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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, 1999
( ) 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, 1999 the aggregate market value of Waterlink's voting Common
Stock held by non-affiliates of Waterlink was approximately $23.5 million.
As of November 30, 1999 there were 19,211,091 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 20, 2000 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 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. Waterlink designs, assembles and sells water and wastewater treatment
products and provides related services to companies and municipalities to treat
their water and wastewater. Waterlink 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 to participate
in the consolidation of the highly fragmented water purification and wastewater
treatment industry. Waterlink grew rapidly through acquisitions from 1995
through 1998. To date Waterlink has made 13 acquisitions, targeting businesses
in two principal markets (wastewater and pure water treatment) and in two
geographic areas (United States and Europe). Our principal executive offices are
located at 4100 Holiday Street N.W., Suite 201, Canton, Ohio 44718 and our
telephone number is (330)649-4000.
DIVISIONAL FORMAT
In September 1998, Waterlink announced its 1999 Strategic Operating Plan.
The 1999 plan provided for a divisional format for efficient centers of product
expertise and geographic experience, to better serve Waterlink's customers and
independent marketing representatives. Under the 1999 plan, Waterlink
reorganized from a company that completed 13 acquisitions with 23 direct and
indirect operating companies into five integrated operating divisions. The five
divisions are:
- the Biological Wastewater Treatment Division
- the Separations Division
- the Pure Water Division
- the Specialty Products Division
- the European Water and Wastewater Division
The following table shows our acquisitions to date and how the acquired
companies are grouped within our five divisions.
ACQUISITION DATE ACQUIRED CURRENT DIVISION
-------------------------------- ------------------------ --------------------------------
(1) Sanborn Technologies March 1995 Biological Wastewater Treatment
(2) Great Lakes Environmental, Inc. August 1995 Separations
(3) Mass Transfer Systems, Inc. January 1996 Biological Wastewater Treatment
(4) Aero-Mod, Inc. April 1996 Biological Wastewater Treatment
Resi-Tech, Inc.
Blue Water Services, Inc.
(5) Waterlink Equipment September 1996 Pure Water
Technologies, Inc.
(6) Nordic Water Products AB March 1997 European Water and Wastewater
Zickert Products AB
Noxon AB
Axel Johnson Engineering GmbH
Zickert Miljo A/S
Nordic Water Products OY
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ACQUISITION DATE ACQUIRED CURRENT DIVISION
-------------------------------- ------------------------ --------------------------------
(7) Bioclear Technology, Inc. June 1997 Biological Wastewater Treatment
(technology only)
(8) Lanco Environmental Products, June 1997 Separations
Inc.
(9) Mellegard V.A. Maskiner AB September 1997 European Water and Wastewater
(MEVA)
(10) Hycor Corporation September 1997 Separations
(11) Chemitreat Services, Inc. March 1998 Pure Water
(12) Aquafine Engineering Services March 1998 European Water and Wastewater,
Limited Biological Wastewater Treatment
Purac Engineering Incorporated and Separations
(13) Barnebey & Sutcliffe Corporation June 1998 Specialty Products
Sutcliffe Speakman Carbons
Limited
Sutcliffe Croftshaw Limited
BIOLOGICAL WASTEWATER TREATMENT DIVISION
The biological wastewater treatment division provides products and
processes treating municipal and industrial wastewater by various biological
based methods. This division furnishes products and processes that can be
incorporated into integrated systems or sold individually. Its products include
aeration systems, which treat wastewater with air and/or process water that is
pumped at high pressures through a series of jet nozzles, resulting in highly
efficient oxygen transfers and mixing activity to separate waste. These systems
are sold separately for use in industrial biological treatment plants and many
other uses, including for underdeveloped countries where land intensive, lagoon
treatment processes are widely accepted. In addition, these systems can be
integrated with other processes for more complete biological treatment
solutions. Waterlink's patented Aero-Mod Sequox(TM) nutrient removal process
uses aeration to increase biological activity for removing unwanted pollutants
from the water.
The biological wastewater treatment division also designs and
manufactures industrial separation systems using various technologies used to
separate solids from industrial coolants. The division markets its products and
processes through both direct sales offices and independent sales
representatives located predominantly in North and South America, the United
Kingdom, Ireland and Asia. For the year ended September 30, 1999, net sales for
this division were approximately $17.8 million.
SEPARATIONS DIVISION
The separations division sells equipment and engineered systems employing
physical and chemical separation technology. Its markets are municipal water and
wastewater as well as industrial process water and wastewater. The division
combines the technology offerings of industry leading product lines. The
separations division's products include the following:
- Hycor(R) screening, conveying, dewatering and screenings/grit washing
equipment. Dewatering is the process of reducing or eliminating
moisture content. These products operate on the principle of
liquid/solid gravity separation and are used to improve water and
wastewater processes, minimize waste, reduce disposal volumes and
provide for water recovery and reuse.
- Nordic Water(TM) continuous sand filters, inclined plate clarifiers and
sludge removal equipment. These products offer a wide range of
capabilities including tertiary polishing filters, used to remove fine
particles, nitrates and phosphates in wastewater, solutions for high
turbidity, or cloudiness, in municipal water treatment, advanced
settling technology and sophisticated sludge removal equipment.
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- Great Lake Environmental(R) oil/water separators, inclined plate
clarifiers and dissolved air flotation systems. With its broad
industrial customer base, this product line offers a wide range of
equipment from the basic separation and removal of oil droplets from
water to systems that remove suspended solids and emulsified oil from
continuous flows.
- Lanco Environmental(TM) filter presses, clarifiers and sludge dryers.
Primarily serving the industrial market, this equipment is designed for
the efficient dewatering of effluent and sludges from specialized
industrial processes.
The separations division sells its products and systems primarily in
North America through a network of independent manufacturers representatives.
For the year ended September 30, 1999, net sales for the division were
approximately $33.5 million.
PURE WATER DIVISION
The pure water division sells products and solutions to the residential,
municipal and industrial water and process water markets through our Waterlink
Technologies, Inc. and C'treat Offshore, Inc. companies.
Waterlink Technologies is an international provider of membrane based
solutions focusing on:
- membrane technology with standard reverse osmosis system solutions
which can treat tap water to sea water for the production of high
purity water
- nanofiltration systems, which can be used to decolor, soften and remove
harmful pathogenic organisms
- desalination systems for the purification of sea water to drinking
water for resorts, municipal and governmental installations
- custom engineered microfiltration systems that can be used for the
clarification and removal of harmful organisms from surface water as
well as pre-treatment for other membrane technology in wastewater
applications
- custom designed ultra pure water treatment systems for the power,
electronic and pharmaceutical industries
- the manufacture of pleated membrane sediment filtration cartridges
which are used for removal of suspended solids
- the distribution of other major lines of filter housings, filters and
components
C'treat is a provider of reverse osmosis desalination equipment and
services to the worldwide energy industry. C'treat equipment economically and
reliably provides fresh water for offshore drilling rigs and production
platforms. C'treat enjoys a significant market presence through a sales
organization that includes representatives and technical licensees in 12
countries. For the year ended September 30, 1999, net sales for this division
were approximately $16.5 million.
SPECIALTY PRODUCTS DIVISION
The specialty products division and its predecessors have specialized in
the development and production of highly sophisticated activated carbons for
more than 80 years. Activated carbon is used to purify air, water and gases by
retaining impurities in carbon granules. The division is a worldwide supplier of
activated carbon for liquid, air and gas filtration systems and is a leading
manufacturer of specialty impregnated carbons used in applications where the
capacity of activated carbons can be significantly increased. A full range of
activated carbons manufactured from coconut shell, coal, wood, along with other
adsorbents such as modified clay media, bone char, and anthracite are offered
for use in:
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- adsorption equipment, both standard and custom configurations,
primarily for separation of solvents from air
- bioreactors and bioscrubbers in which contaminants are destroyed using
biological microbes
- corrosive gas control systems to protect expensive electronic operated
controls
- distillation equipment for separation applications
- systems that control emissions from volatile organic compounds
- area filtration systems for the removal of both vapor phase and
particulate contaminants
- indoor air quality systems
- odor control systems
- soil vapor extraction systems
- solvent recovery systems engineered and installed on a turn-key basis,
to recover valuable solvents
The specialty products division's products and systems are sold worldwide
using a combination of direct sales and sales representatives. For the year
ended September 30, 1999, net sales for this division were approximately $58.0
million.
EUROPEAN WATER AND WASTEWATER DIVISION
The European water and wastewater division provides products and systems
similar to the separations division but focusing specifically on the European,
African and Asian municipal and industrial markets.
The European water and wastewater division, with principal locations in
Sweden, Germany and the United Kingdom, offers its products under various
proprietary names, including:
- Dynasand(TM) continuous sand filters
- Lamella(TM) separators
- Zickert(TM) bottom scrapers
- Noxon(TM) centrifuges
- MEVA(TM) fine screens
The products are sold separately or as an engineered turn-key solution.
For the year ended September 30, 1999, net sales for the division were
approximately $44.4 million.
OPERATING AND SALES STRATEGY
Waterlink has adopted a decentralized approach to the operational
management of our divisions. While functions such as strategic planning,
financial reporting, treasury, communications and risk management are
centralized in Waterlink's corporate headquarters, local management at each of
our five divisions is primarily responsible for the day-to-day operation of the
division's business. Waterlink also provides our divisions with financial
resources, management expertise, and customer and market access, which would be
unavailable to each division individually. Waterlink expects to realize
significant improvement in internal growth rates due to increased marketing
efforts and the opportunities to "cross-sell" products. As customers
increasingly seek to reduce their vendor base, outsource their non-core tasks
and find integrated solutions, the ability of each of our divisions to offer the
complementary equipment and services of other divisions increases the
competitiveness of Waterlink. For example, the separations division can team
with the pure water division and the biological division to offer both pure
water and wastewater solutions to a customer. Additionally, Waterlink's
design/build capabilities allow us to design systems that utilize a broad array
of Waterlink's products and provide opportunities for our specialty products
division. Waterlink also experiences
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cross-selling opportunities from a geographic and customer standpoint. For
example, our European water and wastewater division has introduced our other
divisions' systems, equipment and services into the European market. Likewise,
we have introduced the European water and wastewater division's systems,
equipment and services into our domestic market.
We sell our systems, equipment and services primarily through
approximately 80 direct sales personnel and approximately 250 independent sales
organizations. Waterlink also sells through licensees, principally in the
Asia-Pacific region as well as in Europe. To a lesser extent, Waterlink sells
through water treatment distributors, which take title to equipment for resale
to the end-user. Waterlink 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 Waterlink's direct sales force, which has greater
technical and product knowledge, to complete the sale and service the customer.
Waterlink's direct sales force generally plays a more primary role in sales of
Waterlink's design/build solutions.
While we have received contract awards in excess of $5 million, Waterlink
is primarily focusing its marketing efforts on contract awards of up to
approximately $4 million. We believe that competition is fiercer for larger
contract awards and the timing of these awards is more unpredictable.
To help facilitate revenue growth, and better serve our customer base,
Waterlink has formed a centralized marketing and sales team of three individuals
whose primary focus is to position Waterlink in the marketplace as an important
independent solution provider for municipal and industrial water and wastewater
requirements. This centralized sales and marketing approach will also utilize
technical divisional expertise and the market knowledge of our geographically
based independent representatives to focus on market opportunities. One of these
opportunities appears to be a national accounts program through which we intend
to provide water and wastewater solutions to major engineering and industrial
companies. Waterlink's centralized marketing and sales team is preparing to
focus initially on servicing companies competing for municipal privatization
contracts in the United States and key industrial accounts in the food and
beverage and pulp and paper industry as well an integrated systems sales effort
between divisions.
A representative from each of our divisions, along with Waterlink's
executive officers and other key employees, form Waterlink's senior management
team, which meets on a frequent basis to facilitate the interchange of
information and enhance cross-selling opportunities.
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.
Waterlink 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 Waterlink. We believe 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
to set pricing are often primary considerations. Waterlink 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.
We believe that new entrants will play a significant role in the United
States municipal markets as privatization contracts for water and wastewater
concessions are expected to grow in size and importance. We believe that as an
independent supplier of water and wastewater solutions and equipment to these
service providers, we can provide a sound alternative to our competition.
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Waterlink's primary competitors include operating subsidiaries of
Vivendi, including Compagnie Generale des Eaux and its recent acquisition of
U.S. Filter Corporation, Suez de Lyonaise des Eaux, Calgon Carbon Corporation;
Parkson Corporation; Ionics, Incorporated; Alpha Laval and Humbolt KHD.
ACQUISITION STRATEGY
In order to achieve its objective of becoming a leading international
provider of integrated water purification and wastewater treatment solutions,
Waterlink has pursued an aggressive acquisition-based growth program.
Waterlink's acquisition strategy has been curtailed during fiscal 1999
due to the effort required to complete the 1999 plan and as a result of
Waterlink's leverage and the relatively low price of our common stock. We do not
expect significant acquisition activity during fiscal 2000.
When future conditions permit, Waterlink intends to continue to use
various combinations of its common stock, cash and notes as consideration for
acquisitions. The consideration for each future acquisition will vary on a
case-by-case basis depending on Waterlink's operating performance and the
historic operating results and future prospects of the business to be acquired.
Waterlink intends to finance acquisitions through funds provided by operations
and if available, bank borrowings and proceeds of future equity and debt
financing.
CUSTOMERS
Waterlink markets its products and services to two primary categories of
customers: industrial users that require water for their manufacturing processes
and treat their wastewater and municipal customers that produce drinking water
and treat wastewater. Waterlink has a diverse customer base, with no customer
representing 10% or more of Waterlink's sales for the year ended September 30,
1999.
Waterlink'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. For the year ended September 30, 1999 approximately
73.0% of Waterlink's 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. Waterlink utilizes specialized distribution
channels to service the municipal market and is skilled at participating in the
municipal bidding process. Waterlink focuses its efforts on smaller municipal
projects, which Waterlink believes its product lines are best suited to serve.
