<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------
FORM 8-A
FOR SECURITIES OF CERTAIN CLASSES OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
WATERLINK, INC.
---------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 34-1788678
-------- ----------
(State of Incorporation or Organization) (I.R.S. Employer
Identification no.)
4100 Holiday Street, N.W., Suite 201
Canton, Ohio 44718-2532
------------------------------------ ----------
(Address of Principal Executive Offices) (Zip Code)
<TABLE>
<S> <C>
If this form relates to the If this form relates to the
registration of a class of debt registration of a class of debt
securities and is effective upon filing securities and is to become effective
pursuant to General effectiveness of a concurrent
Instruction A(9c)(1) please check registration statement under the
the following box. [ ] Securities Act of 1933 pursuant to
General Instruction A(c)(2) please
check the following box. [ ]
</TABLE>
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which to
be so Registered Each Class is to be Registered
------------------- ---------------------------------
Common Stock, $.001 par value New York Stock Exchange, Inc.
Series 1 Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Securities to be registered pursuant to Section 12(g) of the Act: Not Applicable
<PAGE> 2
ITEM 1. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
Common Stock
A description of the Registrant's common stock, par value $.001 per
share, as set forth under the caption "Description of Capital Stock" contained
in Amendment No. 1 to Registrant's Registration Statement on Form S-1
(Registration No. 333-25249) as filed with the Securities and Exchange
Commission on May 23, 1997, (the "Form S-1") is hereby incorporated by
reference.
Series 1 Preferred Stock Purchase Rights
A description of the Registrants's Preferred Stock as set forth under
the caption "Description of Capital Stock -- Preferred Stock" in the Form S-1
and (ii) the Rights to purchase the Registrant's Series 1 Preferred Stock as
set forth under the caption "Description of Capital Stock -- Stockholder Rights
Plan" in the Form S-1, are hereby incorporated by reference.
ITEM 2. EXHIBITS
The following documents are being filed as exhibits to the
registration statement:
Exhibit Number Description
-------------- -----------
1 Amendment No. 1 to Registrant's Registration Statement on
Form S-1(Registration No. 333-25249)
2 Form of Fifth Amended and Restated Certificate of
Incorporation of the Registrant (incorporated by reference
from Exhibit 3.1 to the Form S-1)
3 Form of Amended and Restated By-laws of the Registrant
(incorporated by reference from Exhibit 3.2 to the Form
S-1)
4 Form of Rights Agreement, dated as of May 23, 1997,
between the Registrant and American Stock Transfer & Trust
Company (incorporated by reference from Exhibit 4.1 to the
Form S-1)
5 Amended and Restated Registration rights Agreement, dated
as of March 6, 1997, by and among the Registrant, 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
(incorporated by reference from Exhibit 4.2 to the Form
S-1)
6 Registration Rights Agreement, dated as of January 31,
1996, between the Registrant and Mass Transfer Systems,
Inc. (incorporated by reference from Exhibit 4.3 to the
Form S-1)
<PAGE> 3
7 Registration Rights Agreement, dated as of April 26, 1996,
between the Registrant and Lawrence A. Schmid
(incorporated by reference from Exhibit 4.4 to the Form
S-1)
8 Registration Rights Agreement, dated as of September 30,
1996, between the Registrant, 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 (incorporated by reference from Exhibit 4.5
to the Form S-1)
*9 Specimen Common Stock Certificate
* To be filed by amendment
<PAGE> 4
SIGNATURE
Pursuant to the requirement of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized.
WATERLINK, INC.
/s/ MICHAEL J. VANTUSKO
---------------------------
Date: May 23, 1997 By: Michael J. Vantusko
Its: Chief Financial Officer
<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1997
REGISTRATION NO. 333-25249
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
WATERLINK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
3589
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
34-1788678
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
4100 HOLIDAY STREET, N.W.
SUITE 201
CANTON, OHIO 44718-2532
(330) 649-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CHET S. ROSS
WATERLINK, INC.
4100 HOLIDAY STREET, N.W.
SUITE 201
CANTON, OHIO 44718-2532
(330) 649-4000
FACSIMILE: (330) 649-4008
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE AND FACSIMILE NUMBERS,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
Copies to:
IRA C. KAPLAN
BENESCH, FRIEDLANDER, COPLAN & ARONOFF LLP
2300 BP AMERICA BUILDING
200 PUBLIC SQUARE
CLEVELAND, OHIO 44114-2378
(216) 363-4500
FACSIMILE: (216) 363-4588
STEPHEN P. FARRELL
MORGAN, LEWIS & BOCKIUS LLP
101 PARK AVENUE
NEW YORK, NY 10178-0060
(212) 309-6000
FACSIMILE: (212) 309-6273
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
TITLE OF EACH CLASS AMOUNT TO BE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1)(2)(3) REGISTRATION FEE
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
Common Stock, $.001 par value (including associated
preferred stock purchase rights)................... $57,500,000 $17,425(4)
</TABLE>
================================================================================
(1) In accordance with Rule 457(o) under the Securities Act of 1933, as amended,
the number of shares being registered and the proposed maximum offering
price per share are not included in this table.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Includes $7,500,000 of Common Stock which the Underwriters have the option
to purchase to cover over-allotments, if any.
(4) The Registrant paid this fee at the time this Registration Statement was
originally filed.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
THE INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 23, 1997
PROSPECTUS
4,500,000 SHARES
WATERLINK, INC.
COMMON STOCK
------------------
All of the 4,500,000 shares of common stock, par value $.001 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by the Company.
Prior to the Offering, there has not been a public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $10.00 and $12.00 per share. See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price. The Common Stock has been approved for listing on The New York Stock
Exchange under the symbol "WLK" subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF
THE COMMON STOCK OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- ----------------------------------------------------------------------------------------------------
Total (3) $ $ $
====================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
(1) For information regarding indemnification of the several Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 675,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively.
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1997 at the office of Smith Barney Inc., 333 West 34th Street, New
York, NY 10001.
SMITH BARNEY INC.
OPPENHEIMER & CO., INC.
SANDERS MORRIS MUNDY
, 1997
<PAGE> 3
---------------------------
[WATERLINK LOGO]
---------------------------
WATER AND WASTEWATER
TREATMENT SOLUTIONS, WORLDWIDE.
<TABLE>
<C> <S>
- --------------------- Acquired March, 1995. USA. Designs and
[WATERLINK LOGO] builds industrial separation systems,
SANBORN specializing in cutting fluid recovery
TECHNOLOGIES and waste minimization via certrifuges
- --------------------- and membranes.
- --------------------- Acquired August, 1995. USA. Designs
[WATERLINK LOGO] and builds industrial wastewater
GREAT LAKES pretreatment systems and custom, high
ENVIRONMENTAL quality oil/water separation products.
- ---------------------
- --------------------- Acquired January, 1996. USA. Designs
[WATERLINK LOGO] customized jet aeration and jet mixing
MASS TRANSFER SYSTEMS systems used in biological wastewater
- --------------------- treatment.
- --------------------- Acquired April, 1996. USA. Designs
[WATERLINK LOGO] biological wastewater treatment
AERO-MOD plants; provides clarifiers,
- --------------------- diffusers, filters, and dewatering
equipment; provides contract
operations for municipal water
treatment plants.
- --------------------- Acquired September, 1996. USA.
[WATERLINK LOGO] Formerly Water Equipment Technologies,
TECHNOLOGIES Inc. (WET). Designs and builds
- --------------------- continuous sand filters and membrane
separation systems, including reverse
osmosis (RO), for the drinking water,
industrial process water, and
wastewater markets.
NORDIC GROUP Acquired March, 1997. Sweden. the
Nordic Group includes Nordic Water
Products AB, NOXON AB, and Zickert
Products AB located in Sweden, and
Axel Johnson Engineering located in
Germany. Manufactures internationally
recognized and accepted technologies
and equipment used in the municipal
and industrial water markets.
- --------------------- Developed and markets a continuous
[WATERLINK LOGO] sand filter with over 8000
NORDIC WATER installations worldwide; inclined
PRODUCTS plate settler with over 5000
- --------------------- installations worldwide; and
flocculators.
- --------------------- Manufacturer of decanting centrifuges
[WATERLINK LOGO] for municipal and industrial sludge
NOXON dewatering and thickening.
- ---------------------
- --------------------- Manufactures hydraulic stainless steel
[WATERLINK LOGO] surface and bottom sludge scrapers for
ZICKERT PRODUCTS rectangular clarifiers. Advancing
- --------------------- capability in oil/water separators.
- --------------------- Designs and builds water purification
[WATERLINK LOGO] and wastewater treatment plants,
AXEL JOHNSON specializing in the German and Eastern
ENGINEERING European markets.
- ---------------------
</TABLE>
------------------
<TABLE>
<C> <S>
[BIOCLEAR Pending Acquisition. Winnipeg,
TECHNOLOGY Manitoba based company specializes in
INC.(R) LOGO] Sequential Batch Reactor (SBR)
technology for the biological
treatment of municipal and industrial
wastewater; designs and builds
wastewater treatment plants.
[LE LANCO LOGO] Pending Acquisition. Fabricates a
variety of plate and frame filter
presses for dewatering wastewater
sludge, inclined plate clarifiers for
heavy metal removal, and dryers for
metal finishing wastes. Complements
the offerings of Great Lakes
Environmental.
</TABLE>
------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
Picture of plant
The Nordic Group has supplied more than 5000 plate separator plants worldwide,
including this custom European application which produces process and drinking
water from muddy river water.
Picture of equipment
Waterlink Technologies' RO systems produce both drinking water and the high
purity process water required for semi-conductor manufacturing and other
stringent applications.
Picture of plant
The Nordic Group restores a heavily contaminated inland lake in Europe for
drinking and process use.
Picture of equipment
With a broad range of systems, equipment, and services, integrated Waterlink
applications like this combined continuous sand filter/inclined plate settler
system serve all three global water markets: drinking water, process water, and
wastewater.
Picture of equipment installation
Bioclear engineers, fabricates, constructs, installs, remotely monitors, and
services SBR facilities.
Picture of plant
Aero-Mod engineers biological wastewater treatment plants like this sanitary
wastewater plant located at the Arturo Marino Benitez Aeropuerto, Santiago,
Chile.
Picture of equipment
Mass Transfer's aeration and mixing systems are engineered for biological waste
treatment processes, wastewater disinfection and many industrial mixing
applications.
<PAGE> 5
Picture of plant
Picture of equipment
Waterlink's continuous sand filter, used here for purifying process water, has
over 8000 installations worldwide.
Picture of equipment
Picture of equipment installation
For larger industrial process applications, or water/wastewater treatment plants
serving populations of more than 100,000, continuous sand filter installations
can be housed in concrete.
Picture of equipment
This automatic sludge filter press is one of several innovative wastewater
treatment products that Lanco manufactures and distributes worldwide.
Picture of equipment
Great Lakes Environmental's industrial wastewater pretreatment systems remove
contaminants from industrial wastewater before sewer disposal or reuse by
industry.
Picture of equipment
Manufactured in Sweden, Noxon's decanter centrifuges are used for dewatering
industrial and municipal sludge and have been supplied to numerous industries in
Scandinavia, Europe, Asia and North America.
<PAGE> 6
PROSPECTUS SUMMARY
Unless otherwise indicated by the context, reference herein to (i)
"Waterlink" means Waterlink, Inc., (ii) the "Company" means Waterlink and its
subsidiaries, including Bioclear Technology, Inc. ("Bioclear") and Lanco
Environmental Products, Inc. ("Lanco"), the acquisitions which the Company will
consummate simultaneously with the completion of the Offering (the "Pending
Acquisitions") and (iii) "fiscal 1995," "fiscal 1996" and "fiscal 1997" mean,
respectively, the period from December 7, 1994 (date of incorporation) to
September 30, 1995, the year ended September 30, 1996, and the year ending
September 30, 1997, with respect to Waterlink and certain of its subsidiaries.
The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information and
share and per share data in this Prospectus (i) give effect to the Pending
Acquisitions, (ii) assume the Underwriters' over-allotment option is not
exercised, and (iii) give effect to the conversion of all outstanding shares of
the Company's preferred stock into shares of the Common Stock.
THE COMPANY
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. Since its formation in December 1994, the Company has grown
significantly by completing six acquisitions consisting of thirteen operating
companies. In addition, the Company will complete the Pending Acquisitions
concurrently with the closing of the Offering. As a result of its acquisition
program and internal development, the Company has increased its ability to
provide integrated water purification and wastewater treatment solutions and has
expanded its geographic presence.
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
As a result of the implementation of its strategic plan, the Company's pro
forma net sales for fiscal 1996 totaled $72.7 million, primarily due to its
acquisition program. 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. Pro forma net sales of the businesses acquired by the Company prior
to fiscal 1997 grew 26.3% for the six months ended March 31, 1997 compared to
the comparable period in the prior year. The Company's backlog on a pro forma
basis, consisting of written purchase orders received by the Company, was $30.0
million at May 15, 1997.
Through its acquisition program and internal development, the Company has
established a broad distribution system both geographically and within various
markets. In fiscal 1996, 47% of the Company's pro forma net sales were derived
from customers located in the United States and Canada, 40% in Europe, 5% in
Latin America and 8% in other regions, including Asia-Pacific. Industrial
customers accounted for 60% of the
3
<PAGE> 7
Company's pro forma net sales for fiscal 1996 while municipal customers
accounted for 40%. The Company's industrial customers include a broad range of
major corporations which require both purified water for their manufacturing
processes and treatment of their wastewater outflow. Industries served include
the pharmaceutical, electronic and microelectronic, pulp and paper, chemical,
petrochemical, food, beverage, automotive and other heavy manufacturing
industries. The Company serves hundreds of large and small municipal customers
worldwide which provide purified water to, and wastewater treatment for, their
communities.
The global water purification and wastewater treatment industry was
estimated at $300 billion in 1995. The industry is highly fragmented and
consists of companies that design, develop and manufacture equipment, provide
engineering services, run treatment facilities and provide a combination of such
services and capabilities. The industry is composed of two primary end-markets,
municipal and industrial. In the United States, Canada and western Europe,
municipalities have responded not only to environmental regulation but also to
their constituents' awareness of the potential dangers of contaminated sources
of water and the effects of untreated wastewater on the environment. In other
areas of the world where municipalities have historically provided fewer water
and wastewater services, factors such as economic expansion, infrastructure
development, population growth and public awareness have increasingly offered
incentives for municipalities to provide such services. Within the industrial
market, corporations increasingly require sources of pure water as their
production processes become more complex and product quality standards increase.
In addition, corporations have begun treating wastewater not only in response to
government regulation but also due to the economic benefits of water reuse and
wastewater minimization in their industrial processes. Additionally, industrial
companies have increasingly outsourced their water purification and wastewater
treatment functions, eliminating much of their internal engineering capability
and expertise in an effort to reduce costs. The factors influencing both the
municipal and industrial markets are expected to propel the growth of the global
water purification and wastewater treatment industry to $500 billion by the year
2000.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......... 4,500,000 shares
Common Stock to be outstanding upon
completion of the Offering (1)............ 10,932,554 shares
Use of Proceeds............................. To pay the cash portion of the purchase prices
of the Pending Acquisitions, repay indebtedness
of the Company and for general working capital
purposes. See "Use of Proceeds".
Proposed NYSE Symbol........................ WLK
</TABLE>
------------------
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
------------------
- ------------------
(1) The number of shares to be outstanding upon completion of the Offering does
not include (i) 1,437,800 shares subject to outstanding options granted
under the Company's 1995 Stock Option Plan, (ii) 35,000 shares subject to
other outstanding options to purchase Common Stock, (iii) 225,000 shares
issuable upon exercise of a warrant issued to the Company's principal senior
bank lender and (iv) 125,000 shares (subject to adjustment) issuable upon
exercise of warrants issued in connection with commitments to purchase
subordinated indebtedness of the Company. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations -- Liquidity and
Capital Resources," "Management -- Benefit Plans," "Certain
Transactions -- 1997 Notes, 1997 Warrants and Stockholder Guarantee" and
"Description of Capital Stock."
4
<PAGE> 8
SUMMARY SELECTED AND PRO FORMA FINANCIAL DATA
The following table sets forth summary selected historical and unaudited
pro forma consolidated financial data of the Company since its incorporation on
December 7, 1994. The historical financial data presented for fiscal 1995 and
fiscal 1996 are derived from the audited consolidated financial statements of
the Company. The historical data presented for each of the six months ended
March 31, 1996 and 1997 are derived from unaudited financial statements which,
in the opinion of management, include all adjustments (which were of a normal
recurring nature) necessary for a fair presentation of the information set forth
therein. The historical financial data includes the operating results of each
acquired business from the date of acquisition in accordance with the purchase
method of accounting. The historical results of operations for the six months
ended March 31, 1997 are not necessarily indicative of future results. The
historical results of operations should be read in conjunction with the
financial information appearing elsewhere in this Prospectus. See "Consolidated
Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The unaudited pro forma financial data have been adjusted for the
acquisitions completed in fiscal 1996, the acquisition of the Nordic Group (as
defined herein) in March 1997, the Pending Acquisitions, the conversion of all
outstanding shares of the Company's preferred stock into shares of Common Stock
and the closing of the Offering and the application of the net proceeds
therefrom. The pro forma Statements of Operations Data assume that the
acquisitions completed in fiscal 1996, the acquisition of the Nordic Group and
the Pending Acquisitions were closed on October 1, 1995. The pro forma Balance
Sheet Data assume that the Pending Acquisitions were closed on March 31, 1997.
The pro forma financial information is not necessarily indicative of results the
Company would have obtained had these events actually then occurred or of the
Company's future results and should be read in conjunction with the other
financial statements and notes thereto included elsewhere in this Prospectus.
See "Selected and Pro Forma Consolidated Financial Data" and "Unaudited Pro
Forma Condensed Consolidated Financial Data."
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------- ---------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
FISCAL FISCAL ----------------- FISCAL -----------------
1995 1996 1996 1997 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales (1)................... $ 2,684 $19,801 $ 8,243 $24,727 $72,687 $35,827 $41,556
Gross profit (1)(2)............. 827 8,568 3,422 9,927 28,002 13,810 15,628
Selling, general and
administrative expenses
(2)(3)........................ 1,178 7,029 2,897 7,478 21,217 11,062 11,839
Amortization expense (4)........ 15 307 117 280 1,060 531 565
Operating income (loss)......... (366) 1,232 408 2,169 5,725 2,217 3,224
Net income (loss) (5)........... (512) 306 19 985 3,196 1,202 1,917
Pro forma net income per share
(6)........................... $ 0.05 $ -- $ 0.15 $ 0.28 $ 0.11 $ 0.17
Number of shares used to compute
pro forma per share data
(6)........................... 6,428 6,424 6,665 11,256 11,252 11,493
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------
AS ADJUSTED
PRO FORMA (7)(8)
------------- ------------
(In thousands)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................... $14,561 $17,140
Total assets...................................................... 86,534 86,205
Total debt........................................................ 45,905(9) 2,413
Redeemable preferred stock........................................ 8,500 --
Shareholders' equity (3).......................................... 10,558(10) 62,488
</TABLE>
5
<PAGE> 9
(1) Pro forma net sales and gross profit have been adjusted to recognize
revenue on the percentage of completion method of accounting at an acquired
company which previously recognized revenue on the completed contract
method. This adjustment decreased net sales and gross profit by $2,715,000
and $646,000, respectively, for fiscal 1996, decreased net sales and gross
profit by $4,653,000 and $1,097,000, respectively, for the six months ended
March 31, 1996 and increased net sales and gross profit by $2,462,000 and
$536,000, respectively, for the six months ended March 31, 1997.
