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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended September 30, 1997
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period From to
Commission file number 1-13041
WATERLINK, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 34-1788678
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4100 HOLIDAY STREET N.W. SUITE 201
CANTON, OHIO 44718
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(Address of principal executive offices) (Zip Code)
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Registrant's Telephone Number, Including Area Code: (330) 649-4000
Securities registered pursuant to Section 12(b) of the Act:
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<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.001 par value New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of October 31, 1997 the aggregate market value of the Company's voting Common
Stock held by non-affiliates of the Company was approximately $127 million.
As of October 31, 1997 there were 11,906,326 shares of the registrant's Common
Stock, $.001 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 15, 1998 are deemed to be incorporated by
reference in Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Waterlink, Inc. (the "Company") is an international provider of
integrated water purification and wastewater treatment solutions, principally to
industrial and municipal customers. The Company believes its expertise is in the
analysis of a customer's water purification and wastewater treatment
requirements and the customized application of the Company's systems, equipment
and services to provide cost effective solutions. Waterlink was incorporated in
Delaware on December 7, 1994 in order to participate in the consolidation of the
highly fragmented water purification and wastewater treatment industry. The
Company has begun executing this strategy through an acquisition program which
targets businesses in four markets: industrial process water, industrial
wastewater, municipal drinking water and municipal wastewater.
From its incorporation in December 1994 until its first acquisition in
March 1995, the Company focused on initial formation activities, attracting
certain initial employees and pursuing its analysis of potential acquisition
candidates. In March 1995, the Company acquired the assets of Sanborn, Inc.
(doing business as Sanborn Technologies ("Sanborn Technologies")), being
operated by the Company's subsidiary, SanTech Equipment, Inc. Sanborn
Technologies is a designer and builder of industrial separation systems which
are used by customers for environmental compliance, resource conservation and
production processes. Later in fiscal 1995, the Company acquired Great Lakes
Environmental, Inc. ("Great Lakes"), which enabled the Company to enter the
industrial wastewater market. Great Lakes is a designer and builder of
industrial wastewater pretreatment systems and custom high quality oil/water
separation products.
In fiscal 1996, Waterlink completed three acquisitions, comprised of the
assets of Mass Transfer Systems, Inc. ("Mass Transfer"), the assets of Aero-Mod
Incorporated and its affiliates ("Aero-Mod") and the capital stock of Water
Equipment Technologies, Inc. (now known as Waterlink Technologies, Inc.
("Waterlink Technologies")). The acquisition of Mass Transfer provided access to
additional technologies used primarily in the industrial wastewater market and,
to a lesser extent, in the municipal wastewater market. Mass Transfer is a
designer of customized jet aeration and mixing systems used to accelerate the
biological digestion process through the introduction of oxygen in the treatment
of wastewater. The acquisition of Aero-Mod expanded the Company's presence in
the municipal wastewater market and presented cross-selling opportunities with
Mass Transfer. Additionally, Aero-Mod expanded the Company's geographic presence
and scope of operations through its customer base outside of the United States,
especially in Latin America, and its contract operations business. Aero-Mod
designs wastewater treatment plants, provides clarifiers, filters and dewatering
equipment for the biological treatment of wastewater and biosolids and provides
contract operation services. The acquisition of Waterlink Technologies enabled
the Company to enter the industrial process water and municipal drinking water
markets and increased the Company's presence in markets outside the United
States. Waterlink Technologies is a designer and builder of water treatment
filters and membrane separation systems, including reverse osmosis systems, and
related treatment equipment.
During fiscal 1997, Waterlink completed five acquisitions, comprised of
the capital stock of the Nordic Water Products Group subsidiaries (the "Nordic
Group"), Bioclear Technology, Inc. ("Bioclear"), Lanco Environmental Products,
Inc. ("Lanco"), Mellegard V.A. Maskiner AB ("MEVA") and Hycor Corporation
("Hycor") . The Nordic Group provided the Company with numerous benefits
including a distribution channel for its existing businesses into Europe;
internationally recognized and accepted technologies and equipment used in both
the municipal and industrial markets; and the Company's first substantial
design/build operations, focused primarily in Europe. The Nordic Group
manufactures continuous recirculating sand filters, inclined plate settlers and
systems for nutrient
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removal, decanting centrifuges for dewatering biosolids and hydraulic surface
and bottom scrapers. The Nordic Group also installs mechanical and electrical
systems and designs and builds water purification and wastewater treatment
plants in Europe. Bioclear provides the Company with access to sequential batch
reactor technology, which expands its ability to treat industrial and municipal
wastewater biologically. The Company believes that this technology presents
various cross-selling opportunities, particularly with Aero-Mod, Mass Transfer,
Waterlink Technologies and the Nordic Group. Additionally, Bioclear enhances the
Company's design/build capabilities. Lanco expands the Company's product
offerings in the industrial wastewater treatment market and is complementary
with Great Lakes. Lanco fabricates small plate and frame filter presses for
dewatering biosolids and inclined plate clarifiers for heavy metal removal. MEVA
specializes in the design and installation of fine screens and related
accessories for sewage treatment applications. Hycor designs and manufactures
screening, dewatering and related residuals management equipment for
liquid/solid separation in municipal wastewater and industrial wastewater and
process applications. MEVA and Hycor extend the Company's product offerings and
present various cross-selling opportunities with the Company's design/build
operations.
The Company has developed a strategic plan to:
- Provide a full range of systems, equipment and services, whether
independently or as part of a fully engineered water purification or
wastewater treatment solution
- Pursue growth through acquisitions that:
-- increase its geographic diversity
-- add complementary technologies, products and services
-- broaden its customer base and industries served
-- provide strategic, synergistic and corporate cultural fit
- Integrate its operations and marketing strategies in order to maximize
internal growth and increase profitability
- Strengthen market share for its design/build operations outside the
United States
Primarily due to its acquisition program, the Company's pro forma net
sales for fiscal 1997 totaled $111 million. In addition, the Company has begun
to realize significant improvement in internal growth rates due to the
opportunities to cross-sell systems, equipment and services and as a result of
the increased financial, managerial and other resources provided by the Company
to its acquired businesses. For example, subsidiaries selling wastewater
treatment systems now have the ability to offer both aeration and mixing systems
and subsidiaries selling water treatment systems can now offer wastewater
treatment systems for the same projects. Additionally, the Company's
design/build capabilities allow it to design systems that utilize a broad array
of the Company's products and provide opportunities for its contract operation
services. The Company also experiences cross-selling opportunities from a
geographic and customer standpoint. For example, the Company believes that it
should benefit from the recent acquisition of the Nordic Group both from the
Nordic Group's ability to introduce the Company's existing systems, equipment
and services into the European market and from the Company's ability to
introduce the Nordic Group's systems, equipment and services into the Company's
existing markets. Pro forma net sales of the businesses acquired by the Company
to date grew 18.9% during fiscal 1997 compared to the prior year. When used
herein, unless the context otherwise requires, the Company shall mean Waterlink,
Inc. and its subsidiaries.
ACQUISITION STRATEGY
In order to achieve its objective of becoming a leading international
provider of integrated water purification and wastewater treatment solutions,
the Company has pursued an aggressive acquisition-based growth program. In
connection with this program, the Company targets acquisitions
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that will expand the Company's market share, broaden its customer and geographic
base, provide the Company with new products, technologies and services
(including those which generate recurring revenues), and enhance the Company's
design/build capabilities. The Company seeks well-managed, established companies
that provide a strategic fit, synergies with existing businesses and the
potential for accelerated revenue and earnings growth. Assuming that a potential
acquisition is complementary to, and synergistic with, the operation of the
Company's existing subsidiaries, the candidate company is evaluated for cultural
fit, which the Company considers to be critically important. The Company
believes that its future success depends substantially upon collaboration and
teamwork among its operating companies and therefore upon common operating
philosophies.
The Company believes that it is an attractive partner to potential
acquirees because the Company can facilitate their continued growth through
enhanced availability of working capital, surety credit, and borrowing capacity,
as well as through introduction to new customers and markets. The Company also
offers smaller acquisition candidates the ability to remain competitive by
becoming part of a larger, more diversified organization. As customers
frequently seek integrated water treatment solutions, companies with one or a
few product lines are increasingly excluded from projects because they do not
have the capability of meeting customers' requirements either from a product or
financial standpoint. The Company offers acquisition candidates access to a
developed international distribution system and significant management
experience. Additionally, the Company's operating subsidiaries have
cross-selling opportunities which enable them to be considerably more
competitive, thereby increasing sales potential significantly. Finally, and of
utmost importance to some candidates, it is the Company's philosophy generally
to maintain an acquired company's culture and retain its management through
appropriate incentives. The Company's decentralized operating strategy offers an
environment in which initiative and entrepreneurial spirit can thrive.
The Company believes that there is a substantial number of attractive
acquisition candidates in the United States and abroad due to the highly
fragmented nature of the overall industry. These candidates include water
purification equipment and wastewater equipment manufacturers, design/build
companies, point-of-use/point-of-entry equipment providers, contract operations
companies, specialty chemical solution providers, small unit replacement part
companies, and regional service companies.
As consideration for future acquisitions the Company intends to continue
to use various combinations of its common stock, par value $.001 per share
("Common Stock"), cash and notes. The consideration for each future acquisition
will vary on a case-by-case basis depending on the financial interests of the
Company and the historic operating results and future prospects of the business
to be acquired. The Company will finance future acquisitions through funds
provided by operations and by the Credit Facility (as defined herein) and from
the proceeds of future equity and debt financing. The Company intends to
register 5,000,000 shares of Common Stock under the Securities Act of 1933, as
amended (the "Securities Act") during the first quarter of fiscal 1998 for use
in connection with future acquisitions.
SYSTEMS, EQUIPMENT AND SERVICES
The Company provides integrated water purification and wastewater
treatment solutions, principally to its industrial customers for treatment of
process water and wastewater and to its municipal customers for treatment of
drinking water and wastewater. To this end, the Company provides a broad range
of systems and equipment as well as design/build and operating capabilities.
Systems and Equipment. The Company designs and engineers solutions for
the water purification and wastewater treatment industry. The Company believes
its expertise is in the analysis of a customer's water purification and
wastewater treatment requirements and the application of the Company's systems,
equipment and services to provide cost effective solutions. The Company's
equipment can be provided to a customer either as a separate component or as
part of a customized,
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fully engineered water purification or wastewater treatment system or subsystem.
The Company generally does not make significant capital investments in plant and
equipment, focusing instead on partnering with vendors which manufacture the
components used in the Company's systems and equipment. The Company completes
the final assembly of its systems and tests its systems prior to final delivery
to the customer in order to maintain quality control. The Company manufactures
equipment when its manufacturing process is determined to add a significant
value to the final product.
Design/Build Services. The Company's design/build services include
prescribing water purification and wastewater treatment solutions, designing and
engineering necessary facilities, arranging for construction when required and
installing necessary equipment. The Company's strategy is to expand its presence
in the design/build segment of the water purification and wastewater treatment
industry, particularly in the small and medium sized municipal markets outside
the United States. During the past five years, the Company has completed more
than 50 design/build projects.
The Company anticipates that it will expand its activities in this area
due to the trend toward outsourcing in the industry. The Company uses many of
its own products in its design/build operations as well as products manufactured
by others where appropriate.
Contract Operations. The Company operates water purification and
wastewater treatment facilities for municipal customers under contract for
varying time periods. The Company currently operates three small municipal
wastewater treatment facilities in the United States and one in Chile. The
Company's strategy is to leverage its design/build services to offer its
contract operations capability as part of a total solution. The Company is
becoming more involved in the operation and remote monitoring of water
purification and wastewater treatment facilities for both its industrial and
municipal customers.
Replacement Parts, Repairs and Consumables. The Company manufactures and
sells replacement parts and consumables, such as membranes, ion exchange resin
and filter cartridges, manufactured both by the Company and other suppliers.
This equipment is required to support water treatment systems. In addition, the
Company performs maintenance and repair services on equipment manufactured by
both the Company and others.
The following table sets forth the Company's significant systems,
equipment and services, identifying both the customer base and the type of
treatment serviced. The Company is committed to expanding its range of systems,
equipment and services and increasing its sales throughout its available
markets. Management believes that companies with broad product and service
offerings and wide distribution capabilities will be able to capitalize on the
major trends that are affecting the water purification and wastewater treatment
industry.
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<TABLE>
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INDUSTRIAL MUNICIPAL
MARKET MARKET
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PROCESS WASTE DRINKING WASTE
SYSTEMS, EQUIPMENT AND SERVICES WATER WATER WATER WATER
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<S> <C> <C> <C> <C>
Aeration systems X X
Jet aeration
Submerged mechanical mixers
Clarifiers X X X X
ClarAtor(R)/Split ClarAtor(TM)
Inclined parallel plate
Contract operations X X X
Cutting fluid recovery systems X
Design/build X X X X
Dewatering systems--biosolids X X X X
Decanting centrifuges
DRAIMAD(TM) dewatering-bag systems
MONOBELT(TM) filter presses
Plate and frame filter presses
Filters X X X X
Cartridge-replacement filters
Continuous recirculating sand
Rotary vacuum pre-coat
Tertiary polishing
Ion exchange media X X
Media recharge
Systems
Membrane separation systems X X X X
Desalination
Reverse osmosis
Nutrient removal systems X X
Deni process
Oxy process
SEQUOX(TM) process
Oil/water separators X
Sequential batch reactors (SBRs) X X
Screens X X X X
Sludge scrapers and skimmers X X X X
</TABLE>
OPERATING STRATEGY
The Company has adopted a decentralized approach to the operational
management of its subsidiaries. While functions such as financial reporting,
treasury, communications and risk management are centralized in the Company's
corporate headquarters, local management is primarily responsible for the
day-to-day operation of its business. The Company also provides its subsidiaries
with financial resources, management expertise, customer and market access which
would be unavailable to each subsidiary individually. With respect to
acquisitions already completed, the Company has begun to realize significant
improvement in internal growth rates due to the availability of capital and
bonding capacity, and the opportunities to "cross-sell" products. As customers
increasingly seek integrated solutions, the ability of each of the Company's
subsidiaries to offer complementary equipment and services of other subsidiaries
increases the competitiveness of each company. For example, subsidiaries selling
wastewater treatment systems now have the ability to offer both aeration and
mixing systems and subsidiaries selling water treatment systems can now offer
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wastewater treatment systems for the same projects. Additionally, the Company's
design/build capabilities allow it to design systems that utilize a broad array
of the Company's products and provide opportunities for its contract operation
services. The Company also experiences cross-selling opportunities from a
geographic and customer standpoint. For example, the Company believes that it
should benefit from the recent acquisition of the Nordic Group both from the
Nordic Group's ability to introduce the Company's existing systems, equipment
and services into the European market and from the Company's ability to
introduce the Nordic Group's systems, equipment and services into the Company's
existing markets.
A representative from each subsidiary, along with the Company's executive
officers and other key employees, form the Company's operating committee, which
meets on a frequent basis to facilitate the interchange of information and
enhance cross-selling opportunities. As the Company's capabilities have grown,
acquired subsidiaries within the Company have enjoyed growth opportunities far
beyond those that exist for stand-alone companies concentrated in only one area
of the industry.
SALES AND DISTRIBUTION
The Company sells its systems, equipment and services primarily through
approximately 60 direct sales personnel and approximately 250 independent sales
organizations. To a lesser extent, the Company sells through water treatment
distributors which take title to equipment for resale to the end-user. The
Company seeks to have a single sales organization within a particular market in
order to foster a close relationship with its sales representatives and present
a cohesive image to the marketplace. The independent sales representatives
typically will identify sales opportunities, and then work together as a team
with the Company's direct sales force, which has greater technical and product
knowledge, to complete the sale and service the customer. The Company's direct
sales force generally plays a more primary role in sales of the Company's
design/build solutions. The Company also sells through licensees, principally in
the Asia-Pacific region as well as in Europe.
CUSTOMERS
The Company markets its products and services to two primary categories
of customers; industrial users which require water for their manufacturing
processes and treat their wastewater, and municipal customers which produce
drinking water and treat wastewater. The Company has a diverse customer base,
with no customer representing 10% or more of the Company's fiscal 1997 pro forma
net sales.
The Company's industrial customers include many "Fortune 500" companies
and their counterparts outside of the United States. Industries served include
the pharmaceutical, electronic and microelectronic, pulp and paper, chemical,
petrochemical, food, beverage, automotive and other heavy manufacturing
industries. In fiscal 1997 approximately 55% of the Company's pro forma net
sales were derived from industrial sales.
The municipal market is highly competitive. Municipal markets in the
United States, Canada and western Europe are more regulatory driven than
municipal markets in other regions. The Company utilizes specialized
distribution channels to service the municipal market and is skilled at
participating in the municipal bidding process. The Company focuses its efforts
on smaller municipal projects which the Company believes its product lines are
best suited to serve. The Company believes that the municipal business is
important to its overall success by virtue of its large market size. In fiscal
1997 approximately 45% of the Company's pro forma net sales were derived from
municipal sales.
BACKLOG
The Company had a backlog, consisting of written purchase orders received
by the Company of $30.5 million as of September 30, 1997 as compared to $8.6
million as of September 30, 1996. The Company expects that virtually all of the
backlog at the beginning of a fiscal year will be filled during
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that year. Backlog, and therefore sales, may vary from quarter to quarter as a
result of large projects being booked during any quarter and varying project
delivery schedules. In addition, the orders have varying delivery schedules and
the Company's backlog as of any particular date may not be representative of
actual net sales for any succeeding period.
PROCESS AND PRODUCT WARRANTY AND PERFORMANCE GUARANTEES
Consistent with market practices, the Company generally offers a warranty
on finished products for one year or in some cases 18 months from sale and 12
months from installation. The costs associated with warranty expense have not
been material. In connection with providing certain products and design/build
services to its customers, the Company is sometimes required to guarantee that
the products or services will attain specified levels of quality or performance,
based on a defined set of parameters. Should a product fail to perform according
to a warranty, or should a project fail to attain the guaranteed level of
quality, and should the Company be unable to effect a satisfactory replacement
or cure within the prescribed period of time, the Company could incur financial
penalties in the form of liquidated damages or could be required to remove and
replace the equipment or repeat the service in order to meet the specifications.
To date, the Company has not incurred any material payment or other obligations
pursuant to such performance guarantees.
RAW MATERIAL AND SUPPLIES
The raw materials and components used in the Company's products are
commonly available commodities such as stainless steel, carbon steel, plastic,
tubing, wiring, electrical components, pumps, valves, compressors, pressure
vessels, oleophilic media, reverse osmosis membranes and sand. The Company's
systems are fabricated from these materials and assembled together with products
bought from other companies to form an integrated system. The Company is not
dependent upon any single supplier, and if any supplier were to become unable to
perform, the Company believes a substitute source could readily be found. The
Company has generally been able to pass on price increases for raw materials and
components to its customers. The Company is not a party to any material
long-term fixed price supply contracts.
GOVERNMENT REGULATION
Federal, state, local and foreign environmental laws and regulations
necessitate substantial expenditures and compliance with water quality standards
by generators of wastewater and wastewater by-products and impose liabilities on
such entities for noncompliance. Environmental laws and regulations and their
enforcement are, and will continue to be, a significant factor affecting the
marketability of the solutions, systems and equipment provided by the Company.
Many of the countries in which the Company operates or in which its
customers are located, including the United States, Canada and countries in
western Europe, Latin America, and the Asia-Pacific region, have adopted
requirements that govern water quality, wastewater treatment, and wastewater
by-products and the solutions, systems and equipment provided by the Company.
These requirements and their enforcement vary by country, but in general
establish water quality use and disposal standards, set wastewater effluent
discharge limits, and prescribe standards for the protection of human health and
safety and the environment. In each such country, the Company monitors the
status and impact of local environmental regulation and enforcement as it
relates to the marketability of the solutions, systems and equipment provided by
the Company.