Waterlink believes that the municipal business is important to its overall
success because of its large market size. For the year ended September 30, 1999
approximately 27.0% of Waterlink's net sales were derived from municipal sales.
BACKLOG
Total backlog as of September 30, 1999 was $53.3 million as compared to
total backlog of $44.5 million at September 30, 1998. Waterlink had a backlog,
consisting of written purchase orders for capital goods equipment of $46.1
million as of September 30, 1999 as compared to $38.1 million as of September
30, 1998. In addition, at September 30, 1999, Waterlink had $7.2 million of firm
commitments to purchase recurring revenue products from its specialty products
division as compared to $6.4 million as of September 30, 1998. Waterlink expects
that a significant portion of our backlog at the beginning of a fiscal year will
be filled during that year. Backlog, and therefore sales, may vary from quarter
to quarter as a result of large projects being booked during any quarter and
varying project delivery schedules. In addition, the orders have varying
delivery schedules and
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Waterlink's backlog as of any particular date may not be representative of
actual net sales for any succeeding period.
PROCESS AND PRODUCT WARRANTY AND PERFORMANCE GUARANTEES
Consistent with industry practices, we generally offer a warranty on
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 our customers, Waterlink is sometimes required to guarantee that our
products or services will attain specified levels of quality or performance. If
a product fails to perform according to a warranty, or a project fails to attain
the guaranteed level of quality, and if we are unable to effect a satisfactory
replacement or cure within the prescribed period of time, Waterlink 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, Waterlink has not incurred any material payment or
other obligations pursuant to such performance guarantees.
RAW MATERIAL AND SUPPLIES
The raw materials and components used in Waterlink'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. Waterlink's
systems are fabricated from these materials and assembled together with products
bought from other companies to form an integrated system. In addition, the
specialty products division is dependent on the importation of coconut shell
carbon from Asia and the supply of coal based carbon from domestic and Asian
sources. Waterlink is not dependent upon any single supplier, and if any
supplier were to become unable to perform, Waterlink believes a substitute
source could readily be found. Waterlink has generally been able to pass on
price increases for raw materials and components to its customers. Waterlink 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 Waterlink.
Many of the countries in which Waterlink operates or in which our
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 Waterlink.
These requirements and their enforcement vary by country, but in general
establish water quality, use and disposal standards, set wastewater effluent
discharge limits, and prescribe standards for the protection of human health and
safety and the environment. In each country, Waterlink 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 Waterlink.
Any changes in applicable environmental standards and requirements or
their enforcement may affect the operations of Waterlink by imposing additional
regulatory compliance costs on Waterlink's customers, requiring the modification
of and/or affecting the market for Waterlink's solutions, systems and equipment.
To the extent that demand for Waterlink's solutions, systems and equipment is
created by the need to comply with these enhanced standards and requirements or
their enforcement, any modification of the standards and requirements or their
enforcement may reduce demand, thereby adversely affecting Waterlink's business
prospects. Conversely, changes in applicable environmental
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laws imposing additional regulatory compliance standards and requirements or
causing stricter enforcement of these laws or regulations could increase the
demand for Waterlink's systems, equipment and services.
PATENTS, TRADEMARKS AND LICENSES
We currently own a number of United States and foreign patents, and
registrations for United States service marks and trademarks. While each is of
value, Waterlink generally does not consider any of them to be material to our
business, although, as Waterlink has grown and its presence has been extended,
our Waterlink(SM) mark has become more widely known and the goodwill associated
with it has increased.
EMPLOYEES
At September 30, 1999, Waterlink had approximately 648 employees at our
various locations. Approximately 51 people are covered under collective
bargaining agreements in the United States. All of Waterlink's hourly employees
in Europe are covered by collective bargaining agreements. We believe that our
relationship with our employees is good.
RECENT EVENTS
During the fourth quarter of fiscal 1999 we entered into two amendments
under our domestic credit facility. In connection with one of the amendments, a
significant stockholder and three executive officers guaranteed the repayment of
$2.6 million of our outstanding indebtedness. In consideration for these
guarantees, warrants to purchase, in the aggregate, up to 283,637 shares of our
common stock were issued, the issuance of which was approved by our
shareholders.
The other amendment approved the sale of common stock described in the
following paragraph, reduced the domestic credit facility to $76 million, and
waived certain financial covenants that were not satisfied at September 30,
1999, Waterlink's fiscal year end.
On October 5, 1999 we completed the sale of 6,300,000 shares of common
stock in a registered offering to certain institutional investors. The aggregate
net proceeds of $16.2 million from the sale were used to repay a portion of our
outstanding bank debt.
ITEM 2. PROPERTIES
We lease our corporate offices, consisting of approximately 7,000 square
feet located in Canton. In addition, our subsidiaries lease facilities for
office space and manufacturing in the United States in Santa Fe Springs,
California; Clearwater and West Palm Beach, Florida; Lake Bluff and Addison,
Illinois; Manhattan, Kansas; 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, Frolunda, Kungsbacka, and Nynashamn, Sweden; and own
facilities for office space and manufacturing in Columbus, Ohio; Winnipeg,
Manitoba, Canada; and Fjaras, Sweden. The expiration dates for these leases
range from December 1999 to March 2011.
We believe that each of our facilities is in good condition and will
continue to remain suitable for its current purpose. We may add improvements to
the properties listed above. We anticipate using our properties for purposes
consistent with their present use. In the event any of the facilities becomes
unavailable upon termination of the existing lease, we believe we would be able
to find a suitable alternative facility without any significant adverse impact
to us or our operations. We believe our properties are adequately covered by
insurance.
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ITEM 3. LEGAL PROCEEDINGS
From time to time in the normal course of our business, we become a party
to litigation. Most of this litigation involves claims for personal or
employment related injury or property damage incurred in connection with our
operations. We are not a party to any material litigation and believe that none
of our litigation will have a material adverse effect on our business or
financial results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of stockholders of Waterlink held on September 28,
1999 the following actions took place:
i. the approval of the sale in a registered offering of up to
6,300,000 shares of Waterlink common stock to specific
institutional investors:
FOR AGAINST WITHHELD
--- ------- --------
8,912,164 93,077 61,575
ii. the approval of the issuance of warrants to purchase in the
aggregate 283,637 shares of Waterlink common stock to a current
significant stockholder and to the three executive officers of
Waterlink in connection with assisting in the process of improving
Waterlink's capital structure by guaranteeing, in the aggregate,
repayment of up to $2,600,000 of Waterlink senior debt.
FOR AGAINST WITHHELD
--- ------- --------
7,889,070 488,286 689,460
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common stock has been listed on The New York Stock Exchange under the
symbol "WLK" since our initial public offering on June 24, 1997. The following
table sets forth the high and low composite sales prices as reported on the NYSE
for the fiscal quarters indicated.
HIGH LOW
---- ---
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
Fiscal Year ended September 30, 1999
First Quarter $ 5 1/4 $ 2 1/
Second Quarter 5 5/16 3 1/
Third Quarter 4 3/4 2 13/1
Fourth Quarter 3 1/4 2 3/
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 our
common stock as of November 30, 1999 was approximately 229. In addition there
were approximately 2,553 shareholders whose shares are held by brokers/dealers.
DIVIDENDS
We have not paid or declared any dividends on our common stock since our
inception. We anticipate that earnings will be retained to support the growth of
our business and will not be distributed to stockholders as dividends. The
declaration and payment of any future dividends and the amount of any dividend
will be determined by our board of directors and will depend upon our results of
operations, financial condition, cash requirements, future prospects,
limitations imposed by bank credit and debt agreements and other factors deemed
relevant by our board of directors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
Pursuant to our bank credit agreement, we may not declare or make, or
agree to declare or make, directly or indirectly, any dividends, except that we
may declare and pay dividends with respect to our capital stock payable solely
in additional shares of our common stock or options, warrants or other rights to
purchase our common stock.
RECENT SALES OF UNREGISTERED SECURITIES
During fiscal 1999, Waterlink granted Brantley Venture Partners III,
L.P., Theodore F. Savastano, T. Scott King and Michael J. Vantusko warrants to
purchase 250,909, 16,364, 10,909 and 5,455 shares of common stock, respectively,
at a purchase price of $0.01 per share. The warrants were issued in connection
with assisting in the process of improving our capital structure by guaranteeing
up to $2.6 million of indebtedness under the bank credit agreement. The warrants
expire on July 9, 2004. In such transaction, Waterlink did not engage any
underwriter, broker or placement agent. In connection with such transaction,
Waterlink obtained appropriate investment representations supporting its
reliance on such exemption from registration. In such transaction, appropriate
disclosure was
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provided to each investor to support Waterlink'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 historical consolidated financial
data of Waterlink since its incorporation on December 7, 1994. The financial
data presented for the five fiscal years ended September 30, 1999 have been
derived from Waterlink's audited financial statements. The financial data
includes the operating results of each acquired business from the date of
acquisition in accordance with the purchase method of accounting.
You should read the selected historical consolidated financial data in
conjunction with, and they are qualified by, our historical consolidated
financial statements and the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contained elsewhere
in this report.
FISCAL FISCAL FISCAL FISCAL FISCAL
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $170,169 $135,167 $ 64,699 $ 19,801 $ 2,684
Cost of sales(1) 115,943 85,532 40,390 11,233 1,857
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Gross profit 54,226 49,635 24,309 8,568 827
Selling, general and
administrative expenses(2) 43,531 38,639 18,683 7,029 1,178
Special charges(3) 3,843 21,636 2,630 -- --
Amortization expense 2,130 1,871 751 307 15
-------- -------- -------- -------- --------
Operating income (loss) 4,722 (12,511) 2,245 1,232 (366)
Other income (expense):
Interest expense(4) (7,857) (3,562) (1,281) (877) (144)
Interest income and other
items--net (14) 37 263 (44) 33
-------- -------- -------- -------- --------
Income (loss) before income taxes (3,149) (16,036) 1,227 311 (477)
Income taxes 1,033 1,468 470 5 35
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item (4,182) (17,504) 757 306 (512)
Extraordinary item, net of
taxes(5) -- -- (385) -- --
-------- -------- -------- -------- --------
Net income (loss) $ (4,182) $(17,504) $ 372 $ 306 $ (512)
======== ======== ======== ======== ========
Earnings (loss) per common share:
Basic:
Income (loss) before
extraordinary item $ (0.33) $ (1.46) $ 0.15 $ 0.21 $ (0.42)
Extraordinary item -- -- (0.08) -- --
-------- -------- -------- -------- --------
Net income (loss) $ (0.33) $ (1.46) $ 0.07 $ 0.21 $ (0.42)
======== ======== ======== ======== ========
Assuming dilution:
Income (loss) before
extraordinary item $ (0.33) $ (1.46) $ 0.10 $ 0.06 $ (0.42)
Extraordinary item -- -- (0.05) -- --
-------- -------- -------- -------- --------
Net income (loss) $ (0.33) $ (1.46) $ 0.05 $ 0.06 $ (0.42)
======== ======== ======== ======== ========
Weighted average common shares
outstanding:
Basic 12,556 12,007 4,924 1,469 1,225
Assuming dilution 12,556 12,007 7,804 4,954 1,225
- 12 -
13
SEPTEMBER 30,
-------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital $ 34,859 $ 30,737 $ 19,430 $ 3,438 $ 2,064
Total assets 185,395 183,561 115,860 28,991 10,819
Total debt 89,917 87,318 18,961 12,145 6,039
Redeemable preferred stock -- -- -- 8,500 3,900
Shareholders' equity (deficit) 49,986 54,878 70,873 2,407 (11)
- ---------------
(1) In connection with our 1999 plan, Waterlink decided to discontinue the
manufacturing processes for our Great Lakes subsidiary product line in favor
of utilizing subcontractors. As a result of this decision, during the year
ended September 30, 1999, Waterlink recognized $2,137,000 of costs, or $0.16
per share, assuming dilution, comprised of $1,191,000 of cost overruns that
took place on a contractual obligation and $946,000 of inventory write downs
and other costs.
(2) For the year ended September 30, 1999, selling, general and administrative
expenses included $255,000, or $0.02 per share, assuming dilution, relating
to the write off of costs associated with acquisition activity that ceased
during the year.
(3) Waterlink incurred special charges as follows:
- During the fiscal year ended September 30, 1997 Waterlink incurred a
special charge to operations of $2,630,000, or $0.21 per share, assuming
dilution, resulting primarily from the issuance, concurrent with our
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 Waterlink
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.
- During the fiscal year ended September 30, 1998, Waterlink incurred special
charges of $21,636,000, or $1.70 per share, assuming dilution. These
special charges are comprised of the following three components:
i. Waterlink recorded a charge of $2,858,000, or $0.23 per share,
assuming dilution, primarily related to termination benefits and
costs associated with the exiting of certain facilities to implement
our 1999 plan.
ii. As a result of our decision to exit the Bioclear business, during
the fourth quarter of fiscal 1998, Waterlink recorded a non-cash
charge of $17,284,000, or $1.40 per share, assuming dilution,
consisting of $15,967,000 related to the impairment of goodwill
associated with the June 1997 acquisition of Bioclear Technology,
Inc. and $1,317,000 to write off the cumulative translation
adjustment component of Bioclear's equity.
iii. Waterlink incurred special charges of $1,494,000, or $0.07 per
share, assuming dilution, primarily attributable to contractual
obligations to our former chief executive officer, who resigned in
June 1998, and costs necessary to recruit executives to Waterlink.
- During the year ended September 30, 1999, Waterlink incurred special
charges of $3,843,000, or $0.31 per share, assuming dilution, for the
following:
i. Continuing costs of $1,593,000, or $0.13 per share, assuming
dilution, associated with the implementation of Waterlink's 1999
plan, primarily related to termination benefits and facility
consolidation costs.
ii. In conjunction with our 1999 plan, we determined that we would exit
the acquired Bioclear business. During the fourth quarter of fiscal
1998, the assets of Bioclear, primarily related to Bioclear's
manufacturing facility located in Winnipeg, Canada, were reduced to
their estimated net realizable value. Based on the status of the
sales process and Waterlink's June 1999 decision regarding how to
best dispose of the facility, we further reduced the estimated net
realizable value of these remaining assets by $1,300,000, or $0.10
per share, assuming dilution.
iii. Waterlink incurred additional charges related to severance benefits
during 1999 not originally contemplated by the 1999 plan of
$400,000, or $0.03 per share, assuming dilution.
iv. Waterlink incurred additional charges of $550,000, or $0.05 per
share, assuming dilution, related to severance benefits during 1999
related to the announced retirement of our chairman of the board.
