible that the Company's equity or other securities
will be restructured in a manner that will reduce substantially or eliminate any
remaining value. Accordingly, the Company urges that appropriate caution be
exercised with respect to existing and future investments in any of such
securities and claims.
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Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
2. VOLUNTARY PETITION TO FILE BANKRUPTCY (CONTINUED)
Pursuant to the Bankruptcy Code, the Debtors have filed schedules with
the Bankruptcy Court setting forth the assets and liabilities of the Debtors as
of the Petition Date. Differences between amounts recorded by the Debtors and
claims filed by creditors will be investigated and resolved as part of the
Chapter 11 Cases. A deadline for filing proofs of claim has not been
established. Accordingly, the ultimate number and allowed amounts of such claims
are not presently known.
Financial Statement Presentation. The accompanying consolidated
financial statements have been prepared in accordance with American Institute of
Certified Public Accountants' Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,"
and on a going-concern basis, which contemplates continuity of operations,
realization of assets and satisfaction of liabilities in the ordinary course of
business.
SOP 90-7 requires that the financial statements for periods subsequent
to the filing of a Chapter 11 petition distinguish transactions and events that
are directly associated with the reorganization from the operations of the
business. Accordingly, revenues, expenses (including professional fees),
realized gains and losses, and provisions for losses directly associated with
the reorganization and restructuring of the business are reported separately in
the financial statements. The amount of expense incurred was approximately
$1,034,000 from the date of filing, June 27, 2003, through September 30, 2003.
The Consolidated Balance Sheet distinguishes pre-petition liabilities subject to
compromise both from those pre-petition liabilities that are not subject to
compromise and from post-petition liabilities. Liabilities subject to compromise
are reported at the amounts expected to be allowed, even if they may be settled
for lesser amounts.
In addition, as a result of the Chapter 11 filing, the realization of
assets and satisfaction of liabilities, without substantial adjustments and/or
changes in ownership, are subject to uncertainty. While operating as
debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code
and subject to approval of the Bankruptcy Court or otherwise as permitted in the
ordinary course of business, the Debtors, or some of them, may sell or otherwise
dispose of assets and liquidate or settle liabilities for some amounts other
than those reflected in the consolidated financial statements. Further, a plan
in the Chapter 11 Cases could materially change the amounts and classifications
in the historical consolidated financial statements.
Liabilities Subject to Compromise. Liabilities subject to compromise
refers to liabilities incurred prior to the Petition Date. These amounts
represent the Company's estimate of known or potential pre-petition claims to be
resolved in connection with the Chapter 11 Cases. Such
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Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
2. VOLUNTARY PETITION TO FILE BANKRUPTCY (CONTINUED)
claims remain subject to future adjustments. Adjustments may result from
negotiations, actions of the Bankruptcy Court, rejection of executory contracts
and unexpired leases, the determination as to the value of any collateral
securing claims, proofs of claim or other events. It is anticipated that such
adjustments, if any, would be material. Payment terms for these amounts will be
established in connection with the Chapter 11 Cases. A summary of these
liabilities subject to compromise follows (in thousands):
Secured senior debt, including unpaid interest and
and deferred interest totaling $517,000 $ 35,198
Unsecured:
Subordinated notes, including unpaid interest 3,293
Trade accounts payable 3,095
Unpaid severance obligations 1,241
Other 290
--------
7,919
--------
$ 43,117
========
Bankruptcy Items. In connection with the Company's bankruptcy filing,
the Company has incurred through September 30, 2003 expense of approximately
$1,034,000 with regard to professionals expense, of which approximately $90,000
was unpaid as of September 30, 2003.
Condensed Balance Sheet Information. Condensed balance sheet
information with respect to the Debtors at September 30, 2003 is as follows (in
thousands):
Assets:
Current assets $ 21,200
Other assets 4,283
Liabilities:
Current liabilities 3,831
Liabilities subject to compromise 43,117
Long-term liabilities 57
The assets listed above do not include a note receivable from Waterlink
UK Holdings Limited to Waterlink, Inc. of approximately $8,575,000. This note
receivable is eliminated upon consolidation for purposes of the consolidated
balance sheet at September 30, 2003.
-38-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
3. 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 years ended September 30, 2002 and
2001 is presented below (in thousands):
2002 2001
-------------------------
(In thousands)
Net sales $ 9,123 $ 61,533
Operating income 88 1,638
Allocated interest expense (622) (2,230)
Income tax expense - -
-------------------------
Loss from operations (534) (592)
Loss on disposal - (17,475)
-------------------------
$ (534) $ (18,067)
=========================
The remaining escrows and holdbacks related to the sale of the Pure
Water Division have been classified either as current or long-term assets
(included in net assets of discontinued operations) on the consolidated balance
sheets at September 30, 2002 and September 30, 2003 based on the anticipated
timing of their release.
-39-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
4. 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 has incurred net losses of $19,882,000 in
2003, $385,000 in 2002 and $22,977,000 in 2001. The Company filed for bankruptcy
on June 27, 2003 (Note 2) and at September 30, 2003 had a working capital
deficiency of $22,173,000. In addition, as more fully described in Note 19, the
Company has signed a definitive agreement, subject to final Bankruptcy Court
approval, to sell substantially all of the operating assets of the Company.
These factors raise substantial doubt about the Company'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 the Company be unable to continue as
a going concern. Note 19 includes a pro forma presentation of the Company's
balance sheet assuming the above-described sale of assets had occurred on
September 30, 2003.
5 . CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In June 2001, the FASB issued 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 $639,000 and $641,000 for the years
ended September 30, 2002 and 2001, respectively.
During its first fiscal quarter that 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 goodwill balance at October 1,
2002 by $20,500,000. Had the Company accounted for goodwill under SFAS No. 142
for all periods presented, our results from continuing operations and related
per share amounts would have been
-40-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
5. CUMULATIVE EFFECT OF ACCOUNTING CHANGE (CONTINUED)
as follows (in thousands, except per share data):
2003 2002 2001
-----------------------------------
Reported income (loss) from continuing operations $ 618 $ 149 $ (4,910)
Add back goodwill amortization - 639 641
-----------------------------------
Adjusted income (loss) from continuing operations $ 618 $ 788 $ (4,299)
===================================
Earnings (loss) per common share-
basic and diluted
Reported income (loss) per share from continuing operations $ 0.03 $ 0.01 $ (0.25)
Add back goodwill amortization - 0.03 0.03
-----------------------------------
Adjusted income (loss) per share from continuing operations $ 0.03 $ 0.04 $ (0.22)
===================================
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.
Although there were dilutive securities in 2003 and 2002, per share amounts were
identical under both computations.
6. INVENTORIES
Inventories consisted of the following:
SEPTEMBER 30,
2003 2002
-----------------------
(In thousands)
Raw materials and supplies $ 4,500 $ 6,279
Work in process 1,733 203
Finished goods 3,878 4,046
-----------------------
$10,111 $ 10,528
=======================
-41-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
7. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process
is as follows:
SEPTEMBER 30,
2003 2002
----------------------------
(In thousands)
Contract costs incurred to date $ 13,648 $ 20,664
Estimated profits 5,620 8,753
----------------------------
Contract revenue earned to date 19,268 29,417
Less billings to date 18,940 27,866
----------------------------
Cost and estimated earnings in excess of billings, net $ 328 $ 1,551
============================
The above amounts are included in the accompanying consolidated balance
sheet at:
SEPTEMBER 30,
2003 2002
----------------------------
(In thousands)
Costs in excess of billings $ 1,167 $ 1,783
Billings in excess of costs (839) (232)
----------------------------
$ 328 $ 1,551
============================
8. DEBT OBLIGATIONS
Debt obligations consisted of the following:
SEPTEMBER 30,
2003 2002
-----------------------------
(In thousands)
Senior credit facility with a group of banks $34,681 $ 36,424
Revolving facility in England with a bank 939 -
Subordinated notes to related parties 1,000 1,000
Convertible subordinated notes payable to former
shareholders of acquired business 2,250 2,250
-----------------------------
$38,870 $ 39,674
=============================
-42-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
8. DEBT OBLIGATIONS (CONTINUED)
With regard to the above debt obligations, the $34,681,000 of senior
debt, the $1,000,000 of subordinated notes to related parties, and the
$2,250,000 of convertible subordinated notes payable are all subject to
compromise and have been classified accordingly on the balance sheet as of
September 30, 2003. The interest rates on these obligations are (i) four percent
above the bank's base lending rate for the senior debt (ii) 13% on the
$1,000,000 subordinated notes to related parties and (iii) 11% on the $2,250,000
of subordinated notes. No interest expense has been recognized or paid since the
date of the bankruptcy filing since the Company does not expect any amounts to
become due. The amount of interest that would have been recognized during the
period from June 27, 2003 through September 30, 2003 would have been
approximately $852,000.
