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1998 Annual Report and Form 10-K
SOLUTIONS
SPEED
SPIRIT
Focus on profitable performance
[Hand in water]
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WATERLINK
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SOLUTIONS
Waterlink is uniquely positioned to fulfill global demand for total water and
wastewater treatment solutions.
SPEED
OUR COMPANY is a leading global provider of water and wastewater treatment
equipment, systems, and services. From a single product to a fully engineered
and operated system, we offer single-source solutions to the water treatment
challenges faced by municipalities, industrial operations and other water users
throughout the world.
SPIRIT
OUR VISION is to be the most flexible and efficient leading global provider of
quality, single-source water purification and wastewater treatment solutions to
our customers while providing an above-average return to our shareholders and
promising opportunities to our employees and representatives.
OUR MARKET is vast and steadily growing. The global environmental market is
estimated to be $888 billion, with the water and wastewater equipment segment
alone representing $53 billion. The market for water and wastewater equipment
and services is projected to grow well into the next century as the world's
population increases, water becomes more scarce and expensive, health standards
improve, and industrial process water and wastewater treatment requirements
become more stringent. Because safe drinking water and effective wastewater
treatment are essential to human life, an increasing global need for solutions
is certain.
The market for water and wastewater equipment and services is projected to
grow well into the next century.
OUR COMPETITIVE ADVANTAGE
SOLUTIONS
Our comprehensive range of products and our applications engineering expertise
enable us to produce the high performing, single-source SOLUTIONS that water and
wastewater treatment customers are now demanding.
SPEED
Our new organizational structure is designed for flexibility and SPEED in
responding to customers, capitalizing on opportunities and solving problems.
SPIRIT
The expertise, innovation, efficiency and enthusiasm of Waterlink employees
engender a team SPIRIT unmatched in the industry. It is our people that will
make us a great company.
OUR 1999 FOCUS: PROFITABLE GROWTH
All of our resources are focused on a single objective -- to achieve
sustainable, profitable growth in 1999. We are committed to delivering
shareholder value.
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FINANCIAL SUMMARY
WATERLINK, INC. AND SUBSIDIARIES
PRO-FORMA REVENUE SOURCES
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Consumables United States Municipal
28% 51% 31%
Products & Systems International Industrial
72% 49% 69%
95 96 97 98 98PF
Net Sales $ 2,684 $ 19,801 $64,699 $135,167 $ 183,521
in thousands
EBITDA* -336 1,674 6,104 12,451 17,925
in thousands
Backlog 3,224 10,967 30,547 38,082
in thousands
Total Assets 10,819 28,991 115,860 183,561
in thousands
Stockholder's Equity -11 2,407 70,873 54,878
in thousands
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FOR THE YEAR ENDED SEPTEMBER 30,
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in thousands 1995 1996 1997 1998
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Net Sales $ 2,684 $ 19,801 $ 64,699 $135,167
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Operating Income (Loss)* (366) 1,232 4,875 9,125
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EBITDA* (336) 1,674 6,104 12,451
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Net Income (Loss) (512) 306 372 (17,504)
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AT SEPTEMBER 30,
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1995 1996 1997 1998
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Working Capital $ 2,064 $ 3,438 $ 19,430 $ 30,737
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Total Assets 10,819 28,991 115,860 183,561
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Total Debt 6,039 12,145 18,961 87,318
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Stockholders' Equity (Deficit) (11) 2,407 70,873 54,878
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Order Backlog 3,224 10,967 30,547 38,082
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* Operating income and EBITDA exclude a special charge to operations of
$2,630,000 in 1997 related to the Company's initial public offering and
$21,636,000 in 1998 primarily related to the Company's 1999 strategic
operating plan.
PF Pro-Forma assumes all acquisitions were completed as of October 1, 1997.
waterlink annual report 1998
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TO OUR SHAREHOLDERS
By revenue, Waterlink is now one of the top five water/wastewater equipment
manufacturers headquartered in the United States.
Our first full year as a rapidly growing public company was one of both
achievements and challenges. We are proud to report to you that our spirited
people responded well to both conditions, enabling Waterlink to achieve
significant benchmarks toward becoming a global industry leader.
In fiscal 1998, our revenues increased 109% to $135 million, and Waterlink
became, by revenue, one of the top five water/wastewater equipment manufacturers
headquartered in the United States. On a pro-forma basis, our revenues
approached the $200 million mark.
Our revenue growth was primarily due to our successful acquisition program,
which added several more outstanding companies to our organization and greatly
expanded our product capability, geographical reach and customer base. Our
Carbon Group acquisition is particularly notable for its product base
composition, which raised our consumable product revenue to 28% of the total and
achieved a major 1998 objective to offset the revenue peaks and valleys of our
business. Also of note, this acquisition significantly broadened our
environmental scope by adding air pollution control equipment and systems to our
water and wastewater product mix.
In 1998, Waterlink grew to employ 750 people in 23 companies operating from
seven countries and serving the world. Among our 1998 achievements, we gained an
exclusive United States license for a promising biological wastewater treatment
technology, which we believe to have significant potential. In Germany, we
installed what we believe is the largest continuous sand filter application in
the world to date, upholding our industry-leading status in that technology. In
the United States, we supplied the reverse osmosis system for one of the largest
municipal drinking water plants on the East Coast to use membrane technology for
the treatment of brackish water.
In 1998, Waterlink became a leading world supplier of seawater desalination
systems designed specifically for the rugged demands of offshore energy
platforms and floating production facilities. At one of the largest industrial
wastewater facilities in Europe, we supplied what we believe to be the largest
jet aeration system in the world. Consumers throughout the world purchased our
activated carbon as part of home water and air filtration products manufactured
by our customers. The progress of our cross-selling initiatives was evidenced as
we supplied an increasing number of integrated systems comprised of multiple
Waterlink technologies. One example is a resort in the Middle East that selected
Waterlink to supply both the reverse osmosis system for converting water from
the Red Sea into drinking and utility water, and the biological system to treat
wastewater before its return to the environment.
All of Waterlink's considerable resources are focused on one objective -
achieving profitable growth.
Along with significant achievements, we faced many challenges in 1998. As we
made acquisitions at a rapid pace, we recognized the need to develop a more
efficient integration plan, and we experienced disappointing performance at
several of our operations, most notably our Bioclear subsidiary. We also
encountered softness in our European markets and a weakening global economy.
In June, T. Scott King joined Waterlink as President and CEO to help forge a new
operating strategy and guide Waterlink's successful evolution to a $500 million
company. The resulting 1999 Strategic Operating Plan calls for a major
restructuring of the 23 operating units into five divisions, with significant
cost reduction. The restructuring marks Waterlink's final move toward total
integration of its product offerings.
By the end of the fourth quarter in September, all major 1999 Strategic
Operating Plan initiatives were already in place and being implemented. We
believe that these actions will lead to steady sales growth and rising margins
and earnings. As part of the plan, we wrote off the intangible assets of
Bioclear in the fourth quarter. This immediately eliminated a goodwill charge of
$0.5 million annually and created a loss carry-forward in the United States,
which can be used to offset taxes generated from future profits. For the 1998
year, we recorded an EPS operating profit of $0.24 before special charges
compared with $0.31 last year, and after the charges and factors described
above, reported a loss.
waterlink annual report 1998
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As we look forward to 1999, all of Waterlink's considerable resources are
focused on one objective -- achieving profitable growth.
Our organization is now designed for profitable growth. Our five new divisions
are organized by markets and/or geography to concentrate applications
engineering, product, and management expertise. By design, these centers
increase our technical prowess for developing total solutions and increase the
speed of our cross-selling and integrated system sales effectiveness. We are
consolidating facilities as part of this reorganization, which will achieve
immediate cost reduction as well as provide long-term efficiencies and reduced
operating costs. The consolidation, along with other initiatives we have
implemented, will lower our production and distribution costs.
Our new organization is also designed to more efficiently integrate future
acquisitions. Acquisitions will continue to play a strategic role in our future
as they are used to increase competitiveness in product niches and markets, spur
revenue and profit growth, and enhance our total solutions capability. Important
and innovative technologies will also be incorporated onto Waterlink's product
offering through license and technology sharing agreements.
In 1999, we plan to achieve profitable growth by:
- - Increasing internal revenue growth.
- - Increasing external revenue growth through strategic acquisitions.
- - Improving gross and operating margins.
- - Eliminating $4.3 million in costs.
With our integrated structure, extensive product and applications engineering
capability, size and geographic footprint, we believe we are uniquely positioned
to fulfill global customer demand for total solutions. With an organization
designed for more speed and efficiency, we can better provide "one stop
shopping" for customers who are demanding the financial and technical assurance
of single-source accountability. The spirit of our talented employees is driving
our organization toward a strong future of industry leadership.
Waterlink was established to create value for all constituents. In 1998 we built
the foundation for sustainable, profitable, long-term growth. 1999 is the year
of execution, and our entire organization is optimistic about our success. We
sincerely thank our customers, employees, representatives, vendors, and partners
for their continuing contributions, which are essential for Waterlink's growth
and prosperity. We are particularly grateful for the support and patience of our
shareholders and other financial stakeholders during this pivotal year. We are
committed to justifying your confidence and support, and look forward to
reporting our progress in the years to come.
[PHOTO] [PHOTO]
/s/ T. Scott King /s/ Theodore F. Savastano
T. Scott King Theodore F. Savastano
President and Chief Chairman of the Board
Executive Officer
waterlink annual report 1998
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OUR DIVISIONAL STRUCTURE
The new Waterlink organization integrates our considerable product, technical
and applications engineering expertise across the full range of treatment
options and components. Waterlink also provides the flexibility desired by our
customers. Equipment can be provided either stand-alone or as part of a complete
system to treat municipal, commercial and residential drinking water, industrial
and other process water, or municipal, industrial, commercial and residential
wastewater. Our capabilities include design/build and turnkey projects, contract
operations, and access to project finance.
Integrated Systems using multiple Waterlink products or systems provide a
performance-based, total solution backed with technical and financial
accountability.
BIOLOGICAL WASTEWATER TREATMENT
DIVISION
BIOLOGICAL WASTEWATER TREATMENT AND AERATION SYSTEMS
Combining the capability of the companies formerly known as Aero-Mod, Bioclear,
Mass Transfer Systems, Purac Engineering and Sanborn Technologies
Cutting Fluid Recovery Systems
Decanting Centrifuges
Filter Presses
Jet Aeration and Jet Mixing Systems
Moving Bed Biofilm Reactors
Nutrient Removal Processes
Package Plants
Secondary and Tertiary Plants
Sequencing Batch Reactors
Sludge Bagging Systems
Surface and Submersible Aspirating Aerators
SEPARATIONS DIVISION
SEPARATIONS
TECHNOLOGY
AND SOLIDS MANAGEMENT
Combining the capability of the companies formerly known as Great Lakes
Environmental, Hycor, Lanco Environmental Products, Purac Engineering and the
NWP Division of Waterlink Technologies
Coarse and Fine Screens for Process Improvement
- Product Recovery
- Water Reuse
Dissolved Air Flotation Systems
Grit Classifiers and Washers
Groundwater Remediation
Inclined Plate Clarifiers
Oil/Water Separators
Physical/Chemical Pre-Treatment Systems
Plate and Frame Filter Presses
Prepackaged Headworks Systems
Recessed Chamber Filter Presses
Sand Filters
Screenings Washers
Septage Receiving Stations
Sludge Scrapers, Skimmers, Thickeners and Dryers
Solids Dewatering and Conveying
Stormwater Screens
Stormwater Tank Cleaning
PURE WATER DIVISION
MEMBRANE SYSTEMS FOR DRINKING AND PROCESS WATER
Combining the capability of the companies formerly known as C'treat and the WET
Division of Waterlink Technologies
Cooling Tower Treatment
Deionization Systems
Filter Housings and Cartridges
Membranes
Microfiltration Systems
Media Filters
Nanofiltration Systems
Residential Water Purification Systems
Reverse Osmosis Systems
Seawater Desalination Systems
SPECIALTY
PRODUCTS
DIVISION
ACTIVATED
CARBON AND CARBON SYSTEMS
Combining the capability of the companies Barnebey Sutcliffe (US), Sutcliffe
Carbons (UK) and Sutcliffe Croftshaw (UK)
Activated Carbon:
Coconut, Coal and Wood-Based;
Provided in Granular, Extruded, or Powdered Form; Impregnated
Carbon Systems:
Adsorption Systems
Air Stripping
Bioreactors
Bioscrubbers
Concentrators
Corrosive Gas Control Systems
Distillation
Indoor Air Quality Control Systems
Odor Control Systems
Portable Adsorbers
Soil/Vapor Extraction Systems
VOC/HAP Emission Control Systems
EUROPEAN
WATER AND WASTEWATER DIVISION
AXEL JOHNSON ENGINEERING
(Germany)
Design/Build Water and Wastewater Treatment Plants, Germany and Eastern Europe
All Waterlink Products
WATERLINK AB
(Sweden)
Combining the capability of the companies formerly known as Nordic Water
Products, MEVA, NOXON, and Zickert Products
Decanter Centrifuges
Flocculators
Fine Screens and Accessories
Inclined Plate Settlers
Oil/Water Separators
Sand Filters
Screw Wash Presses
Sludge Scrapers and Skimmers
Waterlink Oy (Waterlink Sales, Finland)
Zickert Miljo A/S (Waterlink Sales, Denmark)
WATERLINK UK
Complete Supply and Installation Services for Water and Wastewater Treatment
Plants and River Structures
All Waterlink Products
waterlink annual report 1998
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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, 1998
( ) 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4100 HOLIDAY STREET N.W. SUITE 201
CANTON, OHIO 44718
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (330) 649-4000
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 New York Stock Exchange
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. [ ]
As of October 31, 1998 the aggregate market value of the Company's voting Common
Stock held by non-affiliates of the Company was approximately $32.5 million.
As of November 30, 1998 there were 12,225,604 shares of the registrant's Common
Stock, $.001 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 21, 1999 are deemed to be incorporated by
reference in Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Waterlink, Inc. (the "Company" or "Waterlink") is an international
provider of integrated water purification and wastewater treatment solutions,
treating process water and wastewater for its industrial customers, and drinking
water and wastewater for its municipal customers. The Company believes that its
comprehensive range of products and application engineering expertise enables it
to produce single source solutions demanded by its customers. Waterlink was
incorporated in Delaware on December 7, 1994 in order to participate in the
consolidation of the highly fragmented water purification and wastewater
treatment industry. The Company is executing this strategy through an
acquisition program which targets businesses in two principal markets
(wastewater and pure water) as well as in two geographic areas (United States
and Europe).
From its incorporation in December 1994 until its first acquisition in
March 1995, the Company focused on initial formation activities, attracting
certain initial employees and pursuing its analysis of potential acquisition
candidates. In March 1995, the Company acquired the assets of Sanborn, Inc.
(doing business as Sanborn Technologies ("Sanborn Technologies")), which is
being operated by the Company's subsidiary, SanTech Equipment, Inc. Sanborn
Technologies is a designer and builder of industrial separation systems which
are used by customers for environmental compliance, resource conservation and
production processes. Later in fiscal 1995, the Company acquired Great Lakes
Environmental, Inc. ("Great Lakes"), which enabled the Company to enter the
industrial wastewater market. Great Lakes is a designer and builder of
industrial wastewater pretreatment systems and custom high quality oil/water
separation products.
In fiscal 1996, Waterlink completed three acquisitions, comprised of the
assets of Mass Transfer Systems, Inc. ("Mass Transfer"), the assets of Aero-Mod
Incorporated and its affiliates ("Aero-Mod") and the capital stock of Water
Equipment Technologies, Inc. (now known as Waterlink Technologies, Inc.
("Waterlink Technologies")). The acquisition of Mass Transfer provided access to
additional technologies used primarily in the industrial wastewater market and,
to a lesser extent, in the municipal wastewater market. Mass Transfer is a
designer of customized jet aeration and mixing systems used to accelerate the
biological digestion process through the introduction of oxygen in the treatment
of wastewater. The acquisition of Aero-Mod expanded the Company's presence in
the municipal wastewater market and presented cross-selling opportunities with
Mass Transfer. Additionally, Aero-Mod expanded the Company's geographic presence
and scope of operations through its customer base outside of the United States,
especially in Latin America, and its contract operations business. Aero-Mod
designs wastewater treatment plants, provides clarifiers, filters and dewatering
equipment for the biological treatment of wastewater and biosolids and provides
contract operation services. The acquisition of Waterlink Technologies enabled
the Company to enter the industrial process water and municipal drinking water
markets and increased the Company's presence in markets outside the United
States. Waterlink Technologies is a designer and builder of water treatment
filters and membrane separation systems, including reverse osmosis systems, and
related treatment equipment.