(4) Interest expense for the year ended September 30, 1999 includes a financing
charge of $870,000, or $0.07 per share, assuming dilution, related to the
amortization of the value assigned to warrants issued to purchase up to
283,637 shares of common stock at an exercise price of $0.01 per share.
(5) Net income for fiscal 1997 reflects an extraordinary item. Waterlink 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 Waterlink canceled a note purchase
agreement. In connection with the early retirement of certain indebtedness
and the cancellation of the note purchase agreement, Waterlink realized an
extraordinary charge of $385,000, net of taxes of $257,000, or $0.05 per
share, assuming dilution, related to the write off of unamortized debt
issuance costs and discounts associated with this indebtedness.
- 13 -
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Waterlink 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.
During fiscal 1999 Waterlink focused on the implementation of its 1999
Strategic Operating Plan. The 1999 plan was implemented in three phases: the
restructuring phase, the cost reduction phase, and the growth phase.
The restructuring phase was completed prior to October 1, 1998, the
beginning of Waterlink's recently completed fiscal year, and restructured
Waterlink from a company that completed 13 acquisitions consisting of 23
separate operating companies into the following five fully integrated operating
divisions that are focused on their specific markets:
- the Biological Wastewater Treatment Division
- the Separations Division
- the Pure Water Division
- the Specialty Products Division
- the European Water and Wastewater Division
This divisional structure allows Waterlink to utilize the strengths of
its complementary product lines and brand name to work closer with customers.
The cost reduction phase established goals of reducing selling, general
and administrative expenses by $4.3 million in fiscal 1999, principally by
reducing the number of employees by 75, or approximately 10% of the work force,
and by closing seven facilities. Waterlink has decided to curtail its
manufacturing activities whenever possible, in favor of partnering with vendors
who manufacture components used in our systems and equipment. As of September
30, 1999, the total number of employees has been reduced by 119 people, in
excess of the 75 originally contemplated by the 1999 plan, and the annualized
cost savings goal of $4.3 million has been surpassed by approximately $1.1
million. With regard to facilities, seven have been closed.
The cost reduction phase also includes an initiative to reduce production
costs by identifying common suppliers among divisions and consolidating
purchases to increase Waterlink's purchasing power. Supply contracts with these
common vendors are expected to provide cost savings to help Waterlink remain
competitive in the long term.
The growth phase of the 1999 plan has added 20 sales and marketing
professionals in fiscal 1999, in order to improve revenue performance over the
long term. These additional costs are being funded, in part, by the additional
$1.1 million of annualized savings as a result of the cost reduction phase of
the 1999 plan.
The improved communications and specific identification of markets and
products resulting from the restructuring of Waterlink, together with the
reinvestment in sales and marketing professionals, are intended to allow
Waterlink to increase its sales efforts. Two specific areas of focus are the
implementation of a key account program with selected worldwide buyers of
Waterlink product offerings, and our integrated systems effort that is expected
to provide more interdivisional cross selling opportunities with certain key
customers. Waterlink is also developing sales strategies in regions where we do
not currently have a significant presence or wish to increase our opportunities,
such as South America, as well as servicing companies competing for municipal
privatization contracts in the United States. In the future, we believe these
efforts will build Waterlink into a sales, marketing and engineering leader in
the industry, focused on profitable growth over the long term.
- 14 -
15
Waterlink's new organization is also designed to more efficiently
integrate future acquisitions. Waterlink's current capital structure does not
support an aggressive acquisition program. Waterlink intends to improve its
capital structure through a combination of improved operating performance and
access to capital markets, which we expect will enable us to resume our
acquisition program. Acquisitions are expected to play a strategic role in
Waterlink's future to increase competitiveness, spur revenue and earnings
growth, and enhance our total solutions capability.
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 systems and equipment produced by Waterlink 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 incurred 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 Waterlink has experienced quarterly fluctuations in operating
results due to the contractual nature of its business and the consequent timing
of these orders. In the future, Waterlink expects that it may receive contracts
that are significantly larger than those received by Waterlink historically. In
addition, certain of the contracts will be subject to the customer's ability to
finance, or fund from government sources, the actual costs of completing the
project as well as the ability to receive any necessary permits to commence the
project. Therefore, Waterlink expects that its future operating results could
fluctuate significantly, especially on a quarterly basis, due to the timing of
the awarding of such contracts, the ability to fund project costs, and the
recognition by Waterlink of revenues and profits. In addition, Waterlink has
historically operated with a moderate backlog. However, as a result of its
strategic plan, Waterlink anticipates that both the dollar volume and number of
contracts in its backlog will increase. As of September 30, 1999, Waterlink's
total backlog was approximately $53.3 million, consisting of $46.1 million of
written purchase orders for capital goods equipment and $7.2 million of firm
commitments to purchase recurring revenue products from our specialty products
division. Quarterly sales and operating results will be affected by the volume
and timing of contracts received and performed within the quarter, which are
difficult to forecast. Any significant deferral or cancellation of a contract
could have a material adverse effect on Waterlink's operating results in any
particular period. Because of these factors, Waterlink believes that period-to-
period comparisons of its operating results are not necessarily indicative of
future performances.
- 15 -
16
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
1999 1998 1997
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 68.1 63.3 62.4
----- ----- -----
Gross profit 31.9 36.7 37.6
Selling, general and administrative expenses 25.6 28.6 28.9
Special charges 2.3 16.0 4.1
Amortization 1.2 1.4 1.1
----- ----- -----
Operating income (loss) 2.8 (9.3) 3.5
Other income (expense):
Interest expense (4.6) (2.6) (2.0)
Interest income and other items -- net (0.0) 0.0 0.4
----- ----- -----
Income (loss) before income taxes (1.8) (11.9) 1.9
Income taxes 0.6 1.1 0.7
----- ----- -----
Income (loss) before extraordinary item (2.4) (13.0) 1.2
Extraordinary item, net of tax -- -- 0.6
----- ----- -----
Net income (loss) (2.4)% (13.0)% 0.6%
===== ===== =====
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Net Sales. Net sales for the year ended September 30, 1999 were
$170,169,000, an increase of $35,002,000 from the prior year. The increase was
due to the acquisition of Chemitreat Services, Inc, on March 2, 1998; of
Aquafine Engineering Services Limited and Purac Engineering Incorporated in a
single transaction on March 25, 1998; and of the specialty products division on
June 5, 1998. Waterlink experienced negative internal growth for the year of
11.9%, resulting primarily from significant revenues generated by German-based
sales activity and a Utah-based land development wastewater project in the prior
year. Excluding these two factors, internal growth would have declined by 3.9%
due to the timing of orders at two specific domestic locations. Further, if
currency rate fluctuations were excluded, negative internal growth for the nine
months would have been 2.5%. Waterlink 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, 1999 was
$54,226,000, an increase of $4,591,000 from the prior year due to the
acquisitions. Gross margin was 31.9% for the 1999 period as compared to 36.7%
for 1998. We decided to discontinue the manufacturing processes for our Great
Lakes subsidiary product line in favor of utilizing subcontractors. As a result
of this decision, during the year ended September 30, 1999, Waterlink recognized
$2,137,000 of costs, comprised of $1,191,000 of cost overruns that took place on
a contractual obligation and $946,000 of inventory write downs and other costs.
Absent the $2,137,000 of costs associated with the exit of the Great Lakes
facility, the gross margin would have been 33.1% for the year ended September
30, 1999. The adjusted gross margin of 33.1% is lower than the 36.7% realized in
1998 primarily due to the June 1998 acquisition of the specialty products
division, which historically experiences lower margins as compared to other
Waterlink divisions.
- 16 -
17
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended September 30, 1999 were $43,531,000,
an increase of $4,892,000 from the prior year. The increase was primarily due to
the acquisitions. Selling, general and administrative expenses as a percentage
of net sales were 25.6% in 1999 as compared to 28.6% for the prior year. This
decrease primarily reflects the costs savings realized from Waterlink's 1999
plan; as well as the impact of the June 1998 acquisition of the specialty
products division, which historically experiences a lower percentage of selling,
general and administrative expenses as a percentage of sales as compared to
other Waterlink divisions. The selling, general and administrative expenses for
the year ended September 30, 1999 were increased by a charge of $255,000 from
the write off of costs associated with acquisition activity that ceased during
the year.
Special Charges. Special charges of $3,843,000 during the year ended
September 30, 1999 related to the following:
- Continuing costs of $1,593,000 associated with the implementation of
Waterlink's 1999 plan, primarily related to termination benefits and
facility consolidation costs.
- In conjunction with our 1999 plan, we determined that we would exit the
acquired Bioclear business. During the fourth quarter of fiscal 1998,
the assets of Bioclear, primarily related to Bioclear's manufacturing
facility located in Winnipeg, Canada, were reduced to their estimated
net realizable value. Based on difficulties encountered during the
sales process, we further reduced the estimated net realizable value of
these remaining assets by $1,300,000.
- Additional severance benefits of $400,000 were incurred during fiscal
1999 not originally contemplated by the 1999 plan.
- Additional charges of $550,000 related to severance benefits during
fiscal 1999 related to the announced retirement of our chairman of the
board.
During 1998 Waterlink incurred special charges of $21,636,000 related to
the following:
- Waterlink recorded a charge of $2,858,000 primarily related to
termination benefits and costs associated with the exiting of certain
facilities to implement our 1999 plan.
- As a result of our decision to exit the Bioclear business, during the
fourth quarter of fiscal 1998, Waterlink 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 acquisition of Bioclear
Technology, Inc. and $1,317,000 to write off the cumulative translation
adjustment component of Bioclear's equity.
- Waterlink incurred special charges of $1,494,000, primarily
attributable to contractual obligations to our former chief executive
officer, who resigned in June 1998, and costs necessary to recruit
executives to Waterlink.
Amortization. Amortization expense for the year ended September 30, 1999
was $2,130,000, an increase of $259,000 from the prior year. The increase was
primarily due to the additional goodwill resulting from the fiscal 1998
acquisitions, offset by $322,000 reduction in amortization expense resulting
from the exit of Waterlink's Bioclear business during the fourth quarter of
fiscal 1998.
Interest Expense. Interest expense for the year ended September 30, 1999
was $7,857,000, an increase of $4,295,000 from the prior year primarily due to
increased borrowings related to Waterlink's fiscal 1998 acquisitions. Interest
expense for 1999 includes a primarily non-cash financing charge of $870,000
related to the amortization of the value assigned to warrants issued to purchase
up to 283,637 shares of common stock at an exercise price of $0.01 per share.
Income Taxes. Waterlink recorded income taxes of $1,033,000 on a pre-tax
loss of $3,149,000 for the year ended September 30, 1999. This income tax
expense was recorded on earnings outside the United States and in certain states
domestically.
- 17 -
18
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 completed during fiscal 1998. Waterlink
experienced negative internal growth for the year of 10.8%, resulting
principally from the timing of orders, exchange rate fluctuations and stronger
performance for specific domestic locations during fiscal 1997 that was not
duplicated in fiscal 1998.
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 acquisitions previously described. Gross margin was 36.7%
for 1998 as compared to 37.6% for 1997. Gross margins were impacted in 1998 by
the March 1997 acquisition of the nordic water products group and the June 1998
acquisition of the specialty products division, both of which historically
experience lower margins as compared to other Waterlink divisions.
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 acquisitions previously described. 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, Waterlink
incurred special charges of $21,636,000. These special charges consisted of the
following three components:
- Waterlink recorded a charge of $2,858,000 primarily related to
termination benefits and costs associated with the exiting of
facilities in connection with the implementation of our 1999 plan.
- Waterlink 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 acquisition of Bioclear 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, our 1999 plan includes
Waterlink'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 was not recoverable based on
Bioclear's lack of future undiscounted cash flows and was impaired. Once
the impairment was determined, Waterlink 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, Waterlink 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, Waterlink
also wrote off $1,317,000 of the cumulative translation adjustment
relating to Bioclear's equity.
- 18 -
19
- Waterlink incurred special charges of $1,494,000 primarily attributable
to contractual obligations to our former president and chief executive
officer, who resigned in June 1998, and costs necessary to recruit
executives to Waterlink.
Waterlink incurred special charges of $2,630,000 for the year ended
September 30, 1997 resulting primarily from the issuance at the time of our
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 Waterlink 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 acquisitions previously
described.
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 Waterlink's ongoing
acquisition program.
Income Taxes. Waterlink recorded an income tax provision of $1,468,000
on a pre-tax loss of $16,036,000. Waterlink was required to record income tax
expense on earnings outside the United States and was also required to record
income tax expense in several states domestically. In addition, due to the net
operating loss carryforward in the United States, we had to fully reserve for
deferred tax assets that had been recorded in the previous year.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Waterlink's primary sources of liquidity have been:
- borrowings available under credit facilities
- net proceeds from the sale of Waterlink's common and preferred stock
- issuance of common stock and seller financing incurred in connection
with Waterlink's completed acquisitions
- cash flow from certain profitable acquisitions
Historically, Waterlink's primary uses of capital have been:
- the funding of its acquisition program
- working capital requirements including the funding for growth at
certain acquisitions
- the funding required for certain under-performing acquisitions
Waterlink does not currently anticipate making significant capital
investments in plant and equipment because of our efforts to partner with
vendors who manufacture most of the components used in our systems and
equipment.
For the year ended September 30, 1999, net cash provided by operating
activities was $156,000. Long-term borrowings, along with $519,000 of proceeds
from the sale of a building, were used to help fund purchases of equipment
totaling $1,961,000 and cash outlays related to the purchases of businesses of
$2,240,000.