The Company's senior credit facility is with Bank of America, NA, as
agent, and with five other participating banks. This facility matured on October
1, 2003. In addition, all subordinated notes payable matured on October 15,
2003. Substantially all of the assets of the Company are pledged as collateral
on the senior credit facility. The amount that will ultimately be paid with
regard to these obligations will be determined based on the results of the
Company's bankruptcy proceedings.
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 convertible subordinated notes payable to former shareholders of an
acquired business are convertible into Common Stock of Waterlink at a conversion
price of $15.63 per share. With regard to the $1,000,000 of subordinated notes
to related parties, the Company issued warrants to purchase up to 100,000 shares
of Waterlink common stock at an exercise price of $0.01 per share. The value of
these warrants, totaling $92,000, has been fully amortized through the original
maturity date of the notes, January 18, 2002. The warrants will expire on
January 17, 2006.
In connection with various financing activities, the Company has issued
warrants to purchase shares of Common Stock from July 1999 through January 2001,
481,182, inclusive of the 100,000 warrants described in the preceding paragraph,
of which are outstanding at
-43-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
8. DEBT OBLIGATIONS (CONTINUED)
September 30, 2003. The warrants carry exercise prices ranging from $0.01 to
$3.125 with expiration dates ranging from July 2004 to January 2006.
9. LEASES
The Company leases certain facilities and equipment under operating
leases. Rent expense totaled $1,103,000 in 2003, $1,251,000 in 2002 and
$1,183,000 in 2001. Aggregate future minimum lease payments under noncancelable
operating leases at September 30, 2003 are as follows (in thousands):
Years ending September 30:
2004 $ 823
2005 667
2006 650
2007 561
2008 493
Thereafter 2,415
-------
$ 5,609
=======
Certain of the above leases are executory contracts with regard to the
Company's bankruptcy filing. The Company is not aware of any specific leases
that will not be assumed by the Buyer (see Note 19) and, accordingly, included
all leases in the above table.
10. SPECIAL CHARGES
In September 2001, the Board of Directors of the Company determined the
corporate office of Waterlink should be relocated to its Columbus, Ohio
facility. This consolidation resulted in personnel reductions and the disposal
of certain fixed assets. Accordingly, the Company 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. During fiscal 2003 the Company paid
approximately $205,000 relating to these severance obligations. At September 30,
2003, approximately $1,241,000 remains accrued for severance obligations
relating to two of these individuals. Due to the Company's bankruptcy filing, no
payments have been made on these obligations subsequent to June 27, 2003. These
obligations remain stayed, pending the resolution of the Chapter 11 Cases.
-44-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES
The provision for income taxes consists of the following:
2003 2002 2001
------------------
(In thousands)
Current:
Federal $ 13
State and local 105 $ 94 $ 12
Deferred-foreign 307 - -
------------------
$425 $ 94 $ 12
==================
Income (loss) from continuing operations before income taxes consists
of the following:
2003 2002 2001
----------------------------
(In thousands)
United States $ 575 $ 438 $(6,258)
Foreign 468 (195) 1,360
----------------------------
$ 1,043 $ 243 $(4,898)
============================
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 income (loss) from continuing operations before income taxes:
2003 2002 2001
-----------------------------
(In thousands)
Provision (credit) for income taxes at
the statutory federal rate $ 355 $ 83 $(1,655)
Adjustments:
State and local income taxes 105 94 12
Non-deductible goodwill amortization - 217 218
Change in valuation allowance (35) (300) 1,437
-----------------------------
Provision for income taxes $ 425 $ 94 $ 12
=============================
-45-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
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 purposes. The tax effects of the
net operating loss carryforward and temporary differences are as follows:
2003 2002
--------------------
(In thousands)
Deferred tax assets:
Net operating loss carryforward $ 26,231 $ 27,094
Other 1,427 1,847
Valuation allowance (27,194) (28,483)
--------------------
464 458
Deferred tax liabilities:
Accelerated depreciation (305) (332)
Other (159) (126)
--------------------
(464) (458)
--------------------
Net deferred tax liability $ - $ -
====================
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 net operating loss carryforwards realized in the
future will be recorded as a reduction of goodwill (to the extent available)
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
$305,000 in 2003. No such amounts were recorded in 2002 and 2001.
For tax purposes, the Company has U.S. federal loss carryforwards of
approximately $61,475,000 that expire in varying years through 2022, and net
operating loss carryforwards in the United Kingdom of approximately $17,767,000
that have no expiration dates. A valuation allowance has been established for
the entire amount of the net operating loss carryforwards since the realization
is uncertain. Pursuant to sale of substantially all of the Company's assets (see
Note 19) the Buyer will acquire the net operating loss carryforward in the
United Kingdom, and it is anticipated that the net operating loss in the United
States will be impacted by the sale of
-46-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
assets. The impact on the net operating loss carryforward in the United States
cannot be determined at this time.
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 $7,322,000 at
September 30, 2003. 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.
12. 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.
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 13).
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 expire ten years after the date of grant
(see Note 13). In July 2001 non-employee directors elected to suspend all
compensation, including grants under the Director Plan, until a time in which it
would be more appropriate.
-47-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
12. STOCK OPTION PLANS (CONTINUED)
Collectively, 2,750,000 shares of Common Stock were made available for
granting of awards under the above plans, of which 995,500 are outstanding and
1,289,500 remain available for future awards at September 30, 2003.
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, no shares of Common Stock have been issued since
2000. The Stock Purchase Plan will terminate in 2007.
13. 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
on the date of grant. The Company has elected to follow APB 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 SFAS No. 123, "Accounting For Stock Based Compensation",
requires use of option valuation methods that were not developed for use in
valuing employee stock options. Under APB No. 25, compensation expense has been
recognized for all options granted at less than the fair market value of the
Company's Common Stock on the date of grant.
Pro forma information regarding net income and earnings per share is
required to be disclosed by SFAS No. 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
-48-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
13. STOCK BASED COMPENSATION (CONTINUED)
options and the options granted as part of the various plans were estimated at
the date of grant using a Black-Scholes option-pricing model. The Company
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 5.0% in 2002 and 6.3% in 2001. Further, the volatility factor of
the expected market price of the Company's Common Stock was 42% in 2002 and 34%
in 2001. Following is the weighted-average grant-date fair value of options
granted during 2002 and 2001 using the Black-Scholes model, with the weighted
average exercise price for comparison purposes. There were no options granted
during 2003.
2003 2002 2001
---------------- ----------------- -----------------
FAIR EXERCISE FAIR EXERCISE FAIR EXERCISE
VALUE PRICE VALUE PRICE VALUE PRICE
--------------------------------------------------------
Stock price:
Equals exercise price - - $ 0.05 $ 0.15 $ 0.17 $ 0.44
Less than exercise price - - - - - -
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.
-49-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
13. STOCK BASED COMPENSATION (CONTINUED)
A summary of the Company's stock option activity and related
information follows:
2003 2002 2001
--------------------------- --------------------------- ---------------------------
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 1,015,500 $ 1.24 1,180,848 $ 3.32 2,084,746 $ 4.67
Granted - - 565,000 0.15 356,400 0.44
Exercised - - - - - -
Canceled (20,000) 0.91 (730,348) 3.77 (1,260,298) 4.75
---------------------------------------------------------------------------------------
Outstanding at end
of year 995,500 $ 1.24 1,015,500 $ 1.24 1,180,848 $ 3.32
=======================================================================================
Exercisable at end
of year 536,650 $ 2.03 281,400 $ 3.35 645,777 $ 4.64
=======================================================================================
Available for future
options 1,289,500 1,269,500 1,104,152
========== ========== ==========
-50-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
13. STOCK BASED COMPENSATION (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at September 30, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------------
AVERAGE REMAINING WEIGHTED
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER AVERAGE
EXERCISE PRICE OF OPTIONS (IN YEARS) EXERCISE PRICE OF OPTIONS EXERCISE PRICE
- --------------------------------------------------------------------------------------------------
$0.10 - $0.45 716,900 7.8 $ 0.21 278,450 $ 0.22
$2.75 - $3.25 131,600 5.9 3.16 111,200 3.17
$4.00 - $4.75 105,000 2.9 4.04 105,000 4.04
$5.00 - $5.12 37,000 4.2 5.02 37,000 5.02
$12.94 5,000 4.7 12.94 5,000 12.94
---------------------------------------------------------------------------------
995,500 6.9 $ 1.24 536,650 $ 2.03
=================================================================================
The Company has reserved 2,285,000 shares of Common Stock for the
possible exercise of outstanding stock options.
