1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number __________
AQUA-CHEM, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 39-1900496
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7800 NORTH 113TH STREET
P.O. BOX 421
MILWAUKEE, WISCONSIN
(Address of Principal Executive Offices)
53201
(Zip Code)
(414) 359-0600
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 7, 1998
-------------------------------- --------------------------------------
Common Stock, $.01 par value 1,000,000
2
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
OF
AQUA-CHEM, INC.
Page No.
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited) 3
Consolidated Condensed Statements of Operations -
Three and six months ended June 30, 1998
and 1997 4
Consolidated Condensed Balance Sheets -
June 30, 1998 and December 31, 1997 5
Consolidated Condensed Statements of Cash Flows -
Six months ended June 30, 1998 and 1997 6
Notes to Consolidated Condensed Financial
Statements 7
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10
Part II: OTHER INFORMATION
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 15
Signature Page 16
Exhibit Index 17
2
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
3
4
AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS; EXCEPT PER SHARE DATA)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------- ------------------------------------------
Post-acquisition Pre-acquisition Post-acquisition Pre-acquisition
Basis of Accounting Basis of Accounting Basis of Accounting Basis of Accounting
1998 1997 1998 1997
------------------- ------------------- ------------------- -------------------
Net sales $ 39,416 | $ 48,239 $ 76,222 | $ 83,211
Cost of goods sold 28,408 | 35,811 55,930 | 62,087
------------ | --------------- -------------- | ------------------
Gross margin 11,008 | 12,428 20,292 | 21,124
Costs and expenses: | |
Selling, general and administrative 8,536 | 9,642 17,446 | 18,069
Restructuring charges 4,720 | -- 4,720 | --
------------ | --------------- -------------- | ------------------
13,256 | 9,642 22,166 | 18,069
------------ | --------------- -------------- | ------------------
Operating income (loss) (2,248) | 2,786 (1,874) | 3,055
Other income (expense): | |
Interest income 61 | 206 209 | 390
Interest expense (1,541) | (290) (3,004) | (597)
Other, net 95 | 6 26 | 22
------------ | --------------- -------------- | ------------------
(1,385) | (78) (2,769) | (185)
Income (loss) before income taxes, minority | |
interest, and extraordinary item (3,633) | 2,708 (4,643) | 2,870
Income tax expense (benefit) (1,111) | 446 (1,448) | 494
Minority interest in earnings of | |
consolidated subsidiary 64 | 81 136 | 136
------------ | --------------- -------------- | ------------------
Net income (loss) before extraordinary item (2,586) | 2,181 (3,331) | 2,240
Extraordinary item, net of tax benefit of $840 1,260 | -- 1,260 | --
------------ | --------------- -------------- | ------------------
Net income (loss) $ (3,846) | $ 2,181 $ (4,591) | $ 2,240
Preferred stock dividends (155) | -- (310) | --
------------ | --------------- -------------- | ------------------
Net income (loss) applicable to common $ (4,001) | $ 2,181 $ (4,901) | $ 2,240
============ | =============== ============== | ==================
| |
Other comprehensive income (loss), net of tax | |
Cumulative translation adjustment (109) | (80) (84) | (209)
------------ | --------------- -------------- | ------------------
Other comprehensive (loss) (109) | (80) (84) | (209)
------------ | --------------- -------------- | ------------------
Comprehensive income (loss) $ (3,955) | $2,101 $ (4,675) | $2,031
------------ | --------------- -------------- | ------------------
PER SHARE DATA: | |
Basic net (loss) per share of common stock $ (4.00) | N.A. $ (4.90) | N.A.