Any changes in applicable environmental standards and requirements or
their enforcement may affect the operations of the Company by imposing
additional regulatory compliance costs on the Company's customers, requiring the
modification of and/or affecting the market for the Company's solutions, systems
and equipment. To the extent that demand for the Company's solutions, systems
and equipment is created by the need to comply with such enhanced standards and
requirements or
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their enforcement, any modification of the standards and requirements or their
enforcement may reduce demand, thereby adversely affecting the Company's
business prospects. Conversely, changes in applicable environmental laws
imposing additional regulatory compliance standards and requirements or causing
stricter enforcement of these laws or regulations could increase the demand for
the Company's systems, equipment and services.
COMPETITION
Despite an accelerating trend toward consolidation, the water
purification and wastewater treatment industry remains fragmented and highly
competitive due to the large number of competitors within each product area. The
Company has a significant number of competitors, including a number of
integrated suppliers and equipment manufacturers, some of which are larger and
have greater resources than the Company. The Company believes that success in
this market is based on the ability to offer appropriate technology, influence
specifications, have strong distribution, maintain respect within the consulting
and engineering community, finance and bond projects awarded, provide timely
delivery, and maintain a reputation for service and parts support after the
sale. Additionally, in the municipal arena, the ability to meet bid
specifications and pricing are often primary considerations. The Company
believes that its technologies and cost structures as well as its strong local
presence in international markets enable it to compete effectively against these
companies. The Company's primary competitors include United States Filter
Corporation, Parkson Corporation, Alpha Laval and Humbolt KHD.
PATENTS, TRADEMARKS AND LICENSES
The Company currently owns a number of United States and foreign patents,
and registrations for United States service marks and trademarks. While each is
of value, the Company generally does not consider any of them to be material to
its business, although, as the Company has grown and its presence has been
extended, its Waterlink(SM) mark has become more widely known and the goodwill
associated with it has increased.
EMPLOYEES
At October 31, 1997, the Company and its subsidiaries had approximately
400 employees at its various locations. None of the Company's employees in the
United States are covered under collective bargaining agreements. The Company's
hourly employees in Europe are covered by collective bargaining agreements.
Management believes that the Company's relationship with its employees is good.
ITEM 2. PROPERTIES
The Company leases its corporate offices, consisting of approximately
6,000 square feet located in Canton, Ohio pursuant to a lease agreement dated
July 9, 1996 and amended October 1, 1997. In addition, its subsidiaries lease
facilities for office space and manufacturing in the United States in
Clearwater, Sarasota, and West Palm Beach, Florida; Addison and Lake Bluff,
Illinois; Manhattan, Kansas; Medway, Massachusetts; and Grand Rapids, Michigan;
and outside the United States in Holstebro, Denmark; Ludlow, England; Vanda,
Finland; Neuss-Grimlinghausen, Germany; and Frolunda, Kungsbacka and Nynashamn,
Sweden; and own facilities for office space and manufacturing in Fall River,
Massachusetts; Winnipeg, Manitoba, Canada; and Fjaras, Sweden. The expiration
dates for these leases range from March 31, 1998 to March 31, 2011.
The Company believes that each of its facilities is in good condition and
will continue to remain suitable for its current purpose. The Company may add
improvements to the properties listed above. The Company anticipates using its
properties for purposes consistent with their present use. In the event any of
the facilities becomes unavailable upon termination of the existing lease, the
Company
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believes it would be able to find a suitable alternative facility without
resulting in any significant adverse impact to the Company or its operations. In
the opinion of management of the Company, the properties described above are
adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
or property damage incurred in connection with its operations. The Company is
not a party to any material litigation. Management believes none of the
litigation will have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock has been listed on the New York Stock Exchange
("NYSE") under the symbol WLK since June 24, 1997. The following table sets
forth the high and low composite sales prices as reported by the NYSE for the
fiscal quarters indicated.
<TABLE>
<CAPTION>
HIGH LOW
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<S> <C> <C>
Fiscal Year ended September 30, 1997
Third Quarter (from June 24, 1997) $13 $11
Fourth Quarter 20 3/16 13
</TABLE>
The current quoted price of the Common Stock is listed daily in the Wall
Street Journal in the NYSE section. The number of holders of record of the
Company's Common Stock as of December 1, 1997 was approximately 70.
DIVIDENDS
The Company has not declared or paid any cash dividends on its Common
Stock. It is the Company's current intention to retain earnings to finance the
expansion of its business. Any future dividends will be at the discretion of the
Board of Directors after taking into account various factors, including, among
others, the Company's financial condition, results of operations, cash flows
from operations, current and anticipated cash needs and expansion plans, the
income tax laws then in effect, the requirements of Delaware law, the
restrictions imposed under the Credit Facility (as defined herein) and any
restrictions that may be imposed by the Company's future credit facilities and
other indebtedness. The Credit Facility prohibits its payment of dividends
without the consent of the lender.
RECENT SALES OF UNREGISTERED SECURITIES
During fiscal 1997, the Company made the following sales of its
securities that were not registered under the Securities Act, in reliance on the
exemption provided therefrom by Section 4(2) of the Securities Act. In each
transaction, the Company did not engage any underwriter, broker or placement
agent. In connection with each such transaction, the Company obtained
appropriate investment representations supporting its reliance on such exemption
from registration. In such transactions (other than in connection with the
Waterlink Technologies acquisition), the Company
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obtained representations from the investors that each was an "accredited
investor," as defined in Regulation D under the Securities Act. In such
transactions, appropriate disclosure was provided to each investor to support
the Company's reliance on the exemption from registration provided by Section
4(2) of the Securities Act.
On October 15, 1996, the Company issued 100,000 shares of the Common
Stock to Lawrence M. Schmid on his conversion of a convertible subordinated
promissory note in the principal amount of $400,000 at a conversion price of
$4.00 per share of the Common Stock. The promissory note was issued to Schmid as
part of the purchase price for the Company's acquisition of certain patents and
related know-how owned by Schmid and acquired by the Company as part of its
acquisition of Aero-Mod and Resi-Tech Inc.
On January 6, 1997, the Company issued 350,000 shares and 150,000 shares
of the Common Stock to Mark E. Neville and Frederick J. Siino, respectively, on
their conversion of a convertible subordinated promissory note in the principal
amount of $2,000,000 at a conversion price of $4.00 per share of the Common
Stock. The promissory note was issued to Mass Transfer, and then distributed to
Neville and Siino as shareholders of Mass Transfer, as part of the purchase
price for the Company's acquisition of Mass Transfer.
On February 19, 1997, the Company issued 25,000 shares of the Common
Stock to Wheat First Securities, Inc., as Custodian for L. Dean Hertert, IRA.
Mr. Hertert is a Vice President of the Company. Mr. Hertert paid $106,250 for
these shares.
On February 19, 1997, the Company granted Bank of America a warrant to
purchase 225,000 shares of the Common Stock at a purchase price of $4.50 per
share. The warrant was issued as additional consideration for the provision of
the Company's credit facility with Bank of America.
On February 28, 1997, the Company issued 111,788 shares of the Common
Stock to the shareholders of Waterlink Technologies in payment of an adjustment
to the purchase price paid by the Company for the issued and outstanding shares
of Waterlink Technologies. The total dollar value of the 111,788 shares of
Common Stock issued to the shareholders of Waterlink Technologies as purchase
price adjustment was $475,099 (or $4.25 per share).
On March 12, 1997, in connection with its potential issuance of
subordinated notes in the principal amount of up to $10,000,000, the Company
issued to the potential purchasers (Brantley Capital Corporation, IPP95, L.P.,
River Cities Capital Fund Limited Partnership, National City Capital Corporation
and Environmental Opportunities Management Co., LLC) of the notes warrants to
purchase 125,000 shares of the Common Stock. Each warrant entitles the holder to
purchase one share of Common Stock at an initial purchase price per share of
$4.50, as adjusted on the occurrence of certain events.
On March 14, 1997, the Company issued 50,000 shares of the Common Stock
to Michael J. Vantusko. Mr. Vantusko is Chief Financial Officer of the Company.
Mr. Vantusko paid $212,500 (or $4.25 per share) for these shares.
On April 3, 1997, the Company issued 25,000 shares of the Common Stock to
Rollin S. Reiter. Mr. Reiter is a director of the Company. Mr. Reiter paid
$106,250 (or $4.25 per share) for these shares.
On April 11, 1997, the Company issued 10,000 shares of the Common Stock
to Dr. Paul M. Sutton. Dr. Sutton is a director of the Company. Dr. Sutton paid
$42,500 (or $4.25 per share) for these shares.
On April 14, 1997, the Company issued 5,000 shares of the Common Stock to
Mr. John R. Miller. Mr. Miller is a director of the Company. Mr. Miller paid
$21,250 (or $4.25 per share) for these shares.
- 11 -
<PAGE> 12
On June 27, 1997, the Company issued 328,947 shares of the Common Stock
to the four shareholders of Bioclear (David Romanow, Joe Romanow, Brian Topnik
and Robert Jenkyns) as part of the purchase price for the Company's acquisition
of all of the capital stock of Bioclear. The shares represented $5,000,000
(Canadian), valued at the initial public offering price of $11.00 per share.
On September 12, 1997, the Company issued convertible promissory notes in
the aggregate original principal amount of SEK 12,980,000 Swedish Kronor
(approximately US $1,671,000) to the shareholders of MEVA (Krister Lundberg,
Soren Andersson and Per Mellegard) as part of the purchase price for the
Company's acquisition of all the capital stock of MEVA. The principal amount of
the promissory notes is payable on September 12, 1999, with interest accruing at
the rate of three percent per annum, payable quarterly. The promissory notes are
convertible by their holders, at any time, into shares of Common Stock at an
conversion price of $21.38 per share.
On September 30, 1997, the Company issued 41,095 shares of the Common
Stock to a shareholder of Hycor (Philip A. Thompson) as part of the purchase
price for the Company's acquisition of all of the capital stock of Hycor. The
shares represented $750,000, valued at $18.25, the closing price of the Common
Stock on the NYSE on September 29, 1997, the day immediately preceding the
acquisition. The Company also issued a promissory note in the aggregate original
principal amount of $2,250,000 to Philip A. Thompson as part of the purchase
price for such acquisition. The principal amount of the promissory note is
payable on September 30, 1999, with interest accruing at the rate of 5.81% per
annum, payable quarterly. The promissory note is convertible by its holder, at
any time, into shares of Common Stock at an conversion price of $22.25 per
share.
During fiscal 1997, the Company issued shares of the Common Stock to
employees of the Company upon the exercise of stock options granted to them
under the 1995 Stock Option Plan: (i) on January 3, 1997, Nancy A. Hamerly
purchased 15,000 shares of the Common Stock for an aggregate purchase price of
$1,500 (or $.10 per share), (ii) on March 10, 1997 Donald A. Weidig purchased
2,500 shares of Common Stock for an aggregate purchase price of $250 (or $.10
per share), (iii) on March 31, 1997, Nancy A. Hamerly purchased 10,000 shares of
the Common Stock for an aggregate purchase price of $40,000 (or $4.00 per share)
and (iv) on June 1, 1997, Chet S. Ross purchased 45,000 shares of Common Stock
for an aggregate purchase price of $4,500 (or $.10 per share).
USE OF PROCEEDS
On June 27, 1997, pursuant to its registration statement on Form S-1
(Commission File No. 333-25249, declared effective on June 24, 1997), the
Company consummated its initial public offering of 4,500,000 shares of its
Common Stock at a price of $11 per share, before the underwriters' discount, and
received approximately $43.0 million of net proceeds. On July 16, 1997, the
Company sold 675,000 shares of its Common Stock pursuant to the exercise of the
underwriters' over-allotment option granted in connection with the initial
public offering, and received approximately $6.9 million of net proceeds. These
net proceeds from the initial public offering were primarily used to pay the
cash portion of the purchase prices of Bioclear, Lanco and MEVA, to repay
indebtedness of the Company and for general working capital purposes. All shares
of common stock offered were sold on June 27, 1997 (except the 675,000 shares
offered pursuant to the underwriters' over-allotment option, all of which were
sold on July 16, 1997). The managing underwriters for the initial public
offering were Smith Barney Inc., Oppenheimer & Co., Inc. and Sanders Morris
Mundy Inc. The Company registered 5,175,000 shares of its common stock, with an
aggregate offering price, before commissions and expenses, of $56,925,000. There
were no selling shareholders. Expenses incurred by the Company in connection
with the offering totaled $6,984,750, comprised of $3,984,750 for underwriting
discounts and commissions and $3,000,000 for other expenses. Of the net proceeds
(including the underwriters' over-allotment), $21,855,000 was used to pay the
cash portion of the acquisition of Bioclear, of Lanco and of MEVA, $25,644,000
was used to repay indebtedness and $2,441,250 was used for general working
capital purposes. None of the payments of expenses or of the net proceeds
- 12 -
<PAGE> 13
were direct or indirect payments to directors, officers, general partners of the
Company or their associates; or to persons owning 10 percent or more of any
class of equity security of the Company; or to affiliates of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
the Company since its incorporation on December 7, 1994. The financial data
presented for and as of the end of fiscal 1995, fiscal 1996 and fiscal 1997 were
derived from the audited consolidated financial statements of the Company. The
financial data includes the operating results of each acquired business from the
date of acquisition in accordance with the purchase method of accounting. The
dates of each acquisition included in the operating results are shown below:
<TABLE>
<S> <C>
- Sanborn Technologies March 31, 1995
- Great Lakes August 31, 1995
- Mass Transfer January 31, 1996
- Aero-Mod April 26, 1996
- Waterlink Technologies September 30, 1996
- Nordic Group March 5, 1997
- Bioclear June 27, 1997
- Lanco June 27, 1997
- MEVA September 12, 1997
- Hycor September 30, 1997
</TABLE>
- 13 -
<PAGE> 14
The data presented below should be read in conjunction with the financial
information appearing elsewhere herein.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1997 1996 1995
------- ------- ------
(in thousands, except per share
data)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $64,699 $19,801 $2,684
Cost of sales 40,390 11,233 1,857
------- ------- ------
Gross profit 24,309 8,568 827
Selling, general and administrative expenses 18,683 7,029 1,178
Special management compensation (1) 2,630 -- --
Amortization 751 307 15
------- ------- ------
Operating income (loss) 2,245 1,232 (366)
Other income (expense):
Interest expense (1,281) (877) (144)
Interest income and other items-net 263 (44) 33
------- ------- ------
Income (loss) before income taxes 1,227 311 (477)
Income taxes 470 5 35
------- ------- ------
Income (loss) before extraordinary item 757 306 (512)
Extraordinary item, net of taxes (2) (385) -- --
------- ------- ------
Net income (loss) $ 372 $ 306 $ (512)
======= ======= ======
Net income (loss) per common share:
Income (loss) before extraordinary item $ 0.09 $ 0.05 $(0.11)
Extraordinary item (0.05) -- --
------- ------- ------
$ 0.04 $ 0.05 $(0.11)
======= ======= ======
Weighted average common and equivalent shares 8,337 6,428 4,534
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 19,430 $ 3,438 $ 2,064
Total assets 115,860 28,991 10,819
Total debt 18,961 12,145 6,039
Redeemable preferred stock -- 8,500 3,900
Shareholders' equity (deficit) 70,873 2,407 (11)
</TABLE>
- ---------------
(1) In June 1997, the Company incurred a special charge to operations of
$2,630,000 resulting primarily from the issuance, concurrent with the
initial public offering, of a ten year option to purchase 100,000 shares of
common stock at a price of $0.10 per share to an officer of the Company
pursuant to terms of an employment agreement. Of this amount, approximately
$1,138,000 is non-cash and the remainder represents cash obligations related
principally to the reimbursement of income taxes resulting from the stock
option issuance. This special charge after income taxes on a per share basis
was $0.20 for the year ended September 30, 1997.
(2) The Company used a portion of the proceeds from its initial public offering
to repay substantially all of its outstanding indebtedness. In addition,
concurrent with the offering the Company canceled a note purchase agreement.
In connection with the early retirement of certain indebtedness and the
cancellation of the note purchase agreement, the Company realized an
extraordinary charge of $385,000, net of taxes of $257,000, related to the
write-off of unamortized debt issuance costs and discounts associated with
this indebtedness. This extraordinary item on a per share basis was $0.05
for the year ended September 30, 1997.
- 14 -
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is an international provider of integrated water purification
and wastewater treatment solutions, principally to industrial and municipal
customers. Waterlink was incorporated in Delaware on December 7, 1994 and has
grown through numerous acquisitions.
On June 27, 1997, the Company consummated its initial public offering of
4,500,000 shares of its common stock at a price of $11 per share, before the
underwriters' discount, and received approximately $43.0 million of net
proceeds. On July 16, 1997, the Company sold 675,000 shares of its common stock
pursuant to the exercise of the underwriters' over-allotment option granted in
connection with the initial public offering, and received approximately $6.9
million. These net proceeds from the initial public offering were primarily used
to pay the cash portion of the purchase prices of Bioclear, Lanco and MEVA, to
repay indebtedness of the Company and for general working capital purposes.
The Company's acquisitions have enabled it to build its technical
capabilities and geographical presence. Through September 30, 1997, the Company
completed the following ten acquisitions at the following effective dates:
<TABLE>
<S> <C>
- Sanborn Technologies March 31, 1995
- Great Lakes August 31, 1995
- Mass Transfer January 31, 1996
- Aero-Mod April 26, 1996
- Waterlink Technologies September 30, 1996
- Nordic Group March 5, 1997
- Bioclear June 27, 1997
- Lanco June 27, 1997
- MEVA September 12, 1997
- Hycor September 30, 1997
</TABLE>
As part of its strategic plan, the Company intends to continue an
aggressive acquisition program. The Company's acquisition program has targeted
businesses which have provided the Company with complementary systems, equipment
and services and broadened its customer and geographic base. The Company has
sought companies which provide the potential for synergies with existing
businesses. With respect to the acquisitions completed prior to fiscal 1997, the
Company has begun to realize significant improvement in internal growth rates
due to the opportunities to cross-sell systems, equipment and services and as a
result of the increased financial, managerial and other resources provided by
the Company to its acquired businesses. The Company expects that it will
continue to benefit from such synergies as it more fully integrates the acquired
businesses into its operations.
The acquisitions were accounted for under the purchase method of
accounting and are included in the results of operations for the period
subsequent to the effective date of acquisition. Due to the timing and magnitude
of these acquisitions, results of operations for the periods presented are not
necessarily comparable or indicative of operating results for current or future
periods.
The majority of the Company's systems and equipment are custom designed
and take a number of months to produce. Revenues from large contracts are
recognized using the percentage of completion method of accounting in the
proportion that costs bear to total estimated costs at completion. Revisions of
estimated costs or potential contract losses, if any, are recognized in the
period in which they are determined. Revenues from remaining systems and
equipment sales are recognized when shipped.
- 15 -
<PAGE> 16
The Company has in the past experienced quarterly fluctuations in
operating results due to the contractual nature of its business and, to a lesser
extent, weather conditions. As part of its strategic plan, the Company expects
that in the future it may receive contracts that are significantly larger than
those received by the Company historically. In addition, certain of such
contracts will be subject to the customer's ability to finance, or fund from
government sources, the actual costs of completing the project as well as
receiving any necessary permits to commence the project. Therefore, the Company
expects that its future operating results could fluctuate significantly,
especially on a quarterly basis. The recognition by the Company of revenues and
profits therefrom can fluctuate due to the timing of the awarding of such
contracts and the ability to fund project costs. In addition, the Company has
historically operated with a moderate backlog. However, as a result of its
strategic plan, the Company anticipates that both the dollar volume and number
of contracts in its backlog will increase significantly. As of September 30,
1997, the Company's backlog was approximately $30.5 million. Therefore,
quarterly sales and operating results may be affected by the volume and timing
of contracts received and performed within the quarter, which are difficult to
forecast. Any significant deferral or cancellation of a contract could have a
material adverse effect on the Company's operating results in any particular
quarter. Because of these factors, the Company believes that period-to-period
comparisons of its operating results are not necessarily indicative of future
performances.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, statements of
operations data as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of sales...................................... 62.4 56.7 69.2
----- ----- -----
Gross profit....................................... 37.6 43.3 30.8
Selling, general and administrative expenses....... 28.9 35.5 43.9
Special management compensation.................... 4.1 -- --
Amortization....................................... 1.1 1.6 0.5
----- ----- -----
Operating income (loss)............................ 3.5 6.2 (13.6)
Other income (expense):
Interest expense................................. (2.0) (4.4) (5.4)
Interest income and other items -- net........... 0.4 (0.2) 1.2
----- ----- -----
Income (loss) before income taxes.................. 1.9 1.6 (17.8)
Income taxes....................................... 0.7 0.1 1.3
----- ----- -----
Income (loss) before extraordinary item............ 1.2 1.5 (19.1)
Extraordinary item, net of tax..................... 0.6 -- --
----- ----- -----
Net income (loss).................................. 0.6% 1.5% (19.1)%
===== ===== =====
</TABLE>
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Net Sales. Net sales for the year ended September 30, 1997 were
$64,699,000, an increase of $44,898,000 from the prior year. The increase was
primarily due to the acquisition of Mass Transfer on January 31, 1996, Aero- Mod
on April 26, 1996, Waterlink Technologies, Inc. on September 30, 1996, the
Nordic Group on March 5, 1997, Bioclear and Lanco on June 27, 1997 and MEVA on
September 12, 1997. In addition, internal growth accounted for $6,830,000 of the
increase, which represented an internal growth rate of 34.5%, primarily due to
expansion in overseas markets and to the greater levels of resources provided by
the Company to the businesses subsequent to the acquisitions. The Company
- 16 -
<PAGE> 17
measures internal growth by comparing each subsidiary's net sales from the
months subsequent to their respective acquisition dates during the prior year to
those same months in the current year.