14. RETIREMENT PLANS
The Company sponsors two defined benefit pension plans. One of the
plans is in the U.K., which covers substantially all of the employees of its
subsidiary Sutcliffe Speakman Limited; and the other is a U.S. plan, which
covers substantially all of the employees of its subsidiary Barnebey Sutcliffe.
Information pertaining to the Company's defined benefit pension plans follows:
2003 2002
-------------------
(In thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 14,391 $ 11,874
Service cost 682 610
Interest cost 815 756
Plan participants' contributions 91 86
Actuarial losses 125 1,164
Benefits paid (2,503) (654)
Foreign currency exchange rate changes 509 555
-------------------
Benefit obligation at end of year $ 14,110 $ 14,391
===================
-51-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
14. RETIREMENT PLANS (CONTINUED)
2003 2002
-------------------------
(In thousands, except
percentages
CHANGE IN PLAN ASSETS
Plan assets at beginning of year $ 9,108 $ 9,700
Actual return on plan assets 780 (829)
Company contributions 841 468
Plan participants' contributions 91 86
Benefits paid (2,503) (654)
Foreign currency exchange rate changes 284 337
-------------------------
Plan assets at end of year $ 8,601 $ 9,108
=========================
FUNDED STATUS
Plan assets less than benefit obligations $ (5,509) $ (5,283)
Unrecognized actuarial loss 1,325 1,496
-------------------------
Accrued benefit costs, net $ (4,184) $ (3,787)
=========================
PREPAID (ACCRUED) BENEFIT COST
U. S. plan (included in accrued expenses) $ (381) $ (540)
U. K. plan 1,463 1,867
Minimum pension liability included in accumulated other comprehensive loss (5,266) (5,114)
-------------------------
Net balance sheet liability at September 30 $ (4,184) $ (3,787)
=========================
2003 2002 2001
------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 5.40% to 5.40% to 6.00% to
7.00% 7.00% 7.00%
Expected return on plan assets 7.40% to 7.40% to 7.50% to
9.00% 9.00% 9.00%
Rate of compensation increase 3.50% to 3.50% to 3.50% to
3.90% 3.90% 4.00%
-52-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
14. RETIREMENT PLANS (CONTINUED)
2003 2002 2001
-----------------------------
(In thousands)
COMPONENTS OF NET PERIODIC PENSION COST
Service cost $ 682 $ 610 $ 442
Interest cost 815 756 670
Expected return on plan assets (693) (802) (938)
Amortization of unrecognized net loss 373 168 13
------- ------- -------
Net periodic pension cost $ 1,177 $ 732 $ 187
======= ======= =======
Amounts applicable to the Company's pension plan with projected or accumulated
benefit obligations in excess of plan assets are:
2003 2002
-----------------
(In thousands)
Projected benefit obligation $14,110 $14,391
Accumulated benefit obligation 12,785 12,895
Fair value of plan assets 8,601 9,108
The Company also sponsors a defined contribution plan that covers
substantially all domestic employees. Company contributions to the plan totaled
$22,000 in 2003, $56,000 in 2002 and $37,000 in 2001.
15. 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 to the
former shareholders of C'treat and to related parties, have variable rates and
cost approximates fair value at September 30, 2003. The convertible subordinated
notes do not have a ready market and cost is assumed to approximate fair value.
The aggregate carrying value of these notes is $3,250,000 at September 30, 2003,
with interest rates ranging from 11.00% to 13.00%.
-53-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
16. SEGMENT INFORMATION
Historically the Company's reportable segments were its five operating
Divisions. As described in Note 3 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.
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)
2003
Net sales $47,847 $ 19,011 $66,858
Long-lived assets 4,284 4,839 9,123
2002
Net sales 47,873 16,181 64,054
Long-lived assets 18,154 11,339 29,493
2001
Net sales 49,037 16,516 65,553
Long-lived assets 18,665 11,640 30,305
For all periods presented the Company's products could be classified
into two main categories, (i) carbon and related services and (ii) engineered
systems and equipment. Refer to Note 1 for a detailed description of these
products and services. Information with regard to sales by category follows:
2003 2002 2001
---------------------------
(In thousands)
Carbon and related services $53,962 $48,923 $46,867
Engineered systems and equipment 12,896 15,131 18,686
-54-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
16. SEGMENT INFORMATION (CONTINUED)
The Company did not derive more than 10% of its net sales from any
individual customer during any of the three years in the period ended September
30, 2003.
17. SUPPLEMENTAL CASH FLOW DATA
Supplemental cash flow data is as follows:
2003 2002 2001
------------------------
(In thousands)
Interest paid $2,242 $3,464 $3,973
Income taxes paid 87 74 109
18. CONTINGENCIES
The Company is subject to various lawsuits, claims and proceedings that
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.
In addition, approximately fifty to sixty years ago there was a
chemical spill at the Company's owned location in Columbus, Ohio. In 1998, the
Company engaged an environmental consulting and engineering firm to report on
the extent of any existing contamination. In late calendar 2003, the Company
engaged the same firm to update their previous report. This report is not yet
available. It is not possible to estimate the costs of any environmental
remediation. Accordingly, no adjustments have been recorded in the accompanying
financial statements.
-55-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
19. SUBSEQUENT EVENT (UNAUDITED)
As of December 11, 2003, the Company and its wholly-owned operating
subsidiary, Barnebey Sutcliffe Corporation, executed an agreement with Barnebey
Acquisition Corp. (the "Buyer"), a newly formed Delaware corporation affiliated
with The Compass Group International, LLC, for the Buyer to purchase
substantially all of the assets and business operations of the Company,
including the operations of Barnebey Sutcliffe Corporation and the subsidiaries
of the Company in the United Kingdom (the "Purchase Agreement"). The agreement
is for total cash consideration of approximately $25,750,000, subject to certain
pre-closing and post-closing adjustments, and the assumption by the Buyer of
certain liabilities of the Company. The proposed purchase is subject to the
terms and conditions of the Purchase Agreement, and the purchase price is
subject to certain adjustments required under the Purchase Agreement, which
includes a provision for a working capital adjustment. On December 16, 2003,
Debtors received a $5,000,000 deposit contemplated by the Purchase Agreement.
The Company anticipates that all of the proceeds of the transaction that it
receives will be used to partially satisfy the claims of creditors.
On December 16, 2003, the Company filed a motion with the Bankruptcy
Court, requesting that the court approve the proposed sale and establish bidding
procedures and a date and time for conducting an auction to determine if there
are higher or better offers for the Company's assets and business. There can be
no assurance that the Bankruptcy Court will approve the proposed transaction
reflected in the Purchase Agreement, or that final documentation will be reached
on terms satisfactory to all parties. Subject to receipt of the Bankruptcy
Court's approval and the satisfaction of other pre-closing conditions, the
Company expects the transaction to close in the first quarter of 2004.
Assuming the above-described transaction had occurred on September 30,
2003, the remaining condensed consolidated balance sheet of the Company would be
as follows (in thousands):
-56-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
19. SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
ASSETS LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current assets: Current liabilities:
Cash and cash equivalents $ 1,849 Accounts payable and accrued expenses $ 173
Other current assets 235 Accrued income taxes 146
Net assets of discontinued operations 754 Liabilities subject to compromise 17,367
-------- --------
Total current assets 2,838 Total liabilities 17,686
Other assets 20 Shareholders' deficiency (14,828)
-------- --------
Total assets $ 2,858 Total liabilities and shareholders' deficiency $ 2,858
======== ========
20. QUARTERLY OPERATING RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
for the years ended September 30, 2003 and 2002.