Diluted net (loss) per share of common stock $ (4.00) | N.A. (4.90) | N.A.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
5
AQUA-CHEM, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS; EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
1998 1997
-------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 9,300 $ 11,936
Accounts receivable, less allowances of $1,331 at June 30,
1998 and $638 at December 31, 1997 36,590 33,332
Revenues in excess of billings 2,834 5,068
Inventories 33,443 20,814
Deferred income taxes 3,903 4,237
Prepaid expenses and other current assets 3,263 1,093
--------- --------
Total current assets 89,333 76,480
Property, plant and equipment - net 38,439 31,555
Intangible assets, less accumulated amortization of $444 at
June 30, 1998 and $273 at December 31, 1997 38,792 10,147
Deferred income taxes 1,640 2,086
Other assets 7,530 4,366
--------- --------
TOTAL ASSETS $ 175,734 $124,661
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on long-term debt $ -- $ 1,055
Accounts payable
Trade 9,057 10,685
Other 4,839 5,324
Billings in excess of revenues 4,671 5,654
Compensation and profit sharing 2,998 5,318
Accrued litigation settlements 1,575 3,200
Accrued expenses 19,359 17,624
--------- --------
Total current liabilities 42,499 48,860
Long-term debt 125,000 58,636
Other long-term liabilities 4,642 5,573
--------- --------
Total other liabilities 129,642 64,209
Minority interest 500 589
Preferred stock with mandatory redemption provisions 4,704 7,365
Stockholders' equity:
Common stock, $.01 par value. Authorized 2,000,000 shares;
issued and outstanding 1,000,000 shares at June 30, 1998
and December 31, 1997 10 10
Additional paid-in capital 90 90
Retained earnings (2,151) 3,049
Warrants 468 433
Cumulative translation adjustment (28) 56
--------- --------
Total stockholders' equity (deficit) (1,611) 3,638
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 175,734 $124,661
========= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
5
6
AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
POST-ACQUISITION PRE-ACQUISITION
BASIS OF ACCOUNTING BASIS OF ACCOUNTING
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
|
Cash flows from operating activities: |
Net income (loss) $ (4,591) | $ 2,240
Adjustments to reconcile net income (loss) to net cash |
provided by (used in) operating activities: |
Depreciation and amortization 1,902 | 1,723
Deferred tax expense 1,007 | --
Minority interest in earnings of consolidated |
subsidiary 136 | 136
Extraordinary item, net of tax benefit 1,260 | --
Restructuring charges 4,720 | --
Increase (decrease) in cash due to changes in: |
Accounts receivable 7,199 | 6,286
Revenues in excess of billings 2,234 | (2,102)
Inventories (4,094) | (247)
Prepaid expenses and other current assets 139 | (27)
Accounts payable-- trade (4,151) | (3,302)
Accounts payable-- other (1,086) | (877)
Billings in excess of revenues (3,507) | 780
Accrued expenses and other current liabilities (10,523) | (3,052)
Other, net (987) | 208
--------- | ---------
Total adjustments (5,751) | (474)
---------- | ---------
Net cash provided by (used in) operating activities (10,342) | 1,766
|
Cash flows from investing activities: |
Purchase of National Dynamics Corporation (47,900) | --
Proceeds from sales of property, plant and equipment and |
other assets 11 | 38
Additions to property, plant and equipment (1,023) | (1,097)
Additions to intangibles -- | (269)
Proceeds from notes receivable -- | 1,363
--------- | ---------
Net cash provided by (used in) investing activities (48,912) | 35
|
Cash flows from financing activities: |
Issuance of Notes 125,000 | --
Proceeds from revolving credit agreement 3,000 | --
Issuance of notes payable -- | 118
Principal payments on debt (63,063) | (49)
Redemption of preferred stock (3,269) | --
Deferred financing costs (5,050) | --
--------- | ---------
Net cash provided by financing activities 56,618 | 69
|
Net increase (decrease) in cash and cash equivalents (2,636) | 1,870
Cash and cash equivalents at beginning of period 11,936 | 8,627
--------- | ---------
Cash and cash equivalents at end of period $ 9,300 | $ 10,497
========= | =========
Cash paid during the period for: |
Interest $ 2,909 | $ 595
Taxes $ 2,033 | $ 11
Details of Acquisition of National Dynamics Corporation: |
Fair value of assets acquired $ 29,174 |
Goodwill 28,807 |
Liabilities assumed (10,081) |
--------- |
Cash paid for assets $ 47,900 |
========= |
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
7
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) In the opinion of Management, the accompanying unaudited financial
statements of Aqua-Chem, Inc. contain all adjustments which are of a normal
recurring nature necessary to present fairly the financial position as of
June 30, 1998, and the results of operations and cash flows for the periods
indicated. Interim financial results are not necessarily indicative of
operating results for an entire year.
(2) Certain notes and other information have been condensed or omitted from
these interim consolidated condensed financial statements. Therefore, these
statements should be read in conjunction with the Aqua-Chem, Inc.
Consolidated Financial Statements as of December 31, 1997 and 1996.