Gross Profit. Gross profit for the year ended September 30, 1997 was
$24,309,000, an increase of $15,741,000 from the prior year. The increase was
primarily due to the aforementioned acquisitions and internal growth. Gross
margin was 37.6% for 1997 as compared to 43.3% for 1996. Gross margins have been
impacted by the March 1997 acquisition of the Nordic Group which historically
experiences lower margins as compared to other Waterlink companies, as well as
by a large, lower-margin, design-build project in Germany that is near
completion at the end of the fiscal year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended September 30, 1997 were $18,683,000,
an increase of $11,654,000 from the prior year. The increase was primarily due
to the aforementioned acquisitions. Selling, general and administrative expenses
as a percentage of net sales was 28.9% for 1997 as compared to 35.5% for 1996.
This decrease primarily reflects the spreading of selling, general and
administrative expenses over a larger revenue base.
Special Management Compensation. Special management compensation of
$2,630,000 for the year ended September 30, 1997 resulted primarily from the
issuance, concurrent with the initial public offering, of a ten year option to
purchase 100,000 shares of common stock at a price of $0.10 per share to an
officer of the Company pursuant to terms of an employment agreement. Of this
amount, approximately $1,138,000 is non-cash and the remainder represents cash
obligations related principally to the reimbursement of income taxes resulting
from the stock option issuance.
Amortization. Amortization expense for the year ended September 30, 1997
was $751,000, an increase of $444,000 from the prior year. The increase was
primarily due to the goodwill resulting from the aforementioned acquisitions.
Interest Expense. Interest expense for the year ended September 30, 1997
was $1,281,000, an increase of $404,000 from the prior year. This increase was
primarily related to increased borrowings required to finance the aforementioned
acquisitions.
Extraordinary Item. During the year ended September 30, 1997, the
Company recorded an extraordinary charge of $385,000, net of taxes of $257,000,
related to the write-off of unamortized debt issuance costs associated with
certain indebtedness retired with the net proceeds from, and discounts
associated with a note purchase agreement terminated in connection with, its
initial public offering.
Year Ended September 30, 1996 Compared to Fiscal Period Ended September 30, 1995
Net Sales. Net sales for 1996 were $19,801,000, an increase of
$17,117,000 from the prior period. Substantially all of the increase was
attributable to the timing of the acquisition of Great Lakes in fiscal 1995 and,
Mass Transfer and Aero-Mod in fiscal 1996.
Gross Profit. Gross profit for 1996 was $8,568,000, an increase of
$7,741,000 from the prior period. The increase was primarily due to the timing
of the aforementioned acquisitions. Gross margin was 43.3% for 1996 as compared
to 30.8% in 1995. Sanborn Technologies, which comprised the majority of 1995 net
sales, has historically experienced a lower gross margin that the Company's
other operating subsidiaries owned during 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1996 were $7,029,000, an increase of $5,851,000 from
the prior period. The increase was primarily due to the timing of the
aforementioned acquisitions. Selling, general and administrative
- 17 -
<PAGE> 18
expenses as a percentage of net sales was 35.5% for 1996 as compared to 43.9%
for 1995. This decrease primarily reflects the spreading of selling, general and
administrative expenses over a larger revenue base.
Amortization. Amortization expense for 1996 was $307,000, an increase of
$292,000 from the prior period. The increase was primarily due to the goodwill
resulting from the aforementioned acquisitions.
Interest Expense. Interest expense for 1996 was $877,000, an increase of
$733,000 from the prior period. This increase primarily related to increased
borrowings required to consummate the aforementioned acquisitions and fund
working capital expansion.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's primary sources of liquidity have been
(i) borrowings available under its Credit Facility (as defined below) and prior
credit facilities, (ii) net proceeds from the sale of the Company's common and
preferred stock, and (iii) issuance of common stock and seller financing
incurred in connection with the Company's completed acquisitions. Historically,
the Company's primary uses of capital have been the funding of its acquisition
program and working capital expansion. The Company does not currently anticipate
making significant capital investments in plant and equipment due to its focus
on partnering with vendors which manufacture most of the components used in the
Company's systems and equipment.
For the year ended September 30, 1997, net cash used by operating
activities was $6,708,000, purchases of equipment totaled $1,072,000 and cash
outlays for the purchases of businesses, net of cash acquired, totaled
$42,597,000. These cash outlays, financed primarily by long-term borrowings and
the initial public offering, reflect the Company's continued acquisition program
and expansion of existing operations.
In June 1997, the Company recorded a special management compensation
charge of $2,630,000 resulted primarily from the issuance, concurrent with the
initial public offering, of a ten year option to purchase 100,000 shares of
common stock at a price of $0.10 per share to an officer of the Company pursuant
to terms of an employment agreement. Of this amount, approximately $1,138,000 is
non-cash and the remainder represents cash obligations related principally to
the reimbursement of income taxes resulting from the stock option issuance.
The net proceeds from the initial public offering were used primarily to
pay the cash portion of the purchase prices of Bioclear, Lanco and MEVA, and for
the repayment of outstanding indebtedness and for general working capital
purposes. Such applications enabled the Company to reduce its leverage and will
enable it to expand its product offerings, which together are anticipated to
improve its financial flexibility and enhance the implementation of its
strategic plan.
The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. The Company believes
that through the end of fiscal 1998, (i) future cash flow from operations, (ii)
borrowings under its Credit Facility and (iii) issuances of Common Stock and
seller financing incurred in connection with future acquisitions will be
sufficient to fund its working capital needs, additional acquisitions and
additional contingent consideration related to acquisitions.
Acquisitions. As part of its strategic plan, the Company has implemented
an acquisition program, which has significantly impacted liquidity and capital
resources. As of September 30, 1997, the Company has made ten acquisitions for
an aggregate consideration of $81,837,000, comprised of $59,026,000 of cash,
$7,468,000 of Common Stock, and $15,343,000 of seller financing and assumed
debt, including convertible debt. Of the $15,343,000 of seller financing and
assumed debt, $6,765,000 was outstanding at September 30, 1997.
- 18 -
<PAGE> 19
The Company may be required to make additional purchase consideration
payments of up to $6,545,000, contingent upon the achievement of certain
operating results through fiscal 2000. The payments that may be required in
fiscal 1998, 1999 and 2000 are $4,100,000, $1,713,000 and $732,000,
respectively. In connection with two of the Company's acquisitions, the Company
also may be required to make other additional purchase consideration payments in
the form of cash and Common Stock, in an amount equal to a fixed percentage of
the excess of certain specified annual earnings targets through fiscal 2000.
Since such additional purchase consideration payments, if any, are based on a
fixed percentage of such excess amount, there is no maximum amount for such
payments. Any such additional purchase consideration payments will be treated as
additional goodwill for accounting purposes. As of September 30, 1997,
additional purchase consideration payments of $1,760,000 is accrued on the
Company's balance sheet and is expected to be paid before March 31, 1998.
Credit Availability. On February 19, 1997, the Company entered into a
credit facility with Bank of America National Trust & Savings Association. This
credit facility provided the Company with a revolving line of credit of up to
$8,000,000 and a term loan of $11,000,000. The term loan was used to acquire the
Nordic Group and to refinance certain indebtedness in connection with the
acquisition.
In connection with this credit facility, two of the overseas subsidiaries
of the Company had separate facilities of $2,200,000 and $3,800,000,
respectively, for borrowings in local currencies. Each separate facility is
guaranteed by the Company, with outstanding amounts that bear interest based on
a designated London interbank offering rate plus a spread of 250 basis points.
As additional consideration for this credit facility, the Company granted
the bank, pursuant to a certain warrant agreement dated February 19, 1997, a
warrant, expiring in 2002, to purchase 225,000 shares of Common Stock at a
purchase price of $4.50 per share.
On June 27, 1997, concurrent with the closing of its initial public
offering, the Company terminated this credit facility and entered into a new
$40,000,000 three year, secured, domestic, revolving credit facility with Bank
of America National Trust & Savings Association as agent. In connection with the
domestic revolving credit facility, the separate facilities of the two overseas
subsidiaries were amended to change availability to $4,000,000 and $3,000,000,
respectively. The $40,000,000 domestic revolving credit facility and the
$7,000,000 overseas facilities (the "Credit Facility") will be utilized to fund
operating activities of the Company as well as future acquisitions.
Loans under the Credit Facility will bear interest at a designated
variable base rate plus spreads ranging from 0 to 25 basis points depending on
the ratio of total consolidated indebtedness to the Company's earnings before
interest, taxes, depreciation and amortization. At the Company's option, the
domestic revolving credit facility will bear interest based on a designated
London interbank offering rate plus spreads ranging from 100 to 200 basis
points. At September 30, 1997, approximately $32,404,000 was available under the
Credit Facility.
The Credit Facility restricts or prohibits the Company from many actions,
including paying dividends and incurring or assuming other indebtedness or
liens. The Company's obligations under the Credit Facility are secured by liens
on substantially all of the Company's domestic assets, including equipment,
inventory, accounts receivable and general intangibles and pledge of most of the
stock of the Company's subsidiaries. The Company has guaranteed the payment by
its two overseas subsidiaries of their obligations under the overseas
facilities. The two overseas subsidiaries have given a negative pledge of their
assets in connection with the overseas facilities.
In September 1997 the Company entered into a $3,000,000 credit facility
("Canadian Line of Credit") with Royal Bank of Canada, a participant in the
Credit Agreement above, to fund Canadian working capital requirements including
bankers acceptances and letters of credit. Interest rates are negotiated on an
individual borrowing basis and are related to the Royal Bank of Canada's prime
rate.
- 19 -
<PAGE> 20
Borrowings are payable upon demand and are guaranteed by Bioclear. At September
30, 1997, approximately $802,000 was available under the Canadian Line of
Credit.
In March 1997, the Company entered into a note purchase agreement
pursuant to which the Company could issue, and several purchasers had committed
to purchase, five year subordinated notes in the principal amount of up to
$10,000,000. The notes were not drawn on by the Company and upon the
consummation of the initial public offering the note purchase agreement was
terminated in accordance with its terms. In consideration of entering into the
note purchase agreement, parties agreeing to be purchasers of the notes received
125,000 warrants to purchase shares of Common Stock at a purchase price of $4.50
per share.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
and SFAS No. 129, Disclosure of Information about Capital Structure. The Company
is required to adopt both standards during the first quarter of fiscal 1998.
SFAS No. 128 replaces the presentation of primary earnings per share (EPS) under
Accounting Principle Board Opinion No. 15 and related Interpretations, with the
presentation of basic EPS (which primarily gives effect only to common shares
actually outstanding) and requires dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures. Under SFAS No. 128, the Company's 1997 basic and diluted EPS would
be $.08 per share and $.04 per share, respectively. SFAS No. 129's primary focus
is to expand the number of entities subject to certain capital structure
disclosure requirements, particularly nonpublic entities, and accordingly, will
not have a significant impact on the Company's disclosures.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which changes the way public companies
report segment information in annual financial statements. The statement also
requires public companies to report selected segment information in interim
financial reports to shareholders. The statement is effective for the Company in
fiscal 1999 and restatement of comparative information for earlier years is
required in the initial year of adoption. Management does not expect the
adoption of SFAS No. 131 to have a material impact on the Company's financial
statement disclosures.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed
herein may include forward-looking statements that involve risks and
uncertainties. While forward-looking statements are sometimes presented with
numerical specificity, they are based on variety of assumptions made by
management regarding future circumstances over which the Company has little or
no control. A number of important factors, including those identified in this
section as well as factors discussed elsewhere herein, could cause the Company's
actual results to differ materially from those in forward-looking statements or
financial information. Actual results may differ from forward-looking results
for a number of reasons, including the following: (i) changes in world economic
conditions (including, but not limited to, the potential instability of
governments and legal systems in countries in which the Company conducts
business, and significant changes in currency valuations), (ii) changes in
customer demand as they affect sales and product mix (including, but not limited
to, the effect of strikes at customers' facilities, variations in backlog and
the impact of changes in industrial business cycles), (iii) competitive factors
(including, but not limited to, changes in market penetration and the
introduction of new products by existing and new competitors), (iv) changes in
operating costs (including, but not limited to, the effect of changes in the
Company's manufacturing processes; changes in costs associated with varying
levels of operations; changes resulting from different levels of customers
demands; the effects of unplanned work stoppages; changes in cost of labor and
benefits; and the cost and availability of raw materials and energy), (v) the
success of the Company's operating
- 20 -
<PAGE> 21
plan (including, but not limited to, its ability to achieve the total planned
benefits of its strategic plan, its ability to find and integrate acquisitions
into Company operations, and the ability of recently acquired companies to meet
satisfactory operating results), and (vi) unanticipated litigation, claims or
assessments (including, but not limited to, claims or problems related to
product warranty and environmental issues).
Potential Fluctuations in Quarterly Results of Operations. The Company
has in the past experienced quarterly fluctuations in operating results due to
the contractual nature of its business and, to a lesser extent, weather
conditions. As part of its strategic plan, the Company expects that in the
future it may receive contracts that are significantly larger than those
received by the Company historically. In addition, certain of such contracts
will be subject to the customer's ability to finance, or fund from government
sources, the actual costs of completing the project as well as receiving any
necessary permits. Therefore, the Company expects that its future operating
results could fluctuate significantly, especially on a quarterly basis. The
recognition by the Company of revenues and profits therefrom can fluctuate due
to the timing of the awarding of such contracts and the ability to fund project
cost. In addition, the Company has historically operated with a moderate
backlog. As a result, quarterly sales and operating results depend in part on
the volume and timing of contracts received and performed within the quarter,
which are difficult to forecast. Any significant deferral or cancellation of a
contract could have a material adverse effect on the Company's operating results
in any particular period. Accordingly, the Company believes that
period-to-period comparisons of its operating results may not be necessarily
indicative of future performance. As a result, the Company's operating results
and stock price could prove to be volatile, particularly on a quarterly basis.
Limited Combined Operating History; Risks of Integration. Waterlink has
grown by completing ten acquisitions consisting of seventeen operating
companies. The success of the Company will depend, in part, on the Company's
ability to integrate the operations of these businesses and other companies it
acquires, including centralizing certain functions to achieve cost savings and
developing programs and processes that will promote cooperation and the sharing
of opportunities and resources among its businesses. A number of the businesses
offer different services, utilize different capabilities and technologies,
target different markets and customer segments and utilize different methods of
distribution and sales representatives. While the Company believes that there
are substantial opportunities in integrating the businesses, these differences
increase the difficulty in successfully completing such integration. In
addition, there can be no assurance that such cross selling opportunities will
develop or that the operating results of the Company will match or exceed the
combined individual operating results achieved by the businesses prior to their
respective acquisition.
Waterlink's management group has been assembled only relatively recently.
There can be no assurance that the management group will be able to oversee the
combined entity and implement the Company's operating or growth strategies
effectively. Further, to the extent that the Company is able to implement its
acquisition strategy, the resulting growth of the Company will place significant
demands on management and on the Company's internal controls. There can be no
assurance that the management group will effectively be able to direct the
Company through a period of significant growth.
Further, there can be no assurance that the Company's strategy to become
a leading international provider of integrated water purification and wastewater
treatment solutions will be successful, or that the Company's targeted client
segments will accept the Company as a provider of such solutions.
Dependence on Acquisitions for Growth. A part of the Company's strategic
plan is to grow by acquiring existing businesses. This acquisition strategy
involves risks inherent in assessing the values, strengths, weaknesses, risks
and profitability of acquisition candidates, including adverse short-term
effects on the Company's reported operating results, diversion of management's
attention, dependence on retaining, hiring and training key personnel, and risks
associated with unanticipated
- 21 -
<PAGE> 22
problems or latent liabilities. Although the Company generally has been
successful in acquiring companies it has pursued, there can be no assurance that
acquisition opportunities will continue to be available, that the Company will
have access to the capital required to finance potential acquisitions, that the
Company will continue to acquire businesses or that any business acquired by the
Company will be integrated successfully into the Company's operations and prove
profitable. In addition, to the extent that consolidation becomes more prevalent
in the industry, the prices for attractive acquisition candidates may be bid up
to higher levels and there can be no assurance that businesses acquired in the
future will achieve sales and profitability that justify the investment therein.
Need for Additional Acquisition Financing. The Company currently intends
to use a combination of shares of its Common Stock, cash, and debt obligations
in making future acquisitions. The extent to which the Company will be able or
willing to use the Common Stock for this purpose will depend on its market value
from time to time and the willingness of potential sellers of acquisition
targets to accept it as full or partial payment. To the extent the Company is
unable to use the Common Stock to make future acquisitions, its ability to grow
may be limited by the extent to which it is able to raise capital for this
purpose, as well as to expand existing operations, through debt or additional
equity financing. The Company has approximately $33.2 million in the aggregate
available to it, subject to certain requirements, under the Credit Facility and
the Canadian Line of Credit, to be used for acquisitions, working capital and
other corporate purposes. No assurance can be given the Company will be able to
obtain the capital it would need to finance a successful acquisition program and
its other cash needs.
Operations Outside the United States. A substantial proportion of the
Company's systems, equipment and services are sold in western Europe, Latin
America and other regions outside the United States and a number of the
Company's subsidiaries operate outside of the United States. On an annualized
pro forma basis, the Company's net sales outside the United States were
approximately 58% of its pro forma fiscal 1997 net sales. Such sales pose
certain risks associated with doing business in foreign countries, resulting
from certain political, economic and other uncertainties, including, among
others, risks of war, expropriation or nationalization of assets, renegotiation
or nullification of existing contracts, changing political conditions, changing
laws and policies affecting trade and investment, overlap of different tax
structures, and the general hazards associated with the assertion of sovereignty
over certain areas in which operations are conducted. Additionally, various
jurisdictions have laws limiting the right and ability of subsidiaries and joint
ventures to pay dividends and remit earnings to affiliated companies, unless
specified conditions are satisfied.
Certain aspects of the Company's operations are subject to governmental
regulations in the countries in which the Company operates, including those
relating to currency conversion and repatriation, taxation of its earnings and
earnings of its personnel, and its use of local employees and suppliers. The
Company's operations are also subject to the risk of changes in laws and
policies in the various jurisdictions in which the Company operates which may
impose restrictions on the Company, including trade restrictions, that could
have a material adverse effect on the Company's business, financial condition
and results of operations. Other types of government regulation which could, if
enacted or implemented, materially and adversely affect the Company's operations
include expropriation or nationalization decrees, confiscatory tax systems,
primary or secondary boycotts directed at specific countries or companies,
embargoes and import restrictions or other trade barriers. The Company cannot
determine to what extent future operations and earnings of the Company may be
affected by new laws, new regulations, changes in or new interpretations of
existing laws or regulations or other consequences of doing business outside the
United States.