Year Ended September 30, 2003
-----------------------------------------------
Quarter Ended
December 31 March 31 June 30 September 30
-----------------------------------------------
(In thousands, except per share data)
Net sales $ 14,295 $ 15,768 $18,074 $ 18,721
Gross profit 3,140 3,491 4,130 4,692
Income (loss) from continuing operations (367) 57 367 561
Cumulative effect of accounting change (20,500) - - -
-----------------------------------------------
Net income (loss) $ (20,867) $ 57 $ 367 $ 561
===============================================
Per share-basic:
Continuing operations $ (0.02) $ 0.00 $ 0.02 $ 0.03
Cumulative effect of accounting change (1.04) - - -
-----------------------------------------------
$ (1.06) $ 0.00 $ 0.02 $ 0.03
===============================================
Per share-diluted:
Continuing operations $ (0.02) $ 0.00 $ 0.02 $ 0.03
Cumulative effect of accounting change (1.02) - - -
-----------------------------------------------
$ (1.04) $ 0.00 $ 0.02 $ 0.03
===============================================
-57-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
20. QUARTERLY OPERATING RESULTS (UNAUDITED) - (CONTINUED)
Year Ended September 30, 2002
-----------------------------------------------
Quarter Ended
December 31 March 31 June 30 September 30
-----------------------------------------------
(In thousands, except per share data)
Net sales $ 14,880 $ 16,143 $16,107 $ 16,924
Gross profit 3,355 3,790 3,781 4,427
Income (loss) from continuing operations (639) 127 89 572
Loss from discontinued operations (100) (120) (314) -
-----------------------------------------------
Net income (loss) $ (739) $ 7 $ (225) $ 572
===============================================
Per share-basic:
Continuing operations $ (0.04) $ 0.01 $ 0.01 $ 0.03
Discontinued operations (0.00) (0.01) (0.02) -
-----------------------------------------------
$ (0.04) $ 0.00 $ (0.01) $ 0.03
===============================================
Per share-diluted:
Continuing operations $ (0.04) $ 0.01 $ 0.01 $ 0.03
Discontinued operations (0.00) (0.01) (0.02) -
-----------------------------------------------
$ (0.04) $ 0.00 $ (0.01) $ 0.03
===============================================
-58-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The independent accounting firm of Ernst & Young LLP has acted as
Waterlink's independent auditors since Waterlink's inception and performed the
audit for the fiscal year ended September 30, 2002. Based on an evaluation of
the size and scope of the engagement, on December 11, 2002, Ernst & Young LLP
resigned as Waterlink's independent auditors. The audit committee of the board
of directors of Waterlink has accepted the resignation of Ernst & Young LLP.
During the entire course of the engagement of Ernst & Young LLP as Waterlink's
independent auditors, there were no disagreements on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope of
procedure. For each of the last two fiscal years, those being the years ended
September 30, 2002 and 2001, the Report of Independent Auditors contained an
explanatory paragraph with regard to the uncertainty of Waterlink to continue as
a going concern.
On December 12, 2002 Waterlink, through its audit committee, hired the
firm of Saltz Shamis & Goldfarb, Inc. ("SS&G") to serve as Waterlink's
independent auditors for the fiscal year ending September 30, 2003. During
Waterlink's two most recent fiscal years and the interim period prior to
engaging Saltz Shamis & Goldfarb, Inc., Waterlink has not consulted Saltz Shamis
& Goldfarb, Inc. with respect to any of the matters described in Regulation S-K,
Item 304 (a)(2)(i) or (ii).
The independent accounting firm of Saltz Shamis & Goldfarb, Inc. has
acted as Waterlink's independent auditors since their appointment on December
12, 2002. Due to the fact that the professional liability insurance carrier for
Saltz Shamis & Goldfarb, Inc. would not cover them with regard to performing the
audit of the consolidated financial statements of Waterlink, Inc., on October
27, 2003, SS&G resigned as Waterlink's independent auditors. The audit committee
of the board of directors of Waterlink has accepted the resignation of SS&G.
SS&G did not issue any report on the financial statements of Waterlink during
Waterlink's two most recent fiscal years or any subsequent interim period, as
SS&G was engaged by Waterlink on December 12, 2002, after the filing of
Waterlink's most recent annual report on Form 10-K. During the course of the
engagement of SS&G as Waterlink's independent auditors, there were no
disagreements, whether or not resolved, on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to SS&G's satisfaction, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report.
On October 27, 2003 Waterlink, through its audit committee, hired the
firm of Marcum & Kliegman LLP to serve as its independent auditors for the
fiscal year ending September 30, 2003. During Waterlink's two most recent fiscal
years and the interim periods prior to engaging Marcum & Kliegman LLP, Waterlink
has not consulted Marcum & Kliegman LLP with respect to either (a) the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
Waterlink's financial statements, and neither a written report nor oral advice
was provided that was an important factor considered by Waterlink in reaching a
decision as to an accounting, auditing or financial reporting issue; or (b) any
matter that was either the subject of a disagreement (as defined in paragraph
304(a)(1)(iv) and the related instructions of Item 304 of Regulation S-K) or a
reportable event (as described in paragraph 304(a)(1)(v) of Item 304 of
Regulation S-K). Representatives of Marcum & Kliegman LLP are expected to be
present at Waterlink's 2004 the annual meeting, if held, and will have the
opportunity to make a statement if they desire to do so, and will be available
to respond to appropriate questions.
ITEM 9(a). 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 December 30, 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 filings with the Securities and Exchange
Commission.
-59-
(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 III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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, 2003 ("fiscal 2003"),
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. B. Bruce Cummings and Kenneth Ch'uan-k'ai Leung) hold office until the
scheduled annual meeting of stockholders which is expected to be held in 2004,
the director within Class II (Mr. William W. Vogelhuber) will hold office until
the scheduled annual meeting of stockholders which would be held in early 2005,
and the director within Class III (Mr. Robert P. Pinkas) will hold office until
the scheduled annual meeting of stockholders which would be held in early 2006.
Stockholders will elect the directors of each Class for three-year terms at the
appropriate annual meetings of stockholders.
DIRECTORS WHOSE TERM EXPIRES IN 2004 (CLASS I)
AGE (AS OF DIRECTOR OF
NAME OF DIRECTOR NOVEMBER 30, 2003) WATERLINK SINCE
- --------------------------- ------------------ ---------------
B. Bruce Cummings........... 64 2001
Kenneth Ch'uan-k'ai Leung... 59 2001
DIRECTOR WHOSE TERM EXPIRES IN 2005 (CLASS II)
AGE (AS OF DIRECTOR OF
NAME OF DIRECTOR NOVEMBER 30, 2003) WATERLINK SINCE
- --------------------------- ------------------ ---------------
William W. Vogelhuber....... 70 2001
DIRECTOR WHOSE TERM EXPIRES IN 2006 (CLASS III)
AGE (AS OF DIRECTOR OF
NAME OF DIRECTOR NOVEMBER 30, 2003) WATERLINK SINCE
- ---------------------------- ------------------ ---------------
Robert P. Pinkas............ 50 1994
-60-
B. Bruce Cummings was elected to serve as a Director in May 2001. Mr.
Cummings has been President of Elben L.L.C., a private company providing
corporate finance advisory services, since 1999. From 1987 to the end of 1999
Mr. Cummings was a Managing Director of Investment Banking of Salomon Smith
Barney, an investment-banking firm, responsible for corporate financing
activities with environmental services, engineering/construction, and specific
consolidation/roll-up companies. Mr. Cummings also serves as a director of
Gundle/SLT Environmental, Inc.
Kenneth Ch'uan-k'ai Leung was elected to serve as a Director in May
2001. Mr. Leung has been a Managing Director of Sanders Morris Harris Inc. since
March 1995 and Chief Investment Officer of the Environmental Opportunities Fund,
L.P. since January 1996 and of Environmental Opportunities Fund II, L.P. since
June 1998. Mr. Leung serves on the board of directors of Avista Resources, Inc.;
Synagro Technologies, Inc.; U.S. Energy Systems, Inc.; U.S. Plastic Lumber
Corporation; and SystemOne Technologies, Inc.
William W. Vogelhuber was elected to serve as a Director in October
2001. Mr. Vogelhuber had been President of Waterlink's specialty products
division since its acquisition in June 1998, and was then appointed President
and Chief Executive Officer of Waterlink, Inc. on October 31, 2001. Prior to
1998, Mr. Vogelhuber had been the President and General Manager of Barnebey &
Sutcliffe Corporation, the largest company within what would become Waterlink's
specialty products division, since 1987.