(2) The pro forma Statements of Operations Data include the effect of certain
adjustments in salaries and benefits to the former owners of the companies
acquired in fiscal 1996 and the Pending Acquisitions to levels specified in
current employment agreements as follows: a decrease of $3,518,000 for
fiscal 1996, and a decrease of $112,000 and $25,000 for the six months
ended March 31, 1996 and 1997, respectively. The pro forma Statements of
Operations Data also include the effect of certain adjustments in corporate
office expenses to current levels as follows: an increase of $605,000 for
fiscal 1996 and $349,000 for the six months ended March 31, 1996. In
addition, the pro forma Statements of Operations Data include the effect of
certain reclassifications which increased gross profit and selling, general
and administrative expenses.
(3) The pro forma financial data exclude a special charge to operations of
approximately $2.6 million ($0.13 per share, after tax), assuming an
initial public offering price of $11.00 per share, which will be incurred
in the quarter in which the Offering is completed. Such charge results
primarily from the issuance by the Company of certain compensatory stock
options to an officer of the Company pursuant to the terms of his
employment agreement. Of this amount, approximately $1.1 million is
non-cash, and approximately $1.5 million represents cash payments relating
principally to the reimbursement of income taxes resulting from this stock
option issuance.
(4) The pro forma Statements of Operations Data have been adjusted to reflect
amortization of the goodwill to be recorded as a result of the acquisitions
completed in fiscal 1996, the acquisition of the Nordic Group and the
Pending Acquisitions over a 40 year period.
(5) The pro forma Statements of Operations Data have been adjusted to reflect
reduction of interest expense resulting from the application of estimated
net proceeds of the Offering to repay outstanding indebtedness, as
described in "Use of Proceeds."
(6) Pro forma net income per share is computed by dividing net income by the
number of shares used to compute pro forma per share data. For historical
purposes, share data for the Company includes shares of Common Stock
outstanding, shares of Common Stock to be issued upon the conversion of all
outstanding Preferred Stock and the assumed exercise of outstanding stock
options and warrants using the treasury stock method. For pro forma
purposes, share data also includes shares of Common Stock to be issued in
connection with the Offering and the Pending Acquisitions. Shares
associated with options, warrants, the Offering and the Pending
Acquisitions were computed using an assumed initial public offering price
of $11.00 per share.
(7) Reflects the closing of the Offering and the Company's application of the
estimated net proceeds therefrom as described in "Use of Proceeds," and the
conversion of all outstanding shares of the Company's preferred stock into
shares of Common Stock.
(8) The pro forma as adjusted Balance Sheet Data have been adjusted to reflect
an extraordinary non-cash charge of $355,000, net of tax benefit of
$267,000 ($0.02 per share) which will be incurred by the Company in the
quarter in which the Offering is completed. Such charge relates to the
write-off of unamortized debt issuance costs and discounts associated with
certain indebtedness to be retired with net proceeds of the Offering.
(9) Includes $16,644,000 of pro forma cash consideration payable in connection
with the Pending Acquisitions to be paid from a portion of the net proceeds
of the Offering.
(10) Includes $3,611,000 of pro forma consideration payable in connection with
the Pending Acquisitions to be paid through the issuance of 328,270 shares
of Common Stock (using an assumed initial public offering price of $11.00
per share).
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RISK FACTORS
Prior to making an investment decision, prospective purchasers of the
Common Stock offered hereby should consider carefully all of the information set
forth in this Prospectus and, particularly, should evaluate the following risk
factors.
LIMITED COMBINED OPERATING HISTORY; RISKS OF INTEGRATION
Waterlink, incorporated in Delaware on December 7, 1994, has grown by
completing six acquisitions consisting of thirteen operating companies. See "The
Company." 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 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. See "Business"
and "Management."
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company intends to grow primarily 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 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.
See "The Company" and "Business."
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 $25
million in the aggregate available to it, subject to certain
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borrowing base requirements, under bank credit facilities (the "Credit
Facility") underwritten by certain financial institutions, with Bank of America
Illinois (the "Bank") as Agent and two of the Bank's foreign affiliates, 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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 and due to the Pending
Acquisitions, 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, due to the timing of the awarding of such
contracts, the ability to fund project costs, and the recognition by the Company
of revenues and profits therefrom. 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.
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 (assuming the Pending Acquisitions are
completed), the Company's net sales outside the United States were approximately
61% of its pro forma fiscal 1996 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.
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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 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 restated into dollars utilizing the appropriate foreign currency exchange
rate, and thereby subjecting such results to the impact of currency and exchange
rate fluctuations. See "Business."
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend on the continuing efforts of its executive
officers and its senior management, in particular Theodore F. Savastano,
Waterlink's Chairman; Chet S. Ross, Waterlink's President and Chief Executive
Officer; and the presidents of each of the operating subsidiaries. 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. See "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. See
"Business -- Competition."
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.
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POTENTIAL ENVIRONMENTAL LIABILITIES
In the United States, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA" or "Superfund"),
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 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. See "Business -- Government
Regulation."
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. See "Business -- Process and Product
Warranty and Performance Guarantees."
DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company currently intends to retain earnings to provide funds for the
operation and expansion of its business and, accordingly, does not anticipate
paying cash dividends in the foreseeable future. The Company's Credit Facility
prohibits the payment of dividends without the consent of the Bank. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
On closing of the Offering, 10,932,554 shares of Common Stock will be
outstanding. The 4,500,000 shares sold in the Offering (other than shares that
may be purchased by affiliates of the Company) will be freely tradable. The
remaining shares outstanding may be resold publicly only following their
effective registration under the Securities Act of 1933, as amended (the
"Securities Act"), or pursuant to an available exemption (such as provided by
Rule 144 following a holding period for previously unregistered shares) from the
registration requirements of the Securities Act. Substantially all of the
holders of those remaining shares
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have certain rights to have their shares registered in the future under the
Securities Act (see "Shares Eligible for Future Sale"). The Company, its
officers and directors, and the holders of substantially all of the Common Stock
have agreed that, until the later of December 31, 1997 or 180 days following the
date of this Prospectus (the "Lockup Period"), they will not, without the prior
written consent of Smith Barney Inc., offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock, or any securities convertible into, or
exercisable or exchangeable for, Common Stock, except that the Company may grant
warrants pursuant to the Note Purchase Agreement and grant options under the
Company's stock option and stock purchase plans, and may issue shares of Common
Stock (i) in connection with acquisitions, (ii) pursuant to the exercise of
options granted under the Company's stock option and stock purchase plans, (iii)
pursuant to the exercise of warrants outstanding as of the closing of the
Offering or which the Company is obligated to issue as part of the 1997
Warrants, (iv) pursuant to the conversion of the Company's preferred stock and
(v) pursuant to or in connection with the Company's Rights Plan. Sales made
pursuant to Rule 144 must comply with its applicable volume and manner of sale
limitations and other requirements. Absent additional offerings that are
registered under the Securities Act and any additional issuances of Common Stock
not referred to below, it is anticipated that as many as 6,317,554 shares of
Common Stock may be eligible to be sold pursuant to Rule 144 within
approximately one year of the closing of the Offering, of which approximately
1,855,000 shares of Common Stock may be immediately eligible to be sold (subject
to the Lockup Period).
On closing of the Offering, the Company also will have outstanding options
to purchase up to a total of 1,472,800 shares of Common Stock. The Company
intends to register all the shares subject to these options under the Securities
Act for public resale. See "Management -- Benefit Plans."
In addition, the Company will have outstanding warrants to purchase 350,000
shares of Common Stock (subject to adjustment). Pursuant to the applicable
warrant agreements, the holders of such warrants have certain rights to require
the Company to register the shares of Common Stock to be issued upon exercise of
the warrants. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources"; "Certain
Transactions -- 1997 Notes, 1997 Warrants and Stockholder Guarantee" and
"Description of Capital Stock -- 1997 Warrants."
The Company intends to register 5,000,000 additional shares of Common Stock
under the Securities Act during the fourth quarter of fiscal 1997 for its use in
connection with future acquisitions. These shares generally will be freely
tradable after their issuance by persons not affiliated with the Company, unless
the Company is able to contractually restrict their resale. Sales of these
shares during the Lockup Period would require the prior written consent of Smith
Barney Inc.
Assuming no additional options or warrants to purchase shares of Common
Stock, and no additional shares of Common Stock (other than upon the exercise of
currently outstanding options or warrants) are issued, approximately 6,317,554
shares of Common Stock (in addition to the shares offered in the Offering) could
be traded within one year of the closing of the Offering, of which approximately
1,855,000 shares of Common Stock may be immediately eligible to be sold (subject
to the Lockup Period referred to above). The effect, if any, that the
availability for sale, or sale, of the shares of Common Stock eligible for
future sale will have on the market price of the Common Stock prevailing from
time to time is unpredictable, and no assurance can be given that the effect
will not be adverse.
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, no public market for the Common Stock has existed,
and the initial public offering price, which has been determined by negotiation
between the Company and representatives of the Underwriters, may not be
indicative of the price at which the Common Stock will trade after the Offering.
See "Underwriting" for the factors considered in determining the initial public
offering price. The Common Stock has been approved for listing on The New York
Stock Exchange, subject to official notice of listing, but no assurance can be
given that if so listed, an active trading market for the Common Stock will
develop or, if developed, that it will continue after the Offering. The market
price of the Common Stock after the Offering may be subject to significant
fluctuations from time to time in response to numerous factors, including
variations in the reported annual and quarterly financial results of the
Company, changes in financial
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projections or failures by the Company to meet such projections and changing
conditions in the economy in general or in the Company's industry in particular.
In addition, the stock markets experience significant price and volume
volatility from time to time which may affect the market price of the Common
Stock for reasons unrelated to the Company's performance at that time.
POTENTIAL ANTI-TAKEOVER EFFECTS
Upon the closing of the Offering, the Company will have adopted a
stockholder rights plan. The plan and provisions of the Company's Certificate of
Incorporation, as amended (the "Company Certificate"), the Company's Bylaws, as
amended (the "Company Bylaws"), and the Delaware General Corporation Law (the
"DGCL") may have the effect of delaying, discouraging, inhibiting, preventing or
rendering more difficult an attempt to obtain control of the Company by means of
a tender offer, business combination, proxy contest or otherwise. These
provisions include the charter authorization of "blank check" preferred stock,
classification of the Board of Directors, a restriction on the ability of
stockholders to take actions by written consent, a "fair price" provision and a
DGCL provision imposing restrictions on business combinations with certain
interested parties. See "Description of Capital Stock."
OWNERSHIP AND CONTROL BY CERTAIN SHAREHOLDERS
Upon the closing of the Offering, on a fully diluted basis and assuming the
vesting and exercise of all outstanding options and the conversion of all issued
and outstanding shares of preferred stock, the Company's directors and
management will own or control approximately 33.5% of the Company's outstanding
voting capital stock. Collectively, such shareholders may be able to effectively
control decisions of the Company, as the Company Certificate, and the Company
By-laws generally require a majority vote of holders of the outstanding shares
of the Company to authorize actions of the Company. This concentration of
ownership by directors and management may also have the effect of delaying or
preventing a change in control of the Company. See "Security Ownership" and
"Description of Capital Stock."
DILUTION
Purchasers of Common Stock in the Offering (i) will experience immediate
and substantial dilution in the net tangible book value of their stock of $8.93
per share (see "Dilution") and (ii) may experience further dilution in that
value from issuances of Common Stock in connection with future acquisitions. In
addition, dilution may occur upon exercise of outstanding stock options or
warrants, and/or the Company may reserve additional shares of Common Stock in
the future for issuance under stock option or other incentive employee
compensation plans. The Board of Directors of the Company has the legal power
and authority to determine the terms of an offering of shares of the Company's
capital stock (or securities convertible into or exchangeable for such shares),
to the extent of the Company's shares of authorized and unissued capital stock.
See "Dilution" and "Description of Capital Stock."
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in this
Prospectus 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 in this Prospectus, 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
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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 plan (including, but not limited to, its ability to achieve
the total planned benefits of its strategic plan, its ability to 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).
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THE COMPANY
GENERAL
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. The Company was initially capitalized by the purchase of
shares of Common Stock and Series A Preferred Stock by Brantley Venture Partners
III, L.P. (400,000 shares of Common Stock and 400,000 shares of Series A
Preferred Stock) and by Theodore F. Savastano, the Company's Chairman (800,000
shares of Common Stock), for an aggregate investment of $501,200. 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")). 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 jet 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,
slide rail diffusers, 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. Pro
forma fiscal 1996 net sales relating to the companies acquired in fiscal 1995
and fiscal 1996 totaled $33.1 million.
During fiscal 1997 to date, Waterlink acquired the capital stock of the
Nordic Water Products Group subsidiaries (the "Nordic Group"). 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 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. Pro forma fiscal
1996 net sales relating to the Nordic Group totaled $29.4 million.
Simultaneously with the closing of the Offering, Waterlink will acquire the
capital stock of Bioclear and Lanco. 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
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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. Pro forma fiscal 1996 net sales relating to the Pending
Acquisitions totaled $10.2 million.
Primarily due to its acquisition program, the Company's pro forma net sales
for fiscal 1996 totaled $72.7 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
prior to fiscal 1997 grew 26.3% for the six months ended March 31, 1997 compared
to the comparable period in the prior year.
Since December 7, 1994, the Company has developed the core competencies
required to provide integrated water purification and wastewater treatment
solutions to both industrial and municipal customers. The Company intends to
continue its acquisition program in order to provide the Company with additional
complementary systems, equipment and services, broaden its customer and
geographic base and enhance the Company's design/build capabilities.
SUMMARY OF PRINCIPAL TERMS OF THE PENDING ACQUISITIONS
Simultaneously with the closing of the Offering, the Company will purchase
all of the outstanding shares of capital stock of Bioclear for an aggregate
consideration consisting of (i) $20,000,000 (Canadian) in cash payable at or
prior to the closing, (ii) $5,000,000 (Canadian) in shares of Common Stock
valued at the initial public offering price payable at the closing, (iii) up to
an additional $5,000,000 (Canadian) in cash payable with respect to periods
ending in 1998, 1999 and 2000 pursuant to an earn-out provision and (iv)
additional cash payable with respect to periods ending in 1999 and 2000 pursuant
to certain additional purchase consideration provisions, all as set forth in the
purchase agreement. Of the $20,000,000 (Canadian) in cash payable at or prior to
the closing, $2,000,000 is to be paid into escrow to secure the sellers'
indemnification obligations under the purchase agreement. The earn-out and
additional purchase consideration provisions of the purchase agreement are based
on Bioclear's earnings before interest and taxes, as adjusted in accordance with
the purchase agreement, for the applicable periods. Under the earn out
provision, the sellers would be entitled to a fixed percentage of such adjusted
earnings in excess of an earnings target, with an aggregate maximum earn out
payment of $5,000,000 (Canadian). Under the additional purchase consideration
provisions, the sellers would be entitled to a smaller fixed percentage of such
adjusted earnings in excess of a higher earnings target. 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. In addition, if the
Bioclear acquisition is not completed before June 30, 1997, Bioclear is
permitted to pay to its current stockholders a dividend up to the amount by
which stockholders' equity of Bioclear exceeds $910,620 (Canadian) at the
closing date of the acquisition.
The Company will purchase all of the outstanding shares of stock of Lanco
for an aggregate purchase price of $2,200,000 payable in cash at or prior to the
closing. Of this amount, $100,000 is to be paid into escrow to secure the
seller's indemnification obligations under the purchase agreement.
The consideration being paid by the Company for each of Bioclear and Lanco
was determined by arm's-length negotiations between the applicable parties. The
closing of each of the Pending Acquisitions is subject
15
<PAGE> 19
to customary conditions. These conditions include, among other things, the
accuracy on the closing dates of the representations and warranties made by the
respective sellers, the performance by the respective parties of each of the
applicable covenants included in the purchase agreements, and the nonexistence
of a material adverse change in the business, assets, liabilities, results of
operations or prospects of Bioclear or Lanco, as the case may be. Each purchase
agreement may be terminated, under certain circumstances (i) by mutual consent
of the parties, (ii) by the Company if a material misrepresentation or breach in
representations and warranties by sellers occurs, or if a material portion of
the assets of Bioclear or Lanco, as the case may be, are materially damaged or
destroyed, or (iii) by either party if the conditions to such party's
obligations to consummate the closing of the acquisition have not been
satisfied.
The Company's executive offices are located at 4100 Holiday Street, N.W.,
Suite 201, Canton, Ohio 44718-7532 and its telephone number is (330) 649-4000.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby (based upon an assumed public offering price of $11.00 per
share), after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, are estimated to be approximately
$43.8 million (approximately $50.7 million if the Underwriters exercise their
over-allotment option in full). Of the net proceeds, approximately $16.6 million
will be used to pay the cash portion of the purchase prices for the Pending
Acquisitions, approximately $26.8 million will be used concurrently for the
repayment of outstanding indebtedness of the Company and the remainder will be
used for general working capital purposes. See "Certain Transactions."
The indebtedness to be repaid from the proceeds of the Offering bears
interest at rates ranging from 3.9% to 10.6% and was incurred to fund completed
acquisitions and for working capital requirements. Such indebtedness would
otherwise mature at various dates through April 2002.