Foreign Currency Risks. Because the Company's functional currency is the
United States dollar, its operations outside the United States sometime face the
additional risks of fluctuating currency values and exchange rates, hard
currency shortages and controls on currency exchange. The Company has operations
outside the United States and is hedged, to some extent, from foreign
- 22 -
<PAGE> 23
exchange risks because of its ability to purchase, manufacture and sell in the
local currency of those jurisdictions. In addition, the Company does enter into
foreign currency contracts under certain circumstances to reduce the Company's
exposure to foreign exchange risks. There can be no assurance, however, that the
attempted matching of foreign currency receipts with disbursements or hedging
activity will adequately moderate the risk of currency or exchange rate
fluctuations which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, to the
extent the Company has operations outside the United States, the Company is
subject to the impact of foreign currency fluctuations and exchange rate charges
on the Company's reporting in its financial statements of the results from such
operations outside the United States. Since such financial statements are
prepared utilizing United States dollars as the basis for presentation, results
from any operations outside the United States reported in the financial
statements must be converted into dollars utilizing the appropriate foreign
currency exchange rate, and thereby subjecting such results to the impact of
currency and exchange rate fluctuations.
Dependence on Key Personnel. The Company's operations depend on the
continuing efforts of its executive officers and its senior management. Should
the Company be unable to retain any of its executive officers or senior
management, the Company's prospects could be adversely affected. In addition,
the Company intends to grow through acquisitions and internal expansion. The
Company likely will depend on the senior management of any significant
businesses it acquires in the future and on its ability to attract qualified
management to support its internal expansion. The business or prospects of the
Company could be affected adversely if any of these senior management of
acquired businesses does not continue in his or her management role after
joining the Company and if the Company is unable to attract and retain qualified
replacements and additional members of management.
Competition. The water purification and wastewater treatment industry is
fragmented and highly competitive due to the large number of businesses within
certain product areas. The Company competes with many companies, several of
which have greater market penetration, depth of product line, resources and
access to capital, which could be competitive advantages in securing certain
projects. While the Company believes it is well positioned to deliver technology
and services at a fair price, some competitors have developed product and
service integration capabilities beyond the current scope of the Company. In
addition, some competitors may have greater financial resources than the Company
to finance acquisition and internal growth opportunities. Consequently, the
Company may encounter significant competition in its efforts to achieve its
objectives.
Cyclicality of Demand for Water Purification and Wastewater
Equipment. Much of the water purification and wastewater equipment sold by the
Company requires significant capital expenditures by its customers. As such, the
timing of customer purchases may be affected by various economic factors,
including interest rate and business cycle fluctuations, which are beyond the
control of the Company. While the Company sells equipment across a broad cross
section of industry segments and customers, the cyclical nature of capital
equipment sales could have an adverse effect on the its revenues and
profitability in general, and on the its revenues and profitability in any
individual financial reporting period.
Potential Environmental Liabilities. In the United States, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, and comparable state laws, impose joint and several liability
without fault for the releases of hazardous substances into the environment.
Potentially responsible parties include (i) owners and operators of the site,
(ii) parties which create the hazardous substances released at the site, and
(iii) parties which arrange for the transportation or disposal of such hazardous
substances. The Company is also subject to applicable environmental laws in
countries outside the United States where it operates or in which its customers
are located. These requirements and their enforcement may vary by country but in
general prescribe standards for the protection of human health, safety and the
environment. The Company could face claims by
- 23 -
<PAGE> 24
governmental authorities, private individuals and other persons alleging that
hazardous substances were released during the treatment process or from the use
or disposal of end products and by-products in violation of applicable law.
Reliance on Environmental Regulation. Federal, state, local and foreign
environmental laws and regulations impose substantial standards for properly
purifying water and treating wastewater, and impose liabilities for
noncompliance. Environmental laws and regulations are, and will continue to be,
a significant factor affecting the marketability of the Company's solutions,
systems and equipment. To the extent that demand for the Company's solutions,
systems and equipment is created by the need to comply with such environmental
laws and regulations, any modification of the standards imposed by such laws and
regulations may reduce demand, thereby adversely affecting the Company's
business and prospects. The relaxation or repeal of any such laws or regulations
or the strict enforcement thereof could adversely affect the Company's business
and prospects.
Process and Product Warranty and Performance Guarantees. In connection
with providing certain services and products to its customers, the Company
sometimes is required to guarantee that the services and products will attain
specified levels of quality or performance. Should a product fail to perform
according to a performance guarantee, or should a service fail to accomplish
treatment levels which are guaranteed, and should the Company be unable to
remedy such failure within any applicable cure period, the Company could incur
financial penalties in the form of liquidated damages or could be required to
remove and/or replace the equipment or repeat the service in order to meet the
specifications. While the Company historically has fulfilled all of its
guarantee obligations, there can be no assurance the Company will be able to
fulfill its future guarantee obligations or that fulfilling such obligations may
not involve material costs that could have a material adverse effect on the
Company.
- 24 -
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WATERLINK, INC. AND SUBSIDIARIES
Report of Independent Auditors.................................................... 26
Consolidated Balance Sheets at September 30, 1997 and 1996........................ 27
Consolidated Statements of Operations for the years ended September 30, 1997 and
1996 and the period from December 7, 1994 (date of incorporation) to September
30, 1995........................................................................ 29
Consolidated Statements of Shareholders' Equity for the years ended September 30,
1997 and 1996 and the period from December 7, 1994 (date of incorporation) to
September 30, 1995.............................................................. 30
Consolidated Statements of Cash Flows for the years ended September 30, 1997 and
1996 and the period from December 7, 1994 (date of incorporation) to September
30, 1995........................................................................ 31
Notes to Consolidated Financial Statements........................................ 32
</TABLE>
- 25 -
<PAGE> 26
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Waterlink, Inc.
We have audited the accompanying consolidated balance sheets of
Waterlink, Inc. and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years ended September 30, 1997 and 1996 and the period from
December 7, 1994 (date of incorporation) to September 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Waterlink, Inc. and subsidiaries at September 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years
ended September 30, 1997 and 1996 and the period from December 7, 1994 to
September 30, 1995 in conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP
Canton, Ohio
November 11, 1997
- 26 -
<PAGE> 27
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1997 1996
-------- -------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,482 $ 119
Trade accounts receivable,
less allowance of $775 in 1997
and $101 in 1996 24,625 5,699
Other receivables 1,320 378
Inventories 10,143 3,231
Costs in excess of billings 6,413 1,447
Refundable income taxes 635 --
Other current assets 1,177 172
-------- -------
Total current assets 46,795 11,046
Property, plant and equipment, at cost:
Land, building and improvements 2,366 750
Machinery and equipment 2,536 383
Office equipment 1,463 747
-------- -------
6,365 1,880
Less accumulated depreciation 554 103
-------- -------
5,811 1,777
Other assets:
Goodwill, net of amortization of $929
in 1997 and $287 in 1996 60,419 15,029
Patents, net of amortization of $63 in
1997 and $18 in 1996 1,484 749
Deferred income taxes 611 --
Other assets 740 390
-------- -------
63,254 16,168
-------- -------
Total assets $115,860 $28,991
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
- 27 -
<PAGE> 28
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1997 1996
-------- -------
(In thousands, except
share data)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade $ 9,597 $ 2,076
Accrued expenses 9,447 1,931
Additional purchase consideration payable 1,760 1,013
Billings in excess of cost 3,425 559
Accrued income taxes 490 60
Deferred income taxes 108 --
Current portion of long-term obligations 2,538 1,969
-------- -------
Total current liabilities 27,365 7,608
Long-term obligations:
Long-term debt 12,502 4,676
Notes payable -- related parties -- 3,100
Convertible subordinated notes -- related parties 3,921 2,400
Other 1,199 300
-------- -------
17,622 10,476
Redeemable Preferred Stock -- 8,500
Shareholders' equity:
Preferred Stock, $.001 par value, 10,000,000 shares authorized,
none issued and outstanding
Common Stock, voting, $.001 par value
Authorized -- 40,000,000 shares
Issued and outstanding -- 11,906,326
shares in 1997 and 1,999,996 shares in 1996 12 2
Additional paid-in capital 70,739 2,611
Foreign currency translation adjustment (44) --
Retained earnings (deficit) 166 (206)
-------- -------
Total shareholders' equity 70,873 2,407
-------- -------
Total liabilities and shareholders' equity $115,860 $28,991
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
- 28 -
<PAGE> 29
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 7,
SEPTEMBER 30, 1994 TO
-------------------- SEPTEMBER 30,
1997 1996 1995
------- ------- -------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net sales $64,699 $19,801 $ 2,684
Cost of sales 40,390 11,233 1,857
------- ------- ------
Gross profit 24,309 8,568 827
Selling, general and administrative expenses 18,683 7,029 1,178
Special management compensation 2,630 -- --
Amortization 751 307 15
------- ------- ------
Operating income (loss) 2,245 1,232 (366)
Other income (expense):
Interest expense (1,281) (877) (144)
Interest income and other items -- net 263 (44) 33
------- ------- ------
Income (loss) before income taxes 1,227 311 (477)
Income taxes 470 5 35
------- ------- ------
Income (loss) before extraordinary item 757 306 (512)
Extraordinary item, net of income
taxes of $257 (385) -- --
------- ------- ------
Net income (loss) $ 372 $ 306 $ (512)
======= ======= ======
Net income (loss) per common share:
Income (loss) before extraordinary item $ 0.09 $ 0.05 $ (0.11)
Extraordinary item (0.05) -- --
------- ------- ------
$ 0.04 $ 0.05 $ (0.11)
======= ======= ======
Weighted-average common and equivalent shares
outstanding 8,337 6,428 4,534
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
- 29 -
<PAGE> 30
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOREIGN TOTAL
ADDITIONAL CURRENCY RETAINED SHAREHOLDERS'
COMMON PAID-IN TRANSLATION EARNINGS EQUITY
STOCK CAPITAL ADJUSTMENT (DEFICIT) (DEFICIT)
------ ---------- ---------- -------- -------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
PERIOD FROM DECEMBER 7, 1994 TO
SEPTEMBER 30, 1995
Sale of 1,200,000 shares (initial
capitalization) $ 1 $ 1
Issuance of 250,000 shares in connection
with acquisition of subsidiary $ 500 500
Net loss $ (512) (512)
--- ------- ---- ----- -------
Balance at September 30, 1995 1 500 (512) (11)
YEAR ENDED SEPTEMBER 30, 1996
Exercise of 50,000 stock options 5 5
Issuance of 499,996 shares in connection
with acquisition of subsidiary 1 2,124 2,125
Net income 306 306
Other (18) (18)
--- ------- ---- ----- -------
Balance at September 30, 1996 2 2,611 (206) 2,407
YEAR ENDED SEPTEMBER 30, 1997
Conversion of subordinated notes for
600,000 shares 1 2,516 2,517
Issuance of 481,830 shares in connection
with acquisition of subsidiaries 1 4,843 4,844
Sale of 5,175,000 shares in connection
with the initial public offering and
the exercise of the underwriters
overallotment 5 49,935 49,940
Conversion of 3,250,000 shares of
Preferred Stock 3 8,497 8,500
Issuance of warrants in connection with
debt agreements 413 413
Exercise of 399,500 stock options 583 583
Net income 372 372
Other 1,341 (44) 1,297
--- ------- ---- ----- -------
Balance at September 30, 1997 $ 12 $ 70,739 $(44) $ 166 $70,873
=== ======= ==== ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
- 30 -
<PAGE> 31
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 7,
SEPTEMBER 30, 1994 TO
---------------------- SEPTEMBER 30,
1997 1996 1995
--------- ------- -------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 372 $ 306 $ (512)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Extraordinary item 385 -- --
Special management compensation 1,138 -- --
Deferred income taxes (credit) (549) -- --
Depreciation and amortization 1,229 442 30
Changes in working capital:
Accounts receivable (8,951) (700) (1,258)
Inventories (827) 432 290
Cost in excess of billings (13) (1,390) --
Refundable income taxes (123) -- --
Other assets 462 (80) (112)
Accounts payable 2,265 390 229
Accrued expenses 5 896 295
Billings in excess of cost (2,725) (276) 168
Accrued income taxes 624 (34) 26
--------- ------- -------
Net cash used by operating activities (6,708) (14) (844)
INVESTING ACTIVITIES
Purchases of equipment (1,072) (423) (93)
Purchases of subsidiaries, net of cash acquired (42,597) (5,557) (6,508)
--------- ------- -------
Net cash used in investing activities (43,669) (5,980) (6,601)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 33,110 1,841 4,539
Payments on long-term borrowings (30,866) (1,304) --
Proceeds from sale of Common Stock 50,523 5 1
Proceeds from sale of Preferred Stock -- 4,576 3,900
--------- ------- -------
Net cash provided by financing activities 52,767 5,118 8,440
Effect of exchange rate changes on cash (27) -- --
Increase (decrease) in cash and cash equivalents 2,363 (876) 995
Cash and cash equivalents at beginning of period 119 995 --
--------- ------- -------
Cash and cash equivalents at end of period $ 2,482 $ 119 $ 995
========= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
- 31 -
<PAGE> 32
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Waterlink, Inc. and its wholly-owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated upon consolidation.
FISCAL YEAR END -- The Company's fiscal year ends on September 30th.
References in the notes to the financial statements to the years 1997 and 1996
refer to the fiscal years ended September 30, 1997 and 1996, respectively.
References in the notes to the financial statements to 1995 refer to the period
from December 7, 1994 (date of incorporation) to September 30, 1995.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
REVENUE RECOGNITION -- The majority of the Company's systems and
equipment are custom designed and take a number of months to produce. Revenues
from large contracts are recognized using the percentage of completion method of
accounting in the proportion that costs bear to total estimated costs at
completion. Revisions of estimated costs or potential contract losses, if any,
are recognized in the period in which they are determined. Revenues from the
remaining equipment and product sales are recognized when shipped.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
equivalents and trade receivables. The Company places its cash equivalents with
high quality financial institutions.
Concentrations of credit risk with respect to trade receivables are
limited due to the Company's large number of customers and their dispersion
across many different regions and industries. The Company grants credit to
customers based on an evaluation of their financial condition and collateral is
generally not required. Losses from credit sales are provided for in the
financial statements and have historically been within management's
expectations.
INVENTORIES -- Inventories are valued at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method.
FINANCIAL INSTRUMENTS -- The carrying values of cash, cash equivalents,
accounts receivable and accounts payable are a reasonable estimate of fair value
due to the short-term nature of these instruments. Substantially all of the
Company's long-term debt obligations, except for the convertible subordinated
notes -- related parties, have variable rates and cost approximates fair value
at September 30, 1997. The convertible subordinated notes -- related parties do
not have a ready market and cost is assumed to approximate fair value. The
carrying value of these notes is $3,921,000 at September 30, 1997, with interest
rates of 3% and 5.81% and maturity dates through September 1999.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is valued
at cost. Expenditures for repairs and maintenance are charged to operations as
incurred, while expenditures for additions and improvements are capitalized.
Depreciation is computed principally using the straight-line method over the
estimated useful lives of assets. The useful lives range from 30 to 40 years for
building and improvements; 5 to 10 years for machinery and equipment and 3 to 7
years for office equipment.
- 32 -
<PAGE> 33
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
GOODWILL -- Goodwill represents costs in excess of net assets of acquired
businesses which are amortized using the straight-line method over a period of
40 years. The Company evaluates the realizability of goodwill based on the
undiscounted cash flows of the applicable businesses acquired over the remaining
amortization period. Should the review indicate that goodwill is not
recoverable, the Company's carrying value of goodwill would be reduced by the
estimated shortfall of the cash flows. No reduction of goodwill for impairment
has been necessary to date.
FOREIGN CURRENCY TRANSLATION -- Assets and liabilities of subsidiaries
are translated at the rate of exchange in effect on the balance sheet date;
income and expenses are translated at the average rates of exchange prevailing
during the year. The related translation adjustments are reflected as a separate
component of shareholders' equity. Foreign currency gains and losses resulting
from transactions are included in the results of operations and amounted to a
gain of $167,000 in 1997.
EMPLOYEE BENEFIT PLAN -- Effective February 1, 1996, the Company
implemented a defined contribution plan which covers substantially all
employees. Company contributions to the plan in 1997 totaled $13,000. No Company
contributions were made in 1996.
NET INCOME (LOSS) PER SHARE -- Net income (loss) per share is computed by
dividing net income (loss) by the weighted-average number of shares of Common
Stock and common stock equivalents outstanding during the year. These shares
include common shares outstanding, convertible Preferred Stock (all of which
converted, according to their terms, upon completion of the Company's initial
public offering ("IPO") in June 1997) and common shares which are issuable upon
exercise of outstanding stock options and warrants.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
(SAB) No. 83, stock options and warrants granted by the Company during the
twelve months preceding the Company's IPO date have been included as common
stock equivalents as if they were outstanding for all periods presented prior to
the Company's IPO, using the treasury stock method.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS -- In February 1997, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, and SFAS No. 129,
Disclosure of Information about Capital Structure. The Company is required to
adopt both standards during the first quarter of fiscal 1998. SFAS No. 128
replaces the presentation of primary earnings per share (EPS) under Accounting
Principle Board Opinion No. 15 and related Interpretations, with the
presentation of basic EPS (which primarily gives effect only to common shares
actually outstanding) and requires dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures. Under SFAS No. 128 and SAB No. 83, the Company's 1997 basic and
diluted EPS would be $.05 per share and $.04 per share, respectively. SFAS No.
129's primary focus is to expand the number of entities subject to certain
capital structure disclosure requirements, particularly nonpublic entities, and
accordingly, will not have a significant impact on the Company's disclosures.
- 33 -
<PAGE> 34
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which changes the way public companies
report segment information in annual financial statements. The Statement also
requires public companies to report selected segment information in interim
financial reports to shareholders. The Statement is effective for the Company in
fiscal 1999 and restatement of comparative information for earlier years is
required in the initial year of adoption. Management does not expect the
adoption of SFAS No. 131 to have a material impact on the Company's financial
statement disclosures.
2. ACQUISITIONS
On March 5, 1997, the Company acquired the Nordic Water Products Group
("Nordic Group") for approximately $11,256,000, consisting of $10,721,000 in
cash and $535,000 of seller notes. The Nordic Group manufactures continuous
recirculating sand filters, included plate settlers and systems for nutrient
removal, decanting certrifuges for dewatering biosolids and hydraulic surface
and bottom scrappers. The Nordic Group also designs and builds water
purification and wastewater treatment plants in Europe. The purchase price
includes approximately $5,731,000 of goodwill, which is being amortized on a
straight-line basis over 40 years.
Concurrent with the closing of the Company's IPO, on June 27, 1997, the
Company acquired Bioclear Technology, Inc. ("Bioclear") and Lanco Environmental
Products, Inc. ("Lanco"), for approximately $22,591,000, consisting of
$16,688,000 in cash, $2,285,000 of assumed debt and 328,947 shares of Common
Stock valued at $11 per share. Bioclear designs and builds sequential batch
reactor systems to biologically treat industrial and municipal wastewater, and
Lanco fabricates small plate and frame filter presses for dewatering biosolids
and inclined plate clarifiers for heavy metal removal. The amount of goodwill
recorded in connection with these acquisitions was approximately $19,682,000 and
is being amortized on a straight-line basis over 40 years.
On September 12, 1997, the Company acquired Mellegard V.A. Maskiner AB
("Meva") for approximately $6,838,000; consisting of $5,167,000 in cash and
$1,671,000 of convertible subordinated notes. Meva specializes in the design and
installation of fine screens and related accessories for wastewater treatment
applications. The purchase price includes approximately $4,952,000 of goodwill,
which is being amortized on a straight-line basis over 40 years.
On September 30, 1997, the Company acquired Hycor Corporation ("Hycor")
for approximately $16,002,000; consisting of $12,500,000 in cash, $2,250,000 in
convertible subordinated notes, $502,000 of assumed debt and 41,095 shares of
Common Stock at $18.25 per share. Hycor designs and manufactures screening and
dewatering equipment for liquid/solid separation in industrial and municipal
wastewater and process applications. The purchase price includes approximately
$13,871,000 of goodwill, which will be amortized on a straight-line basis over
40 years.
