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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, 1999
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 [X] No [ ]
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 13, 1999
- -------------------------------- -------------------------------------
Common Stock, $.01 par value 1,000,000
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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 Statement of Operations -
Three months ended June 30, 1999 and June 30, 1998 4
Consolidated Condensed Balance Sheet -
June 30, 1999 and March 31, 1999 5
Consolidated Condensed Statement of Cash Flows -
Three months ended June 30, 1999 and June 30, 1998 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 6 - Exhibits and Reports on Form 8-K 16
Signature Page 17
Exhibit Index 18
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
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AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE THREE
MONTHS MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1998
-------- --------
Net sales $ 49,641 $ 39,416
Cost of goods sold 39,050 28,408
-------- --------
Gross margin 10,591 11,008
Costs and expenses:
Selling, general and administrative 9,333 8,536
Restructuring charges 240 4,720
-------- --------
9,573 13,256
-------- --------
Operating income (loss) 1,018 (2,248)
Other income (expense):
Interest income 53 61
Interest expense (3,771) (1,541)
Other, net (115) 95
-------- --------
(3,833) (1,385)
Loss before income taxes, minority
interest, and extraordinary item (2,815) (3,633)
Income tax benefit (1,038) (1,111)
Minority interest in earnings of
consolidated subsidiary 49 64
-------- --------
Net loss before extraordinary item (1,826) (2,586)
Extraordinary item, net of tax
benefit of $840 -- 1,260
-------- --------
Net loss $ (1,826) $ (3,846)
Preferred stock dividends (103) (155)
-------- --------
Net loss applicable to common $ (1,929) $ (4,001)
======== ========
PER SHARE DATA:
Basic net loss per share of common
stock $ (1.93) $ (4.00)
Diluted net loss per share of
common stock $ (1.93) $ (4.00)
The accompanying notes to the consolidated condensed financial
statements are an integral part of this statement.
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AQUA-CHEM, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
JUNE 30, MARCH 31,
1999 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,169 $ 5,498
Accounts receivable, less allowances of $894
at June 30, 1999 and $848 at March 31, 1999 38,816 39,432
Revenues in excess of billings 11,069 9,754
Inventories 23,589 25,929
Deferred income taxes 6,438 6,438
Prepaid expenses and other current assets 6,292 5,788
--------- ---------
Total current assets 87,373 92,839
Property, plant and equipment - net 35,750 36,290
Intangible assets, less accumulated amortization of
$1,643 at June 30, 1999 and $1,334 at March 31, 1999 37,510 37,745
Deferred income taxes 3,304 3,304
Other assets 7,984 8,053
--------- ---------
TOTAL ASSETS $ 171,921 $ 178,231
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable
Trade 10,638 16,797
Other 4,951 4,465
Billings in excess of revenues 4,722 4,580
Compensation and profit sharing 4,455 4,500
Accrued restructuring costs 1,750 2,531
Accrued interest 7,097 3,516
Accrued litigation settlements -- 375
Other accrued expenses 11,767 12,884
--------- ---------
Total current liabilities 45,380 49,648
Long-term debt 125,000 125,000
Other long-term liabilities 5,030 5,078
--------- ---------
Total other liabilities 130,030 130,078
Minority interest in a consolidated subsidiary 535 486
Preferred stock with mandatory redemption provisions 4,997 4,944
Stockholders' equity:
Common stock, $.01 par value. Authorized
2,000,000 shares; issued and outstanding
1,000,000 shares at June 30, 1999 and March 31, 1999 10 10
Additional paid-in capital 90 90
Retained earnings (deficit) (8,979) (7,050)
Accumulated other comprehensive income (loss) (142) 25
--------- ---------
Total stockholders' equity (deficit) (9,021) (6,925)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 171,921 $ 178,231
========= =========
The accompanying notes to the consolidated condensed financial
statements are an integral part of this statement.
