1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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
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Commission file number
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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 October 12, 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 nine months ended September 30, 1998
and the two months ended September 30, 1997, the one
month ended July 31, 1997 and the seven months ended
July 31, 1997 4
Consolidated Condensed Balance Sheets -
September 30, 1998 and December 31, 1997 5
Consolidated Condensed Statements of Cash Flows -
Nine months ended September 30, 1998 and the two months
ended September 30, 1997 and the seven months ended
July 31, 1997 6
Notes to Consolidated Condensed Financial
Statements 8
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
Part II: OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 17
Signature Page 18
Exhibit Index 19
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
4
AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS; EXCEPT PER SHARE DATA)
POST-ACQUISITION PRE- POST-ACQUISITION PRE-ACQUISITION
ACQUISITION
Basis of accounting Basis of Basis of accounting Basis of
------------------- -------- ------------------- --------
accounting accounting
---------- ----------
Three Nine
Months Two Months Months Two Months
Ended Ended One Month Ended Ended Seven Months
September September Ended July September September Ended July
30, 1998 30, 1997 31, 1997 30, 1998 30, 1997 31, 1997
---------- ---------- ----------- ---------- --------- ------------
Net sales $66,512 $35,875 16,407 142,734 $35,875 $99,618
Cost of goods sold 51,890 26,129 11,569 107,820 26,129 73,656
---------- ---------- --------- --------- -------- ----------
Gross margin 14,622 9,746 4,838 34,914 9,746 25,962
Costs and expenses:
Selling, general
and administrative 11,732 6,993 5,254 29,178 6,993 23,323
Restructuring charges - - - 4,720 - -
---------- ---------- --------- --------- -------- ----------
11,732 6,993 5,254 33,898 6,993 23,323
---------- ---------- --------- --------- -------- ----------
Operating income (loss) 2,890 2,753 (416) 1,016 2,753 2,639
Other income (expense):
Interest income 112 63 60 321 63 450
Interest expense (3,658) (1,003) (156) (6,662) (1,003) (753)
Other, net 39 34 88 65 34 110
---------- ---------- --------- --------- -------- ----------
(3,507) (906) (8) (6,276) (906) (193)
Income (loss) before
income taxes, minority
interest, and extraordinary
item (617) 1,847 (424) (5,260) 1,847 2,446
Income tax expense
(benefit) (189) 739 (73) (1,637) 739 421
Minority interest in
earnings of consolidated
subsidiary 96 66 35 232 66 171
---------- ---------- --------- --------- -------- ----------
Net income (loss) before
extraordinary item (524) 1,042 (386) (3,855) 1,042 1,854
Extraordinary item, net of
tax benefit of $840 - - - 1,260 - -
Net income (loss) $(524) $1,042 (386) $(5,115) $1,042 $1,854
---------- ---------- --------- --------- -------- ----------
Preferred stock dividends (103) (89) -- (413) (89) --
---------- ---------- --------- --------- -------- ----------
Net income (loss)
applicable to common $(627) $953 $(386) $(5,528) $953 $1,854
====== ==== ====== ======= ==== ======
Other comprehensive
income (loss)
Foreign currency
translation adjustment (208) 472 (34) (292) 472 (404)
Comprehensive income
(loss) $(732) $ 1,514 $(420) $(5,407) $1,514 $1,611
PER SHARE DATA:
Basic net income (loss) per share
of common stock $(.63) $.95 N.A. $(5.53) $.95 N.A.
Diluted net income (loss) per share
of common stock $(.63) $.81 N.A. $(5.53) $.81 N.A.
The accompanying notes to consolidated financial statements are an integral
part of these statements.