During fiscal 1996, the Company completed the acquisition of three
companies that design and produce water and wastewater treatment systems. Mass
Transfer Systems, Inc. was purchased effective January 31, 1996 for
approximately $8,000,000, consisting of $3,500,000 in cash, $4,100,000 in seller
notes and $400,000 of assumed debt. Aero-Mod, Inc. and affiliates was purchased
effective April 26, 1996 for approximately $2,700,000, consisting of $1,300,000
in cash, $700,000 in seller notes and $700,000 in assumed debt. Water Equipment
Technologies, Inc. was purchased effective September 30, 1996 for approximately
$5,200,000, consisting of $2,600,000 in cash and 611,784 shares of Common Stock
valued at $4.25 per share. The aggregate purchase price of the 1996 acquisitions
- 34 -
<PAGE> 35
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
included approximately $9,328,000 of goodwill (Mass Transfer Systems, Inc.--
$5,737,000; Aero-Mod, Inc.--$78,000 and Water Equipment Technologies, Inc.--
$3,513,000), which is being amortized on a straight-line basis over 40 years.
During fiscal 1995, the Company acquired SanTech Equipment, Inc. and
Great Lakes Environmental, Inc. which design and produce industrial separation
systems, wastewater pretreatment systems and oil/water separation products.
SanTech Equipment, Inc. was purchased effective March 31, 1995 for cash of
approximately $750,000. Great Lakes Environmental, Inc. was purchased effective
August 31, 1995 for approximately $8,500,000, consisting of $5,800,000 of cash,
$2,200,000 of seller obligations and 250,000 shares of Common Stock at $2.00 per
share. The purchase price of the Great Lakes Environmental, Inc. acquisition
included approximately $7,784,000 of goodwill, which is amortized on a
straight-line basis over 40 years.
All of the acquisitions were accounted for as purchases. The purchase
price allocations for certain of the Company's 1997 acquisitions have been based
on preliminary estimates, which may be revised at a later date. The consolidated
statement of operations of the Company includes the results of operations of the
acquired businesses for the period subsequent to the effective date of these
acquisitions.
Under the terms of certain of the purchase agreements, the Company may be
required to make additional purchase consideration payments of up to $6,545,000,
contingent upon the achievement of specified operating results through fiscal
2000. The payments that may be required in fiscal 1998, 1999 and 2000 are
$4,100,000, $1,713,000 and $732,000, respectively. In connection with two of the
Company's acquisitions, the Company also may be required to make other
additional purchase consideration payments in the form of cash and common stock,
in an amount equal to a fixed percentage of the excess of certain specified
annual earnings targets through fiscal 2000. Since such additional purchase
consideration payments, if any, are based on a fixed percentage of such excess
amount, there is no maximum amount for such payments. Any such additional
purchase consideration payments will be treated as additional goodwill for
accounting purposes.
The following unaudited pro forma information presents the consolidated
results of operations of the Company assuming the acquisitions discussed above
were completed on October 1, 1995:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales $111,026 $ 93,384
Operating profit 6,861 5,977
Income before taxes 3,052 627
Income before extraordinary item 1,740 357
Net income 1,355 357
Per common share:
Income before extraordinary item $0.21 $0.05
Net income 0.16 0.05
</TABLE>
The pro forma results of operations are not indicative of the actual
results of operations that would have occurred had the acquisitions been made on
the date indicated, or the results that may be obtained in the future. The above
pro forma operating results do not reflect the use of proceeds of the IPO and
the resulting reduction of indebtedness. Pro forma operating results for the
year ended
- 35 -
<PAGE> 36
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
September 30, 1997 reflect the $2,630,000 special compensation charge and the
extraordinary item of $385,000 incurred in connection with the IPO, as described
in Notes 8 and 9.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
------- ------
(In thousands)
<S> <C> <C>
Raw materials and supplies $ 4,821 $1,864
Work in process and finished goods 5,322 1,367
------- ------
$10,143 $3,231
======= ======
</TABLE>
4. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
------- ------
(In thousands)
<S> <C> <C>
Contract costs incurred to date $17,033 $1,957
Estimated profits 7,793 1,864
------- ------
Contract revenue earned to date 24,826 3,821
Less billings to date 21,838 2,933
------- ------
Cost and estimated earnings in excess of billings, net $ 2,988 $ 888
======= ======
</TABLE>
The above amounts are included in the accompanying consolidated balance
sheet as:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1997 1996
------ ------
(In thousands)
<S> <C> <C>
Costs in excess of billings $6,413 $1,447
Billings in excess of costs 3,425 559
------ ------
$2,988 $ 888
====== ======
</TABLE>
Amounts receivable include retainage which has been billed, but is not
due pursuant to retainage provisions in construction contracts until completion
of performance and acceptance by the customer. This retainage aggregated
$1,294,000 at September 30, 1997, and $528,000 at September 30, 1996.
Substantially all retained balances are collectible within one year.
- 36 -
<PAGE> 37
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
5. LONG-TERM DEBT OBLIGATIONS
Long-term debt obligations consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>
LONG-TERM DEBT
Revolving credit agreements with a bank, due June 27,
2000. Interest is payable monthly at designated
variable rates. (6.69% at September 30, 1997) $12,000 $ --
Subordinated note to former parent of acquired business
due November 24, 1997. Interest is payable at maturity
at a rate of 7% per annum 535 --
Note payable to a bank, due January 14, 1998. Interest is
payable at maturity at a rate of 4.4% 1,807 --
Note payable in annual installments of $100,000,
including interest at 9.25%, commencing June 1999
through June 2005 502 --
Note payable to a bank, interest payable monthly at a
rate of 4.75% 196 --
Term notes payable to banks -- 5,093
Revolving credit agreement -- 672
Other notes payable to various parties -- 80
NOTES PAYABLE -- RELATED PARTIES
Subordinated notes payable to former shareholders of
acquired companies -- 3,900
CONVERTIBLE SUBORDINATED NOTES -- RELATED PARTIES
Note payable to former shareholders of Meva, due
September 12, 1999. Interest accrues at 3% per annum
and is payable on a quarterly basis 1,671 --
Note payable to a former shareholder of Hycor, due
September 30, 1999. Interest accrues at 5.81% per
annum and is payable on a quarterly basis 2,250 --
Notes payable to former shareholders of acquired
companies -- 2,400
------- -------
18,961 12,145
Less current maturities 2,538 1,969
------- -------
$16,423 $10,176
======= =======
</TABLE>
Future maturities of long-term debt obligations for the five years
subsequent to September 30, 1997 are as follows: 1998--$2,538,000;
1999--$3,924,000; 2000--$12,054,000; 2001-- $59,000 and 2002--$64,000.
Interest paid approximated $1,605,000 in 1997 and $631,000 in 1996.
On February 19, 1997, the Company entered into a credit facility with
Bank of America National Trust & Savings Association ("Credit Facility").
Proceeds from the Credit Facility were used to acquire the Nordic Group and to
refinance certain indebtedness in connection with the acquisition. As
- 37 -
<PAGE> 38
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
additional consideration for the Credit Facility, the Company granted the Bank,
pursuant to an agreement dated February 19, 1997, a warrant, expiring in 2002,
to purchase 225,000 shares of Common Stock at a purchase price of $4.50 per
share. The aggregate fair value of the 225,000 warrants issued of $265,500
($1.18 per share) was treated as an original issue discount and was subsequently
written off in connection with the extraordinary charge discussed in Note 9.
On June 27, 1997, concurrent with the closing of its IPO, the Company
terminated its Credit Facility and entered into a new $40,000,000 three year,
secured, domestic revolving credit facility with Bank of America National Trust
& Savings Association as agent. This facility permits the Company's overseas
subsidiaries to incur up to $10,000,000 of additional unsecured indebtedness. In
connection with entering into the domestic revolving credit facility, the
existing separate facilities of the two overseas subsidiaries were amended to
provide availability of $4,000,000 and $3,000,000, respectively. The $40,000,000
domestic revolving credit facility and the $7,000,000 overseas facilities (the
"New Credit Facility") will be utilized to fund operating activities of the
Company as well as future acquisitions.
Loans under the domestic revolving credit facility will bear interest at
a designated variable base rate plus spreads ranging from 0 to 25 basis points
depending on the ratio of total consolidated indebtedness to the Company's
earnings before interest, taxes, depreciation and amortization. At the Company's
option, the domestic revolving credit facility will bear interest based on a
designated London interbank offering rate plus spreads ranging from 100 to 200
basis points. At September 30, 1997, approximately $32,404,000 was available
under the New Credit Facility.
The New Credit Facility restricts or prohibits the Company from many
actions, including paying dividends and incurring or assuming other indebtedness
or liens. The Company's obligations under the New Credit Facility are secured by
liens on substantially all of the Company's domestic assets, including
equipment, inventory, accounts receivable and general intangibles and pledge of
most of the stock of the Company's subsidiaries. The two overseas subsidiaries
have given a negative pledge of their assets in connection with the overseas
facilities.
In September 1997, the Company entered into a $3,000,000 credit facility
("Canadian Line- of-Credit") with Royal Bank of Canada, a participant in the
Credit Agreement above, to fund Canadian working capital requirements including
bankers acceptances and letters of credit. Interest rates are negotiated on an
individual borrowing basis and are related to the Royal Bank of Canada's prime
rate. Borrowings are payable upon demand and are guaranteed by Bioclear. At
September 30, 1997, approximately $802,000 was available under the Canadian
Line-of-Credit.
Convertible subordinated notes payable to former shareholders of acquired
companies of $2,400,000, plus accrued interest, were converted into 600,000
shares of Common Stock in 1997.
In March 1997, the Company entered into a note purchase agreement (the
"Note Purchase Agreement") pursuant to which the Company could issue, and
several purchasers had committed to purchase, five year subordinated notes (the
"1997 Notes"). The 1997 Notes were not drawn on by the Company and upon the
consummation of the IPO the Note Purchase Agreement terminated in accordance
with its terms. In consideration for entering into the Note Purchase Agreement,
parties agreeing to be purchasers of the 1997 Notes received 125,000 warrants to
purchase shares of common stock at a purchase price of $4.50 per share. The
aggregate fair value of the 125,000 warrants issued of $148,000 ($1.18 per
share) was initially capitalized as deferred financing costs and was
subsequently written off in connection with the extraordinary charge discussed
in Note 9.
- 38 -
<PAGE> 39
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
6. LEASES
The Company leases certain facilities and equipment under operating
leases, some of which are with an entity controlled by former shareholders of
certain acquired businesses. The Company believes that the rents due under the
related party leases are comparable to those which would be charged by an
unrelated party. Rent expense totaled $959,000 in 1997, $241,000 in 1996 and
$64,000 in 1995. Related party rent expense included in these totals amounted to
$438,000 in 1997 and $116,000 in 1996. Aggregate future minimum lease payments
under noncancelable operating leases at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
RELATED
PARTY OTHER
LEASES LEASES TOTAL
------- ------ ------
(In thousands)
<S> <C> <C> <C>
1998 $ 677 $ 588 $1,265
1999 687 471 1,158
2000 697 357 1,054
2001 573 349 922
2002 259 198 457
Thereafter 3,295 195 3,490
------ ------ ------
$ 6,188 $2,158 $8,346
====== ====== ======
</TABLE>
7. REDEEMABLE PREFERRED STOCK
Redeemable Preferred Stock at September 30, 1996 consisted of 400,000
shares of Series A Preferred Stock (issued in 1995), 1,700,000 shares of Series
B Preferred Stock (issued in 1995) and 1,150,000 shares of Series C Preferred
Stock (issued in 1996). These shares had a par value of $.001 per share and a
base liquidation price of $1.25 per share for Series A Preferred Shares, $2.00
per share for Series B Preferred Shares, and $4.00 per share for Series C
Preferred Shares.
In accordance with the terms of the shareholder agreements, all
outstanding shares of Preferred Stock were converted into shares of Common Stock
on a one-for-one basis concurrent with the Company's IPO in June 1997.
8. SPECIAL MANAGEMENT COMPENSATION
In June 1997, the Company incurred a special charge to operations of
$2,630,000 resulting primarily from the issuance, concurrent with the IPO, of a
ten year option to purchase 100,000 shares of common stock at a price of $0.10
per share to an officer of the Company pursuant to terms of an employment
agreement. Of this amount, approximately $1,138,000 is non-cash and the
remainder represents cash obligations related principally to the reimbursement
of income taxes resulting from the stock option issuance. This special charge
after income taxes on a per share basis was $0.20 for the year ended September
30, 1997.
9. EXTRAORDINARY ITEM
The Company used a portion of the proceeds from its IPO to repay
substantially all of its outstanding indebtedness. In addition, concurrent with
the IPO the Company canceled the Note Purchase Agreement discussed in Note 5. In
connection with the early retirement of certain
- 39 -
<PAGE> 40
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
indebtedness and the cancellation of the Note Purchase Agreement, the Company
realized an extraordinary charge of $385,000, net of taxes of $257,000, related
to the write-off of unamortized debt issuance costs and discounts associated
with this indebtedness. This extraordinary item on a per share basis was $0.05
for the year ended September 30, 1997.
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----- ---- ----
(In thousands)
<S> <C> <C> <C>
Current:
U.S. federal $ 807 $ -- $--
State and local (48) 5 35
Foreign 214 -- --
----- ---- ---
973 5 35
Deferred (549) 99 --
Increase (reduction) in valuation allowance 46 (99) --
----- ---- ---
$ 470 $ 5 $35
===== ==== ===
</TABLE>
The Company made income tax payments of approximately $220,000 in 1997,
$40,000 in 1996 and $9,000 in 1995.
Following is the reconciliation between the provision (credit) for income
taxes and the amount computed by applying the statutory U.S. federal income tax
rate of 34% to income before income taxes:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- -----
(In thousands)
<S> <C> <C> <C>
Provision (credit) for income taxes at the statutory
federal rate $417 $106 $(162)
Adjustments:
State and local income taxes (32) 5 35
Non-deductible goodwill amortization 71 -- --
Difference in rates on foreign subsidiaries (46) -- --
Change in valuation allowance 46 (99) 163
Other 14 (7) (1)
---- ---- -----
Provision for income taxes $470 $ 5 $ 35
==== ==== =====
Effective income tax rate 38% 2% (7)%
==== ==== =====
</TABLE>
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
- 40 -
<PAGE> 41
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
purposes. The tax effects of the net operating loss carryforward and temporary
differences are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 771 $ 152 $ 85
Other 645 133 78
Valuation allowance (110) (64) (163)
------ ----- -----
1,306 221 --
Deferred tax liabilities:
Amortization of goodwill (261) (164) --
Revenue recognition (485) -- --
Other (57) (57) --
------ ----- -----
(803) (221) --
------ ----- -----
Net deferred tax asset $ 503 $ -- $ --
====== ===== =====
</TABLE>
For tax purposes, the Company has U.S. federal loss carryforwards of
$1,193,000 which expire in the year 2012 and foreign net operating loss
carryforwards of $1,175,000 that expire in 2003 . A valuation allowance has been
established for certain net operating loss carryforwards for which realization
is uncertain.
11. STOCK OPTION PLANS
During 1997, the Board of Directors approved the Omnibus Incentive Plan
(the "Omnibus Plan") which provides for compensatory equity based awards to
officers and certain other key employees of the Company. Awards may be granted
for no consideration and consist of stock options, stock awards, SARs, dividend
equivalents, other stock based awards (such as phantom stock) and performance
awards consisting of any combination of the foregoing. There have been no awards
granted under this plan.
The Company's 1995 Stock Option Plan (the "Stock Option Plan") provides
grants to officers, key employees, and directors of awards consisting of
"incentive stock options" as defined under the provisions of Section 422 of the
Code, and non-qualified stock options. There are 1,600,000 shares of Common
Stock available for granting of awards under the Stock Option Plan. All options
granted under the Stock Option Plan expire ten years after the date of grant
(see Note 12).
The Company's 1997 Non-Employee Director Stock Option Plan (the "Director
Plan") is authorized to issue up to 150,000 shares of Common Stock. Each
non-employee director is automatically granted an option to purchase 3,000
shares of Common Stock. In addition, on each anniversary date of the Director
Plan, each of the Company's then non-employee directors who have served at least
six-months shall automatically be granted an option to purchase 5,000 shares of
Common Stock. The per share exercise price of options granted under the Director
Plan will be the fair market value of the Common Stock on the date of grant.
Options granted under the Director Plan will expire ten years after the date of
grant (see Note 12).
- 41 -
<PAGE> 42
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
Under the Company's Employee Stock Purchase Plan (the "Plan"), the
Company is authorized to issue up to 500,000 shares of Common Stock. Under the
terms of the Plan, employees can choose to have up to 20% of their annual
compensation withheld to purchase Common Stock. The exercise price for shares
subject to purchase under options granted shall be 85% of the fair market value
of the Common Stock on the first day of the purchase period, unless otherwise
determined by the compensation committee. On the last day of the purchase period
of any offering of shares made under the Plan, each outstanding option shall
automatically be exercised. At any time prior to the end of the purchase period
applicable to each offering, an employee is permitted to terminate or reduce his
or her payroll deductions, to reduce his or her options to purchase or to
withdraw all or part of the amount in his or her account. The employee has the
right to receive in cash the amount accumulated in such account. The Plan will
terminate ten years from the date of adoption.
12. STOCK BASED COMPENSATION
It is the Company's policy to generally grant stock options for a fixed
number of shares to employees with the exercise price approximating fair value.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations and accordingly,
recognizes no compensation expense for stock options granted at fair value.
Management believes that the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting For Stock Based Compensation" ("SFAS
123"), requires use of option valuation methods that were not developed for use
in valuing employee stock options. Under APB 25, compensation expense has been
recognized for all options granted at less than the fair market value of the
Company's common shares on the date of grant (see Note 8).
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value of these options and the options granted as part of the Plan were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1997 and 1996: risk- free
interest rate of 6.0%, dividend yield rate of 0%, volatility factor of the
expected market price of the Company's stock of 30% and a weighted-average
expected life of the options of 5 years. Using the Black-Scholes model, the
weighted-average grant-date fair value of options granted during 1997 and 1996
in the Stock Option Plan follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
FAIR EXERCISE FAIR EXERCISE
VALUE PRICE VALUE PRICE
----- -------- ----- --------
<S> <C> <C> <C> <C>
Stock price equals exercise price $4.28 $ 11.20 $1.53 $ 3.92
Stock price is greater than exercise price -- -- 4.18 .10
Stock price is less than exercise price -- -- 1.54 4.40
</TABLE>
The weighted-average grant-date fair value of the options granted during
1997 under the Plan was $4.86.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially
- 42 -
<PAGE> 43
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated value of the options
is amortized to expense over the options' vesting period. The pro forma results
are not necessarily indicative of what would have occurred had the Company
adopted SFAS 123. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1997 1996
------ ----
(In thousands, except per
share data)
<S> <C> <C>
Pro forma net (loss) income $ (331) $268
Pro forma earnings (loss) per share (.04) .04
</TABLE>
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 666,500 $ 2.96 215,000 $ .10 -- --
Granted 808,800 9.98 501,500 3.88 215,000 $.10
Exercised (184,500) .33 (50,000) .10 -- --
--------- ----- ------ ----- ------- ----
Outstanding at end of year 1,290,800 $ 8.48 666,500 $ 2.96 215,000 $.10
========= ===== ====== ===== ======= ====
Exercisable at end of year 583,000 $ 3.98 3,750 -- -- --
========= ===== ====== ===== ======= ====
Available for future options 74,700 83,500 185,000
========= ====== =======
</TABLE>
The Company has reserved 1,715,500 shares of Common Stock for possible
exercise of outstanding stock options and warrants.
13. GEOGRAPHIC AREA DATA
The Company operates in a single industry, providing integrated water and
wastewater treatment solutions to industry and municipalities worldwide. The
Company has a strategy of acquisition and internal growth to provide integrated
products, technologies and services to water users globally. Export sales
represented approximately one-third of U.S. sales in 1997 and 1996.
Revenue transfers between geographic areas and other intergeographic
eliminations are not material. The Company does not derive more than 10% of its
total revenue from any individual customer.
