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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 2004
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)
---------------------------------
4100 Holiday Street, NW
Canton, Ohio 44718
(Address of Principal Executive Offices)
(Zip Code)
---------------------------------
330-649-4001
(Registrant's Telephone Number, Including Area Code)
----------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value -19,665,149 shares outstanding as of April 30,
2004
================================================================================
INDEX
WATERLINK, INC. AND SUBSIDIARIES
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 2003 and
March 31, 2004 3
Consolidated statements of operations - Three months ended March 31,
2003 and 2004; Six months ended
March 31, 2003 and 2004 4
Consolidated statements of cash flows - Six months
ended March 31, 2003 and 2004 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 12
Signatures 12
2
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS-UNAUDITED
September 30, March 31,
2003 2004
--------- ---------
(In thousands,
ASSETS except share data)
Current assets:
Cash and cash equivalents $ 9 $ 6,246
Other current assets 235 109
Net assets of discontinued operations 32,671 1,831
--------- ---------
Total current assets 32,915 8,186
Other assets 20 10
--------- ---------
Total assets $ 32,935 $ 8,196
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 22 $ 99
Accrued expenses 162 437
Accrued income taxes 560 818
Current debt obligations 43,117 13,658
--------- ---------
Total current liabilities 43,861 15,012
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 March 31, 2004 20 20
Additional paid-in capital 92,174 92,174
Accumulated deficit (103,120) (99,010)
--------- ---------
Total shareholders' deficiency (10,926) (6,816)
--------- ---------
Total liabilities and shareholders' deficiency $ 32,935 $ 8,196
========= =========
See notes to consolidated financial statements
3
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months Ended Six Months Ended
March 31, March 31,
2003 2004 2003 2004
-------- -------- -------- --------
(In thousands, except per share data)
Net sales $ - $ - $ - $ -
General and administrative expenses 236 229 524 433
Interest expense 113 1 283 2
Amortization of financing costs 56 -- 132 --
Bankruptcy related expenses -- 712 -- 1,768
-------- -------- -------- --------
Loss from continuing operations (405) (942) (939) (2,203)
Discontinued operations:
Income from operations, net of taxes 462 (209) 629 243
Gain on sale of assets -- 57 -- 6,070
Cumulative effect of accounting change -- -- (20,500) --
-------- -------- -------- --------
462 (152) (19,871) 6,313
-------- -------- -------- --------
Net income (loss) $ 57 $ (1,094) $(20,810) $ 4,110
======== ======== ======== ========
Earnings (loss) per common share-basic:
Continuing operations $ (0.02) $ (0.05) $ (0.05) $ (0.11)
Discontinued operations 0.02 (0.01) (1.01) 0.32
-------- -------- -------- --------
$ 0.00 $ (0.06) $ (1.06) $ 0.21
======== ======== ======== ========
Earnings (loss) per common share-basic:
Continuing operations $ (0.02) $ (0.05) $ (0.05) $ (0.02)
Discontinued operations 0.02 (0.01) (1.01) (1.04)
-------- -------- -------- --------
$ 0.00 $ (0.06) $ (1.06) $ (1.06)
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 19,664 19,664 19,662 19,665
Assuming dilution 20,092 20,092 19,662 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
Six Months Ended
March 31,
2003 2004
-------- --------
(In thousands)
OPERATING ACTIVITIES
Loss from continuing operations $ (939) $ (2,203)
Adjustments to reconcile loss from continuing operations
to net used by operating activities:
Amortization 133 --
Changes in working capital:
Other assets (6) 442
Accounts payable (45) 39
Accrued expenses (199) 10
-------- --------
Net cash used by operating activities (1,056) (1,712)
INVESTING ACTIVITIES
Proceeds from sale of divisions 250 32,873
FINANCING ACTIVITIES
Payments on debt obligations (1,543) (28,804)
-------- --------
Cash flows (used) provided by continuing operations (2,349) 2,357
Cash flows provided by discontinued operations 1,635 3,880
-------- --------
(Decrease) increase in cash and cash equivalents (714) 6,237
Cash and cash equivalents at beginning of period 775 9
-------- --------
Cash and cash equivalents at end of period $ 191 $ 6,246
======== ========
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 MARCH 31, 2004 AND FOR THE THREE AND SIX-MONTH PERIODS ENDED
MARCH 31, 2003 AND 2004 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). Waterlink 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 Waterlink, 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.
Sections 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 sale 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
6
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 Calgon Carbon Corporation
("Calgon").