DIVIDEND POLICY
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 and the 1997 Notes (as defined
below) and any restrictions that may be imposed by the Company's future credit
facilities and other indebtedness. The Company's Credit Facility prohibits its
payment of dividends without the consent of the Bank. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
16
<PAGE> 20
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company at March 31, 1997, (ii) the pro forma capitalization, giving effect to
the Pending Acquisitions (to be completed concurrently with the Offering), and
(iii) the pro forma capitalization, as adjusted to reflect the Offering and the
application of the net proceeds therefrom as described in "Use of Proceeds" and
the conversion of all outstanding shares of the Company's preferred stock into
shares of Common Stock. This table should be read in conjunction with "Unaudited
Pro Forma Condensed Consolidated Financial Data" and the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------------
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Current maturities of long-term debt........................... $ 2,019 $ 4,432 $ 2,413
Long-term debt, less current portion........................... 21,729 21,729 --
Notes payable-related parties.................................. 3,100 3,100 --
Pro forma cash consideration payable in connection with the
Pending Acquisitions......................................... -- 16,644 --
---------- --------- -----------
Total debt................................................ 26,848 45,905 2,413
Redeemable preferred stock, $.001 par value, 5,463,000 shares
authorized; 400,000 Series A, 1,700,000 Series B, 1,150,000
Series C shares issued and outstanding, historical and pro
forma; and none issued and outstanding, as adjusted.......... 8,500 8,500 --
Shareholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, none issued and outstanding, as adjusted...... -- -- --
Common stock, $.001 par value, 9,537,000 shares authorized,
2,814,284 shares issued and outstanding, historical; and
3,142,554 shares issued and outstanding, pro forma; and
40,000,000 shares authorized, 10,892,554 shares issued and
outstanding, as adjusted(1)............................... 3 3 11
Additional paid-in-capital................................... 6,380 9,991(2) 62,268
Foreign currency translation adjustment...................... (215) (215) (215)
Retained earnings............................................ 779 779 424(3)
---------- --------- -----------
Total shareholders' equity................................ 6,947 10,558 62,488
---------- --------- -----------
Total capitalization.................................... $ 42,295 $64,963 $64,901
======= ======== =========
</TABLE>
- ---------------
(1) Excludes (i) 1,437,800 shares subject to outstanding options granted under
the Company's 1995 Stock Option Plan, (ii) 75,000 shares subject to other
outstanding options to purchase Common Stock, 40,000 of which were
exercised in April 1997, (iii) 225,000 shares issuable upon exercise of a
warrant issued to the Bank, and (iv) 125,000 shares (subject to adjustment)
issuable upon exercise of warrants issued in connection with commitments to
purchase subordinated indebtedness of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Management -- Benefit Plans", "Certain
Transactions -- 1997 Notes, 1997 Warrants and Stockholder Guarantee" and
"Description of Capital Stock."
(2) Includes $3,611,000 of pro forma consideration payable in connection with
the Pending Acquisitions to be paid through the issuance of 328,270 shares
of the Company's Common Stock (using an assumed initial public offering
price of $11.00 per share).
(3) The pro forma as adjusted retained earnings (deficit) has been adjusted to
reflect an extraordinary non-cash charge of $355,000, net of tax benefit of
$267,000 ($0.02 per share) which will be incurred by the Company in the
quarter in which the Offering is completed. Such charge relates to the
write-off of unamortized debt issuance costs and discounts associated with
certain indebtedness to be retired with net proceeds of the Offering.
17
<PAGE> 21
DILUTION
The deficit in pro forma net tangible book value of the Company as of March
31, 1997 was approximately $20,855,000, or approximately $3.26 per share, after
giving effect to the Pending Acquisitions. The deficit in pro forma net tangible
book value per share represents the amount by which the Company's pro forma
total liabilities exceed the Company's pro forma net tangible assets as of March
31, 1997, divided by the number of shares of Common Stock to be outstanding
after giving effect to (i) the Pending Acquisitions and (ii) the conversion of
all outstanding shares of the Company's preferred stock into shares of Common
Stock. After giving effect to the sale of the 4,500,000 shares offered hereby
(at an assumed public offering price of $11.00 per share) and after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company, the Company's pro forma net tangible book value as of
March 31, 1997 would have been approximately $22,575,000, or approximately $2.07
per share. This represents an immediate increase in pro forma net tangible book
value of approximately $5.33 per share to existing shareholders and an immediate
dilution of approximately $8.93 per share to new investors purchasing shares in
the Offering at the assumed public offering price per share. The following table
illustrates this pro forma per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.......... $11.00
Pro forma deficit in net tangible book value per
share before the Offering...................... $(3.26)
Increase in pro forma net tangible book value per
share attributable to new investors............ 5.33
------
Pro forma net tangible book value per share after
the Offering................................... 2.07
------
$ 8.93
Dilution per share to new investors.............. ======
</TABLE>
The following table sets forth, as of March 31, 1997, the number of shares
of Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid to the Company by existing
shareholders and the new investors purchasing shares of Common Stock from the
Company in the Offering at an assumed public offering price of $11.00 per share
(before deducting underwriting discounts and commissions and estimated offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders...... 6,392,554 58.7% $18,094,841 26.8% $ 2.83
New investors.............. 4,500,000 41.3 49,500,000 73.2 $ 11.00
---------- ------- ----------- -------
Total................. 10,892,554 100.0% $67,594,841 100.0%
========= ===== ========== =====
</TABLE>
18
<PAGE> 22
SELECTED AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical and unaudited pro forma
consolidated financial data of the Company since its incorporation on December
7, 1994. The historical financial data presented for and as of the end of fiscal
1995 and fiscal 1996 were derived from the audited consolidated financial
statements of the Company. The historical financial data presented for and as of
the end of each of the six months ended March 31, 1996 and 1997 were derived
from unaudited financial statements which, in the opinion of management, include
all adjustments (which were of a normal recurring nature) necessary for a fair
presentation of the information set forth therein. The historical 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 historical 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
</TABLE>
The pro forma Statements of Operations Data for fiscal 1996 and for the six
months ended March 31, 1996 and 1997 were adjusted for the acquisitions
completed in 1996, the acquisition of the Nordic Group (completed in March 1997)
and the Pending Acquisitions (to be completed concurrently with the closing of
the Offering), as if these acquisitions had been completed as of October 1, 1995
and the application of the Offering proceeds. The pro forma Balance Sheet Data
assume that the Pending Acquisitions were closed on March 31, 1997.
The historical results of operations for the six months ended March 31,
1997 and the pro forma results of operations are not necessarily indicative of
future results. The pro forma financial information is based on preliminary
estimates, available information and certain assumptions that management deems
appropriate and should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.
The historical data presented below should be read in conjunction with the
financial information appearing elsewhere in this Prospectus. See "Consolidated
Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The pro forma data presented below should
be read in conjunction with "Unaudited Pro Forma Condensed Consolidated
Financial Data" appearing elsewhere in this Prospectus.
19
<PAGE> 23
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------ ---------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
FISCAL FISCAL ---------------- FISCAL -----------------
1995 1996 1996 1997 1996 1996 1997
------- ------- ------ ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales(1)................................ $ 2,684 $19,801 $8,243 $24,727 $72,687 $35,827 $41,556
Cost of sales(1)(2)......................... 1,857 11,233 4,821 14,800 44,685 22,017 25,928
------- ------- ------ ------- ------- ------- -------
Gross profit................................ 827 8,568 3,422 9,927 28,002 13,810 15,628
Selling, general and administrative
expenses(2)(3)............................ 1,178 7,029 2,897 7,478 21,217 11,062 11,839
Amortization(4)............................. 15 307 117 280 1,060 531 565
------- ------- ------ ------- ------- ------- -------
Operating income (loss)..................... (366) 1,232 408 2,169 5,725 2,217 3,224
Other income (expense):
Interest expense(5)....................... (144) (877) (354) (612) (100) (50) (50)
Other-net................................. 33 (44) (33) 75 (17) (58) 189
------- ------- ------ ------- ------- ------- -------
Income (loss) before income taxes........... (477) 311 21 1,632 5,608 2,109 3,363
Income taxes................................ 35 5 2 647 2,412 907 1,446
------- ------- ------ ------- ------- ------- -------
Net income (loss)........................... $ (512) $ 306 $ 19 $ 985 $ 3,196 $ 1,202 $ 1,917
======== ======== ====== ======== ======== ======== ========
Pro forma net income per share(6)........... $ 0.05 $ -- $ 0.15 $ 0.28 $ 0.11 $ 0.17
======== ====== ======== ======== ======== ========
Number of shares used to compute pro forma
per share data(6)......................... 6,428 6,424 6,665 11,256 11,252 11,493
======== ====== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL MARCH 31, 1997(3)
------------------------------------- ------------------
MARCH 31, AS
FISCAL FISCAL ----------------- PRO ADJUSTED
1995 1996 1996 1997 FORMA (7)(8)
------- ------- ------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 2,064 $ 3,438 $ 2,224 $15,963 $14,561 $ 17,140
Total assets........................................ 10,819 28,991 19,364 62,687 86,534 86,205
Total debt.......................................... 6,039 12,145 12,411 26,848 45,905(9) 2,413
Redeemable preferred stock.......................... 3,900 8,500 3,900 8,500 8,500 --
Shareholders' equity (deficit)...................... (11) 2,407 9 6,947 10,558(10) 62,488
</TABLE>
- ---------------
(1) Pro forma net sales and gross profit have been adjusted to recognize
revenue on the percentage of completion method of accounting at an acquired
company which previously recognized revenue on the completed contract
method. This adjustment decreased net sales and gross profit by $2,715,000
and $646,000, respectively, for fiscal 1996, decreased net sales and gross
profit by $4,653,000 and $1,097,000, respectively, for the six months ended
March 31, 1996, and increased net sales and gross profit by $2,462,000 and
$536,000, respectively, for the six months ended March 31, 1997.
(2) The pro forma Statements of Operations Data include the effect of certain
adjustments in salaries and benefits to the former owners of the companies
acquired in fiscal 1996 and the Pending Acquisitions to levels specified in
current employment agreements as follows: a decrease of $3,518,000 for
fiscal 1996, and a decrease of $112,000 and $25,000 for the six months
ended March 31, 1996 and 1997, respectively. The pro forma Statements of
Operations Data also include the effect of certain adjustments in corporate
office expenses to current levels as follows: an increase of $605,000 for
fiscal 1996 and $349,000 for the six months ended March 31, 1996. In
addition, the pro forma Statements of Operations Data include the effect of
certain reclassifications which decreased cost of sales and increased
selling, general and administrative expenses.
(3) The pro forma financial data exclude a special charge to operations of
approximately $2.6 million ($0.13 per share, after tax), assuming an
initial public offering price of $11.00 per share, which will be incurred
in the quarter in which the Offering is completed. Such charge results
primarily from the issuance by the Company of certain compensatory stock
options to an officer of the Company pursuant to the terms of an employment
agreement. Of this amount, approximately $1.1 million is non-cash, and
approximately $1.5 million represents cash payments relating principally to
the reimbursement of income taxes resulting from this stock option
issuance.
(4) The pro forma Statements of Operations Data have been adjusted to reflect
amortization of the goodwill to be recorded as a result of the acquisitions
completed in fiscal 1996, the acquisition of the Nordic Group and the
Pending Acquisitions over a 40 year period.
20
<PAGE> 24
(5) The pro forma Statements of Operations Data have been adjusted to reflect
reduction of interest expense resulting from the application of estimated
net proceeds of the Offering to repay outstanding indebtedness, as
described in "Use of Proceeds."
(6) Pro forma net income per share is computed by dividing net income by the
number of shares used to compute pro forma per share data. For historical
purposes, share data for the Company includes shares of Common Stock
outstanding, shares of Common Stock to be issued upon the conversion of all
outstanding Preferred Stock and the assumed exercise of outstanding stock
options and warrants using the treasury stock method. For pro forma
purposes, share data also includes shares of Common Stock to be issued in
connection with the Offering and the Pending Acquisitions. Shares
associated with options, warrants, the Offering and the Pending
Acquisitions were computed using an assumed initial public offering price
of $11.00 per share.
(7) Reflects the closing of the Offering and the Company's application of the
estimated net proceeds therefrom as described in "Use of Proceeds," and the
conversion of all outstanding shares of the Company's preferred stock into
shares of Common Stock.
(8) The pro forma as adjusted Balance Sheet Data have been adjusted to reflect
an extraordinary non-cash charge of $355,000, net of tax benefit of
$267,000 ($0.02 per share) which will be incurred by the Company in the
quarter in which the Offering is completed. Such charge relates to the
write-off of unamortized debt issuance costs and discounts associated with
certain indebtedness to be retired with net proceeds of the Offering.
(9) Includes $16,644,000 of pro forma cash consideration payable in connection
with the Pending Acquisitions to be paid from a portion of the net proceeds
of the Offering.
(10) Includes $3,611,000 of pro forma consideration payable in connection with
the Pending Acquisitions to be paid through the issuance of 328,270 shares
of Common Stock (using an assumed initial public offering price of $11.00
per share).
21
<PAGE> 25
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. The Company's acquisitions have enabled it
to build its technical capabilities and geographical presence. Through March 31,
1997, the Company had completed the following six 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
</TABLE>
The Company will complete the Pending Acquisitions simultaneously with the
completion of the Offering.
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 below 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.
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 and due to the Pending
Acquisitions, 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, due to the timing of the
awarding of such contracts, the ability to fund project costs, and the
recognition by the Company of revenues and profits therefrom. In addition, the
Company has historically operated with a moderate backlog. However, as a result
of its strategic plan and the Pending Acquisitions, the Company anticipates that
both the dollar volume and number of contracts in its backlog will increase
significantly. As of May 15, 1997, the Company's backlog was $30.0 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.
22
<PAGE> 26
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain Selected
Consolidated Financial Data as a percentage of net sales.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL MARCH 31,
--------------- -----------------
1995 1996 1996 1997
----- ----- ------ ------
<S> <C> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0 % 100.0 %
Cost of sales......................................... 69.2 56.7 58.5 59.9
----- ----- ------ ------
Gross profit.......................................... 30.8 43.3 41.5 40.1
Selling, general and administrative expenses.......... 43.9 35.5 35.1 30.2
Amortization.......................................... 0.5 1.6 1.4 1.1
----- ----- ------ ------
Operating income (loss)............................... (13.6) 6.2 5.0 8.8
Other income (expense):
Interest expense.................................... (5.4) (4.4) (4.3) (2.5)
Other-net........................................... 1.2 (0.2) (0.5) 0.3
----- ----- ------ ------
Income (loss) before income taxes..................... (17.8) 1.6 0.2 6.6
Income taxes.......................................... 1.3 0.1 0.0 2.6
----- ----- ------ ------
Net income (loss)..................................... (19.1)% 1.5% 0.2 % 4.0 %
===== ===== ====== ======
</TABLE>
Six Months Ended March 31, 1997 compared to Six Months Ended March 31, 1996
Net Sales
Net sales for the six months ended March 31, 1997 were $24,727,000, an
increase of $16,484,000 from the comparable prior period. The increase was
primarily attributable to the contributions from Mass Transfer, which was
acquired on January 31, 1996, and from Aero-Mod, Waterlink Technologies and the
Nordic Group, which were acquired after March 31, 1996. In addition, internal
growth accounted for $2,484,000 of the increase, which represented an internal
growth rate of 30.1%, primarily due to the greater levels of financial resources
provided by the Company to businesses acquired in fiscal 1995 than the levels
previously available to them.
Gross Profit
Gross profit for the six months ended March 31, 1997 was $9,927,000, an
increase of $6,505,000 from the comparable prior period. The increase was
primarily due to the aforementioned acquisitions. Gross margin was 40.1% for the
six months ended March 31, 1997 as compared to 41.5% for the comparable prior
period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended March
31, 1997 were $7,478,000, an increase of $4,581,000 from the comparable prior
period. The increase was primarily due to the aforementioned acquisitions.
Selling, general and administrative expenses as a percentage of net sales was
30.2% for the six months ended March 31, 1997 as compared to 35.1% for the
comparable prior period. This decrease primarily reflected the spreading of
corporate overhead expense over a larger sales base.
Amortization
Amortization expense for the six months ended March 31, 1997 was $280,000,
an increase of $163,000 from the comparable prior period. The increase was
primarily due to the goodwill resulting from the aforementioned acquisitions.
Interest Expense
Interest expense for the six months ended March 31, 1997 was $612,000, an
increase of $258,000 from the comparable prior period. This increase was
primarily related to increased borrowings required to finance the aforementioned
acquisitions.
23
<PAGE> 27
Fiscal Year Ended September 30, 1996 compared to Fiscal Year Ended September 30,
1995
Net Sales
Net sales for fiscal 1996 were $19,801,000, an increase of $17,117,000 from
the comparable prior period. Substantially all of the increase was attributable
to the timing of the acquisitions of Great Lakes in fiscal 1995 and, Mass
Transfer and Aero-Mod in fiscal 1996.
Gross Profit
Gross profit for fiscal 1996 was $8,568,000, an increase of $7,741,000 from
the comparable prior period. The increase was primarily due to the timing of the
aforementioned acquisitions. Gross margin was 43.3% for fiscal 1996 as compared
to 30.8% in fiscal 1995. Sanborn Technologies, which comprised the majority of
fiscal 1995 net sales, has historically experienced a lower gross margin than
the Company's other operating subsidiaries.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 1996 were
$7,029,000, an increase of $5,851,000 from the comparable prior period. The
increase was primarily due to the timing of the aforementioned acquisitions.
Selling, general and administrative expenses as a percentage of net sales was
35.5% for fiscal 1996 as compared to 43.9% for the comparable prior period in
fiscal 1995. This decrease as a percentage of sales primarily reflected the
spreading of corporate overhead expense over a larger sales base.
Amortization
Amortization expense for fiscal 1996 was $307,000, an increase of $292,000
from the comparable prior period. The increase was primarily due to the goodwill
resulting from the aforementioned acquisitions.
Interest Expense
Interest expense for fiscal 1996 was $877,000, an increase of $733,000 from
the comparable prior period. This increase primarily related to increased
borrowings 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 (and prior credit
facilities), (ii) proceeds from the sale of the Company's 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 fiscal 1996, net cash used by operating activities was $14,000,
purchases of equipment totaled $423,000 and purchases of businesses, net of cash
acquired, totaled $5,557,000. These outlays were primarily financed by the sale
of shares of the Company's preferred stock in the aggregate amount of
$4,576,000, long-term borrowings, and excess cash balances.
For the six months ended March 31, 1997, net cash used by operating
activities was $1,972,000, purchases of equipment totaled $439,000 and purchases
of businesses, net of cash acquired, totaled $8,750,000. These cash outlays,
financed primarily by long-term borrowings, reflect the Company's continued
acquisition program and expansion of existing operations.
The net proceeds from the Offering will be used primarily to pay the cash
portion of the purchase prices for the Pending Acquisitions and for the
repayment of outstanding indebtedness. Such applications will enable the Company
to reduce its leverage and expand its product offerings which together are
anticipated to improve its financial flexibility and enhance the implementation
of its strategic plan.
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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 New Credit Facility (as hereafter defined) 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. Upon
consummation of the Offering, the Company will have made eight acquisitions
consisting of fifteen operating companies for an aggregate consideration of
$57,035,000, comprised of $41,210,000 of cash, $6,711,000 of Common Stock, and
$9,114,000 of seller financing, including convertible debt.