In the fourth quarter of fiscal 1998, Waterlink's board of directors
approved the 1999 plan. The 1999 plan provided for costs associated with the
exiting of certain facilities and employee termination costs. Costs associated
with this plan totaled $2,858,000 during fiscal 1998 and $1,993,000 for the year
ended September 30, 1999. Waterlink also recorded special charges during fiscal
1998 related to the resignation of our chief executive officer who resigned in
June 1998. In addition, Waterlink recorded $550,000 of special charges during
fiscal 1999 related to the announced retirement of our chairman of
- 19 -
20
the board. With regard to these special charges, approximately $1,439,000
remains reserved for future payment at September 30, 1999, which will be paid
over the next two fiscal years.
Waterlink is in the process of selling and disposing of non-revenue
producing assets. A Waterlink-owned facility vacated during fiscal 1998 was sold
and the proceeds of $519,000 were received during January 1999. Waterlink is
also in the process of selling our land, building and equipment in Winnipeg,
Manitoba, Canada, the former site of our Bioclear manufacturing facility. Based
on difficulties encountered during the sales process, Waterlink further reduced
the estimated net realizable value of these remaining assets held for sale by
$1,300,000 to approximately $1,000,000, and recorded this change in accounting
estimate during the year ended September 30, 1999. Waterlink expects to sell, at
approximately estimated net realizable value, the remaining assets of the
Bioclear manufacturing facility during fiscal 2000.
During fiscal 1998 Waterlink invested in Aquatec Water Systems,
Incorporated, a designer and manufacturer of specialized multi-chamber pumps for
the pure water industry, in the form of two $700,000 subordinated notes,
convertible into approximately 30% of the equity of Aquatec, together with other
stock purchase options. Waterlink reached an agreement to sell both notes at
their face value of $700,000 each plus interest to a group of investors.
Waterlink received $1,375,000 as partial payment for the notes and anticipates
receiving the balance of $25,000 during fiscal 2000.
Acquisitions. Waterlink's current capital structure does not support an
aggressive acquisition program. Waterlink's intends to improve its capital
structure through a combination of improved operating performance and access to
capital markets, which we expect will enable us to resume our acquisition
program. Acquisitions are expected to play a strategic role in Waterlink's
future to increase competitiveness, spur revenue and earnings growth, and
enhance our total solutions capability. The timing, size and success of any
acquisition effort and the associated potential capital commitments are
unpredictable at this time. As a result of the specialty products division
acquisition and the implementation of our 1999 plan, our debt is in excess of
our stockholders' equity and we bear the risks associated with increased
leverage.
During the year ended September 30, 1999 Waterlink made additional
purchase consideration payments of $2,240,000 related to the achievement of
targeted operating results of two of our acquisitions. In addition, additional
purchase consideration of $298,000 in connection with one of Waterlink's
acquisitions had been earned and recorded as of September 30, 1999, and was paid
in October, 1999. These amounts have been recorded as additional goodwill.
Under the terms of certain of the purchase agreements, Waterlink may be
required to make additional purchase consideration payments of up to $1,000,000,
contingent upon the achievement of specified operating results during fiscal
2000. Any additional purchase consideration payments will be treated as
additional goodwill for accounting purposes.
Credit Availability. Waterlink's credit facilities are comprised of (1) a
$76,000,000 domestic facility with Bank of America National Trust & Savings
Association as agent, which expires on May 19, 2003 and (2) separate facilities
aggregating approximately $6,500,000 at three of its overseas subsidiaries. The
credit facilities will be utilized to primarily fund operating activities of
Waterlink and, to a lesser extent, fund future acquisitions.
Prior to the amendment mentioned below, $2,600,000 of borrowings was made
available to Waterlink as the result of third party guarantees. In connection
with assisting in the process of improving our capital structure, these third
party guarantees were provided by Brantley Venture Partners III, L.P. in the
amount of $2,300,000, and by the three executive officers of Waterlink totaling
$300,000.
Waterlink granted the guarantors warrants to purchase, in the aggregate,
up to 283,637 shares of Waterlink common stock at an exercise price of $.01 per
share. Of the 283,637 warrants, 125,000
- 20 -
21
were issued at the time the guarantees were issued and the remaining 158,637
warrants were issued on September 28, 1999, the date of shareholder approval for
the remaining warrants. The warrants are immediately exercisable and expire if
unexercised in five years. The number of warrants granted to each guarantor was
based on their proportionate share of the $2,600,000 in guarantees.
Effective with the sale of 6,300,000 shares of Waterlink common stock at
$2.725 per share on October 5, 1999, Waterlink entered into an amendment of our
domestic facility waiving certain financial covenants that were not satisfied at
September 30, 1999. The waiver remains effective until December 31, 1999,
assuming Waterlink realizes not less than $750,000 of operating income for each
of the months of October, November and December 1999. At December 31, 1999
Waterlink will be required to be in compliance with certain financial covenants
on a quarterly basis as defined in the amendment. The net proceeds from the sale
of common stock were used to repay a portion of the domestic credit facility.
After giving effect to the repayment, availability for future borrowings upon
effectiveness of the amendment under the credit facilities is approximately
$8,925,000. Availability for future borrowings may increase or decrease based on
the pro forma operating performance of Waterlink.
Loans under the credit facilities bear interest at a designated variable
base rate plus spreads ranging from 0 to 75 basis points depending on a leverage
ratio of total consolidated indebtedness to Waterlink's earnings before
interest, taxes, depreciation and amortization. At Waterlink's option, the
credit facilities bear interest based on a designated London interbank offering
rate, or LIBOR, plus spreads ranging from 100 to 275 basis points, depending on
Waterlink's leverage ratio.
The credit facilities restrict or prohibit Waterlink from taking many
actions, including paying dividends and incurring or assuming other indebtedness
or liens. The banks that participate in the credit facilities also must approve
most acquisitions. Waterlink's obligations under the credit facilities are
secured by liens on substantially all of Waterlink's domestic assets, including
equipment, inventory, accounts receivable and general intangibles and the pledge
of most of the stock of Waterlink's subsidiaries. Waterlink has guaranteed the
payment by our three overseas subsidiaries of their obligations under the
overseas facilities. The three overseas subsidiaries have given the lenders an
assurance that the subsidiaries would not pledge their assets to any other
party.
Waterlink also has in place a $2,570,000 credit facility 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. At September 30, 1999 the Canadian credit facility was fully utilized.
Borrowings under the Canadian credit facility are payable upon demand and are
guaranteed by the real and personal property of Waterlink's Bioclear facility.
Waterlink believes that through the end of fiscal 2000, sufficient funds
for our working capital needs, additional cash requirements of the 1999 plan and
other special charges and additional contingent consideration payments related
to acquisitions will be provided by:
- future cash flow from operations
- borrowings under its credit facilities
- issuance of subordinated indebtedness, common stock, preferred stock
and seller financing incurred in connection with future financings or
acquisitions
- the sale of certain non-revenue producing assets
Market Risk. Waterlink's earnings are affected by changes in interest
rates charged on our domestic facility. If the market rates for borrowings
increased by 1% on our domestic facility, the impact would be an increase to
interest expense of $665,000 with a corresponding decrease to income before
income taxes. This amount was determined by considering the impact of
hypothetical interest rates on the balance of Waterlink's domestic facility at
September 30, 1999, after giving effect
- 21 -
22
to the $16,222,000 of net proceeds generated by the sale of 6,300,000 shares of
common stock on October 5, 1999, as well as the payment of the $1,600,000 notes
payable to the former shareholders of MEVA that occurred on October 8, 1999.
This analysis does not consider the effects of the overall economic environment
associated with such a change nor does it assume any change to Waterlink's
current financial structure. During fiscal 1998 Waterlink entered into an
interest rate swap agreement to modify the characteristics of the domestic
facility, which fixed Waterlink's LIBOR based rate at 5.25% on a notional amount
of $75,000,000. On September 30, 1999 this agreement was sold for a nominal
gain.
Waterlink also has exposure to currency rate fluctuations related
primarily to the purchases of inventory and the collection of accounts
receivable. Waterlink continues to utilize a limited number of foreign exchange
instruments, primarily forward contracts, to manage this exposure. Waterlink had
no significant hedging contracts outstanding at September 30, 1999.
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 Waterlink's decentralized IT
environments, individual assessments, in accordance with Waterlink's year 2000
program, have been conducted at Waterlink's operating companies. Collectively,
these assessments indicate that Waterlink's exposure to this segment of the year
2000 issue is not significant as Waterlink does not extensively rely on IT
systems which require modification. Waterlink's externally developed system
issues have been assessed company-wide through inquiry of 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. Waterlink has tested internally developed software systems where
applicable and has developed programs to make these systems year 2000 compliant.
Testing of upgraded or modified systems has begun at Waterlink's various
operating units. Results of these testing procedures, which will be completed by
December 31, 1999, are incomplete.
The year 2000 program also addresses issues related to non-IT
environments. Collectively, these assessments indicate that Waterlink's exposure
to this segment of the year 2000 issue is not significant due to Waterlink's
limited manufacturing operations and related capital equipment needs.
Waterlink's operating equipment has been assessed through inquiry of external
manufacturers and internal testing procedures. Remediation efforts have begun
where necessary. Collectively, Waterlink will complete and test remediated
assets by December 31, 1999.
Waterlink's primary system interface with an external party involves its
banking institutions. Based on inquiries of its banking institutions, Waterlink
is not aware of any unresolved year 2000 issues. Further, due to Waterlink's
decentralized operations, individual assessments, in accordance with Waterlink's
year 2000 program, have been conducted at Waterlink's operating companies
regarding significant suppliers and subcontractors. These assessments, which are
not complete, have been executed primarily through inquiry of our various
suppliers and subcontractors. To date, Waterlink is not aware of any external
party with an unresolved year 2000 issue that would materially impact
Waterlink's operations and financial position. However, Waterlink 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 Waterlink's operations and financial position. The effect of
non-compliance by external parties is not determinable.
Waterlink has primarily utilized internal resources to assess, test,
remediate and implement software and equipment related to the year 2000. The
total cost of our year 2000 program, excluding employee salaries, is estimated
at $400,000, primarily attributable to software upgrades and modifications.
Waterlink has incurred approximately $375,000 related to the various phases of
its year 2000 program through September 30, 1999.
- 22 -
23
We believe that we have a program established to resolve the year 2000
issue in a timely manner. Waterlink's year 2000 program has not been completed.
In the event Waterlink does not complete its remaining year 2000 procedures, we
believe under a worst case scenario, certain functions may be interrupted.
Waterlink 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 Waterlink.
The potential liability and loss of revenue from these issues is not
determinable.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," which
makes SFAS No. 133 effective for Waterlink beginning October 1, 2000. Waterlink
does not expect the adoption of this statement to have a material effect on our
financial statements.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in
this report may include forward-looking statements that involve risks and
uncertainties. While forward-looking statements are sometimes presented with
numerical specificity, they are based on variety of assumptions made by
management regarding future circumstances over which Waterlink has little or no
control. A number of important factors, including those identified in this
section as well as factors discussed elsewhere herein, could cause Waterlink's
actual results to differ materially from those in forward-looking statements or
financial information. Actual results may differ from forward-looking results
for a number of reasons, including the following:
- changes in world economic conditions, including
i. instability of governments and legal systems in countries in
which Waterlink conducts business
ii. significant changes in currency valuations
iii. recessionary environments
iv. year 2000 compliance issues relating to Waterlink's programs
and external parties, including suppliers and customers
v. the effects of military conflicts
- changes in customer demand and timing of orders as they affect sales
and product mix, including
i. the effect of strikes at customer's facilities
ii. variations in backlog
iii. the impact of changes in industry business cycles
iv. changes in environmental laws
- competitive factors, including
i. changes in market penetration
ii. introduction of new products by existing and new competitors
- 23 -
24
- changes in operating costs, including
i. changes in Waterlink's and its subcontractors' manufacturing
processes
ii. changes in costs associated with varying levels of
operations
iii. changes resulting from different levels of customers demands
iv. effects of unplanned work stoppages
v. changes in cost of labor and benefits
vi. the cost and availability of raw materials and energy
- the degree of success of Waterlink's strategic plan
- unanticipated litigation, claims or assessments
Our Quarterly Results of Operations Could Fluctuate Significantly Which
Could Result in Defaults Under Our Bank Credit Agreement and in Volatility in
the Market Price of Our Common Stock. We need to finalize complicated contracts
and orders with our customers before we produce our revenues. Often, the timing
of those contracts and orders is also subject to our customers receiving
financing, various permits and other aspects outside our control. A delay in
finalizing any of these contracts could have a significant negative impact on
our operating results in any fiscal quarter. We believe that period-to-period
comparisons of our operating results are not necessarily meaningful and should
not necessarily be relied upon as indicators of our future performance. Since
some of our financial covenants in our bank credit agreement are based on
quarterly results, these fluctuations could result in our needing to negotiate
amended terms or being in default of our bank credit agreement. Also, these
fluctuations in our quarterly results could lead to our failure to meet
expectations of securities analysts and investors and could seriously harm the
market price of our common stock. Quarterly operating results have varied
significantly in the past and will likely vary significantly in the future.
Our Substantial Amount of Debt Could Limit Our Growth and Imposes
Restrictions on Our Business. We have incurred substantial indebtedness. Our
level of debt and our recent operating performance, including the impact of
special charges to our income, limit our ability to:
- obtain additional financing to fund our strategy, capital expenditures,
acquisitions and other general corporate purposes;
- use operating cash flow in other areas of our business since we must
dedicate a substantial portion of these funds to pay interest and
retire debt; and
- react to changing market conditions and economic downturns.
At September 30, 1999, our total indebtedness was $89,917,000. On October
5, 1999, Waterlink sold 6,300,000 shares of common stock in a registered
offering at a price of $2.725 per share, which resulted in the aggregate net
proceeds of approximately $16,222,000. After the repayment of a portion of this
debt from the sale of 6,300,000 shares of common stock, this total indebtedness
is reduced to $71,695,000.