(3) On July 31, 1997, Aqua-Chem, Inc. ("OLDCO") entered into a definitive
merger agreement with A-C Acquisition Corp. ("A-C Acquisition"), a 100%
owned subsidiary of Rush Creek LLC ("Rush Creek"). Rush Creek is a Limited
Liability Company owned by certain management of OLDCO and Whitney Equity
Partners L.P. Also on July 31, 1997, A-C Acquisition acquired the assets of
OLDCO (the "Management Buy-Out") for $125,747, which includes $69,196 of
liabilities assumed and $5,000 of Series A Cumulative Preferred Stock
issued to the sellers. The amount paid or assumed does not include
contingent consideration to be paid to the sellers based on cumulative
earnings of certain operations of OLDCO subsequent to the Management
Buy-Out. The Management Buy-Out was accounted for by Aqua-Chem using the
purchase method of accounting.
(4) The consolidated financial statements for the six months ended June 30,
1997 were prepared using OLDCO's historical basis of accounting (the
"pre-acquisition basis of accounting"). The consolidated financial
statements for the six months ended June 30, 1998 were prepared under a new
basis of accounting that reflects the fair values of assets acquired and
liabilities assumed, the related financing costs and all debt incurred in
connection with the Management Buy-Out (the "post-acquisition basis of
accounting"). Accordingly, the accompanying financial statements are not
comparable in all material respects since those financial statements report
financial position, results of operations, and cash flows of two separate
entities.
(5) Inventories consist of the following:
June 30, December 31,
1998 1997
---------- --------------
Raw materials and work-in-process $25,744 $16,963
Finished goods 7,699 3,851
------- -------
Total inventories $33,443 $20,814
======= =======
(6) On June 23, 1998 Aqua-Chem issued $125,000 in unsecured senior subordinated
notes. The notes carry an interest rate of 11 1/4% and are due July 1,
2008. Interest is payable semi-annually beginning January 1, 1999. Proceeds
from the notes were used to repay Aqua-Chem's existing debt, to redeem
$3,269 of Aqua-Chem's Series A Preferred Stock, to acquire substantially
all of the assets of National Dynamics Corporation ("NDC") (see note (9)),
to pay the accrued interest and dividends, fees and expenses associated
with the foregoing, and for general corporate purposes.
In conjunction with the issuance of the notes and the acquisition of NDC,
Aqua-Chem entered into a new revised $45,000 secured revolving credit
facility. Borrowings under this facility are made in the form of revolving
credit notes. These notes bear interest at a rate of either eurocurrency
plus a factor as defined in the agreement, prime, or federal funds rate
plus 100 basis points. The revolving credit agreement will
7
8
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
terminate June 23, 2003. The facility is secured by the assets of the
Company. At June 30, 1998 there were no borrowings outstanding. Among other
restrictions, the credit agreement contains covenants relating to financial
ratios and other limitations, as defined by the agreement. As of June 30,
1998, the Company was in compliance with these covenants.
(7) On June 25, 1998 the Board of Directors approved a plan of closure for the
Greenville, Mississippi facility and the agreement reached with the Union
representing the facility's production workers. As a result, the Company
recorded a restructuring charge of $4,720 to operations in the six months
ended June 30, 1998. Work currently performed at the facility will be
transferred to other Company facilities and/or outsourced. The plan will
result in the elimination of 149 positions and closure of the facility
within approximately one year. The provision includes $3,021 to write down
the value of certain fixed assets and inventory, $1,460 of employee
termination benefits and $239 of other costs.
(8) On June 23, 1998, Aqua-Chem acquired substantially all the assets of
National Dynamics Corporation for $57,981, which includes $10,081 of
liabilities assumed. The acquisition was accounted for using the purchase
method of accounting. The total purchase cost was allocated first to
identified tangible and intangible assets and liabilities based upon their
respective fair values, with the remainder of $28,807 being allocated to
goodwill, which will be amortized on a straight-line basis over 40 years.
The financial statements reflect the preliminary estimates of allocating
purchase price and may be revised at a later date. The Company does not
expect the final purchase price allocation to be materially different from
preliminary estimates.
(9) The following information presents pro forma condensed consolidated
statements of operations assuming OLDCO and National Dynamics Corporation
had been acquired by Aqua-Chem as of January 1, 1997. Such information
includes adjustments to reflect additional interest expense and
depreciation expense, amortization of goodwill and other intangibles, a
reduction of other expenses due to Management Buy-Out-related payments
being made by OLDCO and the net elimination of employment costs of the
former owners of National Dynamics Corporation.
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
Net sales $ 98,495 $112,833
Net loss applicable to common shares (4,971) (49)
Loss per common share (basic) $ (4.97) $ (0.05)
(10) Effective January 1, 1998, Aqua-Chem adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). This statement establishes standards for reporting and display of
comprehensive income and its components. Components of comprehensive income
are net income and all other non-owner changes to equity. SFAS No. 130
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement for the period in which they are
recognized. Aqua-Chem has chosen to disclose comprehensive income in the
Consolidated Statements of Operations. Prior years have been restated to
conform to the SFAS No. 130 requirements.