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 Director of Brantley Capital Corporation, a
registered investment company, and Chairman of the Board, Chief Executive
Officer, Treasurer and a manager of Brantley Capital Management, L.L.C., an
investment adviser. He is also a general partner of Brantley Micro Cap Fund,
L.P., a private hedge fund and a founding member of Brantley Asset Management
LLC, a registered investment adviser. Mr. Pinkas was the founding partner of
Brantley Venture Partners, L.P., a venture capital fund started in 1987, and led
the formation of three related venture capital funds, Brantley Venture Partners
II, L.P., Brantley Venture Partners III, L.P. and Brantley Partners IV, L.P. A
family limited partnership of which Mr. Pinkas is the sole general partner
serves as a general partner of the sole general partner of each of Brantley
Venture Partners, L.P., Brantley Venture Partners II, L.P., Brantley Venture
Partners III, L.P. and Brantley Partners IV, L.P. From 1981 to 1987, Mr. Pinkas
was active in venture capital management and financing as a founding director
and investor in seven early-stage companies. He serves on the board of directors
of several portfolio companies in which one or more of Brantley Venture
Partners, L.P., Brantley Venture Partners II, L.P., Brantley Venture Partners
III, L.P. and Brantley Partners IV, L.P. have invested. Additionally, Mr. Pinkas
is a director at Pediatric Services of America, Inc.
INFORMATION RELATING TO NON-DIRECTOR EXECUTIVE OFFICER OF WATERLINK
Donald A. Weidig, 46, a certified public accountant, joined Waterlink
on December 1, 1995 as Controller and was appointed Treasurer and Chief
Financial Officer on October 31, 2001. Prior to joining Waterlink, Mr. Weidig
was Director of Finance for Summit Environmental Group from June 1990 to
February 1994. From February 1994 to November 1995 he was in charge of the audit
practice at S.R. Arner & Company, a regional accounting firm. Mr. Weidig also
worked for Ernst & Young LLP, an international accounting firm, from 1979 to
1990.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Each of the four directors and the non-director executive officer
referred to above was a director or an executive officer, as the case may be, of
Waterlink at the time Waterlink filed a petition for protection under the
federal bankruptcy laws.
-61-
AUDIT COMMITTEE FINANCIAL EXPERT
Waterlink's board of directors has determined that Waterlink has at
least one audit committee financial expert serving on its audit committee. The
name of the audit committee financial expert is the chairman of the committee,
Mr. Kenneth Ch'uan-k'ai Leung, and such person is "independent" as that term is
used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
CODE OF ETHICS
On December 23, 2003, Waterlink adopted a Code of Ethics applicable to
its chief executive officer, chief financial officer, and other persons
performing similar functions. A copy of the Code of Ethics is filed as Exhibit
14.1 to this Annual Report on Form 10-K and is also available on Waterlink's
website at www.waterlink.com. Waterlink will post on its website any amendment
to, or waiver from, its Code of Ethics within three days of any such amendment
or waiver.
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 2003. We refer to these individuals
collectively as the "Named Executive Officers." The compensation described in
the table does not include benefits that are generally available to all our
salaried employees and perquisites and other personal benefits that 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($) OPTIONS(#) COMPENSATION($)
- ------------------------- ---- --------- ---------- --------------- ---------- ---------- ---------------
William W. Vogelhuber (1) 2003 $ 200,000 $ 5,000(2) -- -- -- $ 1,917(4)
Chief Executive Officer 2002 $ 198,907 $46,722(3) -- -- 200,000 $ 2,034(4)
and President 2001 $ 186,886 $ -- -- -- 50,000 $ 1,900(4)
Donald A. Weidig (1) 2003 $ 132,000 $ 3,300(2) -- -- -- $ 1,320(4)
Chief Financial Officer, 2002 $ 131,000 $30,000(3) -- -- 100,000 $ 1,310(4)
Treasurer and Secretary 2001 $ 117,250 $ -- -- -- 47,000 $ 1,220(4)
(1) The board elected Mr. Vogelhuber to be our president and chief
executive officer and Mr. Weidig to be our chief financial officer on
October 31, 2001. For terms of Mr. Vogelhuber's and Mr. Weidig's
compensation, see "Employment Agreements," below.
(2) Mr. Vogelhuber and Mr. Weidig earned bonuses in fiscal 2003 based on
performance goals established by the board of directors.
(3) Bonuses were paid to Mr. Vogelhuber and Mr. Weidig in connection with
the successful completion of Waterlink's strategic alternative process,
which concluded with the sale of its pure water division in May 2002.
(4) The amounts shown represent Waterlink "match" payment relating to our
401(k) Plan.
-62-
STOCK OPTION GRANTS
There were no grants of stock options made to the Named Executive
Officers during fiscal 2003. In addition, Waterlink has not granted stock
appreciation rights, or SARs.
STOCK OPTION EXERCISES
The following table describes exercises of stock options during fiscal
2003 by each of the Named Executive Officers and their stock options outstanding
as of September 30, 2003. Waterlink has not granted stock appreciation rights.
The value of "in the money" options is based on the closing price of $0.031 on
September 30, 2003.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL AT FISCAL
SHARES YEAR-END(#) YEAR-END($)
ACQUIRED ON VALUE EXERCISABLE(E)/ EXERCISABLE (E)/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(U) UNEXERCISABLE(U)
---- ----------- ----------- ---------------- ----------------
William W. Vogelhuber -- -- 153,750(E) -- (E)
131,250(U) -- (U)
Donald A. Weidig -- -- 110,500(E) -- (E)
101,000(U) -- (U)
EMPLOYMENT AGREEMENTS
Mr. Vogelhuber entered into an employment agreement with Waterlink
effective November 1, 2001, which provides for him to serve as president and
chief executive 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 $200,000. Mr. Vogelhuber participates in Waterlink's annual
incentive bonus plan that entitles him to earn annually an amount ranging from
zero to 50% of his base salary if performance goals established by the board of
directors are achieved. If Mr. Vogelhuber's employment is terminated without
cause, he will receive in twenty-four equal semi-monthly installments an amount
equal to his base salary in effect when terminated. If Mr. Vogelhuber's
employment is terminated due to a change in control, he will receive a lump-sum
amount equal to the present value of his base salary in effect at the date of
the change in control. If any of the payments payable to Mr. Vogelhuber under
these circumstances are "excess parachute payments" for federal tax purposes,
Mr. Vogelhuber 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 12 months following its termination. This employment agreement is an
executory contract for purposes of the Chapter 11 Cases and as such may or may
not be assumed by Waterlink.
Mr. Weidig entered into an employment agreement with Waterlink
effective November 1, 2001, 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 $132,000. Mr. Weidig participates in Waterlink's annual incentive
bonus plan, which entitles him to earn annually an amount ranging from zero to
50% of his base salary if performance goals established by the board of
directors are achieved. If Mr. Weidig's employment is terminated without cause,
he will receive in twenty-four equal semi-monthly installments an amount equal
to his base salary in effect when terminated. If Mr. Weidig's employment is
terminated due to a change in control, he will receive a lump-sum amount equal
to the present value of his base salary in effect at the date of the change in
control. If any of the payments payable to Mr. Weidig under these circumstances
are "excess parachute payments" for federal tax purposes, Mr. Weidig is to be
paid an
63
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 12 months following its
termination. This employment agreement is an executory contract for purposes of
the Chapter 11 Cases and as such may or may not be assumed by Waterlink.
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.
Directors who are not employees of Waterlink are entitled to receive an
annual retainer of $10,000, payable in equal quarterly installments. In
addition, non-employee directors are entitled to 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 July 2001 non-employee board members
elected to suspend all compensation (other than expense reimbursement),
including grants under the Director Plan (as defined below), until a time in
which it would be more appropriate.
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, pursuant to the terms of the Director Plan, 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.
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. As previously described, in July 2001
non-employee board members elected to suspend all compensation (other than
expense reimbursement), including grants under the Director Plan, until a time
in which it would be more appropriate.
The Compensation Committee administers the Director Plan. 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Waterlink's Compensation Committee is currently composed of Messrs.
Pinkas and Leung. No member of the Compensation Committee is currently or was
formerly an officer or an employee of Waterlink or its subsidiaries. There are
no compensation committee interlocks and no insider participation in
compensation decisions that are required to be reported under the rules and
regulations of the Exchange Act.
64
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
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 50% of base salary. The
Chief Executive Officer and Chief Financial Officer earned bonuses of $5,000 and
$3,300, respectively, in connection with this plan during fiscal 2003.