- 43 -
<PAGE> 44
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
Prior to 1997, the Company's operations were all domestic. Information by
geographic area for the year ended September 30, 1997 follows:
<TABLE>
<CAPTION>
UNITED
STATES SWEDEN GERMANY OTHER CONSOLIDATED
------- ------- ------- ------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net sales $43,015 $12,440 $7,840 $ 1,404 $ 64,699
Operating income (1) 787 1,276 137 45 2,245
Income before income taxes (1) 431 763 14 19 1,227
Assets employed at year end 62,489 25,127 5,972 22,272 115,860
</TABLE>
- ---------------
(1) The special management compensation charge of $2,630,000 is included under
the United States.
- 44 -
<PAGE> 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item is located on pages 3 through 7 of the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of the Company's fiscal year
ended September 30, 1997 and is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this item is located on pages 7 through 16 of the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of the Company's fiscal year
ended September 30, 1997 and is incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is located on pages 2 through 3 of the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of the Company's fiscal year
ended September 30, 1997 and is incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is located on pages 13 through 14 of
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of the Company's fiscal year
ended September 30, 1997 and is incorporated herein by reference thereto.
- 45 -
<PAGE> 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following report and consolidated financial statements of Waterlink,
Inc. and Subsidiaries are included in Item 8, Part II of this report:
Report of Independent Auditors
Consolidated Balance Sheets at September 30, 1997 and 1996
Consolidated Statements of Operations for the years ended September 30,
1997 and 1996 and the period from December 7, 1994 (date of
incorporation) to September 30, 1995
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1997 and 1996 and the period from December 7, 1994 (date of
incorporation) to September 30, 1995
Consolidated Statements of Cash Flows for the years ended September 30,
1997 and 1996 and the period from December 7, 1994 (date of
incorporation) to September 30, 1995
Notes to Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENT SCHEDULE
Schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
Financial Statements or notes thereto.
The report of independent auditors and financial statements of Lanco
Environmental Products, Inc. as of June 27, 1997 and for the period from
January 1, 1997 to June 27, 1997 and the auditors' report and
consolidated financial statements of Bioclear Technology Inc. as of June
27, 1997 and for the period from September 1, 1996 to June 27, 1997 are
included only in the copies of this Form 10-K filed with the Securities
and Exchange Commission and NYSE.
(b) REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
DATE ITEM FINANCIAL STATEMENTS
---------------------------- ---- ----------------------------------------------
<S> <C> <C>
1. June 27, 1997 #2 Unaudited Pro Forma Condensed Consolidated
Financial Data of Waterlink, Inc. and
Subsidiaries (to the extent incorporated
therein by reference).
Financial statements of Lanco Environmental
Products, Inc. (to the extent incorporated
therein by reference).
Consolidated financial statements of Bioclear
Technology, Inc. (to the extent incorporated
therein by reference).
</TABLE>
- 46 -
<PAGE> 47
<TABLE>
<CAPTION>
DATE ITEM FINANCIAL STATEMENTS
---------------------------- ---- ----------------------------------------------
<S> <C> <C>
2. September 12, 1997 #2 Unaudited Pro Forma Condensed Consolidated
Financial Data of Waterlink, Inc. and
Subsidiaries.
Financial statements of Mellegard V.A.
Maskiner AB.
3. September 30, 1997 #2 Unaudited Pro Forma Condensed Consolidated
Financial Data of Waterlink, Inc. and
Subsidiaries (to be filed by amendment on or
prior to December 15, 1997).
Financial statements of Hycor Corporation (to
be filed by amendment on or prior to December
15, 1997).
</TABLE>
(c) EXHIBITS
The exhibits are set forth on the attached Exhibit Index which is
incorporated by reference. Exhibits are included only in the copies of
this Form 10-K filed with the Securities and Exchange Commission and
NYSE.
- 47 -
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Waterlink, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WATERLINK, INC.
By: /s/ Chet S. Ross
--------------------------------------
Its President and Chief Executive
Officer
Date: December 1, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
<TABLE>
<S> <C>
/s/ John R. Miller /s/ Robert P. Pinkas
- ------------------------------------------- -------------------------------------------
John R. Miller, Robert P. Pinkas,
Director Director
Date: December 1, 1997 Date: December 1, 1997
/s/ Rollin S. Reiter /s/ Chet S. Ross
- ------------------------------------------- -------------------------------------------
Rollin S. Reiter, Chet S. Ross,
Director Director, President and Chief Executive
Date: December 1, 1997 Officer
Date: December 1, 1997
/s/ Theodore F. Savastano /s/ Dr. Paul M. Sutton
- ------------------------------------------- -------------------------------------------
Theodore F. Savastano, Dr. Paul M. Sutton,
Director and Chairman of the Board Director
Date: December 1, 1997 Date: December 1, 1997
/s/ Michael J. Vantusko
- -------------------------------------------
Michael J. Vantusko,
Chief Financial Officer
(and principal accounting officer)
Date: December 1, 1997
</TABLE>
- 48 -
<PAGE> 49
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
----------- ---------------------------------------------------------------------------
<S> <C>
*3.1 Form of Fifth Amended and Restated Certificate of Incorporation of the
Company (filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, File No. 1-13041)
*3.2 Form of Amended and Restated By-Laws of the Company (filed as an exhibit to
the Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, File No. 1-13041)
*4.1 Form of Rights Agreement, dated as of May 23, 1997, between the Company and
American Stock Transfer & Trust Company (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1997, File No. 1-13041)
*4.2 Amended and Restated Registration Rights Agreement, dated as of March 6,
1997, by and among the Company, Brantley Venture Partners III, L.P.,
Theodore F. Savastano, River Cities Capital Fund limited Partnership,
IPP95, L.P., Environmental Opportunities Fund, L.P., Environmental
Opportunities Fund (Cayman), L.P., Brantley Capital Corporation and
National City Capital Corporation (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*4.3 Registration Rights Agreement, dated as of January 31, 1996, between the
Company and Mass Transfer Systems, Inc (filed as an exhibit to the
Company's Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249)
*4.4 Registration Rights Agreement, dated as of April 26, 1996, between the
Company and Lawrence A. Schmid (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249)
*4.5 Registration Rights Agreement dated as of September 30, 1996, between the
Company, Lawrence Stenger, Theresa Stenger, Ronald Jaworski, Christine
Jaworski, John Stenger, Dawn P. Stenger, Scott Stenger, Kristie D. Stenger,
Jorg Menningman, Michael Mudrick, Robert Young and Gary Prae (filed as an
exhibit to the Company's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249).
*10.1 Employment Agreement, dated May 23, 1997, between the Company and Chet S.
Ross (filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.2 Employment Agreement, dated May 23, 1997, between the Company and Theodore
F. Savastano (filed as an exhibit to the Company's Amendment No. 1 to
Registration Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
*10.3 Employment Agreement, dated May 23, 1997, between the Company and Michael
J. Vantusko (filed as an exhibit to the Company's Amendment No. 1 to
Registration Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
*10.4 Employment Agreement, dated May 23, 1997, between the Company and L. Dean
Hertert, Jr. (filed as an exhibit to the Company's Amendment No. 1 to
Registration Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
*10.5 Employment Agreement, dated July 1, 1987, between Nordic Water Products AB
and Dr. Hans F. Larsson (filed as an exhibit to the Company's Amendment No.
1 to Registration Statement on Form S-1, filed May 23, 1997, Registration
No. 333-25249).
*10.6 Credit Agreement, dated as of February 19, 1997 among the Company, Bank of
America Illinois, as agent, and the other financial institutions party
thereto (filed as an exhibit to the Company's Registration Statement on
Form S-1, filed April 16, 1997, Registration No. 333-25249)
</TABLE>
- 49 -
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
----------- ---------------------------------------------------------------------------
<S> <C>
*10.7 Brantley Guaranty, dated as of February 19, 1997, by Brantley Venture
Partners, III, L.P. in favor of Bank of America Illinois, as agent, on
behalf of the other financial institutions party to the Credit Agreement,
dated as of February 19, 1997 (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.8 Credit Agreement, dated as of June 27, 1997, among the Company, Bank of
America National Trust & Savings Association (successor by merger to Bank
of America Illinois), as agent, and for other financial institutions party
thereto (filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, File No. 1-13041)
*10.9 Credit Agreement, dated as of March 4, 1997, among Gigantissimo 2061 AB (to
be known as Waterlink (Sweden) AB), the Company, as guarantor, and Bank of
America National Trust & Savings Association, London Branch (filed as an
exhibit to the Company's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249).
*10.10 First Amendment, dated as of June 27, 1997, to Credit Agreement, dated
March 4, 1997, among Waterlink (Sweden) AB, the Company, as guarantor, and
Bank of America National Trust & Savings Association, London Branch (filed
as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997, File No. 1-13041)
*10.11 Credit Agreement, dated as of March 4, 1997, among Provista
Einhundertsechsundfunfzigste Verwaltungsgesellschaft mbH (to be known as
Waterlink (Germany) GmbH), Waterlink, Inc., as guarantor, and Bank of
America National Trust & Savings Association, Frankfurt Branch (filed as an
exhibit to the Company's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249).
*10.12 First Amendment, dated as of June 27, 1997, to Credit Agreement, dated
March 4, 1997, among Waterlink (Germany) GmbH, the Company, as guarantor,
and Bank of America National Trust & Savings Association, Frankfurt Branch
(filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997, File No. 1-13041)
*10.13 Common Stock Warrant Agreement, dated as of February 19, 1997, between the
Company and Bank of America Illinois (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.14 The Company's 1995 Stock Option Plan (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.15 Subordinated Note Purchase Agreement and Credit Facility, dated as of March
6, 1997, among the Company, Brantley Venture Partners III, L.P. and the
purchasers named therein, along with the Form of Subordinated Note due 2002
attached thereto as Exhibit A (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.16 Warrant Agreement, dated as of March 6, 1997, among the Company and each of
the purchasers named therein, along with the Form of Warrant to Purchase
Common Stock, attached thereto as Exhibit A (filed as an exhibit to the
Company's Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.17 The Company's 1997 Omnibus Incentive Plan (filed as an exhibit to the
Company's Amendment No. 1 to Registration Statement on Form S-1, filed May
23, 1997, Registration No. 333-25249).
</TABLE>
- 50 -
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
----------- ---------------------------------------------------------------------------
<S> <C>
*10.18 Asset Purchase Agreement, dated January 31, 1996, among the Company,
Waterlink Acquisition Corporation, Mass Transfer Systems, Inc., Mark E.
Neville and Frederick J. Siino (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.19 Asset Purchase Agreement, dated April 26, 1996, among the Company, A-M
Acquisitions Corp., Aero-Mod Incorporated, Resi-Tech, Inc. and Lawrence A.
Schmid (filed as an exhibit to the Company's Registration Statement on Form
S-1, filed April 16, 1997, Registration No. 333-25249).
*10.20 Asset Purchase Agreement, dated April 26, 1996, among the Company, B-W
Acquisition Corp., Blue Water Services, Inc. and Lawrence A. Schmid (filed
as an exhibit to the Company's Registration Statement on Form S-1, filed
April 16, 1997, Registration No. 333-25249).
*10.21 Agreement and Plan of Merger, dated September 27, 1996, by and among the
Company, Wet Acquisition Corp. and Water Equipment Technologies, Inc. and
the shareholders of Water Equipment Technologies, Inc (filed as an exhibit
to the Company's Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.22 Share Purchase Agreement, dated March 4, 1997, among Waterlink (Sweden) AB,
Waterlink (Germany) GmbH, Awpe Svenska AB and Anglian Water Holding GmbH
(filed as an exhibit to the Company's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249).
*10.23 Purchase and Sale Agreement, dated March 14, 1995, among Santech, Inc. (as
assignee from the Company pursuant to an Assignment of Purchase and Sale
Agreement dated March 28, 1995) and Sanborn, Inc (filed as an exhibit to
the Company's Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.24 Asset Purchase Agreement, dated August 28, 1995, among Great Lakes
Environmental, Inc., a Delaware corporation (as assignee from the Company
pursuant to an Assignment dated August 31, 1995), Great Lakes
Environmental, Inc., an Illinois corporation, Lawrence Field and David
Field (filed as an exhibit to the Company's Registration Statement on Form
S-1, filed April 16, 1997, Registration No. 333-25249).
*10.25 The Company's Employee Stock Purchase Plan (filed as an exhibit to the
Company's Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249)
*10.26 First Amendment, dated as of June 23, 1997, to the Company's Employee Stock
Purchase Plan (filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1997, File No. 1-13041)
*10.27 The Company's 1997 Non-Employee Director Stock Option Plan.
*10.28 Stock Purchase Agreement among Waterlink (Sweden) AB, Waterlink, Inc. and
the shareholders of Mellegard V.A. Maskiner AB dated September 12, 1997
(filed as an exhibit to the Company's Current Report on Form 8-K, filed
September 26, 1997, File No. 1-13041).
*10.29 Stock Purchase Agreement dated September 30, 1997 among Waterlink, Inc.,
Philip A. Thompson and the Hycor Corporation Employee Stock Ownership Trust
(filed as an exhibit to the Company's Current Report on Form 8-K, filed
October 14, 1997, File No. 1-13041).
*10.30 Stock Purchase Agreement between Waterlink, Inc., and David Romanow, Joe
Romanow, Brian Topnik and Robert Jenkyns dated as of April 15, 1997 (filed
as an exhibit to the Company's Current Report on Form 8-K, filed July 9,
1997, File No. 1-13041).
</TABLE>
- 51 -
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
----------- ---------------------------------------------------------------------------
<S> <C>
*10.31 Stock Purchase Agreement between Great Lakes Environmental, Inc. and David
M. Rice dated as of April 14, 1997 (filed as an exhibit to the Company's
Amendment No. 1 to Registration Statement on Form S-1, filed May 23, 1997,
Registration No. 333-25249).
10.32 Letter Agreement among Waterlink, Inc., Bioclear Technology, Inc. and Royal
Bank of Canada dated September 24, 1997
11.1 Computation of per share earnings.
21.1 List of Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Ernst & Young.
24.1 Powers of Attorney (included on signature page).
27.1 Financial Data Schedule as of and for the year ended September 30, 1997.
</TABLE>
- ---------------
* Incorporated herein by reference as indicated.
- 52 -
<PAGE> 1
Exhibit 10.32
September 24, 1997
Mr. David Romanow
Bioclear Technology Inc.
Box 13 Grp. 524 RR 5
1218 Redonda Street
Winnipeg, Manitoba
R2C 2Z2
Dear Sir:
CONFIRMATION OF CREDIT FACILITIES
- ---------------------------------
Further to our recent discussions, we are pleased to confirm the Credit
Facilities described below subject to the following terms and conditions.
DEFINITIONS: The definitions attached hereto in Schedule "A" are
incorporated in this agreement by reference as if set
out in full herein.
BORROWER: BIOCLEAR TECHNOLOGY INC. (the "Borrower").
LENDER: Royal Bank of Canada (the "Bank"), through its Branch
at 220 Portage Avenue, Winnipeg, Manitoba (the
"Branch of Account").
CREDIT
FACILITIES: The Credit Facility in the total principal amount of
US$3,000,000 is available in the following segments
at the Borrower's option to the maximum Canadian
equivalent of $4,000,000.
Segment (1) Demand Operating:
-----------
a) Royal Bank Prime based
loans ("RBP Loans")
b) Bankers' Acceptances
("B/A's").
c) Match Funded Base Rate
Loans ("MFBR Loans").
d) Standby Letters of
Credit and/or
Guarantees, ("L/G's").
Segment (2) Corporate Visa Account, the
----------- terms and conditions of which
are set out under separate
agreement with the Bank.
(collectively, "the Borrowings")
<PAGE> 2
BIOCLEAR TECHNOLOGY INC.
PAGE 2
- --------------------------------------------------------------------------------
AMOUNTS: Segment (1) $3,900,000
- -------- -----------
Segment (2) $ 100,000
-----------
PURPOSE: Segment (1) Operating purposes.
- -------- -----------
Segment (2) Travel and entertainment
----------- expense for employees.
REPAYMENT: Segment (1)
- ---------- -----------
Notwithstanding compliance with the Covenants section
herein, Borrowings under this segment are repayable
on demand.
Upon demand of Segment (1), the Borrower shall pay to
the Bank all Borrowings under this agreement
including the face amount of borrowings ascribed to
all B/A's, L/C's and L/G's which are unmatured or
unexpired, which amount shall be held by the Bank as
collateral security for the Borrower's obligations to
reimburse the Bank for any payment made by the Bank
in respect of such all B/A's, L/C's and L/G's. The
Bank may enforce its rights to realize upon its
security and retain sufficient funds to cover amounts
outstanding by way of these instruments.
Segment (2)
-----------
As per cardholder agreement.
AVAILABILITY: Segment (1)
- ------------- -----------
The Borrower may borrow, repay, convert and reborrow
up to the amount of this operating segment.
B/A's shall be issued for not less than $500,000.00
and shall be in multiples of $100,000.00 and shall
have a term of not less than 30 days and not more
than one year.
MFBR Loans shall be issued for not less than
$1,000,000.00 and shall have a term of not less than
one year and not more than 5 years.
L/C's will have sight drawings and bills of lading
will be made payable to the order of the Bank.
L/G's will be issued for periods not exceeding one
year, except with the agreement of the Bank
The credit facility is made available at the sole
discretion of the Bank and the Bank may cancel any
unutilized portion of these segments at any time and
from time to time upon reasonable notice.
<PAGE> 3
BIOCLEAR TECHNOLOGY INC.
PAGE 3
- --------------------------------------------------------------------------------
INTEREST
RATES & FEES: Segment (1) a) Royal Bank Prime ("RBP").
- ------------- -----------
b) RBPAF
c) Scheduled rates for MFBR
term loans
d) L/C's/L/G's (see below)
LETTERS OF CREDIT
- -----------------
<TABLE>
<CAPTION>
Financial Guarantees: Non-Financial Guarantees:
- --------------------- -------------------------
<S> <C> <C> <C>
$0 - $50,000 1.625% $0 - $50,000 1.500%
$50,001 to $200,000 1.500% $50,001 to $200,000 1.375%
$200,001 to $500,000 1.375% $200,001 to $500,000 1.250%
$500,001 to $1,000,000 1.250% $500,001 to $1,000,000 1.125%
Over $1,000,000 1.125% Over $1,000,000 1.000%
</TABLE>
SIGHT L/C'S
- -----------
<TABLE>
<CAPTION>
DRAWN WITHIN
------------
TERM OF DRAFT
0 - 90 DAYS 91 - 120 DAYS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sight .3125% .3750%
1 - 30 Days .4425% .5050%
31 - 60 Days .5725% .6350%
61 - 90 Days .7025% .7650%
91 - 120 Days .8325% .8950%
121 - 150 Days .9625% 1.0250%
151 - 180 Days 1.0925% 1.1550%
Over 180 Days Additional .13% for each 30 days or part thereof
</TABLE>
<PAGE> 4
BIOCLEAR TECHNOLOGY INC.
PAGE 4
- --------------------------------------------------------------------------------
PAYMENT OF
INTEREST & FEES: RBP Loans and MFBR Loans
- ---------------- ------------------------
Interest on these loans shall be computed on the
daily principal amounts outstanding, at the
aforementioned rates, based on the actual number of
days elapsed divided by three hundred and sixty five
(365), and shall be payable in arrears on or about
the 26th of each month.
B/A's
-----
Upon the Bank accepting B/A's hereunder, the Borrower
shall forthwith pay to the Bank a stamping fee equal
to the RBPAF in effect at the time of acceptance plus
1% per annum, the whole calculated on the face amount
of each accepted B/A and on the basis of the number
of days in the term of such B/A and based on a year
of 365 days or 366 days, as the case may be.
L/C's
-----
Fees and out-of-pocket expenses are payable when the
drawings are paid.
L/G's
-----
The Borrower shall pay fees at the rate set forth
above in advance at the time of issue of the L/G.
This fee shall be based upon the amount of the
instrument issued and shall be calculated on the
number of days that it will be outstanding.