8
9
AQUA-CHEM, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" was issued by
The American Institute of Certified Public Accountants in March of 1998
and is effective for fiscal years beginning after December 15, 1998.
Aqua-Chem's accounting for costs of computer software developed for
internal use is consistent with the guidelines established in the SOP and,
as a result, Aqua-Chem does not anticipate that the adoption of this
statement will have a material impact on Aqua-Chem's financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as an asset or liability measured at its fair
value. Statement 133 is effective for fiscal years beginning after June 15,
1999. The Company has not determined the timing of or method of adoption,
but does not anticipate that the adoption of this standard will have a
material impact on its financial statements.
(11) In connection with the Management Buy-Out, Aqua-Chem adopted the Aqua-Chem,
Inc. 1997 Stock Option Plan (the "Plan"), which provides for the granting
to key employees, directors, and other individuals of options to purchase
an aggregate of 61,919 shares of Aqua-Chem common stock at a purchase price
not less than the greater of (i) $3.75, or (ii) fair market value as
determined by the Plan. Options vest primarily based upon Aqua-Chem
achieving certain operating results or within 7 years from the date of
grant. As of June 30, 1998, there were no options granted or outstanding
under the Plan.
Under separate agreements from the Plan, the option to purchase 1,725
shares of common stock have been granted to two directors of Aqua-Chem.
Under the terms of the agreements, the option to purchase 600 shares vests
one year from the effective date of the grant, with the remaining 1,125
options vesting at a rate of 225 per year commencing on December 31, 1998
and continuing through December 31, 2002. These options allow the holder to
purchase common stock of Aqua-Chem at $3.75 per share, which does not
differ significantly from fair market value. As of June 30, 1998, no
options were exercised.
9
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to the consolidated condensed financial
statements of the Company appearing elsewhere in this document.
On July 31, 1997, the Company's management acquired the Company from
its former owners ("the Management Buy-Out"). The financial results of the
Company for all periods prior to July 31, 1997 reflect the operations of
the Company under its prior owners. The consolidated financial statements for
subsequent periods reflect the financial results of the Company under a new
basis of accounting that reflects the fair values of assets acquired and
liabilities assumed, the related financing costs, and all debt incurred in
connection with the Management Buy-Out. Accordingly, the financial information
for the Company before and after the Management Buy-Out are not directly
comparable. See footnote (4) to the Notes to Consolidated Condensed Financial
Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage to net sales of certain items included in the Company's statement of
operations.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0 %
Cost of goods sold 74.2 72.1 74.6 73.4
---- ---- ---- ----
Gross margin 25.8 27.9 25.4 26.6
Selling, general and administrative expenses 20.0 21.6 21.7 22.9
Restructuring charges - 12.0 - 6.2
-- ---- -- ----
Operating income (loss) 5.8% (5.7)% 3.7% (2.5)%
=== ===== === ====
Composition of net sales for the Company's Cleaver-Brooks and
Water Technologies Divisions for the periods indicated is listed below.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
---- ---- ---- ----
(DOLLARS IN MILLIONS)
Net sales:
Cleaver-Brooks $40.6 $30.2 $67.9 $58.3
Water Technologies 7.6 9.2 15.3 17.9
--- --- ---- ----
Total $48.2 $39.4 $83.2 $76.2
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Net Sales. Net sales for the three month period ended June 30, 1998
declined $8.8 million to $39.4 million from $48.2 million. Net sales of
Cleaver-Brooks declined $10.4 million (25.6%). Approximately 22% of the decrease
resulted from the sale of the contract machining business in the fourth quarter
of 1997 with the remainder attributable to soft orders during the second half of
1997 through the first quarter of 1998. Water Technologies sales increased $1.6
million (21.1%) during the same time period primarily due to a large land-based
water desalination project.
Gross Margin. Gross margin declined $1.4 million (11.4%) to $11.0
million from $12.4 million for the same period in 1997. The gross margin
percentage increased 2.1% to 27.9% due to margin improvements on a large
contract and on parts at Water Technologies and due to certain cost reductions
at Cleaver-Brooks which were facilitated by improvements in management of the
facilities.
10
11
Selling General and Administrative Expenses. Selling, general and
administrative expense declined $1.1 million (11.5%) to $8.5 million.