During fiscal 1997, Waterlink completed five acquisitions, comprised of
the capital stock of the Nordic Water Products Group subsidiaries (the "Nordic
Group"), Bioclear Technology, Inc. ("Bioclear"), Lanco Environmental Products,
Inc. ("Lanco"), Mellegard V.A. Maskiner AB ("MEVA") and Hycor Corporation
("Hycor"). The Nordic Group provides the Company with numerous benefits
including a distribution channel for its existing businesses into Europe;
internationally recognized and accepted technologies and equipment used in both
the municipal and industrial markets; and the Company's first substantial
design/build operations, focused primarily in Europe. The Nordic Group
manufactures continuous recirculating sand filters, inclined plate settlers and
systems for nutrient
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removal, decanting centrifuges for dewatering biosolids and hydraulic surface
and bottom scrapers. The Nordic Group also installs mechanical and electrical
systems and designs and builds water purification and wastewater treatment
plants in Europe. The Bioclear acquisition was intended to provide sequential
batch reactor technology to the Company. Lanco expands the Company's product
offerings in the industrial wastewater treatment market and is complementary
with the products offered by Great Lakes. Lanco fabricates small plate and frame
filter presses for dewatering biosolids and inclined plate clarifiers for heavy
metal removal. MEVA specializes in the design and installation of fine screens
and related accessories for sewage treatment applications. Hycor designs and
manufactures screening, dewatering and related residuals management equipment
for liquid/solid separation in municipal wastewater and industrial wastewater
and process applications. MEVA and Hycor extend the Company's product offerings
and present various cross-selling opportunities with the Company's design/build
operations.
During fiscal 1998, the Company completed three acquisitions, comprised
of the capital stock of Chemitreat Services, Inc. ("C'treat"), Aquafine
Engineering Services Limited ("AES") and Purac Engineering Incorporated
("Purac") in a single transaction, and Barnebey & Sutcliffe Corporation,
Sutcliffe Speakman Carbons Limited and Sutcliffe Croftshaw Limited (the "Carbons
Group"). C'treat is a leading designer and manufacturer of pure watermakers for
use in the global offshore energy industry. C'treat provides the global offshore
energy industry with a reliable and economical supply of fresh water,
continuously generated from sea water using the reverse osmosis process. Nearly
half of C'treat's revenues are generated from parts, consumables and field
services. C'treat expands the Company's pure water business as well as its
consumable revenue base. AES designs and manufactures industrial and municipal
water and wastewater systems and solutions primarily for the United Kingdom
market. Purac designs water and wastewater systems principally for the United
States municipal market. AES and Purac bring additional product, engineering and
manufacturing capabilities to the Company which are complementary to the Nordic
Group, Hycor, and design/build product lines through cross-selling and
geographic expansion. The Carbons Group is engaged in the design, manufacture
and marketing of products and services utilizing activated carbon for the
separation, concentration or purification of water, liquids and gases. The
Carbons Group expands the Company's customer base and consumable revenue base.
The Carbons Group is the Company's largest acquisition to date and expanded the
Company's revenue base in fiscal 1998 to $183.5 million on a pro-forma basis.
In September 1998, the Company, under the direction of its recently
appointed President and Chief Executive Officer, announced its 1999 Strategic
Operating Plan (the "1999 Plan"). The 1999 Plan provides a divisional format for
efficient centers of product expertise and geographic experience to better serve
the Company's customers and independent marketing representatives. The 1999 Plan
calls for the reorganization of Waterlink from a holding company comprising 23
operating companies into five integrated divisions consisting of the Biological
Wastewater Division, the Separations Division, the European Water and Wastewater
Division, the Pure Water Division, and the Specialty Products Division. The 1999
Plan also sets cost savings and integration goals of $4.3 million in the first
year. This cost savings is expected to be realized as a result of the
consolidation of six facilities, and the resultant reduction of approximately 75
employees, or 10% of the Company's work force.
In conjunction with the 1999 Plan, the Company determined that it would
exit the acquired Bioclear business, which was purchased from four individual
shareholders in June 1997. At the time of the acquisition, Bioclear provided the
Company with sequential batch reactor technology, which was expected to expand
its biological wastewater solution capabilities. Bioclear was also expected to
provide the Company with cross-selling opportunities as well as design/build
capabilities. These benefits and expected orders never materialized, and will
not materialize, as this proprietary technology, while functional, proved to be
competitive in only narrow market niches that the Company believes are not
reliable for future order generation. In addition, the technology proved to be a
higher priced alternative when compared to other sequential batch reactor
product offerings or
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alternative technologies advanced by competitors. This lack of orders prevented
the Company from exploiting any potential cross selling and design/build
opportunities it had anticipated at the time of the acquisition. The Company is
currently evaluating whether to invest in the reengineering effort necessary to
develop a more competitive non-proprietary sequential batch reactor technology
at its Biological Wastewater Division in Fall River, Massachusetts and at its
European Water and Wastewater Division. The Company no longer expects the
existing Bioclear technology to provide meaningful benefits, and therefore has
significantly reduced the expected future benefits of the Bioclear acquisition
and has written off the associated goodwill. As a result the Company is also
evaluating the most favorable means to divest the remaining assets of Bioclear,
primarily related to its manufacturing facility in Winnipeg, Canada. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Year Ended September 30, 1998 Compared to
Year Ended September 30, 1997", and "-- Liquidity and Capital Resources").
SYSTEMS, EQUIPMENT AND SERVICES
The Company provides integrated water purification and wastewater
treatment solutions, principally to its industrial customers for treatment of
process water and wastewater and to its municipal customers for treatment of
drinking water and wastewater. To this end, the Company provides a broad range
of systems and equipment as well as design/build and operating capabilities.
Systems and Equipment. The Company designs and engineers solutions for
the water purification and wastewater treatment industry. The Company believes
its expertise is in the analysis of a customer's water purification and
wastewater treatment requirements and the application of the Company's systems,
equipment and services to provide cost effective solutions. The Company's
equipment can be provided to a customer either as a separate component or as
part of a customized, fully engineered water purification or wastewater
treatment system or subsystem. The Company generally does not make significant
capital investments in plant and equipment, focusing instead on partnering with
vendors which manufacture the components used in the Company's systems and
equipment. The Company completes the final assembly of its systems and tests its
systems prior to final delivery to the customer in order to maintain quality
control. The Company manufactures equipment when its manufacturing process is
determined to add a significant value to the final product.
Design/Build Services. The Company's design/build services include
prescribing water purification and wastewater treatment solutions, designing and
engineering necessary facilities, arranging for construction when required and
installing necessary equipment. The Company's strategy is to expand its presence
in the design/build segment of the water purification and wastewater treatment
industry, particularly in the small and medium sized municipal markets outside
the United States. During the past five years, the Company has completed more
than 50 design/build projects.
The Company anticipates that it will expand its activities in this area
due to the trend toward outsourcing in the industry. The Company uses many of
its own products in its design/build operations as well as products manufactured
by others where appropriate.
Replacement Parts, Repairs and Consumables. The Company manufactures and
sells replacement parts and consumables, such as activated carbon, membranes,
ion exchange resin and filter cartridges, manufactured both by the Company and
other suppliers. This equipment is required to support residential, industrial
and municipal water treatment systems. In addition, the Company performs
maintenance and repair services on equipment manufactured by both the Company
and others.
Contract Operations. The Company operates water purification and
wastewater treatment facilities for municipal customers under contract for
varying time periods. The Company currently operates three small municipal
wastewater treatment facilities in the United States and one in Chile. The
Company's strategy is to leverage its design/build services to offer its
contract operations capability as part of a total solution. The Company is
becoming more involved in the operation and
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remote monitoring of water purification and wastewater treatment facilities for
both its industrial and municipal customers.
As illustrated below, the 1999 Plan provides a divisional format for
efficient centers of product expertise and geographic experience to better serve
the Company's customers and independent marketing representatives. The Company's
organization integrates product, technical and applications engineering
expertise across a full range of treatment options and components. Equipment can
be provided either stand-alone or as part of a complete system to treat
municipal, commercial and residential drinking water, industrial and other
process water or municipal, industrial, commercial and residential wastewater.
BIOLOGICAL EUROPEAN WATER
WASTEWATER SEPARATIONS PURE WATER SPECIALTY PRODUCTS AND WASTEWATER
TREATMENT DIVISION DIVISION DIVISION DIVISION DIVISION
- --------------------- -------------------- -------------------- -------------------- --------------------
Biological Wastewater Separations Membrane Systems for Activated Carbon and Design, Supply &
and Aeration Systems Technology and Drinking and Process Carbon Systems Installation
Services Solids Management Water Services
for Water and
Wastewater
Treatment Plants
- --------------------- -------------------- -------------------- -------------------- --------------------
Combining the Combining the Combining the Combining the Combining the
capabilities of capabilities of capabilities of capabilities of the capabilities of the
Aero-Mod, Bioclear, Great C'treat Carbons Group Nordic Group, AES
Mass Transfer, Purac Lakes, Hycor, Lanco, and Waterlink and MEVA
and Sanborn Purac and the Nordic Technologies
Technologies Group
- --------------------- -------------------- -------------------- -------------------- --------------------
Cutting Fluid Coarse and Fine Cooling Tower Activated Carbon: All Waterlink
Recovery Systems Screens for Process Treatment Coconut, Coal and Products,
Decanting Centrifuges Improvement Deionization Systems Wood-Based; including
Filter Presses -- Product Recovery Filter Housings and Provided in
Jet Aeration and Jet --Water Reuse Cartridges Granular, Extruded, Decanter
Mixing Systems Dissolved Air Membranes or Powdered Form; Centrifuges
Moving Bed Flotation Systems Microfiltration Impregnated Flocculators
Biofilm Reactors Grit Classifiers and Systems Fine Screens and
Nutrient Removal Washers Media Filters Carbon Systems: Accessories
Processes Groundwater Nanofiltration Adsorption Systems Inclined Plate
Package Plants Remediation Systems Air Stripping Settlers
Secondary and Inclined Plate Residential Water Bioreactors Oil/Water Separators
Tertiary Plants Clarifiers Purification Bioscrubbers Sand Filters
Sequencing Batch Oil/Water Separators Systems Concentrators Screw Wash
Reactors Physical/Chemical Reverse Osmosis Corrosive Gas Presses
Sludge Bagging Pre-Treatment Systems Control Systems Sludge Scrapers and
Systems Systems Seawater Distillation Skimmers
Surface and Plate and Frame Desalination Indoor Air Quality
Submersible Filter Systems Control Systems
Aspirating Aerators Presses Odor Control
Prepackaged Systems
Headworks Systems Portable Adsorbers
Recessed Chamber Soil/Vapor
Filter Presses Extraction
Sand Filters Systems
Screenings VOC/HAP Emission
Washers Control Systems
Septage Receiving
Stations
Sludge Scrapers,
Skimmers,
Thickeners
and Dryers
Solids Dewatering
and Conveying
Stormwater Screens
Stormwater Tank
Cleaning
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OPERATING STRATEGY
The Company has adopted a decentralized approach to the operational
management of its divisions. While functions such as strategic planning,
financial reporting, treasury, communications and risk management are
centralized in the Company's corporate headquarters, local management at each of
its five divisions is primarily responsible for the day-to-day operation of the
division's business. The Company also provides its divisions with financial
resources, management expertise, customer and market access which would be
unavailable to each division individually. With respect to acquisitions already
completed, the Company expects to realize improvements in internal growth rates
due to the availability of capital and bonding capacity, and the opportunities
to "cross-sell" products. As customers increasingly seek integrated solutions,
the ability of each of the Company's divisions to offer complementary equipment
and services of other divisions increases the competitiveness of the Company.
For example, the Separations Division can team with the Pure Water Division and
the Biological Wastewater Treatment Division to offer both pure water and
wastewater solutions to a customer. Additionally, the Company's design/build
capabilities allow it to design systems that utilize a broad array of the
Company's products and provide opportunities for its Specialty Products
Division. The Company also experiences cross-selling opportunities from a
geographic and customer standpoint. For example, the Company benefits from the
European Water and Wastewater Division given the ability to introduce the
Company's other Division's systems, equipment and services into the European
market and from the Company's ability to introduce the European Water and
Wastewater Division's systems, equipment and services into the Company's
domestic market.
A representative from each division, along with the Company's executive
officers and other key employees, form the Company's operating committee, which
meets on a frequent basis to facilitate the interchange of information and
enhance cross-selling opportunities. As the Company's capabilities have grown,
acquired companies within each division have been provided growth opportunities
far beyond those that exist for stand-alone companies concentrated in only one
area of the industry.
ACQUISITION STRATEGY
In order to achieve its objective of becoming a leading international
provider of integrated water purification and wastewater treatment solutions,
the Company has pursued an aggressive acquisition-based growth program. In
connection with this program, the Company targets acquisitions that will expand
the Company's market share, broaden its customer and geographic base, provide
the Company with new products, technologies and services (including those which
generate recurring revenues), and enhance the Company's design/build
capabilities. The Company seeks well-managed, established companies that provide
a strategic fit, synergies with existing businesses and the potential for
accelerated revenue and earnings growth. Assuming that a potential acquisition
is complementary to, and synergistic with, the operation of the Company's
existing subsidiaries, the candidate company is evaluated for cultural fit,
which the Company considers to be critically important. The Company believes
that its future success depends substantially upon collaboration and teamwork
among its operating companies and therefore upon common operating philosophies.
The Company believes that it is an attractive partner to potential
acquirees because the Company can facilitate their continued growth through
enhanced availability of working capital, surety credit, and borrowing capacity,
as well as through introduction to new customers and markets. The Company also
offers smaller acquisition candidates the ability to remain competitive by
becoming part of a larger, more diversified organization. As customers
frequently seek integrated water treatment solutions, companies with one or a
few product lines are increasingly excluded from projects because they do not
have the capability of meeting customers' requirements either from a product or
financial standpoint. The Company offers acquisition candidates access to a
developed international distribution system and significant management
experience. Additionally, the Company's operating subsidiar-
- 6 -
13
ies have cross-selling opportunities which enable them to be considerably more
competitive, thereby increasing sales potential significantly.
The Company believes that there is a substantial number of attractive
acquisition candidates in the United States and abroad due to the highly
fragmented nature of the overall industry. These candidates include water
purification equipment and wastewater equipment manufacturers, design/build
companies, point-of-use/point-of-entry equipment providers, contract operations
companies, specialty chemical solution providers, small unit replacement part
companies, and regional service companies. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Forward-Looking
Statements -- Need for Additional Acquisition Financing")
As consideration for future acquisitions the Company intends to continue
to use various combinations of its common stock, par value $.001 per share
("Common Stock"), cash and notes. The consideration for each future acquisition
will vary on a case-by-case basis depending on the financial interests of the
Company and the historic operating results and future prospects of the business
to be acquired. The Company will finance future acquisitions through funds
provided by operations and by the Amended Credit Facilities (as defined herein)
and from the proceeds of future equity and debt financing. The Company intends
to have 5,000,000 shares of Common Stock registered under the Securities Act of
1933, as amended, ("Securities Act") for use in connection with future
acquisitions.
SALES AND DISTRIBUTION
The Company sells its systems, equipment and services primarily through
approximately 80 direct sales personnel and approximately 250 independent sales
organizations. To a lesser extent, the Company sells through water treatment
distributors which take title to equipment for resale to the end-user. The
Company seeks to have a single sales organization within a particular market in
order to foster a close relationship with its sales representatives and present
a cohesive image to the marketplace. The independent sales representatives
typically will identify sales opportunities, and then work together as a team
with the Company's direct sales force, which has greater technical and product
knowledge, to complete the sale and service the customer. The Company's direct
sales force generally plays a more primary role in sales of the Company's
design/build solutions. The Company also sells through licensees, principally in
the Asia-Pacific region as well as in Europe.
CUSTOMERS
The Company markets its products and services to two primary categories
of customers; industrial users which require water for their manufacturing
processes and treat their wastewater, and municipal customers which produce
drinking water and treat wastewater. The Company has a diverse customer base,
with no customer representing 10% or more of the Company's fiscal 1998 pro forma
net sales.
The Company's industrial customers include many "Fortune 500" companies
and their counterparts outside of the United States. Industries served include
the pharmaceutical, electronic and microelectronic, pulp and paper, chemical,
petrochemical, food, beverage, printing, automotive and other heavy
manufacturing industries. In fiscal 1998 approximately 69% of the Company's pro
forma net sales were derived from industrial sales.
The municipal market is highly competitive. Municipal markets in the
United States, Canada and western Europe are more regulatory driven than
municipal markets in other regions. The Company utilizes specialized
distribution channels to service the municipal market and is skilled at
participating in the municipal bidding process. The Company focuses its efforts
on smaller municipal projects which the Company believes its product lines are
best suited to serve. The Company believes that the municipal business is
important to its overall success by virtue of its large market size. In fiscal
1998 approximately 31% of the Company's pro forma net sales were derived from
municipal sales.
- 7 -
14
BACKLOG
The Company had a backlog, consisting of written purchase orders received
by the Company, of $38.1 million as of September 30, 1998 as compared to $30.5
million as of September 30, 1997. At September 30, 1998, in addition to the
backlog of $38.1 million, the Company also had $6.4 million of firm commitments
to purchase recurring revenue products from its Specialty Products Division. The
Company expects that virtually all of the 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 the Company'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 market practices, the Company generally offers a warranty
on finished products for one year or in some cases 18 months from sale and 12
months from installation. The costs associated with warranty expense have not
been material. In connection with providing certain products and design/build
services to its customers, the Company is sometimes required to guarantee that
the products or services will attain specified levels of quality or performance,
based on a defined set of parameters. Should a product fail to perform according
to a warranty, or should a project fail to attain the guaranteed level of
quality, and should the Company be unable to effect a satisfactory replacement
or cure within the prescribed period of time, the Company could incur financial
penalties in the form of liquidated damages or could be required to remove and
replace the equipment or repeat the service in order to meet the specifications.
