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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended September 30, 2003
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period From to
Commission file number 1-13041
WATERLINK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1788678
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
835 NORTH CASSADY AVENUE
COLUMBUS, OHIO 43219
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (614) 258-9501
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.001 par value None
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes ( ) No (X)
As of November 30, 2003 the aggregate market value of Waterlink's voting Common
Stock held by non-affiliates of Waterlink was approximately $709,000.
As of November 30, 2003 there were 19,665,149 shares of the registrant's Common
Stock, $.001 par value outstanding.
PART I
ITEM 1. BUSINESS
GENERAL
Waterlink is an international provider of integrated water and air
purification solutions for both industrial and municipal customers. Our
principal executive offices are located at 835 North Cassady Avenue, Columbus,
Ohio 43219 and our telephone number is (614) 258-9501.
Waterlink was incorporated in Delaware on December 7, 1994 to
participate in the consolidation of the highly fragmented water purification and
wastewater treatment industry. Waterlink grew rapidly through acquisitions from
1995 through 1998, having made 13 acquisitions. In May 2000 Waterlink announced
that its board of directors had instructed management to explore various
strategic alternatives, including the sale of all or part of Waterlink that
could maximize our shareholders' investment in Waterlink. To date, Waterlink has
sold four of its five operating divisions: the biological division in two
separate transactions in September and December 2000, the separations division
in February 2001, the european water and wastewater division in a series of
transactions during the fourth quarter of our fiscal year ended September 30,
2001, and the pure water division in May 2002.
As of September 30, 2003 the remaining operations of Waterlink are the
entities that comprised what had previously been reported as the specialty
products division. Accordingly, the operations of all divisions except for the
specialty products operations are reported as discontinued operations for each
period presented. A brief description of the operations that comprise
Waterlink's continuing operations follows.
The specialty products operations and their predecessors have
specialized in the development and production of highly sophisticated activated
carbons for more than 80 years. The worldwide and domestic headquarters are
located in Columbus, Ohio. Approximately seventy percent of Waterlink's net
sales are generated from the United States, with the remaining thirty percent
generated from our facility in Lancashire, England. Activated carbon is used to
purify air, water and gases by retaining impurities in carbon granules.
Waterlink is a worldwide supplier of activated carbon for liquid, air and gas
filtration systems and is a leading manufacturer of specialty-impregnated
carbons used in applications where the capacity of activated carbons can be
significantly increased. A full range of activated carbons manufactured from
coconut shell, coal, wood, along with other adsorbents such as modified clay
media, bone char, and anthracite are offered for use in:
- adsorption equipment, both standard and custom configurations,
primarily for separation of solvents from air
- bioreactors and bioscrubbers in which contaminants are
destroyed using biological microbes
- corrosive gas control systems to protect expensive electronic
operated controls
- distillation equipment for separation applications
- systems that control emissions from volatile organic compounds
- area filtration systems for the removal of both vapor phase
and particulate contaminants
- indoor air quality systems
- odor control systems
- soil vapor extraction systems
- solvent recovery systems engineered and installed on a
turn-key basis, to recover valuable solvents
The products and systems are sold using a combination of direct sales
and sales representatives.
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BANKRUPTCY CONSIDERATIONS
On June 27, 2003 (the "Petition Date"), Waterlink and four of its
direct, wholly owned subsidiaries (collectively, the "Debtors") filed voluntary
petitions for relief under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). The bankruptcy cases are being jointly
administered under Case No. 03-11989 (the "Chapter 11 Cases").
The Debtors continue to operate their businesses as
"debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code, the Federal
Rules of Bankruptcy Procedure and applicable court orders. In general, as
debtors-in-possession, the Debtors are authorized under the Bankruptcy Code to
continue to operate as an ongoing business, but may not engage in transactions
outside the ordinary course of business without the prior approval of the
Bankruptcy Court. All vendors are being paid for all goods furnished and
services provided after the Petition Date. However, under Section 362 of the
Bankruptcy Code, the filing of the bankruptcy petition automatically stays most
actions against a debtor, including most actions to collect pre-petition
indebtedness or to exercise control over the property of the debtor's estate.
The Debtors are currently funding their operations through the use of
cash collateral pursuant to order entered by the Bankruptcy Court pursuant to
Section 363 of the Bankruptcy Code. The Debtors believe that the use of cash
collateral will support current operations and satisfy all current customer
needs. The Debtors currently have authority to use cash collateral until January
30, 2004.
Pursuant to an order entered in the Chapter 11 Cases, the Debtors have
employed NatCity Investments, Inc. to act as their investment bankers to assist
the Debtors in the investigation and consideration of their strategic
alternatives. Among the strategic alternatives investigated and considered by
the Debtors is the possibility of a sale of all or substantially all of their
assets either through a motion or the confirmation of a plan.
The United States Trustee for the District of Delaware (the "U.S.
Trustee") has appointed an Official Committee of Unsecured Creditors (the
"Creditors' Committee"). The Creditors' Committee and its legal representatives
have a right to be heard on all matters that come before the Bankruptcy Court
with respect to the Debtors.
As of December 11, 2003, Waterlink and its wholly-owned operating
subsidiary, Barnebey Sutcliffe Corporation, executed an agreement with Barnebey
Acquisition Corp. (the "Buyer"), a newly formed Delaware corporation affiliated
with The Compass Group International, LLC, for the Buyer to purchase
substantially all of the assets and business operations of Waterlink, including
the operations of Barnebey Sutcliffe Corporation and the subsidiaries of the
Company in the United Kingdom (the "Purchase Agreement"). The Purchase Agreement
provides for total cash consideration of approximately $25,750,000, subject to
certain pre-closing and post-closing adjustments, and the assumption by the
Buyer of certain liabilities of Waterlink. On December 16, 2003, Debtors
received a $5,000,000 deposit contemplated by the Purchase Agreement. The
proposed purchase is subject to the terms and conditions of the Purchase
Agreement, and the purchase price is subject to certain adjustments required
under the Purchase Agreement, which includes a provision for a working capital
adjustment. Waterlink anticipates that all of the proceeds of the transaction
that it receives will be used to partially satisfy the claims of creditors.
On December 16, 2003, the Debtors' filed a motion with the Bankruptcy
Court, requesting that the Bankruptcy Court approve the proposed sale pursuant
to the Purchase Agreement and establish bidding procedures and a date and time
for conducting an auction to determine if there are higher or better offers for
Waterlink's assets and business. There can be no assurance that the Bankruptcy
Court will approve the proposed transaction reflected in the Purchase Agreement,
or that final documentation will be reached on terms satisfactory to all
parties. Subject to receipt of the Bankruptcy Court's approval and the
satisfaction of other pre-closing conditions, Waterlink expects the transaction
to close in the first quarter of 2004. Waterlink anticipates that all of the
proceeds from the transaction will be used to partially satisfy the claims of
its creditors.
The Bankruptcy Code provides special treatment for collective
bargaining agreements ("CBAs"). In particular, Section 1113(c) of the Bankruptcy
Code permits Waterlink to move to reject its collective bargaining agreements if
Waterlink first satisfies a number of statutorily prescribed substantive and
procedural prerequisites and obtains the Bankruptcy Court's approval of the
rejection. After bargaining in good faith and sharing relevant information with
its unions, a debtor must make proposals to modify its existing CBAs based on
the most complete and reliable information available at the time. The
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proposed modifications must be necessary to permit the reorganization of the
debtor and must ensure that all the affected parties are treated fairly and
equitably relative to the creditors and the debtor. Ultimately, rejection is
appropriate if the unions refuse to agree to the debtor's necessary proposals
"without good cause" and the balance of the equities favors rejection. See
"Employees" below under this Item 1.
There can be no assurance that the Creditors' Committee or the Debtors'
secured creditors will support the Debtors' positions with respect to the
Purchase Agreement or otherwise. Disagreements among the Debtors, the Creditors'
Committee and the Debtors' secured creditors could protract the Chapter 11
Cases, negatively impact the Debtors' ability to operate during the Chapter 11
Cases and delay the conclusion of the Chapter 11 Cases.
In order to successfully exit Chapter 11, the Debtors will need to
propose, and obtain confirmation by the Bankruptcy Court of, a plan that
satisfies the requirements of the Bankruptcy Code. A plan could resolve, among
other things, the Debtors' pre-petition obligations, set forth the revised
capital structure of the newly reorganized entity and provide for its corporate
governance subsequent to exit from bankruptcy protection. The timing and filing
of a plan of reorganization by Waterlink will depend on the timing and outcome
of numerous other ongoing matters in the Chapter 11 Cases, including the sale of
assets contemplated in the proposed Purchase Agreement. At this time, it appears
unlikely that the Debtors will emerge from Chapter 11 protection. The likely
outcome of these Chapter 11 Cases is that the sale of assets to the Buyer or the
maker of a higher or better offer will be consummated. There can be no assurance
at this time that a plan will be filed in the Chapter 11 Cases, confirmed by the
Bankruptcy Court, or that any such plan will be implemented successfully.