Commissions to independent representatives and to internal sales personnel were
$0.4 million lower in the current period due to the reduced sales volume while
post retiree health care costs declined $0.1 million as a result of recognition
of the transition obligation at the time of the Management Buy-Out.
Restructuring Charges. A restructuring charge of $4.7 million was
recorded in the current period as a result of the Board of Directors' approval
of a plan to close its Greenville, Mississippi manufacturing facility and
transfer production to the Company's other facilities (the "1998
Restructuring"). The provision included $3.0 million to write down the value
of certain fixed assets and inventory, $1.5 million for employee severance and
additional workers compensation related costs and $0.2 million
for other related costs.
Operating Income. For the reasons set forth above, operating income
decreased $5.0 million to a loss of $2.2 million. Excluding the $4.7 million
restructuring charge, operating income decreased $0.3 million to $2.5 million
compared to $2.8 million for the three months ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net Sales. Net sales for the six month period ended June 30, 1998
declined $7.0 million to $76.2 million from $83.2 million. Net sales of
Cleaver-Brooks declined $9.6 million (14.1%). Approximately 41% of the decrease
resulted from the sale of the contract machining business in the fourth quarter
of 1997 with the remainder attributable to soft orders during the second half of
1997 through the first quarter of 1998. Water Technologies sales increased $2.6
million (17.0%) during the same time period primarily due to a large land-based
water desalination project.
Gross Margin. Gross margin declined $0.8 million (3.9%) to $20.3
million from $21.1 million for the same period in 1997. The gross margin
percentage increased 1.2% to 26.6% due to margin improvements on a large
contract and on parts at Water Technologies and due to certain cost reductions
at Cleaver-Brooks which were facilitated by improvements in management of the
facilities.
Selling General and Administrative Expenses. Selling, general and
administrative expense declined $0.6 million (3.4%) to $17.4 million.
Commissions to independent representatives and to internal sales personnel were
$0.5 million lower in the current period due to the reduced sales volume while
post retiree health care costs declined $0.3 million as a result of recognition
of the transition obligation at the time of the Management Buy-Out.
Restructuring Charges. A restructuring charge of $4.7 million was
recorded in the current period as a result of the Board of Directors' approval
of the 1998 Restructuring. The provision included $3.0 million to write
down the value of certain fixed assets and inventory, $1.5 million for
employee severance and additional workers compensation related costs and $0.2
million for other related costs.
Operating Income. For the reasons set forth above, operating income
decreased $4.9 million to a loss of $1.9 million. Excluding the $4.7 million
restructuring charge, operating income decreased $0.3 million to $2.8 million
compared to $3.1 million for the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $10.3 million for the six months
ended June 30, 1998 compared to $1.8 million of cash provided by operating
activities for the same period in 1997. The decrease of $12.1 million is due
primarily to a build of inventory of $4.1 million, $2.3 million of additional
interest expense due to the increased debt levels resulting from the Management
Buy-Out and a decrease in accrued expenses of $7.5 million, consisting of $2.6
million in litigation settlement payments, $2.3 million in increased performance
related incentives and $2.0 of income tax payments.
Cash used in investing activities was $48.9 million for the six months
ended June 30, 1998 compared to a net of $0.0 million for the same period in
1997. The current period included $47.9 million for the purchase of National
Dynamics Corporation and capital expenditures of $1.0 million. The prior year
period included
11
12
$1.4 million of proceeds from the collection of notes receivable offset by $1.1
million of capital expenditures and $0.3 million of additions to intangible
assets.
Cash provided by financing activities was $56.6 million for the six
months ended June 30, 1998 compared to $0.1 million for the same period in 1997.
The current period included $125.0 million of proceeds from the issuance of the
Company'S 11-1/4% Senior Subordinated Notes Due 2008 and advances under the
Company's credit facility and repayments of senior and subordinated debt and
preferred stock of $66.3 million in conjunction with the notes offering. The
increase is also offset by deferred financing costs of $5.1 million related to
the issuance of the notes in the current period.
Management believes that cash generated from operating activities
together with borrowing availability under the credit facility will be
adequate to cover the Company's working capital. debt service and capital
expenditure requirements. The Company may, however, consider other options
available to it in connection with funding future working capital and capital
expenditure needs, including the issuance of additional debt and the issuance of
equity securities.
