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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended December 31, 2003
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number 1-13041
WATERLINK, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 34-1788678
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
---------------------------------
835 North Cassady Avenue
Columbus, Ohio 43219
(Address of Principal Executive Offices)
(Zip Code)
---------------------------------
614-258-9501
(Registrant's Telephone Number, Including Area Code)
----------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes | | No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value -19,665,149 shares outstanding as of January 31,
2004
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INDEX
WATERLINK, INC. AND SUBSIDIARIES
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 2003 and
December 31, 2003 3
Consolidated statements of operations - Three months
ended December 31, 2002 and 2003 4
Consolidated statements of cash flows - Three months
ended December 31, 2002 and 2003 5
Notes to consolidated financial statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 11
Item 4. Controls and Procedures 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11-12
Signatures 12
2
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS-UNAUDITED
September 30, December 31,
2003 2003
---------- --------
(In thousands,
except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 9 $ 43
Other current assets 235 344
Net assets of discontinued operations 32,671 37,979
---------- --------
Total current assets 32,915 38,366
Other assets 20 12
---------- --------
Total assets $ 32,935 $ 38,378
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 22 $ 23
Accrued expenses 162 319
Accrued income taxes 560 560
Current debt obligations 43,117 43,198
---------- --------
Total current liabilities 43,861 44,100
Shareholders' deficiency:
Preferred Stock, $.001 par value, 10,000,000 shares
authorized, none issued and outstanding - -
Common Stock, voting, $.001 par value,
authorized - 40,000,000 shares,
issued and outstanding - 19,665,149 shares
at September 30 and December 31, 2003 20 20
Additional paid-in capital 92,174 92,174
Accumulated deficit (103,120) (97,916)
---------- --------
Total shareholders' deficiency (10,926) (5,722)
---------- --------
Total liabilities and shareholders' deficiency $ 32,935 $ 38,378
========== ========
See notes to consolidated financial statements
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PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS-UNAUDITED
Three Months Ended
December 31,
2002 2003
---------- --------
(In thousands,
except per share data)
Net sales $ - $ -
General and administrative expenses 288 204
Interest expense 170 1
Amortization of loan fees 76 -
Bankruptcy related expenses - 1,056
---------- --------
Loss from continuing operations (534) (1,261)
Discontinued operations:
Income from operations, net of taxes of $22,000 in 2002 167 452
Gain on sale of assets - 6,013
Cumulative effect of accounting change (20,500) -
---------- --------
(20,333) 6,465
---------- --------
Net income (loss) $ (20,867) $ 5,204
========== ========
Earnings (loss) per common share-basic:
Continuing operations $ (0.03) $ (0.06)
Discontinued operations (1.03) 0.33
---------- --------
$ (1.06) $ 0.27
========== ========
Earnings (loss) per common share-diluted:
Continuing operations $ (0.03) $ (0.06)
Discontinued operations (1.03) 0.33
---------- --------
$ (1.06) $ 0.27
========== ========
Weighted average common shares outstanding-
Basic 19,660 19,665
Diluted 19,660 19,665
See notes to consolidated financial statements
4
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
Three Months Ended
December 31,
2002 2003
------------------ -------------------
(In thousands)
OPERATING ACTIVITIES
Loss from continuing operations $ (534) $ (1,261)
Adjustments to reconcile loss from continuing operations to net used by
operating activities:
Depreciation
Amortization 76 -
Changes in working capital:
Other assets (46) (58)
Accounts payable (50) 25
Accrued expenses (396) 158
------- --------
Net cash used by operating activities (950) (1,136)
INVESTING ACTIVITIES
Proceeds from sale of divisions 250 -
FINANCING ACTIVITIES
Payments on debt obligations (1,193) -
------- --------
Cash flows used by continuing operations (1,893) (1,136)
Cash flows provided by discontinued operations 1,309 1,170
------- --------
(Decrease) increase in cash and cash equivalents (584) 34
Cash and cash equivalents at beginning of period
775 9
------- --------
Cash and cash equivalents at end of period $ 191 $ 43
======= ========
See notes to consolidated financial statements
5
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(INFORMATION AS OF DECEMBER 31, 2003 AND FOR THE THREE-MONTH PERIODS
ENDED DECEMBER 31, 2002 AND 2003 IS UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
As reported on Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 9, 2004, Waterlink signed an agreement to sell
all of the operating assets of its businesses to Calgon Carbon Corporation. The
transaction closed on February 18, 2004. As a result, Waterlink has no remaining
operations or employees. Waterlink continues to bear the ongoing cost of
administering the Chapter 11 Cases (see Note 2). Management expects that the
continued administration of the Chapter 11 Cases will be the only remaining
activities of Waterlink throughout the reminder of the fiscal year ending
September 30, 2004. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2003.