5
AQUA-CHEM, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS; EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $6,114 $11,936
Accounts receivable, less allowances of $2,370
at September 30, 1998 and $638 at December 31, 1997 47,609 33,332
Revenues in excess of billings 4,691 5,068
Inventories 27,406 20,814
Deferred income taxes 3,672 4,237
Prepaid expenses and other current assets 6,592 1,093
-------- --------
Total current assets 96,084 76,480
Property, plant and equipment - net 37,778 31,555
Intangible assets, less accumulated amortization of
$653 at September 30, 1998 and $273 at December 31, 1997 38,859 10,174
Deferred income taxes 1,640 2,086
Other assets 7,162 4,366
-------- --------
TOTAL ASSETS $181,523 $124,661
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on long-term debt $- $1,055
Accounts payable
Trade 10,652 10,685
Other 3,263 5,324
Billings in excess of revenues 5,361 5,654
Compensation and profit sharing 3,214 5,318
Accrued litigation settlements 1,425 3,200
Accrued expenses 25,042 17,624
-------- --------
Total current liabilities 48,957 48,860
Long-term debt 125,000 58,636
Other long-term liabilities 5,088 6,006
-------- --------
Total other liabilities 130,088 64,642
Minority interest 597 589
Preferred stock with mandatory redemption provisions 4,795 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 (2,778) 3,049
Accumulated other comprehensive income (236) 56
-------- --------
Total stockholders' equity (deficit) (2,914) 3,205
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $181,523 $124,661
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
POST-ACQUISITION PRE-ACQUISITION
BASIS OF ACCOUNTING BASIS OF
ACCOUNTING
------------------------------ ---------------
NINE MONTHS TWO MONTHS SEVEN MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, JULY 31,
1998 1997 1997
Cash flows from operating activities:
Net income (loss) $(5,115) $1,044 $1,854
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,399 804 1,690
Deferred tax expense 1,239 --
Minority interest in earnings of consolidated
subsidiary 232 97 171
Extraordinary item, net of tax benefit 1,260
Restructuring charges 4,720
Increase (decrease) in cash due to changes in:
Accounts receivable (1,907) (6,219) 5,166
Revenues in excess of billings 377 2,666 (2,881)
Inventories 3,649 2,106 (1,948)
Prepaid expenses and other current assets (1,282) (66) (623)
Accounts payable-- trade (3,816) (2,614) 1,969
Accounts payable-- other (2,662) 228 (1,743)
Billings in excess of revenues (4,711) 157 2,250
Accrued expenses and other current liabilities (6,229) 3,900 (999)
Other, net (1,987) (1,688) (49)
--------- -------- ---------
Total adjustments (7,718) (629) 3,003
--------- -------- ---------
Net cash provided by (used in) operating activities (12,833) 415 4,857
Cash flows from investing activities:
Management Buy-Out of Aqua-Chem, Inc. -- (52,102) --
Purchase of National Dynamics Corporation (47,900) -- --
Proceeds from sales of property, plant and
equipment and other assets 55 -- 73
Additions to property, plant and equipment (1,772) (641) (2,195)
Additions to intangibles -- -- (270)
Proceeds from notes receivable -- 51 1,511
--------- -------- ---------
Net cash used in investing activities (49,617) (52,692) (881)
Cash flows from financing activities:
Issuance of Notes 125,000 -- --
Proceeds from revolving credit agreement 3,000 -- --
Proceeds from debt -- 65,573 118
Principal payments on debt (63,063) (25,020) (112)
Issuance of common stock -- 100 --
Issuance of warrants -- 433 --
Redemption of preferred stock and payment of
dividends (3,282) -- --
Issuance of preferred stock -- 2,655 --
7
Deferred financing costs (5,027) (2,030) --
-------- -------- ---------
Net cash provided by financing activities 56,628 41,711 6
Net increase (decrease) in cash and cash
equivalents (5,822) (10,566) 3,982
Cash and cash equivalents at beginning of period 11,936 12,609 8,627
-------- -------- ---------
Cash and cash equivalents at end of period $ 6,114 $ 2,043 $ 12,609
======== ======== =========
Cash paid during the period for:
Interest $ 2,909 $ 548 $ 658
Taxes $ 2,039 $ 55 $ 11
Details of Acquisition of National Dynamics
Corporation in 1998 and Management
Buy-Out in 1997 :
Fair value of assets acquired $34,659 $116,058
Goodwill 27,932 9,689
Liabilities assumed (14,691) (69,196)
Issuance of Series A Cumulative Preferred Stock -- (4,449)
-------- --------
Cash paid for assets $47,900 $ 52,102
======== =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
8
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 September 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 does
not include contingent consideration to be paid to the sellers based on
cumulative earnings of certain operations of Aqua-Chem 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 condensed financial statements for the seven months
ended July 31, 1997 were prepared using OLDCO's historical basis of
accounting (the "pre-acquisition basis of accounting"). The consolidated
condensed financial statements for the two months ended September 30,
1997 and for the nine months ended September 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:
September 30, December 31,
1998 1997
------------- ------------
Raw materials and work-in-process $21,934 $16,963
Finished goods 5,472 3,851
------- -------
Total inventories $27,406 $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. The holders of the Series B Preferred Stock elected not to
require that the Series B Preferred be redeemed in connection with the
private offering.