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AQUA-CHEM, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1998
------------ ------------
Cash flows from operating activities:
Net loss $ (1,826) $ (3,846)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,517 1,197
Deferred tax expense -- --
Minority interest in earnings of consolidated
subsidiary 49 64
Extraordinary item, net of tax benefit -- 1,260
Restructuring charges, net of cash expended of $1,021
and $0, respectively (781) 4,720
Increase (decrease) in cash due to changes in:
Accounts receivable 616 (1,832)
Revenues in excess of billings (1,315) 1,806
Inventories 1,614 (499)
Prepaid expenses and other current assets (504) 1
Accounts payable--trade (6,159) (3,615)
Accounts payable--other 486 1,730
Billings in excess of revenues 142 (1,018)
Accrued expenses and other current liabilities 2,044 (3,149)
Other, net (208) (605)
------------ ------------
Total adjustments (2,499) 60
------------ ------------
Net cash used in operating activities (4,325) (3,786)
Cash flows from investing activities:
Purchase of National Dynamics Corporation -- (47,900)
Proceeds from sales of property, plant and
equipment 1,192 --
Additions to property, plant and equipment (1,166) (439)
------------ ------------
Net cash provided by (used in) investing activities 26 (48,339)
Cash flows from financing activities:
Issuance of Notes -- 125,000
Proceeds from revolving credit agreement -- 3,000
Net principal payments on debt -- (63,012)
Redemption of Series A Preferred Stock -- (3,269)
Deferred financing costs -- (5,050)
Dividends paid (30) --
------------ ------------
Net cash provided by (used in) financing activities (30) 56,669
Net increase (decrease) in cash and cash
equivalents (4,329) 4,544
Cash and cash equivalents at beginning of period 5,498 4,756
------------ ------------
Cash and cash equivalents at end of period $ 1,169 $ 9,300
============ ============
Cash paid during the period for:
Interest $ -- $ 1,482
Taxes 22 208
Details of Acquisition of National Dynamics
Corporation in 1998:
Fair value of assets acquired $ 38,487
Goodwill 26,751
Liabilities assumed (17,338)
------------
Cash paid for assets $ 47,900
============
The accompanying notes to the consolidated condensed financial
statements are an integral part of this statement.
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AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT AS NOTED)
(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, 1999, 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 March 31, 1999 and December 31,
1997.
(3) Inventories consist of the following:
JUNE 30, MARCH 31,
1999 1999
--------- ---------
Raw materials and work-in-process $ 19,046 $ 20,859
Finished goods 4,543 5,070
--------- ---------
Total inventories $ 23,589 $ 25,929
========= =========
(4) 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 (6)),
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 June 30, 1999
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, 1999, the Company
was in compliance with these covenants.
(5) On June 25, 1998 the Board of Directors approved a plan of closure for the
Greenville, Mississippi facility ("1998 Plan") and the agreement reached
with the labor union representing the facility's production workers. As a
result, the Company recorded a restructuring charge of $4,720 to operations
in June 1998. The work performed at the facility has been transferred to
other Company facilities and outsourced. The plant closed in June 1999
resulting in the elimination of 149 positions. The Company transferred some
of the fixed assets to other facilities and will sell or dispose of the
remaining assets. Approximately $2,900 of the restructuring charge was for
the write down of assets representing the estimated impairment of assets at
the Greenville facility as a direct result of the closing of this facility.
The valuation adjustment to reflect that impairment was based upon the
estimated fair value of the
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AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
assets at the date of commitment as compared to their carrying values. A
charge of $955 is for employee termination payments representing the
employee cash severance costs to reduce personnel as a result of the
closure of the Greenville facility. These termination payments include the
cost of severance and contractual benefits in accordance with collective
bargaining arrangements and Company policy. The remaining charge of $865
includes facility exit costs, such as employee costs associated with the
plant closure that are incurring after operations have ceased, and the
write-off of other plant-related assets not included in property, plant,
and equipment.
An analysis of the 1998 Plan is summarized in the table below:
BALANCE AT BALANCE AT
1998 RESERVES MARCH 31, RESERVES JUNE 30,
PLAN UTILIZED 1999 UTILIZED 1999
------ -------- ---------- -------- ----------
Writedown of property, plant and
equipment $2,900 $ (2,900) $ -- $ -- $ --
Employee termination payments 955 (129) 826 (334) 492
Costs related to closing the existing
facility 865 -- 865 (277) 588
------ -------- ---------- -------- ----------
Total Restructuring $4,720 $ (3,029) $ 1,691 $ (611) $ 1,080
====== ======== ========= ======== ==========
During the three months ended June 30, 1999 the Company also recognized
$313 of relocation charges which could not be accrued as part of the 1998
Plan. The facility was closed in June 1999, as scheduled.
In January 1999, Aqua-Chem recognized a restructuring charge of $1,161
("1999 Plan"). The charge for the 1999 Plan consists of employee
termination payments associated with the termination of 35 personnel. These
termination payments include the cost of severance and outplacement
services. As of March 31, 1999, the Company had made payments of $321
against this reserve. During the three months ended June 30, 1999 the
Company had made payments of $320 against this reserve leaving a balance of
$520.
In April 1999, Aqua-Chem recognized a restructuring charge of $240 ("2000
Plan"). The charge for the 2000 Plan consists of employee termination
payments associated with the termination of 23 personnel. These termination
payments include the cost of severance and outplacement services. As of
June 30, 1999, the Company had made payments of $90 against this reserve.