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 2003, no stock options
were granted to employees. As of September 30, 2003, approximately 52 employees,
including executive officers, held stock options granted by Waterlink.
Generally, all stock options granted are anticipated to vest over four years,
except under limited circumstances.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
William W. Vogelhuber's compensation for fiscal 2003 was pursuant to an
employment agreement entered into contemporaneously with his election as
President and Chief Executive Officer of Waterlink effective November 1, 2001.
Mr. Vogelhuber's compensation, including base salary and bonus compensation, was
determined based upon negotiation between Waterlink and Mr. Vogelhuber. Pursuant
to Mr. Vogelhuber's employment agreement, he was entitled to earn up to 50% of
his base salary pursuant to Waterlink's bonus plan. Mr. Vogelhuber earned a
bonus of $5,000 during fiscal 2003.
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 paid to
Waterlink's executives will exceed the deduction limit set by Section 162(m).
MEMBERS OF THE COMMITTEE
ROBERT P. PINKAS, Chairman
KENNETH CH'UAN-K'AI LEUNG
65
PERFORMANCE GRAPH
Set forth below is a graph comparing Waterlink's cumulative, five-year
stockholder return of the Common Stock, to the Standard and Poor's 500 Index and
a peer group index constructed by Waterlink for the five-year period ended
September 30, 2003. The peer group index consists of: Calgon Carbon Corporation;
Ionics, Inc.; and Flanders Corporation. These corporations are involved in
various aspects of the air and water filtration business. The graph assumes $100
invested on September 30, 1998 in Waterlink and in each of the other indices.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
ASSUMES INITIAL INVESTMENT OF $100
SEPTEMBER 2003
[LINE GRAPH]
TOTAL RETURN ANALYSIS 1998 1999 2000 2001 2002 2003
- ---------------------------------------------------------------------------------------
Waterlink, Inc. $ 100.00 $ 95.45 $ 81.82 $ 5.11 $ 1.46 $ 1.13
Peer Group $ 100.00 $ 105.83 $ 83.43 $ 88.36 $ 83.31 $ 94.70
S&P 500 $ 100.00 $ 127.81 $ 144.78 $ 106.24 $ 84.48 $ 105.09
Source: Zacks Investment Research, Inc. (925) 370-1299.
* Total return assumes reinvestment of dividends (none paid by Waterlink)
Note: Companies in indices measured by Market Capitalization
66
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth the beneficial ownership of Waterlink
common stock as of November 30, 2003 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
19,665,149 shares outstanding. An asterisk indicates less than one percent of
shares outstanding.
SHARES OF WATERLINK PERCENT
COMMON STOCK OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
- ----------------------------------------------------------------------------------------------------------------------
Brantley Venture Partners III, L.P. ...................................... 2,400,909(1) 12.02%
3201 Enterprise Parkway, Suite 350
Beachwood, OH 44122
Philip A. Thompson........................................................ 2,039,691(2) 10.37%
9820 East Thompson Peak Parkway #658
Scottsdale, AZ 85255
T. Rowe Price Associates, Inc. ........................................... 1,671,750(3) 8.50%
100 East Pratt St
Baltimore, MD 21202
CID Equity Capital V, L.P................................................. 1,153,000(4) 5.85%
One American Square, Suite 2850
Indianapolis, IN 46282
William W. Vogelhuber..................................................... 263,000(5) 1.32%
Donald A. Weidig.......................................................... 140,500(5) *
Robert P. Pinkas.......................................................... 2,564,159(5)(6) 12.77%
B. Bruce Cummings......................................................... 69,000(5)(7) *
Kenneth Ch'uan-k'ai Leung................................................. 823,893(5)(8) 4.19%
All directors and executive officers as a group (5 persons)............... 3,860,552(9) 19.34%
(1) Includes warrants to purchase 300,909 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.
(2) Based on information confirmed by the stockholder on December 9, 2003.
(3) Based on information filed with the Securities and Exchange Commission on
February 14, 2003. T. Rowe Price Associates, Inc. has sole voting power with
respect to 18,200 shares and sole dispositive power with respect to
1,671,750 shares.
(4) Based on information confirmed by the stockholder on December 4, 2003 and
includes warrants to purchase 53,000 shares of Waterlink common stock.
67
(5) Includes options for the indicated option holder to purchase the indicated
shares of Waterlink common stock, which options are exercisable within 60
days of November 30, 2003:
William W. Vogelhuber................................................ 260,000
Donald A. Weidig..................................................... 138,000
Robert P. Pinkas..................................................... 116,250
B. Bruce Cummings.................................................... 1,500
Kenneth Ch'uan-k'ai Leung............................................ 1,500
(6) Includes shares, including the 300,909 warrants referred to in footnote 1
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 3201
Enterprise Parkway, Suite 350, Beachwood, OH 44122.
(7) Mr. Cummings' business address is 126 East 56th Street, 28th Floor, New
York, NY 10022.
(8) Includes 625,000 shares which are held by Environmental Opportunities Fund,
L.P., which Sanders Morris Harris, Inc. controls, and an additional 181,393
shares which are held by Sanders Morris Harris, Inc. The 181,393 shares held
by Sanders Morris Harris, Inc. were purchased for certain of Sanders Morris
Harris, Inc.'s discretionary accounts as to which Sanders Morris Harris,
Inc. has sole voting and investment power. Kenneth Ch'uan-k'ai Leung is the
Chief Investment Officer of Environmental Opportunities Fund, L.P. and is a
Managing Director of Sanders Morris Harris, Inc., and has sole voting and
investment power with respect to these shares. Mr. Leung's business address
is 126 East 56th Street, 28th Floor, New York, NY 10022.
(9) Includes options to purchase 517,250 shares of common stock, which are
exercisable within 60 days of November 30, 2003, and 300,909 warrants as
indicated above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
68
PART IV
ITEM 15. 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:
Reports of Independent Auditors
Consolidated Balance Sheets at September 30, 2003 and 2002
Consolidated Statements of Operations for the years ended September 30,
2003, 2002 and 2001
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended September 30,
2003, 2002 and 2001
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
Waterlink did not file any reports on Form 8-K during the last quarter
of the period covered by this report.
(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.
69
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/ WILLIAM W. VOGELHUBER
-----------------------------
Its President and Chief Executive Officer
Date: January 13, 2004
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
- --------------------
Robert P. Pinkas,
Director and Chairman of the Board
Date: January 13, 2004
/ /s/ B. BRUCE CUMMINGS
- -----------------------
B. Bruce Cummings,
Director
Date: January 13, 2004
/s/ KENNETH CH'UAN-K'AI LEUNG
- -----------------------------
Kenneth Ch'uan-k'ai Leung,
Director
Date: January 13, 2004
/s/ WILLIAM W. VOGELHUBER
- -------------------------
William W. Vogelhuber,
Director, President and Chief Executive Officer
Date: January 13, 2004
/s/ DONALD A. WEIDIG
- --------------------
Donald A. Weidig,
Chief Financial Officer
(and principal accounting officer)
Date: January 13, 2004
70
INDEX TO EXHIBITS
EXHIBIT 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).
*10.1 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).
*10.2 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).
*10.3 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)
*10.4 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)
*10.5 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).
*10.6 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).
*10.7 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 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).
*10.8 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).
*10.9 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 ands Savings
Association, as agent, and other financial institutions party
hereto (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).
-71-
EXHIBIT EXHIBIT DESCRIPTION
- ------- -------------------
*10.10 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 other financial institutions party
hereto (filed as an exhibit to Waterlink's registration
statement on Form S-1 filed on August 11, 1999, registration
number 333-84985).
*10.11 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 other financial institutions party
hereto (filed as an exhibit to Waterlink's registration
statement on Form S-1 filed on August 11, 1999, registration
number 333-84985).
*10.12 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).
*10.13 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 other financial institutions party
hereto (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).
*10.14 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).
*10.15 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).
*10.16 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).
*10.17 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).
*10.18 Warrant Agreement dated January 20, 2000 between Waterlink,
Inc. and CID Equity Partners V, L.P. (filed as an exhibit to
Waterlink's Annual Report on Form 10-K for the fiscal year
ended September 30, 2000, File No. 1-13041).
*10.19 Amendment to Executive Employment Agreement, dated as of May
19, 2000, between Waterlink and Mark E. Brody (filed as an
exhibit to Waterlink's Annual Report on Form 10-K for the
fiscal year ended September 30, 2000, File No. 1-13041).