In conjunction with the issuance of the notes and the acquisition of
NDC, Aqua-Chem entered into a 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 terminate June 23, 2003. The facility is secured by the assets of
the Company. At September 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
9
agreement. As of September 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
nine months ended September 30, 1998. Work currently performed at the
facility is in the process of being 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
from the date of approval. The Greenville facility has fixed assets with
a net book value of $3,800, which includes $1,828 of machinery and
equipment, $1,846 in lease and leasehold improvements and $126 in
furniture and fixtures. The Company intends to transfer some of the
fixed assets to other facilities and will sell or dispose of the
remaining assets by the closure date. The write down associated with the
assets to be sold or disposed of results in a restructuring charge of
$2,921. The remaining charge includes $100 to write down the value of
the inventory, $1,460 of employee termination benefits and $239 of other
costs related to post closure upkeep and maintenance of the facility.
(8) On June 23, 1998, Aqua-Chem acquired substantially all the assets of
National Dynamics Corporation for $62,591, which includes $14,691 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 $27,932 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 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.
Nine Months Nine Months
Ended Ended
September 30, 1998 September 30, 1997
------------------ ------------------
Net sales $164,199 $182,493
Net income (loss) applicable to common shares (5,717) 2,129
Earnings (loss) per common share (basic) $ (5.72) $ 2.13
Earnings (loss) per common share (diluted) $ (5.72) $ 1.81
(10) Effective December 31, 1997, 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 which includes foreign currency
translation adjustments accounted for under SFAS No. 52. 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. Accumulated other
comprehensive income at September 30, 1998 and December 31, 1997 is
comprised of only foreign currency translation adjustments. Prior years
have been restated to conform to the SFAS No. 130 requirements.
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
10
December 15, 1998. Aqua-Chem's accounting for costs of computer
software developed or obtained 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 "1997 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 September 30, 1998,
4,000 options have been granted and are outstanding under the 1997
Plan.
On August 1, 1998, Aqua-Chem adopted the Aqua-Chem, Inc. 1998 Stock
Option Plan (the "1998 Plan"), which provides for the granting to key
advisers, consultants and employees options to purchase an aggregate
of 61,919 shares of Aqua-Chem common stock at a purchase price of not
less than $3.75 nor greater than the market price as determined by the
Board of Directors. Options vest primarily in accordance with vesting
provisions contained in written agreement with the optionee. As of
September 30, 1998, 15,740.40 options have been granted and are
outstanding under the 1998 Plan.
Under separate agreements from the 1997 Plan and the 1998 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 September 30, 1998, no
options were exercised.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF AQUA-CHEM
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, certain members of management and a private
investor 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 comparable in all material respects since those financial statements
report the financial position, results of operations and cash flows of
two separate entities.