The Company may be required to make additional purchase consideration
payments of up to $4,465,000, contingent upon the achievement of certain
operating results through fiscal 2000. The payments that may be required in
fiscal 1997, 1998, 1999 and 2000 are $800,000, $2,200,000, $733,000 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.
Credit Availability
On February 19, 1997, the Company entered into the Credit Facility with
Bank of America Illinois. The Credit Facility provides the Company with a
revolving line of credit of up to $8,000,000 and a term loan of $11,000,000. The
revolving line of credit has a sublimit of $6,000,000 for letters of credit and
can be used for working capital and other general corporate purposes, including
the financing of acquisitions. The term loan was used to acquire the Nordic
Group and to refinance certain indebtedness in connection with the acquisition.
Loans under the revolving line of credit and the term loan bear interest at a
designated variable base rate plus spreads ranging from 0 to 50 basis points and
25 to 75 basis points, respectively, 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 loans under the
revolving line of credit and the term loan may bear interest based on a
designated London interbank offering rate plus spreads ranging from 175 to 225
basis points and 200 to 250 basis points, respectively, based on the same ratio.
The revolving line of credit terminates on February 18, 2000, and the term loan
matures on February 19, 2002. The term loan has mandatory quarterly repayments
commencing June 30, 1997 in amounts ranging from $400,000 to $750,000 per
repayment. The Credit Facility prohibits or restricts the Company from many
actions, including paying dividends and incurring or assuming other indebtedness
or liens.
The Company's obligations under the revolving line of credit and the term
loan are secured by liens on substantially all of the Company's assets,
including equipment, inventory, accounts receivable and general intangibles and
a pledge of most of the stock of the Company's subsidiaries. As additional
security, Brantley Venture Partners III, L.P., a principal shareholder of the
Company, has executed a guaranty of $2,000,000 of indebtedness under the
revolving line of credit and term loan. See "Certain Transactions -- 1997 Notes,
1997 Warrants and Stockholder Guarantee."
As part of the Credit Facility, two of the foreign subsidiaries of the
Company have separate facilities of $2,200,000 and $3,800,000, respectively, for
borrowings in local currencies. Each separate facility is guaranteed by the
Company. Both of these facilities mature in February 2000, with outstanding
amounts bearing interest based on a designated London interbank offering rate
plus a spread of 250 basis points.
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<PAGE> 29
As of May 15, 1997, there was $5,960,000 outstanding under the revolving
line of credit, $11,000,000 outstanding under the term loan and $5,377,000
outstanding under the two separate foreign facilities.
As additional consideration for the Credit Facility, the Company has
granted the Bank, pursuant to a certain warrant agreement dated February 19,
1997 (the "Bank Warrant Agreement"), a warrant, expiring in 2002, to purchase
225,000 shares of Common Stock at a purchase price of $4.50 per share.
Upon consummation of the Offering, the Company anticipates that it will
terminate its Credit Facility and enter into a new $50,000,000 three year,
multi-currency, secured, revolving credit facility with Bank of America Illinois
(the "New Credit Facility") to fund operating activities of the Company as well
as future acquisitions. Loans under the New 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 New Credit Facility may bear interest on a designated
London interbank offering rate plus spreads ranging from 100 to 200 basis
points, based on the same ratio.
In March 1997, the Company entered into a note purchase agreement (the
"Note Purchase Agreement") pursuant to which the Company may issue, and several
purchasers have committed to purchase, five year subordinated notes in the
principal amount of up to $10,000,000 (the "1997 Notes"). As of the date of this
Prospectus, none of the 1997 Notes are outstanding. Each 1997 Note would bear
interest at a rate of 12% per annum for the first twelve months after its
issuance date and at a rate of 14% per annum thereafter. In consideration of
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. See
"Description of Capital Stock -- 1997 Warrants." The 1997 Notes, if any are then
outstanding, will become payable at the completion of the Offering. The Note
Purchase Agreement will terminate upon completion of the Offering.
Accounting Charges in Connection with the Offering
A special charge to operations of approximately $2.6 million ($0.13 per
share, after tax), assuming an initial public offering price of $11.00 per
share, will be incurred in the quarter in which the Offering is completed. Such
charge results primarily from the issuance upon completion of the Offering by
the Company of a ten year option to purchase 100,000 shares of Common Stock at a
price of $.10 per share to an officer of the Company pursuant to the terms of an
employment agreement. Of this amount, approximately $1.1 million is non-cash,
and approximately $1.5 million represents cash payments relating principally to
the reimbursement of income taxes resulting from this stock option issuance.
An extraordinary non-cash charge of $355,000, net of tax benefit of
$267,000 ($0.02 per share) will be incurred by the Company in the quarter in
which the Offering is completed. Such charge relates to the write-off of
unamortized debt issuance costs and discounts associated with certain
indebtedness to be repaid with net proceeds of the Offering.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, which provides an alternative to APB Opinion No.
25, Accounting for Stock Issued to Employees, in accounting for stock-based
compensation issued to employees. The Company intends to account for stock
options in accordance with APB Opinion No. 25. The disclosure requirements of
SFAS No. 123, which are required if an entity elects to continue to use the
accounting method in APB Opinion No. 25, will be adopted as required for the
Company's fiscal 1997 financial statements.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS
No. 128 replaces the presentation of primary earnings per share ("EPS") under
Accounting Principles 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. The Company is required to adopt SFAS No. 128
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<PAGE> 30
during the first quarter of fiscal 1998. The Company has not completed its
evaluation of the potential impact of this new standard on EPS in future
periods.
THE WATER PURIFICATION AND WASTEWATER TREATMENT INDUSTRY
GENERAL
Demand for water purification and wastewater treatment has continued to
grow world-wide due to economic expansion, scarcity of usable water, concern
about water quality and regulatory requirements. Industrial companies require
treated water for most manufactured products, whether as an ingredient in
finished products or as part of the manufacturing process. Municipalities,
responsible for providing potable water, employ water treatment technology to
purify the water supply. Additionally, industrial companies and municipalities
are required by law to treat outgoing wastewater, primarily in the United
States, Canada and western Europe and, to a lesser extent, in the rest of the
world.
The global water treatment market was estimated at $300 billion in 1995 and
was divided as follows: municipal wastewater treatment, 36%; drinking water,
30%; industrial process water, 20%; and industrial wastewater treatment, 14%. By
the year 2000, when expenditures for water purification and wastewater treatment
are expected to reach $500 billion, the municipal water market is forecasted to
total $300 billion, and the industrial water market to total $200 billion.
The water purification and wastewater treatment industry is highly
fragmented, with thousands of companies involved in various capacities. Diverse
customer needs have created a demand for companies that are able to provide a
broad range of technologies, products and cost effective solutions. Most water
treatment companies provide only a limited number of products or services and
are unable to provide integrated solutions to their customers. These limitations
have helped propel industry consolidation and have created acquisition and
expansion opportunities. The Company believes an accelerated acquisition and
consolidation phase is likely in the water purification and wastewater treatment
industry in foreseeable future.
INDUSTRIAL USERS
Most industries, including the pharmaceutical, electronic and
microelectronic, pulp and paper, chemical, petrochemical, food, beverage,
automotive and other heavy manufacturing industries, are dependent on purified
water for their manufacturing processes. The use of untreated water in
manufacturing processes can result in unusable products, inconsistent product
quality, and in equipment degradation, leading to costly maintenance or
replacement. Increasingly, industrial companies are outsourcing their pure water
needs. A number of elements have driven this shift, including a current trend
among companies to focus on core competencies, the desire to reduce operating
costs, and the growing use of off-balance sheet financing.
In the United States, Canada, and western Europe, industrial users are
often required to treat their wastewater as a result of government regulations
and public sensitivity to industrial pollution. Outside these regions, many
multinational corporations are applying throughout their global operations
standards similar to those in effect in the United States, Canada and western
Europe even though local regulations do not yet require adherence to those
standards. However, regulations are becoming more important in these regions.
For example, the North American Free Trade Agreement has resulted in a more
rigorous regulatory environment in Mexico and water purification and wastewater
treatment laws in Chile have become more stringent. Additionally, due to higher
water prices and wastewater discharge fees, industrial manufacturers have also
become aware of the cost-effectiveness of recycling their wastewater. Waste
minimization and water reuse are increasingly significant incentives for growth
in the wastewater treatment industry because the economic benefits outweigh the
associated treatment costs. Reuse can lower costs by reducing the need for
costly water and water purification, waste treatment, and waste disposal. As a
result of these factors, industrial companies increasingly require complex
systems and equipment to treat and recycle process water and wastewater. It is
estimated that from 1995 to 2000, water purification and wastewater treatment
expenditures by industrial users will increase at a compound annual growth rate
of approximately 14%.
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MUNICIPAL USERS
In many countries throughout the world, particularly in the United States,
Canada and western Europe, governmental regulation and enforcement have required
strict standards for potable water and the discharge of pollutants in wastewater
for many years. These municipalities have spent billions of dollars building
water purification and wastewater treatment facilities, which historically they
have managed. However, many of these municipalities are facing increasing
budgeting constraints and thus are seeking alternatives to maintaining and
upgrading their aging facilities. As a result, many such potential customers are
seeking improved technologies and equipment, and various outsourcing
opportunities such as contract operations and privatization. Privatization
involves the transfer of ownership and operation of water purification and
wastewater treatment facilities to companies capable of providing such services
on a long-term basis.
As a result of economic and infrastructure growth, as well as public
sensitivity to water quality, in other areas of the world, including Latin
America, eastern Europe and the Asia-Pacific region, the demand for water
purification and wastewater treatment is increasing. In these areas,
municipalities seek to utilize the most cost-effective and manageable
technologies and are often more receptive to new solutions than municipalities
in more regulated regions of the world. In addition, these municipalities often
seek to have a third party manage these new facilities.
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BUSINESS
GENERAL
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. Since its formation in December 1994, the Company has grown
significantly by completing six acquisitions consisting of thirteen operating
companies. In addition, the Company will complete the Pending Acquisitions
simultaneously with the closing of the Offering. As a result of its acquisition
program and internal development, the Company has increased its ability to
provide integrated water purification and wastewater treatment solutions and has
expanded its geographic presence.
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
As a result of the implementation of its strategic plan, the Company's pro
forma net sales for fiscal 1996 totaled $72.7 million, primarily due to its
acquisition program. 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. Pro forma net sales of the businesses acquired by the Company prior
to fiscal 1997 grew 26.3% for the six months ended March 31, 1997 compared to
the comparable period in the prior year. The Company's backlog on a pro forma
basis, consisting of written purchase orders received by the Company, was $30.0
million at May 15, 1997.
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 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.
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<PAGE> 33
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, and regional service companies.
As consideration for future acquisitions the Company intends to continue to
use various combinations of its 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 from a portion of the proceeds of the Offering, through funds
provided by operations and by the New Credit Facility 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 during the fourth quarter of
fiscal 1997 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, 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.
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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.
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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. For
a more detailed description of the Company's systems, equipment and services,
see "Systems, Equipment and Services Glossary."
<TABLE>
<CAPTION>
INDUSTRIAL MUNICIPAL
MARKET MARKET
------------------- -------------------
PROCESS WASTE DRINKING WASTE
SYSTEMS, EQUIPMENT AND SERVICES WATER WATER WATER WATER
- ----------------------------------------------------------- -------- -------- -------- --------
<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
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
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<PAGE> 36
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
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 specialized in only one
segment of the industry.
SALES AND DISTRIBUTION
The Company sells its systems, equipment and services primarily through
approximately 50 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 1996 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 1996 approximately 60% 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 1996 approximately 40% of the
Company's pro forma net sales were derived from municipal sales.
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BACKLOG
The Company had a backlog, consisting of written purchase orders received
by the Company, on a pro forma basis, of $30.0 million as of May 15, 1997. The
Company expects that nearly all of the backlog at the beginning of a fiscal year
will be filled during that year. Backlog 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.
In the United States, the Environmental Protection Agency has promulgated
regulations under the Clean Water Act that address the issues of treatment of
wastewater and the subsequent disposition of end products and by-products
generated in the treatment process. These regulations establish use and disposal
standards applicable to approximately 60,000 public and privately owned
wastewater treatment plants in the United States, including approximately 26,000
public owned treatment works. These regulations also establish specific effluent
limitations for the discharge of pollutants in wastewater.
The treatment of drinking water in the United States is also governed by
the Safe Drinking Water Act (the "SDWA"). The 1996 drinking water amendments to
the SDWA emphasize risk-based standards for contaminants in drinking water,
afford small water supply systems operational flexibility and provide assistance
to water system infrastructures through a multi-billion-dollar Drinking Water
State Revolving Fund (the "DWSRF"). The DWSRF program assists public water
systems with the financing of the costs of drinking water infrastructure that is
necessary to achieve or maintain compliance with the SDWA requirements and to
protect public health. The DWSRF, patterned after the State Revolving Fund
contained in the Clean Water
34
<PAGE> 38
Act, provides funding to the states to establish a renewable source of financing
for drinking water infrastructure projects. The DWSRF program is designed to
ensure that the drinking water supplies in the United States remain safe and
affordable, and that systems that receive funding will be properly operated and
maintained. Regulations under the SDWA also establish maximum contaminant levels
(MCLs) for a wide variety of chemicals that may be present in drinking water and
require treatment to meet applicable standards.
Many of the countries in which the Company operates or in which its
customers are located, including 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 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 or their enforcement,
any modification of the standards or their enforcement may reduce demand,
thereby adversely affecting the Company's business prospects. Conversely,
changes in applicable environmental requirements imposing additional regulatory
compliance requirements or causing stricter enforcement of these laws or
regulations could increase the demand for the Company's systems, equipment and
services.
The water purification and wastewater treatment facilities at which the
Company's solutions, systems and equipment may be used are required to have
permits, registrations and approvals from governmental authorities in the United
States as well as foreign countries. Any of the permits, registrations or
approvals noted above, or applications therefor, may be subject to denial,
revocation or modification under various circumstances. In addition, if new
environmental laws or regulations are enacted or existing laws or regulations
are amended or are enforced differently, the Company's customers may be required
to obtain additional operating permits, registrations or approvals. The process
of obtaining a required permit, registration or approval can be lengthy and
expensive and the issuance of such permit or the obtaining of such approval may
be subject to public opposition. There can be no assurances that the Company
and/or its customers will be able to meet applicable regulatory requirements or
will be successful in obtaining required permits and approvals.
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. See "Risk
Factors -- Competition."
35
<PAGE> 39
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 does not consider any of them to be material to its
business.
EMPLOYEES
At May 15, 1997, the Company and its subsidiaries had approximately 310
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.
LITIGATION
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 and does not know of any threatened claim
that may result in material litigation.
PROPERTIES
The Company leases its corporate offices, consisting of 4,975 square feet
located in Canton, Ohio pursuant to a lease agreement dated July 9, 1996. In
addition, its subsidiaries lease facilities for office space and manufacturing
in Medway, Massachusetts; Addison, Illinois; Manhattan, Kansas; West Palm Beach,
Florida; Sarasota, Florida; Clearwater, Florida; Nynashamn, Sweden; Kungsbacka,
Sweden; Neuss-Grimlinghausen, Germany; Holstebro, Denmark; and Grand Rapids,
Michigan, 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 December 31, 2003.
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 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.
36
<PAGE> 40
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's current directors and executive officers are as follows (ages
are as of May 15, 1997):
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- -------------------------------------
<S> <C> <C>
Theodore F. Savastano.......................... 59 Director, Chairman of the Board
Chet S. Ross................................... 57 Director, President and Chief
Executive Officer
Robert P. Pinkas............................... 43 Director
Michael J. Vantusko............................ 40 Chief Financial Officer
L. Dean Hertert, Jr............................ 50 Vice President
Dr. Hans F. Larsson............................ 54 Vice President
Dr. Paul M. Sutton............................. 49 Director
Rollin S. Reiter............................... 69 Director
John R. Miller................................. 59 Director
</TABLE>
Theodore F. Savastano is the founder of the Company and has been Chairman
of the Board of Directors of the Company since its inception in December 1994.
He served as Chief Executive Officer of Hunter Environmental Services, Inc., a
multi-disciplined environmental company from August 1985 to January 1988 and as
Chief Executive Officer and founder of Summit Environmental Group, Inc., a
full-service environmental consulting engineering company built via ten
acquisitions over five years, from August 1988 to May 1994.
Chet S. Ross joined the Company in June 1995 as President and Chief
Executive Officer and was elected to the Board of Directors on August 1, 1995.
Mr. Ross has over 30 years of experience in the water industry. Mr. Ross and
others acquired the operations of Wallace and Tiernan Group, Inc., a water and
wastewater disinfection and chemical treatment company in May 1989, and he
served as Chairman, President and Chief Executive Officer of Wallace and Tiernan
until it was sold in 1991 to North West Water Group, PLC, a privatized water
utility company in the United Kingdom. He then was President and Chief Executive
Officer of North West Water's North American operations from 1991 to 1994 and
was a private consultant to North West Water from 1994 to 1995.
Robert P. Pinkas, a Director since the inception of the Company, is
Chairman of the Board, Chief Executive Officer, Treasurer and a director of
Brantley Capital Corporation, a business development corporation, and Chairman
of the Board, Chief Executive Officer, Treasurer and a manager of Brantley
Capital Management, L.L.C., an investment adviser. Mr. Pinkas also serves as
managing general partner of Brantley Venture Partners, a venture capital firm
that makes investments through its various partnership funds. Mr. Pinkas founded
and has been affiliated with the Brantley entities for more than the past five
years. Additionally, Mr. Pinkas is a director of Quad Systems Corporation;
Gliatech, Inc.; Pediatric Services of America, Inc.; and Medirisk, Inc.
Michael J. Vantusko, a certified public accountant, joined the Company on
January 1, 1997 as Chief Financial Officer. From October 1995 to December 1996,
he served as Chief Financial Officer of Waxman Industries, Inc., a packager and
distributor of plumbing, electrical and hardware products. From February 1994 to
September 1995, Mr. Vantusko served as President, Chief Operating Officer, and
Chief Financial Officer of Overdrive Systems, Inc., an emerging software
developer of electronic books. From 1979 to 1994, he was employed by The
Fairchild Corporation (formerly Banner Industries, Inc.) where he held several
positions, including Chief Financial Officer of Fairchild's largest wholly-owned
operating division from 1990 to 1994 and Vice President of Fairchild from 1986
to 1990.
L. Dean Hertert, Jr. joined the Company as a Vice President in August 1996
and currently directs the Company's operations in the United States, Canada and
Latin America. Mr. Hertert joined the Company from Capital Controls, Inc. where
he was Vice President and General Manager from December 1988 to July 1996.
Capital Controls Co., Inc. is a manufacturer of equipment and instruments for
municipal water,
37
<PAGE> 41
industrial process water and wastewater treatment. Mr. Hertert has 20 years of
business and multinational experience in the areas of marketing, sales and
general management.