The accompanying unaudited consolidated financial statements have not
been reviewed by the Company's independent auditors. As previously indicated, in
the opinion of management, all adjustments necessary for a fair presentation
have been included.
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.
On December 16, 2003, the Debtors filed a motion pursuant to 11 U.S.C.
ss.ss. 105, 363 and 365 for an Order authorizing (i) the sale of certain assets
of the estates free and clear of liens, claims and interests; and (ii) the sale,
assumption and assignment of certain leases and executory contracts. On February
3, 2004, a sales hearing was held where the agreement to sell of substantially
all of the operating assets of the Debtors was approved. On February 9, 2004,
the
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Bankruptcy Court entered an Order (i) authorizing the sale of certain assets of
the Debtors' estates free and clear of liens, claims and interests; and (ii)
authorizing the sale, assumption and assignment of certain leases and executory
contracts (the "Sale Order"). Pursuant to the Sale Order, on February 18, 2004,
the Debtors sold substantially all of their assets to an affiliate of Calgon
Carbon Corporation ("Calgon").
At this time, it is clear that there will be no property available to
distribute to stockholders and that the Company's equity securities will be
extinguished through a liquidating plan to be filed in the Chapter 11 Cases. The
Company is aware of no set of circumstances under which shareholders will
receive any value on account of their shares. Accordingly, the Company believes
that the shares are worthless and that appropriate caution should be exercised
with respect to existing and future investments in any of such securities.
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
$1,056,000 during the three months ended December 31, 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. Also, a plan in the Chapter 11
Cases could materially change the amounts and classifications of assets and
liabilities in the Company's 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 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.
7
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 3,176
Unpaid severance obligations 1,241
Other 290
--------------
8,000
--------------
$ 43,198
==============
Condensed Balance Sheet Information. Condensed balance sheet
information with respect to the Debtors at December 31, 2003 is substantially
the same as the consolidated balance sheet presented.
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.
As described in Note 2, in February 2004, the Company sold
substantially all of the assets of its remaining businesses. The agreement is
for total cash consideration of approximately $35.2 million, subject to certain
pre-closing and post-closing adjustments, and the assumption by the Buyer of
certain liabilities of the Registrant. The 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 post-closing working capital adjustment.
Accordingly, the results of operations for the businesses sold have
been presented within discontinued operations in the accompanying consolidated
financial statements for all periods presented. The Company allocates interest
expense to its discontinued operations based on the expected net proceeds from
the sale of its assets. Information regarding discontinued operations for the
three-month periods ended December 31, 2002 and 2003 is presented below (in
thousands):
Three Months Ended
December 31,
2002 2003
----------------------------
Net sales $ 14,295 $ 14,455
Operating income 888 452
Allocated interest expense (699) -
Income tax expense (22) -
----------------------------
Income from operations $ 167 $ 452
============================
8
The remaining escrows and holdbacks related to both sale agreements
have been classified as current on the consolidated balance sheets at September
30, 2003 and December 31, 2003 based on the anticipated timing of their release.
4. CAPITALIZATION
Debt obligations consisted of the following at September 30 and December 31,
2003 (in thousands):
Expired senior credit facility with a group of banks $34,681
Subordinated notes to related parties 1,000
Convertible subordinated notes payable to former shareholders
of acquired business 2,250
-------
$37,931
=======
With regard to the above debt obligations, all amounts are subject to
compromise and have been classified accordingly on the balance sheet as of
September 30 and December 31, 2003.
5. GOING CONCERN CONSIDERATIONS
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As indicated in
Note 2, Waterlink has no remaining operations or employees and the only
remaining activities will be the administration of the Chapter 11 Cases.