RESULTS OF OPERATIONS
Composition of net sales for Cleaver-Brooks, Water Technologies,
and National Dynamics' for the periods indicated is listed below.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Net sales:
Cleaver-Brooks $42.7 $40.3 $110.6 $ 98.6
Water Technologies 9.6 8.0 24.9 25.9
National Dynamics - 18.2 - 8.2
----- ----- ------ ------
Total $52.3 $66.5 $135.5 $142.7
===== ===== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net Sales. Net sales for the three month period ended September
30, 1998 increased $14.2 million to $66.5 million from $52.3 million.
$18.2 million of the increase relates to the acquisition of National
Dynamics as of June 1998. Net sales of Cleaver-Brooks declined $2.4
million (5.6%) of which approximately 52% 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 first two
quarters of 1998. Water Technologies sales decreased $1.5 million (16.0%)
during the same time period primarily due to soft orders in the navy
sector.
Gross Margin. Gross margin remained flat at $14.6 million as
compared to 1997. The gross margin percentage decreased 5.9% to 22.0%
primarily due to the inclusion of National Dynamics operations for the
first time in 1998. Margins at National Dynamics reflected an inventory
write-up of $1.4 million as a result of the acquisition on June 23, 1998.
Additionally, after adjustment for the inventory write-up, National
Dynamics' gross margin is 19.2% which is substantially less than
Aqua-Chem's normal margins without National Dynamics.
Selling, General and Administrative Expenses. Selling, general
and administrative expense increased $0.5 million (4.9%) to $11.7
million. Commissions to independent representatives and to internal sales
personnel were $0.1 million lower in the current period due to the
reduced sales volume while post retiree health care costs increased $0.2
million as a result of an adjustment in 1997 for the recognition of the
transition obligation at the time of the Management Buy Out. The
acquisition of National Dynamics in June 1998 increased selling, general
and administrative expenses $1.4 million which is offset by $1.3 million
of certain non-recurring expenses related to the Management Buy-Out in
1997.
Operating Income. For the reasons set forth above, operating
income decreased $0.5 million to $2.9 million.
Other Income (Expense). Other income (expense) for the three
months ended September 30, 1998 was an expense of $3.5 million as
compared to an expense of $0.9 million for the same period in 1997,
resulting in a difference of $2.6 million (283.7%). This difference is
primarily due to increased debt issued in conjunction with the Management
Buy-Out and the Private Offering.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net Sales. Net sales for the nine month period ended September
30, 1998 increased $7.2 million to $142.7 million from $135.5 million.
This increase was primarily attributable to the acquisition of National
Dynamics Corporation which occurred on June 23, 1998. The National
Dynamics Division ("National Dynamics") contributed $18.2 million in net
sales since the date of acquisition. Net sales of Cleaver-Brooks declined
$12.0 million (10.8%). Approximately 43.3% 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 $1.0 million (4.0%) during the same time period primarily due
to a large land-based water desalination project.
Gross Margin. Gross margin declined $0.8 million (2.2%) to $34.9
million from $35.7 million for the same period in 1997. The gross margin
percentage decreased 1.9% to 24.5% primarily due to the inclusion of
National Dynamics operations for the first time in 1998. Margins at
National Dynamics reflected an inventory write-up of $1.4 million as a
result of the acquisition on June 23, 1998. Additionally, after
adjustment for the inventory write-up, National Dynamics' gross margin is
19.2% which is substantially less than Aqua-Chem's normal margins without
National Dynamics. Also, depreciation expense was higher in 1998 as a
result of the step-up in basis of the fixed assets in connection with the
Management Buy-Out on July 31, 1997.
Selling, General and Administrative Expenses. Selling, general
and administrative expense
12
declined $1.4 million (4.5%) to $29.2 million. Commissions to independent
representatives and to internal sales personnel were $0.8 million lower
in the current period due to the reduced sales volume. The acquisition of
National Dynamics in June 1998 increased selling, general and
administrative expenses $1.4 million which is offset by $1.3 million of
certain non-recurring expenses related to the Management Buy-Out in 1997.