Dr. Hans F. Larsson joined the Company as a Vice President upon completion
of the Nordic Group acquisition in March 1997. Dr. Larsson directs the Company's
operations in Europe and serves as the Managing Director of Nordic Water
Products AB, a wholly-owned subsidiary of the Company. Dr. Larsson has served as
the Managing Director of the Nordic Group since 1987.
Dr. Paul M. Sutton was elected to the Company's Board of Directors on
January 2, 1997. Since 1987, Dr. Sutton has served as President of P.M. Sutton &
Associates, Inc., an environmental process engineering company providing
services to private industry and government organizations.
Rollin S. Reiter was elected to the Company's Board of Directors on March
13, 1997. Mr. Reiter was Vice President of Sales and Marketing, Dairy, for Dean
Foods Co., a grocery and food service company in Franklin Park, Illinois from
1990 through 1993, when he retired. Prior to that, Mr. Reiter was President of
the Reiter Dairy Company in Akron, Ohio from 1968 through 1990.
John R. Miller was elected to the Company's Board of Directors on March 13,
1997. Since 1988, Mr. Miller has been President and Chief Executive Officer of
TBN Holdings Inc., a resource recovery and recycling company. Mr. Miller has
previously served as a director and Chairman of the Board of the Federal Reserve
Bank of Cleveland and as President, Chief Operating Officer and a director of
The Standard Oil Company. Mr. Miller serves on the Board of Directors of Eaton
Corporation, a global manufacturer of highly engineered products which serve
industrial, vehicle, construction, commercial and aerospace markets.
Pursuant to the Company Certificate and the Company By-laws, the Board of
the Company is divided into three classes with each director serving a
three-year term (after the initial term). The directors of Class I (Messrs.
Savastano and Miller) hold office until the first scheduled annual meeting of
stockholders, the directors of Class II (Messrs. Ross and Reiter) hold office
until the second scheduled annual meeting of stockholders and the directors of
Class III (Messrs. Pinkas and Sutton) hold office until the third scheduled
annual meeting of stockholders. Stockholders will elect the directors of each
Class for three-year terms at the appropriate succeeding annual meetings of
stockholders.
The Board has established an Audit Committee consisting of Messrs. Sutton,
Reiter and Miller, a Compensation Committee consisting of Messrs. Pinkas,
Sutton, Reiter and Miller and a Nominating Committee consisting of Messrs.
Pinkas, Sutton and Miller.
EMPLOYMENT AGREEMENTS
The terms of the employment arrangements between the Company and its
executive officers are described below.
Mr. Savastano's employment agreement with the Company, which became
effective as of May 23, 1997, provides for him to serve as Chairman of the Board
of the Company for an initial term of three years, subject to automatic one year
extensions upon each anniversary of the date of the employment agreement until
mandatory retirement at age 65. The employment agreement provides for an initial
annual base salary of $240,000. Mr. Savastano will be entitled to participate in
an annual incentive bonus plan (the "Bonus Plan") that the Company has agreed,
pursuant to Mr. Savastano's employment agreement, to establish. The Bonus Plan
will entitle Mr. Savastano to earn, in each year during the term of the
employment agreement, commencing with fiscal 1998, an amount ranging from 0% to
150% of his base salary, subject to achievement of certain performance goals to
be established by the Board from the Company's annual operating plan. In
addition, Mr. Savastano will continue to be provided with certain benefits
currently provided to him. In the event that Mr. Savastano's employment is
terminated without cause (as defined in the employment agreement) or in the
event he terminates his employment for good reason (as defined in the employment
agreement), he will be entitled to receive (in a lump sum if such termination
occurs within one year after a change of control (as defined in the employment
agreement) of the Company) an amount equal to the present value of the product
of (i) the sum of (x) the base salary in effect on the date of termination and
(y) the annual bonus compensation paid to Mr. Savastano with respect to the
fiscal year in which Mr. Savastano's
38
<PAGE> 42
employment is terminated provided that such bonus is calculable as of such date,
and if not so calculable, then the bonus, if any, paid to Mr. Savastano with
respect to the fiscal year immediately preceding the year in which his
employment is terminated (which for fiscal 1996 and 1997 shall be deemed to be
$240,000) and (ii) two; provided, however, that if any portion of such
compensation would constitute an "excess parachute payment" under Section 280G
of the Internal Revenue Code of 1983, as amended (the "Code"), the Company will
pay to Mr. Savastano an additional amount to offset any taxes payable with
respect to the excess parachute payment and the additional payment. The
employment agreement also contains provisions which restrict Mr. Savastano from
competing with the Company during the term of the agreement and for 24 months
following termination thereof. In addition, pursuant to his 1994 employment
agreement, upon the consummation of the Offering, Mr. Savastano will receive
options exercisable to purchase 100,000 shares of Common Stock, at an exercise
price of $.10 per share. Such options will be fully exercisable for a ten year
period commencing upon the date of grant. The Company shall hold Mr. Savastano
harmless from, and shall pay to Mr. Savastano, any taxes payable by Mr.
Savastano as a result of the grant of the options. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Mr. Ross's employment agreement with the Company, which became effective as
of May 23, 1997, provides for Mr. Ross to serve as President and Chief Executive
Officer of the Company for an initial term of three years, subject to automatic
one year extensions upon each anniversary of the date of the employment
agreement until mandatory retirement at age 65. The employment agreement
provides for an initial annual base salary of $240,000. Pursuant to his
employment agreement, Mr. Ross will be entitled to participate in the Bonus
Plan, which will entitle him to earn, in each year during the term of his
employment agreement, commencing with fiscal 1998, an amount ranging from 0% to
150% of his base salary, subject to achievement of certain performance goals to
be established by the Board from the Company's annual operating plan. In
addition, Mr. Ross will continue to be provided with certain benefits and
perquisites currently provided to him. In the event that Mr. Ross' employment is
terminated without cause (as defined in the employment agreement) or in the
event he terminates his employment for good reason (as defined in the employment
agreement), Mr. Ross will be entitled to receive (in a lump sum if such
termination occurs within one year after a change of control (as defined in the
employment agreement) of the Company) an amount equal to the present value of
the product of (i) the sum of (x) the base salary in effect on the date of
termination and (y) the annual bonus compensation paid to Mr. Ross with respect
to the fiscal year in which his employment is terminated, provided that such
bonus is calculable as of such date, and if not so calculable, then the bonus,
if any, paid to him with respect to the fiscal year immediately preceding the
year in which his employment is terminated (which for fiscal 1996 and 1997 shall
be deemed to be $240,000) and (ii) two; provided, however, that if any portion
of such compensation would constitute an "excess parachute payment" under
Section 280G of the Code, the Company will pay to Mr. Ross an additional amount
to offset any taxes payable with respect to the excess parachute payment and the
additional payment. The employment agreement also contains provisions which
restrict Mr. Ross from competing with the Company during the term of the
agreement and for 24 months following termination thereof. Additionally,
pursuant to his employment agreement, under the terms of the Stock Option Plan,
Mr. Ross was granted a non-qualified option to purchase 300,000 shares of Common
Stock at $12 per share, which option price will be adjusted to the initial
offering price of the Common Stock sold in the Offering. This option shall be
exercisable in four equal annual installments, commencing upon the first
anniversary of the date of grant subject to acceleration in certain
circumstances.
Mr. Vantusko's employment agreement with the Company, which became
effective as of May 23, 1997, provides for Mr. Vantusko to serve as Chief
Financial Officer of the Company for an initial term of three years, subject to
automatic one year extensions upon each annual anniversary of the date of the
employment agreement, unless either party notifies the other of his or its
intent not to extend the agreement not less than one year prior to the then
scheduled expiration date. The employment agreement provides for an initial
annual base salary of $150,000. Mr. Vantusko will be entitled to participate in
the Bonus Plan, which will entitle him to earn, in each year during the term of
his employment agreement, commencing with fiscal 1998, an amount ranging from 0%
to 150% of his base salary, subject to achievement of certain performance goals
to be established by the Board from the Company's annual operating plan. In
addition, pursuant to the terms of the employment agreement, Mr. Vantusko will
continue to be provided with certain benefits and perquisites
39
<PAGE> 43
currently provided to him. In the event that Mr. Vantusko's employment is
terminated without cause (as defined in the employment agreement) or in the
event he terminates his employment for good reason (as defined in the employment
agreement), Mr. Vantusko will be entitled to receive (in a lump sum if such
termination occurs within one year after a change of control (as defined in the
employment agreement) of the Company) an amount equal to the present value of
the sum of (x) the base salary in effect on the date of termination and (y) the
annual bonus compensation paid to Mr. Vantusko with respect to the fiscal year
in which his employment is terminated, provided that such bonus is calculable as
of such date, and if not so calculable, then the bonus, if any, paid to him with
respect to the fiscal year immediately preceding the year in which his
employment is terminated (which for fiscal 1996 and 1997 shall be deemed to be
$150,000). The employment agreement also contains provisions which restrict Mr.
Vantusko from competing with the Company during the term of the agreement and
for 12 months following termination thereof. Additionally, pursuant to his
employment agreement, under the terms of the Stock Option Plan, Mr. Vantusko was
granted a non-qualified option to purchase 100,000 shares of Common Stock at $12
per share, which option price will be adjusted to the initial offering price of
the Common Stock sold in the Offering. This option shall be exercisable in four
equal annual installments, commencing upon the first anniversary of the date of
grant, subject to acceleration in certain circumstances.
Mr. Hertert's employment agreement with the Company, which became effective
as of May 23, 1997, provides for Mr. Hertert to serve as the Vice President of
Operations of the Company for an initial term of three years, subject to
automatic one year extensions upon each annual anniversary of the date of the
employment agreement, unless either party notifies the other of his or its
intent not to extend the agreement at least one year prior to the then scheduled
expiration date. The employment agreement provides for an initial annual base
salary of $140,000. Mr. Hertert will be entitled to participate in the Bonus
Plan, which will entitle him to earn, in each year during the term of his
employment agreement, commencing with fiscal 1998, an amount ranging from 0% to
150% of his base salary, subject to achievement of certain performance goals to
be established by the Board from the Company's annual operating plan. In
addition, pursuant to the term of the employment agreement, Mr. Hertert will
continue to be provided with certain benefits and perquisites currently provided
to him. In the event that Mr. Hertert's employment is terminated without cause
(as defined in the employment agreement) or in the event he terminates his
employment for good reason (as defined in the employment agreement), Mr. Hertert
will be entitled to receive (in a lump sum if such termination occurs within one
year after a change of control (as defined in the employment agreement) of the
Company) an amount equal to the present value of the product of (i) the sum of
(x) the base salary in effect on the date of termination and (y) the annual
bonus compensation paid to Mr. Hertert with respect to the fiscal year in which
his employment is terminated, provided that such bonus is calculable as of such
date, and if not so calculable, then the bonus, if any, paid to him with respect
to the fiscal year immediately preceding the year in which is employment is
terminated (which for fiscal 1996 and 1997 shall be deemed to be $140,000) and
(ii) one and one-half. The employment agreement also contains provisions which
restrict Mr. Hertert from competing with the Company during the term of the
agreement and for 12 months following termination thereof. Additionally,
pursuant to his employment agreement, under the terms of the Stock Option Plan,
Mr. Hertert was granted a non-qualified option to purchase 50,000 shares of
Common Stock at $12 per share, which option price will be adjusted to the
initial offering price of the Common Stock sold in the Offering. This option
shall be exercisable in four equal annual installments, commencing upon the
first anniversary of the date of grant, subject to acceleration in certain
circumstances.
Mr. Larsson's employment agreement with Nordic Water Products AB ("Nordic
AB"), which became effective as of July 1, 1987, provides for Mr. Larsson to
serve as Managing Director of Nordic AB, for an indefinite term. If Nordic AB
terminates the employment agreement within 12 months after Nordic AB changes
ownership, Nordic AB must provide Mr. Larsson at least 18 months notice of its
intent to terminate the agreement. The employment agreement provided for an
initial annual base salary of 336,000 krona (approximately $43,693). Mr.
Larsson's current base salary is $94,700. The employment agreement contains
provisions which restrict Mr. Larsson from competing with Nordic AB, without
Nordic AB's consent, during the term of the agreement.
40
<PAGE> 44
The Company has also entered into employment agreements with key employees
of each of the subsidiaries. In addition to other standard provisions, each such
employment agreement imposes confidentiality restrictions on the employee, and
most contain a covenant not to compete with the Company.
COMPENSATION OF DIRECTORS
Members of the Board who are employees of the Company do not receive any
additional compensation for service on the Board or any committees of the Board.
Each member of the Board who is not an employee of the Company receives, for
each year of service on the Board, a non-qualified stock option granted under
the Stock Option Plan (as defined below) to purchase 3,000 shares of Common
Stock, at a price equal to the fair market value of the Common Stock on the date
of grant. Each option vests according to a schedule determined by the Board of
Directors, with the initial option vesting in two equal annual installments. The
options become fully vested and immediately exercisable in the event of an
underwritten public offering of Common Stock (as will occur by completion of the
Offering). In addition, each member of the Board who is not an employee of the
Company is granted at the time he becomes a member of the Board the right to
acquire at any time prior to an underwritten public offering up to 25,000 shares
of Common Stock, at a price equal to the then current fair market value.
Members of the Board who are not employees of the Company will receive an
annual retainer of $10,000, payable in equal quarterly installments. All
directors will be reimbursed for out of pocket expenses incurred in attending
meetings of the Board or committees and for other expenses incurred in their
capacity as directors.
In June 1996, Robert P. Pinkas, a director of the Company, was granted
options to purchase 100,000 shares of Common Stock at an exercise price of $4.00
per share pursuant to the Stock Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth, for each of the years indicated, the
compensation paid by the Company to the Company's Chief Executive Officer and
the only other executive officer of the Company as of September 30, 1996 who
received compensation from or on behalf of the Company in excess of $100,000
during said fiscal years (together, the "Named Executive Officers"). During
these years, the Named Executive Officers were compensated in accordance with
the plans and policies of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------ -------------------------------
NAME AND OTHER ANNUAL RESTRICTED STOCK SECURITIES
PRINCIPAL COMPENSATION AWARDS UNDERLYING ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) ($) (1) ($) (2) OPTIONS (#) COMPENSATION ($)
- ---------------- ---- ---------- --------- ------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Theodore F. 1996 $ 225,800 -- $4,977 -- -- --
Savastano.....
Chairman of 1995 $ 126,989 -- -- -- -- --
the Board
of
Directors
Chet S. Ross.... 1996 $ 225,800 -- $ 262 -- -- --
Chief 1995 $ 95,267 -- -- -- -- --
Executive
Officer and
President
</TABLE>
(1) Certain incidental personal benefits to executive officers of the Company
may result from expenses incurred by the Company in the interest of
attracting and retaining qualified personnel. These incidental personal
benefits made available to the Named Executive Officers during 1996 are not
described herein because the incremental cost to the Company of such
benefits is below the SEC disclosure threshold.
(2) No grants of restricted stock have been made.
41
<PAGE> 45
STOCK OPTION GRANTS
The following table sets forth information regarding options to purchase
Common Stock granted to the Named Executive Officers during 1996.
OPTION/SAR(1) GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
NUMBER OF TOTAL VALUE AT
SECURITIES OPTIONS EXERCISE ASSUMED ANNUAL
UNDERLYING GRANTED TO OR RATES OF STOCKS
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRICE APPRECIATION
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE FOR OPTION TERM (2)
- ------------------------------- ---------- ------------ ---------- ---------- --------------------
5%($) 10%($)
-------- ---------
<S> <C> <C> <C> <C> <C> <C>
Theodore F. Savastano.......... 100,000 19.9% $ 4.40 6/15/2006 $211,558 $ 597,497
Chet S. Ross................... 220,000 43.9% $ 4.00 6/15/2006 $553,427 $1,402,493
</TABLE>
(1) There have been no stock appreciation rights ("SARs") granted by the Company
to date.
(2) The potential realizable values represent future opportunity and have not
been reduced to present value in 1996 dollars. The dollar amounts included
in these columns are the result of calculations at assumed rates set by the
Securities Exchange Commission (the "SEC") for illustration purposes. These
rates are not intended to be a forecast of the Common Stock price and are
not necessarily indicative of the values that may be realized by the Named
Executive Officers. The potential realizable values are based on
arbitrarily assumed annualized rates of stock price appreciation of 5% and
10% over the full ten-year term of the options. For example, in order for
the individuals named above who received options with an exercise price of
$4.00 and $4.40 per share, respectively, for Common Stock to realize the
potential values set forth in the 5% and 10% columns in the table above,
the price per share of Common Stock would have to be approximately $6.52
and $10.37, respectively.
STOCK OPTION AND SAR EXERCISES
The following table sets forth certain information concerning exercises of
stock options during 1996 by each of the Named Executive Officers and their
stock options outstanding as of September 30, 1996. The Company has not granted
SARs to date.
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES (1)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR-END (#) YEAR-END ($) (2)
SHARES ----------------- -----------------
ACQUIRED ON VALUE EXERCISABLE (E)/ EXERCISABLE (E)/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE (U) UNEXERCISABLE (U)
- -------------------------------- ------------ ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Theodore F. Savastano........... -0- -0- -0-(E) -0-(E)
100,000(U) $ 10,000(U)
Chet S. Ross.................... 45,000 $175,500 -0-(E) -0-(E)
355,000(U) $ 704,000(U)
</TABLE>
(1) There have been no SARs granted by the Company to date.
(2) Value is based on the latest negotiated price relating to shares of Common
Stock of $4.50 per share, which was negotiated in connection with the 1997
Warrants.
42
<PAGE> 46
BENEFIT PLANS
The Company's Omnibus Incentive Plan
General Information. The Company's Omnibus Incentive Plan (the "Omnibus
Plan") provides for compensatory equity based awards (each an "Award"). There
are reserved for issuance pursuant to, or by reason of, stock awards and
stock-based awards an aggregate number of shares of Common Stock equal to the
lesser of (x) the greater of (i) 1,750,000 shares or (ii) 12.5% of the number of
shares of Common Stock outstanding, from time to time, (calculated on a fully
diluted basis (including the maximum number of shares that may be issued, or
subject to awards, under the Omnibus Plan and the Stock Option Plan (as defined
below) (collectively, the "Employee Stock Plans"))); in either case (i) or (ii)
above less the number of shares that are issued under the Employee Stock Plans
after the effective date of the Omnibus Plan or are subject to outstanding
awards under the Employee Stock Plans plus the number of any shares surrendered
to the Company in payment of the exercise price of options issued under either
of the Employee Stock Plans or (y) 5,000,000 shares of Common Stock. The
foregoing amount is referred to herein as the "Employee Stock Plan Share
Amount." 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. The Omnibus Plan is designed to provide an incentive to the
officers and certain other key employees of the Company by making available to
them an opportunity to acquire a proprietary interest or to increase their
proprietary interest in the Company. Any Award issued under the Omnibus Plan
which is forfeited, expires or terminates prior to vesting or exercise will
again be available for Award under the Omnibus Plan. No participant may receive
stock or stock-based awards to acquire more than 500,000 shares in any one year.