At this time, it is not possible to predict with certainty the effect
of the bankruptcy process on Waterlink's business or whether and when Waterlink
may emerge from Chapter 11 protection. The rights and claims of various
creditors and security holders may be determined by a plan as well. No assurance
can be given as to what values, if any, will be ascribed in the bankruptcy
proceedings to each of these constituencies, and it is likely that Waterlink's
equity or other securities will be restructured in a manner that will reduce
substantially or eliminate any remaining value. Accordingly, Waterlink urges
that appropriate caution be exercised with respect to existing and future
investments in any of such securities.
Pursuant to the Bankruptcy Code, the Debtors have filed schedules with
the Bankruptcy Court setting forth the assets and liabilities of the Debtors as
of the Petition Date. Differences between amounts recorded by the Debtors and
claims filed by creditors will be investigated and resolved as part of the
Chapter 11 Cases. A deadline for filing proofs of claim has been established.
However, the ultimate number and allowed amounts of such claims are not
presently known.
Under Section 365 of the Bankruptcy Code, the Debtors may assume, assume
and assign, or reject certain executory contracts and unexpired leases,
including leases of real property, subject to the approval of the Bankruptcy
Court and certain other conditions. In general, rejection of an unexpired lease
or executory contract is treated as a pre-petition breach of the lease or
contract in question. Subject to certain exceptions, this rejection relieves the
Debtors of performing their future obligations under that lease or contract but
entitles the lessor or contract counterparty to a pre-petition general unsecured
claim for damages caused by the deemed breach.
Counterparties to these rejected contracts or leases may file proofs of
claim against the Debtors' estate for such damages. Waterlink is unable to
project the magnitude of these claims with any degree of certainty at this time.
Generally, the assumption of an executory contract or unexpired lease
requires a debtor to cure most existing defaults under such executory contract
or unexpired lease.
OPERATING AND SALES STRATEGY
The corporate headquarters for Waterlink were relocated to Columbus,
Ohio in November 2001 and are located within the main facility of Barnebey
Sutcliffe Corporation. We sell our consumable products, equipment, services and
engineered systems primarily through direct sales personnel. In the United
States, Waterlink strives to have locations close to our customers and centers
of business by means of our locations throughout the country. In England the
sales force is centralized and reaches its customers through travel.
Approximately seventy-five percent of Waterlink's revenue is recurring
in nature in the form of carbons, related carbon services, and sales of standard
equipment; with the remaining twenty-five percent being generated from the sale
of engineered
-4-
equipment and systems. While we have received contract awards for engineered
systems in excess of $3 million, Waterlink is primarily focusing its marketing
efforts with regard to engineered systems on contract awards approximating $2
million. We believe that competition is fiercer for larger contract awards and
the timing of these awards is more unpredictable.
COMPETITION
Despite some large competitors, the market for activated carbons
remains fragmented and highly competitive due to the large number of competitors
within each product and geographic area. Waterlink has a significant number of
competitors, the majority of which are specific to certain products and regions,
but some competitors are larger and have greater resources than Waterlink. We
believe that success in our market is based on the ability to offer appropriate
products, services and technical support for our recurring revenue products; and
by providing cost-effective, reliable engineered systems that meet customer
specifications. On the average, over 95% of our business is with industrial
customers. In the municipal arena, the ability to meet bid specifications and
the ability to set pricing are often primary considerations. In addition, our
highly leveraged financial condition has hurt our competitive position to
finance and bond large projects, especially with municipalities.
Waterlink's primary competitors include operating subsidiaries of
Vivendi, including Compagnie Generale des Eaux and U.S. Filter Corporation,
Calgon Carbon Corporation and Norit America.
CUSTOMERS
Waterlink markets its products and services primarily to industrial
customers. Waterlink's industrial customers include many "Fortune 500" companies
and their counterparts outside of the United States. Industries served include
the point-of-use/point-of-entry consumer business, chemical processing,
remediation, electronic and microelectronic, food, beverage, printing, and other
manufacturing industries. For the year ended September 30, 2003, approximately
96.3% of Waterlink's net sales from continuing operations were derived from
industrial sales. The percentage of net sales to industrial customers was
approximately 97.9% in 2002 and 96.6% in 2001.
The municipal market is highly competitive, and municipal markets in
the United States are more regulatory driven than municipal markets in other
regions. Although Waterlink has products and services that could address this
market, our financial condition and the ability to obtain performance bonds for
projects has precluded us from obtaining large municipal contracts. For the year
ended September 30, 2003, approximately 3.7% of Waterlink's net sales from
continuing operations were derived from municipal sales. The percentage of net
sales to municipal customers was approximately 2.1% in 2002 and 3.4% in 2001.
BACKLOG FROM CONTINUING OPERATIONS
Total backlog from continuing operations as of September 30, 2003 was
$13.0 million as compared to total backlog from continuing operations of $15.2
million at September 30, 2002. At September 30, 2003, Waterlink had $9.6 million
of firm commitments to purchase recurring revenue products, as compared to $13.0
million as of September 30, 2002. In addition, Waterlink had a backlog,
consisting of written purchase orders for capital goods equipment of $3.4
million as of September 30, 2003 as compared to $2.2 million as of September 30,
2002. Waterlink expects that a significant portion of our backlog at the
beginning of a fiscal year will be filled during that year. Backlog, and
therefore sales, may vary from quarter to quarter as a result of large projects
being booked during any quarter and varying project delivery schedules. In
addition, the orders have varying delivery schedules and Waterlink's backlog as
of any particular date may not be representative of actual net sales for any
succeeding period.
PROCESS AND PRODUCT WARRANTY AND PERFORMANCE GUARANTEES
Consistent with industry practices, we generally offer a warranty on
engineered systems for one year or in some cases 18 months from sale and 12
months from installation for product and workmanship. No process or performance
guarantees are made. In addition, we warrant that carbons and other consumable
products meet customer specifications. The costs associated with warranty
expense have not been material.
-5-
RAW MATERIAL AND SUPPLIES
Waterlink is dependent on the importation of coconut shell carbon from
Asia and the supply of coal based carbon from domestic and Asian sources.
Waterlink is not dependent upon any single supplier, and if any supplier were to
become unable to perform, Waterlink believes a substitute source could readily
be found. Waterlink attempts to pass on price increases for raw materials and
components to its customers as market conditions allow. Waterlink is not a party
to any material long-term fixed price supply contracts. The raw materials and
components used in Waterlink's engineered systems are commonly available
commodities such as stainless steel, carbon steel, plastic, tubing, wiring,
electrical components, pumps, valves, compressors, and pressure vessels.
Waterlink's systems are fabricated from these materials and assembled together
with products bought from other companies to form an integrated system.
GOVERNMENT REGULATION
Federal, state, local and foreign environmental laws and regulations
necessitate substantial expenditures and compliance with water quality standards
by generators of wastewater and wastewater by-products and impose liabilities on
such entities for noncompliance. Environmental laws and regulations and their
enforcement are, and will continue to be, a significant factor affecting the
marketability of the products and equipment provided by Waterlink.
The countries in which Waterlink operates or in which our customers are
located, including the United States, countries in western Europe, Latin
America, and the Asia-Pacific region, have adopted requirements that govern
water quality. These requirements and their enforcement vary by country, but in
general establish water quality, use and disposal standards, set wastewater
effluent discharge limits, and prescribe standards for the protection of human
health and safety and the environment.
Any changes in applicable environmental standards and requirements or
their enforcement may affect the operations of Waterlink by imposing additional
regulatory compliance costs on Waterlink's customers, requiring the modification
of and/or affecting the market for Waterlink's products and equipment. To the
extent that demand for Waterlink's products and equipment is created by the need
to comply with these enhanced standards and requirements or their enforcement,
any modification of the standards and requirements or their enforcement may
reduce demand, thereby adversely affecting Waterlink's business prospects.
Conversely, changes in applicable environmental laws imposing additional
regulatory compliance standards and requirements or causing stricter enforcement
of these laws or regulations could increase the demand for Waterlink's products
and equipment.
PATENTS, TRADEMARKS AND LICENSES
We currently own a number of registrations for United States service
marks and trademarks and two patents in England. While each is of value,
Waterlink generally does not consider any of them to be material to our
business.
EMPLOYEES
At September 30, 2003, Waterlink had approximately 244 employees at our
various locations. Approximately 54 employees are covered under collective
bargaining agreements in the United States, which expired at midnight on October
31, 2003. Waterlink has negotiated a new collective bargaining agreement with
its employees, subject to final approval of the ultimate acquirer of the
business as referred to in "Bankruptcy Considerations" referred to above. There
can be no assurance that such approval will be obtained. We believe that our
relationship with our employees is good.