To date, the Company has not incurred any material payment or other obligations
pursuant to such performance guarantees.
RAW MATERIAL AND SUPPLIES
The Specialty Products Division is dependent on the importation of
coconut shell carbon from the Far East and the supply of coal based carbon from
domestic and Far East sources. The Company is not dependent upon any single
supplier, and if any supplier were to become unable to perform, the Company
believes a substitute source could readily be found. The raw materials and
components used in the Company's products are commonly available commodities
such as stainless steel, carbon steel, plastic, tubing, wiring, electrical
components, pumps, valves, compressors, pressure vessels, oleophilic media,
reverse osmosis membranes and sand. The Company's systems are fabricated from
these materials and assembled together with products bought from other companies
to form an integrated system. The Company has generally been able to pass on
price increases for raw materials and components to its customers. The Company
is not a party to any material long-term fixed price supply contracts.
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 solutions, systems and equipment provided by the Company.
Many of the countries in which the Company operates or in which its
customers are located, including the United States, Canada and countries in
western Europe, Latin America, and the Asia-Pacific region, have adopted
requirements that govern water quality, wastewater treatment, and wastewater
by-products and the solutions, systems and equipment provided by the Company.
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
- 8 -
15
of human health and safety and the environment. In each such country, the
Company monitors the status and impact of local environmental regulation and
enforcement as it relates to the marketability of the solutions, systems and
equipment provided by the Company.
Any changes in applicable environmental standards and requirements or
their enforcement may affect the operations of the Company by imposing
additional regulatory compliance costs on the Company's customers, requiring the
modification of and/or affecting the market for the Company's solutions, systems
and equipment. To the extent that demand for the Company's solutions, systems
and equipment is created by the need to comply with such enhanced standards and
requirements or their enforcement, any modification of the standards and
requirements or their enforcement may reduce demand, thereby adversely affecting
the Company'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 the Company's systems, equipment and services.
COMPETITION
Despite an accelerating trend toward consolidation, the water
purification and wastewater treatment industry remains fragmented and highly
competitive due to the large number of competitors within each product area. The
Company has a significant number of competitors, including a number of
integrated suppliers and equipment manufacturers, some of which are larger and
have greater resources than the Company. The Company believes that success in
this market is based on the ability to offer appropriate technology, influence
specifications, have strong distribution, maintain respect within the consulting
and engineering community, finance and bond projects awarded, provide timely
delivery, and maintain a reputation for service and parts support after the
sale. Additionally, in the municipal arena, the ability to meet bid
specifications and pricing are often primary considerations. The Company
believes that its technologies and cost structures as well as its strong local
presence in international markets enable it to compete effectively against these
companies. The Company's primary competitors include United States Filter
Corporation, Calgon Carbon Corporation, Parkson Corporation, Ionics,
Incorporated, Alpha Laval and Humbolt KHD.
PATENTS, TRADEMARKS AND LICENSES
The Company currently owns a number of United States and foreign patents,
and registrations for United States service marks and trademarks. While each is
of value, the Company generally does not consider any of them to be material to
its business, although, as the Company has grown and its presence has been
extended, its Waterlink(SM) mark has become more widely known.
EMPLOYEES
At September 30, 1998, the Company and its subsidiaries had approximately
715 employees at its various locations. Approximately 55 people are covered
under collective bargaining agreements in the United States. The Company's
hourly employees in Europe are covered by collective bargaining agreements.
Management believes that the Company's relationship with its employees is good.
ITEM 2. PROPERTIES
The Company leases its corporate offices, consisting of approximately
7,000 square feet located in Canton, Ohio pursuant to a lease agreement dated
July 9, 1996 and amended October 1, 1997. In addition, its subsidiaries lease
facilities for office space and manufacturing in the United States in Carson,
California; Wilmington, Delaware; Clearwater, Sarasota, and West Palm Beach,
Florida; Addison and Lake Bluff, Illinois; Manhattan, Kansas; Medway and Fall
River, Massachusetts; Grand Rapids, Michigan; Sparks, Nevada; and The Woodlands,
Texas; and outside the United States in Holstebro, Denmark; Lancashire, England;
Vanda, Finland; Neuss-Grimlinghausen, Germany; and Mariestad,
- 9 -
16
Frolunda, Kungsbacka, and Nynashamn, Sweden; and own facilities for office space
and manufacturing in Fall River, Massachusetts; Columbus, Ohio; Winnipeg,
Manitoba, Canada; and Fjaras, Sweden. The expiration dates for these leases
range from May 31, 1999 to March 31, 2011.
The Company believes that each of its facilities is in good condition and
will continue to remain suitable for its current purpose. The Company may add
improvements to the properties listed above. The Company anticipates using its
properties for purposes consistent with their present use. The Company
anticipates selling the facility in Winnipeg, Manitoba, Canada currently
utilized by its Bioclear business. In the event any of the facilities becomes
unavailable upon termination of the existing lease, the Company believes it
would be able to find a suitable alternative facility without resulting in any
significant adverse impact to the Company or its operations. In the opinion of
management of the Company, the properties described above are adequately covered
by insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
or property damage incurred in connection with its operations. The Company is
not a party to any material litigation. Management believes none of the
litigation will have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock has been listed on The New York Stock Exchange
("NYSE") under the symbol WLK since June 24, 1997. The following table sets
forth the high and low composite sales prices as reported by the NYSE for the
fiscal quarters indicated.
HIGH LOW
---- ---
Fiscal Year ended September 30, 1997
Third Quarter (from June 24, 1997) $13 $11
Fourth Quarter 20 3/16 13
Fiscal Year ended September 30, 1998
First Quarter $19 3/4 $16 5/1
Second Quarter 17 11/16 12 11/1
Third Quarter 14 5/8 8 5/
Fourth Quarter 8 5/8 2 7/1
The current quoted price of the Common Stock is listed daily in the Wall
Street Journal in the NYSE section. The number of holders of record of the
Company's Common Stock as of November 30, 1998 was approximately 227. In
addition there were approximately 2,707 shareholders whose shares are held by
brokers/dealers.
- 10 -
17
DIVIDENDS
The Company has not declared or paid any cash dividends on its Common
Stock. It is the Company's current intention to retain earnings to finance the
expansion of its business. Any future dividends will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including, among others, the Company's financial condition, results of
operations, cash flows from operations, current and anticipated cash needs and
expansion plans, the income tax laws then in effect, the requirements of
Delaware law, the restrictions imposed under the Amended Credit Facilities and
any restrictions that may be imposed by the Company's future credit facilities
and other indebtedness. The Amended Credit Facilities prohibit the payment of
dividends by the Company without the consent of the lender.
RECENT SALES OF UNREGISTERED SECURITIES
During fiscal 1998, the Company made one sale of its securities that were
not registered under the Securities Act, in reliance on the exemption provided
therefrom by Section 4(2) of the Securities Act. On February 19, 1998, the
Company issued 928 shares of Common Stock to the former shareholders of
Waterlink Technologies in payment of an adjustment to the purchase price paid by
the Company for the issued and outstanding shares of Waterlink Technologies. The
total dollar value of the 928 shares of Common Stock issued to the former
shareholders of Waterlink Technologies as purchase price adjustment was $15,660
(or $16.88 per share). In such transaction, the Company did not engage any
underwriter, broker or placement agent. In connection with such transaction, the
Company obtained appropriate investment representations supporting its reliance
on such exemption from registration. In such transaction, appropriate disclosure
was provided to each investor to support the Company's reliance on the exemption
from registration provided by Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
the Company since its incorporation on December 7, 1994. The financial data
presented for and as of the end of fiscal 1995, fiscal 1996, fiscal 1997 and
fiscal 1998 were derived from the audited consolidated financial statements of
the Company. The financial data includes the operating results of each acquired
business from the date of acquisition in accordance with the purchase method of
accounting. The dates of each acquisition included in the operating results are
shown below:
- - Sanborn Technologies March 31, 1995
- - Great Lakes August 31, 1995
- - Mass Transfer January 31, 1996
- - Aero-Mod April 26, 1996
- - Waterlink Technologies September 30, 1996
- - Nordic Group March 5, 1997
- - Bioclear June 27, 1997
- - Lanco June 27, 1997
- - MEVA September 12, 1997
- - Hycor September 30, 1997
- - C'treat March 2, 1998
- - AES/Purac March 25, 1998
- - Carbons Group June 5, 1998
- 11 -
18
The data presented below should be read in conjunction with the financial
information appearing elsewhere herein.
FISCAL FISCAL FISCAL FISCAL
1998 1997 1996 1995
--------- -------- -------- --------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 135,167 $ 64,699 $ 19,801 $ 2,684
Cost of sales 85,532 40,390 11,233 1,857
--------- -------- -------- --------
Gross profit 49,635 24,309 8,568 827
Selling, general and administrative
expenses 38,639 18,683 7,029 1,178
Special charges(1) 21,636 2,630 -- --
Amortization 1,871 751 307 15
--------- -------- -------- --------
Operating income (loss) (12,511) 2,245 1,232 (366)
Other income (expense):
Interest expense (3,562) (1,281) (877) (144)
Interest income and other items-net 37 263 (44) 33
--------- -------- -------- --------
Income (loss) before income taxes (16,036) 1,227 311 (477)
Income taxes 1,468 470 5 35
--------- -------- -------- --------
Income (loss) before extraordinary item (17,504) 757 306 (512)
Extraordinary item, net of taxes(2) -- (385) -- --
--------- -------- -------- --------
Net income (loss) $ (17,504) $ 372 $ 306 $ (512)
========= ======== ======== ========
Earnings (loss) per common share:
Basic:
Income (loss) before extraordinary
item $ (1.46) $ 0.15 $ 0.21 $ (0.42)
Extraordinary item -- (0.08) -- --
--------- -------- -------- --------
$ (1.46) $ 0.07 $ 0.21 $ (0.42)
========= ======== ======== ========
Assuming dilution:
Income (loss) before extraordinary
item $ (1.46) $ 0.10 $ 0.06 $ (0.42)
Extraordinary item -- (0.05) -- --
--------- -------- -------- --------
$ (1.46) $ 0.05 $ 0.06 $ (0.42)
========= ======== ======== ========
Weighted average common and equivalent
shares:
Basic 12,007 4,924 1,469 1,225
========= ======== ======== ========
Assuming dilution 12,007 7,804 4,954 1,225
========= ======== ======== ========
SEPTEMBER 30,
-------------
1998 1997 1996 1995
--------- -------- -------- --------
BALANCE SHEET DATA:
Working capital $ 30,737 $ 19,430 $ 3,438 $ 2,064
Total assets 183,561 115,860 28,991 10,819
Total debt 87,318 18,961 12,145 6,039
Redeemable preferred stock -- -- 8,500 3,900
Shareholders' equity (deficit) 54,878 70,873 2,407 (11)
- ---------------
(1) During 1998 the Company recorded special charges totaling $21,636,000
comprised of the following three components: (i) $2,858,000 of termination
benefits and costs associated with the exiting of certain facilities in
connection with the 1999 Plan (ii) a non-cash charge of $17,284,000,
consisting of $15,967,000 related to the impairment of goodwill associated
with the June 1997 Bioclear acquisition and $1,317,000 to write off the
cumulative translation adjustment component of Bioclear's equity, and (iii)
$1,494,000 of costs primarily attributable to contractual obligations of the
- 12 -
19
Company to its former president and chief executive officer, who resigned in
June 1998. These special charges of $21,636,000 on a per share
basis-assuming dilution were $1.70 for the fiscal year ended September 30,
1998.
In June 1997, the Company incurred a special charge to operations of
$2,630,000 resulting primarily from the issuance, concurrent with the
Company's initial public offering ("Initial Public Offering"), of a ten year
option to purchase 100,000 shares of Common Stock at a price of $0.10 per
share to an officer of the Company pursuant to terms of an employment
agreement. Of this amount, approximately $1,138,000 was non-cash and the
remainder represented cash obligations related principally to the
reimbursement of income taxes resulting from the stock option issuance. This
special charge after income taxes on a per share basis-assuming dilution was
$0.21 for the fiscal year ended September 30, 1997.
(2) The Company used a portion of the proceeds from its Initial Public Offering
to repay substantially all of its outstanding indebtedness. In addition,
concurrent with the offering the Company canceled a note purchase agreement.
In connection with the early retirement of certain indebtedness and the
cancellation of the note purchase agreement, the Company realized an
extraordinary charge of $385,000, net of taxes of $257,000, related to the
write-off of unamortized debt issuance costs and discounts associated with
this indebtedness. This extraordinary item on a per share basis-assuming
dilution was $0.05 for the fiscal year ended September 30, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is an international provider of integrated water purification
and wastewater treatment solutions, principally to industrial and municipal
customers. Waterlink was incorporated in Delaware on December 7, 1994 and has
grown externally by completing thirteen acquisitions and internally through
industry wide expansion as well as Company sponsored programs.
On June 27, 1997, the Company consummated its Initial Public Offering of
4,500,000 shares of its Common Stock at a price of $11 per share, before the
underwriters' discount, and received approximately $43.0 million of net
proceeds. On July 16, 1997, the Company sold 675,000 shares of its common stock
pursuant to the exercise of the underwriters' over-allotment option granted in
connection with the Initial Public Offering, and received approximately $6.9
million. These net proceeds from the Initial Public Offering were primarily used
to pay the cash portion of the purchase prices of Bioclear, Lanco and MEVA, to
repay indebtedness of the Company and for general working capital purposes.
The Company's acquisitions have enabled it to build its technical
capabilities and geographical presence. Through September 30, 1998, the Company
completed the following acquisitions at the following effective dates:
- - Sanborn Technologies March 31, 1995
- - Great Lakes August 31, 1995
- - Mass Transfer January 31, 1996
- - Aero-Mod April 26, 1996
- - Waterlink Technologies September 30, 1996
- - Nordic Group March 5, 1997
- - Bioclear June 27, 1997
- - Lanco June 27, 1997
- - MEVA September 12, 1997
- - Hycor September 30, 1997
- - C'treat March 2, 1998
- - AES/Purac March 25, 1998
- - Carbons Group June 5, 1998
As part of its strategic plan, the Company intends to continue its
acquisition program. The Company's acquisition program targets businesses which
provide the Company with complementary systems, equipment and services, and
broadens its customer and geographic base. In addition, the
- 13 -
20
Company seeks companies that provide the potential for synergies with existing
businesses. With respect to the acquisitions completed to date, the Company has
begun to identify and act upon opportunities to cross-sell systems, equipment
and services. As a result of the increased financial, managerial and other
resources provided by the Company to its acquired businesses, the Company
expects its internal growth rate to be a positive influence on its growth
strategy. The Company also expects that it will continue to benefit from such
synergies as it continues to more fully integrate the acquired businesses into
its operations.
All acquisitions have been accounted for under the purchase method of
accounting and are included in the results of operations for the period
subsequent to the effective date of acquisition. Due to the timing and magnitude
of these acquisitions, results of operations for the periods presented are not
necessarily comparable or indicative of operating results for current or future
periods.
The majority 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, if any, 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. Revenues from remaining systems and equipment sales
are recognized when shipped.
In the past the Company has experienced quarterly fluctuations in
operating results due to the contractual nature of its business and the
consequent timing of these orders. As part of its strategic plan, the Company
expects that in the future it may receive contracts that are significantly
larger than those received by the Company historically. In addition, certain of
such 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
receiving any necessary permits to commence the project. Therefore, the Company
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 the Company
of revenues and profits therefrom. In addition, the Company has historically
operated with a moderate backlog. However, as a result of its strategic plan,
the Company anticipates that both the dollar volume and number of contracts in
its backlog will increase significantly. As of September 30, 1998, the Company's
backlog was approximately $38.1 million. In addition, the Company also had $6.4
million of firm commitments to purchase recurring revenue products from its
recently acquired Carbons Group at September 30, 1998. Therefore, quarterly
sales and operating results may 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 the Company's operating results in any particular
quarter. Because of these factors, the Company believes that period-to-period
comparisons of its operating results are not necessarily indicative of future
performances.
- 14 -
21
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, statements of
operations data as a percentage of net sales:
FISCAL FISCAL FISCAL
1998 1997 1996
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 63.3 62.4 56.7
----- ----- -----
Gross profit 36.7 37.6 43.3
Selling, general and administrative expenses 28.6 28.9 35.5
Special charges 16.0 4.1 --
Amortization 1.4 1.1 1.6
----- ----- -----
Operating income (loss) (9.3) 3.5 6.2
Other income (expense):
Interest expense (2.6) (2.0) (4.4)
Interest income and other items -- net 0.0 0.4 (0.2)
----- ----- -----
Income (loss) before income taxes (11.9) 1.9 1.6
Income taxes 1.1 0.7 0.1
----- ----- -----
Income (loss) before extraordinary item (13.0) 1.2 1.5
Extraordinary item, net of tax -- 0.6 --
----- ----- -----
Net income (loss) (13.0)% 0.6% 1.5%
===== ===== =====
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Net Sales. Net sales for the year ended September 30, 1998 were
$135,167,000, an increase of $70,468,000 from the prior year. The increase was
due to the timing of the acquisitions previously described. The Company
experienced negative internal growth for the year of 10.8%, resulting
principally from the timing of orders, exchange rate fluctuations and stronger
performance for certain domestic companies during fiscal 1997 that was not
duplicated in fiscal 1998. The Company measures internal growth by comparing
each subsidiary's net sales from the months subsequent to their respective
acquisition dates during the prior year to those same months in the current
year.