The Compensation Committee administers the Omnibus Plan and has the full
power and authority, subject to the provisions of the Omnibus Plan, to designate
participants, grant Awards and determine the terms of all Awards. Members of the
Compensation Committee are not eligible to receive Awards under the Omnibus
Plan.
The Omnibus Plan was approved by the Company's Board and shareholders in
May 1997, and will terminate on the tenth anniversary of the date approved by
the Board.
Stock Awards. The Compensation Committee has the right to grant Awards of
shares of Common Stock which are subject to such restrictions (including
restrictions on transferability and limitations on the right to vote or receive
dividends with respect to the restricted shares) and such terms regarding the
lapse of restrictions as the Compensation Committee deems appropriate.
Generally, upon termination of employment for any reason during the restriction
period, restricted shares will be forfeited to the Company.
SARs. An Award may consist of SARs. Upon exercising an SAR, the holder
will be paid by the Company the difference between the fair market value of the
Common Stock on the date of exercise and the fair market value of the Common
Stock on the date of the grant of the SAR, less applicable withholding of
Federal and state taxes. The Company may, at its election, pay such difference
in cash or in shares of Common Stock valued at the fair market value of the
Common Stock on the day preceding the date of payment. In no event may (i) an
aggregate payment by the Company during any fiscal year upon the exercise of
SARs exceed $100,000, or (ii) a holder of an SAR, who is also an employee of the
Company or its subsidiaries, exercise an SAR if the aggregate amount to be
received as a result of his or her exercise of SARs in the preceding 12 month
period exceeds such employee's current base salary, in each case except as may
otherwise be permitted by the Compensation Committee.
Options Issued Under the Omnibus Plan. The terms of specific options are
determined by the Compensation Committee. Generally, options will be granted at
an exercise price equal to at least 100% of fair market value of the Common
Stock on the date of grant. Each option will be exercisable after the period or
periods specified in the option agreement, which will generally not exceed 10
years from the date of grant. Options may be issued in tandem with SARs ("Tandem
Options") as a performance award. Upon the exercise of an option, the option
holder will pay to the Company the exercise price plus the amount of the
required Federal and state withholding taxes, if any.
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<PAGE> 47
Performance Awards Consisting of Options and SARs Issued in Tandem Under
the Omnibus Plan. Upon exercise of a Tandem Option, the optionee will be
entitled to a credit toward the exercise price equal to the value of the SARs
issued in tandem with the option exercised, but not to exceed the amount of the
Federal income tax deduction allowed to the Company in respect of such SAR and
not in an amount which would reduce the amount of payment by the optionee below
the par value of the shares being purchased. Upon exercise of a Tandem Option,
the related SAR will terminate, the value being limited to the credit which can
be applied only toward the purchase price of Common Stock. In all cases, full
payment of the net purchase price of the shares must be made in cash or its
equivalent at the time the Tandem Option is exercised, together with the amount
of the required Federal and State withholding taxes, if any. When a SAR issued
as part of a Tandem Option is exercised, the option to which it relates will
cease to be exercisable to the extent of the number of shares with respect to
which the SAR was exercised.
Other Performance Awards Issued Under the Omnibus Plan. The Omnibus Plan
authorizes the Compensation Committee to grant, to the extent permitted under
Rule 16b-3 promulgated by the SEC under the Exchange Act, and applicable law,
other Awards that are denominated or payable in, valued by reference to, or
otherwise based on or related to shares of Common Stock. Furthermore, the amount
or terms of an Award may be related to the performance of the Company or to such
other criteria or measure of performance as the Compensation Committee may
determine.
The Company's 1995 Stock Option Plan
The Company's 1995 Stock Option Plan (the "Stock Option Plan") is intended
to encourage ownership of Common Stock by officers and other key employees and
advisors of the Company, to encourage their continued employment with the
Company and to provide them with additional incentives to promote the success of
the Company.
The Stock Option Plan authorizes the grant to officers, key employees, and
directors of awards ("Awards") consisting of "incentive stock options," as that
term is defined under the provisions of Section 422 of the Code, and
non-qualified stock options. There were 1,600,000 shares of Common Stock
available for granting Awards under the Stock Option Plan. The Compensation
Committee of the Board (the "Committee") administers the Stock Option Plan and
has sole discretion to determine those employees to whom Awards will be granted,
the number of Awards granted, the provisions applicable to each Award and the
time periods during which Awards may be exercisable.
The Committee may grant incentive stock options, non-qualified stock
options, or a combination of the two. The exercise price of each incentive stock
option may not be less than the fair market value of the Common Stock at the
date of grant. Under the Stock Option Plan, fair market value is generally
determined in accordance with procedures established by the Committee. The
option price per share of any non-qualified stock option is determined by the
Committee on the date the option is granted. The exercise price of each
incentive stock option granted to any stockholder possessing more than 10% of
the combined voting power of all classes of capital stock of the Company, or, if
applicable, a parent or subsidiary of the Company, on the date of grant must not
be less than 110% of the fair market value on that date, and no such option may
be exercisable more than five years after the date of grant.
Options granted are exercisable for a term of not more than ten years from
the date of grant. In addition, no employee may be granted an incentive stock
option to the extent the aggregate fair market value, as of the date of grant,
of the stock with respect to which incentive stock options are first exercisable
by such employee during any calendar year exceeds $100,000.
Awards granted under the Stock Option Plan are subject to adjustment upon a
recapitalization, stock split, stock dividend, merger, reorganization,
liquidation, extraordinary dividend, or other similar event affecting the Common
Stock. An Award is not transferable, other than by will or the laws of descent
and distribution or, in certain circumstances, pursuant to a qualified domestic
relations order, and an Award may be exercised, during the lifetime of the
holder of the Award, only by the holder, or the holder's personal representative
in the event of disability.
44
<PAGE> 48
The Stock Option Plan terminates on February 1, 2005, and Awards will not
be granted under the Stock Option Plan after that date, although the terms of
any Award may be amended in accordance with the Stock Option Plan at any date
prior to the end of the term of such Award. Any Awards outstanding at the time
of termination of the Stock Option Plan continue in full force and effect
according to the terms and conditions of the Award and the Stock Option Plan.
The Stock Option Plan may be amended by the Committee, subject to approval
of the Board, but no amendment may impair any rights of any holder of an Award
previously granted under the Stock Option Plan without the holder's consent. As
of May 15, 1997, options for 740,000 shares were outstanding, options for 77,500
shares had been granted and exercised, and options for 482,500 shares were
unissued.
The Company's Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Stock Purchase Plan") was
approved by the Company's Board and shareholders in May 1997. There are reserved
for issuance upon the exercise of Options to be granted under the Stock Purchase
Plan an aggregate of 500,000 shares of Common Stock, subject to adjustment upon
the occurrence of certain specific capitalization events.
The Stock Purchase Plan is intended to encourage ownership of Common Stock
by eligible employees of the Company, to encourage their continued employment
with the Company and to provide them with additional incentives to promote the
success of the Company. Except as discussed below, eligible employees are
employees who have been employed by the Company or any of its subsidiaries for
at least six months and who customarily work more than 20 hours per week and
five months per calendar year.
The Stock Purchase Plan authorizes the Compensation Committee to grant
options to purchase shares of Common Stock to eligible employees pursuant to one
or more offerings to be made under the Stock Purchase Plan. The Compensation
Committee administers the Stock Purchase Plan and has sole discretion to
determine when offerings will be made under the Stock Purchase Plan, the number
of shares of Common Stock to be made available in any such offering, the length
of the period pursuant to which employees can elect to participate in any
offering (the "Subscription Period") and the period pursuant to which
installment obligations of the option price must be paid (the "Purchase
Period"). The Subscription Period and Purchase Period of any offering made under
the Stock Purchase Plan may not together exceed 27 months.
The Compensation Committee may exclude the employees of any specific
subsidiary from any offering made under the Stock Purchase Plan and may
determine not to include certain highly compensated employees. In addition, no
option may be granted to an employee who, immediately after the option is
granted, owns 5% or more of the value or voting power of all classes of stock of
the Company or its parent, if any, or subsidiary corporations, after taking into
account certain attribution rules. Subject to these provisions, all eligible
employees must be given the right to participate in any offering made under the
Stock Purchase Plan.
Prior to any offering made under the Stock Purchase Plan, the Company will
grant to each employee eligible to participate in the offering the right to
subscribe for an option to purchase on the last business day of the Purchase
Period applicable to such offering at a price determined by the Compensation
Committee, the number of full shares of Common Stock which such employee's
accumulated payroll deductions will purchase as of the last business day of the
Purchase Period. Unless the Compensation Committee determines otherwise, the
option price will equal 85% of the fair market value of the Common Stock on the
first day of the Purchase Period. Employees may elect to subscribe for options
to purchase shares of Common Stock for an aggregate purchase price up to a
specified percentage of their annual compensation as determined by the
Compensation Committee for a particular offering.
On the first day of the Purchase Period, eligible employees who elect to
participate in an offering will receive, subject to certain limitations set
forth in the Stock Purchase Plan, an option to purchase the number of shares for
which such employee has subscribed. These options will be automatically
exercised as of the last business day of the Purchase Period.
45
<PAGE> 49
Subject to certain limitations set forth in the Stock Purchase Plan, an
employee is permitted, at any time prior to the end of the Purchase Period
applicable to such offering, 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, without interest. Upon the termination of
the employee's employment with the Company prior to the last day of the Purchase
Period for any reason other than death or retirement, the employee's only right
will be to receive the amount of cash then in such employee's account, without
interest.
Options granted under the Stock Purchase Plan will be subject to adjustment
upon a recapitalization, stock split, stock dividend, merger, reorganization,
liquidation, extraordinary dividend or other similar event affecting the Common
Stock. Options will not be transferable, other than by will or the laws of
descent and the distribution, or if permitted pursuant to the Code, and the
Regulations thereunder without affecting the option's qualification under
Section 423 of the Code, pursuant to a qualified domestic relations order, and
an option may be exercised, during the lifetime of the holder of the option,
only by such option holder, or his or her personal representative in the event
of disability.
In the case of an unusual corporate event such as liquidation, merger,
reorganization (other than a reorganization as defined by Section 368(a)(1)(F)
of the Code), or other business combination, acquisition or change in control of
the Company through a tender offer or otherwise, the Board may, in its sole
discretion, determine to terminate the Purchase Period of any offering made
under the Stock Purchase Plan as of the last day of the month during which such
unusual corporate event occurs, but in the event of any such termination, an
option holder will have the right, commencing at least five days prior to the
unusual corporate event, to either make a lump sum payment equal to the
remaining portion of the purchase price payable under his or her option or to
cancel his or her election to purchase shares pursuant to such option.
The Stock Purchase Plan will terminate ten years from the date of adoption,
and an option shall not be granted under the plan after such date. Any options
outstanding at the time of termination of the Stock Purchase Plan will continue
in full force and effect according to the terms and conditions of the Stock
Purchase Plan.
1997 Non-Employee Director Stock Option Plan
The Company's 1997 Non-Employee Director Stock Option Plan (the "Director
Plan") was approved by the Company's Board and shareholders in May 1997. An
aggregate of 150,000 shares of Common Stock have been reserved for issuance
under the Director Plan, subject to adjustment upon the occurrence of certain
specified capitalization events.
The Director Plan is intended to encourage non-employee directors of the
Company to acquire or increase their ownership of Common Stock on reasonable
terms and to foster a strong incentive for non-employee directors to put forth
maximum effort for the continued success and growth of the Company. The Director
Plan will become effective as of the completion of the Offering and will
terminate ten years from that date.
Each non-employee director who becomes a member of the Board subsequent to
the closing of this Offering shall automatically be granted an option to
purchase 3,000 shares of Common Stock. In addition, on each anniversary of the
date the Director Plan becomes effective, each of the Company's then
non-employee directors who have served as directors for at least six (6) 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. The
exercise price of options granted under the Director Plan is payable in cash or
in shares of Common Stock valued at fair market value at the time of exercise,
or a combination of cash and shares; however, the Company may establish
"cashless exercise" procedures, subject to applicable laws, rules and
regulations, pursuant to which a director may exercise an option and arrange for
a simultaneous sale of the underlying Common Stock, with the exercise price
being paid from the proceeds of such sale. Options granted under the Director
Plan will expire ten years after the date of grant, subject to earlier
termination, and may be exercised as follows: twenty-five percent (25%) after
one (1) year from the date of grant, fifty percent (50%) after two (2) years
from the date of
46
<PAGE> 50
grant, seventy-five percent (75%) after three (3) years from the date of grant
and one hundred percent (100%) after four (4) years from the date of grant.
In the event that a director ceases to be a member of the Board (other than
by reason of death or disability), an option may be exercised by the director
(to the extent the director was entitled to do so at the time he or she ceased
to be a member of the Board) at any time within three months after he or she
ceases to be a member of the Board, but not beyond the term of the option. If
the director dies or becomes disabled while he or she is a member of the Board,
or within three months after he or she ceases to be a member of the Board, the
option may be exercised (to the extent the director was entitled to do so at the
time of his or her death) in full by his or her personal representative or
distributees at any time within one year after his or her death or disability,
but not beyond the term of the option. In the event of the occurrence of a
Change in Control (as defined in the Director Plan) a director would be entitled
to exercise the option in full, but such option would terminate 90 days after
the Change in Control.
The Director Plan will be administered by the Compensation Committee. The
principal terms of the option grants are set forth in the Director Plan,
therefore, the Compensation Committee will have no discretion to select which
directors receive options, the number of shares of Common Stock subject to
options or the exercise price of options.
Each of the above plans may be amended at any time and from time to time by
the Board of Directors, but no amendment without the approval of the
shareholders of the Company shall be made if shareholder approval would be
required under applicable law. No amendment may, however, impair the rights or
obligations of the holder of any option granted under the Omnibus Plan, the
Stock Purchase Plan or the Director Plan without his or her consent.
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<PAGE> 51
SECURITY OWNERSHIP
The following table sets forth the beneficial ownership of the Company's
Common Stock as of May 15, 1997, and after giving effect to the closing of the
Offering, by each of the executive officers referred to in the compensation
section appearing above, each of the directors of the Company and all executive
officers, directors and director nominees of the Company as a group, as well as
by each person known by the Company to be the beneficial owner of more than 5%
of the Company's Common Stock.
<TABLE>
<CAPTION>
SHARES OF PERCENT OF SHARES
COMMON STOCK OUTSTANDING PERCENT OF SHARES
NAME AND ADDRESS BENEFICIALLY PRIOR TO OUTSTANDING
OF BENEFICIAL OWNER OWNED(1) OFFERING(2) AFTER OFFERING(3)
- ----------------------------------------------- ------------------- ------------------ -----------------
<S> <C> <C> <C>
Brantley Venture Partners III, L.P. ........... 2,026,250(4) 33.05% 18.49%
20600 Chagrin Blvd.
Suite 1150
Cleveland, OH 44122
Environmental Opportunities Management Co.,
LLC.......................................... 650,000(5) 10.60% 5.93%
3100 Texas Commerce Tower
Houston, TX 77002
River Cities Capital Fund Limited
Partnership.................................... 636,250(6) 10.40% 5.81%
221 East 4th Street
Suite 2250
Cincinnati, OH 45202
IPP95, L.P. ................................... 400,000(7) 6.53% 3.65%
c/o William E. Simon & Sons, L.L.C.
310 South Street
P.O. Box 1913
Morristown, NJ 07964
Lawrence and Theresa H. Stenger................ 382,023(8) 6.26% 3.49%
832 Pike Road
West Palm Beach, FL 33411
Mark E. Neville................................ 352,000(9) 5.76% 3.22%
146 Darrington Drive
Taunton, MA 02767
Theodore F. Savastano.......................... 1,000,000(10) 16.12% 8.98%
Chet S. Ross................................... 400,000(11) 6.19% 3.54%
Robert P. Pinkas............................... 2,126,250(12) 34.13% 19.23%
Paul M. Sutton................................. 28,000(13) * *
Rollin S. Reiter............................... 28,000(13) * *
John R. Miller................................. 28,000(13) * *
All directors, nominees and executive officers
as a group (9 persons)......................... 3,800,250(14) 60.89% 34.25%
</TABLE>
- ---------------
*Less than 1%
(1) Beneficial ownership includes shares of Common Stock subject to options,
warrants, rights, conversion privileges or similar obligations exercisable
within 60 days for purposes of computing the percentage of the person or
group holding such options or warrants. Except as noted, each stockholder
has sole voting power and sole investment power with respect to all shares
beneficially owned by such stockholder.
(2) Based upon 6,104,284 shares outstanding prior to the Offering and prior to
shares issued in connection with the Pending Acquisitions.
(3) Based upon 10,932,554 shares outstanding after the Offering. Does not
reflect shares, if any, purchased by any such person in the Offering.
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<PAGE> 52
(4) Includes 1,600,000 shares which will be issued upon the conversion of the
Series A Shares, Series B Shares, and Series C Shares held by the
beneficial owner and 26,250 warrants to purchase shares of Common Stock
held by Brantley Capital Corporation, an affiliate of Brantley Venture
Partners III, L.P. Robert P. Pinkas, a director of the Company, is managing
general partner of Brantley Venture Partners III, L.P. and has sole voting
and investment power with respect to these shares.
(5) Includes 556,062 shares which will be issued upon conversion of the Series
C Shares held by Environmental Opportunities Fund, L.P. and 68,938 shares
which will be issued upon conversion of the Series C Shares held by
Environmental Opportunities Fund (Cayman), L.P., and an aggregate of 25,000
warrants issued to such entities to purchase shares of Common Stock, as to
which entities Environmental Opportunities Management Co., LLC is the
general partner and has sole voting and investment power with respect to
these shares. See "Underwriting."
(6) Includes 625,000 shares which will be issued upon the conversion of the
Series B Shares and Series C Shares held by the beneficial owner and 11,250
warrants to purchase shares of Common Stock. Mayson, Inc., an Ohio
corporation, is the general partner of the partnership which is the general
partner of River Cities Capital Fund Limited Partnership and has sole
voting and investment power with respect to these shares.
(7) Includes 375,000 shares which will be issued upon the conversion of the
Series B Shares held by the beneficial owner and 25,000 warrants to
purchase shares of Common Stock. Wesinvest, Inc., a Delaware corporation,
is the general partner of IPP95, L.P. and has sole voting and investment
power with respect to these shares.
(8) Includes 119,036 shares owned by Lawrence Stenger, 69,207 shares owned by
Theresa H. Stenger and 193,780 shares owned by Lawrence and Theresa
Stenger, jointly.