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ITEM 2. PROPERTIES
The corporate office of Waterlink is located within the Columbus, Ohio
facility of Barnebey Sutcliffe Corporation. We also lease approximately 1,000
square feet located in Canton, Ohio. Our subsidiaries own or lease facilities
for office space and manufacturing as follows:
- Barnebey Sutcliffe Corporation - United States
- Columbus, Ohio (own)
- Santa Fe Springs, California (lease)
- Addison, Illinois (lease)
- Sulphur, Louisiana (lease)
- Worcester, Massachusetts (lease)
- Sparks, Nevada (lease)
- Downington, Pennsylvania (lease)
- Morgantown, West Virginia (lease)
- Charlotte, NC (lease)
- Prineville, Oregon (lease)
- Sutcliffe Speakman Limited - England
- Lancashire, England (lease)
The expiration dates for these leased properties range from one-month
notice to June 2008 in the United States, with the lease for the facility in
England expiring in September 2018. We believe that each of our facilities is in
adequate condition and will continue to remain suitable for its current purpose.
We may add improvements to the properties listed above. We anticipate using our
properties for purposes consistent with their present use. In the event any of
the facilities becomes unavailable upon termination of the existing lease, we
believe we would be able to find a suitable alternative facility without any
significant adverse impact to our operations. We believe our properties are
adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
From time to time in the normal course of our business, we become a
party to litigation. Most of this litigation involves claims for personal or
employment related injury or property damage incurred in connection with our
operations. We are not a party to any material litigation and believe that none
of our litigation will have a material adverse effect on our business or
financial results.
As discussed in Item 1 above, on the Petition Date, Waterlink and four
of its direct, wholly owned subsidiaries filed voluntary petitions for relief
under the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases are
being jointly administered under Case No. 03-11989. As debtors-in-possession,
the Debtors are authorized under the Bankruptcy Code to continue to operate as
an ongoing business, but may not engage in transactions outside the ordinary
course of business without the prior approval of the Bankruptcy Court. As of the
Petition Date, virtually all pending litigation was stayed, and absent further
order of the Bankruptcy Court, no party, subject to certain exceptions, may take
any action, again subject to certain exceptions, to recover on pre-petition
claims against the Debtors. In addition, the Debtors may reject pre-petition
executory contracts and unexpired lease obligations, and parties affected by
these rejections may file claims with the Bankruptcy Court. At this time, it is
not possible to predict with certainty the outcome of the Chapter 11 Cases or
their effect on Waterlink's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-7-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common stock is listed on the OTC Bulletin Board under the symbol
"WLKNQ". The following table sets forth the high and low composite sales prices
for the fiscal quarters indicated. These quotations may reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.
HIGH LOW
---- ---
Fiscal Year ended September 30, 2002
First Quarter............................................................... $ 0.26 $ 0.12
Second Quarter.............................................................. 0.18 0.085
Third Quarter............................................................... 0.17 0.035
Fourth Quarter.............................................................. 0.09 0.0375
Fiscal Year ended September 30, 2003
First Quarter............................................................... $ 0.105 $ 0.015
Second Quarter.............................................................. 0.17 0.075
Third Quarter............................................................... 0.09 0.017
Fourth Quarter.............................................................. 0.07 0.014
HOLDERS
The number of holders of record of our common stock as of November 30,
2003 was approximately 251.
DIVIDENDS
We have not paid or declared any dividends on our common stock since
our inception. We anticipate that any earnings will be retained to support the
growth of our business and will not be distributed to stockholders as dividends.
The declaration and payment of any future dividends and the amount of any
dividend will be determined by our board of directors and will depend upon our
results of operations, financial condition, cash requirements, future prospects,
limitations imposed by bank credit and debt agreements and other factors deemed
relevant by our board of directors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
Pursuant to our bank credit agreement, we may not declare or make, or
agree to declare or make, directly or indirectly, any dividends, except that we
may declare and pay dividends with respect to our capital stock payable solely
in additional shares of our common stock or options, warrants or other rights to
purchase our common stock.
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EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
------------- -------------------- -------------------- -------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 1,273,682 $ 0.97 1,289,500
Equity compensation plans not
approved by security holders 203,000 $ 0.06 -
--------- ---------
Total 1,476,682 $ 0.85 1,289,500
========= =========
With regard to the 203,000 securities issued without the approval of
security holders, all are warrants to purchase shares of common stock. Specific
information with regard to each issuance is presented below:
- On January 20, 2000, 3,000 warrants to purchase common stock
were issued to CID Equity Partners V, LP in lieu of an equal
amount of stock options which would have been issued pursuant
to Waterlink's 1997 Non-Employee Director Stock Option Plan to
John T. Hackett, then a Managing General Partner of CID Equity
Partners, L.P., upon Mr. Hackett's election to Waterlink's
board of directors.
- On May 2, 2000, 100,000 warrants to purchase shares of common
stock were issued to Bank of America, N.A., in connection with
the eighth amendment to Waterlink's senior credit facility.
- On January 18, 2001, 50,000 warrants to purchase shares of
common stock were issued to each of Brantley Venture Partners
III, LP and CID Equity Partners V, LP, in connection with
subordinated indebtedness issued to each of them on the amount
of $500,000.
In each case, the warrants expire five years after issuance.
RECENT SALES OF UNREGISTERED SECURITIES
There were no sales of unregistered securities during the fiscal year
ended September 30, 2003.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated
financial data of Waterlink over the last five fiscal years. The financial data
presented for the five fiscal years ended September 30, 2003 have been derived
from Waterlink's audited financial statements with reclassifications made to
reflect discontinued operations as presented below. The financial data includes
the operating results of each acquired business from the date of acquisition in
accordance with the purchase method of accounting.
You should read the selected historical consolidated financial data in
conjunction with, and they are qualified by, our historical consolidated
financial statements and the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contained elsewhere
in this report.
FISCAL FISCAL FISCAL FISCAL FISCAL
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $ 66,858 $ 64,054 $ 65,553 $ 64,775 $ 58,188
Cost of sales................................... 51,405 48,701 51,150 48,970 43,460
-------- -------- -------- -------- --------
Gross profit.................................... 15,453 15,353 14,403 15,805 14,728
Selling, general and
administrative expenses....................... 10,036 9,840 10,566 12,013 10,918
Special charges(1).............................. -- -- 2,560 -- 456
Amortization expense............................ 553 850 530 485 627
-------- -------- -------- -------- --------
Operating income (loss)......................... 4,864 4,663 747 3,307 2,727
Other income (expense):
Interest expense(2).......................... (2,508) (3,712) (3,992) (3,997) (4,477)
Amortization of loan fees ................... (282) (642) (1,386) (401) (305)
Bankruptcy related expenses.................. (1,034) -- -- -- --
Other items--net............................. 3 (66) (267) 45 34
-------- -------- -------- -------- --------
Income (loss) before income taxes............... 1,043 243 (4,898) (1,046) (2,021)
Income taxes.................................... 425 94 12 386 674
-------- -------- -------- -------- --------
Income (loss) from continuing operations........ 618 149 (4,910) (1,432) (2,695)
Discontinued operations:
Loss from discontinued operations............ -- (534) (592) (20,773) (1,487)
Loss on disposal of discontinued operations.. -- -- (17,475) (16,151) --
-------- -------- -------- -------- --------
Income (loss) before cumulative effect 618 (385) (22,977) (38,356) (4,182)
of accounting change..........................
Cumulative effect of accounting change.......... (20,500) -- -- -- --
-------- -------- -------- -------- --------
Net loss........................................ $(19,882) $ (385) $(22,977) $(38,356) $ (4,182)
======== ======== ======== ======== ========
Earnings (loss) per common share:
Basic:
Continuing operations...................... $ 0.03 $ 0.01 $ (0.25) $ (0.08) $ (0.21)
Discontinued operations.................... -- (0.03) (0.92) (1.91) (0.12)
Cumulative effect of accounting change..... (1.04) -- -- -- --
-------- -------- -------- -------- --------
Net loss................................... $ (1.01) $ (0.02) $ (1.17) $ (1.99) $ (0.33)
======== ======== ======== ======== ========
Earnings (loss) per common share:
Diluted:
Continuing operations...................... $ 0.03 $ 0.01 $ (0.25) $ (0.08) $ (0.21)
Discontinued operations.................... -- (0.03) (0.92) (1.91) (0.12)
Cumulative effect of accounting change..... (1.02) -- -- -- --
-------- -------- -------- -------- --------
Net loss................................... $ (0.99) $ (0.02) $ (1.17) $ (1.99) $ (0.33)
======== ======== ======== ======== ========
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Weighted average common shares outstanding:
Basic .................... 19,664 19,660 19,660 19,299 12,556
Diluted .................. 20,022 20,062 19,660 19,299 12,556
SEPTEMBER 30,
-------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit) (3).... $(22,173) $(23,823) $(24,146) $(19,365) $ 7,071
Total assets (4)................. 37,252 56,674 56,378 60,699 63,623
Total debt....................... 38,870 39,674 51,930 71,139 85,829
Shareholders' equity (deficit)... (16,853) 2,642 4,200 23,981 49,986
(1) Waterlink incurred special charges relating to continuing operations as
follows:
- During the year ended September 30, 1999, Waterlink incurred
special charges of $456,000, or $0.04 per share, for
continuing costs associated with the implementation of
Waterlink's 1999 plan, primarily related to termination
benefits.