The Debtors are currently funding the administration of the Chapter 11
Cases 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 the administration of the
Chapter 11 Cases. The Debtors currently have authority to use cash collateral
until July 2, 2004.
At this time, it is clear that there will be no property available to
distribute to stockholders and that Waterlink's equity securities will be
extinguished through a liquidating plan to be filed in the Chapter 11 Cases.
Waterlink is aware of no set of circumstances under which shareholders will
receive any value on account of their shares. Accordingly, Waterlink 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
$712,000 and $1,768,000 during the three months and six months ended March 31,
2004, respectively. The unaudited 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
7
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 $ 6,394
Unsecured :
Subordinated notes, including unpaid interest 3,293
Trade accounts payable 2,706
Unpaid severance obligations 1,241
Other 24
-------
7,264
-------
$13,658
=======
The above amount with regard to senior debt reflects a payment made of
approximately $28,804,000 on February 19, 2004 from the closing proceeds in
connection with the sale of substantially all of Waterlink's assets.
Condensed Balance Sheet Information. Condensed balance sheet
information with respect to the Debtors at March 31, 2004 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 and six-month periods ended March 31, 2003 and 2004 is presented below (in
thousands):
8
Three Months Ended Six Months Ended
March 31, March 31,
2003 2004 2003 2004
-----------------------------------------------------------
Net sales $ 15,768 $ 7,180 $ 30,063 $ 21,635
Operating income (loss) 1,229 (209) 2,117 243
Allocated interest expense (712) - (1,411) -
Income tax expense (55) - (77) -
-----------------------------------------------------------
Income (loss) from operations 462 (209) 629 243
Gain on disposal 57 - 6,070
Cumulative effect of accounting change - - (20,500) -
-----------------------------------------------------------
$ 462 $ (152) $ (19,871) $ 6,313
===========================================================
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 March 31, 2004 based on the anticipated timing of their release.
4. CAPITALIZATION
Debt obligations consisted of the following (in thousands):
September 30, March 31,
2003 2004
----------------------------------
Expired senior credit facility with a group of banks $34,681 $5,877
Subordinated notes to related parties 1,000 1,000
Convertible subordinated notes payable to former
shareholders of acquired business 2,250 2,250
----------------------------------
$37,931 $9,127
==================================
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 March 31, 2004. As previously referred to, the above amount
with regard to senior debt reflects a payment made of approximately $28,804,000
on February 19, 2004 from the closing proceeds in connection with the sale of
substantially all of Waterlink's assets.
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 March 31, 2004 Compared to Three Months Ended March 31, 2003
General and Administrative Expenses: General and administrative expenses for the
three months ended March 31, 2004 and 2003 were $229,000 and $236,000,
respectively.
Amortization of Financing Costs: Amortization of financing costs of $113,000 for
the three months ended March 31, 2003 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, 2002 to October 1, 2003.
Bankruptcy Related Expenses: Waterlink incurred approximately $712,000 of costs
associated with the administration of the Chapter 11 Cases during the three
months ended March 31, 2004. Substantially this entire amount was related to
professional fees.
Six Months Ended March 31, 2004 Compared to Six Months Ended March 31, 2003
General and Administrative Expenses: General and administrative expenses for the
six months ended March 31, 2004 and 2003 were $433,000 and $524,000,
respectively.
Amortization of Financing Costs: Amortization of financing costs of $132,000 for
the six months ended March 31, 2003 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, 2002 to October 1, 2003.
Bankruptcy Related Expenses: Waterlink incurred approximately $1,768,000 of
costs associated with the administration of the Chapter 11 Cases during the six
months ended March 31, 2004. Substantially this entire amount was related to
professional fees.
10
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.
At this time, it is clear that there will be no property available to
distribute to stockholders and that Waterlink's equity securities will be
extinguished through a liquidating plan to be filed in the Chapter 11 Cases.
Waterlink is aware of no set of circumstances under which shareholders will
receive any value on account of their shares. Accordingly, Waterlink 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.
Credit Availability
Based on the status of the Chapter 11 Cases, Waterlink has no credit
availability.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our Chief Financial Officer,
we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2004, the evaluation date. Based upon
the evaluation, the 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.
11
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
Financial Officer (Filed herewith.)
32.1 Section 906 Certification of the Company's Chief
Financial Officer (Filed herewith.)
(b) Reports on Form 8-K.
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.
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.
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/ Donald A. Weidig
--------------------
Donald A. Weidig
Chief Financial Officer
Dated: May 11, 2004
12