Gross Profit. Gross profit for the year ended September 30, 1998 was
$49,635,000, an increase of $25,326,000 from the prior year. The increase was
primarily due to the aforementioned acquisitions. Gross margin was 36.7% for
1998 as compared to 37.6% for 1997. Gross margins have been impacted by the
March 1997 acquisition of the Nordic Group and the June 1998 acquisition of the
Carbons Group, both of which historically experience lower margins as compared
to other Waterlink companies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended September 30, 1998 were $38,639,000,
an increase of $19,956,000 from the prior year. The increase was primarily due
to the aforementioned acquisitions. Selling, general and administrative expenses
as a percentage of net sales was 28.6% for 1998 as compared to 28.9% for 1997.
This decrease primarily reflects the spreading of selling, general and
administrative expenses over a larger revenue base.
Special Charges. During the year ended September 30, 1998 the Company
incurred special charges of $21,636,000. These special charges are comprised of
the following three components:
- The Company recorded a charge of $2,858,000 primarily related to
termination benefits and costs associated with the exiting of certain
facilities in connection with the implementation of its 1999 Plan.
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22
- The Company recorded a non-cash charge of $17,284,000, consisting of
$15,967,000 related to the impairment of goodwill associated with the
June 1997 Bioclear acquisition and $1,317,000 to write off the
cumulative translation adjustment component of Bioclear's equity. With
regard to the $17,284,000 impairment charge, the 1999 Plan includes the
Company's decision to exit the acquired business of Bioclear. Several
factors lead to this decision including:
i. The lack of orders at Bioclear in fiscal 1998 led to a
comprehensive market review, which was completed in August 1998.
This analysis indicated that Bioclear's originally perceived niche
market was not reliable and possibly nonexistent.
ii. In order to compete in more traditional markets, Bioclear's
proprietary product would need to be reengineered, at great
expense, to significantly reduce the water treatment cost per
gallon. In addition, this reengineered proprietary product would
not guarantee success due to the extremely competitive traditional
marketplace.
iii. In July 1998, Bioclear's founder, a former owner and president,
resigned.
iv. In August 1998, Bioclear's chief engineer and a former owner
announced his desire to reduce his involvement to part time, making
the reengineering effort more difficult.
Having made the decision to exit the business, the remaining goodwill
associated with the Bioclear acquisition is not recoverable based on
Bioclear's lack of future undiscounted cash flows and is impaired. Once
the impairment was determined, the Company obtained an independent
appraisal of the fair value of the Bioclear business. This appraisal
indicated no value for the business above the identified tangible net
assets. As a result, the Company wrote off the unamortized balance of
goodwill of $15,967,000. Since this was deemed to be a substantially
complete liquidation of an investment in a foreign entity, the Company
also wrote off $1,317,000 of the cumulative translation adjustment
relating to Bioclear's equity.
- The Company incurred a special charge of $1,494,000 primarily
attributable to contractual obligations of the Company to its former
president and chief executive officer, who resigned in June 1998.
The Company incurred special charges of $2,630,000 for the year ended
September 30, 1997 resulting primarily from the issuance, concurrent with the
Initial Public Offering, of a ten year option to purchase 100,000 shares of
common stock at a price of $0.10 per share to an officer of the Company pursuant
to terms of an employment agreement. Of this amount, approximately $1,138,000
was non-cash and the remainder represented cash obligations related principally
to the reimbursement of income taxes resulting from the stock option issuance.
Amortization. Amortization expense for the year ended September 30, 1998
was $1,871,000, an increase of $1,120,000 from the prior year. The increase was
primarily due to the goodwill resulting from the aforementioned acquisitions.
Interest Expense. Interest expense for the year ended September 30, 1998
was $3,562,000, an increase of $2,281,000 from the prior year. This increase was
primarily due to increased borrowings related to the Company's ongoing
acquisition program.
Income Taxes. The Company recorded an income tax provision of $1,468,000
on a pre-tax loss of $16,036,000. The Company was required to record income tax
expense on its earnings outside the United States and was also required to
record income tax expense in certain states domestically. In addition, due to
the net operating loss carryforward in the United States, certain deferred tax
assets that had been recorded in the previous year had to be fully reserved for.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Net Sales. Net sales for the year ended September 30, 1997 were
$64,699,000, an increase of $44,898,000 from the prior year. The increase was
primarily due to its acquisitions. In addition,
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internal growth accounted for $6,830,000 of the increase, which represented an
internal growth rate of 34.5%, primarily due to expansion in overseas markets
and to the greater levels of resources provided by the Company to the businesses
subsequent to the acquisitions.
Gross Profit. Gross profit for the year ended September 30, 1997 was
$24,309,000, an increase of $15,741,000 from the prior year. The increase was
primarily due to its acquisitions and internal growth. Gross margin was 37.6%
for 1997 as compared to 43.3% for 1996. Gross margins have been impacted by the
March 1997 acquisition of the Nordic Group which historically experiences lower
margins as compared to other Waterlink companies, as well as by a large,
lower-margin, design-build project in Germany that is near completion at the end
of the fiscal year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended September 30, 1997 were $18,683,000,
an increase of $11,654,000 from the prior year. The increase was primarily due
to the aforementioned acquisitions. Selling, general and administrative expenses
as a percentage of net sales was 28.9% for 1997 as compared to 35.5% for 1996.
This decrease primarily reflects the spreading of selling, general and
administrative expenses over a larger revenue base.
Special Charges. Special management compensation of $2,630,000 for the
year ended September 30, 1997 resulted primarily from the issuance, concurrent
with the Initial Public Offering, of a ten year option to purchase 100,000
shares of Common Stock at a price of $0.10 per share to an officer of the
Company pursuant to terms of an employment agreement. Of this amount,
approximately $1,138,000 is non-cash and the remainder represents cash
obligations related principally to the reimbursement of income taxes resulting
from the stock option issuance.
Amortization. Amortization expense for the year ended September 30, 1997
was $751,000, an increase of $444,000 from the prior year. The increase was
primarily due to the goodwill resulting from the aforementioned acquisitions.
Interest Expense. Interest expense for the year ended September 30, 1997
was $1,281,000, an increase of $404,000 from the prior year. This increase was
primarily related to increased borrowings required to finance the aforementioned
acquisitions.
Extraordinary Item. During the year ended September 30, 1997, the
Company recorded an extraordinary charge of $385,000, net of taxes of $257,000,
related to the write-off of unamortized debt issuance costs associated with
certain indebtedness retired with the net proceeds from, and discounts
associated with a note purchase agreement terminated in connection with, its
Initial Public Offering.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's primary sources of liquidity have been
(i) borrowings available under credit facilities, (ii) net proceeds from the
sale of the Company's common and preferred stock, (iii) issuance of common stock
and seller financing incurred in connection with the Company's completed
acquisitions, and (iv) cash flow from certain profitable operations.
Historically, the Company's primary uses of capital have been the funding of its
acquisition program, working capital requirements including the funding for
growth at certain acquisitions and the funding required for certain
under-performing operations. The Company does not currently anticipate making
significant capital investments in plant and equipment due to its focus on
partnering with vendors who manufacture most of the components used in the
Company's systems and equipment.
For the year ended September 30, 1998, net cash used by operating
activities was $9,453,000, purchases of equipment totaled $2,261,000 and
purchases of businesses, net of cash acquired, totaled $53,430,000. These cash
outlays, financed primarily by long-term borrowings, reflect the cash purchase
price of acquisitions as well as additional payments made during the period
related to
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acquisitions, expansion of working capital requirements and purchases of
equipment for existing operations.
In the fourth quarter of fiscal 1998, the Company's Board of Directors
approved the 1999 Plan which calls for the reorganization of the Company from a
holding company comprised of twenty-three operating companies into five
integrated divisions that focus on specific market segments. This plan, which
will eliminate redundant costs and improve operating efficiencies, is
anticipated to be substantially completed by the end of fiscal 1999. The plan
includes costs associated with the exiting of certain facilities and employee
termination costs. Costs associated with this plan of approximately $2,858,000
were recognized during fiscal 1998, of which approximately $2,258,000 is
reserved for future payment at September 30, 1998. Other costs associated with
the 1999 Plan of approximately $1,000,000, which do not meet the criteria for
recognition at September 30, 1998, are expected to be recognized in fiscal 1999.
Additionally, in conjunction with its 1999 Plan, the Company recorded a
$17,284,000 non-cash charge, primarily related to the impairment of goodwill
associated with the June 1997 Bioclear acquisition. At September 30, 1998, the
Company had approximately $2,300,000 of long-lived assets recorded at its
Bioclear subsidiary, which represents the fair value utilizing an independent
appraisal, comprised primarily of property, plant and equipment. The Company is
evaluating the most favorable means to divest of the remaining assets of
Bioclear, primarily related to its manufacturing facility in Winnipeg, Canada.
At the present time the Company is attempting to sell the entire Bioclear
business, a purchaser of which has not yet been identified. If the Company is
unsuccessful in selling the entire Bioclear business in a reasonable time frame,
the Company will most likely close the facility, terminate the remaining eleven
employees, and sell the building and individual pieces of manufacturing and
office equipment in an orderly fashion.
The Company also incurred a special charge in during the third quarter of
fiscal 1998 of approximately $1,494,000, primarily attributable to contractual
obligations of the Company to its former president and chief executive officer,
who resigned in June 1998, and the costs necessary to recruit executives to the
Company. Approximately $822,000 of this charge is reserved for future payment at
September 30, 1998.
The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. On June 5, 1998,
concurrent with the acquisition of the Carbons Group, the Company amended and
restated its then existing $40,000,000 domestic revolving credit with Bank of
America National Trust & Savings Association as agent by entering into a
$110,000,000 secured, domestic facility, comprised of a $75,000,000 revolving
facility and a $35,000,000 term loan ("New Domestic Facility"). On September 30,
1998, the New Domestic Facility was amended to allow for the implementation of
the 1999 Plan described above and the Company reduced the New Domestic Facility
to $87,000,000, comprised of a $52,000,000 revolving facility and a $35,000,000
term loan ("Amended Domestic Facility").
As a result of the Carbons Group acquisition and the implementation of
the 1999 Plan, the Company has caused its current and long-term debt to be in
excess of stockholder's equity and bears the risks associated with increased
leverage.
The Company believes that through the end of fiscal 1999, (i) future cash
flow from operations, (ii) borrowings under the credit facilities described
above or as amended, (iii) issuance of subordinated indebtedness, Common Stock
and seller financing incurred in connection with future acquisitions or
financings and (iv) the sale of certain underperforming assets will be
sufficient to fund its working capital needs, additional cash requirements of
the 1999 Plan, acquisitions and additional contingent consideration related to
acquisitions.
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Acquisitions. During the twelve months ended September 30, 1998, the
Company completed three acquisitions for an aggregate consideration of
$57,072,000, comprised of $54,822,000 of cash and $2,250,000 of seller financing
in the form of convertible debt. In addition, contingent consideration payments
totaling $1,776,000 were made in connection with acquisitions made prior to
1998.
Under the terms of certain of the purchase agreements, the Company may be
required to make additional purchase consideration payments of up to $2,468,000,
contingent upon the achievement of specified operating results through fiscal
2000. The payments that are expected to be required for meeting fiscal 1999 and
2000 targets are $1,468,000 and $1,000,000, respectively. Any such additional
purchase consideration payments will be treated as additional goodwill for
accounting purposes.
The Company, from time to time, has and expects to make in the future
strategic investments in industry related companies. During fiscal 1998 the
Company invested in Aquatec Water Systems, Incorporated ("Aquatec"), a designer
and manufacturer of specialized multi-chamber pumps for the pure water industry,
in the form of a $1,400,000 subordinated debt instrument. This investment is
convertible into approximately 30% of the equity of Aquatec. The Company also
has the option to purchase at anytime through March 2001 the remaining equity of
Aquatec at a pre-determined formula based on earnings. The Company will
determine during fiscal 1999 whether to retain its investment in Aquatec.
Credit Availability. The Company currently has a $87,000,000 Amended
Domestic Facility with Bank of America National Trust & Savings Association as
agent, which expires on May 19, 2003. In connection with this facility, the
Company also has separate facilities at three of its overseas subsidiaries
aggregating $7,000,000. The Amended Domestic Facility and the three overseas
facilities ("Amended Credit Facilities") will be utilized to fund operating
activities of the Company as well as future acquisitions.
Loans under the Amended Credit Facilities bear interest at a designated
variable base rate plus spreads ranging from 0 to 25 basis points depending on
the ratio of total consolidated indebtedness to the Company's earnings before
interest, taxes, depreciation and amortization. At the Company's option, the
Amended Credit Facilities bear interest based on a designated London interbank
offering rate ("LIBOR") plus spreads ranging from 100 to 225 basis points,
depending on the Company's aforementioned leverage ratio.
The Amended Credit Facilities restricts or prohibits the Company from
taking many actions, including paying dividends and incurring or assuming other
indebtedness or liens. The banks that participate in the Amended Credit
Facilities also must approve most acquisitions. The Company's obligations under
the Credit Facility are secured by liens on substantially all of the Company's
domestic assets, including equipment, inventory, accounts receivable and general
intangibles and the pledge of most of the stock of the Company's subsidiaries.
The Company has guaranteed the payment by its three overseas subsidiaries of
their obligations under the overseas facilities. The three overseas subsidiaries
have given a negative pledge of their assets in connection with the overseas
facilities.
Availability for future borrowings under the Credit Facility is based on
a multiple of the Company's pro forma earnings before interest, taxes,
depreciation and amortization. At September 30, 1998, approximately $4,100,000
was available for future borrowings under the Amended Credit Facilities.
Availability for future borrowings may increase or decrease based on the pro
forma operating performance of the Company.
The Company also has in place a $3,000,000 credit facility ("Canadian
Line of Credit") with Royal Bank of Canada to fund Canadian working capital
requirements including banker's acceptances and letters of credit. Interest
rates are negotiated on an individual borrowing basis and are related to the
Royal Bank of Canada's prime rate. Borrowings are payable upon demand and are
guaranteed by Bioclear. At September 30, 1998, the Canadian Line of Credit was
fully utilized.
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The Company's earnings are affected by changes in interest rates related
to its Amended Domestic Facility. During 1998, the Company entered into an
interest rate swap agreement with a major commercial bank to modify the interest
characteristics of its Amended Domestic Facility. The agreement involves the
exchange of amounts based on a fixed rate of interest for an amount based on a
LIBOR-based floating rate over the life of the agreement without an exchange of
the notional amount upon which the payments are based. The agreement, which
expires on December 30, 1999, fixes the Company's LIBOR-based rate at 5.25% on a
notional amount of $75,000,000. If LIBOR averaged 1% less in fiscal 1999 than
the fiscal 1998 year-end rate, the Company's interest expense, after considering
the effects of the interest rate swap, would not be materially impacted due to
the interest rate swap agreement. The impact was determined by considering the
hypothetical impact of interest rates on the Amended Domestic Facility and
interest rate swap agreement. The analysis does not consider the effects of the
overall economic environment associated with such a change nor does it assume
any change to the Company's current financial structure. See Note 14 of the
Company's 1998 audited financial statements for further discussion regarding the
Company's use of derivative financial instruments.
Year 2000. The Year 2000 issue, as widely reported, could cause
malfunctions in certain computer-related applications with respect to dates on
or after January 1, 2000. These malfunctions could relate to Information
Technology ("IT") or non-IT environments. Due to the Company's decentralized IT
environments, individual assessments, in accordance with the Company's Year 2000
program, have been conducted at the Company's operating companies. Collectively,
these assessments indicate that the Company's exposure to this segment of the
Year 2000 issue is not significant as the Company does not extensively rely on
IT systems which require modification. The Company's externally developed system
issues have been assessed Company-wide through inquiry of its major external
vendors and testing procedures where necessary. The appropriate upgrades, if
required, have been (or are scheduled to be) attained in order to make these
systems Year 2000 compliant. The Company has tested internally developed
software systems where applicable and have developed programs to make these
systems Year 2000 compliant. Testing of upgraded or modified systems has begun
at the Company's various operating units. Results of these testing procedures,
which are scheduled to be completed by the end of fiscal 1999, are incomplete.
The Year 2000 program also addresses issues related to non-IT
environments. Collectively, these assessments indicate that the Company's
exposure to this segment of the Year 2000 issue is not significant due to the
Company's limited manufacturing operations and related capital equipment needs.
The Company's operating equipment has been assessed through inquiry of its major
external manufacturers and internal testing procedures. Remediation efforts have
begun where necessary. Collectively, the Company intends to complete and test
remediated assets by the end of fiscal 1999.
The Company's primary system interface with an external party involves
its banking institutions. Based on inquiries of its banking institutions, the
Company is not aware of any unresolved Year 2000 issues. Further, due to the
Company's decentralized operations, individual assessments, in accordance with
the Company's Year 2000 program, have been conducted at the Company's operating
companies regarding significant suppliers and subcontractors. These assessments,
which are not complete, have been executed primarily through inquiry of its
various suppliers and subcontractors. To date, the Company is not aware of any
external party with an unresolved Year 2000 issue that would materially impact
the Company's operations and financial position. However, the Company has no
means of ensuring that external parties will be Year 2000 compliant. The
inability of external parties to resolve their Year 2000 issue in a timely
manner could impact the Company's operations and financial position. The effect
of non-compliance by external parties is not determinable.