- During the year ended September 30, 2001, Waterlink incurred
special charges of $2,560,000, or $0.13 per share, related to
the closing of its corporate office, primarily related to
termination benefits.
(2) Interest expense for the years ended September 30, 1999, 2000 and 2001
include financing charges of $870,000, or $0.07 per share, $217,000, or
$0.01 per share, and $87,000, or $0.00 per share, respectively, related
to the amortization of the value assigned to warrants issued to
purchase up to 283,637 shares of common stock at an exercise price of
$0.01 per share in 1999 and 100,000 shares of common stock at an
exercise price of $0.01 in 2000. No interest expense has been recorded
in connection with Waterlink's senior credit facility in the United
States or any of our subordinated notes since the bankruptcy proceeding
began on June 27, 2003.
(3) At September 30, 2000 Waterlink was in violation of certain of its
financial covenants with respect to its senior credit facility.
Accordingly, the entire balance of the senior credit facility was
classified as current at September 30, 2000. Based on certain
conditions of Waterlink's senior credit facility and other indebtedness
that could accelerate the maturity date of such indebtedness, all debt
was classified as current at September 30, 2002 and 2001. Based on the
maturity date of October 1, 2003, all debt was classified as current at
September 30, 2003.
(4) Total assets exclude net assets of discontinued operations for all
periods presented.
-11-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Waterlink is an international provider of integrated water and air
purification solutions for both industrial and municipal customers. Waterlink
was incorporated in Delaware on December 7, 1994 to participate in the
consolidation of the highly fragmented water purification and wastewater
treatment industry. Waterlink grew rapidly through acquisitions from 1995
through 1998, having made 13 acquisitions. In May 2000 Waterlink announced that
its board of directors had instructed management to explore various strategic
alternatives, including the sale of all or part of Waterlink that could maximize
our shareholders' investment in Waterlink. To date, Waterlink has sold four of
its five operating divisions: the biological division in two separate
transactions in September and December 2000, the separations division in
February 2001, the european water and wastewater division in a series of
transactions during the fourth quarter of our fiscal year ended September 30,
2001, and the pure water division in May 2002. Waterlink's continuing operations
are comprised of what was formerly referred to as the specialty products
division.
CHAPTER 11 CASES
On the Petition Date, the Debtors filed voluntary petitions for relief
under the Bankruptcy Code in the Bankruptcy Court. For further details regarding
the Chapter 11 Cases, see "Bankruptcy Considerations" under Item 1. Waterlink
also sought, and was granted, authority to use certain cash collateral to
support current operations and satisfy customer needs. Waterlink has remained in
possession of its assets and properties, and it has continued to operate its
business and manage its properties as "debtor-in-possession" pursuant to
Sections 1107(a) and 1108 of the Bankruptcy Code. The Debtors are currently
funding their operations through the use of cash collateral pursuant to Order
entered by the Bankruptcy Court pursuant to Section 363 of the Bankruptcy Code.
While we believe that the use of cash collateral will support current operations
and satisfy all current customer needs, there can be no assurance that cash
collateral will be sufficient and it is unlikely that we would be able to obtain
other financing. The Debtors currently have authority to use cash collateral
until January 30, 2004.
As of December 11, 2003, Waterlink and its wholly-owned operating
subsidiary, Barnebey Sutcliffe Corporation, executed the Purchase Agreement with
the Buyer, for the Buyer to purchase substantially all of the assets and
business operations of Waterlink, including the operations of Barnebey
Sutcliffe Corporation and the subsidiaries of Waterlink in the United Kingdom.
On December 16, 2003, Debtors received a $5,000,000 deposit contemplated by the
Purchase Agreement. The proposed purchase is subject to the terms and conditions
of the Purchase Agreement, including purchase price adjustments. Waterlink
anticipates that all of the proceeds of the transaction will be used to
partially satisfy the claims of creditors.
On December 16, 2003, Waterlink filed a motion with the Bankruptcy
Court, requesting that the court approve the proposed sale and establish bidding
procedures and a date and time for conducting an auction to determine if there
are higher or better offers for Waterlink's assets and business. There can be no
assurance that the Bankruptcy Court will approve the proposed transaction
reflected in the Purchase Agreement, or that final documentation will be reached
on terms satisfactory to all parties. Subject to receipt of the Bankruptcy
Court's approval and the satisfaction of other pre-closing conditions, Waterlink
expects the transaction to close in the first quarter of 2004. Waterlink
anticipates that all of the proceeds of the transaction will be used to
partially satisfy the claims of creditors.
In order to successfully exit Chapter 11, the Debtors will need to
propose, and obtain confirmation by the Bankruptcy Court of, a plan that
satisfies the requirements of the Bankruptcy Code. A plan could resolve, among
other things, the Debtors' pre-petition obligations, set forth the revised
capital structure of the newly reorganized entity and provide for its corporate
governance subsequent to exit from bankruptcy protection. The timing and filing
of a plan of reorganization by Waterlink will depend on the timing and outcome
of numerous other ongoing matters in the Chapter 11 Cases, including the sale of
assets contemplated in the proposed Purchase Agreement. At this time, it appears
unlikely that the Debtors will emerge from Chapter 11 protection. The likely
outcome of these cases is that the sale of assets to the Buyer or the maker of a
higher or better offer will be consummated. There can be no assurance at this
time that a plan will be filed in the Chapter 11 Cases, confirmed by the
Bankruptcy Court, or that any such plan will be implemented successfully.
-12-
Under Section 362 of the Bankruptcy Code, the filing of a bankruptcy
petition automatically stays most actions against a debtor, including most
actions to collect pre-petition indebtedness or to exercise control over the
property of the debtor's estate. Absent an order of the Bankruptcy Court,
substantially all pre-petition liabilities are subject to settlement under the
plan of reorganization. Under Section 365 of the Bankruptcy Code, the Debtors
may assume, assume and assign, or reject certain executory contracts and
unexpired leases, including leases of real property, subject to the approval of
the Bankruptcy Court and certain other conditions. In general, rejection of an
unexpired lease or executory contract is treated as a pre-petition breach of the
lease or contract in question. Subject to certain exceptions, this rejection
relieves the Debtors of performing their future obligations under that lease or
contract but entitles the lessor or contract counterparty to a pre-petition
general unsecured claim for damages caused by the deemed breach. Section 1113(c)
of the Bankruptcy Code specifies particular treatment of collective bargaining
agreements ("CBAs") which a debtor may move to reject if the debtor first
satisfies a number of statutorily prescribed substantive and procedural
prerequisites and obtains the Bankruptcy Court's approval of the rejection. See
"Employees" under Item 1 for further information.
At this time, it is not possible to predict with certainty the effect
of the Chapter 11 Cases on Waterlink's business or whether and when it may
emerge from Chapter 11 protection. The rights and claims of various creditors
and security holders may be determined by a plan, as well. No assurance can be
given as to what values, if any, will be ascribed in the bankruptcy proceedings
to each of these constituencies, and it is likely that Waterlink's equity or
other securities will be restructured in a manner that will reduce substantially
or eliminate any remaining value. Accordingly, Waterlink urges that appropriate
caution be exercised with respect to existing and future investments in any of
such securities.
The accompanying consolidated financial statements have been prepared
in accordance with American Institute of Certified Public Accountants' Statement
of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," and on a going-concern basis, which
contemplates continuity of operations, realization of assets and satisfaction of
liabilities in the ordinary course of business. The Statements of Consolidated
Financial Position distinguish pre-petition liabilities subject to compromise
both from those pre-petition liabilities that are not subject to compromise and
from post-petition liabilities. Liabilities subject to compromise are reported
at the amounts expected to be allowed, even if they may be settled for lesser
amounts.
In addition, as a result of the Chapter 11 filing, the realization of
assets and satisfaction of liabilities, without substantial adjustments and/or
changes in ownership, are subject to uncertainty. While operating as
debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code
and subject to approval of the Bankruptcy Court or otherwise as permitted in the
ordinary course of business, the Debtors, or some of them, may sell or otherwise
dispose of assets and liquidate or settle liabilities for some amounts other
than those reflected in the consolidated financial statements. Further, a plan
in the Chapter 11 cases could materially change the amounts and classifications
in the historical consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
Waterlink considers its accounting policy regarding revenue recognition
on long-term contracts to be a critical accounting policy. The majority of
revenue relates to carbon sales and services and is recognized when title passes
upon shipment. The systems and equipment produced by Waterlink are custom
designed and can take a number of months to produce. Revenues from systems and
equipment contracts are recognized using the percentage of completion method of
accounting in the proportion that costs incurred bear to total estimated costs
at completion. Waterlink believes that this method of accounting best measures
revenue earned as progress is made toward completion of the contract. Revisions
of estimated costs are recognized in the period in which they are determined.