*10.20 Amendment to Executive Employment Agreement, dated as of May
21, 2000, 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, 2000, File No. 1-13041).
*10.21 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 (filed as an exhibit
to Waterlink's Annual Report on Form 10-K for the fiscal year
ended September 30, 2000, File No. 1-13041).
-72-
EXHIBIT EXHIBIT DESCRIPTION
- ------- -------------------
*10.22 Tenth Amendment, dated as of December 29, 2000, to Amended and
Restated Credit Agreement, dated as of February 11, 2000, among
Waterlink, Inc. and Bank of America, N.A., as agent, and the
other financial institutions party thereto (filed as an exhibit
to Waterlink's Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2000, File No. 1-13041).
*10.23 Warrant Agreement dated as of January 18, 2001 among Waterlink,
Inc., Brantley Venture Partners III, L.P., and CID Equity
Capital V, L.P. (filed as an exhibit to Waterlink's Quarterly
Report on Form 10-Q for the quarterly period ended December 31,
2000, File No. 1-13041).
*10.24 13% Subordinated Note dated as of January 18, 2001, in the
amount of $500,000, from Waterlink, Inc. to Brantley Venture
Partners III, L.P. (filed as an exhibit to Waterlink's
Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2000, File No. 1-13041).
*10.25 13% Subordinated Note dated as of January 18, 2001, in the
amount of $500,000, from Waterlink, Inc. to CID Equity Capital
V, L.P. (filed as an exhibit to Waterlink's Quarterly Report on
Form 10-Q for the quarterly period ended December 31, 2000,
File No. 1-13041).
*10.26 Eleventh Amendment and Waiver to Amended and Restated Credit
Agreement, dated as of May 14, 2001, among Waterlink, Inc. and
Bank of America, N.A., as agent, and the other financial
institutions party thereto (filed as an exhibit to Waterlink's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2001, File No. 1-13041).
*10.27 Twelfth Amendment and Waiver to Amended and Restated Credit
Agreement, dated as of September 30, 2001, among Waterlink,
Inc. and Bank of America, N.A., as agent, and 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, 2002, File No. 1-3041).
*10.28 Thirteenth Amendment and Waiver to Amended and Restated Credit
Agreement, dated as of December 20, 2001, among Waterlink, Inc.
and Bank of America, N.A., as agent, and 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, 2002, File No. 1-3041).
*10.29 Fourteenth Amendment to Amended and Restated Credit Agreement,
dated as of January 15, 2002, among Waterlink, Inc. and Bank of
America, N.A., as agent, and 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, 2001, File
No. 1-3041).
*10.30 Executive Employment Agreement, dated as of November 1, 2001,
between Waterlink, Inc. and William W. Vogelhuber (filed as an
exhibit to Waterlink's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 2001, File No. 1-3041).
*10.31 Executive Employment Agreement, dated as of November 1, 2001,
between Waterlink, Inc. and Donald A. Weidig (filed as an
exhibit to Waterlink's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 2001, File No. 1-3041).
*10.32 Letter Agreement dated as of February 7, 2002, between
Waterlink, Inc. and T. Scott King (filed as an exhibit to
Waterlink's Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2001, File No. 1-3041).
*10.33 Letter Agreement dated as of February 7, 2002, between
Waterlink, Inc. and Mark E. Brody (filed as an exhibit to
Waterlink's Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2001, File No. 1-3041).
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EXHIBIT EXHIBIT DESCRIPTION
- ------- -------------------
*10.36 Fifteenth Amendment to Amended and Restated Credit Agreement,
dated as of October 1, 2002, among Waterlink, Inc. and Bank of
America, N.A., as agent, and other financial institutions party
thereto.
14.1 Code of Ethics.
21.1 List of Subsidiaries of Waterlink.
23.1 Consent of Marcum & Kliegman LLP.
23.2 Consent of Ernst & Young LLP.
31.1 Section 302 Certification of the Company's Chief Executive
Officer.
31.2 Section 302 Certification of the Company's Chief Financial
Officer.
32.1 Section 906 Certification of the Company's Chief Executive
Officer.
32.2 Section 906 Certification of the Company's Chief Financial
Officer.
- ------------------------
* Incorporated herein by reference as indicated.
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EXHIBIT 14.1
CODE OF ETHICS
Waterlink, Inc. together with all of its subsidiaries and controlled entities
(the "Company") believe in adherence to ethical and legal standards in the
conduct of its business. Integrity, as an integral part of this belief, is a
core value at the Company and directors, officers and employees (individually,
an "Employee" and collectively, "Employees") must conduct themselves
accordingly. In addition, Employees are expected to conduct their outside
business and personal affairs in a manner that does not conflict with the best
interests of the Company. All Employees are required to be alert to potential
conflicts with this Code of Ethics and pursue the prompt resolution of such
matters. Violations of the provisions of this Code of Ethics may result in
disciplinary action, including termination of employment. This Code of Ethics
applies to all Employees. It is the personal responsibility of each Employee to
observe the standards in the Code of Ethics whether or not they are imposed by
law. Any Employee who does not comply with this Code of Ethics is acting outside
the scope of his or her employment.
ALTHOUGH THIS POLICY IS WRITTEN AS THE CODE OF ETHICS OF WATERLINK, INC., ALL
PROVISIONS SHALL ALSO APPLY TO EACH EMPLOYEE OF BARNEBEY SUTCLIFFE CORPORATION.
IN ADDITION, ALL EXISTING POLICIES CURRENTLY IN FORCE WITH REGARD TO POLICIES
AND PROCEDURES FOR BARNEBEY SUTCLIFFE THAT MAY NOT BE ADDRESSED IN THIS DOCUMENT
SHALL ALSO BE IN FORCE.
CONDUCT OF BUSINESS
LETTER AND SPIRIT OF THE LAW
Business will be conducted in strict compliance with all applicable laws and
governmental regulations of the United States, of the various states and of any
foreign country where applicable. Where a situation is not covered by law or
where the law is unclear or conflicting, business will be conducted in a fair
and forthright manner.
USE OF FUNDS AND ASSETS
Each Employee is responsible for the proper use, conservation and protection of
Company assets, including its property, plant, equipment, computer information
and data, inventions, and other proprietary business and technical information.
The use of Company funds or other assets is prohibited for:
- Contributions to domestic or foreign political candidates, whether or
not allowed by law.
- Payments, gifts, loans or any other transfer either directly or
indirectly to officials, agents or associates of labor organizations,
political parties or foreign or domestic governments, or to any other
persons or entities, where such transfer could be reasonably considered
a bribe, kickback or other illegal or unethical payment.
- Personal gain or other purpose not intended to benefit the Company.
In addition, the Company prohibits any dishonest, unethical or fraudulent act,
including, (but not limited to)
- falsification of Company records for personal or other reasons;
- misappropriation of other employees', customers', or suppliers' assets.
EQUAL EMPLOYMENT OPPORTUNITY
Company policy prohibits all unlawful discrimination against any Employee or
applicant for employment. Employees must adhere to established equal employment
opportunity practices to prevent discrimination against job applicants and
co-workers on the basis of race, color, gender, religion, national origin, age,
veteran status, disability, or other basis prohibited by applicable law.
NON-PUBLIC COMPANY INFORMATION
Employees are responsible for protecting non-public Company information at all
times. Only executive officers and designated spokespersons are permitted to
make public statements on behalf of the Company. All questions received from
news media representatives should be directed to the Company's Chief Executive
Officer and all inquiries from investors and securities analysts should be
referred to the Company's Chief Executive Officer or Chief Financial Officer.
Also, Employees must exercise the utmost care to avoid inadvertent disclosure of
non-public information through casual or public conversations or presentations.
As a general practice, public speeches or presentations addressing corporate
issues, or those
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given on behalf of the Company, should be prepared or reviewed by the Company's
Chief Executive Officer. In addition, the Company works with proprietary data of
customers, suppliers and joint venture partners. To merit the continued support
of our customers, suppliers, and joint venture partners, we should act to
preserve the confidential nature of this information. Without express Company
authorization confidential and proprietary information must not be shared with
persons outside the Company and should be shared with fellow Employees on a
need-to-know basis only.