The Company has utilized primarily internal resources to assess, test,
remediate and implement software and equipment related to the Year 2000. The
total cost of the Company's Year 2000 program, excluding employee salaries, is
estimated at $300,000, primarily attributable to software upgrades and
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modifications. The Company has incurred approximately $100,000 related to the
various phases of its Year 2000 program.
Management of the Company believes that it has a program established to
resolve the Year 2000 issue in a timely manner. Collectively, the Company's Year
2000 program has not been completed. In the event the Company does not complete
its remaining Year 2000 procedures, certain functions may be interrupted. The
Company does not have a formal contingency plan established if all phases of its
Year 2000 program are not completed. However, appropriate actions, such as
interim manual information systems, will be instituted to mitigate such
interruption. In addition, disruptions in the economy generally resulting from
unresolved Year 2000 issues could also materially adversely affect the Company.
The potential liability and loss of revenue from these issues is not
determinable.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income", which establishes standards for the reporting and display of
comprehensive income and its components. This Statement is intended to address
the concerns of financial statement users' for the increasing number of items
that bypass the income statement, such as foreign currency translation
adjustments. The Statement is effective for the Company in fiscal 1999. The
Company does not expect the adoption of this Statement to have a material effect
on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which changes the way public
companies report segment information in annual financial statements. The
Statement also requires public companies to report selected segment information
in interim financial reports to shareholders. The Statement is effective for the
Company in fiscal 1999 and restatement of comparative information for earlier
years is required in the initial year of adoption. The implementation of the
1999 Strategic Operating Plan will require the Company to present segmented
industry information upon adoption of SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The Statement will require, among other things, that all
derivatives be recorded on the balance sheet at fair value. The Statement is
effective for the Company in fiscal 2000. The Company has not yet determined
what the effect of adopting SFAS No. 133 will be on its operations or financial
position.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed
herein 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 the Company 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 the Company'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: (i) changes in economic
conditions (including, but not limited to, the potential instability of
governments and legal systems in countries in which the Company conducts
business, significant changes in currency valuations, recessionary environments
and Year 2000 compliance issues relating to the Company's program and external
parties, including suppliers and customers), (ii) changes in customer demand as
they affect sales and product mix (including, but not limited to, the effect of
strikes at customers' facilities, variations in backlog, the impact of changes
in industrial business cycles, and legislative changes that affect the municipal
or industrial marketplace), (iii) competitive factors (including, but not
limited to, changes in market penetration and the introduction of new products
by existing and new competitors), (iv) changes in operating costs (including,
but not limited to, the effect of changes in the Company's manufacturing
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processes; changes in costs associated with varying levels of operations;
changes resulting from different levels of customers demands; the effects of
unplanned work stoppages; changes in cost of labor and benefits; and the cost
and availability of raw materials and energy), (v) the success of the Company's
strategic plan (including, but not limited to, its ability to achieve the total
planned benefits of its 1999 Plan (including its ability to eliminate costs,
improve operating efficiencies, and successfully divest of its Bioclear
subsidiary), its ability to find and integrate acquisitions into Company
operations, and the ability of recently acquired companies to meet satisfactory
operating results), and (vi) unanticipated litigation, claims or assessments
(including, but not limited to, claims or problems related to product warranty
and environmental issues).
Potential Fluctuations in Quarterly Results of Operations. We have
experienced quarterly fluctuations in operating results due to the contractual
nature of our business and, to a lesser extent, weather conditions. We expect to
receive contracts that are significantly larger than those received by us in the
past. In addition, certain contracts will be subject to our customer's ability
to finance the project as well as to receive any necessary permits. Therefore,
we expect that our future operating results could fluctuate significantly,
especially on a quarterly basis. Our recognition of revenues and profits can
fluctuate due to the timing of the awarding of such contracts and the ability to
fund project costs. In addition, we have historically operated with a moderate
backlog. As a result, our quarterly sales and operating results depend in part
on 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 our operating results in any
particular period. Accordingly, we believe that period-to-period comparisons of
our operating results may not be necessarily indicative of future performance.
Also, our operating results and stock price could be volatile, particularly on a
quarterly basis.
Limited Combined Operating History; Risks of Integration. We were formed
in December 1994 and have principally grown through acquisitions. Our success
depends, in part, on our ability to integrate the operations of our various
businesses and companies, including centralizing certain functions to achieve
cost savings and developing programs and processes that will promote cooperation
and the sharing of opportunities and resources among our businesses. Our new
1999 Plan and our restructured organization are designed to promote this
integration. While the breadth and diversity of our products and services permit
us to offer our customers single-source solutions to water and wastewater
treatment needs, this breadth and diversity also makes total integration more
difficult. We can not assure you that we will achieve our total integration
goals or that our operating results will match or exceed the combined individual
operating results achieved by our businesses prior to being acquired by us.
Our management group has been assembled only relatively recently, with
several key people joining us within the last twelve months. We cannot assure
you that management will be able to work together efficiently, implement our
strategies and the 1999 Plan effectively or direct us through a period of
significant growth.
While we believe that our customers and targeted customers benefit from
single-source solutions to water and wastewater treatment needs, we cannot
assure you that those customers will prefer the single-source approach or that
they will accept us as the provider of such solutions.
Significant Leverage. We have significant leverage. As of September 30,
1998, our total indebtedness was approximately $87,318,000 and our total
shareholders' equity was approximately $54,878,000. Our degree of leverage could
(i) increase our vulnerability to general adverse economic conditions, (ii)
limit our ability to obtain additional financing to fund working capital needs,
acquisitions and other general corporate requirements, (iii) require a greater
portion of our cash flow to go to interest and principal payments and reducing
cash flow for other general corporate purposes, and (iv) limit our ability to
react to changes in our business and industry. While we believe that cash flow
from operations will be sufficient to meet our anticipated needs, including debt
service, we can not assure you that general economic, financial, competitive or
other factors will not result in our
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being in default of our debt obligations. Such a default, if not waived, could
result in acceleration of our indebtedness and other adverse effects.
Dependence on Acquisitions for Growth. We intend to grow significantly
by acquiring existing businesses. This acquisition strategy involves risks
inherent in assessing the values, strengths, weaknesses, risks and profitability
of acquisition candidates. These risks include adverse short-term effects on our
operating results, diversion of our management's attention, dependence on
retaining, hiring and training key personnel, and risks associated with
unanticipated problems or latent liabilities. Although we generally have been
successful in acquiring companies we have pursued, we can not assurance you that
acquisition opportunities will continue to be available, that we will have
access to the capital required to finance potential acquisitions, that we will
continue to acquire businesses or that we will integrate successfully into our
operations any business we acquire. In addition, to the extent that
consolidation becomes more prevalent in our industry, the prices for attractive
acquisition candidates may be bid up to higher levels and we can not assure you
that businesses we acquire will achieve sales and profitability that justify our
investment in them.
Need for Additional Acquisition Financing. We currently intend to use a
combination of our Common Stock, cash, and debt obligations in making future
acquisitions. The extent to which we will be able or willing to use our Common
Stock for this purpose will depend on its market value from time to time and the
willingness of potential sellers of acquisition targets to accept it as full or
partial payment. To the extent we are unable to use our Common Stock to make
acquisitions, our ability to grow may be limited by the extent to which we are
able to raise capital for this purpose, as well as to expand existing
operations, through debt or additional equity financing. At September 30, 1998,
we had approximately $4,100,000 available under the Amended Credit Facilities,
to be used for acquisitions (most of which would need to be approved by our
bank), working capital and other corporate purposes. We can not assure you that
we will be able to obtain the capital we need to finance a successful
acquisition program and our other cash needs.
Operations Outside the United States. We sell a substantial proportion
of our systems, equipment and services in western Europe, Latin America and
other regions outside the United States. Also, a number of our divisions operate
outside of the United States. On an annualized pro forma basis, our net sales
outside the United States were approximately 49% of our pro forma fiscal 1998
net sales. Political, economic, regulatory and social conditions in foreign
countries in which we operate 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, and the general
hazards associated with the assertion of sovereignty over certain areas in which
operations are conducted. We can not assure you that changes in political,
economic, regulatory or social conditions will not have a substantial adverse
effect on our business.
Foreign Currency Risks. Because our functional currency is the United
States dollar, our operations outside the United States sometime face the
additional risks of fluctuating currency values and exchange rates, hard
currency shortages and controls on currency exchange. We have operations outside
the United States and are therefore hedged, to some extent, from foreign
exchange risks because of our ability to purchase, manufacture and sell in the
local currency of those jurisdictions. We also enter into foreign currency
contracts under certain circumstances to reduce our exposure to foreign exchange
risks. We can not assure you that our attempted matching of foreign currency
receipts with disbursements or hedging activity will adequately moderate the
risk of currency or exchange rate fluctuations. In addition, to the extent we
have operations outside the United States, we are subject to the impact of
foreign currency fluctuations and exchange rate charges on our reporting in our
financial statements of the results from such operations outside the United
States.
Dependence on Key Personnel. Our business depends on our ability to hire
and retain our executive officers and senior management. Our prospects could be
adversely affected if, for any reason, any of our executive officers or senior
management ceases active employment with us. We will
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depend on the senior management of any significant businesses we acquire in the
future to support our external growth and on our ability to attract qualified
management to support our internal expansion. Our business or prospects could be
affected adversely if any of these senior management of acquired businesses does
not continue in his or her management role after joining us and if we are unable
to attract and retain qualified replacements and additional members of
management.
Competition. Our industry, the water purification and wastewater
treatment industry, is fragmented and highly competitive due to the large number
of businesses within certain product areas. We compete with many companies,
several of which have greater market penetration, depth of product line,
resources and access to capital, which could be competitive advantages in
securing certain 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 can
not assure you that we can compete successfully in our market.
Cyclicality of Demand for Water Purification and Wastewater
Equipment. Much of our water purification and wastewater equipment requires
significant capital expenditures by our customers. As such, the timing of
customer purchases from us may be affected by various economic factors,
including interest rate and business cycle fluctuations, which are beyond the
our control. The cyclical nature of capital equipment sales could have an
adverse effect on the our revenues and profitability in general, and on the our
revenues and profitability in any individual financial reporting period.
Potential Environmental Liabilities. In the United States, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended ("CERCLA" or "Superfund"), and comparable state laws, impose joint
and several liability without fault for the releases of hazardous substances
into the environment. Potentially responsible parties include (i) owners and
operators of the site, (ii) parties which create the hazardous substances
released at the site, and (iii) parties which arrange for the transportation or
disposal of such hazardous substances. We are also subject to applicable
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. 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 in violation of applicable law.
Reliance on Environmental Regulation. 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 the marketability of our solutions, systems and
equipment. To the extent that demand for our solutions, systems and equipment is
created by the need to comply with such environmental laws and regulations, any
modification of the standards imposed by such laws and regulations may reduce
demand, thereby adversely affecting our business and prospects.
Process and Product Warranty and Performance Guarantees. In connection
with providing certain services and products to our customers, we sometimes
guarantee that the services and products will attain specified levels of quality
or performance. A product could fail to perform according to our performance
guarantee. A service could fail to accomplish treatment levels which we
guarantee. If that happens and if we are unable to remedy such failure within
any applicable cure period, we could incur financial penalties. We also could be
required to remove and/or replace the equipment or repeat the service in order
to meet the specifications. While we have fulfilled all of our guarantee
obligations, we can not assure you that we will continue to be able to fulfill
our guarantee obligations or that we will not incur significant costs in
fulfilling our obligations.
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
20.
- 24 -
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
PAGE
----
WATERLINK, INC. AND SUBSIDIARIES
Report of Independent Auditors.............................. 26
Consolidated Balance Sheets at September 30, 1998 and
1997...................................................... 27
Consolidated Statements of Operations for the years ended
September 30, 1998, 1997 and 1996......................... 29
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1998, 1997 and 1996............. 30
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996......................... 31
Notes to Consolidated Financial Statements.................. 32
- 25 -
32
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Waterlink, Inc.
We have audited the accompanying consolidated balance sheets of
Waterlink, Inc. and subsidiaries as of September 30, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Canton, Ohio
November 6, 1998
- 26 -
33
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30,
--------------------
1998 1997
-------- --------
(In thousands,
except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 3,925 $ 2,482
Trade accounts receivable,
less allowance of $1,266 in 1998
and $775 in 1997 29,906 24,625
Other receivables 2,757 1,320
Inventories 22,160 10,143
Costs in excess of billings 17,195 6,413
Refundable income taxes 840 635
Other current assets 3,111 1,177
-------- --------
Total current assets 79,894 46,795
Property, plant and equipment, at cost:
Land, building and improvements 4,095 2,366
Machinery and equipment 8,293 2,536
Office equipment 2,899 1,463
-------- --------
15,287 6,365
Less accumulated depreciation 1,557 554
-------- --------
13,730 5,811
Other assets:
Goodwill, net of amortization of $2,555
in 1998 and $929 in 1997 79,936 60,419
Patents, net of amortization of $217 in
1998 and $63 in 1997 1,408 1,484
Deferred income taxes -- 611
Other assets 8,593 740
-------- --------
89,937 63,254
-------- --------
Total assets $183,561 $115,860
======== ========
The accompanying notes are an integral part of these statements.
- 27 -
34
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30,
--------------------
1998 1997
-------- --------
(In thousands,
except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade $ 15,133 $ 9,597
Accrued expenses 18,881 9,447
Additional purchase consideration payable 1,000 1,760
Billings in excess of costs 3,392 3,425
Accrued income taxes 1,158 490
Deferred income taxes 164 108
Current portion of long-term obligations 9,429 2,538
-------- --------
Total current liabilities 49,157 27,365
Long-term obligations:
Long-term debt 73,639 12,502
Convertible subordinated notes -- related parties 4,250 3,921
Other 1,637 1,199
-------- --------
79,526 17,622
Shareholders' equity:
Preferred Stock, $.001 par value, 10,000,000 shares
Authorized, none issued and outstanding -- --
Common Stock, voting, $.001 par value
Authorized -- 40,000,000 shares
Issued outstanding -- 12,225,604 shares in 1998 and
11,906,326 shares in 1997 12 12
Additional paid-in capital 71,973 70,739
Foreign currency translation adjustment 231 (44)
Retained earnings (deficit) (17,338) 166
-------- --------
Total shareholders' equity 54,878 70,873
-------- --------
Total liabilities and shareholders' equity $183,561 $115,860
======== ========
The accompanying notes are an integral part of these statements.
- 28 -
35
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1998 1997 1996
--------- -------- --------------
(In thousands, except per share data)
Net sales $135,167 $64,699 $19,801
Cost of sales 85,532 40,390 11,233
-------- ------- -------
Gross profit 49,635 24,309 8,568
Selling, general and administrative expenses 38,639 18,683 7,029
Special charges 21,636 2,630 --
Amortization 1,871 751 307
-------- ------- -------
Operating income (loss) (12,511) 2,245 1,232
Other income (expense):
Interest expense (3,562) (1,281) (877)
Interest income and other items -- net 37 263 (44)
-------- ------- -------
Income (loss) before income taxes (16,036) 1,227 311
Income taxes 1,468 470 5
-------- ------- -------
Income (loss) before extraordinary item (17,504) 757 306
Extraordinary item, net of income taxes of $257 -- (385) --
-------- ------- -------
Net income (loss) $(17,504) $ 372 $ 306
======== ======= =======
Earnings (loss) per common share:
Basic:
Income (loss) before extraordinary item $ (1.46) $ 0.15 $ 0.21
Extraordinary item -- (0.08) --
-------- ------- -------
$ (1.46) $ 0.07 $ 0.21
======== ======= =======
Assuming dilution:
Income (loss) before extraordinary item $ (1.46) $ 0.10 $ 0.06
Extraordinary item -- (0.05) --
-------- ------- -------
$ (1.46) $ 0.05 $ 0.06
======== ======= =======
Weighted average common shares outstanding:
Basic 12,007 4,924 1,469
Assuming dilution 12,007 7,804 4,954
The accompanying notes are an integral part of these statements.
- 29 -
36
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
FOREIGN TOTAL
ADDITIONAL CURRENCY RETAINED SHAREHOLDERS
COMMON PAID-IN TRANSLATION EARNINGS EQUITY
STOCK CAPITAL ADJUSTMENT (DEFICIT) (DEFICIT)
------ ---------- ----------- --------- -------------
(In thousands, except share data)
YEAR ENDED SEPTEMBER 30, 1996
Balance at October 1, 1995 $ 1 $ 500 $ (512) $ (11)
Exercise of 50,000 incentive stock
options 5 5
Issuance of 499,996 shares in
connection with acquisition of
subsidiary 1 2,124 2,125
Net income 306 306
Other (18) (18)
--- ------- ---- -------- --------
Balance at September 30, 1996 2 2,611 (206) 2,407
YEAR ENDED SEPTEMBER 30, 1997
Conversion of subordinated notes for
600,000 shares 1 2,516 2,517
Issuance of 481,830 shares in
connection with acquisition of
subsidiaries 1 4,843 4,844
Sale of 5,175,000 shares in connection
with the initial public offering and
the exercise of the underwriters
overallotment 5 49,935 49,940
Conversion of 3,250,000 shares of
Preferred Stock into Common Stock 3 8,497 8,500
Issuance of warrants in connection
with debt agreements 413 413
Exercise of 399,500 stock options 583 583
Net income 372 372
Other 1,341 $(44) 1,297
--- ------- ---- -------- --------
Balance at September 30, 1997 12 70,739 (44) 166 70,873
YEAR ENDED SEPTEMBER 30, 1998
Exercise of 275,966 stock options and
warrants -- 912 912
Issuance of 42,384 shares in
connection with the employee stock
purchase plan -- 396 396
Issuance of 928 shares in connection
with acquisitions -- 16 16
Net loss -- -- -- (17,504) (17,504)
Other -- (90) 275 185
--- ------- ---- -------- --------
$12 $71,973 $231 $(17,338) $ 54,878
=== ======= ==== ======== ========
The accompanying notes are an integral part of these statements.