Our debt agreements contain numerous financial and operating covenants
that limit our discretion which respect to certain business matters. These
covenants place significant restrictions on, among other things, our ability to:
- incur additional indebtedness, both under the bank credit agreement and
other debt agreements;
- merge or consolidate with other entities;
- make acquisitions;
- repay our obligations; and
- pay dividends and other distributions.
- 24 -
25
We Have a Limited Combined Operating History and are Still in the Process
of Integrating Those Acquisitions That We Have Completed. We were formed in
December 1994 and have grown principally through the acquisition of existing
businesses. Our success depends, in part, on our ability to integrate the
operations of our various businesses, including centralizing some functions to
achieve cost savings and developing programs and processes that will promote
cooperation in the sharing of opportunities and resources among our businesses.
Our 1999 plan and our restructured organization are intended to continue to
promote our ongoing integration process. Our management group has been assembled
for only a relatively short time with several key managers, sales and
engineering personnel joining us within the last two fiscal years.
The Demand for Our Products is Cyclical. Much of our water purification
and wastewater equipment requires significant capital expenditures by our
customers. As such, the timing of customer purchases from us is affected by
various economic factors, including interest rate and business cycle
fluctuations, the timing and process of government funding and the setting of
rates by regulators, all of which are beyond our control. The cyclical nature of
capital equipment sales could have an adverse affect on our revenues and
profitability in general and on our revenues and profitability in any particular
quarterly financial reporting period.
Our Industry is Highly Competitive. 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 projects. While we believe we are well positioned to
deliver technology and services at a fair price, some of our competitors have
developed product and service integration capabilities beyond our current scope.
We are Dependent on Key Personnel. Our business depends on our ability to
hire and retain our executive officers and senior management. Our business could
be adversely affected if for any reason any of our executive officers or senior
managers cease to be employed by us. In addition, we will be dependent on the
senior managers of any significant businesses we may acquire in the future and
on our ability to attract and retain qualified managers to support our internal
expansion.
The Current Members of Our Board of Directors and Management Own
Approximately 20.4% of Our Common Stock and Can Exercise Significant Influence
over Our Affairs. Also, Several Institutional Investors Own Substantial
Percentages of Our Common Stock. At October 31, 1999, our current directors and
management own or control, in the aggregate, approximately 20.4% of our common
stock. In addition, several large institutional investors own or control a
significant percentage of our common stock. Accordingly, these individuals and
institutional investors, if acting together or even alone, can exercise
significant influence over our affairs including the election of our directors,
appointment of our management and approval of actions requiring the approval of
our stockholders, which may include the adoption of amendments to our
certificate of incorporation, the approval of mergers or sales of all or
substantially all our assets, and similar items. The concentration of voting
power of these stockholders, if they act together, could, under certain
circumstances, have the effect of delaying or preventing a change in control of
Waterlink.
Our Foreign Operations Are Subject to Political and Economic Risks and We
May Be Adversely Affected by Foreign Currency Fluctuation. We sell a substantial
proportion of our systems, equipment and services in Western Europe, Latin
America and other regions outside the United States. Also, a number of our
divisions operate outside of the United States. Our net sales outside the United
States were approximately 48.8% of our net sales for the year ended September
30, 1999. Political,
- 25 -
26
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
- the general hazards associated with the assertion of sovereignty over
certain areas in which operations are conducted
Because our reporting currency is the United States dollar, our
operations outside the United States sometimes face the additional risks of
fluctuating currency values and exchange rates, hard currency shortages and
controls on currency exchange. We are subject to the impact of foreign currency
fluctuations and exchange rate charges on our reporting for results from those
operations in our financial statements.
We May Be Subject to Liability Under Environmental Laws. In the United
States, the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, and comparable state laws, impose liability without fault
for the releases of hazardous substances into the environment. Potentially
responsible parties include (a) owners and operators of a site, (b) parties
which create the hazardous substances released at a site, and (c) parties which
arrange for the transportation or disposal of hazardous substances. We could
face claims by governmental authorities, private individuals and other persons
alleging that hazardous substances were released during the treatment process or
from the use or disposal of end products and by-products of the treatment
process in violation of law. We are also subject to environmental laws in
countries outside the United States where we operate or in which our customers
are located. These requirements and their enforcement may vary by country but in
general prescribe standards for the protection of human health, safety and the
environment.
Changes in Environmental Laws Could Affect Our Business. Federal, state,
local and foreign environmental laws and regulations impose substantial
standards for properly purifying water and treating wastewater, and impose
liabilities for noncompliance. Environmental laws and regulations are, and will
continue to be, a significant factor affecting our ability to sell our
solutions, systems and equipment. To the extent that demand for our solutions,
systems and equipment is created by the need to comply with environmental laws
and regulations, any modification of the standards imposed by these laws and
environmental laws and regulations may reduce demand for our products and
services, thereby adversely affecting our business and prospects.
Our Long-Term Growth Strategy Is Dependent on Completing
Acquisitions. Over the long-term, we intend to grow significantly by acquiring
other businesses. Our current capital structure does not support an aggressive
acquisition program. We intend to use a combination of our common stock, cash
and debt obligations to make these future acquisitions. The extent to which we
are able to use our common stock for this purpose will depend on its market
value from time to time and the willingness of potential sellers 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 to funds from internally
generated cash flow over and above our other cash needs and our ability to incur
additional indebtedness. Our current capital structure may make it more
difficult for us to borrow money to use for acquisitions.
An acquisition strategy such as ours involves risks inherent in assessing
the values, strengths, weaknesses and profitability of acquisition candidates.
Historically, we have been successful in identifying potential acquisition
candidates. As consolidation continues in the industry, the prices for
- 26 -
27
attractive acquisition candidates may be higher than we have paid and may make
an acquisition strategy for growth less viable.
Our Business is Subject to Potential Warranty and Performance Guarantee
Claims. Some of our customers require us to guarantee that our services and
products will be of a specified level of quality or performance. If a product or
service fails to attain that level of quality or performance, we could incur
significant financial penalties.
We Face Many Unknown Risks Associated with Year 2000 Problems. Many
currently installed computer systems and software products are dependant upon
internal calendars coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish dates after the beginning of year 2000 from those before. While we
believe that we have a program established to resolve the year 2000 issue in a
timely manner in our computer systems, we may not have resolved all issues.
Also, we depend on third parties, including suppliers, subcontractors and
customers, for the operation of our day-to-day business. If they fail to correct
their year 2000 problems, failures or interruptions to our business may occur,
resulting in significant financial and other problems. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Provisions of Our Corporate Documents Could Delay or Prevent a Change in
Control of Waterlink. Our certificate of incorporation and bylaws contain
certain provisions which may have anti-takeover effects and may discourage,
delay, or prevent a takeover attempt that a stockholder might consider in his
best interest. These documents allow our board of directors to authorize the
issuance of preferred stock, which could adversely affect the voting and other
rights of the holders of our common stock, provide that our directors are
classified into three classes with staggered terms, and contain a "fair price
provision" which imposes restrictions in the event of certain business
combinations.
ITEM 7(A). QUALITATIVE AND QUANTITATIVE DISCLOSURES REGARDING MARKET RISK
The disclosures required under this item are included in Management's
Discussion and Analysis of Financial Condition and Results of Operations on
pages 21-22.
- 27 -
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
PAGE
----
Report of Independent Auditors.............................. 29
Consolidated Balance Sheets at September 30, 1999 and
1998...................................................... 30
Consolidated Statements of Operations for the years ended
September 30, 1999, 1998 and 1997......................... 32
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1999, 1998 and 1997............. 33
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997......................... 34
Notes to Consolidated Financial Statements.................. 35
- 28 -
29
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, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 1999. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1999, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Canton, Ohio
November 8, 1999
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30
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
(In thousands,
except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 1,734 $ 3,925
Trade accounts receivable, less allowance of $1,376 in
1999 and $1,266 in 1998 37,883 29,906
Other receivables 2,163 2,757
Inventories 23,761 22,160
Costs in excess of billings 18,641 17,195
Refundable income taxes -- 840
Other current assets 3,198 3,111
-------- --------
Total current assets 87,380 79,894
Property, plant and equipment, at cost:
Land, building and improvements 3,022 4,095
Machinery and equipment 8,501 8,293
Office equipment 3,271 2,899
-------- --------
14,794 15,287
Less accumulated depreciation 2,660 1,557
-------- --------
12,134 13,730
Other assets:
Goodwill, net of amortization of $4,244 in 1999 and $2,555
in 1998 77,777 79,936
Patents, net of amortization of $336 in 1999 and $217 in
1998 1,316 1,408
Other assets 6,788 8,593
-------- --------
85,881 89,937
-------- --------
Total assets $185,395 $183,561
======== ========
The accompanying notes are an integral part of these statements.
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31
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
(In thousands,
except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade $ 22,197 $ 15,133
Accrued expenses 16,266 18,881
Additional purchase consideration payable 298 1,000
Billings in excess of cost 4,022 3,392
Accrued income taxes 1,360 1,158
Deferred income taxes 160 164
Current portion of long-term obligations 8,218 9,429
-------- --------
Total current liabilities 52,521 49,157
Long-term obligations:
Long-term debt 78,449 73,639
Convertible subordinated notes -- related parties 3,250 4,250
Other 1,189 1,637
-------- --------
82,888 79,526
Shareholders' equity:
Preferred Stock, $.001 par value, authorized 10,000,000
shares, none issued and outstanding -- --
Common Stock, voting, $.001 par value
Authorized -- 40,000,000 shares
Issued and outstanding -- 12,635,861 shares in 1999 and
12,225,604 shares in 1998 13 12
Additional paid-in capital 73,781 71,973
Accumulated other comprehensive income (loss) (2,288) 231
Accumulated deficit (21,520) (17,338)
-------- --------
Total shareholders' equity 49,986 54,878
-------- --------
Total liabilities and shareholders' equity $185,395 $183,561
======== ========
The accompanying notes are an integral part of these statements.
- 31 -
32
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1999 1998 1997
---------- ---------- ---------
(In thousands, except per share data)
Net sales $170,169 $135,167 $64,699
Cost of sales 115,943 85,532 40,390
-------- -------- -------
Gross profit 54,226 49,635 24,309
Selling, general and administrative expenses 43,531 38,639 18,683
Special charges 3,843 21,636 2,630
Amortization 2,130 1,871 751
-------- -------- -------
Operating income (loss) 4,722 (12,511) 2,245
Other income (expense):
Interest expense (7,857) (3,562) (1,281)
Interest income and other items--net (14) 37 263
-------- -------- -------
Income (loss) before income taxes (3,149) (16,036) 1,227
Income taxes 1,033 1,468 470
-------- -------- -------
Income (loss) before extraordinary item (4,182) (17,504) 757
Extraordinary item, net of income taxes of $257 -- -- (385)
-------- -------- -------
Net income (loss) $ (4,182) $(17,504) $ 372
======== ======== =======
Earnings (loss) per common share:
Basic:
Income (loss) before extraordinary item $ (0.33) $ (1.46) $ 0.15
Extraordinary item -- -- (0.08)
-------- -------- -------
$ (0.33) $ (1.46) $ 0.07
======== ======== =======
Assuming dilution:
Income (loss) before extraordinary item $ (0.33) $ (1.46) $ 0.10
Extraordinary item -- -- (0.05)
-------- -------- -------
$ (0.33) $ (1.46) $ 0.05
======== ======== =======
Weighted average common shares outstanding:
Basic 12,556 12,007 4,924
Assuming dilution 12,556 12,007 7,804
The accompanying notes are an integral part of these statements.
- 32 -
33
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
ACCUMULATED TOTAL
ADDITIONAL OTHER SHAREHOLDERS
COMMON PAID-IN COMPREHENSIVE ACCUMULATED EQUITY
STOCK CAPITAL INCOME (LOSS) DEFICIT (DEFICIT)
------ ---------- ------------- ----------- ------------
(In thousands, except share data)
YEAR ENDED SEPTEMBER 30, 1997
Balance at October 1, 1996 $ 2 $ 2,611 $ (206) $ 2,407
Net income 372 372
Foreign currency translation
adjustments $ (44) (44)
---------
Comprehensive income 328
Conversion of subordinated notes --
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
Other 1,341 1,341
---- -------- -------- --------- ---------
Balance at September 30, 1997 12 70,739 (44) 166 70,873
YEAR ENDED SEPTEMBER 30, 1998
Net loss (17,504) (17,504)
Foreign currency translation
adjustments 275 275
---------
Comprehensive loss (17,229)
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
Other (90) (90)
---- -------- -------- --------- ---------
Balance at September 30, 1998 12 71,973 231 (17,338) 54,878
YEAR ENDED SEPTEMBER 30, 1999
Net loss (4,182) (4,182)
Foreign currency translation
adjustments (2,519) (2,519)
---------
Comprehensive loss (6,701)
Conversion of subordinated notes for
410,257 shares 1 999 1,000
Issuance of warrants in connection
with guaranty of senior indebtedness 820 820
Other (11) (11)
---- -------- -------- --------- ---------
Balance at September 30, 1999 $ 13 $ 73,781 $ (2,288) $ (21,520) $ 49,986
==== ======== ======== ========= =========
The accompanying notes are an integral part of these statements.