(9) Includes 2,000 options to purchase shares of Common Stock which become
fully vested upon completion of the Offering.
(10) Includes 200,000 options to purchase shares of Common Stock which become
fully vested upon completion of the Offering.
(11) Includes 355,000 options to purchase shares of Common Stock which become
fully vested upon completion of the Offering.
(12) Includes shares, including securities referred to in footnote 4 above,
which are held by Brantley Venture Partners III, L.P., of which Mr. Pinkas
is managing general partner, and 100,000 options to purchase shares of
Common Stock which become fully vested upon completion of the Offering.
(13) Includes 25,000 options to purchase shares of Common Stock currently vested
and 3,000 options to purchase shares of Common Stock which become fully
vested upon completion of the Offering.
(14) Also includes 115,000 options to purchase shares of Common Stock which
become fully vested upon completion of the Offering.
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<PAGE> 53
CERTAIN TRANSACTIONS
The following summarizes certain material agreements between the Company
and its officers, directors and certain of its existing shareholders. The
summary is not a complete description of such agreements and therefore this
discussion is qualified in its entirety by reference to the agreements, copies
of which will be made available for inspection upon written request to the
Company. It is the Company's intention that in the future, transactions with
directors, officers, employees or affiliates of the Company will be minimal and
will be approved in advance by a majority of the disinterested members of the
Company's Board of Directors.
REGISTRATION RIGHTS AGREEMENTS
Several of the officers, directors and holders of more than 5% of the
Common Stock have entered into registration rights agreements relating to shares
of Preferred Stock or Common Stock. See "Description of Capital Stock --
Registration Rights Agreements."
1997 NOTES, 1997 WARRANTS AND STOCKHOLDER GUARANTEE
In March 1997, the Company entered into the Note Purchase Agreement with
respect to the 1997 Notes and entered into the 1997 Warrant Agreement with
respect to the 1997 Warrants. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Capital Stock -- 1997 Warrants." The parties to
the Note Purchase Agreement and the holders of the 1997 Warrants include several
of the Company's significant stockholders or their affiliates. The following
significant shareholders, or their affiliates, agreed to acquire the indicated
percent of any 1997 Note that may be issued by the Company: Brantley Capital
Corporation -- 21%; IPP95, L.P. -- 20%; River Cities Capital Fund Limited
Partnership -- 9%; and Environmental Opportunities Management Co., LLC -- 20%.
These stockholders and the other parties to the Note Purchase Agreement (other
than the Company) have received, and will be entitled to receive, 1997 Warrants
as and when issued in accordance with the 1997 Warrant Agreement, pro rata in
proportion to the principal amount of 1997 Notes to be issued to such purchaser.
In the event (i) the Offering is completed at a price of $9.00 per share or
greater and (ii) either the Offering is completed within 180 days of the date of
sale of the 1997 Notes or there have been no 1997 Notes sold, then the Company
will have issued a minimum of 125,000 Warrants (if no 1997 Notes are sold) and a
maximum of 425,000 Warrants (if all $10,000,000 of 1997 Notes are sold). In the
event the Offering referred to in the preceding sentence is completed at a price
of less than $9.00 per share, then the Company will have also issued an
additional number of 1997 Warrants equal to 25% of the then outstanding 1997
Warrants. As of the date of this Prospectus, none of the 1997 Notes are
outstanding, and 125,000 of the 1997 Warrants are issued and outstanding. The
Company intends to repay all outstanding 1997 Notes, if any, in full upon
completion of the Offering. The Note Purchase Agreement will terminate upon the
closing of the Offering.
Brantley Venture Partners III, L.P. ("Brantley"), a holder of 33.05% of the
Common Stock prior to the Offering, has guaranteed through June 1, 1997 up to
$2,000,000 of the Company's indebtedness under the Credit Facility in the event
the Company defaults on its payment obligations thereunder. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." The Company paid no consideration to Brantley
for this guarantee. To the extent that Brantley makes a payment under its
guarantee of the Company's indebtedness under the Credit Facility, the amount of
such payments will be deemed to be an advance under the 1997 Notes from the date
of such payment. Robert P. Pinkas, a director of the Company, is an affiliate of
Brantley Capital Corporation and Brantley. See "Management -- Directors and
Executive Officers." In management's opinion, it is not likely that Brantley
will become obligated to make a payment pursuant to such guarantee, either prior
to completion of the Offering or thereafter.
STOCKHOLDER NOTE
In connection with the Company's acquisition of Mass Transfer, the Company
is the obligor under a $400,000 promissory note to Mark E. Neville, a former
stockholder and current president of Mass Transfer.
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<PAGE> 54
The promissory note accrues interest at 10% per annum and is due and payable on
August 1, 1997. The promissory note is subordinated to the Company's obligations
to the Bank.
ADDITIONAL OPTIONS
In June 1996, Robert P. Pinkas, a director of the Company, was granted an
option to purchase 100,000 shares of Common Stock at an exercise price of $4.00
per share pursuant to the Stock Option Plan.
LEASE TRANSACTIONS
Waterlink Technologies is the tenant under two industrial building leases
in West Palm Beach, Florida (the "West Palm Building") and in Clearwater,
Florida (the "Clearwater Building"). Lawrence and Theresa H. Stenger, the
beneficial owners of more than 5% of the Common Stock and former owners of
Waterlink Technologies, are the direct or indirect landlords of the two
buildings. Both leases are dated as of September 30, 1996 and have a term of
five years. The leases may be renewed for two additional terms of two years
each. The annual base rent for the West Palm Building is $222,220. The annual
base rent for the Clearwater Building is $17,728. The annual base rent for the
third, fourth and fifth years of each lease increases to reflect the change in
the consumer price index, as defined in the lease.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the Offering and assuming (i) no exercise of
outstanding options or warrants and (ii) conversion of all outstanding shares of
the Company's preferred stock, 10,932,554 shares of Common Stock will be
outstanding. Of such shares, the 4,500,000 shares sold in the Offering, and any
of the 675,000 shares which may be sold upon exercise of the Underwriters'
over-allotment option, will be freely tradable by persons other than
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 6,432,554 shares of Common Stock are "restricted
securities" within the meaning of Rule 144 (collectively, the "Restricted
Shares"). The Restricted Shares may not be sold unless they are registered under
the Securities Act or sold pursuant to an applicable exemption from
registration, including an exemption pursuant to Rule 144 under the Securities
Act. Holders of approximately 6,215,054 Restricted Shares have certain
registration rights pursuant to certain registration rights agreements. See
"Description of Capital Stock -- Registration Rights Agreements."
The Company intends to register the shares of Common Stock reserved or to
be available for issuance pursuant to the Stock Option Plan. Following the
closing of the Offering, shares of Common Stock issued pursuant to the Stock
Option Plan generally will be available for sale in the open market by holders
who are not affiliates of the Company and, subject to the volume and other
limitations of Rule 144, by holders who are affiliates of the Company. In
addition, each director who is not an employee of the Company has been granted
an option to purchase shares of Common Stock. See "Management -- Compensation of
Directors."
In connection with entering into the Credit Facility and commitments to
purchase subordinated indebtedness, the Company issued warrants to purchase
350,000 shares of Common Stock. Pursuant to the applicable warrant agreements,
the holders of such warrants have certain rights to require the Company to
register the shares of Common Stock to be issued upon exercise of the warrants.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year, including persons who may be deemed to be "affiliates" of the
Company, as that term is defined under Rule 144, may sell within any three-month
period a number of Restricted Shares that does not exceed the greater of one
percent of the then outstanding shares of Common Stock (estimated to be
10,932,554 shares after completion of this Offering, or 11,607,554 shares if the
Underwriters' over-allotment option is exercised in full) or the average weekly
trading volume of the Common Stock on the open market during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
manner-of-sale limitations, notice requirements, and the availability of current
public information about the Company. Pursuant to Rule 144(k), a person (or
persons whose shares are aggregated) who is deemed not to have been an
"affiliate" of the Company during the three months preceding
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a sale, and who has beneficially owned Restricted shares for at least two years,
would be entitled to sell such shares under Rule 144 without regard to the
volume limitations, manner-of-sale provisions or notice requirements. Restricted
Shares properly sold in reliance upon Rule 144 are thereafter freely tradable
without restrictions or registration under the Securities Act, unless thereafter
held by an "affiliate" of the Company. The foregoing summary of Rule 144 is not
intended to be a complete description thereof. Absent additional offerings that
are registered under the Securities Act and any additional issuances of Common
Stock not referred to above, it is anticipated that as much as 6,317,554 shares
of Common Stock may be eligible to be sold pursuant to Rule 144 within
approximately one year of the closing of the Offering, of which approximately
1,855,000 shares of Common Stock may be immediately eligible to be sold (subject
to the Lockup Period referred to below).
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provision of Rule 701 under the Securities Act, which permits affiliates and
non-affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, commencing 90 days after the effectiveness of
the Offering. In addition, non-affiliates may sell Rule 701 shares without
complying with the public information, volume and notice provisions of Rule 144.
Approximately 192,500 shares of Common Stock currently outstanding may be sold
pursuant to Rule 701.
The Company, its officers and directors, and the holders of substantially
all of the Common Stock have agreed that, until the later of December 31, 1997
or 180 days following the date of this Prospectus, they will not, without the
prior written consent of Smith Barney Inc., offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any securities convertible
into, or exercisable or exchangeable for, Common Stock, except that the Company
may grant warrants pursuant to the Note Purchase Agreement and grant options
under the Company's stock option and purchase plans, and may issue shares of
Common Stock (i) in connection with acquisitions, (ii) pursuant to the exercise
of options granted under the Company's stock option and purchase plans, (iii)
pursuant to the exercise of warrants outstanding as of the closing of the
Offering or which the Company is obligated to issue as part of the 1997
Warrants, (iv) pursuant to the conversion of the Company's preferred stock and
(v) pursuant to or in connection with the Company's Rights Plan.
The Company intends to register 5,000,000 shares of Common Stock under the
Securities Act during 1997 for its use in connection with future acquisitions.
These shares generally will be freely tradable after their issuance by persons
not affiliated with the Company; however, sales of these shares during the
Lockup Period would require the prior written consent of Smith Barney Inc.
Prior to the Offering there has been no market for the Common Stock, and no
prediction can be made as to the effect, if any, that sales of Restricted
Shares, or the availability of Restricted Shares for sale, by existing
shareholders in reliance upon Rule 144, pursuant to registration or otherwise
will have on the market price of Common Stock. The sale by the Company or the
shareholders referred to above of a substantial number of shares of Common Stock
after the Offering could adversely affect the market price for the Common Stock.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the Offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, par value $.001 per
share, and 10,000,000 shares of preferred stock, par value $.001 per share (the
"Preferred Stock"), of which 10,932,554 shares of Common Stock will be issued
and outstanding and no shares of Preferred Stock will be issued and outstanding.
Prior to the completion of this Offering, the authorized capital stock of the
Company included 440,000 shares of Series A Preferred Stock, par value $.001 per
share, of which 400,000 shares were issued and outstanding, 1,836,000 shares of
Series B Preferred Stock, par value $.001 per share, of which 1,700,000 shares
were issued and outstanding, and 1,647,000 shares of Series C Preferred Stock,
par value $.001 per share, of which 1,150,000 shares were issued and
outstanding. Prior to the completion of the Offering, all outstanding shares of
the Company's preferred stock will be converted into Common Stock in accordance
with the terms of such preferred stock, and such preferred stock will no longer
be authorized or outstanding. An aggregate of 3,250,000 shares of Common Stock
will be issued upon the conversion of all outstanding shares of the Company's
preferred stock, which shares of Common Stock are included in the number of
shares of Common Stock to be outstanding upon the completion of the Offering, as
set forth above.
The following summary of certain provisions of the Common Stock does not
purport to be complete and is subject to, and qualified in its entirety by, the
provisions of the Company Certificate and the Company Bylaws to be in effect
upon the closing of the Offering, the form of each of which is included as an
exhibit to the Registration Statement of which this Prospectus is a part, and by
the provisions of applicable law.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record by them upon all matters to be voted on by the holders of Common Stock.
The holders of Common Stock are entitled to participate equally in all dividends
payable with respect to the Common Stock subject to any preferences or rights of
any outstanding preferred stock. In the event of liquidation, dissolution or
winding up of the affairs of the Company, the holders of Common Stock are
entitled to share ratably in all assets of the Company remaining available for
distribution to them after payment of liabilities and after provision has been
made for each class of stock, including any preferred stock, that has preference
over the Common Stock. Holders of shares of Common Stock, as such, have no
conversion rights, and there are no redemption or sinking fund provisions
applicable to the Common Stock. All of the outstanding shares of Common Stock
are fully paid and nonassessable.
PREFERRED STOCK
Effective upon the closing of the Offering, the Board of Directors will
have the authority, without any further vote or action by the stockholders, to
provide for the issuance of up to 10,000,000 shares of Preferred Stock from time
to time in one or more series and to fix such designations, rights, preferences
and limitations as the Board of Directors may determine, including the
consideration received therefor, the number of shares comprising each series,
dividend rates, redemption provisions, liquidation preferences, sinking fund
provisions, conversion rights and voting rights, including Series 1 Preferred
Stock (the "Series 1 Preferred Stock") authorized in connection with the
Stockholders Rights Plan described below. Although it is not possible to state
the effect that any issuance of Preferred Stock might have on the rights of
holders of Common Stock, the issuance of Preferred Stock may have one or more of
the following effects: (i) restrict Common Stock dividends if Preferred Stock
dividends have not been paid; (ii) dilute the voting power and equity interests
of holders of Common Stock to the extent that any Preferred Stock series has
voting rights or is convertible into Common Stock; or (iii) prevent current
holders of Common Stock from participating in the Company's assets upon
liquidation until any liquidation preferences granted to holders of Preferred
Stock are satisfied. In addition, the issuance of Preferred Stock may, under
certain circumstances, have the effect of discouraging a change in control of
the Company by, for example, granting voting rights to holders of Preferred
Stock that require approval by the separate vote of the holders of Preferred
Stock for any amendment to the Company
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Certificate or any reorganization, consolidation or merger (or other similar
transaction involving the Company). As a result, the issuance of such Preferred
Stock may discourage bids for the Company's Common Stock at a premium over the
market price therefor and could have a material adverse effect on the market
value of the Common Stock. The Board of Directors does not presently intend to
issue any shares of Preferred Stock, other than in connection with the
stockholders rights plan, referred to below.
REGISTRATION RIGHTS AGREEMENTS
In connection with the issuance by the Company of all of the outstanding
shares of the Company's preferred stock (with the exception of 25,000 shares of
Series C Preferred Stock issued to one particular shareholder), the Common Stock
issued prior to the Offering (other than upon exercise of stock options) and any
securities of the Company convertible into or exchangeable for shares of Common
Stock (other than a stock option), including the 1997 Warrants, the Company
granted to holders thereof certain rights relating to registering the Common
Stock under the Securities Act.
In general, the "Investors" as defined in the Amended and Restated
Registration Rights Agreement dated March 6, 1997 (the "Registration Rights
Agreement") (generally defined as substantially all holders of Series A
Preferred Stock, Series B Preferred and Series C Preferred Stock and 1997
Warrants) and Mr. Savastano may demand registration under the Securities Act of
the Common Stock issued upon the conversion of outstanding shares of the
Company's preferred stock and the exercise of the 1997 Warrants upon the request
of the Investors (treated as a single class and calculated on an "as converted
basis"). The Company will pay all registration expenses relating to such
registration. Each of the registration rights agreements otherwise contain such
terms and conditions ordinarily and customarily found in registration rights
agreements, including, without limitation, piggyback registration rights,
indemnification provisions, and holdback agreements.
STOCKHOLDER RIGHTS PLAN
Effective upon the consummation of the Offering, the Board has adopted a
stockholder rights plan, pursuant to which one Right will be distributed for
each share of Common Stock. Each Right entitles the registered holder to
purchase from the Company one one-hundredth of a share of Series 1 Preferred
Stock at a price of $65.00 per one one-hundredth of a share of Series 1
Preferred Stock (the "Purchase Price"), subject to adjustment. The following
summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement (the "Rights
Agreement"), between the Company and American Stock Transfer & Trust Company, as
Rights Agent (the "Rights Agent"), the form of which is filed as an exhibit to
the Registration Statement of which this Prospectus is a part and is
incorporated herein by reference. See "Description of Capital Stock -- Preferred
Stock."
Until the earliest to occur of (i) the first date of public announcement
that a person (other than the Company, any subsidiary of the Company, an
employee benefit plan of the Company or a subsidiary of the Company, or an
Exempt Person (defined below)) or group of affiliated or associated persons has
acquired, or obtain the right to acquire, beneficial ownership of 15% or more of
the outstanding shares of Common Stock (an "Acquiring Person") and (ii) the
tenth day (or such later date as may be specified by the Board prior to such
time as any person or group of affiliated or associated persons becomes an
Acquiring Person) after the date any person commences or announces its intention
to commence a tender offer or exchange offer, the consummation of which would
result in such person, together with its affiliates or associates becoming an
Acquiring Person (the earlier of such dates being hereinafter called the
"Distribution Date"), the Rights are evidenced by the certificates for shares of
Common Stock. "Exempt Persons" include any person who prior to this Offering was
the beneficial owner of 15% or more of the outstanding shares of Common Stock
for so long as (a) such person, together with all affiliates and associates
thereof, does not increase its percentage beneficial ownership by 1% or more of
the outstanding shares of Common Stock (b) there is no change of control of such
person, (c) such person, together with its affiliates or associates does not
commence a tender offer or exchange offer for Common Stock and (d) the Company
does not consolidate or merge with or into such person, or any of its affiliates
or associates, or sell, mortgage or otherwise transfer to such person, or any
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of its affiliates or associates, assets or earning power representing 50% or
more of the assets or earning power of the Company.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with shares of Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights),
certificates for shares of Common Stock issued after the date of the Rights
Agreement will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for shares of Common
Stock in respect of which Rights have been issued will also constitute the
transfer of the Rights associated with the shares of Common Stock represented by
such certificates. As soon as practicable following the Distribution Date,
separate certificates evidencing the Rights (the "Right Certificates") will be
mailed to holders of record of the shares of Common Stock as of the close of
business on the Distribution Date and such separate Right Certificates alone
will evidence the Rights.
No Right will be exercisable at any time prior to the Distribution Date.
The Rights will expire on the tenth anniversary of the date of the Rights
Agreement (the "Final Expiration Date"), unless earlier redeemed or exchanged by
the Company as described below. Until a Right is exercised, the holder thereof,
as such, will have no rights as a stockholder of the Company, including without
limitation the right to vote or to receive dividends.