- 30 -
37
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------
1998 1997 1996
-------- ------- -------------
(In thousands)
OPERATING ACTIVITIES
Net income (loss) $(17,504) $ 372 $ 306
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Extraordinary item -- 385 --
Non-cash portion of special charges 17,378 1,138 --
Deferred income taxes (credit) 667 (503) --
Depreciation and amortization 3,326 1,229 442
Changes in working capital:
Accounts receivable 6,128 (8,951) (700)
Inventories (2,583) (827) 432
Costs in excess of billings (7,224) (13) (1,390)
Refundable income taxes (205) (123) --
Other assets (8,155) 462 (80)
Accounts payable 195 2,265 390
Accrued expenses 1,693 5 896
Billings in excess of costs (3,284) (2,725) (276)
Accrued income taxes 115 578 (34)
-------- ------- -------
Net cash used by operating activities (9,453) (6,708) (14)
INVESTING ACTIVITIES
Purchases of equipment (2,261) (1,072) (423)
Purchases of subsidiaries, net of cash acquired (53,430) (42,597) (5,557)
-------- ------- -------
Net cash used in investing activities (55,691) (43,669) (5,980)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 66,709 33,110 1,841
Payments on long-term borrowings (1,417) (30,866) (1,304)
Proceeds from sale of Common Stock 1,308 50,523 5
Proceeds from sale of Preferred Stock -- -- 4,576
-------- ------- -------
Net cash provided by financing activities 66,600 52,767 5,118
Effect of exchange rate changes on cash (13) (27) --
-------- ------- -------
Increase (decrease) in cash and cash equivalents 1,443 2,363 (876)
Cash and cash equivalents at beginning of year 2,482 119 995
-------- ------- -------
Cash and cash equivalents at end of year $ 3,925 $ 2,482 $ 119
======== ======= =======
The accompanying notes are an integral part of these statements.
- 31 -
38
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Waterlink, Inc. and its wholly-owned subsidiaries (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 1998, 1997 and
1996 refer to the fiscal years ended September 30, 1998, 1997 and 1996,
respectively.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
CONTRACTS AND REVENUE RECOGNITION -- The majority 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 direct engineering, 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 shipped.
INVENTORIES -- Inventories are valued at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
equivalents, trade receivables and notes 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. Notes receivable of approximately $2,800,000 from one
customer are classified in other long-term assets and are collateralized. Losses
from credit sales are provided for in the financial statements and have
historically been within management's expectations.
PROPERTY, PLANT AND EQUIPMENT -- 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.
- 32 -
39
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
GOODWILL -- Goodwill represents costs in excess of net assets of acquired
businesses which are amortized using the straight-line method over a period of
40 years. The Company evaluates the realizability of goodwill based on the
undiscounted cash flows of the applicable businesses acquired over the remaining
amortization period. Should the review indicate that goodwill is not
recoverable, the Company's carrying value of goodwill would be reduced by the
estimated shortfall of the cash flows (See Note 7).
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 average rates of exchange prevailing
during the year. The related translation adjustments are reflected as a separate
component of shareholders' equity. Foreign currency gains and losses resulting
from transactions are included in the results of operations and amounted to a
net gain of $91,000 in 1998 and $167,000 in 1997.
EARNINGS (LOSS) PER SHARE -- In 1997, the FASB issued SFAS No. 128,
Earnings Per Share, which replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share. In
addition, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 98, which became effective in February 1998. SAB 98 revises
the views of the staff contained in certain topics of the staff accounting
bulletin series, including SAB No. 83 -- Earnings Per Share Computations in an
Initial Public Offering, to be consistent with the provisions of SFAS No. 128.
All earnings per share amounts conform to the requirements of SFAS No. 128 and
SAB No. 98, where applicable (see Note 12).
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1997, the FASB
issued Statement No. 130, Reporting Comprehensive Income, which establishes
standards for the reporting and display of comprehensive income and its
components. This Statement is intended to address the concerns of financial
statement users' for the increasing number of items that bypass the income
statement, such as foreign currency translation adjustments. The Statement is
effective for the Company in fiscal 1999. The Company does not expect the
adoption of this Statement to have a material effect on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which changes the way public companies
report segment information in annual financial statements. The Statement also
requires public companies to report selected segment information in interim
financial reports to shareholders. The Statement is effective for the Company in
fiscal 1999 and restatement of comparative information for earlier years is
required in the initial year of adoption. The implementation of the 1999
Strategic Operating Plan will require the Company to present segmented industry
information upon adoption of SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The Statement will require, among other things, that all
derivatives be recorded on the balance sheet at fair value. The Statement is
effective for the
- 33 -
40
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
Company in fiscal 2000. The Company has not yet determined what the effect of
adopting SFAS No. 133 will be on its operations or financial position.
RECLASSIFICATIONS
Certain amounts reported in the 1997 financial statements have been
reclassified to conform to the 1998 presentation.
2. ACQUISITIONS
On March 2, 1998, the Company acquired Chemitreat Services, Inc.
("C'treat") for approximately $4,500,000; consisting of $2,250,000 in cash and
$2,250,000 in convertible subordinated notes. C'treat designs and manufactures
pure watermakers for use in the global offshore energy industry. The purchase
price includes approximately $3,685,000 of goodwill, which is being amortized on
a straight-line basis over 40 years.
On March 25, 1998, the Company acquired Aquafine Engineering Services
Limited ("AES") and Purac Engineering Incorporated ("Purac") in a single
transaction for approximately $7,572,000 in cash. AES designs and manufactures
industrial and municipal water and wastewater systems and solutions principally
for the United Kingdom market. Purac designs water and wastewater systems
principally for the United States municipal market. The purchase price includes
approximately $3,174,000 of goodwill, which is being amortized on a
straight-line basis over 40 years.
On June 5, 1998, the Company acquired Barnebey & Sutcliffe Corporation
("Barnebey"), Sutcliffe Speakman Carbons Limited ("Carbons") and Sutcliffe
Croftshaw Limited ("Croftshaw") in a single transaction for approximately
$45,000,000 in cash. Barnebey is located in the United States and Carbons and
Croftshaw are located in the United Kingdom. These three companies ("Carbons
Group") design, manufacture and market products and services utilizing activated
carbon for separation, concentration and purification of water, liquid and
gases. The purchase price includes approximately $29,441,000 of goodwill, which
is being amortized on a straight-line basis over 40 years.
During fiscal 1997, the Company completed five acquisitions of companies
that design and produce water and wastewater treatment systems. The Nordic Water
Products Group ("Nordic Group") was purchased effective March 5, 1997 for
approximately $11,256,000, consisting of $10,721,000 in cash and $535,000 of
seller notes. Bioclear Technology, Inc. ("Bioclear") and Lanco Environmental
Products, Inc. ("Lanco") were purchased effective June 27, 1997. The purchase
price for Bioclear was approximately $20,391,000, which consisted of $14,488,000
in cash, $2,285,000 of assumed debt and 328,947 shares of Common Stock valued at
$11 per share. Lanco was purchased for $2,200,000 in cash. Mellegard V.A.
Maskiner AB ("Meva") was purchased effective September 12, 1997 for
approximately $7,730,000, consisting of $6,059,000 in cash and $1,671,000 of
seller notes. Hycor Corporation ("Hycor") was purchased effective September 30,
1997 for approximately $17,002,000, consisting of $13,500,000 in cash,
$2,250,000 in convertible subordinated notes, $502,000 of assumed debt and
41,095 shares of Common Stock at $18.25 per share. The aggregate purchase price
of the 1997 acquisitions included approximately $46,316,000 of goodwill (Nordic
Group -- $5,919,000; Bioclear -- $17,849,000; Lanco -- $1,833,000;
Meva -- $5,844,000 and Hycor -- $14,871,000), which is being amortized on a
straight-line basis over 40 years. During fiscal 1998, the Company made the
decision to exit the Bioclear business due to the lack of order inflow and
- 34 -
41
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
proposal opportunities, the unreliability of Bioclear's niche market, and the
turnover in upper management of Bioclear. As a result of the Company's decision
to exit the business, the unamortized balance of Bioclear goodwill was written
off as part of the special charges to operations discussed in Note 7.
During fiscal 1996, the Company completed the acquisition of three
companies that design and produce water and wastewater treatment systems. Mass
Transfer Systems, Inc. was purchased effective January 31, 1996 for
approximately $8,000,000, consisting of $3,500,000 in cash, $4,100,000 in seller
notes and $400,000 of assumed debt. Aero-Mod, Inc. and Affiliates was purchased
effective April 26, 1996 for approximately $2,700,000, consisting of $1,300,000
in cash, $700,000 in seller notes and $700,000 in assumed debt. Water Equipment
Technologies, Inc. was purchased effective September 30, 1996 for approximately
$5,200,000, consisting of $2,600,000 in cash and 611,784 shares of Common Stock
valued at $4.25 per share. The aggregate purchase price of the 1996 acquisitions
included approximately $9,365,000 of goodwill (Mass Transfer
Systems -- $5,737,000; Aero-Mod -- $78,000 and Water Equipment
Technologies -- $3,550,000), which is being amortized on a straight-line basis
over 40 years.
All of the acquisitions were accounted for as purchases. The purchase
price allocations for certain of the Company's 1998 acquisitions have been based
on preliminary estimates, which may be revised at a later date, due primarily to
obtaining property appraisals and actuarial valuations. The Company does not
believe that these revisions will result in a significant change to the purchase
allocations. The consolidated statements of operations of the Company includes
the results of operations of the acquired businesses for the period subsequent
to the effective date of these acquisitions.
Under the terms of certain of the purchase agreements, the Company may be
required to make additional purchase consideration payments of up to $2,468,000,
contingent upon the achievement of specified operating results through fiscal
2000. The payments that are expected to be required for meeting fiscal 1999 and
2000 targets are $1,468,000 and $1,000,000, respectively. Any such additional
purchase consideration payments will be treated as additional goodwill for
accounting purposes.
The following unaudited pro forma information presents the consolidated
results of operations of the Company assuming the acquisitions discussed above
were completed on October 1, 1996:
1998 1997
-------- --------
(In thousands)
Net sales $183,521 $183,843
Operating income (loss) (8,443) 12,613
Income (loss) before taxes and extraordinary item (14,617) 4,605
Income (loss) before extraordinary item (16,360) 2,763
Net income (loss) (16,360) 2,378
Per common share-basic:
Income (loss) before extraordinary item $(1.36) $0.53
Net income (loss) (1.36) 0.46
Per common share-assuming dilution:
Income (loss) before extraordinary item $(1.36) $0.34
Net income (loss) (1.36) 0.29
- 35 -
42
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
The pro forma results of operations are not indicative of the actual
results of operations that would have occurred had the acquisitions been made on
the date indicated, or the results that may be obtained in the future. Pro forma
operating results for the year ended September 30, 1998 reflect $21,636,000 of
special charges incurred in connection with the Company's fiscal 1999 Strategic
Operating Plan as described in Note 7. Pro forma operating results for the year
ended September 30, 1997 reflect the $2,630,000 special charge incurred in
connection with the Initial Public Offering, as described in Note 7. The 1997
pro forma operating results do not reflect the use of proceeds of the Initial
Public Offering in June 1997 and the related reduction of indebtedness.
3. INVENTORIES
Inventories consisted of the following:
SEPTEMBER 30,
------------------
1998 1997
------- -------
(In thousands)
Raw materials and supplies $11,843 $ 4,821
Work in process 3,500 1,842
Finished goods 6,817 3,480
------- -------
$22,160 $10,143
======= =======
4. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is
as follows:
SEPTEMBER 30,
------------------
1998 1997
------- -------
(In thousands)
Contract costs incurred to date $57,435 $17,033
Estimated profits 24,497 7,793
------- -------
Contract revenue earned to date 81,932 24,826
Less billings to date 68,129 21,838
------- -------
Cost and estimated earnings in excess of billings, net $13,803 $ 2,988
======= =======
The above amounts are included in the accompanying consolidated balance
sheet as:
SEPTEMBER 30,
------------------
1998 1997
------- -------
(In thousands)
Costs in excess of billings $17,195 $ 6,413
Billings in excess of costs 3,392 3,425
------- -------
$13,803 $ 2,988
======= =======
Amounts receivable include retainage which has been billed, but is not
due pursuant to retainage provisions in construction contracts until completion
of performance and acceptance by the
- 36 -
43
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
customer. This retainage aggregated $1,411,000 at September 30, 1998, and
$1,294,000 at September 30, 1997. Substantially all retained balances are
collectible within one year.
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
SEPTEMBER 30,
-------------------
1998 1997
-------- -------
(In thousands)
LONG-TERM DEBT
Revolving credit agreements with a bank, due May 19,
2003. Interest is payable monthly at designated
variable rates (average rate of 7.93% at September
30, 1998) $ 43,000 $12,000
Term note payable to a bank, quarterly payments ranging
from $1,000,000 in March 1999 to $2,500,000 in March
2003, with the balance due upon maturity. Interest is
payable quarterly at variable rates (7.88% at
September 30, 1998) 35,000 --
Notes payable to a bank, due January 14, 1999. Interest
is payable at maturity (average rate of 6.03% at
September 30, 1998) 2,535 2,003
Other notes payable to various parties 862 1,037
CONVERTIBLE SUBORDINATED NOTES -- RELATED PARTIES
Note payable to former shareholders of Meva, due
September 12, 1999. Interest accrues at 3% per annum
and is payable on a quarterly basis 1,671 1,671
Note payable to a former shareholder of Hycor, due
September 30, 1999. Interest accrues at 5.81% per
annum and is payable on a quarterly basis 2,000 2,250
Note payable to former shareholders of C'treat, due
March 2, 2001. Interest accrues at 5.54% per annum
and is payable on a quarterly basis 2,250 --
-------- -------
87,318 18,961
Less current maturities 9,429 2,538
-------- -------
$ 77,889 $16,423
======== =======
Future maturities of long-term obligations for the five years subsequent
to September 30, 1998 are as follows: 1999 -- $9,429,000; 2000 -- $4,177,000;
2001 -- $10,315,000; 2002 -- $10,071,000 and 2003 -- $53,074,000.
Interest paid approximated $2,758,000 in 1998, $1,605,000 in 1997 and
$631,000 in 1996.
On February 19, 1997, the Company entered into a credit facility with
Bank of America National Trust & Savings Association ("Pre IPO Credit
Facility"). Proceeds from the Pre IPO Credit Facility were used to acquire the
Nordic Group and to refinance certain indebtedness in connection with the
acquisition. As additional consideration for the Pre IPO Credit Facility, the
Company granted the Bank, pursuant to an agreement dated February 19, 1997, a
warrant, expiring in 2002, to purchase
- 37 -
44
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
225,000 shares of Common Stock at a purchase price of $4.50 per share. The
aggregate fair value of the 225,000 warrants issued of $265,500 ($1.18 per
share) was treated as an original issue discount and was subsequently written
off in connection with the extraordinary charge discussed in Note 8. The
warrants under this agreement have not been exercised as of September 30, 1998.
On June 27, 1997, concurrent with the closing of its Initial Public
Offering, the Company terminated its Pre IPO Credit Facility and entered into
its $40,000,000 three year, secured, domestic revolving credit facility with
Bank of America National Trust & Savings Association as agent (the "Post IPO
Credit Facility"). The Post IPO Credit Facility also permits the Company's
overseas subsidiaries to incur up to $10,000,000 of additional unsecured
indebtedness.
On June 5, 1998, concurrent with the acquisition of the Carbons Group,
the Company amended and restated its Post IPO Credit Facility by entering into a
$110,000,000 secured, domestic facility, comprised of a $75,000,000 revolving
facility and a $35,000,000 term loan (the "New Domestic Facility"). On September
30, 1998, the New Domestic Facility was amended to allow for the implementation
of the 1999 Strategic Operating Plan described in Note 7 and the Company reduced
the New Domestic Facility to $87,000,000, comprised of a $52,000,000 revolving
facility and a $35,000,000 term loan (the "Amended Credit Facilities"). The
Company's Amended Credit Facilities expire on May 19, 2003, and combined with
the three oversees facilities will be utilized to fund operating activities of
the Company, as well as future acquisitions.
Availability for future borrowings under the Amended Credit Facilities is
based on a multiple of the Company's pro forma earnings before interest, taxes,
depreciation and amortization. At September 30, 1998, approximately $4,100,000
was available for future borrowings under the Amended Credit Facilities.
Loans under the Amended Credit Facilities bear interest at a designated
variable base rate plus spreads ranging from 0 to 25 basis points depending on
the ratio of total consolidated indebtedness to the Company's earnings before
interest, taxes, depreciation and amortization. At the Company's option, the
credit facilities bear interest based on a designated London interbank offering
rate ("LIBOR") or prime plus spreads ranging from 100 to 225 basis points,
depending on the Company's aforementioned leverage ratio. Certain borrowings
under the Amended Credit Facilities are subject to an interest rate swap
agreement (see Note 14).