- 33 -
34
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
-------------------------------
1999 1998 1997
------- -------- --------
(In thousands)
OPERATING ACTIVITIES
Net income (loss) $(4,182) $(17,504) $ 372
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Extraordinary item -- -- 385
Non-cash portion of special charges 3,053 17,378 1,138
Deferred income taxes (credit) 542 667 (503)
Depreciation and amortization 3,994 3,326 1,229
Changes in working capital:
Accounts receivable (7,916) 6,128 (8,951)
Inventories (2,681) (2,583) (827)
Cost in excess of billings (1,788) (7,224) (13)
Refundable income taxes 840 (205) (123)
Other assets 2,092 (8,155) 462
Accounts payable 7,326 195 2,265
Accrued expenses (2,031) 1,693 5
Billings in excess of cost 684 (3,284) (2,725)
Accrued income taxes 223 115 578
------- -------- --------
Net cash provided (used) by operating activities 156 (9,453) (6,708)
INVESTING ACTIVITIES
Purchases of equipment (1,961) (2,261) (1,072)
Proceeds from sale of building 519 -- --
Purchases of subsidiaries, net of cash acquired (2,240) (53,430) (42,597)
------- -------- --------
Net cash used in investing activities (3,682) (55,691) (43,669)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 5,306 66,709 33,110
Payments on long-term borrowings (2,470) (1,417) (30,866)
Proceeds from sale of Common Stock -- 1,308 50,523
------- -------- --------
Net cash provided by financing activities 2,836 66,600 52,767
Effect of exchange rate changes on cash (1,501) (13) (27)
------- -------- --------
Increase (decrease) in cash and cash equivalents (2,191) 1,443 2,363
Cash and cash equivalents at beginning of year 3,925 2,482 119
------- -------- --------
Cash and cash equivalents at end of year $ 1,734 $ 3,925 $ 2,482
======= ======== ========
The accompanying notes are an integral part of these statements.
- 34 -
35
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
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 1999, 1998 and
1997 refer to the fiscal years ended September 30, 1999, 1998 and 1997,
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 aggregating approximately $2,600,000
from two customers 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.
- 35 -
36
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. In addition, the Company assesses
long-lived assets for impairment under Financial Accounting Standards Board's
(FASB) Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of." Under those rules,
goodwill associated with assets acquired in a purchase business combination is
included in impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable (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 in
accumulated other comprehensive income (loss) in shareholders' equity.
Accumulated other comprehensive income (loss) consists entirely of foreign
currency translation adjustments in all periods presented. Foreign currency
gains and losses resulting from transactions are included in the results of
operations and amounted to a net gain of $213,000 in 1999, $91,000 in 1998 and
$167,000 in 1997.
EARNINGS (LOSS) PER SHARE -- Earnings per share is computed by dividing
net income by the weighted-average number of common shares outstanding during
the year. Earnings per share -- assuming dilution is computed by dividing net
income by the weighted-average number of common shares outstanding adjusted for
any dilutive impact of potential common shares for options, warrants,
convertible subordinated debt and convertible redeemable preferred stock.
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 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. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133," which makes SFAS No. 133 effective
for the Company beginning October 1, 2000. The Company does not expect the
adoption of this Statement to have a material effect on the Company's financial
statements.
RECLASSIFICATIONS -- Certain amounts reported in the 1998 and 1997
financial statements have been reclassified to conform to the 1999 presentation.
2. ACQUISITIONS
During fiscal 1998, the Company completed three acquisitions. On March 2,
1998 the Company purchased Chemitreat Services, Inc. ("C'treat"), which designs
and manufactures pure watermakers for use in the global offshore energy
industry, for approximately $5,000,000. The purchase price
- 36 -
37
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
consists of $2,750,000 in cash and $2,250,000 in convertible subordinated notes.
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. 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 ("Specialty Products Division") design, manufacture and market
products and services utilizing activated carbon for separation, concentration
and purification of water, liquid and gases. The aggregate purchase price of the
1998 acquisitions included approximately $35,704,000 of goodwill
(C'treat--$4,288,000; AES/Purac--$3,236,000; and Specialty Products
Division--$28,180,000), 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 $8,638,000, consisting of $6,967,000 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 $47,207,000 of goodwill (Nordic
Group -- $5,878,000; Bioclear -- $17,849,000; Lanco -- $1,907,000;
Meva -- $6,702,000 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
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.
All of the acquisitions were accounted for as purchases. The consolidated
statements of operations of the Company include 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 $1,000,000,
contingent upon the achievement of specified operating results during fiscal
2000. Any such additional purchase consideration payments will be treated as
additional goodwill for accounting purposes.
The following unaudited pro forma information for 1998 presents the
consolidated results of operations of the Company assuming the acquisitions
discussed above were completed on October 1, 1997. Actual results for 1999 are
presented for comparative purposes.
- 37 -
38
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
1999 1998
---------- ----------
(In thousands except per
share data)
Net sales $170,169 $183,521
Operating income (loss) 4,722 (8,443)
Loss before taxes and extraordinary item (3,149) (14,617)
Net loss (4,182) (16,360)
Net loss per common share -- basic $ (0.33) $ (1.36)
Net loss per common share -- assuming dilution $ (0.33) $ (1.36)
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. The 1999
actual results of operations reflect several non-recurring charges totaling
$7,105,000. Of this amount, $3,843,000 was classified as special charges (see
Note 7); $870,000 is included in interest expense (see Note 5); $2,137,000
relates to the exit of a manufacturing facility is included in cost of sales,
and $255,000 relates to the write off of costs associated with certain
acquisition activity that was ceased during 1999 that was classified in selling,
general and administrative expense. Pro forma operating results for the year
ended September 30, 1998 reflect $21,636,000 of special charges as described in
Note 7.
3. INVENTORIES
Inventories consisted of the following:
SEPTEMBER 30,
------------------
1999 1998
------- -------
(In thousands)
Raw materials and supplies $13,836 $11,843
Work in process 4,394 3,500
Finished goods 5,531 6,817
------- -------
$23,761 $22,160
======= =======
4. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is
as follows:
SEPTEMBER 30,
------------------
1999 1998
------- -------
(In thousands)
Contract costs incurred to date $64,062 $57,435
Estimated profits 25,439 24,497
------- -------
Contract revenue earned to date 89,501 81,932
Less billings to date 74,882 68,129
------- -------
Cost and estimated earnings in excess of billings, net $14,619 $13,803
======= =======
- 38 -
39
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
The above amounts are included in the accompanying consolidated balance
sheet as:
SEPTEMBER 30,
-------------------
1999 1998
-------- -------
(In thousands)
Costs in excess of billings $ 18,641 $17,195
Billings in excess of costs 4,022 3,392
-------- -------
$ 14,619 $13,803
======== =======
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 customer. This retainage aggregated
$2,188,000 at September 30, 1999 and $1,411,000 at September 30, 1998.
Substantially all retained balances are collectible within one year.
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
SEPTEMBER 30,
-------------------
1999 1998
-------- -------
(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 8.17% at September
30, 1999) $ 32,269 $43,000
Term note payable to a bank, quarterly payments
ranging from $500,000 in December 1999 to
$2,500,000 in March 2003, with the balance due
upon maturity on May 19, 2003. Interest is payable
quarterly at variable rates (average rate of 8.42%
at September 30, 1999) 48,836 35,000
Note payable to a bank, in monthly installments of
$187,500 beginning in January 2000, with the
balance due at maturity on September 25, 2000.
Interest is payable at maturity ( 9.25% at
September 30, 1999) 2,570 2,535
Other notes payable to various parties 1,392 862
- 39 -
40
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
SEPTEMBER 30,
-------------------
1999 1998
-------- -------
(In thousands)
CONVERTIBLE SUBORDINATED NOTES -- RELATED PARTIES
Note payable to former shareholders of Meva. Interest
accrues at 3% per annum and is payable on a
quarterly basis. 1,600 1,671
Note payable to a former shareholder of Hycor, due
October 1, 2000. Interest accrues at 6.06% per
annum and is payable on a quarterly basis. 1,000 2,000
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 2,250
-------- -------
89,917 87,318
Less current maturities 8,218 9,429
-------- -------
$ 81,699 $77,889
======== =======
Future maturities of long-term obligations for the five years subsequent
to September 30, 1999 are as follows: 2000--$8,218,000; 2001--$11,702,000;
2002--$10,070,000; 2003--$59,675,000 and 2004--$77,000.
Interest paid approximated $7,467,000 in 1999, $2,758,000 in 1998 and
$1,605,000 in 1997.
The Company's senior credit facilities are comprised of a domestic credit
facility with Bank of America National Trust & Savings Association as agent, and
three separate facilities at overseas locations. During the last quarter of
1999, the Company entered into two amendments of its domestic credit facility,
the fifth and sixth amendments. In connection with the fifth amendment, a
significant stockholder and the three executive officers of the Company
guaranteed the repayment in the aggregate of up to $2,600,000 of outstanding
indebtedness. In consideration for these guarantees, warrants to purchase, in
the aggregate, up to 283,637 shares of Common Stock were issued at an exercise
price of $0.01 per share. The warrants are immediately exercisable and expire if
unexercised after five years. The guarantees expired on October 5, 1999 upon the
completion of the sale of 6,300,000 shares of Common Stock as described in Note
16. The value of these warrants, plus costs associated with their issuance,
totaling approximately $870,000, was amortized over the guarantee period and is
included in interest expense for the year ended September 30, 1999. The fifth
amendment also waived certain financial covenants that were not satisfied at
June 30, 1999.
In connection with the sale of 6,300,000 shares of Common Stock, the
Company entered into the sixth amendment to the domestic credit facility. This
amendment reduced the domestic credit facility to $76,000,000 and waived certain
financial covenants that were not satisfied at September 30, 1999. The waiver
remains in effect until December 31, 1999 assuming the Company realizes not less
that $750,000 of operating income for each month of October, November and
December 1999.
Availability for future borrowings under the domestic credit facility is
based on a multiple of the Company's pro forma earnings before interest, taxes,
depreciation and amortization, with the first measurement period being December
31, 1999. At September 30, 1999, approximately $400,000 was available for future
borrowings under the domestic credit facility. After giving effect to
approximately $16.2 million of net proceeds generated from the sale of 6,300,000
shares of Common Stock on
- 40 -
41
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
October 5, 1999, approximately $8,925,000 is available for future borrowings. On
October 8, 1999 the $1,600,000 of convertible subordinated notes to former
shareholders of Meva were paid.
Loans under the Amended Credit Facilities bear interest at a designated
variable base rate plus spreads ranging from 0 to 75 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, or LIBOR, or prime plus spreads ranging from 100 to 275 basis points,
depending on the Company's leverage ratio.
The 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 credit facilities also must approve
most acquisitions. The Company's obligations under the credit facilities 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 the
lenders an assurance that the subsidiaries would not pledge their assets to any
other party.
The Company also has in place a $2,570,000 credit facility 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. At September 30, 1999 the Canadian credit facility was fully utilized.
Borrowings under the Canadian credit facility are payable on a monthly basis
during fiscal 2000 and are guaranteed by the real and personal property of the
Company's Bioclear facility.
During 1999, the Company entered into an agreement with one of its
existing holders of convertible subordinated notes to reduce the note principal
amount from $2,000,000 to $1,000,000 in exchange for 410,257 shares of Common
Stock. In addition, for the remaining $1,000,000 of the convertible subordinated
note, the maturity date was extended from September 30, 1999 to October 1, 2000;
the interest rate on the remaining note balance was increased from 5.81% to
6.06%; and the conversion rate was decreased from $22.25 per share to $6.75 per
share. Effective October 1, 1999, $750,000 of the $1,000,000 balance was
converted in exchange for 275,230 shares of Common Stock, with the remaining
principal balance being paid in cash.
The conversion rate on the convertible subordinated notes payable to the
former shareholders of C'treat is $15.63.
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 $2,583,000 in 1999, $2,072,000
in 1998 and $959,000 in 1997. Related party rent expense included in
- 41 -
42
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
these totals amounted to $511,000 in 1999, $758,000 in 1998 and $438,000 in
1997. Aggregate future minimum lease payments under noncancelable operating
leases at September 30, 1999 are as follows:
RELATED
PARTY OTHER
LEASES LEASES TOTAL
------- ------ -------
(In thousands)
2000 $ 741 $1,441 $ 2,182
2001 750 1,254 2,004
2002 413 1,057 1,470
2003 439 761 1,200
2004 474 469 943
Thereafter 3,246 1,597 4,843
------ ------ -------
$6,063 $6,579 $12,642
====== ====== =======
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 restructure the Company from a holding company with 23 operating
companies into five integrated divisions that focus on specific market segments.
The plan, which has eliminated redundant costs and is intended to improve
operating efficiencies, includes costs associated with the exiting and
consolidation of certain facilities and employee termination costs. In
conjunction with the 1999 Plan, the Company expected to reduce its domestic and
foreign workforce by approximately 75 people and eliminate certain
administrative and production-related functions no longer required. Through
September 30, 1999, 119 employees have been terminated in conjunction with the
1999 Plan. Of the 119 employees terminated, 95 people have received, or are
currently receiving, termination benefits in accordance with Company guidelines
or local laws. Further, seven facilities have been closed or relocated as of
September 30, 1999.
The following table summarizes the provisions, payments and remaining
reserves associated with the 1999 Plan:
TERMINATION OTHER 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
Provision in 1999 1,093 900 1,993
Payments in 1999 (1,444) (1,918) (3,362)
------ ------ ------
Reserve at September 30, 1999 $ 605 $ 284 $ 889
====== ====== ======
In conjunction with its 1999 Plan, the Company determined that it would
exit the acquired Bioclear business. During 1998, the assets of Bioclear,
primarily related to its manufacturing facility located in Winnipeg, Canada,
were reduced to their estimated net realizable value. Accordingly, the Company
recorded a $17,284,000 non-cash charge during 1998, consisting of $15,967,000
related to the impairment of goodwill associated with the June 1997 Bioclear
acquisition and $1,317,000 to
- 42 -
43
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
write-off the cumulative translation adjustment component of Bioclear's equity.
Based on the status of the sales process and the Company's decision regarding
how to best dispose of the facility, the Company further reduced the estimated
net realizable value of these remaining assets by $1,300,000 and recorded this
change in accounting estimate during the year ended September 30, 1999. The
carrying value of the facility, $959,000, is included in other long-term assets
at September 30, 1999. For segment reporting purposes, the remaining asset value
and the amount of impairment charges for 1999 and 1998 are included under the
Biological Wastewater Treatment Division.