The yearly rates of interest to which the rates
determined in accordance with the Payment of Interest
and Fees section of this agreement are equivalent,
are the rates so determined multiplied by the actual
number of days in the calendar year and divided by
three hundred and sixty-five (365).
GENERAL
INDEMNITY: The Borrower shall reimburse the Bank for any
- ---------- additional costs or reduction of income arising as a
result of the imposition of increase in taxes (other
than on the overall net income of the Bank) on
amounts paid by the Borrower to the Bank, any
imposition of or increase in reserve requirements, or
the imposition of any other condition affecting the
Credit Facility by any governing governmental agency
or body, tribunal or regulatory authority.
<PAGE> 5
BIOCLEAR TECHNOLOGY INC.
PAGE 5
- --------------------------------------------------------------------------------
COLLATERAL
SECURITY: THE FOLLOWING COLLATERAL IS HELD AND WILL BE RELEASED
- --------- UPON MATURITY OF B/A'S PREVIOUSLY REQUIRED BY THE
BORROWER TOTALLING $2,500,000:
General Security Agreement.
Fixed and Floating Charge Debenture in the amount of
$2,000,000.
Business Loan Insurance or Assignment of Life
Insurance on the life of David Romanow in the amount
of $2,000,000.
Business Loan Insurance or Assignment of Life
Insurance on the life of Brian Topnik in the amount
of $1,060,000.
Business Loan Insurance on the life of Robert Jenkyns
in the amount of $2,500,000.
Guarantee & Postponement of Claim in the amount of
$2,400,000 signed by Bioclear Tech Sales Inc.
General Security Agreement signed by Bioclear Tech
Sales Inc.
AFTER MATURITY OF B/A'S, COLLATERAL SECURITY WILL
CONSIST OF:
Guarantee & Postponement of Claim in the amount of
$3,000,000 U.S. Dollars to the maximum Canadian
equivalent of $4,000,000 signed by Waterlink, Inc.
supported by Directors Resolution.
The foregoing is security for the within facility as
well as for any "Future Rate Agreement" between the
Borrower and the Bank heretofore or hereafter made
and all other obligations of the Borrower to the
Bank.
In the event of any contradiction between the terms
of this letter and any security taken and given
pursuant hereto, the latter shall govern.
EVIDENCE OF
INDEBTEDNESS: The Bank shall open and maintain at the Branch of
- ------------- Account accounts and records evidencing the
Borrowings made available to the Borrower by the Bank
under this agreement. The Bank shall record the
principal amount of such Borrowings, the payment of
principal and interest on account of the loans, and
all other amounts becoming due to the Bank under this
agreement.
The Bank's accounts and records constitute, in the
absence of manifest error, PRIMA FACIE evidence of
the indebtedness of the Borrower to the Bank pursuant
to this agreement.
<PAGE> 6
BIOCLEAR TECHNOLOGY INC.
PAGE 6
- --------------------------------------------------------------------------------
The Borrower authorizes and directs the Bank to
automatically debit, by mechanical, electronic or
manual means, any bank account of the Borrower for
all amounts payable under this agreement, including
but not limited to, the repayment of principal and
the payment of interest, fees and all charges for the
keeping of such bank accounts.
REVOLVEMENT: The Bank shall establish an account (the "Revolvement
- ------------ Account") for the conduct of the Borrower's day to
day banking business other than pursuant to this
agreement and if the balance in the Revolvement
Account:
a) is a credit, the Bank may apply the amount of
such credit or any part thereof, rounded to
the nearest $5,000.00, as a repayment of
Borrowings then due and owing outstanding
under Segment (1), or
b) is a debit, the Bank shall make available a
Borrowing in an amount, rounded to the nearest
$5,000.00 provided there are sufficient funds
available under Segment (1) of the Credit
Facility.
REPRESENTATIONS
AND WARRANTIES: The Borrower represents and warrants to the Bank that:
- ---------------
a) it is a corporation validly incorporated and
subsisting under the laws of Canada; and that
it is duly registered or qualified to carry on
business in all jurisdictions where the
character of its properties or the nature of
its business makes such registration or
qualification necessary;
b) the execution and delivery of this agreement
has been duly authorized by all necessary
actions and does not violate any law or any
provision of its constating documents, or
result in the creation of any encumbrance on
its properties and assets except as
contemplated hereunder;
c) The Borrower is in compliance with all
applicable statutes, regulations, orders and
by-laws enacted or adopted for the protection
and conservation of the natural environment;
NON-MERGER: The provisions of the agreement shall not merge with
- ----------- any security given by the Borrower to the Bank, but
shall continue in full force for the benefit of
the Parties.
COVENANTS: The Borrower agrees:
- ----------
a) To pay all sums of money when due under this
agreement;
b) To provide the Bank with opening balance sheet
of Bioclear Technology Inc. once available;
<PAGE> 7
BIOCLEAR TECHNOLOGY INC.
PAGE 7
- --------------------------------------------------------------------------------
c) To provide the Bank quarterly with
consolidated management prepared Financial
Statements within 45 days of quarter end;
d) To provide the Bank annually with Review
Engagement Financial Statements for Bioclear
Technology Inc. within 120 days of year end;
e) To provide the Bank annually with audited
consolidated Financial Statements for
Waterlink, Inc. within 120 days of year end;
f) To provide the Bank annually with Notice to
Reader Financial Statements for Bioclear
Technology (USA) Inc. within 120 days of year
end;
g) The default by the Borrower or Guarantor or
any subsidiary of the Guarantor under any
obligation to repay borrowed money in excess
of $1,000,000, or in the performance or
observance of any agreement or condition in
respect of such borrowed money, and as a
result of such default the maturity of such
obligation is accelerated unless being
contested in good faith by appropriate
proceedings;
h) The Borrower and its subsidiaries not to or
allow any of its subsidiaries to grant,
create, assume or suffer to exist any
mortgage, charge, lien, pledge, security
interest, or other encumbrances affecting any
of its properties, plant and equipment and
inventory in addition to accounts receivable,
except as otherwise permitted pursuant to the
Credit Agreement dated as of June 27, 1997,
among Waterlink, Inc., the Bank of America
National Trust & Savings Association
(previously known as Bank of America Illinois)
and the financial institutions from time to
time party thereto (the "Waterlink Credit
Agreement");
i) Not to declare or pay dividends without the
approval of the Bank, except as otherwise
permitted pursuant to the Waterlink Credit
Agreement;
j) To file all material tax returns which are or
will be required to be filed, to pay or make
provision for payment of all material taxes
(including interest and penalties) and other
Potential Priority Claims which are or will
become due and payable and to provide adequate
reserves for the payment of any tax, the
payment of which is being contested;
k) Not to sell, transfer, convey, lease or
otherwise dispose of any part of its property
or assets, without the prior written consent
of the Bank, except in the ordinary course of
business, except as
<PAGE> 8
BIOCLEAR TECHNOLOGY INC.
PAGE 8
- --------------------------------------------------------------------------------
otherwise permitted pursuant to the Waterlink Credit Agreement;
l) Not to, directly or indirectly, guarantee or
otherwise provide for, on a direct or indirect
or contingent basis, the payment of any monies
or performance of any obligations by any third
party except as provided herein, except as
otherwise permitted pursuant to the Waterlink
Credit Agreement;
m) To give the Bank 30 days prior notice in
writing of any intended change in the
ownership of its shares, except as otherwise
permitted pursuant to the Waterlink Credit
Agreement;
n) To insure and to keep fully insured all
properties customarily insured by companies
carrying on a similar business;
o) Not to change its name or merge, amalgamate or
consolidate with any other corporation, except
as otherwise permitted pursuant to the
Waterlink Credit Agreement; and
p) To comply strictly and in all respects with
the requirements of environmental laws and to
notify the Bank immediately in the event of
any release or discovery of any contaminant
at, upon, under, over or within its property
or any contiguous real property or any real
property to which a contaminant could
reasonably be anticipated to be released. The
Borrower agrees to promptly forward to the
Bank copies of all orders, notices, permits,
applications or other communications and
reports in connection with any release or the
presence of any contaminant or any matters
relating to environmental laws as they affect
its property.
EXPENSES: The Borrower agrees to pay all of the Bank's costs
- --------- incurred from time to time in the preparation,
negotiation and execution of this agreement and the
collateral security, and any costs incurred in the
operation or enforcement of this agreement or any
other agreement entered into pursuant to this
agreement.
GAAP: Unless otherwise provided, all accounting terms used
- ----- in this agreement shall be interpreted in accordance
with Canadian Generally Accepted
Accounting Principles from time to time.
SEVERABILITY: If any provision of this agreement is or becomes
- ------------- prohibited or unenforceable in any jurisdiction, such
prohibition or unenforceability shall not invalidate
or render unenforceable the provision concerned in
any other jurisdiction nor shall it invalidate,
affect or impair any of the remaining provisions.
GOVERNING LAW: This agreement shall be construed in accordance
- -------------- with and governed by the laws of the Province of
Manitoba and of Canada applicable therein.
<PAGE> 9
BIOCLEAR TECHNOLOGY INC.
PAGE 9
- --------------------------------------------------------------------------------
ASSIGNMENT: This agreement shall be binding upon and enure to the
benefit of the Bank and the Borrower and their
respective successors and permitted assigns.
No part performance of any obligation under this
agreement shall be accepted, or be deemed to be
accepted, by the Bank in full satisfaction of the
entire obligation unless expressly accepted in
writing.
All notices and other communications by the
provisions hereof required or permitted to be given
by one Party to the other(s) shall be given in
writing and sent by registered mail, postage prepaid,
or delivered in person; in the event that postal
service is interrupted or substantially delayed,
delivered in person only; to such other(s) addressed
as follows:
a) In the case of the Bank, to:
Royal Bank of Canada
Business Banking Centre
9th Floor - 220 Portage Avenue
Winnipeg, Manitoba
R3C 0A5
b) In the case of the Borrower, to:
Bioclear Technology Inc.
Box 13 Grp. 524 RR 5
1218 Redonda Street
Winnipeg, Manitoba
R2C 2Z2
c) In the case of the Guarantor, to:
Waterlink, Inc.
4100 Holiday Street, NW
Canton, OH
44718-2532
or to any other address(es) in respect of which
notice has been given pursuant hereto, and shall be
deemed to have been effectively given and received on
the third business day next following the date of the
posting thereof, if mailed, and on the day of the
delivery thereof, if delivered in person.
ACCEPTANCE: This offer expires if not accepted by September 29,
1997, unless extended
<PAGE> 10
BIOCLEAR TECHNOLOGY INC.
PAGE 10
- --------------------------------------------------------------------------------
in writing by the Bank.
If this agreement is acceptable, kindly sign and return the attached copy to the
Bank.
Yours truly,
W.H. (Wayne) Deslauriers
Senior Account Manager
988-4288
Encl.
We acknowledge and accept the within terms and conditions.
BIOCLEAR TECHNOLOGY INC. WATERLINK INC.
Per: /s/Michael J. Vantusko Per: /s/Michael J. Vantusko
Assistant Secretary Chief Financial Officer
Per: _____________________ Per: ___________________
Date: September 24, 1997 Date: September 24, 1997
<PAGE> 11
SCHEDULE "A"
------------
Schedule "A" to the letter agreement dated as of the 18th day of November, 1997,
between BIOCLEAR TECHNOLOGY INC. as the Borrower, and Royal Bank of Canada, as
the Bank.
For purposes of the foregoing agreement, the following terms and phrases shall
have the following meanings:
"B/A'S" mean bills of exchange drawn on the Bank by and payable to the order of
the Borrower, which have been accepted by the Bank;
"CANADIAN DOLLARS" and "CDN$" mean lawful money of Canada;
"RBP" means the annual rate of interest announced by the Bank from time to time
as being a reference rate then in effect for determining interest rates on
Canadian Dollar commercial loans in Canada.
<PAGE> 1
Exhibit 11.1
EXHIBIT 11.1 - COMPUTATION OF EARNINGS PER SHARE
WATERLINK, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Average common shares outstanding 4,923,529 1,469,290 1,226,182
Net effect of the following (as if outstanding
for all periods presented):
Shares issued in connection with the
acquisition of Waterlink Technologies 45,940 610,418 611,784
Shares issued in connection with the
exercise of options to purchase
common stock 52,658 115,000 115,000
Conversion of convertible subordinated
notes into common stock 3,836 100,000 100,000
Conversion into preferred stock into
common stock (1) 2,395,205 3,250,000 1,713,514
Impact of outstanding stock options and
warrants (using the treasury stock method)(2) 916,331 883,088 767,883
----------- ---------- -----------
8,337,499 6,427,796 4,534,363
=========== ========== ===========
</TABLE>
(1) Assumes conversion of Series A, Series B and Series C Preferred Stock into
Common Stock on a one-for-one basis.
(2) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, stock options and warrants granted by the Company during the twelve
months preceding the Company's IPO date have been included as common stock
equivalents as if they were outstanding for all periods presented prior to
the Company's IPO, using the treasury stock method.
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF WATERLINK, INC.
<TABLE>
<S> <C>
1. Aero-Mod Incorporated, a Delaware corporation
2. Great Lakes Environmental, Inc., a Delaware corporation
3. Hycor Corporation, a Delaware corporation
4. Mass Transfer Systems, Inc., a Delaware corporation
5. San Tech Equipment, Inc., an Ohio corporation
6. Waterlink Management, Inc., an Ohio corporation
7. Waterlink Technologies, Inc., a Delaware corporation
8. Water Equipment Technologies (Europe) Limited, a UK corporation
9. Waterlink Operational Services, Inc., a Delaware corporation
10. Waterlink (UK) Ltd., a UK corporation
11. Waterlink (Germany) GmbH, a German corporation
12. Axel Johnson Engineering GmbH, a German corporation
13. Waterlink (Sweden) AB, a Swedish corporation
14. Mellegard V.A. Maskiner AB, a Swedish corporation
15. Nordic Water Products AB, a Swedish corporation
16. Nordic Water Products Spain S.L., a Spanish corporation
17. Noxon AB, a Swedish corporation
18. Nordic Water Products OY, a Finish corporation
19. Zickert Miljo A/S, a Danish corporation
20. Zickert Products AB, a Swedish corporation
</TABLE>
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-29911) pertaining to the Employee Stock Purchase Plan of
Waterlink, Inc.; 1997 Non-Employee Director Stock Option Plan of Waterlink,
Inc.; Waterlink, Inc. Amended and Restated 1995 Stock Option Plan, and the
Waterlink, Inc. 1997 Omnibus Incentive Plan of (i) our report dated November
11, 1997 with respect to the consolidated financial statements of Waterlink,
Inc. and (ii) our report dated November 11, 1997 with respect to the financial
statements of Lanco Environmental Products, Inc. included in the Waterlink
Annual Report (Form 10-K) for the year ended September 30, 1997.
ERNST & YOUNG LLP
Canton, Ohio
December 1, 1997
<PAGE> 1
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-29911) pertaining to the Employee Stock Purchase Plan of Waterlink,
Inc.; 1997 Non-Employee Director Stock Option Plan of Waterlink, Inc.;
Waterlink, Inc. Amended and Restated 1995 Stock Option Plan, and the Waterlink,
Inc. 1997 Omnibus Incentive Plan of our report dated December 1, 1997, with
respect to the consolidated financial statements of Bioclear Technology, Inc.
included in the Waterlink, Inc. Annual Report (Form 10-K) for the year ended
September 30, 1997.
ERNST & YOUNG
Chartered Accountants
Winnipeg, Canada
December 1, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 2,482,000
<SECURITIES> 0
<RECEIVABLES> 25,945,000
<ALLOWANCES> 0
<INVENTORY> 10,143,000
<CURRENT-ASSETS> 46,795,000
<PP&E> 6,365,000
<DEPRECIATION> 554,000
<TOTAL-ASSETS> 115,860,000
<CURRENT-LIABILITIES> 27,365,000
<BONDS> 0
0
0
<COMMON> 12,000
<OTHER-SE> 70,861,000
<TOTAL-LIABILITY-AND-EQUITY> 115,860,000
<SALES> 64,699,000
<TOTAL-REVENUES> 64,699,000
<CGS> 40,390,000
<TOTAL-COSTS> 40,390,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,281,000
<INCOME-PRETAX> 1,227,000
<INCOME-TAX> 470,000
<INCOME-CONTINUING> 757,000
<DISCONTINUED> 0
<EXTRAORDINARY> (385,000)
<CHANGES> 0
<NET-INCOME> 372,000
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
<PAGE> 1
Lanco Environmental Products, Inc.
Audited Financial Statements
Period from January 1, 1997
to June 27, 1997
CONTENTS
Report of Independent Auditors.................................................1
Balance Sheet..................................................................2
Statement of Operations........................................................3
Statement of Changes in Stockholder's Equity...................................4
Statement of Cash Flows........................................................5
Notes to Financial Statements..................................................6
<PAGE> 2
Report of Independent Auditors
Board of Directors
Lanco Environmental Products, Inc.
We have audited the accompanying balance sheet of Lanco Environmental Products,
Inc. as of June 27, 1997, and the related statements of operations,
stockholder's equity and cash flows for the period from January 1, 1997 to June
27, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lanco Environmental Products,
Inc. at June 27, 1997, and the results of its operations and its cash flows for
the period from January 1, 1997 to June 27, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Canton, Ohio
November 11, 1997
<PAGE> 3
Lanco Environmental Products, Inc.
Balance Sheet
June 27, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,923
Trade accounts receivable--net of allowance for
doubtful accounts of $60,000 364,028
Inventories 507,932
Other 21,490
--------------
Total current assets 902,373
Property, plant and equipment, at cost:
Leasehold improvements 105,860
Machinery and equipment 119,110
Office equipment 31,908
--------------
256,878
Less accumulated depreciation 109,139
--------------
147,739
--------------
Total assets $ 1,050,112
==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Note payable to bank $ 100,000
Trade accounts payable 432,726
Accounts payable - related party 20,500
Deferred income taxes 99,100
Accrued expenses 41,604
Other current liabilities 34,376
--------------
Total current liabilities 728,306
Deferred income taxes 6,000
Stockholder's equity:
Common stock, $1 par value, 60,000 shares
authorized, 1,000 shares issued and outstanding 1,000
Additional paid-in capital 166,838
Retained earnings 147,968
--------------
Total stockholder's equity 315,806
--------------
Total liabilities and stockholder's equity $ 1,050,112
==============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
'
Lanco Environmental Products, Inc.
Statement of Operations
Period from January 1, 1997
to June 27, 1997
<TABLE>
<S> <C>
Net sales $1,277,435
Cost of sales 1,022,288
-------------
Gross profit 255,147
Selling, administrative and general expenses 351,033
-------------
Operating loss (95,886)
Other expense--net 3,733
-------------
Net loss $ (99,619)
=============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
Lanco Environmental Products, Inc.
Statement of Changes in Stockholder's Equity
Period from January 1, 1997
to June 27, 1997
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------
NUMBER ADDITIONAL
OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------------- ------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 1,000 $1,000 $166,838 $ 247,587 $415,425
Net loss (99,619) (99,619)
------------- ------------- ---------------- --------------- ---------------
Balance at June 27, 1997 1,000 $1,000 $166,838 $ 147,968 $315,806
============= ============= ================ =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
Lanco Environmental Products, Inc.
Statement of Cash Flows
Period from January 1, 1997
to June 27, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss $ (99,619)
Adjustments to reconcile net loss to
cash provided by operating activities:
Depreciation and amortization 12,426
Deferred income taxes (54,100)
Loss on sale of equipment 4,357
Changes in working capital:
Accounts receivable 148,412
Inventories (29,973)
Other current assets (15,155)
Trade accounts payable 131,658
Accrued expenses and other current liabilities 5,280
--------
Net cash provided by operating activities 103,286
INVESTING ACTIVITIES
Purchase of equipment - net (18,802)
FINANCING ACTIVITIES
Proceeds from note payable to bank 100,000
Advances from related company 900
Payments on advances from related company (202,409)
--------
Net cash used in financing activities (101,509)
--------
Decrease in cash and cash equivalents (17,025)
Cash and cash equivalents at beginning of period 25,948
--------
Cash and cash equivalents at end of period $ 8,923
========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 7
Lanco Environmental Products, Inc.