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 $4.2 million to $1.0 million. Excluding the $4.7 million
restructuring charge, operating income increased $0.5 million to $5.7
million compared to $5.2 million for the nine months ended September 30,
1997. The inclusion of National Dynamic's operations contributed $0.7
million to operating income.
Other Income (Expense). Other income (expense) for the nine
months ended September 30, 1998 was an expense of $6.3 million as
compared to an expense of $1.1 million for the same period in 1997,
resulting in a difference of $5.1 million (471.3%) $4.9 million of this
difference is due to increased debt issued in conjunction with the
Management Buy-Out and the Private Offering. Additionally, interest
income declined $0.2 million due to the use of cash-on-hand in
conjunction with the Management Buy-Out.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $12.8 million for the nine
months ended September 30, 1998 compared to cash provided by operating
activities of $5.3 million for the same period in 1997. The decrease of
$18.1 million is due primarily to $1.7 million of additional interest
expense due to the increased debt levels resulting from the issuance of
$125 million in notes and the subsequent acquisition of National
Dynamics, $3.0 million decrease in accounts payable, and a decrease in
accrued expenses of $10.1 million which includes $2.7 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 $49.6 million for the nine
months ended September 30,
13
1998 compared to a net use of $53.6 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 $1.8 million. The prior
year period included $52.1 million for the Management Buy-Out of the
Company and $2.8 million of capital expenditures.
Cash provided by financing activities was $56.6 million for the
nine months ended September 30, 1998 compared to $41.7 million for the
same period in 1997. The current period included $125.0 million of
proceeds from the issuance of notes and advances under the revolving
credit agreement and repayments of senior and subordinated debt and
preferred stock of $66.3 million in conjunction with the 11 1/4% notes
offering. The increase was also offset by deferred financing costs of
$5.1 million related to the issuance of the notes in the current period.
The prior year period included $68.2 million of proceeds from senior and
subordinated debt and the issuance of preferred stock in conjunction with
the Management Buy-Out. This increase was partially offset by the
repayment of debt of $25.0 million and deferred financing costs of $2.0
million related to the Management Buy-Out.
Management believes that cash generated from operating
activities together with borrowing availability under the New Credit
Facility will be adequate to cover the Company's working capital, debt
service and capital expenditure requirements on a short and long term
basis. 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.
Under the New Credit Facility the Company is required to
maintain an adjusted consolidated tangible net worth (consolidated
tangible net worth plus an amount equal to the aggregate outstanding
principle amount of subordinated debt) of not less than $70 million plus
(on a cumulative basis) for each fiscal quarter ending on or after June
23, 1998, the sum of (a) 50% of consolidated net income if positive and
100% of the cash proceeds of the issuance of any equity interest of the
Company during such fiscal quarter. In addition, the New Credit Facility
requires the Company to maintain a fixed charge coverage ratio of not
less than 1.25 to 1 and a senior funded debt to consolidated EBITDA ratio
of not more than 3.5 to 1.
The Indenture prohibits the Company from incurring additional
Indebtedness unless, on the date of such incurrence and after giving
effect thereto, the Consolidated Coverage Ratio exceeds 2.0 to 1 if such
Indebtedness is incurred prior to January 1, 2000, 2.25 to 1 if such
Indebtedness is incurred on or after January 1, 2000 and prior to January
1, 2001 or 2.5 to 1 thereafter (the "Coverage Limitation"). As of
September 30, 1998, the Company could not have incurred any additional
Indebtedness under the Coverage Limitation.