Provisions are made currently for all known or anticipated losses. Variations
from estimated contract performance could result in a material adjustment to
operating results for any fiscal quarter or year. Claims for extra work or
changes in scope of work are included in revenues when collection is probable.
Retirement Plans
Waterlink sponsors two defined benefit pension plans that cover
substantially all of our employees. The accounting for pensions is determined by
standardized accounting and actuarial methods that include critical assumptions;
which include discount rates, expected return on plan assets and future
compensation increases. Waterlink considers these assumptions to be
-13-
critical as they can impact periodic pension expense as well as the minimum
pension liability. As shown in the consolidated statements of shareholders'
equity and discussed in note 14 to the consolidated financial statements, during
fiscal 2003 Waterlink increased the additional minimum pension liability by
$152,000 and reduced equity by the corresponding amount. At September 30, 2003,
Waterlink's pension liabilities totaled $4,184,000, of which $381,000 is
included in accrued expenses.
BACKLOG
In the past Waterlink has experienced quarterly fluctuations in
operating results due to the contractual nature of its business and the
consequent timing of these orders. In addition, certain of the contracts will be
subject to the customer's ability to finance, or fund from government sources,
the actual costs of completing the project as well as the ability to receive any
necessary permits to commence the project. Therefore, Waterlink expects that its
future operating results could fluctuate significantly, especially on a
quarterly basis, due to the timing of the awarding of such contracts, the
ability to fund project costs, and the recognition by Waterlink of revenues and
profits. In addition, Waterlink has historically operated with a moderate
backlog. As of September 30, 2003, Waterlink's total backlog from continuing
operations was approximately $13.0 million, consisting of $9.6 million of firm
commitments to purchase carbon and related service products, and $3.4 million of
written purchase orders for capital goods equipment. Quarterly sales and
operating results will be affected by the volume and timing of contracts
received and performed within the quarter, which are difficult to forecast. Any
significant deferral or cancellation of a contract could have a material adverse
effect on Waterlink's operating results in any particular period. Because of
these factors, Waterlink believes that period-to-period comparisons of its
operating results are not necessarily indicative of future performances.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth for the periods indicated, statements of
operations data as a percentage of net sales. In an effort to enhance
comparability between periods, goodwill amortization has been excluded from the
amounts for fiscal 2002 and 2001.
FISCAL FISCAL FISCAL
2003 2002 2001
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 76.9 76.0 78.0
----- ----- -----
Gross profit 23.1 24.0 22.0
Selling, general and administrative expenses 15.0 15.4 16.1
Special charges -- -- 3.9
Amortization 0.8 0.3 (0.1)
----- ----- -----
Operating income 7.3 8.3 2.1
Other income (expense):
Interest expense (3.8) (5.8) (6.1)
Amortization of loan fees (0.4) (1.0) (2.1)
Bankruptcy related expenses (1.5) -- --
Other items-net 0.0 (0.1) (0.4)
----- ----- -----
Income (loss) before income taxes 1.6 1.4 (6.5)
Income taxes 0.7 0.2 0.0
----- ----- -----
Income (loss) from continuing operations 0.9 1.2 (6.5)
Discontinued operations:
Loss from discontinued operations -- (0.8) (0.9)
Loss from disposal of discontinued operations -- -- (26.7)
----- ----- -----
Income (loss) before cumulative effect of accounting change 0.9 0.4 (34.1)
Cumulative effect of accounting change (30.6) -- --
----- ----- -----
Net loss (29.7)% 0.4% (34.1)%
===== ===== =====
-14-
Year Ended September 30, 2003 Compared to Year Ended September 30, 2002
Net Sales: Net sales for the year ended September 30, 2003 were
$66,858,000, an increase of $2,804,000, or 4.4%, from the prior year. Net sales
of carbons, related services, and standard equipment increased by 10.3% in 2003
as compared to the prior year, principally in England. This increase was
partially offset by a 14.8% decrease in sales of engineered systems and
equipment. The decrease in sales of engineered systems and equipment during
fiscal 2003 occurred in both the United States and England.
Gross Profit: Gross profit for the year ended September 30, 2003 was
$15,453,000, an increase of $100,000 from the prior year due to the increase in
net sales. The gross margin for 2003 was 23.1% as compared to 24.0% in the prior
year. The gross margin decrease in 2003 is the result of product mix as compared
to the prior year.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the year ended September 30, 2003 were $10,036,000,
an increase of $196,000, or 2.0%, from the prior year. This increase reflects
$375,000 of costs recorded at the corporate office with regard to professionals
engaged to assist the Company with the evaluation of its financial alternatives
with regard to its leverage situation. Selling, general and administrative
expenses as a percentage of net sales were 15.0% in 2003 as compared to 15.4%
for the prior year.
Interest Expense: Interest expense for the year ended September 30,
2003 was $2,508,000, as compared to $3,712,000 in the prior year. This decrease
is due to the fact that interest on senior indebtedness and subordinated notes
in the United States stopped being accrued on June 27, 2003, the date of
Waterlink's bankruptcy filing. In addition there was also a decrease through the
first nine months of the fiscal year due to lower interest rates in the current
year as well as principal reductions made during fiscal 2003.
Amortization of Financing Costs: Amortization of financing costs for
the year ended September 30, 2003 was $282,000 as compared to $642,000 for the
prior year. These amounts vary based on the amounts associated with and timing
of amendment fees related to amendments of the senior credit facility in the
United States.
Income Taxes: Waterlink recorded income taxes of $425,000 on pre-tax
income of $1,043,000 for the year ended September 30, 2003, which represented
current state income taxes on domestic earnings and deferred tax on earnings in
England. For the year ended September 30, 2002, state income taxes of $94,000
were recorded on a pre-tax income of $243,000.
Year Ended September 30, 2002 Compared to Year Ended September 30, 2001
Net Sales: Net sales for the year ended September 30, 2002 were
$64,054,000, a decrease of $1,499,000, or 2.3%, from the prior year. Net sales
of carbons, related services, and standard equipment increased by 4.4% in 2002
as compared to the prior year, principally in England. This increase was more
than offset by a 19.0% decrease in engineered systems and equipment. The
decrease in sales of engineered systems and equipment during fiscal 2002
occurred in both the United States and England.
Gross Profit: Gross profit for the year ended September 30, 2002 was
$15,353,000, an increase of $950,000 from the prior year despite the decrease in
sales. The gross margin for 2002 was 24.0% as compared to 22.0% in the prior
year. The increase in gross margin in 2002 resulted from sales of carbon and
related services in fiscal 2002 being weighted more toward specialized carbons
as compared to the prior year.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the year ended September 30, 2002 were $9,840,000, a
decrease of $7264,000, or 6.9%, from the prior year. This decrease is primarily
due to cost reductions in the corporate office. Selling, general and
administrative expenses as a percentage of net sales were 15.4% in 2002 as
compared to 16.1% for the prior year, which reflects the decrease in expense.
Interest Expense: Interest expense for the year ended September 30,
2002 was $3,712,000, as compared to $3,992,000 in the prior year. This decrease
reflects lower interest rates in the current year as well as $1,425,000 of term
payments made during fiscal 2002. In addition, interest expense for 2001
included non-cash charges related to amortization of expense recognized in
connection with the issuance of common stock warrants of $87,000.
-15-
Amortization of Financing Costs: Amortization of financing costs for
the year ended September 30, 2002 was $642,000 as compared to $1,386,000 for the
prior year. The amount in 2001 reflects the accelerated amortization of deferred
financing costs resulting from the maturity date of our senior credit facility
being moved from May 23, 2003 to October 1, 2001. By subsequent amendments, the
senior credit facility has been extended to October 1, 2003.
Income Taxes: Waterlink recorded income taxes of $94,000 on pre-tax
income of $243,000 for the year ended September 30, 2002, which represented
state income taxes on domestic earnings. For the year ended September 30, 2001,
state income taxes of $12,000 were recorded on a pre-tax loss of $4,898,000.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Waterlink's primary sources of liquidity have
been:
- borrowings available under credit facilities
- net proceeds from the sale of Waterlink's common and preferred
stock
- net proceeds from the sale of businesses in connection with
the strategic alternative process
- issuance of common stock and seller financing incurred in
connection with Waterlink's completed acquisitions
- cash flow from certain profitable operations
Historically, Waterlink's primary uses of capital have been:
- the funding of its acquisition program
- working capital requirements including the funding for growth
at certain operations
- the funding required for certain under-performing acquisitions
- the funding of interest on borrowings and the repayment of
borrowings
In May 2000 Waterlink announced that its board of directors had
instructed management to explore various strategic alternatives, including the
sale of all or part of Waterlink. To date, Waterlink has sold four of its five
operating divisions: the biological division in two separate transactions in
September and December 2000; the separations division in February 2001; the
European water and wastewater division in a series of transactions during the
fourth quarter of our fiscal year ended September 30, 2001, and the pure water
division in May 2002. At September 30, 2003, Waterlink has recorded $2,217,000
of net assets of discontinued operations that represents amounts either placed
in escrow or held back by the purchaser of the pure water division. These assets
are subject to reduction for indemnification claims made on or before May 30,
2004.