Liabilities subject to compromise are reported at the amounts expected to be
allowed, even if they may be settled for lesser amounts.
9
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Waterlink had been an international provider of integrated water and
air purification solutions for both industrial and municipal customers, and was
incorporated in Delaware on December 7, 1994. With the sale of substantially all
of its operating assets in February 2004, the Company has no source of
continuing revenue. The activities of Waterlink are now devoted to the
administration of the Chapter 11 Cases.
CHAPTER 11
Bankruptcy Proceedings. On June 27, 2003, the Debtors filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code. For
further details regarding the Chapter 11 Cases, see "Voluntary Chapter 11" in
the Notes to Consolidated Financial Statements.
RESULTS OF CONTINUING OPERATIONS
Three Months Ended December 31, 2003 Compared to Three Months Ended
December 31, 2002
General and Administrative Expenses: General and administrative expenses for
the three months ended December 31, 2003 and 2002 were $204,000 and $288,000,
respectively.
Amortization of Financing Costs: Amortization of financing costs of $76,000 for
the three months ended December 31, 2002 represented the amortization of a bank
amendment fee relating to an amendment that extended the maturity date of our
senior credit facility from October 1, 2001 to January 15, 2002.
Bankruptcy Related Expenses: Waterlink incurred approximately $1,056,000 of
costs associated with the administration of the Chapter 11 Cases during the
three months ended December 31, 2003. Substantially this entire amount was
related to professional fees.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the sale of substantially all of the assets of
Waterlink for approximately $35.2 million, a portion of the proceeds have been
provisionally allocated to unencumbered property sold. This amount has not been
subject to a final determination by the Bankruptcy Court as of the date of this
filing and Waterlink cannot definitively determine what amounts will be left for
distribution to creditors.
Management believes that the Waterlink's equity securities are
worthless because it does not expect that any assets will be distributed to
stockholders, and that the equity securities will be extinguished in the Chapter
11 Cases.
Credit Availability
Based on the status of the Chapter 11 Cases, Waterlink has no credit
availability.
10
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2003, the evaluation date. Based upon the
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the evaluation date, our disclosure controls and procedures are
effective in timely alerting them to the material information relating to us
required to be included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are filed as part of this Form 10-Q.
31.1 Section 302 Certification of the Company's Chief
Executive Officer (Filed herewith.)
31.2 Section 302 Certification of the Company's Chief
Financial Officer (Filed herewith.)
32.1 Section 906 Certification of the Company's Chief
Executive Officer (Filed herewith.)
32.2 Section 906 Certification of the Company's Chief
Financial Officer (Filed herewith.)
(b) Reports on Form 8-K.
On November 3, 2003 Waterlink filed a Current Report on Form
8-K reporting under Item 4 the resignation of Saltz Shamis &
Goldfarb, Inc. as our independent auditors, and the
appointment of Marcum & Kliegman LLP to serve as our
independent auditors for the fiscal year ending December 31,
2003. A letter from Saltz Shamis & Goldfarb, Inc. to the
Securities and Exchange Commission stating that Saltz Shamis &
Goldfarb, Inc. is in agreement with the statement contained in
the first paragraph of Item 4 of the Current Report on Form
8-K, and including under Item 7(c) a copy of such letter.
11
On December 16, 2003 Waterlink filed a Current Report on Form
8-K reporting under Item 2 an agreement with a newly formed
acquisition entity affiliated with The Compass Group to sell
substantially all of the operating assets of Waterlink. Under
Item 2 Waterlink stated that the agreement was subject to the
approval of U.S. Bankruptcy Court for the District of
Delaware, as well as higher or better offers.
On February 13, 2004 Waterlink filed a Current Report on Form
8-K reporting under Item 5 the resignation of William W.
Vogelhuber from our Board of Directors.
On February 9, 2004 Waterlink filed a Current Report on Form
8-K reporting under Item 2 an agreement with Calgon Carbon
Corporation to sell substantially all of the operating assets
of Waterlink.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Waterlink, Inc.
(Registrant)
By: /s/ William W. Vogelhuber
---------------------------------------
William W. Vogelhuber
President and Chief Executive Officer
By: /s/ Donald A. Weidig
---------------------------------------
Donald A. Weidig
Chief Financial Officer
Dated: March 5, 2004
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