Theodore F. Savastano, the Company's founder and Chairman of the Board of
Directors, will retire at the Annual Meeting of Shareholders in January 2000. In
conjunction with Mr. Savastano's retirement, the Company recorded $550,000 in
special charges in fiscal 1999 attributable to contractual obligations. This
post-employment obligation will be payable over the next two fiscal years.
As a result of the reduction in estimated net realizable value of the
remaining Bioclear assets, together with the termination and facility
consolidation costs and the contractual obligation to its Chairman previously
discussed, the Company has recorded special charges totaling $3,843,000 during
the year ended September 30, 1999.
In addition to the $2,858,000 recorded in connection with the 1999 Plan
and the $17,284,000 of non-cash charges associated with the exit of the acquired
Bioclear business, the Company also incurred a special charge during 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 Company's 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
Prior to its initial public offering in 1997, the Company issued warrants
to purchase 225,000 shares of Common Stock to Bank of America National Trust &
Savings Association in connection with its then effective credit facility, and
warrants to purchase 125,000 shares of Common Stock in conjunction with entering
into a note purchase agreement with several purchasers. The 350,000 warrants
were issued at $4.50 per share and were assigned an original issue discount
value of $413,500 ($1.18 per share), which was capitalized as deferred financing
costs. As a result of its initial public offering, the Company cancelled the
note purchase agreements and retired certain indebtedness that resulted in the
write off of the original issue discount and other unamortized debt issuance
costs. As a result, the Company realized an extraordinary charge of $385,000,
net of taxes of $257,000, which reduced earnings per share, assuming dilution,
by $0.05 for the year ended September 30, 1997.
- 43 -
44
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
9. INCOME TAXES
The provision for income taxes consists of the following:
1999 1998 1997
------- -------- ------
(In thousands)
Current:
U.S. federal $ -- $ -- $ 807
State and local 223 111 (48)
Foreign 268 690 214
------- -------- ------
491 801 973
Deferred (credit):
U.S. federal -- 620 (620)
Foreign 542 47 117
------- -------- ------
542 667 (503)
------- -------- ------
$ 1,033 $ 1,468 $ 470
======= ======== ======
Income (loss) before income taxes consists of the following:
1999 1998 1997
------- -------- ------
(In thousands)
United States $(2,459) $ 1,379 $ 431
Foreign (690) (17,415) 796
------- -------- ------
$(3,149) $(16,036) $1,227
======= ======== ======
The Company made income tax payments of approximately $1,020,000 in 1999,
$979,000 in 1998 and $220,000 in 1997.
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:
1999 1998 1997
------- ------- ------
(In thousands)
Provision (credit) for income taxes at the
statutory federal rate $(1,071) $(5,452) $ 417
Adjustments:
State and local income taxes 223 111 (32)
Non-deductible goodwill amortization 565 247 71
Difference in rates on foreign subsidiaries (33) 45 (46)
Change in valuation allowance 1,150 6,141 46
Other 199 376 14
------- ------- ------
Provision for income taxes $ 1,033 $ 1,468 $ 470
======= ======= ======
Effective income tax rate (33)% (9)% 38%
======= ======= ======
- 44 -
45
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:
1999 1998 1997
-------- -------- -------
(In thousands)
Deferred tax assets:
Net operating loss carryforward $ 15,459 $ 15,100 $ 771
Other 2,524 3,010 645
Valuation allowance (16,728) (16,124) (110)
-------- -------- -------
1,255 1,986 1,306
Deferred tax liabilities:
Amortization of goodwill (749) (553) (261)
Revenue recognition -- (1,164) (485)
Other (666) (433) (57)
-------- -------- -------
(1,415) (2,150) (803)
-------- -------- -------
Net deferred tax asset (liability) $ (160) $ (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 1999 and 1998,
income taxes of $546,000 and $250,000, respectively, were recorded which
resulted in a corresponding decrease in goodwill.
For tax purposes, the Company has U.S. federal loss carryforwards of
$19,348,000 which expire in the year 2014 and foreign net operating loss
carryforwards of $24,987,000, $2,120,000 of which expire in 2006 and $22,867,000
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 $5,300,000 at
September 30, 1999. 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 the Company. Awards may be granted for no
consideration and consist of stock options, stock awards,
- 45 -
46
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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 will 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, 1999.
Under the Company's Employee Stock Purchase Plan (the "Stock Purchase
Plan"), the Company is authorized to issue up to 500,000 shares of Common Stock.
Under the terms of the Stock Purchase Plan, employees can choose to have up to
20% of their annual compensation, but no more that $25,000 per year, withheld to
purchase Common Stock. The exercise price for shares subject to purchase under
options granted shall be 85% of the fair market value of the Common Stock on the
first day of the purchase period, unless otherwise determined by the
compensation committee. On the last day of the purchase period of any offering
of shares made under the Stock Purchase Plan, each outstanding option shall
automatically be exercised. At any time prior to the end of the purchase period
applicable to each offering, an employee is permitted to terminate or reduce his
or her payroll deductions, to reduce his or her options to purchase or to
withdraw all or part of the amount in his or her account. The employee has the
right to receive in cash the amount accumulated in such account. 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
- 46 -
47
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 assumed a dividend yield rate of 0% and a weighted-average
expected life of the options of 5 years for all periods presented. The risk-free
interest factor utilized was 5.9% in 1999 and 6.0% in 1998 and 1997. Further,
the volatility factor of the expected market price of the Company's stock was
32% in 1999, 26% in 1998 and 30% in 1997. Following is the weighted-average
grant-date fair value of options granted during 1999, 1998 and 1997 in the Stock
Option Plan using the Black-Scholes model, with the weighted average exercise
price for comparison purposes:
1999 1998 1997
---------------- ---------------- ----------------
FAIR EXERCISE FAIR EXERCISE FAIR EXERCISE
VALUE PRICE VALUE PRICE VALUE PRICE
----- -------- ----- -------- ----- --------
Stock price:
Equals exercise price $1.30 $3.35 $3.14 $ 8.98 $4.28 $11.20
Less than exercise price 0.75 5.00 -- -- -- --
The weighted-average grant-date fair values of the shares granted during
1998 under the Stock Purchase Plan were $2.14. No such shares were granted
during 1999.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
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:
1999 1998 1997
--------- ---------- -------
(In thousands, except per share data)
Pro forma net loss $(4,633) $(18,249) $(331)
Pro forma loss per share -- basic and
assuming dilution (0.37) (1.52) (.07)
A summary of the Company's stock option activity and related information
follows:
1999 1998 1997
-------------------- -------------------- --------------------
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 1,884,300 $9.25 1,290,800 $8.48 666,500 $2.96
Granted 442,500 3.35 825,000 8.98 808,800 9.98
Exercised -- -- (230,500) 3.96 (184,500) .33
Canceled (148,484) 8.39 (1,000) 12.09 -- --
--------- ----- --------- ----- --------- -----
Outstanding at end of year 2,178,316 $6.59 1,884,300 $9.25 1,290,800 $8.48
========= ===== ========= ===== ========= =====
Exercisable at end of year 1,032,366 $7.37 754,325 $8.00 583,000 $3.98
========= ===== ========= ===== ========= =====
Available for future Options 106,684 400,700 74,700
========= ========= =========
- 47 -
48
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
The Company has reserved 2,921,137 shares of Common Stock for the
possible exercise of outstanding stock options and warrants.
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share.
1999 1998 1997
---------- ----------- ---------
(In thousands, except per share data)
Numerator:
Income (loss) before extraordinary item $(4,182) $(17,504) $ 757
Extraordinary item, net of tax -- -- (385)
------- -------- ------
Income (loss) available to common stockholders for
basic
and diluted earnings per share $(4,182) $(17,504) $ 372
======= ======== ======
Denominator:
Average shares outstanding -- basic 12,556 12,007 4,924
Effect of dilutive securities:
Conversion of preferred stock into common Stock -- -- 2,395
Stock options and warrants -- -- 485
------- -------- ------
Dilutive potential common shares -- -- 2,880
------- -------- ------
Denominator for diluted earnings per share --
Adjusted weighted-average shares and assumed
conversions 12,556 12,007 7,804
======= ======== ======
Earnings (loss) per common share:
Basic:
Income (loss) before extraordinary item $ (0.33) $ (1.46) $ 0.15
Extraordinary item, net of tax -- -- (0.08)
------- -------- ------
$ (0.33) $ (1.46) $ 0.07
======= ======== ======
Assuming dilution:
Income (loss) before extraordinary item $ (0.33) $ (1.46) $ 0.10
Extraordinary item, net of tax -- -- (0.05)
------- -------- ------
$ (0.33) $ (1.46) $ 0.05
======= ======== ======
For the fiscal year ended September 30, 1999 and 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 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 Specialty Products Division 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
- 48 -
49
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):
1999 1998
------- ------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 9,001 $ --
Benefit obligations assumed in connection with acquisitions -- 8,449
------- ------
9,001 8,449
Service cost 483 171
Interest cost 604 195
Plan participants' contributions 119 41
Actuarial gains (199) (53)
Benefits paid (298) (53)
Foreign currency exchange rate changes (179) 251
------- ------
Benefit obligation at end of year $ 9,531 $9,001
======= ======
CHANGE IN PLAN ASSETS
Plan assets at beginning of year $ 9,880 $ --
Plan assets acquired -- 9,756
------- ------
9,880 9,756
Actual return on plan assets 895 (241)
Company contributions 373 55
Plan participants' contributions 119 41
Benefits paid (298) (53)
Foreign currency exchange rate changes (222) 322
------- ------
Plan assets at end of year $10,747 $9,880
======= ======
FUNDED STATUS
Plan assets in excess of benefit obligations $ 1,216 $ 879
Unrecognized actuarial loss 224 496
------- ------
Prepaid benefit cost, net $ 1,440 $1,375
======= ======
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 7.00% 7.00%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 3.50% 3.50%
TO to
4.50% 4.50%
COMPONENTS OF NET PERIODIC PENSION COST
Service cost $ 483 $ 171
Interest cost 604 195
Expected return on plan assets (872) (291)
Amortization of unrecognized net loss 30 --
------- ------
Net periodic pension cost $ 245 $ 75
======= ======
- 49 -
50
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
1999 1998
------- ------
PREPAID (ACCRUED) BENEFIT COST
United States plan $ (525) $ (556)
United Kingdom plan 1,965 1,931
------- ------
Net balance sheet asset at September 30 $ 1,440 $1,375
======= ======
Amounts applicable to the Company's pension plan with projected or
accumulated benefit obligations in excess of plan assets are (in thousands):
1999 1998
------- ------
Projected benefit obligation $ 3,676 $3,346
Accumulated benefit obligation 3,298 3,010
Fair value of plan assets 3,329 2,775
In addition to the defined benefit plans acquired in the Specialty
Products Division 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 an amendment to the terms of the sale and purchase agreement, these
employees will remain in the plan as deferred vested pensioners for an
undetermined period of time for their service prior to March 31, 1999. Upon
expiration of the amended period, the participants will either remain in the
former parent company plan as deferred vested pensioners or have their assets
transferred into a defined contribution pension plan funded by the Company's
U.K. operations and the plan participants. The Company does not expect to incur
any one-time obligation relating to the transfer of the plan participants into
the defined contribution plan. The Company does not expect any exposure related
to future funding obligations for employees who remain in the former parent
company plan to be significant.
The Company also sponsors a defined contribution plan that covers
substantially all domestic employees. Company contributions to the Plan totaled
$99,000 in 1999, $94,000 in 1998 and $13,000 in 1997.
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, 1999. 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 $4,850,000 at September 30, 1999, with interest
rates ranging from 3.00% to 6.06% with various maturity dates through March
2001.
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 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, 1999 and 1998.
- 50 -
51
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
15. SEGMENT INFORMATION
In fiscal 1999 the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the way public companies report information about
operating segments. The reportable segments are the five divisions the Company
established as part of its 1999 Strategic Operating Plan, which are described
below:
- The Biological Wastewater Treatment Division treats municipal and
industrial wastewater by various biological based methods. This
division furnishes products and processes that can be incorporated into
integrated systems or sold individually. Its products include aeration
systems, moving bed biofilm reactors, package plants, nutrient removal
processes, secondary and tertiary plants, filter presses/bagging
systems for sludge removal, and cutting fluid recovery systems.
- The Separations Division sells equipment and engineered systems
employing physical and chemical separations technology in the municipal
water and wastewater market as well as in the industrial process water
and wastewater market. Its products include course and fine screening,
conveying, dewatering and screening/grit washing equipment, filter
presses, clarifiers, sludge dryers; oil/water separations equipment,
dissolved air flotation systems, continuous sand filters and inclined
plate clarifiers.
- The Pure Water Division sells products and solutions to the
residential, municipal and industrial water and process water markets.
Its products include membrane technology using reverse osmosis systems,
nanofiltration and microfiltration systems, desalination equipment to
purify seawater, and watermakers for the offshore oil industry.
- The Specialty Products Division specializes in the development and
production of activated carbons used to purify air, water and gases.
The division is a worldwide supplier of activated carbon for liquid,
air and gas filtration systems and is a manufacturer of specialized
impregnated carbons. Its products include adsorption equipment,
bioreactors and bioscrubbers, corrosive gas control systems, solvent
recovery systems, and a variety of air, odor and vapor control and
filtration systems.
- The European Water and Wastewater Division provides products and
systems similar to the Separations Division focusing specifically on
the European, African and Asian municipal and industrial markets. Its
products include continuous sand filters, inclined plate clarifiers,
sludge scrapers, centrifuges, and fine screens.
The Company evaluates the performance of each division or segment and
considers allocation of resources to it based on its revenue growth prospects,
operating income performance, and return on invested capital, or total assets.
The accounting policies of the five divisions, or reporting segments, are the
same as those described in Note 1. Intersegment sales and transfers are recorded
at cost plus a stated percentage mark up, which creates intercompany profit on
intersegment sales or transfers.
The division format provides efficient centers of product expertise and
geographic experience to better serve the Company's customers and independent
marketing representatives. Each division president reports directly to and
maintains regular contact with the chief operating decision maker, the Chief
Executive Officer, to discuss operating activities, financial results, and
business plans.