YEAR 2000
The Company has assessed and continues to assess the impact of the year
2000 issue on its operations, including the development of cost estimates for
and the extent of programming changes required to address this issue. The
Company is also assessing the impact of this issue with its key vendors and
suppliers. Although final cost estimates have yet to be determined management
anticipates that the Company will be required to modify significant portions of
its software so that it will function properly in the year 2000. Since 1996
the Company has been executing an information technologies upgrade plan. This
plan includes leasing a new mainframe computer at an annual cost of
$0.6 million, and the expansion of, and improvements to, its networks arid
other hardware totaling $0.2 million. Additionally, the Company has spent $1.5
million on new financial systems of which $1.3 million has been capitalized. An
additional benefit of upgrading and/or replacing older technology and systems
is that management believes that the new hardware and software are year 2000
compliant. Preliminary estimates of the total costs remaining to be incurred
prior to 2000 range from $0.2 million to $0.3 million. Maintenance or
modification costs will be expensed as incurred, while the costs of new
software will be capitalized and amortized over the software's useful life.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this report, including, without
limitation, such statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and located elsewhere herein,
regarding the financial position and capital expenditures of the Company are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from such
expectations ("Cautionary Statements") are disclosed in this report and other
documents filed with the Securities and Exchange Commission, including, without
limitation, in the Company's Registration Statement on Form S-4 filed with the
Commission on August 6, 1998 (File no. 333-60759) and/or under the following
sections therein: "Risk Factors -- Substantial Leverage; Ability to Service the
Notes," "-- Implementation of Business Strategy," "-- Cyclical Nature of
Industry; Potential Fluctuations in Operating Results," "-- Realization of
Benefits of the Acquisition," "-- Restrictive Debt Covenants," "--
International Expansion," "-- Control by Principal Shareholder," "--
Competition," "-- Prices of Raw Materials and Component Parts," "-- Dependence
on Key Personnel," "-- Environmental and Related Matters," "Product Liability
Litigation," and "-- Labor Relations." All subsequent written or oral
forward-looking statements attributable to the Company or persons acting on
behalf of the Company are expressly qualified in their entirety by the
Cautionary Statements.
12
13
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Notes Offering. On June 23, 1998, the Company completed the private
placement of $125 million aggregate principal amount of its 11-1/4% Senior
Subordinated Notes Due 2008 (the "Private Notes") in a transaction under Rule
144A under the Securities Act of 1933, as amended (the "Private Offering").
The proceeds to the Company for the sale of the Private Notes were
approximately $121.3 million, net of the initial purchasers' discount. The net
proceeds to the Company from the sale of the Private Notes were used as
follows: (i) approximately $47.9 million was used to pay the purchase price of
the acquisition of National Dynamics Corporation (see below) and related
expenses; (ii) approximately $63.9 million was used to repay the Company's
existing revolving credit facility and term loan facility, existing
subordinated debt, and an existing note payable; (iii) approximately $3.3
million was used to retire a portion of the Company's Series A Preferred Stock;
(iv) approximately $1.3 million was used to pay fees and expenses of the
Private Offering; and (v) approximately $4.9 million was used for general
corporate purposes.
Pursuant to the terms of a registration rights agreement entered into
with the initial purchasers of the Private Notes, on August 6, 1998, the Company
filed with the Securities and Exchange Commission a Registration Statement on
Form S-4 relating to the Company's offer to the holders of the Private Notes
(the "Exchange Offer") to exchange up to $125 million aggregate principal amount
of the Company's 11-1/4% Senior Subordinated Notes Due 2008 (the "Exchange
Notes", and together with the Private Notes, the "Notes") for the Private Notes.
Acquisition. On May 28, 1998, the Company entered into a definitive
agreement (the "Asset Purchase Agreement") with National Dynamics Corporation
("NDC"), a Nebraska corporation, and three of NDC's individual shareholders who
collectively held 83.3% of the issued and outstanding shares of NDC (the
"Shareholders"), to acquire substantially all of the assets of NDC for a
purchase price of $47.0 million plus the assumption of certain liabilities (the
"Acquisition"). Pursuant to the Asset Purchase Agreement, the purchase price is
subject to certain post-closing adjustments based upon a closing balance sheet
and NDC's physical inventory as of the closing date, to be prepared not later
than August 22, 1998.
The Asset Purchase Agreement provided for the assumption of certain of
NDC's liabilities by the Company, including without limitation, contractual
obligations to furnish goods and services or to pay for goods and services that
were acquired; provided, however, that the Company did not assume any
liabilities for personal or property damage related to Products Sold (as
defined therein). The Asset Purchase Agreement included customary
representations and warranties by the Company, NDC and the Shareholders
regarding business and legal issues and customary indemnification provisions.