The Amended Credit Facilities restrict or prohibit the Company from
taking many actions, including paying dividends and incurring or assuming other
indebtedness or liens. The banks that participate in the Amended Credit
Facilities also must approve most acquisitions. The Company's obligations under
the Amended Credit Facility are secured by liens on substantially all of the
Company's domestic assets, including equipment, inventory, accounts receivable
and general intangibles and the pledge of most of the stock of the Company's
subsidiaries. The Company has guaranteed the payment by its three overseas
subsidiaries of their obligations under the overseas facilities. The three
overseas subsidiaries have given a negative pledge of their assets in connection
with their facilities.
The conversion rate on convertible subordinated notes payable to former
shareholders of acquired companies range from $15.63 to $22.25.
In March 1997, the Company entered into a note purchase agreement (the
"Note Purchase Agreement") pursuant to which the Company could issue, and
several purchasers had committed to
- 38 -
45
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
purchase, five year subordinated notes (the "1997 Notes"). The 1997 Notes were
not drawn on by the Company and upon the consummation of the Initial Public
Offering the Note Purchase Agreement terminated in accordance with its terms. In
consideration of entering into the Note Purchase Agreement, parties agreeing to
be purchasers of the 1997 Notes received 125,000 warrants to purchase shares of
common stock at a purchase price of $4.50 per share. The aggregate fair value of
the 125,000 warrants issued of $148,000 ($1.18 per share) was initially
capitalized as deferred financing costs and was subsequently written off in
connection with the extraordinary item discussed in Note 8. At September 30,
1998, warrants to purchase 62,500 shares of Common Stock were outstanding.
6. LEASES
The Company leases certain facilities and equipment under operating
leases, some of which are with entities controlled by former shareholders of
certain acquired businesses. Rent expense totaled $2,072,000 in 1998, $959,000
in 1997 and $241,000 in 1996. Related party rent expense included in these
totals amounted to $758,000 in 1998, $438,000 in 1997 and $116,000 in 1996.
Aggregate future minimum lease payments under noncancelable operating leases at
September 30, 1998 are as follows:
RELATED
PARTY OTHER
LEASES LEASES TOTAL
------- ------ -------
(In thousands)
1999 $ 876 $1,558 $ 2,434
2000 886 1,206 2,092
2001 766 1,167 1,933
2002 389 1,101 1,490
2003 415 670 1,085
Thereafter 3,600 2,015 5,615
------ ------ -------
$6,932 $7,717 $14,649
====== ====== =======
7. SPECIAL CHARGES
During the fourth quarter of fiscal 1998, the Company's Board of
Directors approved the 1999 Strategic Operating Plan (the "1999 Plan") which is
designed to reorganize the Company from a holding company with 23 operating
companies into five integrated divisions that focus on specific market segments.
The 1999 Plan, which will eliminate redundant costs and improve operating
efficiencies, is expected to be substantially completed by the end of fiscal
1999. The plan includes costs associated with the exiting and consolidation of
certain facilities and employee termination costs. Costs associated with this
plan of approximately $2,858,000 were recognized during 1998. The 1999 Plan will
reduce the Company's domestic and foreign workforce by approximately 75 people
and eliminate certain production-related functions no longer required. At
September 30, 1998, 41 employees have been terminated in conjunction with the
1999 Plan. Due to the timing of certain termination benefits and facility
consolidation costs, the reserve is expected to be utilized throughout 1999 and
2000. Other costs associated with the 1999 Plan of approximately $1,000,000,
which do not meet the criteria for recognition at September 30, 1998, will be
recognized in future periods as
- 39 -
46
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
incurred. The following table summarizes the provisions, payments and remaining
reserves associated with the 1999 Plan:
OTHER
TERMINATION EXIT
BENEFITS COSTS TOTAL
----------- ---------- ------
(In thousands)
Provision in 1998 $1,076 $1,782 $2,858
Payments in 1998 (120) (480) (600)
------ ------ ------
Reserve at September 30, 1998 $ 956 $1,302 $2,258
====== ====== ======
The Company also recorded a $17,284,000 non-cash charge during the fourth
quarter of 1998, consisting of $15,967,000 related to the impairment of goodwill
associated with the June 1997 Bioclear acquisition and $1,317,000 to write off
the cumulative translation adjustment component of Bioclear's equity. In
conjunction with the 1999 Plan, the Company determined that it would exit the
acquired Bioclear business and the associated goodwill was therefore, not
recoverable. The impairment charge was determined by reducing the carrying value
of Bioclear's assets to fair value utilizing a certified independent third party
valuation.
The Company also incurred a special charge during the third quarter of
fiscal 1998 of approximately $1,494,000 primarily attributable to contractual
obligations of the Company to its former chief executive officer, who resigned
in June 1998, and costs necessary to recruit executives to the Company.
The special charges of $2,630,000 for the year ended September 30, 1997
resulted primarily from the issuance, concurrent with the Initial Public
Offering, of a ten year option to purchase 100,000 shares of common stock at a
price of $0.10 per share to an officer of the Company pursuant to terms of an
employment agreement. Of this amount, approximately $1,138,000 was non-cash and
the remainder represented cash obligations related principally to the
reimbursement of income taxes resulting from the stock option issuance.
8. EXTRAORDINARY ITEM
The Company used a portion of the proceeds from its Initial Public
Offering to repay substantially all of its outstanding indebtedness. In
addition, concurrent with the Initial Public Offering the Company canceled the
Note Purchase Agreement discussed in Note 5. In connection with the early
retirement of certain indebtedness and the cancellation of the Note Purchase
Agreement, the Company realized an extraordinary charge of $385,000, net of
taxes of $257,000, related to the write-off of unamortized debt issuance costs
and discounts associated with this indebtedness. This extraordinary item on a
per share basis - assuming dilution was $0.05 for the year ended September 30,
1997.
- 40 -
47
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
9. INCOME TAXES
The provision for income taxes consists of the following:
1998 1997 1996
------ ---- ----
(In thousands)
Current:
U.S. federal $ -- $807 $--
State and local 111 (48) 5
Foreign 690 214 --
------ ---- ---
801 973 5
Deferred (credit):
U.S. federal 620 (620) --
Foreign 47 117 --
------ ---- ---
667 (503) --
------ ---- ---
$1,468 $470 $ 5
====== ==== ===
The Company made income tax payments of approximately $979,000 in 1998,
$220,000 in 1997 and $40,000 in 1996.
Following is the reconciliation between the provision (credit) for income
taxes and the amount computed by applying the statutory U.S. federal income tax
rate of 34% to income before income taxes:
1998 1997 1996
------- ---- ----
(In thousands)
Provision (credit) for income taxes at the statutory
federal rate $(5,452) $417 $106
Adjustments:
State and local income taxes 111 (32) 5
Non-deductible goodwill amortization 247 71 --
Difference in rates on foreign subsidiaries 45 (46) --
Change in valuation allowance 6,141 46 (99)
Other 376 14 (7)
------- ---- ----
Provision for income taxes $ 1,468 $470 $ 5
======= ==== ====
Effective income tax rate (9)% 38% 2%
======= ==== ====
- 41 -
48
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- 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:
1998 1997 1996
------- ------ ----
(In thousands)
Deferred tax assets:
Net operating loss carryforward $15,100 $ 771 $152
Other 3,010 645 133
Valuation allowance (16,124) (110) (64)
------- ------ ----
1,986 1,306 221
Deferred tax liabilities:
Amortization of goodwill (553) (261) (164)
Revenue recognition (1,164) (485) --
Other (433) (57) (57)
------- ------ ----
(2,150) (803) (221)
------- ------ ----
Net deferred tax asset (liability) $ (164) $ 503 $ -
======= ====== ====
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, $1,497,000 in Germany and $509,000 in
the United States due primarily to net operating loss carryforwards existing in
these tax jurisdictions. The benefit of these net operating loss carryforwards
realized in the future will be recorded as a reduction of goodwill rather than
as a credit to income tax expense during that period. During 1998, an income tax
benefit of $350,000 was recorded which resulted in a corresponding decrease in
goodwill.
For tax purposes, the Company has U.S. federal loss carryforwards of
$17,629,000 which expire in the year 2018 and foreign net operating loss
carryforwards of $25,389,000, $2,211,000 of which expire in 2005 and $23,178,000
that have no expiration date. A valuation allowance has been established for the
entire amount of these net operating loss carryforwards since the realization is
uncertain.
The Company plans to continue to finance expansion of its operations
outside of the United States by reinvesting undistributed earnings of its
non-U.S. subsidiaries. The amount of undistributed earnings considered to be
indefinitely reinvested for this purpose was approximately $4,600,000 at
September 30, 1998. 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.
10. 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
- 42 -
49
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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 11).
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 11).
Collectively, 2,750,000 shares of Common Stock are available for granting
of awards under the above plans at September 30, 1998.
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 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. The Stock Purchase Plan will terminate in 2007.
11. 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.
The Company has elected to follow APB Opinion 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 FASB Statement No. 123, "Accounting For Stock Based Compensation" ("SFAS
123"), requires use of option valuation methods that were not developed for use
in valuing employee stock options. Under APB 25, compensation expense has been
recognized for all options granted at less than the fair market value of the
Company's common shares on the date of grant (see Note 7).
Pro forma information regarding net income and earnings per share is
required by SFAS 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 options and the options granted as part of the
- 43 -
50
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
Plan were estimated at the date of grant using a Black-Scholes option pricing
model. The Company utilized the following weighted-average assumptions for 1998,
1997 and 1996; risk-free interest rate of 6.0%, dividend yield rate of 0% and a
weighted-average expected life of the options of 5 years. Further, the
volatility factor of the expected market price of the Company's stock was 26% in
1998 and 30% in 1997 and 1996. Using the Black-Scholes model, the
weighted-average grant-date fair value of options granted during 1998, 1997 and
1996 in the Stock Option Plan follows:
1998 1997 1996
---------------- ---------------- ----------------
FAIR EXERCISE FAIR EXERCISE FAIR EXERCISE
VALUE PRICE VALUE PRICE VALUE PRICE
----- -------- ----- -------- ----- --------
Stock price:
Equals exercise price $3.14 $8.98 $4.28 $11.20 $1.53 $3.92
Greater than exercise price -- -- -- -- 4.18 .10
Less than exercise price -- -- -- -- 1.54 4.40
The weighted-average grant-date fair values of the shares granted during
1998 and 1997 under the Stock Purchase Plan were $2.14 and $4.86, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which 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.
For purposes of pro forma disclosures, the estimated value of the options
is amortized to expense over the options' vesting period. The pro forma results
are not necessarily indicative of what would have occurred had the Company
adopted SFAS 123. The Company's pro forma information follows:
1998 1997 1996
----------- -------- -------
(In thousands, except per share data)
Pro forma net income (loss) $(18,249) $(331) $268
Pro forma earnings (loss) per share -- basic (1.52) (.07) .18
Pro forma earnings (loss) per share -- assuming dilution (1.52) (.07) .05
- 44 -
51
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
A summary of the Company's stock option activity and related information
follows:
1998 1997 1996
-------------------- -------------------- ------------------
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 1,290,800 $8.48 666,500 $2.96 215,000 $ .10
Granted 825,000 8.98 808,800 9.98 501,500 3.88
Exercised (230,500) 3.96 (184,500) .33 (50,000) .10
Canceled (1,000) 12.09
--------- ----- --------- ----- ------- -----
Outstanding at end of year 1,884,300 $9.25 1,290,800 $8.48 666,500 $2.96
========= ===== ========= ===== ======= =====
Exercisable at end of year 754,325 $8.00 583,000 $3.98 3,750 --
========= ===== ========= ===== ======= =====
Available for future Options 400,700 74,700 83,500
========= ========= =======
The Company has reserved 2,572,500 shares of Common Stock for possible
exercise of outstanding stock options and warrants.
- 45 -
52
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share.
1998 1997 1996
----------- --------- ---------
(In thousands, except per share data)
Numerator:
Income (loss) before extraordinary item $(17,504) $ 757 $ 306
Extraordinary item, net of tax -- (385) --
-------- ------ ------
Income (loss) available to common stockholders for
basic and diluted earnings per share $(17,504) $ 372 $ 306
======== ====== ======
Denominator:
Average shares outstanding -- basic 12,007 4,924 1,469
Effect of dilutive securities:
Conversion of preferred stock into common stock -- 2,395 3,250
Stock options and warrants -- 485 235
-------- ------ ------
Dilutive potential common shares -- 2,880 3,485
-------- ------ ------
Denominator for diluted earnings per share --
Adjusted weighted-average shares and assumed
conversions 12,007 7,804 4,954
======== ====== ======
Earnings (loss) per common share:
Basic:
Income (loss) before extraordinary item $ (1.46) $ 0.15 $ 0.21
Extraordinary item, net of tax -- (0.08) --
-------- ------ ------
$ (1.46) $ 0.07 $ 0.21
======== ====== ======
Assuming dilution:
Income (loss) before extraordinary item $ (1.46) $ 0.10 $ 0.06
Extraordinary item, net of tax -- (0.05) --
-------- ------ ------
$ (1.46) $ 0.05 $ 0.06
======== ====== ======
For the fiscal year ended September 30, 1998, certain issuances of
potential common stock were excluded from the computation of diluted earnings
per share since their inclusion in the computation would have an anti-dilutive
effect. Further, certain outstanding convertible subordinated notes in 1997 and
1996 have been excluded from the computation of diluted earnings per share,
since they would have an anti-dilutive effect on earnings per share.
13. RETIREMENT PLANS
In conjunction with the acquisition of the Carbons Group on June 5, 1998,
the Company acquired two defined benefit pension plans. The Company acquired a
U.K. plan, which covers substantially all of the employees of Carbons and
Croftshaw, and a U.S. plan, which covers
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53
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
substantially all of the employees of Barnebey. Information pertaining to the
Company's defined benefit pension plans follows (in thousands):
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at October 1, 1997 $ --
Benefit obligations assumed in connection with acquisitions 8,449
------
8,449
Service cost 171
Interest cost 195
Plan participants' contributions 41
Actuarial gains (53)
Benefits paid (53)
Foreign currency exchange rate changes 251
------
Benefit obligation at September 30, 1998 $9,001
======
CHANGE IN PLAN ASSETS
Plan assets at October 1, 1997 $ --
Plan assets acquired 9,756
------
9,756
Actual return on plan assets (241)
Company contributions 55
Plan participants' contributions 41
Benefits paid (53)
Foreign currency exchange rate changes 322
------
Plan assets at September 30, 1998 $9,880
======
FUNDED STATUS
Plan assets in excess of benefit obligations $ 879
Unrecognized actuarial loss 496
------
Prepaid benefit cost, net $1,375
======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF SEPTEMBER 30, 1998
Discount rate 7.00%
Expected return on plan assets 9.00%
Rate of compensation increase 3.50
to 4.50%
COMPONENTS OF NET PERIODIC PENSION COST
Service cost $ 171
Interest cost 195
Expected return on plan assets (291)
------
Net periodic pension cost $ 75
======
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54
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
Amounts applicable to the Company's pension plan with accumulated benefit
obligations in excess of plan assets are (in thousands):
Projected benefit obligation $3,346
Accumulated benefit obligation 3,010
Fair value of plan assets 2,775
In addition to the defined benefit plans acquired in the Carbons Group
acquisition, the Company has certain other employees, all located in the United
Kingdom, which currently participate in a defined benefit pension plan operated
and funded by their former parent company. In accordance with the terms of the
sale and purchase agreement, the Company is required to make contributions to
the plan for a period not to exceed twelve months from the acquisition date, or
March 1999. Upon expiration of the twelve-month period, the participants (and
related plan assets and benefit obligation) will be transferred into a defined
benefit pension plan funded and administered by the Company's U.K. operations.
The net asset or obligation associated with this plan is not determinable at
September 30, 1998.
The Company also sponsors a defined contribution plan which covers
substantially all domestic employees. Company contributions to the Plan totaled
$94,000 in 1998 and $13,000 in 1997. No Company contributions were made in 1996.
14. 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 --
related parties, have variable rates and cost approximates fair value at
September 30, 1998. The convertible subordinated notes -- related parties do not
have a ready market and cost is assumed to approximate fair value. The aggregate
carrying value of these notes is $5,921,000 at September 30, 1998, with interest
rates ranging from 3.00% to 5.81% and maturity dates ranging from September 1999
to March 2001.
During 1998, the Company entered into an interest rate swap agreement
with a major commercial bank to modify the interest characteristics of its
Amended Domestic Facility. The agreement involves the exchange of amounts based
on a fixed rate of interest for an amount based on a LIBOR-based floating rate
over the life of the agreement without an exchange of the notional amount upon
which the payments are based. The agreement, which expires on December 30, 1999,
fixes the Company's LIBOR-based rate at 5.25% on a notional amount of
$75,000,000. The differential to be paid or received as the interest rates
change is accrued and recognized as an adjustment of interest expense related to
the debt. The amount payable to or receivable from its counterparty is included
in other liabilities or assets. The fair value of the swap agreement and changes
in the fair value as a result of changes in market interest rates are not
recognized in the financial statements. The fair value of the swap agreement at
September 30, 1998 was a loss of $388,000. The counterparty to the agreement is
a major commercial bank. Management believes that any loss related to credit
risk is remote.