The Indenture further provides that, in addition to the
additional indebtedness which the Company may incur under the Coverage
Limitation, the Company may incur additional Indebtedness of certain
types up to certain limitations applicable to each type (the "Basket
Limitations"). The Basket Limitations are described under "Description of
the Notes - Certain Covenants - Limitation on Indebtedness." The amount
of additional Indebtedness which the Company could have incurred as of
September 30, 1998 under certain of the Basket Limitations is impossible
to quantify as of the date of this Prospectus because those Basket
Limitations relate to transactions or other events or conditions that had
not occurred or did not exist as of such date, and the applicable dollar
limitations thereunder depend upon the nature of such events or the
nature and terms of such transactions. Certain of the Basket Limitations
relate to intercompany transactions and guarantees, which would not
increase the aggregate amount of additional Indebtedness that may be
incurred. However, the Company could have incurred approximately $77.3
million of additional Indebtedness under the remaining Basket Limitations
on September 30, 1998, including the following: (a) Indebtedness pursuant
to the New Credit Facility of up to the greater of (i) $45.0 million or
(ii) the sum of 50% of the book value of inventory and 85% of the book
value of accounts receivable as of such date (however, the limitation
under clause (ii) would have been approximately $54.2 million at
September 30, 1998; this limitation would not have affected the maximum
amount that could have been borrowed under the New Credit Facility as of
September 30, 1998 because the maximum amount of the New Credit Facility
on that date was $45.0 million); (b) Indebtedness by foreign subsidiaries
not exceeding the sum of (i) 60% of
14
the book value of inventory and (ii) 85% of the book value of accounts
receivable; (c) purchase money Indebtedness not exceeding the greater of
(i) $20 million or (ii) 5% of the consolidated net worth of the Company;
and (d) an additional $10 million without regard to the nature or purpose
of such Indebtedness.
YEAR 2000
Many computer software applications, hardware and equipment and embedded
chip systems identify dates using only the last two digits of the year. These
products may be unable to distinguish between dates in the year 2000 and dates
in the year 1900. That inability (referred to as the "Year 2000 Issue"), if not
addressed, could cause applications, equipment or systems to fail or provide
incorrect information after December 31, 1999, or when using dates after
December 31, 1999. The Company uses a number of computer software programs,
operating systems, and types of equipment with computer chips in its internal
operations, including applications used in its financial business systems, order
entry and manufacturing systems, manufacturing processes and administrative
functions. The Company also manufactures products that incorporate components
purchased from other manufacturers that contain computer chips. To the extent
that the above listed items contain source code or computer chips that are
unable to interpret appropriately the upcoming calendar year 2000,
distinguishing it from the year 1900, some level of modification or possible
replacement will be necessary.
STATE OF READINESS - The Company has assessed and continues to assess the
impact of the Year 2000 Issue on its operations. The Company's assessments have
focused on the three major elements of the Year 2000 Issue: IT systems; Non-IT
systems; and third party relationships.
IT SYSTEMS - Since 1996 the Company has been executing an IT system
upgrade plan, which includes leasing a new mainframe computer at an annual cost
of $0.6 million, and the expansion of and improvements to, its networks and
capital spending on hardware totaling $0.2 million. Additionally, the Company
has spent $1.5 million on new financial systems software, of which $1.3 million
has been capitalized. These systems are replacing software that has been in use
since the early 1980's. The IT system upgrade plan was not undertaken in
response to the Year 2000 Issue, nor was it accelerated due to the Year 2000
Issue.
Of these new financial systems, the general ledger and reporting packages have
been implemented, while the accounts receivable and accounts payable packages
are in the installation phase with a March 1999 targeted completion date.
Management believes these projects are currently on schedule to meet this target
date. The current human resource/payroll system has been upgraded to address the
Year 2000 Issue.
The Company has received written assurances from the manufacturers that the
following hardware and software are Year 2000 compliant as a result of the IT
upgrade plan: mainframe hardware; mainframe systems software; mainframe
operating system; LAN/WAN hardware; LAN/WAN operating systems; LAN/WAN system
software; personal computers and related software; and financial systems
software.
The Company's order entry and manufacturing systems are in the process of being
upgraded to address the Year 2000 Issue. The databases for all these systems
have been expanded and regenerated. Management believes the application programs
for these systems are on schedule to be converted by the end of October, 1998
with testing to occur until production turnover in March, 1999. Other non-Year
2000 IT efforts have not been materially delayed or impacted by Year 2000
initiatives.