- 51 -
52
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
The following table summarizes the Company's operations by the five
divisions, or segments, and corporate.
BIOLOGICAL EUROPEAN
WASTEWATER PURE SPECIALTY WATER AND
TREATMENT SEPARATIONS WATER PRODUCTS WASTEWATER
DIVISION DIVISION DIVISION DIVISION DIVISION CORPORATE TOTAL
---------- ----------- -------- --------- ---------- --------- -----
(In thousands)
1999
Net sales from external
customers $ 17,757 $ 33,490 $ 16,465 $ 58,024 $ 44,433 $ 170,169
Intersegment net sales 12 220 657 164 981 $ (2,034) --
Special charges 2,033 533 107 -- 714 456 3,843
Depreciation and amortization
expense 453 906 288 1,472 797 78 3,994
Segment operating income
(loss) (1,520) (1,047) 2,229 6,793 2,333 (4,066) 4,722
Segment assets 25,906 38,567 14,432 61,369 42,865 2,256 185,395
Expenditures for fixed assets 447 367 130 387 458 172 1,961
-------- -------- -------- -------- -------- -------- ---------
1998
Net sales from external
customers $ 21,702 $ 29,342 $ 14,235 $ 17,979 $ 51,909 $ 135,167
Intersegment net sales 4,630 291 8 367 1,002 $ (6,298) --
Special charges 17,400 281 55 -- 842 3,058 21,636
Depreciation and amortization
expense 850 902 230 498 800 46 3,326
Segment operating income
(loss) (14,214) 1,446 999 1,761 3,231 (5,734) (12,511)
Segment assets 23,979 42,201 12,718 57,966 41,534 5,163 183,561
Expenditures for fixed assets 327 574 158 293 743 166 2,261
-------- -------- -------- -------- -------- -------- ---------
1997
Net sales from external
customers $ 18,275 $ 13,116 $ 10,266 -- $ 23,042 $ 64,699
Intersegment net sales 2,701 -- -- -- 1,271 $ (3,972) --
Special charges -- -- -- -- -- 2,630 2,630
Depreciation and amortization
expense 388 249 128 -- 441 23 1,229
Segment operating income
(loss) 3,247 1,443 592 -- 1,323 (4,360) 2,245
Segment assets 39,042 34,254 7,917 -- 32,208 2,439 115,860
Expenditures for fixed assets 186 117 304 -- 334 131 1,072
-------- -------- -------- -------- -------- -------- ---------
A reconciliation of the reportable segments' operating income (loss) to
consolidated income before income taxes follows:
1999 1998 1997
------- -------- -------
(In thousands)
Total operating income (loss) for reportable
segments, including corporate $ 4,722 $(12,511) $ 2,245
Interest expense (7,857) (3,562) (1,281)
Interest income and other items -- net (14) 37 263
------- -------- -------
$(3,149) $(16,036) $ 1,227
======= ======== =======
- 52 -
53
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
Net sales are reflected in the country from which the sales are made.
Information with regard to revenues and long-lived assets by geographic areas
follows:
UNITED
STATES EUROPE CANADA TOTAL
--------- -------- ------- ---------
(In thousands)
1999
Net sales $ 107,224 $ 62,920 $ 25 $ 170,169
Long-lived assets 65,031 32,459 525 98,015
1998
Net sales 74,719 57,676 2,772 135,167
Long-lived assets 67,623 34,494 1,550 103,667
1997
Net sales 43,015 20,556 1,128 64,699
Long-lived assets 37,309 11,479 19,666 68,454
The Company did not derive more than 10% of its net sales from any
individual customer during any of the three years ended September 30, 1999.
16. SUBSEQUENT EVENT
On October 5, 1999 the Company completed the sale of 6,300,000 shares of
Common Stock in a registered offering at $2.725 per share, based on the
twenty-day average closing price. The aggregate net proceeds of approximately
$16.2 million were used to repay a portion of outstanding senior debt. Under the
terms of the sixth amendment to the domestic credit agreement, sixty percent of
the net proceeds were applied as a permanent reduction to the term note payable,
with the remaining forty percent being applied to the revolving credit
agreement. The sixth amendment reduced the revolving credit portion of the
domestic credit facility to $36,000,000, of which approximately $8,925,000 was
available for future borrowings immediately after the application of the net
proceeds from the sale of Common Stock.
- 53 -
54
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 4 through 8 of
Waterlink's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of Waterlink's fiscal year
ended September 30, 1999 and is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is located on pages 9 through 14 of
Waterlink's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of Waterlink's fiscal year
ended September 30, 1999 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
Waterlink's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of Waterlink's fiscal year
ended September 30, 1999 and is incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
- 54 -
55
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, 1999 and 1998
Consolidated Statements of Operations for the years ended September 30,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended September 30,
1999, 1998 and 1997
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
None.
(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.
- 55 -
56
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, 1999
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, 1999 Date: December 1, 1999
/s/ Rollin S. Reiter /s/ Dr. Paul M. Sutton
- ------------------------------------------- -------------------------------------------
Rollin S. Reiter, Dr. Paul M. Sutton,
Director Director
Date: December 1, 1999 Date: December 1, 1999
/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, 1999 Officer
Date: December 1, 1999
/s/ Michael J. Vantusko
- -------------------------------------------
Michael J. Vantusko,
Chief Financial Officer
(and principal accounting officer)
Date: December 1, 1999
- 56 -
57
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
* 3.1 Form of Fifth Amended and Restated Certificate of
Incorporation of Waterlink (filed as an exhibit to
Waterlink's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, File No. 1-13041)
* 3.2 Form of Amended and Restated By-Laws of Waterlink (filed as
an exhibit to Waterlink's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1997, File No. 1-13041)
* 4.1 Form of Rights Agreement, dated as of May 23, 1997, between
Waterlink and American Stock Transfer & Trust Company (filed
as an exhibit to Waterlink's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, File No.
1-13041)
* 4.2 Amended and Restated Registration Rights Agreement, dated as
of March 6, 1997, by and among Waterlink, Brantley Venture
Partners III, L.P., Theodore F. Savastano, River Cities
Capital Fund limited Partnership, IPP95, L.P., Environmental
Opportunities Fund, L.P., Environmental Opportunities Fund
(Cayman), L.P., Brantley Capital Corporation and National
City Capital Corporation (filed as an exhibit to Waterlink's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249)
* 4.3 Registration Rights Agreement, dated as of January 31, 1996,
between Waterlink and Mass Transfer Systems, Inc (filed as
an exhibit to Waterlink'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 Waterlink and Lawrence A. Schmid (filed as an
exhibit to Waterlink'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 Waterlink, Lawrence Stenger, Theresa Stenger,
Ronald Jaworski, Christine Jaworski, John Stenger, Dawn P.
Stenger, Scott Stenger, Kristie D. Stenger, Jorg
Menningmann, Michael Mudrick, Robert Young and Gary Prae
(filed as an exhibit to Waterlink's Registration Statement
on Form S-1, filed April 16, 1997, Registration No.
333-25249)
*10.1 Employment Agreement, dated May 23, 1997, between Waterlink
and Theodore F. Savastano (filed as an exhibit to
Waterlink's Amendment No. 1 to Registration Statement on
Form S-1, filed May 23, 1997, Registration No. 333-25249)
*10.2 Employment Agreement, dated May 23, 1997, between Waterlink
and Michael J. Vantusko (filed as an exhibit to Waterlink's
Amendment No. 1 to Registration Statement on Form S-1, filed
May 23, 1997, Registration No. 333-25249)
*10.3 Credit Agreement, dated as of June 27, 1997, among
Waterlink, Bank of America National Trust & Savings
Association (successor by merger to Bank of America
Illinois), as agent, and for other financial institutions
party thereto (filed as an exhibit to Waterlink's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1997, File No. 1-13041)
*10.4 Credit Agreement, dated as of March 4, 1997, among
Gigantissimo 2061 AB (to be known as Waterlink (Sweden) AB),
Waterlink, as guarantor, and Bank of America National Trust
& Savings Association, London Branch (filed as an exhibit to
Waterlink's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249)
*10.5 First Amendment, dated as of June 27, 1997, to Credit
Agreement, dated March 4, 1997, among Waterlink (Sweden) AB,
Waterlink, as guarantor, and Bank of America National Trust
& Savings Association, London Branch (filed as an exhibit to
Waterlink's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, File No. 1-13041)
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58
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
*10.6 Credit Agreement, dated as of March 4, 1997, among Provista
Einhundertsechsundfunfzigste Verwaltungsgesellschaft GmbH
(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
Waterlink's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249)
*10.7 First Amendment, dated as of June 27, 1997, to Credit
Agreement, dated March 4, 1997, among Waterlink (Germany)
GmbH, Waterlink, as guarantor, and Bank of America National
Trust & Savings Association, Frankfurt Branch (filed as an
exhibit to Waterlink's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997, File No. 1-13041)
*10.8 Common Stock Warrant Agreement, dated as of February 19,
1997, between Waterlink and Bank of America Illinois (filed
as an exhibit to Waterlink's Registration Statement on Form
S-1, filed April 16, 1997, Registration No. 333-25249)
*10.9 Waterlink's 1995 Stock Option Plan (filed as an exhibit to
Waterlink's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249)
*10.10 Warrant Agreement, dated as of March 6, 1997, among
Waterlink 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 Waterlink's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249)
*10.11 Waterlink's 1997 Omnibus Incentive Plan (filed as an exhibit
to Waterlink's Amendment No. 1 to Registration Statement on
Form S-1, filed May 23, 1997, Registration No. 333-25249)
*10.12 Waterlink's Employee Stock Purchase Plan (filed as an
exhibit to Waterlink's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249)
*10.13 First Amendment, dated as of June 23, 1997, to Waterlink's
Employee Stock Purchase Plan (filed as an exhibit to
Waterlink's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, File No. 1-13041)
*10.14 Waterlink's 1997 Non-Employee Director Stock Option Plan
(filed as an exhibit to Waterlink's Registration Statement
on Form S-1, filed April 16, 1997, Registration No.
333-25249)
*10.15 Letter Agreement among Waterlink, Inc., Bioclear Technology,
Inc. and Royal Bank of Canada dated September 24, 1997
(filed as an exhibit to Waterlink's Annual Report on Form
10-K for the fiscal year ended September 30, 1997, File No.
1-13041)
*10.16 Stock Purchase Agreement between Waterlink, Inc., and
Anglian Water Services Limited dated as of March 25, 1998
(filed as an exhibit to Waterlink's Current Report on Form
8-K, filed April 9, 1998, File No. 1-13041)
*10.17 Stock Purchase Agreement between Waterlink, Inc., and
Sutcliffe Speakman PLC dated as of June 5, 1998 (filed as an
exhibit to Waterlink's Current Report on Form 8-K, filed
June 19, 1998, File No. 1-13041)
*10.18 Amended and Restated Credit Agreement, dated as of June 27,
1997 and amended and restated as of May 19, 1998, among
Waterlink, Inc. and Bank of America National Trust and
Savings Association, as agent, Letter of Credit Issuing
Bank, and Swing Line Bank, and the other financial
institutions party hereto (filed as an exhibit to
Waterlink's Current Report on Form 8-K, filed June 19, 1998,
File No. 1-13041)
*10.19 Agreement, dated June 5, 1998, between Waterlink and Chet S.
Ross (filed as an exhibit to Waterlink's Annual Report on
Form 10-K for the fiscal year ended September 30, 1998, File
No. 1-13041)
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59
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
*10.20 Executive Employment Agreement, dated June 8, 1998, between
Waterlink and T. Scott King (filed as an exhibit to
Waterlink's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998, File No. 1-13041)
*10.21 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 thereto (filed as an exhibit to
Waterlink's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998, File No. 1-13041)
*10.22 Fourth Amendment, dated as of February 25, 1999, to Amended
and Restated Credit Agreement, dated as of May 19, 1998,
among Waterlink, Inc. and Bank of America National Trust and
Savings Association, as agent, and the other financial
institutions party thereto (filed as an exhibit to
Waterlink's registration statement on Form S-1 filed on
August 11, 1999, registration number 333-84985)
*10.23 Fifth Amendment, dated as of June 29, 1999, to Amended and
Restated Credit Agreement, dated as of May 19, 1998, among
Waterlink, Inc. and Bank of America National Trust and
Savings Association, as agent, and the other financial
institutions party thereto (filed as an exhibit to
Waterlink's registration statement on Form S-1 filed on
August 11, 1999, registration number 333-84985)
*10.24 Agreement dated as of April 15, 1999, among Waterlink, Inc.
and each of the current holders of warrants issued pursuant
to that certain Warrant Agreement dated as of March 6, 1997
(filed as an exhibit to Waterlink's registration statement
on Form S-1 filed on August 11, 1999, registration number
333-84985)
*10.25 Warrant Agreement dated as of July 9, 1999 among Waterlink
and each of the Warrantholders party thereto (filed as an
exhibit to Waterlink's amendment no. 1 to registration
statement on Form S-1 filed on September 23, 1999,
registration number 333-84985)
10.26 Sixth Amendment, dated as of September 30, 1999, to Amended
and Restated Credit Agreement, dated as of May 19, 1998,
among Waterlink, Inc. and Bank of America National Trust and
Savings Association, as agent, and the other financial
institutions party
10.27 Amendment to Confirmation of Credit Facility, dated as of
October 8, 1999, among Waterlink and Royal Bank of Canada
thereto
10.28 Form of securities purchase agreement between Waterlink and
certain institutional investors in connection with offering
up to 6,300,000 shares of common stock, dated October 1,
1999
10.29 Agreement dated October 25, 1999, between Waterlink and
Theodore F. Savastano
*21.1 List of Subsidiaries of Waterlink (filed as an exhibit to
Waterlink's registration statement on Form S-1 filed on
August 11, 1999, registration number 333-84985)
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule as of and for the year ended
September 30, 1999
- ---------------
* Incorporated herein by reference as indicated.
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