Notes to Financial Statements
June 27, 1997
1. ACCOUNTING POLICIES
Lanco Environmental Products, Inc., located in Grand Rapids, Michigan operates
in a single business segment, manufacturing wastewater treatment equipment and
components. The Company's products are sold principally in the domestic
industrial wastewater market.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
REVENUE RECOGNITION
Revenue from the sale of wastewater treatment equipment is generally recognized
upon shipment.
FINANCIAL INSTRUMENTS
The carrying values of cash, cash equivalents, accounts receivable and accounts
payable are a reasonable estimate of fair value due to the short-term nature of
these instruments.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers with which the Company does business. The
Company grants credit to customers based on an evaluation of their financial
condition and collateral is generally not required. Losses from credit sales are
provided for in the financial statements and have historically been within
management's expectations.
6
<PAGE> 8
Lanco Environmental Products, Inc.
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is valued at cost. Expenditures for repairs and
maintenance are charged to operations as incurred, while expenditures for
additions and improvements are capitalized. Depreciation is computed principally
using the straight-line method over the estimated useful lives of assets. The
useful lives are 25 years for leasehold improvements; 5 to 10 years for
machinery and equipment and 10 years for office equipment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
ADVERTISING EXPENSES
The cost of advertising is expensed as incurred. The Company incurred $65,000 in
advertising costs for the period January 1, 1997 to June 27, 1997.
2. INVENTORIES
Inventories consist of the following as of June 27, 1997:
<TABLE>
<S> <C>
Component parts $ 259,951
Finished goods 247,981
--------------
$ 507,932
==============
</TABLE>
7
<PAGE> 9
Lanco Environmental Products, Inc.
Notes to Financial Statements (continued)
3. FINANCING ARRANGEMENT
The Company has a $100,000 short-term line-of-credit with a bank. It is
collateralized by the personal guarantee of the sole stockholder and is due on
demand. Interest on borrowings is at the bank's prime rate, an effective rate of
8.50% at June 27, 1997. There was $100,000 outstanding under this arrangement at
June 27, 1997.
4. FEDERAL INCOME TAXES
The provision for income taxes consists of the following as of the period ended
June 27, 1997:
<TABLE>
<S> <C>
Current tax expense $ 54,100
Deferred tax benefit (54,100)
---------------
$ -
===============
</TABLE>
The Company made income tax payments of $35,000 during the period January 1,
1997 through June 27, 1997.
Deferred income taxes reflect the effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred income tax assets and liabilities at June 27, 1997 are as
follows:
Deferred tax assets:
<TABLE>
<S> <C>
Allowance for doubtful accounts $ 20,400
Employee benefits 1,700
-----------------
22,100
</TABLE>
Deferred tax liabilities:
<TABLE>
<S> <C>
Inventories 121,200
Depreciation 6,000
-----------------
127,200
-----------------
Net deferred tax liabilities $ 105,100
=================
</TABLE>
8
<PAGE> 10
Lanco Environmental Products, Inc.
Notes to Financial Statements (continued)
5. LEASES AND RELATED-PARTY TRANSACTIONS
During the period January 1, 1997 to June 27, 1997, the Company paid a
management fee to a related company of $50,000 for administrative services.
The Company leases its headquarters and manufacturing facility from its sole
stockholder under an operating lease arrangement expiring in June 1998.
Effective June 28, 1997, the monthly rental under this agreement was reduced
from $5,000 to $2,500 per month through June 1998. The Company has the option to
renew the lease for an additional year through June 1999 for $5,000 per month.
The Company is required to pay all insurance, taxes and maintenance costs
associated with the property.
In addition, the Company leases certain vehicles and machinery under operating
leases with a Company that is owned by the sole stockholder. These leases
terminated on June 27, 1997 in connection with the acquisition of the Company by
Waterlink, Inc.
Rent expense for the period January 1, 1997 through June 27, 1997 totaled
$42,000 which was paid to related parties under the leases described above.
6. SUBSEQUENT EVENT
At the close of business on June 27, 1997, all of the outstanding shares of the
Company's stock were acquired by Waterlink, Inc.
9
<PAGE> 11
BIOCLEAR TECHNOLOGY INC.
AUDITED FINANCIAL STATEMENTS
PERIOD FROM SEPTEMBER 1, 1996 TO JUNE 27, 1997
Auditors' Report 1
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
and Retained Earnings
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
<PAGE> 12
AUDITORS' REPORT
To the Directors of
BIOCLEAR TECHNOLOGY INC.
We have audited the consolidated balance sheets of BIOCLEAR TECHNOLOGY INC. as
of June 27, 1997 and August 31, 1996 and the consolidated statements of income
and retained earnings and cash flows for the period from September 1, 1996 to
June 27, 1997 and for the year ended August 31, 1996. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as of June 27, 1997
and August 31, 1996 and the results of its operations and the changes in its
financial position for the period from September 1, 1996 to June 27, 1997 and
the year ended August 31, 1996 in accordance with accounting principles
generally accepted in Canada.
ERNST & YOUNG
Chartered Accountants
Winnipeg, Canada,
December 1, 1997
1
<PAGE> 13
BIOCLEAR TECHNOLOGY INC.
Incorporated under the Canada Business Corporations Act
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, JUNE 27,
1996 1997
C$ C$
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS [note 3]
CURRENT
Cash and cash equivalents 2,350,094 --
Accounts receivable 2,415,050 1,971,628
Income taxes recoverable 21,221 289,662
Prepaid expenses 69,926 101,578
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,856,291 2,362,868
Fixed assets [notes 4 and 6] 1,094,320 2,902,693
- -----------------------------------------------------------------------------------------------------
5,950,611 5,265,561
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Bank indebtedness [note 3] 331,000 2,641,988
Accounts payable and accrued charges [note 6] 4,270,991 402,620
Deferred revenue 156,000 286,438
Due to:
Waterlink, Inc. [bearing interest at 10% per annum,
without specific repayment terms] -- 506,042
Shareholders [non-interest bearing,
without specific repayment terms] -- 358,810
Deferred income taxes [note 7] 282,000 301,000
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,039,991 4,496,898
- -----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital [note 5] 85,151 85,151
Retained earnings 825,469 683,512
- -----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 910,620 768,663
- -----------------------------------------------------------------------------------------------------
5,950,611 5,265,561
=====================================================================================================
</TABLE>
See accompanying notes
2
<PAGE> 14
BIOCLEAR TECHNOLOGY INC.
CONSOLIDATED STATEMENTS OF
INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
SEPTEMBER 1,
1996
YEAR ENDED TO
AUGUST 31, JUNE 27,
1996 1997
C$ C$
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
SALES 10,507,190 3,124,245
COST OF SALES [note 6] 4,368,223 1,392,843
- -----------------------------------------------------------------------------------------------------
GROSS PROFIT 6,138,967 1,731,402
- -----------------------------------------------------------------------------------------------------
Expenses
Depreciation 145,813 208,120
Interest 16,816 68,432
Administrative 5,323,641 1,575,685
- -----------------------------------------------------------------------------------------------------
5,486,270 1,852,237
- -----------------------------------------------------------------------------------------------------
Income (loss) from operations 652,697 (120,835)
- -----------------------------------------------------------------------------------------------------
Other income (loss)
Interest 71,953 25,599
Loss on foreign exchange (16,029) (28,208)
Loss on sale of fixed assets -- (5,513)
- -----------------------------------------------------------------------------------------------------
55,924 (8,122)
- -----------------------------------------------------------------------------------------------------
Income (loss) before income taxes 708,621 (128,957)
- -----------------------------------------------------------------------------------------------------
Income tax expense (recovery) [note 7]
Current 72,555 (6,000)
Deferred 173,500 19,000
- -----------------------------------------------------------------------------------------------------
246,055 13,000
- -----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD 462,566 (141,957)
Retained earnings, beginning of period 664,894 825,469
Excess of redemption price over stated capital [note 5] (282,991) --
Refundable taxes paid (19,000) --
- -----------------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD 825,469 683,512
=====================================================================================================
</TABLE>
See accompanying notes
3
<PAGE> 15
BIOCLEAR TECHNOLOGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
SEPTEMBER 1,
1996
YEAR ENDED TO
AUGUST 31, JUNE 27,
1996 1997
C$ C$
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) for the period 462,566 (141,957)
Add charges to operations not requiring a
current cash payment
Depreciation 145,813 208,120
Deferred income tax 173,500 19,000
Loss on sale of fixed assets -- 5,513
- -----------------------------------------------------------------------------------------------------
781,879 90,676
Net change in non-cash working capital
balances related to operations [note 8] 77,561 (3,594,604)
- -----------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 859,440 (3,503,928)
- -----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of fixed assets [net of investment
tax credits of C$232,019; 1996 - C$11,208] (249,023) (2,030,772)
Proceeds on sale of fixed assets -- 8,766
- -----------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (249,023) (2,022,006)
- -----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in due to Waterlink, Inc. -- 506,042
Refundable taxes paid (19,000) --
Redemption of shares (288,000) --
Increase in due to shareholders -- 358,810
- -----------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (307,000) 864,852
- -----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH DURING THE PERIOD 303,417 (4,661,082)
Cash position, beginning of period 1,715,677 2,019,094
- -----------------------------------------------------------------------------------------------------
CASH POSITION, END OF PERIOD 2,019,094 (2,641,988)
- -----------------------------------------------------------------------------------------------------
</TABLE>
Cash position is comprised of cash and cash equivalents, net of bank
indebtedness.
See accompanying notes
4
<PAGE> 16
BIOCLEAR TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 27, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared by management on the historical
cost basis in accordance with accounting principles generally accepted in
Canada. These accounting principles are, in all material respects, in accordance
with those generally accepted in the United States except as described in note
10, "Summary of Significant Differences Between Canadian and U.S.
Generally Accepted Accounting Principles."
[a] PRINCIPLES OF CONSOLIDATION
These consolidated financial statements, expressed in Canadian dollars, include
the accounts of the company and its wholly-owned subsidiaries, Bioclear Tech
Sales Inc. and Bioclear Technology U.S.A., Inc.
[b] REVENUE RECOGNITION
The company recognizes contract revenue using the "percentage of completion"
method of accounting in the proportion that costs bear to total estimated costs
at completion. Revisions of estimates to complete and losses, if any, are
recognized in the period in which they are determined.
[c] FIXED ASSETS
Fixed assets are stated at historical cost. Maintenance and repairs are expensed
as incurred. Investment tax credits received towards the acquisition of fixed
assets are deducted from fixed assets with depreciation calculated on the net
amount.
Depreciation is provided over the estimated life of the asset at the following
annual rates and bases:
<TABLE>
<CAPTION>
<S> <C> <C>
Building 4% Declining balance
Furniture and fixtures 20% Declining balance
Office equipment 20% Declining balance
Pilot plant 20% Declining balance
Shop equipment 20% Declining balance
Bridge crane 20% Declining balance
Small tools 50% Straight line
Trucks 30% Declining balance
</TABLE>
When fixed assets are sold or scrapped, the cost of the asset and the related
accumulated depreciation are removed from the accounts and the resulting gain or
loss is included in income.
5
<PAGE> 17
BIOCLEAR TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 27, 1997
[d] INCOME TAXES
The company follows the tax allocation method of providing for income taxes.
Under this method, the provision for income taxes is based upon the income
reported on the income statement. The primary differences between accounting and
taxable income are caused by the difference between depreciation for accounting
purposes and capital cost allowance for income tax purposes, as well as the
difference between the profits on contracts in progress recognized for
accounting purposes and the profits recognized for income tax purposes.
[e] TRANSLATION OF FOREIGN CURRENCIES
The financial statements of the U.S. subsidiary, which is considered to be an
integrated foreign operation, and foreign currency denominated balances of the
company have been translated to Canadian dollars ["C$"] using the temporal
method. Under this method, monetary assets and liabilities, both current and
long-term, are translated at year end rates of exchange. Other assets and
liabilities are translated at historical rates of exchange in effect at the
dates of transactions.
Revenue and costs are translated at the average rates of exchange for the year
except for property, plant and equipment and depreciation which are translated
at historical rates.
Gains and losses on translation are included in income.
2. AMALGAMATION
The company was formed on August 31, 1996, through the amalgamation of 3212904
Canada Ltd. and Bioclear Technology Inc. The financial statements of the company
recognize the continuity of interest of the shareholders in assets, liabilities,
and operations of the amalgamating companies and are prepared on the following
basis:
[a] In the balance sheet, the assets, liabilities, share capital and retained
earnings of the amalgamating companies have been combined at their
respective carrying values.
[b] The statements of income and retained earnings and cash flows represent the
combined results of operations and combined cash flows of the amalgamating
companies during the periods.
3. BANK INDEBTEDNESS
The bank indebtedness is comprised of banker's acceptances in the amount of
C$2,500,000 and an operating line of credit. The banker's acceptances bear
interest ranging from 4.04% to 4.4% and are due on January 14, 1998. The
operating line of credit bears interest at the bank prime rate which was 4.75%
at June 27, 1997.
As collateral security for the bank indebtedness, the company has provided a
general security agreement providing a charge over all assets owned by the
company and a fixed and floating charge debenture in the amount of C$2,000,000.
6
<PAGE> 18
BIOCLEAR TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 27, 1997
4. FIXED ASSETS
<TABLE>
<CAPTION>
AUGUST 31, 1996 JUNE 27, 1997
----------------------------------- -------------------------
ACCUMULATED NET BOOK ACCUMULATED NET BOOK
COST DEPRECIATION VALUE COST DEPRECIATION VALUE
C$ C$ C$ C$ C$ C$
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Land 52,066 -- 52,066 52,066 -- 52,066
Building 711,550 178,213 533,337 1,982,775 219,612 1,763,163
Furniture and
fixtures 68,144 31,251 36,893 70,800 37,484 33,316
Office
equipment 140,620 61,706 78,914 143,358 74,200 69,158
Pilot plant 94,394 74,423 19,971 94,394 77,752 16,642
Shop
equipment 191,854 41,677 150,177 834,609 124,222 710,387
Bridge crane 130,651 54,472 76,179 229,600 76,563 153,037
Small tools 10,864 9,358 1,506 14,630 12,357 2,273
Trucks 205,412 60,135 145,277 190,967 88,316 102,651
- -----------------------------------------------------------------------------------------------------
1,605,555 511,235 1,094,320 3,613,199 710,506 2,902,693
=====================================================================================================
</TABLE>
5. SHARE CAPITAL
<TABLE>
<CAPTION>
AUGUST 31, JUNE 27,
1996 1997
C$ C$
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
AUTHORIZED
Unlimited number of Class A voting common shares
Unlimited number of Class B common shares carrying
two votes per share
Unlimited number of preference shares, voting,
convertible to Class B common shares,
non-cumulative dividends not to exceed C$1 per share
ISSUED
944,486 Class A common shares [1996 - 944,486] 37 37
4,896,000 preference shares [1996 - 4,896,000] 85,114 85,114
- -----------------------------------------------------------------------------------------------------
85,151 85,151
=====================================================================================================
</TABLE>
During 1996, 55,556 Class A common shares and 288,000 preference shares were
purchased for cancellation for consideration of C$288,000. Also, 34 Class A
common shares were issued for consideration of C$3.
7
<PAGE> 19
BIOCLEAR TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 27, 1997
6. RELATED PARTY TRANSACTIONS
During the period, the company had the following transactions with companies
owned by shareholders of Bioclear Technology Inc.:
<TABLE>
<CAPTION>
AUGUST 31, JUNE 27,
1996 1997
C$ C$
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost of sales
Roman Equipment Services (1973) Ltd. 1,018,704 145,399
Jenkyns Electric Ltd. 35,592 11,228
Fixed asset additions - building
Roman Equipment Services (1973) Ltd. -- 102,546
Jenkyns Electric Ltd. -- 115,335
</TABLE>
Charges for these services were at estimated fair market value.
At the period end, C$25,339 [1996 - C$186,248] remains payable to Roman
Equipment Services (1973) Ltd. and is included in accounts payable.
7. INCOME TAXES
The company has non-capital losses of C$707,000 available for carry forward. The
potential benefit of these losses, which will be realized as a reduction of
federal income taxes payable in future years, has been recorded as an offset to
the deferred income tax liability account. These amounts will expire as follows:
<TABLE>
<CAPTION>
C$
- -----------------------------------------------------------------------------------------------------
<S> <C>
2001 13,000
2003 694,000
</TABLE>
In addition, the company has provincial investment tax credits of C$181,000
available for carry forward. The potential benefit of these credits, which will
be realized as a reduction of provincial income taxes payable in future years,
has been recorded as income taxes recoverable. The credits expire in 2003.
The company is classified as a private corporation under the Income Tax Act and,
therefore, certain taxes paid relative to investment income are potentially
refundable and are not deducted in computing net income for the year. Such taxes
will normally be refunded at the rate of C$1 for each C$3 of taxable dividends
paid. When some part of these taxes becomes definitely refundable because of
dividend payments, the appropriate amount is transferred to income taxes
recoverable. At the end of the period, the balance in the company's refundable
tax account was approximately C$54,000 [1996 - C$54,000].
8
<PAGE> 20
BIOCLEAR TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 27, 1997
8. NET CHANGE IN NON-CASH WORKING CAPITAL
BALANCES RELATED TO OPERATIONS
<TABLE>
<CAPTION>
AUGUST 31, JUNE 27,
1996 1997
C$ C$
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net decrease (increase) in current assets
Accounts receivable (2,288,593) 443,422
Income taxes recoverable (21,221) (268,441)
Inventory 50,745 --
Prepaid expenses 10,588 (31,652)
Net increase (decrease) in current liabilities
Accounts payable and accrued charges 2,250,601 (3,868,371)
Deferred revenue 156,000 130,438
Income taxes payable (80,559) --
- -----------------------------------------------------------------------------------------------------
77,561 (3,594,604)
=====================================================================================================
</TABLE>
9. SUBSEQUENT EVENTS
At the close of business on June 27, 1997 all the issued and outstanding shares
of the company were purchased by the Waterlink, Inc. group of companies.
10. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN
CANADIAN AND U.S. GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The financial statements have been prepared in accordance with accounting
principles generally accepted in Canada which, in the case of Bioclear
Technology Inc., conform in all material respects with those in the United
States except that:
[a] Short-term bank borrowings have been presented in the consolidated
statements of cash flows as a component of cash and cash equivalents rather
than as a financing activity. If U.S. generally accepted accounting
principles had been followed, the amounts on the consolidated statements of
cash flows would be adjusted as follows:
<TABLE>
<CAPTION>
AUGUST 31, JUNE 27,
1996 1997
C$ C$
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by financing activities 331,000 2,310,988
Net increase in cash during the period 331,000 2,310,988
Cash position, beginning of period -- 331,000
Cash position, end of period 331,000 2,641,988
</TABLE>
9
<PAGE> 21
BIOCLEAR TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 27, 1997
[b] The interest expense for each period approximates the interest paid for
each period. The amount of income taxes paid in each period was as follows:
<TABLE>
<CAPTION>
AUGUST 31, JUNE 27,
1996 1997
C$ C$
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Income taxes paid 172,572 29,221
</TABLE>
[c] Under SEC regulations, the redeemable preferred shares included in share
capital would be presented separately outside shareholders' equity as
follows:
<TABLE>
<CAPTION>
AUGUST 31, JUNE 27,
1996 1997
C$ C$
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Redeemable preferred shares 85,114 85,114
Common share capital 37 37
</TABLE>
[d] The following table sets forth at the end of and for the periods indicated,
certain information concerning the closing, average, high and low exchange
rates for United States Dollars ["US$"] as a ratio of Canadian Dollars
["C$"]. The exchange rates used are those quoted by the Federal Reserve
Bank of New York and are the noon buying rates in New York City for cable
transfer in foreign currencies. On November 13, 1997, the closing ratio of
United States Dollar per Canadian Dollar was .710.
<TABLE>
<CAPTION>
AUGUST 31, JUNE 27,
1996 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Ratio of US$ per C$
Exchange rate at end of period .731 .722
Average exchange rate during period .734 .731
Highest exchange rate during period .746 .746
Lowest exchange rate during period .727 .717
</TABLE>
10