NON-IT SYSTEMS - The Company has reviewed all of its communication
systems (phone and data transmission systems), fax machines, photocopiers,
postage machines, elevators, HVAC systems, security systems and shop floor
equipment with the manufacturers or vendors of those systems and equipment and
has received verbal assurances that these systems are Year 2000 compliant.
Written certifications of Year 2000 compliance for these systems has been
requested from the manufacturers or vendors. The Company is currently reviewing
the responses it has received to date and has sent a follow up letter to any
manufacturers or vendors who have not responded.
THIRD PARTY RELATIONSHIPS - All of the Company's suppliers of raw
materials, components, and other goods and services have been sent a
questionnaire regarding their Year 2000 compliance and their plans to be Year
2000 compliant. Over half of the suppliers contacted have responded. A follow up
letter has been sent to those suppliers who have yet to respond. For those
remaining suppliers who do not respond to this questionnaire, or who do not have
a Year 2000 compliance plan in place, the Company has identified alternative
suppliers and will use an alternative supplier who has certified that it is Year
2000 compliant. For all suppliers of equipment containing computer chips which
are incorporated into the Company's products, the Company has received written
assurance that this equipment is Year 2000 compliant.
15
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUE - Costs incurred by the
Company to date to address the Year 2000 Issue, excluding the IT system upgrade
costs, are approximately $0.1 million. The Company estimates total costs
remaining to be incurred prior to the year 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. These costs will be funded from operating cash flows.
RISKS AND CONTINGENCY PLANS - Although the Company believes its efforts
will adequately address its Year 2000 Issue internally, it is possible that the
Company will be adversely affected by problems encountered by its vendors or
suppliers. Despite any vendor's or supplier's certification regarding Year 2000
compliance, there can be no assurance that the vendor's or supplier's ability to
provide goods and services will not be adversely affected by the Year 2000
Issue. The most likely worst case scenario would be that a failure by the
Company or one or more of its vendors or suppliers to adequately and timely
address the Year 2000 Issue, interrupts manufacturing of the Company's products
for a undeterminable period of time. The Company has identified and will
continue to identify alternative vendors should a vendor's ability to meet the
Company's raw material and supply requirements be impacted by the Year 2000
Issue. While the Company believes it can minimize the impact of such
non-compliance through the use of these alternative vendors, a disruption in
production could have a material adverse impact on the Company. The Company does
not currently expect to develop a formal contingency plan.
GENERAL
The costs of the Company's efforts to address the Year 2000 Issue and the
dates on which the Company believes it will complete such efforts are based upon
management's best estimates, which were derived using numerous assumptions
regarding future events. There can be no assurance that these estimates will
prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that could cause such material
differences include, but are not limited to, the Company's ability to identify,
assess, remediate and test relevant computer codes and embedded technology, the
Company's reliance on third-party assurances and the variability of definitions
of " Year 2000 compliance" which may be used by such third parties, and similar
uncertainties.
16
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.
17
PART II
OTHER INFORMATION
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.
18
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: December 23, 1998 By: /s/ Jeffrey A. Miller
----------------------
Jeffrey A. Miller
Chairman, President and
Chief Executive Officer
19
EXHIBIT INDEX
TO QUARTERLY REPORT ON FORM 10-Q
OF
AQUA-CHEM, INC.
- --------------------------------------------------------------------------------
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE HEREWITH
10.23 Employment Agreement dated Exhibit 10.23 to the Company's
August 13, 1998 between Amendment No. 2 to Registration
Aqua-Chem, Inc. and Daniel Statement on Form S-4, filed
B. Teich with the Commission on October
28, 1998 (File No. 333-60759)
10.24 Aqua-Chem, Inc. 1998 Stock Exhibit 10.24 to the Company's
Option Plan Amendment No. 2 to Registration
Statement on Form S-4, filed
with the Commission on
October 28, 1998 (File No. 333-
60759)
27.6 Financial Data Schedule X
(3 months ended 6/30/98)