In the Asset Purchase Agreement, NDC and the Shareholders covenanted not to
compete with the Company, as described therein, for a period of 48 months
following the Closing Date and not to disclose Confidential Information (as
defined therein) except as provided therein.
The Company used a portion of the proceeds of the Private Offering to
finance the Acquisition, which was closed on June 23, 1998, concurrently with
the Private Offering. Since the Acquisition, the former business of NDC
has been operated as the National Dynamics Division of the Company. There can
be no assurance that the expected benefits of the Acquisition will be realized.
For additional information regarding the Acquisition and related items,
including the audited and unaudited financial statements of NDC, see the
Prospectus which forms a part of the Registration Statement on Form S-4 filed
by the Company on August 6, 1998 (File no. 333-60759).
13
14
Credit Facility. In connection with the Private Offering, the Company
amended and restated its existing revolving credit facility (as amended and
restated, the "Credit Facility") with Comerica Bank. Borrowings under the
Credit Facility bear interest at variable rates and permit borrowings and
letters of credit totaling $45.0 million.
The obligations of the Company under the Credit Facility are guaranteed
by all existing and future domestic subsidiaries and by Rush Creek LLC (a
holding company whose only asset is the capital stock of the Company), and
borrowings under the Credit Facility are secured by substantially all of the
assets of the Company, other than assets (including real property) of foreign
subsidiaries. Pricing on the Credit Facility is, at the option of the Company,
(i) a base rate equal to the higher of Comerica's prime rate or the Federal
funds rate plus 1.00%, or (ii) a Eurodollar-based rate plus an applicable
margin ranging from 1.00% to 1.75% dependent on the ratio of total debt to
EBITDA. Letters of credit are priced at 1.00% to 1.75% dependent on the ratio
of total debt to EBITDA plus a facing fee. The Company also pays a revolving
credit facility fee of 0.25% to 0.50% dependent on the ratio of total debt to
EBITDA.
The Credit Facility contains certain restrictive covenants that impose
limitations upon, among other things, the ability of the Company and the
guarantors (other than Rush Creek LLC) to incur liens; merge, consolidate or
dispose of assets; make loans and investments; incur indebtedness; engage in
certain transactions with affiliates; incur contingent obligations; enter into
joint ventures; enter into lease agreements; pay dividends and make other
distributions; change its business; and make capital expenditures. The Credit
Facility also contains covenants requiring the Company (a) to maintain certain
financial ratios as follows: (i) a fixed charge coverage ratio; and (ii) a
funded debt to EBITDA ratio; and (b) to maintain a minimum base tangible net
worth.
All extensions of credit under the Credit Facility are subject to
customary documentation and on the continued accuracy of all representations
and warranties as well as the absence of any Default or Event of Default (as
defined in the Credit Facility). The Credit Facility may be refinanced, as
defined in the indenture pursuant to which the Private Notes were issued, from
time to time in accordance with the limits of such indenture.
14
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See attached Exhibit Index.
(b) There were no reports filed on Form 8-K during the quarter for which
this report is filed.
15
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AQUA-CHEM, INC. (Registrant)
Date: August 7, 1998 By: /s/ J. Scott Barton
--------------------
J. Scott Barton
Vice President, Chief Financial Officer
and duly authorized officer
16
17
EXHIBIT INDEX
TO REGISTRATION STATEMENT ON FORM S-4
OF
AQUA-CHEM, INC.
- --------------------------------------------------------------------------------
INCORPORATED
EXHIBIT HEREIN BY FILED
Number DESCRIPTION REFERENCE HEREWITH
2.1 Asset Purchase Agreement dated May Exhibit 2.1 to the Company's
28, 1998 among Aqua-Chem, Inc., Registration Statement on
National Dynamics Corporation, and Form S-4, filed with the
certain shareholders of National Comission on August 6,
Dynamics Corporation 1998 (File No. 333-60759)
3.1 Aqua-Chem, Inc. Certificate of Exhibit 3.1 to the Company's
Incorporation (incorporating amendments) Registration Statement on
Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
3.2 Aqua-Chem, Inc. Bylaws Exhibit 3.2 to the Company's
Registration Statement on
Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
4.1 Indenture of Trust dated June 23, Exhibit 4.1 to the Company's
1998 between Aqua-Chem, Inc. and Registration Statement on
United States Trust Company of New Form S-4, filed with the
York, as Trustee Comission on August 6,
1998 (File No. 333-60759)
4.3 Form of Aqua-Chem, Inc. 11-1/4% (1)
Senior Subordinated Note Due 2008
issued on June 23, 1998
----------------
(1) Included as Exhibit 1 to the Rule 144A/
Regulation S Appendix to the Indenture
of Trust included as Exhibit 4.1 to this
report.