CONTRACT AND AGREEMENT NEGOTIATION
Employees responsible for the negotiation of contracts or agreements must deal
only with reputable parties whose performance qualifications indicate the
ability to accomplish the requested objective. The contracting person(s) or
department(s) will be responsible for (1) obtaining the most favorable price,
quality and service terms available to the Company; (2) clearly and completely
establishing responsibilities of the parties involved; (3) preserving auditing
rights in contracts and agreements; (4) maintaining records to support
contracting decisions; and (5) protecting the proprietary and confidential
information of all parties involved in the contracting process.
CONTROLLED SUBSTANCES AND ALCOHOL
The Company will maintain procedures designed to protect the safety and health
of Employees, as well as to protect property and assets. In support of this
goal, Employees are required to report to work free of impairment from the use
of controlled substances or alcohol. The use, possession or distribution of
illegal drugs or drug paraphernalia on Company property is strictly prohibited.
In addition, possession of alcoholic beverages, firearms or other weapons on
Company property is prohibited.
INTERNAL CONTROLS
A system of internal controls will be documented and maintained throughout the
Company to aid compliance with the principles outlined in this Code of Ethics
and to protect the assets and best interests of the Company. Each Employee is
responsible for carrying out the activities that ensure internal control.
ANTITRUST
It is the policy of the Company to comply with all laws governing its
operations, including federal, state and foreign antitrust laws, and to conduct
its affairs in keeping with the highest legal and ethical standards. It is our
policy not only to adhere strictly to the antitrust laws but also to conduct our
affairs consistent with the spirit of the laws. At a minimum, every Employee
MUST refrain from entering into any understanding or agreement, expressed or
implied, or discussing, either formally or informally, with any representative
of any competitor, in regard to prices, terms or conditions of sale, or
allocation of business, markets, customers, or territories.
FOREIGN CORRUPT PRACTICES ACT
The U.S. Foreign Corrupt Practices Act (FCPA) makes it a crime for any U.S.
company or person to offer, give, promise or authorize a payment, in cash or in
kind, or any service to a foreign official or political party for the purpose of
obtaining, retaining (doing) or directing business or to induce that official or
party to effect any governmental act or decision. The FCPA prohibitions also
apply to payments or offers of anything of value to intermediaries, agents or
sales representatives if the Employee knows, or has reason to know, that the
payment or offer will be used for any illegal payment. The Company's procedures
must be followed and advice from the Chief Executive Officer must be obtained
regarding interpretations of the FCPA.
The FCPA also includes provisions that establish accounting standards for both
domestic and foreign business activities. This Act, together with rules issued
by the Securities and Exchange Commission, also make it a crime to directly or
indirectly falsify any book, record or account.
CONFLICT OF INTEREST
OWNERSHIP INTERESTS
Employees who own, directly or indirectly, any interest in property or companies
providing services or materials to the Company, must disclose such information
promptly and in writing to their immediate supervisors.
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INSIDER TRADING
Employees are strictly prohibited from trading in securities of the Company or
any other issuer while having knowledge of material non-public information,
obtained or revealed to them as a consequence of employment. Furthermore,
Employees are strictly prohibited from revealing or transmitting such
information to others, expressly or by recommending purchases or sales of such
securities. Federal law carries onerous penalties for Employees, at any level,
who violate this ban. All officers and directors of the Company must comply with
the insider trading and reporting requirements of the Securities and Exchange
Commission.
GIFTS, BRIBES AND KICKBACKS
Employees shall not seek or accept personal gain, directly or indirectly,
neither from anyone soliciting business from or doing business with the Company,
nor from any person or firm in business competition with the Company. Likewise,
an Employee shall not offer or provide anything of personal gain to any persons
or organizations for the purpose of influencing their business relationship with
the Company. It is recognized that common business practice permits the offer
and acceptance of certain courtesies of nominal value, usually in the form of
meals and entertainment. In offering or accepting such courtesies, Employees
shall be guided by whether the business objectivity of either party may be
adversely affected.
OTHER EMPLOYMENT
A full-time Employee must have written approval from the Employee's supervisor
to participate in employment outside of the Company. An Employee may not
participate in outside employment, self-employment or avocation, or serve as an
officer, director, partner or consultant for outside organizations, if such
activity (1) reduces work efficiency; (2) interferes with the Employee's ability
to act conscientiously in the best interest of the Company; (3) requires the
Employee to utilize proprietary, confidential or otherwise non-public
information, procedures, plans or techniques of the Company; or (4) creates an
appearance of impropriety. If an Employee has any questions the Employee's
supervisor should be consulted.
OBJECTIVITY INFLUENCES
Employees who inadvertently find themselves in a position where their
objectivity reasonably may be questioned because of individual interest or
family or personal relationships should notify their respective supervisors.
GENERAL INFORMATION
ACCURACY OF FINANCIAL REPORTS AND OTHER PUBLIC COMMUNICATIONS
As a public company we are subject to various securities laws, regulations and
reporting obligations. Both federal law and our policies require the disclosure
of accurate and complete information regarding the Company's business, financial
condition and results of operations. Inaccurate, incomplete or untimely
reporting will not be tolerated and can severely damage the Company and result
in legal liability.
The Company's Chief Financial Officer and other employees working with him have
a special responsibility to ensure that all of our financial disclosures are
full, fair, accurate, timely and understandable. These employees must understand
and strictly comply with generally accepted accounting principles and all
standards, laws and regulations for accounting and financial reporting of
transactions, estimates and forecasts.
CERTIFICATE OF COMPLIANCE
As appropriate, from time to time, Employees will be notified of this Code of
Ethics and sign a form acknowledging receipt of a copy.
REPORTING OF VIOLATIONS
Any known or suspected violation of this Code of Ethics must be reported
immediately to the Company's Chief Executive Officer or Chief Financial Officer.
Any Employee who, honestly and in good faith, reports what he or she believes to
be a violation of this Code of Ethics will not be subject to any disciplinary
action or retaliation on account of making such a report. To the fullest extent
possible, the identity of an Employee making a report will be kept confidential.
If an Employee believes that he or she is being treated unfairly because of
reporting a violation, this should immediately be brought to the attention of
the Company's Chief Executive Officer or Chief Financial Officer.
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DISSEMINATION OF CODE OF ETHICS
Each supervisor is responsible for compliance with this Code of Ethics by the
Employees under his or her direction. Each supervisor must stress the Company's
commitment to the principles set out in this Code of Ethics and create an
environment in the workplace that encourages the conduct of all business in
accordance with the highest integrity and ethical standards.
REPORTING OF THEFT AND VANDALISM
Any loss of Company property due to theft or vandalism must be reported
immediately to your supervisor.
COMPLIANCE AND DISCIPLINE
Violations of this Code of Ethics will result in disciplinary action that may
include termination, referral for criminal prosecution and reimbursement to the
Company for any losses or damages resulting from the violation, all in
accordance with the Company's legal and contractual obligations. As with all
matters involving investigations of violations and discipline, principles of
fairness and dignity will be applied. Any Employee that is charged with a
violation of this Code of Ethics will be afforded an opportunity to explain his
or her actions before any decision is made about appropriate disciplinary
action. Appropriate disciplinary action will be taken against:
- Employees who authorize or participate directly in any action that is a
violation of this Code of Ethics;
- any Employee who may have deliberately failed to report a violation or
deliberately withheld relevant information concerning a violation of
this Code of Ethics;
- the violator's managerial superiors, to the extent that the
circumstances of the violation reflect inadequate supervision or a lack
of diligence; and
- any supervisor who retaliates, directly or indirectly, or encourages
others to do so, against an associate who reports a suspected violation
of this Code of Ethics.
IMPORTANT PHONE NUMBERS AND ADDRESSES
To report a suspected violation or ask a question regarding the Code of Ethics
please call one of the following:
William W. Vogelhuber (614) 258-9501 ext. 227
President and Chief Executive Officer
Donald A. Weidig (614) 258-9501 ext. 213
Chief Financial Officer
CONFIDENTIAL MESSAGES:
If you wish to remain anonymous you may report a violation by calling
the numbers noted above and leaving a voicemail message. If you use the
voicemail system noted above and refrain from identifying yourself, the
Company may have insufficient information to investigate the
allegations.
All matters that do not appear to constitute violations of this Code of
Ethics will be referred to the appropriate department.
Employees with questions regarding this Code of Ethics or its application may
also discuss the matters with their immediate supervisors.
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The Code of Ethics and the matters contained herein are neither a contract of
employment nor a guarantee of continuing Company policy. The Company reserves
the right to amend, supplement or discontinue this Code of Ethics and the
matters addressed herein, without prior notice, at any time.
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