(6) On June 23, 1998, Aqua-Chem acquired substantially all the assets of
National Dynamics Corporation ("NDC") for $65,838, which includes $17,338
of liabilities assumed and now conducts NDC's former operations through its
National Dynamics Division ("National Dynamics"). The acquisition was
accounted for using the purchase method of accounting. The total purchase
cost was allocated first to identified tangible assets and liabilities
based upon their respective fair values, with the remainder of $26,751
being allocated to goodwill, which will be amortized on a straight-line
basis over 40 years.
(7) The following information presents unaudited pro forma condensed
consolidated statements of operations assuming the acquisition of NDC by
Aqua-Chem had occurred as of April 1, 1998. Such information includes
adjustments to reflect additional interest expense, depreciation expense
and amortization of goodwill and other intangibles.
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AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
Net sales $ 49,641 $ 49,044
Loss before extraordinary item (1,826) (3,529)
Net loss applicable to common shares (1,929) (4,944)
Loss per common share (basic) (1.93) (4.94)
Loss per common share (diluted) (1.93) (4.94)
(8) In 1999, Aqua-Chem adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". Aqua-Chem's reportable business
segments are:
Boiler: consists of packaged firetube, commercial and industrial
watertube boilers, burners and aftermarket parts.
Water Technologies: consists of water purification and desalination
systems.
Other: includes the operations of the corporate office, interest
expense on Aqua-Chem's current and long-term debt obligations, interest
income, and any eliminating entries.
Aqua-Chem's reportable segments are strategic business units that offer
different products and services. They are managed differently as each
business requires different technology and marketing strategies. The Boiler
segment includes both the operating segments of Cleaver-Brooks and National
Dynamics due to their similarity in products and services, production
processes, type of customer, and the methods used to distribute their
products.
THREE MONTHS THREE MONTHS
ENDED ENDED
SEGMENT JUNE 30, 1999 JUNE 30, 1998
------- ------------- -------------
Net sales:
Boiler $ 40,050 $ 30,216
Water Technologies 9,591 9,200
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Total $ 49,641 $ 39,416
============= =============
Income (loss) before income taxes,
minority interest and extraordinary
item:
Boiler $ 1,386 $ (2,582)
Water Technologies 2 514
Other (4,203) (1,565)
------------- -------------
Total $ (2,815) $ (3,633)
============= =============
(9) In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. This statement must be adopted no later than April 1, 2001,
although earlier application is permitted. The Company is currently
evaluating the impact of adopting SFAS No. 133 but does not expect the
impact to be material to its financial position or results of operations.
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AQUA-CHEM, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
The Company adopted SOP No. 98-5, "Reporting on the Costs of Start-Up
Activities," effective April 1, 1999. The adoption of this statement did
not have a material effect on the Company's financial position or results
of operations.
(10) Accumulated other comprehensive income consists solely of cumulative
translation adjustments as of June 30, 1999 and March 31, 1999, as follows:
JUNE 30, MARCH 31,
1999 1999
-------- ---------
Cumulative translation adjustment $ (142) $ 25
======== =========
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.
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
JUNE 30,
1998 1999
------ ------
(DOLLARS IN MILLIONS)
Net sales:
Cleaver-Brooks $ 30.2 $ 27.6
Water Technologies 9.2 9.6
National Dynamics -- 12.4
------ ------
Total $ 39.4 $ 49.6
====== ======
Gross Margin:
Cleaver-Brooks $ 8.6 $ 6.0
Water Technologies 2.4 2.2
National Dynamics -- 2.4
------ ------
Total $ 11.0 $ 10.6
====== ======
Selling, general and administrative
expenses $ 8.5 $ 9.3
Restructuring charges 4.7 0.2
------ ------
Operating income (loss) $ (2.2) $ 1.0
====== ======
Other income (expense) $ (1.4) $ (3.8)
====== ======
Income tax benefit $ (1.1) $ (1.0)
====== ======
Minority interest in earnings of
Consolidated subsidiary $ 0.1 $ --
====== ======
Extraordinary Item $ 1.2 $ --
====== ======
Net loss $ (3.8) $ (1.8)
====== ======
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THREE MONTHS ENDED June 30, 1999 COMPARED TO THREE MONTHS ENDED June 30, 1998
Net Sales. Net sales for the three month period ended June 30, 1999
increased $10.2 million to $49.6 million from $39.4 million for the comparable
period of the prior fiscal year. The increase is due primarily to the impact of
the National Dynamics acquisition. Net sales of Cleaver-Brooks declined $2.6
million (8.6%). The decline is primarily due to continued market softness in the
firetube boiler premium product line. Water Technologies sales increased $0.4
million (4.3%) during the same period.