The Company uses a limited number of foreign exchange instruments,
primarily forward contracts, to manage exposure to currency rate fluctuations
primarily related to the purchases of inventory. Gains and losses incurred on
foreign exchange instruments identified as hedges are deferred
- 48 -
55
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
and recognized in income in the same period as the hedged transaction. The
deferred gains or losses from hedging anticipated transactions were not material
to the Company's financial condition at September 30, 1998 and 1997.
15. GEOGRAPHIC AREA DATA
The Company operates in a single industry, providing integrated water and
wastewater treatment solutions to industry and municipalities worldwide. The
Company has a strategy of acquisition and internal growth to provide integrated
products, technologies and services to water users globally. Export sales
represented approximately one-fifth of U.S. sales in 1998 and one-third in 1997
and 1996.
Revenue transfers between geographic areas and other intergeographic
eliminations are not material. The Company does not derive more than 10% of its
total revenue from any individual customer.
Prior to 1997, the Company's operations were all domestic. Information by
geographic area for the years ended September 30, 1998 and 1997 follows:
UNITED
STATES EUROPE CANADA CONSOLIDATED
------- ------- -------- ------------
(In thousands)
1998
Net sales $74,719 $57,676 $ 2,772 $135,167
Operating income (loss) (1) 332 3,847 (16,690) (12,511)
Income (loss) before income
taxes (1) 1,379 1,765 (19,180) (16,036)
Assets employed at year end 112,200 66,940 4,421 183,561
1997
Net sales $43,015 $20,556 $ 1,128 $ 64,699
Operating income (2) 787 1,323 135 2,245
Income (loss) before income
taxes (2) 431 1,162 (366) 1,227
Assets employed at year end 62,489 32,317 21,054 115,860
- ---------------
(1) The special charges of $21,636,000 were recorded as follows: United
States -- $3,335,000; Europe -- $1,017,000; Canada -- $17,284,000.
(2) The special charge of $2,630,000 is included under the United States.
- 49 -
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item is located on pages 3 through 7 of the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of the Company's fiscal year
ended September 30, 1998 and is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this item is located on pages 8 through 15 of the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of the Company's fiscal year
ended September 30, 1998 and is incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is located on pages 2 and 3 of the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of the Company's fiscal year
ended September 30, 1998 and is incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
- 50 -
57
PART IV
ITEM 14. 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:
Report of Independent Auditors
Consolidated Balance Sheets at September 30, 1998 and 1997
Consolidated Statements of Operations for the years ended September 30,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended September 30,
1998, 1997 and 1996
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
DATE ITEM FINANCIAL STATEMENTS
---- ---- --------------------
August 14, 1998 #7 Historical Combined Financial Statements of
Barnebey & Sutcliffe Corporation and Combined
Affiliates.
Unaudited Pro Forma Condensed Consolidated
Financial Data of Waterlink, Inc. and
Subsidiaries.
(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 and
NYSE.
- 51 -
58
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/ T.Scott King
---------------------------------
Its President and Chief Executive
Officer
Date: December 1, 1998
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/ John R. Miller /s/ Robert P. Pinkas
- ------------------------------------------- -------------------------------------------
John R. Miller, Robert P. Pinkas,
Director Director
Date: December 1, 1998 Date: December 1, 1998
/s/ Rollin S. Reiter /s/ Dr. Paul M. Sutton
- ------------------------------------------- -------------------------------------------
Rollin S. Reiter, Dr. Paul M. Sutton,
Director Director
Date: December 1, 1998 Date: December 1, 1998
/s/ Theodore F. Savastano /s/ T. Scott King
- ------------------------------------------- -------------------------------------------
Theodore F. Savastano, T. Scott King,
Director and Chairman of the Board Director, President and Chief Executive
Date: December 1, 1998 Officer
Date: December 1, 1998
/s/ Michael J. Vantusko
- -------------------------------------------
Michael J. Vantusko,
Chief Financial Officer
(and principal accounting officer)
Date: December 1, 1998
- 52 -
59
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
*3.1 Form of Fifth Amended and Restated Certificate of
Incorporation of the Company (filed as an exhibit to the
Company'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 the Company (filed
as an exhibit to the Company'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
the Company and American Stock Transfer & Trust Company
(filed as an exhibit to the Company'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 the Company, 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 the
Company's Registration Statement on Form S-1, filed
April 16, 1997, Registration No. 333-25249).
*4.3 Registration Rights Agreement, dated as of January 31, 1996,
between the Company and Mass Transfer Systems, Inc (filed as
an exhibit to the Company's Registration Statement on
Form S-1, filed April 16, 1997, Registration No. 333-25249)
*4.4 Registration Rights Agreement, dated as of April 26, 1996,
between the Company and Lawrence A. Schmid (filed as an
exhibit to the Company's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249)
*4.5 Registration Rights Agreement dated as of September 30,
1996, between the Company, Lawrence Stenger, Theresa
Stenger, Ronald Jaworski, Christine Jaworski, John Stenger,
Dawn P. Stenger, Scott Stenger, Kristie D. Stenger, Jorg
Menningman, Michael Mudrick, Robert Young and Gary Prae
(filed as an exhibit to the Company's Registration Statement
on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.1 Employment Agreement, dated May 23, 1997, between the
Company and Chet S. Ross (filed as an exhibit to the
Company's Amendment No. 1 to Registration Statement on
Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.2 Employment Agreement, dated May 23, 1997, between the
Company and Theodore F. Savastano (filed as an exhibit to
the Company's Amendment No. 1 to Registration Statement on
Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.3 Employment Agreement, dated May 23, 1997, between the
Company and Michael J. Vantusko (filed as an exhibit to the
Company's Amendment No. 1 to Registration Statement on Form
S-1, filed May 23, 1997, Registration No. 333-25249).
*10.4 Employment Agreement, dated May 23, 1997, between the
Company and L. Dean Hertert, Jr. (filed as an exhibit to the
Company's Amendment No. 1 to Registration Statement on
Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.5 Employment Agreement, dated July 1, 1987, between Nordic
Water Products AB and Dr. Hans F. Larsson (filed as an
exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
- 53 -
60
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
*10.6 Credit Agreement, dated as of February 19, 1997 among the
Company, Bank of America Illinois, as agent, and the other
financial institutions party thereto (filed as an exhibit to
the Company's Registration Statement on Form S-1, filed
April 16, 1997, Registration No. 333-25249)
*10.7 Brantley Guaranty, dated as of February 19, 1997, by
Brantley Venture Partners, III, L.P. in favor of Bank of
America Illinois, as agent, on behalf of the other financial
institutions party to the Credit Agreement, dated as of
February 19, 1997 (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.8 Credit Agreement, dated as of June 27, 1997, among the
Company, 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 the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, File No. 1-13041)
*10.9 Credit Agreement, dated as of March 4, 1997, among
Gigantissimo 2061 AB (to be known as Waterlink (Sweden) AB),
the Company, as guarantor, and Bank of America National
Trust & Savings Association, London Branch (filed as an
exhibit to the Company's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249).
*10.10 First Amendment, dated as of June 27, 1997, to Credit
Agreement, dated March 4, 1997, among Waterlink (Sweden) AB,
the Company, as guarantor, and Bank of America National
Trust & Savings Association, London Branch (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1997, File No. 1-13041)
*10.11 Credit Agreement, dated as of March 4, 1997, among Provista
Einhundertsechsundfunfzigste Verwaltungsgesellschaft mbH (to
be known as Waterlink (Germany) GmbH), Waterlink, Inc., as
guarantor, and Bank of America National Trust & Savings
Association, Frankfurt Branch (filed as an exhibit to the
Company's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249).
*10.12 First Amendment, dated as of June 27, 1997, to Credit
Agreement, dated March 4, 1997, among Waterlink (Germany)
GmbH, the Company, as guarantor, and Bank of America
National Trust & Savings Association, Frankfurt Branch
(filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1997, File
No. 1-13041)
*10.13 Common Stock Warrant Agreement, dated as of February 19,
1997, between the Company and Bank of America Illinois
(filed as an exhibit to the Company's Registration Statement
on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.14 The Company's 1995 Stock Option Plan (filed as an exhibit to
the Company's Registration Statement on Form S-1, filed
April 16, 1997, Registration No. 333-25249).
*10.15 Subordinated Note Purchase Agreement and Credit Facility,
dated as of March 6, 1997, among the Company, Brantley
Venture Partners III, L.P. and the purchasers named therein,
along with the Form of Subordinated Note due 2002 attached
thereto as Exhibit A (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
- 54 -
61
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
*10.16 Warrant Agreement, dated as of March 6, 1997, among the
Company and each of the purchasers named therein, along with
the Form of Warrant to Purchase Common Stock, attached
thereto as Exhibit A (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.17 The Company's 1997 Omnibus Incentive Plan (filed as an
exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
*10.18 Asset Purchase Agreement, dated January 31, 1996, among the
Company, Waterlink Acquisition Corporation, Mass Transfer
Systems, Inc., Mark E. Neville and Frederick J. Siino (filed
as an exhibit to the Company's Registration Statement on
Form S-1, filed April 16, 1997, Registration No. 333-25249).
*10.19 Asset Purchase Agreement, dated April 26, 1996, among the
Company, A-M Acquisitions Corp., Aero-Mod Incorporated,
Resi-Tech, Inc. and Lawrence A. Schmid (filed as an exhibit
to the Company's Registration Statement on Form S-1, filed
April 16, 1997, Registration No. 333-25249).
*10.20 Asset Purchase Agreement, dated April 26, 1996, among the
Company, B-W Acquisition Corp., Blue Water Services, Inc.
and Lawrence A. Schmid (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.21 Agreement and Plan of Merger, dated September 27, 1996, by
and among the Company, Wet Acquisition Corp. and Water
Equipment Technologies, Inc. and the shareholders of Water
Equipment Technologies, Inc (filed as an exhibit to the
Company's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249).
*10.22 Share Purchase Agreement, dated March 4, 1997, among
Waterlink (Sweden) AB, Waterlink (Germany) GmbH, Awpe
Svenska AB and Anglian Water Holding GmbH (filed as an
exhibit to the Company's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249).
*10.23 Purchase and Sale Agreement, dated March 14, 1995, among
Santech, Inc. (as assignee from the Company pursuant to an
Assignment of Purchase and Sale Agreement dated March 28,
1995) and Sanborn, Inc (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.24 Asset Purchase Agreement, dated August 28, 1995, among Great
Lakes Environmental, Inc., a Delaware corporation (as
assignee from the Company pursuant to an Assignment dated
August 31, 1995), Great Lakes Environmental, Inc., an
Illinois corporation, Lawrence Field and David Field (filed
as an exhibit to the Company's Registration Statement on
Form S-1, filed April 16, 1997, Registration No. 333-25249).
*10.25 The Company's Employee Stock Purchase Plan (filed as an
exhibit to the Company's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249)
*10.26 First Amendment, dated as of June 23, 1997, to the Company's
Employee Stock Purchase Plan (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, File No. 1-13041)
*10.27 The Company's 1997 Non-Employee Director Stock Option Plan.
*10.28 Stock Purchase Agreement among Waterlink (Sweden) AB,
Waterlink, Inc. and the shareholders of Mellegard V.A.
Maskiner AB dated September 12, 1997 (filed as an exhibit to
the Company's Current Report on Form 8-K, filed September
26, 1997, File No. 1-13041).
- 55 -
62
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
*10.29 Stock Purchase Agreement dated September 30, 1997 among
Waterlink, Inc., Philip A. Thompson and the Hycor
Corporation Employee Stock Ownership Trust (filed as an
exhibit to the Company's Current Report on Form 8-K, filed
October 14, 1997, File No. 1-13041).
*10.30 Stock Purchase Agreement between Waterlink, Inc., and David
Romanow, Joe Romanow, Brian Topnik and Robert Jenkyns dated
as of April 15, 1997 (filed as an exhibit to the Company's
Current Report on Form 8-K, filed July 9, 1997, File No. 1-
13041).
*10.31 Stock Purchase Agreement between Great Lakes Environmental,
Inc. and David M. Rice dated as of April 14, 1997 (filed as
an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
*10.32 Letter Agreement among Waterlink, Inc., Bioclear Technology,
Inc. and Royal Bank of Canada dated September 24, 1997
(filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997, File No.
1-13041)
*10.33 Stock Purchase Agreement between Waterlink, Inc., and
Anglian Water Services Limited dated as of March 25, 1998
(filed as an exhibit to the Company's Current Report on Form
8-K, filed April 9, 1998, File No. 1-13041).
*10.34 Stock Purchase Agreement between Waterlink, Inc., and
Sutcliffe Speakman PLC dated as of June 5, 1998 (filed as an
exhibit to the Company's Current Report on Form 8-K, filed
June 19, 1998, File No. 1-13041).
*10.35 Amended as 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 the other financial
institutions party hereto (filed as an exhibit to the
Company's Current Report on Form 8-K, filed June 19, 1998,
File No. 1-13041).
10.36 Agreement, dated June 5, 1998, between the Company and Chet
S. Ross.
10.37 Executive Employment Agreement, dated June 8, 1998, between
the Company and T. Scott King.
10.38 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 and
Savings Association, as agent, and the other financial
institutions party hereto.
11.1 Computation of earnings per share.
21.1 List of Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule as of and for the year ended
September 30, 1998.
- ---------------
* Incorporated herein by reference as indicated.
- 56 -
63
CORPORATE DIRECTORY
DIRECTORS
Theodore F. Savastano
Chairman of the Board
T. Scott King
President and Chief Executive Officer
John R. Miller*o
Director
Robert P. Pinkas o
Director
Rollin S. Reiter*o
Director
Dr. Paul M. Sutton*o
Director
* Audit Committee
o Compensation Committee
CORPORATE OFFICERS AND
SENIOR MANAGEMENT
T. Scott King
President and Chief Executive Officer
Michael J. Vantusko
Chief Financial Officer
L. Dean Hertert, Jr.
Vice President, Marketing and Business Development
Dr. Hans F. Larsson
Vice President, Technology
William A. McSwain
Vice President, Operations Integration
Donald A. Weidig
Controller and Secretary
Henrik Kallen
President, European Water and Wastewater Division
Frederick J. Siino
President, Biological Wastewater Systems Division
Philip A. Thompson
President, Separations Division
William W. Vogelhuber
President, Specialty Products Division
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
700 William R. Day Building
121 Cleveland Avenue South
Canton, Ohio
44702-1920
INDEPENDENT COUNSEL
Benesch, Friedlander, Coplan and Aronoff LLP
2300 BP Tower
200 Public Square
Cleveland, Ohio
44114-2378
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
SHAREHOLDER INFORMATION
The Company's common stock trades on the New York Stock Exchange under the
symbol "WLK".
ANNUAL MEETING
The Annual Shareholders Meeting will be held on January 21, 1999 at the Sheraton
Inn Belden Village, 4375 Metro Circle, North Canton, Ohio at 10:00 a.m.
CORPORATE OFFICE
Waterlink, Inc.
4100 Holiday Street NW
Canton, Ohio
44718-2532
Phone: 330-649-4000
Fax: 330-649-4008
E-mail:
waterlink@waterlink.com
Web: www.waterlink.com
WORLDWIDE OPERATING LOCATIONS
BIOLOGICAL WASTEWATER SYSTEMS DIVISION
MTS and Kaldnes Systems
Fall River, Massachusetts
+1 508-679-6770
Aero-Mod Systems
Manhattan, Kansas
+1 785-537-4995
Sanborn Technologies
Medway, Massachusetts
+1 508-533-8800
SEPARATIONS DIVISION
Hycor, NWP, Purac Products
Lake Bluff, Illinois
+1 847-473-3700
Great Lakes Environmental Products and Systems
Addison, Illinois
+1 630-543-9444
Lanco Products
Grand Rapids, Michigan
+1 616-791-9100
SPECIALTY PRODUCTS DIVISION
Waterlink/Barnebey Sutcliffe
Columbus, Ohio
+1 614-258-9501
Waterlink/Sutcliffe Carbons and Sutcliffe Croftshaw
Lancashire, UK
+ 44 1942 275 400
PURE WATER DIVISION
C'treat Offshore Watermakers
The Woodlands, Texas
+1 281-367-2800
WET Products and Systems
West Palm Beach, Florida
+1 561-684-6300
EUROPEAN WATER AND WASTEWATER DIVISION
WATERLINK AB
MEVA, NOXON, and Zickert Products
Gothenburg, Sweden
+46 31 68 49 96
Filtration Products
Nynashamn, Sweden
+46 8 520 651 00
NOXON and Zickert Products Manufacturing
Kungsbacka, Sweden
+46 300 710 65
MEVA Products
Design/Engineering
Mariestad, Sweden
+46 501 787 00
Waterlink Oy
Vantaa, Finland
+358 9 5305 6500
Zickert Miljo A/S
Holstebro, Denmark
+45 9741 0222
WATERLINK UK
Cambridgeshire, UK
+44 1353 602 700
AXEL JOHNSON ENGINEERING GMBH
Neuss-Grimlinghausen
Germany
+49 2131 3106 0
SOLUTIONS
SPEED
SPIRIT
64
- ---------
WATERLINK
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4100 Holiday Street N.W.
Canton, Ohio 44718-2532
www.waterlink.com