-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VhWlimeKznNa+YP+W+TsvDE1e0zt7CDdoPkUuGgVoCSTxS4PA5dwvDmKcjGO+p3A WlB6MLLJbMY6QvRniFx+Qg== 0000950124-98-007672.txt : 19981228 0000950124-98-007672.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950124-98-007672 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AQUA CHEM INC CENTRAL INDEX KEY: 0000006992 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED PLATE WORK (BOILER SHOPS) [3443] IRS NUMBER: 391900496 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 333-60759 FILM NUMBER: 98775018 BUSINESS ADDRESS: STREET 1: 7800 NORTH 113TH ST STREET 2: P O BOX 421 CITY: MILWAUKEE STATE: WI ZIP: 53201 BUSINESS PHONE: 4145772723 10-Q/A 1 FORM 10-Q/A 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 ------------ ----------- 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 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. 11 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) EX-27.6 2 FINANCIAL DATA SCHEDULE
5 3-MOS SEP-30-1998 JUL-01-1998 SEP-30-1998 6,114 0 49,979 2,370 27,406 96,084 41,374 3,536 181,523 48,957 125,000 4,795 0 10 (2,924) 181,523 66,512 66,663 51,890 63,622 0 0 3,658 (617) (189) (524) 0 0 0 (524) (.63) (.63)
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