Gross Margin. Gross margin declined $0.4 million (3.8%) to $10.6
million from $11.0 million. The gross margin percentage decreased 6.6 percentage
points to 21.3%. Cleaver-Brooks' gross margin percentage declined 6.8 percentage
points to 21.7% due to changing sales mix weighted more heavily to the sale of
lower priced, lower margin products as well as manufacturing inefficiencies at
the Greenville, MS facility during the closure process of this location. Water
Technologies' gross margin percentage declined 3.2 percentage points to 22.9%
primarily as a result of manufacturing inefficiencies due to the learning curve
on the deaerator product line that previously was manufactured at the Greenville
facility and transferred as part of the closure of the Greenville facility.
Additionally, the current year results include National Dynamics' gross margin
percentage which is less than Aqua-Chem's historical margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expense increased $0.8 million (9.3%) to $9.3 million from $8.5
million for the comparable period of the prior fiscal year. The increase is due
primarily to the acquisition of National Dynamics which is partially offset by
savings from the restructuring actions taken in January and April of 1999 as
well as lower commissions paid due to lower sales volumes at Cleaver-Brooks.
Restructuring Charges. A restructuring charge of $4.7 million was
recorded in the prior year to accrue for the costs of the closure of the
Greenville, MS facility. The provision included $2.9 million to write down the
value of certain fixed assets, $1.0 million for employee termination payments
and $0.8 million for other costs related to closing the existing facility. In
response to a worldwide decline in demand for boiler equipment as compared to
previous years, Aqua-Chem approved a restructuring plan in the current period to
reduce headcount and mitigate the effects of this decreased demand. As a result,
Aqua-Chem recorded an additional restructuring charge of $0.2 million related to
employee termination payments and outplacement services. The restructuring plans
are progressing as scheduled.
Operating Income. For the reasons set forth above, operating income
improved $3.3 million (145.3%) to $1.0 million from an operating loss of $2.2
million for the comparable period of the prior fiscal year. Excluding the
restructuring charges described, operating income decreased $1.2 million (49.1%)
to $1.3 million compared to $2.5 million for the three months ended June 30,
1998. National Dynamic's operations contributed $0.7 million to operating income
for the three months ended June 30, 1999.
Other Income (Expense). Other income (expense) for the three months
ended June 30, 1999 was an expense of $3.8 million as compared to an expense of
$1.4 million for the same period in 1998, resulting in a difference of $2.4
million. This difference is primarily due to an increase in interest expense of
$2.2 million resulting from the issuance of $125 million of unsecured senior
subordinated notes.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $4.3 million for the three months ended
June 30, 1999 compared to cash used of $3.8 million for the three months ended
June 30, 1998. The additional use of cash of $0.5 million was attributable
primarily to a reduction of trade payables, partially offset by payments
associated with the restructuring plans.
Net cash of $0.03 million was provided by investing activities for the three
months ended June 30, 1999 compared to cash used in investing activities of
$48.3 million
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for the three months ended June 30, 1998. The prior year period included $47.9
million for the acquisition of National Dynamics. Capital expenditures for the
current period were $1.2 million as compared to $0.4 million for the three
months ended June 30, 1998. The current period included cash proceeds of $1.1
million for the sale of the Lebanon, Pennsylvania plant, which has been held for
sale since 1995.
Cash used in financing activities was $0.03 million for the three months ended
June 30, 1999 compared to cash provided of $56.7 million for the three months
ended June 30, 1998. Cash from financing activities in the three months ended
June 30, 1998 included $125.0 million in proceeds from the Subordinated Notes
issued in connection with the acquisition of National Dynamics and repayments of
$63.0 million, of which $60.1 million related to repayment of prior debt and
$3.0 million related to the redemption of a portion of the Preferred A stock.
BORROWING AVAILABILITY AND LIMITATIONS.
The Company has a revolving credit facility that provides $45.0 million of
borrowing availability and is secured by substantially all assets of the
Company. Under the revolving 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 principal amount of
subordinated debt) of not less than $70 million plus (on a cumulative basis) for
each fiscal quarter, 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 revolving credit facility
as amended on May 25, 1999 requires the Company to maintain (i) a fixed charge
coverage ratio of not less than 1.0 to 1 for the quarters ended June 30, 1999
and September 30, 1999, 1.10 to 1 for the quarter ended December 31, 1999, 1.15
to 1 for the quarter ended March 31, 2000 and 1.25 to 1 for each subsequent
quarter, and (ii) a senior funded debt to consolidated EBITDA ratio of not more
than 3.5 to 1.