In September 2001 the board of directors of Waterlink determined the
corporate office should be relocated to its Columbus, Ohio facility. This
consolidation resulted in personnel reductions and the disposal of certain fixed
assets. Accordingly, Waterlink recorded a special charge of $2,560,000 in 2001
relating to severance obligations to eight individuals and the write off of
certain fixed assets. During fiscal 2003 Waterlink paid approximately $205,000
relating to these severance obligations. At September 30, 2003, approximately
$1,241,000 remained accrued for severance obligations relating to two of these
individuals. Due to Waterlink's bankruptcy filing, no payments have been made
on these obligations subsequent to June 27, 2003. These obligations remain
stayed, pending the resolution of Waterlink's bankruptcy case.
Waterlink does not currently anticipate making significant capital
investments in plant and equipment because we believe our current businesses do
not require such investments as well as our current financial position.
For the year ended September 30, 2003, net cash provided by continuing
operating activities was $1,952,000 and purchases of equipment totaled
$1,214,000. During fiscal 2003 Waterlink realized proceeds totaling $250,000
from the final holdback relating to the sale of certain operations in Europe.
These proceeds were used to repay senior indebtedness as required by our senior
credit facility.
The consolidated financial statements of Waterlink have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
-16-
financial statements, Waterlink has incurred net losses of $22,977,000 in 2001,
$385,000 in 2002 and $19,882,000 in 2003. Waterlink filed for bankruptcy on June
27, 2003 and at September 30, 2003 had a working capital deficiency of
$23,173,000. In addition, Waterlink has signed a definitive agreement, subject
to final Bankruptcy Court approval, to sell substantially all its operating
assets. These factors raise substantial doubt about Waterlink's ability to
continue as a going concern for a reasonable period of time. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of assets or the amounts and classification of
liabilities that might be necessary should Waterlink be unable to continue as a
going concern.
Credit Availability
As of September 30, 2003, Waterlink's credit facilities were comprised
of (1) a $34,681,000 domestic senior credit facility with Bank of America, NA,
as agent, which expired on October 1, 2003, and (2) a 1,250,000 pounds sterling
revolving credit facility in England with The Royal Bank of Scotland. At
September 30, 2003 there were no borrowings available under the domestic senior
credit facility in the United States and approximately $984,000 of borrowings
available in England with The Royal Bank of Scotland.
Since the filing of the Chapter 11 cases, Waterlink has not made any
interest or principal payments under the domestic senior credit facility. The
maturity date of this facility was October 1, 2003. Any future credit
availability, if any, would be based on orders approved by the bankruptcy court.
In December 2002, Sutcliffe Speakman Limited, Waterlink's wholly-owned
operating subsidiary in England, entered into a credit facility with The Royal
Bank of Scotland, with availability based on a percentage of eligible accounts
receivable, with a maximum borrowing amount of 1,250,000 pounds sterling. In
connection with this facility certain accounts receivable were pledged as
collateral. In connection with entering into this credit facility, Waterlink
remitted $1 million of the proceeds to our senior bank group as required by the
October 1, 2002 amendment to the domestic senior credit facility. The balance
outstanding on the facility with The Royal Bank of Scotland in England was
approximately $939,000 at September 30, 2003.
The terms of the credit facilities restrict or prohibit Waterlink from
taking many actions, including paying dividends and incurring or assuming other
indebtedness or liens. Waterlink's obligations under the domestic senior credit
facility are secured by liens on a substantial portion of Waterlink's domestic
assets, including equipment, inventory, accounts receivable and general
intangibles and the pledge of most of the stock of Waterlink's subsidiaries.
The Debtors are currently funding their operations through the use of
cash collateral pursuant to an order entered by the Bankruptcy Court pursuant to
Section 363 of the Bankruptcy Code. While we believe that the use of cash
collateral will support current operations and satisfy all current customer
needs, there can be no assurance that cash collateral will be sufficient and it
is unlikely that we would be able to obtain other financing. The Debtors
currently have authority pursuant to the order to use cash collateral until
January 30, 2004.
Market Risk
Waterlink's earnings are affected by changes in interest rates charged
on our domestic facility. If the market rates for borrowings increased by 1% on
our domestic facility, the impact would be an increase to interest expense of
$346,000 with a corresponding decrease to income before income taxes. This
amount was determined by considering the impact of hypothetical interest rates
on the balance of Waterlink's domestic facility at September 30, 2003. This
analysis does not consider the effects of the overall economic environment
associated with such a change nor does it assume any change to Waterlink's
current financial structure. Based on the bankruptcy proceedings that commenced
on June 27, 2003, no amounts for interest on the domestic facility were expensed
or paid subsequent to that date.
Waterlink occasionally has exposure to currency rate fluctuations
related primarily to the purchases of inventory and the collection of accounts
receivable. In these situations Waterlink utilizes a limited number of foreign
exchange instruments, primarily forward contracts, to manage this exposure.
Waterlink had no significant hedging contracts outstanding at September 30,
2003.
-17-
Impact of Recently Issued Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No.146, "Accounting
for Costs Associated with Exit or Disposal Activities", provides guidance on the
recognition and measurement of liabilities for cost associated with exit or
disposal activities. The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002. The adoption of
SFAS No.146 did not have a material effect on the Company's consolidated
financial statements.
In November 2002, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 45, ("FIN 45") "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires a company, at the time it issues a guarantee, to
recognize an initial liability for the fair value of obligations assumed under
the guarantee and elaborates on existing disclosure requirements related to
guarantees and warranties. The initial recognition requirements of FIN 45 are
effective for guarantees issued or modified after December 31, 2002 and adoption
of the disclosure requirements are effective for the Company as of December 31,
2002. The adoption of the recognition requirements of FIN 45 did not have a
material effect on the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after September 15, 2003. The adoption of FIN 46 did not have a
material effect on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which establishes standards for how an entity that issues financial instruments
(or may be required under the terms of a financial instrument to issue its
equity shares) classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. The adoption of SFAS No. 150 did not have a material effect on the
Company's consolidated financial statements.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in
this report may include forward-looking statements that involve risks and
uncertainties. While forward-looking statements are sometimes presented with
numerical specificity, they are based on variety of assumptions made by
management regarding future circumstances over which Waterlink has little or no
control. A number of important factors, including those identified in this
section as well as factors discussed elsewhere herein, could cause Waterlink's
actual results to differ materially from those in forward-looking statements or
financial information. Actual results may differ from forward-looking results
for a number of reasons, including the following:
- the impact on operations of the bankruptcy proceedings and
orders and authority of the bankruptcy court
- the ability to generate sufficient cash flows to support
working capital needs
- changes in world economic conditions, including
i. instability of governments and legal systems in
countries in which Waterlink conducts business
ii. significant changes in currency valuations
iii. recessionary environments
iv. the effects of military conflicts
- changes in customer demand and timing of orders as they affect
sales and product mix, including
i. the effect of strikes at customer's facilities
ii. variations in backlog
iii. the impact of changes in industry business cycles
iv. changes in environmental laws
- competitive factors, including
i. changes in market penetration
ii. introduction of new products by existing and new
competitors
-18-
- changes in operating costs, including
i. changes in Waterlink's and its subcontractors'
manufacturing processes
ii. changes in costs associated with varying levels of
operations
iii. changes resulting from different levels of
customers demands
iv. effects of unplanned work stoppages
v. changes in cost of labor and benefits
vi. the cost and availability of raw materials and
energy
- the cost of capital, including interest rate increases
- unanticipated litigation, claims or assessments
RISK FACTORS
Our Operations, Our Securities and Our Constituencies Are Being, and Will Be,
Affected By Our Filing For Protection Under the Bankruptcy Code
On June 27, 2003, we filed voluntary petitions for protection under the
Bankruptcy Code in the Bankruptcy Court. We continue to operate our businesses
as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code, the Federal
Rules of Bankruptcy Procedure and applicable court orders. There can be no
assurance that our customers and suppliers will continue to transact business
with us in the same manner as prior to our filing.
We are currently funding our operations through the use of cash
collateral pursuant to Order entered by the Bankruptcy Court pursuant to Section
363 of the Bankruptcy Code. While we believe that the use of cash collateral
will support current operations and satisfy all current customer needs, there
can be no assurance that cash collateral will be sufficient and it is unlikely
that we would be able to obtain other financing.