17
18
- --------------------------------------------------------------------------------
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE HEREWITH
4.4 Common Stock Purchase Warrant dated Exhibit 4.4 to the Company's
July 31, 1997 Registration Statement on
Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
10.1 Credit Agreement dated June 23, 1998 Exhibit 10.1 to the Company's
among Aqua-Chem, Inc. and Comerica Registration Statement on
Bank Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
10.2 Registration Rights Agreement dated Exhibit 10.2 to the Company's
June 18, 1998 among Aqua-Chem, Registration Statement on
Inc., Credit Suisse First Boston Form S-4, filed with the
Corporation, and Bear, Stearns & Comission on August 6,
Co. Inc. 1998 (File No. 333-60759)
10.3 Employment Agreement dated July 31, Exhibit 10.3 to the Company's
1997 between Aqua-Chem, Inc. and Registration Statement on
Jeffrey A. Miller, as amended Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
10.4 Employment Agreement dated February Exhibit 10.4 to the Company's
5, 1997 between Aqua-Chem, Inc. Registration Statement on
and Rand E. McNally, as amended Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
10.5 Employment Agreement dated January Exhibit 10.5 to the Company's
20, 1997 between Aqua-Chem, Inc. Registration Statement on
and J. Scott Barton, as amended Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
10.6 Employment Agreement dated January 7, Exhibit 10.6 to the Company's
1997 between Aqua-Chem, Inc. and Registration Statement on
Charles J. Norris, as amended Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
10.7 Employment Agreement dated September 1, Exhibit 10.7 to the Company's
1997 between Aqua-Chem, Inc. and Registration Statement on
Daniel L. Johnson, as amended Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
18
19
- --------------------------------------------------------------------------------
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE HEREWITH
10.8 Interim Management Agreement dated Exhibit 10.8 to the Company's
July 8, 1996 between Aqua-Chem, Inc., Registration Statement on
J. Miller Management, Inc. and Form S-4, filed with the
Jeffery A. Miller Comission on August 6,
1998 (File No. 333-60759)
10.9 Aqua-Chem, Inc. 1997 Stock Option Exhibit 10.9 to the Company's
Plan Amended and Restated Registration Statement on
Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
10.11 Aqua-Chem, Inc. Executive Management Exhibit 10.11 to the Company's
Incentive Plan approved November Registration Statement on
15, 1996 Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
10.12 Aqua-Chem, Inc. 1998 Phantom Stock Plan Exhibit 10.12 to the Company's
Registration Statement on
Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
10.14 Aqua-Chem, Inc. 11 1/4% Senior Subordinated Exhibit 10.14 to the Company's
Notes Due 2008, Purchase Agreement dated Registration Statement on
June 18, 1998 Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
10.15 Consulting Agreement with Verlyn Westra dated Exhibit 10.15 to the Company's
June 19, 1998 Registration Statement on
Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
10.16 Consulting Agreement with Roger Swanson dated Exhibit 10.16 to the Company's
June 19, 1998 Registration Statement on
Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
10.17 Amended and Restated Securities Purchase Exhibit 10.17 to the Company's
Agreement dated December 5, 1997 by and Registration Statement on
among Rush Creek, LLC, A-C Acquisition Corp., Form S-4, filed with the
CB-Kramer Sales and Service, Inc., Whitney Comission on August 6,
Subordinated Debt Fund, LP, and Whitney Equity 1998 (File No. 333-60759)
Partners, LP
10.18 First Amendment and Consent Agreement dated Exhibit 10.18 to the Company's
June 23, 1998, by and among Rush Creek, LLC, Registration Statement on
A-C Acquisition Corp., CB-Kramer Sales and Form S-4, filed with the
Service, Inc., Whitney Subordinated Debt Comission on August 6,
Fund, LP, and Whitney Equity Partners, LP 1998 (File No. 333-60759)
10.19 Letter Agreement with William P. Killian Exhibit 10.19 to the Company's
dated December 17, 1997 Registration Statement on
Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
10.20 Letter Agreement with James W. Hook dated Exhibit 10.20 to the Company's
February 11, 1998 Registration Statement on
Form S-4, filed with the
Comission on August 6,
1998 (File No. 333-60759)
19
20
- --------------------------------------------------------------------------------
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE HEREWITH
27.6 Financial Data Schedule (3 months ended 6/30/98) X
20