The Company intends to fund future working capital, capital expenditures and
debt service requirements through cash flows generated from operating activities
and from borrowings under the revolving credit facility. As expected by
management, the Company borrowed under the revolving credit facility in the
second quarter of fiscal 2000, but expects that cash flows for the balance of
the year will allow for the repayment of these borrowings by year end. As of
August 11, 1999, the amount borrowed on the revolving credit facility was $2.0
million.
At June 30, 1999 the Company had $125 million of 11 1/4% Senior Subordinated
Notes (the "Notes") outstanding under an Indenture dated June 23, 1998 (the
"Indenture"). The Indenture generally prohibits the incurrence by the Company of
additional debt unless the Company satisfies one of two requirements, the
Coverage Limitation or the Basket Limitation described below. Under the Coverage
Limitation, the Company may not incur 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, 2001 or 2.5 to 1 thereafter (the "Coverage
Limitation"). As of June 30, 1999, the Company could not have incurred any
additional Indebtedness under the Coverage Limitation.
The Indenture permits the Company to incur additional indebtedness of certain
types up to certain limitations applicable to each type (the "Basket
Limitation") notwithstanding the Coverage Limitation. The Company could have
incurred approximately $77.1 million of additional indebtedness under the Basket
Limitations on June 30, 1999, including the following: (a) indebtedness pursuant
to the revolving credit agreement 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 (the limitation under clause (ii) would have
been approximately $44.8 million at June 30, 1999); (b) indebtedness by foreign
subsidiaries not exceeding the sum of (i) 60% of 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.
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The Company expects that its cash needs for debt service under the Indenture
during the 13 fiscal 2000 will be approximately $14.1 million. Mandatory
repayments of the Company's outstanding indebtedness is $125 million subsequent
to fiscal year 2002. Mandatory redemptions of the Company's outstanding Series A
Preferred Stock subsequent to March 31, 2000 are $1 million in each of fiscal
year 2001 and 2002.
During the year ended March 31, 2000, the Company expects to make approximately
$2.8 million of capital expenditures related to the Thomasville facility to
improve the facility's efficiency. Apart from this item, the Company believes
that its manufacturing facilities and computer software and hardware are
generally adequate to meet projected needs. Additionally, the Company expects
other capital expenditures of $3.1 million.
Management believes that cash generated from operating activities together with
borrowing availability under the revolving 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.
At June 30, 1999, the Company had no material market risk exposure (e.g.,
interest rate risk, foreign currency exchange rate risk or commodity price
risk).
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
$2.2 million on new financial systems software, of which $2.0 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, accounts receivable,
accounts payable and reporting packages have been implemented, while the human
resource/payroll package is in the installation phase with a September 1999
targeted completion date. Management believes this project is currently on
schedule to meet this target date.
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.
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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. Some of these systems have been put into
production. Management believes the remaining systems are on schedule to be
placed into production in October, 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 have 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.
Approximately 90% of the suppliers contacted have responded. Follow up letters
have been sent to those suppliers who have not yet responded. Telephone calls
will be made to these remaining vendors during the next quarter to obtain a
response. 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.
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 $0.3 million. The Company estimates total costs remaining to
be incurred prior to the year 2000 range from $0.1 million to $0.2 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.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, trend analysis and other information contained in this report
relative to markets for the Company's products and trends in the Company's
operations or financial results, as well as other statements including words
such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and
other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include general
economic conditions, the cyclical nature of its business, its customers' access
to credit, political uncertainty and civil unrest in various areas of the world,
pricing, product initiatives and other actions taken by competitors, disruptions
in production capacity, excess inventory levels, the effect of changes in laws
and regulations (including government subsidies and international trade
regulations), technological difficulties (including the Year 2000 Issue),
changes in environmental laws, and employee and labor relations.
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PART II
OTHER INFORMATION
From time to time the Company is involved in various litigation matters arising
in the ordinary course of its business. None of these matters, either
individually or in the aggregate, currently is material to the Company except
for the matters reported in the Company's Annual Report of Form 10-K for the
year ended March 31, 1999. There were no material developments subsequent to
March 31, 1999 in the litigation matters previously disclosed.
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.
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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 13, 1999 By: /s/ James A. Kettinger
------------------------------------
James A. Kettinger
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
TO QUARTERLY REPORT ON FORM 10-Q
OF
AQUA-CHEM, INC.
- --------------------------------------------------------------------------------
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE HEREWITH
27 Financial Data Schedule X
(3 months ended 6/30/99)