As of December 11, 2003, we executed an agreement to sell substantially
all of our assets and business operations. On December 16, 2003, we filed a
motion with the Bankruptcy Court, requesting that the court approve the proposed
sale and establish bidding procedures and a date and time for conducting an
auction to determine if there are higher or better offers for our assets and
business. There can be no assurance that the Bankruptcy Court will approve the
proposed transaction, that final documentation will be reached on terms
satisfactory to all parties or that the Creditors' Committee and our secured
creditors will support our positions with respect to the proposed transaction or
otherwise. Disagreements among the Creditors' Committee, our secured creditors
and us could protract the Chapter 11 Cases, negatively impact our ability to
operate during the Chapter 11 Cases and delay the conclusion of the Chapter 11
Cases. We anticipate that all of the proceeds of the proposed transaction that
we receive will be used to partially satisfy the claims of our creditors.
In order to successfully exit Chapter 11 protection, we will need to
propose, and obtain confirmation by the Bankruptcy Court of, a plan that
satisfies the requirements of the Bankruptcy Code. At this time, it appears
unlikely that we will emerge from Chapter 11. The likely outcome is the sale of
substantially all of our assets to the Buyer or the maker of a higher or better
offer. There can be no assurance at this time that a plan will be filed in the
Chapter 11 Cases, that such plan will be confirmed by the Bankruptcy Court, or
that any such plan will be implemented successfully.
At this time, it is not possible to predict with certainty the effect
of the Chapter 11 process on our business or whether and when we may emerge from
Chapter 11. The rights and claims of various creditors and security holders may
be determined by a plan, if any. No assurance can be given as to what values, if
any, will be ascribed in the bankruptcy proceedings to each of these
constituencies, and it is likely our equity or other securities will be
restructured in a manner that will reduce substantially or eliminate any
remaining value.
Our Industry is Highly Competitive
Our industry, the water and air purification industry, is fragmented
and highly competitive. We compete with many companies, several of which have
greater market penetration, depth of product line, resources and access to
capital, which could
-19-
be competitive advantages in securing projects. While we believe we are well
positioned to deliver technology and services at a fair price, some of our
competitors have developed product and service integration capabilities beyond
our current scope.
We are Dependent on Key Personnel
Our business depends on our ability to hire and retain our executive
officers and senior management. Our business could be adversely affected if for
any reason any of our executive officers or senior managers cease to be employed
by us.
The Current Members of Our Board of Directors and Management Own Approximately
19.3% of Our Common Stock and Can Exercise Significant Influence over Our
Affairs. Also, Several Institutional Investors Own Substantial Percentages of
Our Common Stock
At November 30, 2003, our current directors and management own or
control, in the aggregate, approximately 19.3% of our common stock. In addition,
several large institutional investors own or control a significant percentage of
our common stock. Accordingly, these individuals and institutional investors, if
acting together or even alone, can exercise significant influence over our
affairs including the election of our directors, appointment of our management
and approval of actions requiring the approval of our stockholders, which may
include the adoption of amendments to our certificate of incorporation, the
approval of mergers or sales of all or substantially all our assets, and similar
items. The concentration of voting power of these stockholders, if they act
together, could, under certain circumstances, have the effect of delaying or
preventing a change in control of Waterlink.
Our Foreign Operations Are Subject to Political and Economic Risks and We May Be
Adversely Affected by Foreign Currency Fluctuation
We sell a substantial proportion of our systems, equipment and services
in Western Europe, Asia and other regions outside the United States. Also, we
have one subsidiary that operates in England. Our net sales outside the United
States were approximately 36.8% of our net sales for the year ended September
30, 2003. Political, economic, regulatory and social conditions in foreign
countries in which we sell product may change. Risks associated with sales and
operations in foreign countries include risks of:
- war
- expropriation or nationalization of assets
- renegotiation or nullification of existing contracts
- changing political conditions
- changing laws and policies affecting trade, taxation and
investment
- overlap of different tax structures
- the general hazards associated with the assertion of
sovereignty over certain areas in which operations are
conducted
Because our reporting currency is the United States dollar, our
operations outside the United States sometimes face the additional risks of
fluctuating currency values and exchange rates, hard currency shortages and
controls on currency exchange. We are subject to the impact of foreign currency
fluctuations and exchange rate charges on our reporting for results from those
operations in our financial statements.
We May Be Subject to Liability Under Environmental Laws
In the United States, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, and comparable state laws,
impose liability without fault for the releases of hazardous substances into the
environment. Potentially responsible parties include (a) owners and operators of
a site, (b) parties which create the hazardous substances released at a site,
and (c) parties which arrange for the transportation or disposal of hazardous
substances. We could face claims by governmental authorities, private
individuals and other persons alleging that hazardous substances were released
during the treatment process or from the use or disposal of end products and
by-products of the treatment process in violation of law. We are also subject to
environmental laws in countries outside the United States where we operate or in
which our customers are located. These requirements and their enforcement may
vary by country but in general prescribe standards for the protection of human
health, safety and the environment.
-20-
Changes in Environmental Laws Could Affect Our Business
Federal, state, local and foreign environmental laws and regulations
impose substantial standards for properly purifying water and treating
wastewater, and impose liabilities for noncompliance. Environmental laws and
regulations are, and will continue to be, a significant factor affecting our
ability to sell our solutions, systems and equipment. To the extent that demand
for our solutions, systems and equipment is created by the need to comply with
environmental laws and regulations, any modification of the standards imposed by
these laws and environmental laws and regulations may reduce demand for our
products and services, thereby adversely affecting our business and prospects.
Our Business is Subject to Potential Warranty and Performance Guarantee Claims
Some of our customers require us to guarantee that our services and
products will be of a specified level of quality or performance. If a product or
service fails to attain that level of quality or performance, we could incur
significant financial penalties.
Provisions of Our Corporate Documents Could Delay or Prevent a Change in Control
of Waterlink
Our certificate of incorporation and bylaws contain certain provisions
that may have anti-takeover effects and may discourage, delay, or prevent a
takeover attempt that a stockholder might consider in his best interest. These
documents allow our board of directors to authorize the issuance of preferred
stock, which could adversely affect the voting and other rights of the holders
of our common stock, provide that our directors are classified into three
classes with staggered terms, and contain a "fair price provision" which imposes
restrictions in the event of certain business combinations.
ITEM 7(a). QUALITATIVE AND QUANTITATIVE DISCLOSURES REGARDING MARKET
RISK
The disclosures required under this item are included in Management's
Discussion and Analysis of Financial Condition and Results of Operations on page
17.
-21-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
Reports of Independent Auditors................................................................................ 23
Consolidated Balance Sheets at September 30, 2003 and 2002..................................................... 25
Consolidated Statements of Operations for the years ended September 30, 2003,
2002 and 2001............................................................................................... 27
Consolidated Statements of Shareholders' Equity (Deficiency) for the years ended
September 30, 2003, 2002 and 2001........................................................................... 28
Consolidated Statements of Cash Flows for the years ended September 30, 2003,
2002 and 2001............................................................................................... 29
Notes to Consolidated Financial Statements..................................................................... 30
-22-
Report of Independent Auditors
To the Audit Committee of the Board of Directors and Shareholders of
Waterlink, Inc.
We have audited the accompanying consolidated balance sheet of
Waterlink, Inc. (debtor-in-possession) and subsidiaries (the "Company") as of
September 30, 2003, and the related consolidated statements of operations,
shareholders' deficiency and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Waterlink, Inc. (debtor-in-possession) and subsidiaries at September 30, 2003,
and the consolidated results of their operations and their cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements for 2003 have been
prepared assuming that the Company will continue as a going concern. As more
fully described in Note 4, the Company has incurred substantial losses and has a
working capital deficiency. Additionally, the Company filed for bankruptcy on
June 27, 2003 and on December 11, 2003 the Company signed a definitive
agreement, subject to final approval, to sell substantially all of its assets.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regards to these matters are also
described in Note 4. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that might result from
the outcome of these uncertainties.
/s/ Marcum & Kliegman LLP
Woodbury, NY
December 30, 2003
-23-
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Waterlink, Inc.
We have audited the accompanying consolidated balance sheet of Waterlink, Inc.
and subsidiaries as of September 30, 2002, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years in the period ended September 30, 2002. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Waterlink, Inc. and subsidiaries at September 30, 2002, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended September 30, 2002, in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements for 2002 have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 4, the Company has incurred losses and has a working capital
deficiency. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regards to these matters
are also described in Note 4. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Canton, Ohio
November 1, 2002
-24-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Balance Sheets
SEPTEMBER 30,
2003 2002
---------------------------
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 2,666 $ 2,530
Trade accounts receivable, less allowance of $294 in 2003
and $275 in 2002 13,153 11,210
Inventories 10,111 10,528
Costs in excess of billings 1,167 1,783
Other current assets 1,032 1,130
Net assets of discontinued operations 754 640
---------------------------
Total current assets 28,883 27,821
Property, plant and equipment, at cost:
Land, building and improvements 2,111 1,626
Machinery and equipment 7,369 6,538
Office equipment 842 717
---------------------------
10,322 8,881
Less accumulated depreciation 4,785 3,723
---------------------------
5,537 5,158
Other assets:
Goodwill, net of amortization of $2,914 in 2002 3,566 24,250
Other assets 20 85
Net assets of discontinued operations - 219
---------------------------
3,586 24,554
---------------------------
Total assets $ 38,006 $ 57,533
===========================
The accompanying notes are an integral part of these statements
-25-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Balance Sheets
SEPTEMBER 30,
2003 2002
---------------------------
(In thousands, except share data)
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
Trade accounts payable $ 3,416 $ 6,848
Accrued expenses 2,515 4,577
Billings in excess of cost 839 232
Accrued income taxes 230 313
Current debt obligations 939 39,674
Liabilities subject to compromise 43,117 -
---------------------------
Total current liabilities 51,056 51,644
Accrued pension costs 3,803 3,247
Shareholders' (deficiency) equity:
Preferred Stock, $.001 par value, authorized 10,000,000
shares, none issued and outstanding - -
Common Stock, voting, $.001 par value,
authorized--40,000,000 shares,
issued and outstanding--19,665,149 shares at September 30, 2003
and 19,659,694 shares at September 30, 2002 20 20
Additional paid-in capital 92,174 92,174
Accumulated other comprehensive loss (5,927) (6,314)
Accumulated deficit (103,120) (83,238)
---------------------------
Total shareholders' (deficiency) equity (16,853) 2,642
---------------------------
Total liabilities and shareholders' (deficiency) equity $ 38,006 $ 57,533
===========================
The accompanying notes are an integral part of these statements.
-26-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Statements of Operations
YEAR ENDED SEPTEMBER 30,
2003 2002 2001
-----------------------------------------
(In thousands, except per share data)
Net sales $ 66,858 $ 64,054 $ 65,553
Cost of sales 51,405 48,701 51,150
-----------------------------------------
Gross profit 15,453 15,353 14,403
Selling, general and administrative expenses 10,036 9,840 10,566
Special charges - - 2,560
Amortization 553 850 530
-----------------------------------------
Operating income 4,864 4,663 747
Other income (expense):
Interest expense (2,508) (3,712) (3,992)
Amortization of loan fees (282) (642) (1,386)
Bankruptcy related expenses (1,034) - -
Other items--net 3 (66) (267)
-----------------------------------------
Income (loss) before income taxes 1,043 243 (4,898)
Income taxes 425 94 12
-----------------------------------------
Income (loss) from continuing operations 618 149 (4,910)
Discontinued operations:
Loss from operations, no income tax effect - (534) (592)
Loss on disposal - - (17,475)
-----------------------------------------
Income (loss) before cumulative effect of accounting change 618 (385) (22,977)
Cumulative effect of accounting change (20,500) - -
-----------------------------------------
Net loss $ (19,882) $ (385) $ (22,977)
=========================================
Earnings (loss) per common share-basic:
Continuing operations $ 0.03 $ 0.01 $ (0.25)
Discontinued operations - (0.03) (0.92)
Cumulative effect of accounting change (1.04) - -
-----------------------------------------
$ (1.01) $ (0.02) $ (1.17)
=========================================
Earnings (loss) per common share- diluted:
Continuing operations $ 0.03 $ 0.01 $ (0.25)
Discontinued operations - (0.03) (0.92)
Cumulative effect of accounting change (1.02) - -
-----------------------------------------
$ (0.99) $ (0.02) $ (1.17)
=========================================
Weighted average common shares outstanding-
Basic 19,664 19,660 19,660
Diluted 20,022 20,062 19,660
The accompanying notes are an integral part of these statements.
-27-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Statements of Shareholders' Equity (Deficiency)
ACCUMULATED TOTAL
ADDITIONAL OTHER SHAREHOLDERS'
COMMON PAID-IN COMPREHENSIVE ACCUMULATED EQUITY
STOCK CAPITAL LOSS DEFICIT (DEFICIENCY)
---------- ---------- ------------- ----------- -------------
(In thousands, except share data)
YEAR ENDED SEPTEMBER 30, 2001
Balance at October 1, 2000 20 92,087 (8,250) (59,876) 23,981
Net loss (22,977) (22,977)
Foreign currency translation adjustments,
including $6,416 reclassification due to the
sale of the European Water and Wastewater
Division 6,004 6,004
Minimum pension liability adjustment (2,895) (2,895)
-------------
Comprehensive loss (19,868)
Issuance of warrants in connection with
the issuance of subordinated notes 87 87
---------- ---------- ------------- ----------- -------------
Balance at September 30, 2001 20 92,174 (5,141) (82,853) 4,200
YEAR ENDED SEPTEMBER 30, 2002
Net loss (385) (385)
Foreign currency translation adjustments 1,046 1,046
Minimum pension liability adjustment (2,219) (2,219)
-------------
Comprehensive loss (1,558)
---------- ---------- ------------- ----------- -------------
Balance at September 30, 2002 20 92,174 (6,314) (83,238) 2,642
YEAR ENDED SEPTEMBER 30, 2003
Net loss (19,882) (19,882)
Exercise of 5,455 common stock warrants - -
Foreign currency translation adjustments 539 539
Minimum pension liability adjustment (152) (152)
-------------
Comprehensive loss (19,495)
---------- ---------- ------------- ----------- -------------
Balance at September 30, 2003 $ 20 $ 92,174 $ (5,927) $ (103,120) $ (16,853)
========== ========== ============= =========== =============
The accompanying notes are an integral part of these statements.
-28-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Statements of Cash Flows
YEAR ENDED SEPTEMBER 30,
2003 2002 2001
-----------------------------------------
(In thousands)
OPERATING ACTIVITIES
Income (loss) from continuing operations $ 618 $ 149 $ (4,910)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Deferred income taxes 320 - -
Depreciation 949 995 1,182
Amortization 836 1,481 2,006
Changes in working capital:
Trade accounts receivable (1,713) 996 (932)
Inventories 526 43 293
Cost in excess of billings 642 (103) (1,117)
Other assets 30 (836) 142
Trade accounts payable (483) (179) 672
Accrued expenses (430) (513) 2,008
Billings in excess of cost 602 (171) (169)
Accrued income taxes 55 7 215
-----------------------------------------
Net cash provided by (used in) operating activities 1,952 1,869 (610)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (1,214) (621) (370)
Proceeds from sale of subsidiaries 250 12,780 20,360
-----------------------------------------
Net cash (used in) provided by investing activities (964) 12,159 19,990
FINANCING ACTIVITIES
Proceeds from long-term borrowings 906 422 1,713
Payments on long-term borrowings (1,743) (12,678) (20,922)
-----------------------------------------
Net cash used in financing activities (837) (12,256) (19,209)
Effect of exchange rate changes on cash 67 102 (524)
-----------------------------------------
Cash flows provided by (used in) continuing operations 218 1,874 (353)
Cash flows used in discontinued operations (82) (990) (921)
-----------------------------------------
Increase (decrease) in cash and cash equivalents 136 884 (1,274)
Cash and cash equivalents at beginning of year 2,530 1,646 2,920
-----------------------------------------
Cash and cash equivalents at end of year $ 2,666 $ 2,530 $ 1,646
=========================================
The accompanying notes are an integral part of these statements.
-29-
Waterlink, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements
September 30, 2003
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Waterlink, Inc. and its wholly-owned subsidiaries
("Waterlink" or the "Company"). All significant intercompany accounts and
transactions have been eliminated upon consolidation.
FISCAL YEAR END - The Company's fiscal year ends on September 30th.
References in the notes to the financial statements to the years 2003, 2002 and
2001 refer to the fiscal years ended September 30, 2003, 2002 and 2001,
respectively.
DESCRIPTION OF THE BUSINESS - The Company specializes in the
development and production of activated carbons used to purify air, water and
gases. Waterlink is a supplier of activated carbon for liquid, air and gas
filtration systems and is a manufacturer of specialized impregnated carbons. Its
products include adsorbtion equipment, bioreactors and bioscrubbers, corrosive
gas control systems, solvent recovery systems, and a variety of air, odor and
vapor control and filtration systems. The Company has locations throughout the
United States as well as one in England.
CASH EQUIVALENTS - The Company considers all highly liquid investments
with a maturity date of three months or less when purchased to be cash
equivalents.
CONTRACTS AND REVENUE RECOGNITION - A portion of the Company's systems
and equipment are custom designed and take a number of months to produce.
Revenues from large contracts are recognized using the percentage of completion
method of accounting in the proportion that costs bear to total estimated costs
at completion. Revisions of estimated costs or potential contract losses are
recognized in the period in which they are determined. Provisions are made
currently for all known or anticipated losses. Variations from estimated
contract