The Purchase Price payable, and the number of shares of Series 1 Preferred
Stock or other securities issuable, upon exercise of the Rights will be subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Series 1
Preferred Stock, (ii) upon the grant to holders of shares of Series 1 Preferred
Stock of certain rights or warrants to subscribe for or purchase shares of
Series 1 Preferred Stock at a price, or securities convertible into shares of
Series 1 Preferred Stock with a conversion price, less than the then current
market price of the shares of Series 1 Preferred Stock or (iii) upon the
distribution to holders of the shares of Series 1 Preferred Stock of evidences
of indebtedness or cash (excluding regular periodic cash dividends), assets,
stock (excluding dividends payable in shares of Series 1 Preferred Stock) or of
subscription rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-hundredth of a
share of Series 1 Preferred Stock issuable upon the exercise of each Right also
will be subject to adjustment in the event of a stock dividend on the Common
Stock payable in shares of Common Stock or subdivision, combination or
reclassification of the Common Stock occurring, in any such case, prior to the
Distribution Date.
Shares of Series 1 Preferred Stock issuable upon exercise of the Rights
will not be redeemable. Each share of Series 1 Preferred Stock will be entitled
to a minimum preferential quarterly dividend payment equal to the greater of (i)
$1.00 per share and (ii) an amount equal to 100 times the aggregate dividends
declared per share of Common Stock during the related quarter. In the event of
liquidation, the holders of the shares of Series 1 Preferred Stock will be
entitled to a preferential liquidation payment equal to accrued and unpaid
dividends thereon, plus the greater of (a) $100 per share and (b) an amount
equal to 100 times the liquidation payment made per share of Common Stock.
Finally, in the event of any merger, consolidation or other transaction in which
shares of Common Stock are exchanged, each share of Series 1 Preferred Stock
will be entitled to receive 100 times the amount received per share of Common
Stock. These rights are protected by customary antidilution provisions. Each
share of Series 1 Preferred Stock will have 100 votes, voting together with the
shares of Common Stock. In addition, in the event that the amount of accrued and
unpaid dividends on the Series 1 Preferred Stock is equivalent to six full
quarters dividends or more, the holders thereof shall have the right, voting as
a class, to elect two directors in addition to the directors elected by the
holders of the Common Stock.
In the event that any person or group or affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights that are or were owned beneficially by the
Acquiring Person (which, from and after the later of the Distribution Date and
the date of the earliest of any such events, will be void), will thereafter have
the right to receive, upon exercise thereof at the then current exercise price
of the Right, that number of shares of Common Stock (or, under certain
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circumstances, an economically equivalent security or securities of the Company)
having a market value of two times the exercise price of the Right.
To illustrate the operation of such an adjustment, at a Purchase Price of
$40.00, assuming the current market price (as determined pursuant to the
provisions of the Rights Agreement) per share of Common Stock was $4.00, each
Right not owned beneficially by an Acquiring Person at or after the time of such
an occurrence would entitle its holder to purchase (after the Distribution Date)
from the Company 20 shares of Common Stock (having an aggregate market value of
$80.00) for $40.00.
In the event that, at any time after a person or group of affiliated or
associated persons has become an Acquiring Person, (i) the Company merges with
or into any person and the Company is not the surviving corporation, (ii) any
person merges with or into the Company and the Company is the surviving
corporation, but the shares of Common Stock are changed or exchanged, or (iii)
50% or more of the Company's assets or earning power are sold, proper provision
shall be made so that each holder of a Right will thereafter have the right to
receive, upon the exercise thereof at the then current exercise price of the
Right, that number of shares of common stock (or, under certain circumstances,
an economically equivalent security or securities) of such other person which at
the time of such transaction would have a market value of two times the exercise
price of the Right.
At any time after the first date of public announcement that an Acquiring
Person has become such and prior to the acquisition by any person or group of
affiliated or associated persons of 50% or more of the outstanding shares of
Common Stock, the Board may exchange the Rights (other than any Rights which
have become void) for shares of Common Stock, in whole or in part, at an
exchange ratio of one share of Common Stock per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment in the Purchase
Price of at least 1%. The Company is not required to issue fractional shares of
Series 1 Preferred Stock (other than fractions which are integral multiples of
one one-hundredth of a share of Series 1 Preferred Stock, which may, at the
option of the Company, be evidenced by depositary receipts) or fractional shares
of Common Stock or other securities issuable upon the exercise of Rights. In
lieu of issuing such securities, the Company may make a cash payment, as
provided in the Rights Agreement.
The Company may redeem all, but not less than all, the Rights at a price of
$.01 per Right (the "Redemption Price"), payable in cash or Common Stock, at any
time prior to such time as a person or group of affiliated or associated persons
becomes an Acquiring Person. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the only right of the holders of
Rights will be to receive the Redemption Price.
Prior to the Distribution Date, the Rights Agreement may be amended by the
Company without the approval of any holders of Rights. From and after the
Distribution Date, the Rights Agreement may be amended by the Company without
the approval of any holders of Rights in any manner which does not, in the good
faith determination of the Board, adversely affect the holders of the Rights
(other than an Acquiring Person), including amendments which add other events
requiring adjustment to the purchase price payable and the number of shares of
Series 1 Preferred Stock or other securities issuable upon the exercise of the
Rights or which modify procedures relating to the redemption of the Rights.
Under no circumstances may the Rights Agreement be amended to decrease the
stated Redemption Price or the period of time remaining until the Final
Expiration Date or to modify a time period relating to when the Rights may be
redeemed at such time as the Rights are not then redeemable.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board, except pursuant to an offer conditioned on a
substantial number of Rights being acquired. The Rights should not interfere
with any merger or other business combination approved by the Board since
(subject to the limitations described above) the Rights may be redeemed by the
Company at the Redemption Price prior to the time that a person or group has
become an Acquiring Person.
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1997 WARRANTS
In March 1997, in connection with its entering into the Note Purchase
Agreement relating to the 1997 Notes, the Company entered into a warrant
agreement (the "1997 Warrant Agreement") pursuant to which it agreed to issue
warrants (the "1997 Warrants") to persons agreeing to be purchasers of the 1997
Notes. Each 1997 Warrant entitles the holder to purchase one share of Common
Stock at an initial purchase price per share of $4.50 ("Exercise Price"). In the
event (i) the Offering is completed at a price of $9.00 per share or greater and
(ii) either the Offering is completed within 180 days of the date of sale of the
1997 Notes or there have been no 1997 Notes sold, then the Company will have
issued a minimum of 125,000 Warrants (if no 1997 Notes are sold) and a maximum
of 425,000 Warrants (if all $10,000,000 of 1997 Notes are sold). In the event
the Offering referred to in the preceding sentence is completed at a price of
less than $9.00 per share, then the Company will have also issued an additional
number of 1997 Warrants equal to 25% of the then outstanding 1997 Warrants. As
of the date of this Prospectus, none of the 1997 Notes are outstanding but
125,000 Warrants have been issued and are outstanding. The Company intends to
repay any 1997 Notes in full upon completion of the Offering, in which event no
additional 1997 Notes or 1997 Warrants will be issued. The Exercise Price of the
1997 Warrants is subject to adjustment upon the occurrence of certain events
such as the issuance of securities at prices less than the Exercise Price then
in effect, or upon stock splits, stock dividends, reorganizations, mergers or
consolidations. The Note Purchase Agreement will terminate upon the closing of
the Offering.
CERTAIN ANTI-TAKEOVER CONSIDERATIONS
The Company Certificate and the Company Bylaws, each of which will become
effective upon completion of the Offering, contain certain provisions which
operate only with respect to an extraordinary corporate transaction involving
the Company (or any of its subsidiaries) and which are designed to encourage any
person who desires to take control of and/or acquire the Company to enter into
negotiations with the Board, thereby making more difficult the acquisition of
the Company by means of a tender offer, a proxy contest or other non-negotiated
means. In general, these provisions (i) provide for a classified Board from
which directors may only be removed for cause, by the affirmative vote of 80% of
all of the stockholders (ii) provide that only a majority of the Board shall
have the authority to fill vacancies on the Board, (iii) limit the right of
stockholders to amend the Company Certificate and the Company Bylaws, (iv)
eliminate the right of stockholders to call special meetings and to take action
without a meeting, (v) establish an advance notice procedure regarding the
nomination of directors by stockholders and stockholder proposals to be brought
before an annual meeting, and (vi) require that certain business combinations
either meet certain minimum price and procedural requirements, be approved by
the members of the Board who are unaffiliated with the persons seeking to effect
such business combinations or be approved by a supermajority stockholder vote.
In addition to encouraging any person intending to attempt a takeover of the
Company to negotiate with the Board, these provisions also curtail such person's
use of a dominant equity interest to control any negotiations with the Board.
Under such circumstances, the Board may be better able to make and implement
reasoned business decisions and protect the interests of all of the Company's
stockholders. A copy of the Company Certificate and the Company Bylaws are filed
as exhibits to the Registration Statement of which this Prospectus is a part.
Classified Board of Directors
The Company Certificate provides for the Board to be divided into three
classes serving staggered terms so that directors' initial terms will expire at
the first, second or third scheduled annual meeting of stockholders. Starting
with the first scheduled annual meeting of the Company's stockholders, one class
of directors will be elected each year for a three-year term. See "Management --
Directors and Executive Officers." The classes will be as nearly equal in number
as possible. The classification of directors makes it more difficult for a
significant stockholder to change the composition of the Board in a relatively
short period of time and, accordingly, provides the Board and stockholders time
to review any proposal that a significant stockholder may make and to pursue
alternative courses of action which are fair to all the stockholders of the
Company.
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Removal of and Filling Vacancies on the Board of Directors of the Company
The Company Certificate provides that, subject to any rights of the holders
of Preferred Stock of the Company, only a majority of the Board then in office
or the sole remaining director shall have the authority to fill any vacancies on
the Board, including vacancies created by an increase in the number of
directors. Moreover, because the Company Certificate provides for a classified
board, Delaware law provides that the stockholders may remove a member of the
Board only for cause. The Company Certificate provides that the affirmative vote
of the holders of at least 80% of the voting power of stock entitled to vote
generally in the election of directors is required to remove a director for
cause. These provisions relating to removal and filling of vacancies on the
Board preclude stockholders from enlarging the Board or removing incumbent
directors and filling the vacancies with their own nominees.
Amendment of the Company Certificate and the Company Bylaws
The Company Certificate contains provisions requiring the affirmative vote
of the holders of at least 80% of the voting power of the stock entitled to vote
generally in the election of directors to amend certain provisions of the
Company Certificate and the Company Bylaws (including certain of the provisions
discussed above). These provisions make it more difficult for stockholders to
make changes in the Company Certificate or the Company Bylaws, including changes
designed to facilitate the exercise of control over the Company.
Limitations on Stockholder Action by Written Consent; Special Meetings
Meetings. The Company Certificate provides that stockholder action can be
taken only at an annual or special meeting of stockholders and prohibits
stockholder action by written consent in lieu of a meeting. The Company
Certificate and the Company Bylaws provide that, subject to the rights of
holders of any series of Preferred Stock, special meetings of stockholders can
be called only by a majority of the entire Board or by the President or Chairman
of the Board. Stockholders are not permitted to call a special meeting or to
require that the Board call a special meeting of stockholders. Moreover, the
business permitted to be conducted at any special meeting of stockholders is
limited to the business brought before the meeting by or at the direction of the
Board. These provisions prohibit a significant stockholder from proposing a
stockholder vote on issues not approved by the Board or from authorizing
stockholder action without a meeting at which all stockholders would be entitled
to participate.
Nominations of Directors and Stockholder Proposals. The Company Bylaws
establish an advance notice procedure with regard to the nomination other than
by, or at the direction of, the Board of candidates for election as directors
(the "Nomination Procedure") and with regard to stockholder proposals to be
brought before an annual meeting of stockholders (the "Business Procedure"). The
Nomination Procedure provides that only persons who are nominated by, or at the
direction of, the Board, or by a stockholder who has given timely written notice
to the Secretary of the Company prior to the meeting at which directors are to
be elected, are eligible for election as directors of the Company. The Business
Procedure provides that to be properly brought before an annual meeting,
business must be specified in the notice of the annual meeting given by or at
the direction of the Board (or any duly authorized committee thereof) or brought
before the meeting by, or at the direction of, the Board (or any duly authorized
committee thereof) or by a stockholder who has given timely written notice to
the Secretary of the Company of such stockholder's intention to bring such
business before such meeting. The notice from the stockholder must also meet
certain information requirements, as further set forth in the Company Bylaws.
If the officer of the Company presiding at the meeting determines that a
person was not nominated in accordance with the Nomination Procedure, or that
other business was not brought before the meeting in accordance with the
Business Procedure, such person is not eligible for election as a director, or
such business is not to be conducted at such meeting, as the case may be.
The purpose of the Nomination Procedure is, by requiring advance notice of
nomination by stockholders, to afford the Board a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the Board, to inform stockholders about such
qualifications. The purpose of the Business Procedure is, by requiring advance
notice of stockholder proposals, to provide a more
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orderly procedure for conducting annual meetings of stockholders and, to the
extent deemed necessary or desirable by the Board, to provide the Board with a
meaningful opportunity to inform stockholders, prior to such meetings, of any
proposal to be introduced at such meetings, together with any recommendation as
to the Board's position or belief as to action to be taken with respect to such
proposal, so as to enable stockholders better to determine whether they desire
to attend such meeting or grant a proxy to the Board as to the disposition of
any such proposal. Although the Company Bylaws do not give the Board any power
to approve or disapprove stockholder nominations for the election of directors
or of any other proposal submitted by stockholders, the Company Bylaws may have
the effect of precluding a nomination for the election of directors or
precluding the conducting of business at a particular stockholder meeting if the
proper procedures are not followed, and may discourage or deter a third party
from conducting a solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of the Company, even if the conduct of
such solicitation or such attempt might be beneficial to the Company and its
stockholders.
Fair Price Provision
Article Sixth of the Company Certificate (the "Fair Price Provision")
requires the approval by the holders of 80% of the voting power of the
outstanding capital stock of the Company entitled to vote on all matters
submitted to the stockholders, generally (the "Voting Stock") as a condition for
mergers and certain other business combinations ("Business Combinations")
involving the Company and any holder of more than ten percent (10%) of such
voting power (an "Interested Stockholder"), excluding Voting Stock beneficially
owned by the Interested Stockholder, unless the transaction is either (i)
approved by a majority of the members of the Board who are not affiliated with
the Interested Stockholder and who were directors before the Interested
Stockholder became an Interested Stockholder (the "Continuing Directors") or
(ii) certain minimum price and procedural requirements are met. These
requirements include that the aggregate amount of cash and the fair market value
(as defined), as of the date of the consummation of the Business Combination, of
consideration other than cash to be received per share by holders of capital
stock in such Business Combination shall be at least equal to the highest of (i)
the highest per share price paid by or on behalf of the Interested Stockholder
for any share of such capital stock in connection with the acquisition by the
Interested Stockholder of beneficial ownership of shares of such capital stock
(x) within the two-year period immediately prior to the first public
announcement of the proposed Business Combination (the "Announcement Date") or
(y) in the transaction in which it became an Interested Stockholder, or (ii) the
fair market value per share of such capital stock on the Announcement Date or on
the date on which the Interested Stockholder became an Interested Stockholder
(the "Determination Date"); or (iii) as to capital stock other than Common
Stock, the highest preferential amount per share to which the holders of shares
of such class or series of capital stock would be entitled in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Company regardless of whether the Business Combination to be consummated
constitutes such an event. Also, the consideration to be received by holders of
a particular class or series of outstanding capital stock must be in cash or in
the same form as previously paid by or on behalf of the Interested Stockholder
in connection with its direct or indirect acquisition of beneficial ownership of
shares of such class or series of capital stock. If the consideration so paid
for shares of any class or series of capital stock varied as to form, the form
of consideration for such class or series of capital stock must be either cash
or the form used to acquire beneficial ownership of the largest number of shares
of such class or series of capital stock previously acquired by the Interested
Stockholder. In addition, there cannot be any of several specified changes in
the payment of regular dividends or in the holdings of capital stock by such
Interested Stockholders after the Determination Date, nor can the Interested
Stockholders make any major change in the Company's business or equity capital
structure.
The Fair Price Provision is designed to prevent a third party from
utilizing two-tier pricing and similar inequitable tactics in a takeover
attempt. The Fair Price Provision is not designed to prevent or discourage
tender offers for the Company. However, the separate provisions contained in the
Company Certificate and the Company Bylaws relating to "Classified Board of
Directors" and "Limitations on Stockholder Action by Written Consent; Special
Meetings" discussed above will, as therein indicated, curtail an Interested
Stockholder's ability to exercise control in several respects, including such
stockholder's ability to change incumbent directors who may oppose a Business
Combination or to implement a Business Combination by
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<PAGE> 63
written consent without a stockholder meeting. In addition, the Fair Price
Provision would discourage some takeover attempts by persons intending to
acquire the Company in two steps and to eliminate remaining stockholder
interests by means of a Business Combination involving less consideration per
share than the acquiring person would propose to pay for its initial interest in
the Company.
In addition, the Company is subject to certain anti-takeover provisions of
the DGCL which prohibit the Company from engaging in any Business Combination
with any Interested Stockholder unless certain conditions are satisfied.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, each of
the Underwriters named below has severally agreed to purchase from the Company,
and the Company has agreed to sell to such Underwriter, the respective number of
shares of Common Stock set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------- ----------------
<S> <C>
Smith Barney Inc. .................................
Oppenheimer & Co., Inc. ...........................
Sanders Morris Mundy Inc. .........................
-------
Total.............................................. 4,500,000
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all shares
of Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Oppenheimer & Co., Inc. and
Sanders Morris Mundy Inc. are acting as representatives (the "Representatives"),
propose to offer part of the shares of Common Stock directly to the public at
the offering price set forth on the cover page of this Prospectus and part of
the shares to certain dealers at a price which represents a concession not in
excess of $ per share under the public offering price. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $
per share to certain other dealers. The Representatives of the Underwriters have
advised the Company that the Underwriters do not intend to confirm any shares to
any accounts over which they exercise discretionary authority. After the initial
public offering, the offering price and other selling terms may be changed by
the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an additional 675,000
shares of Common Stock at the price to the public set forth on the cover page of
this Prospectus, minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with the Offering. To the extent such
option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares set forth opposite each Underwriter's name in the
preceding table bears to the total number of shares listed in such table.
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<PAGE> 65
The Company, its officers and directors, and the holders of substantially
all of the Common Stock have agreed that, until the later of December 31, 1997
or 180 days following the date of this Prospectus, they will not, without the
prior written consent of Smith Barney Inc., offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any securities convertible
into, or exercisable or exchangeable for, Common Stock, except that the Company
may grant warrants pursuant to the Note Purchase Agreement and grant options
under the Company's stock option and purchase plans, and may issue shares of
Common Stock (i) in connection with acquisitions, (ii) pursuant to the exercise
of options granted under the Company's stock option and purchase plans, (iii)
pursuant to the exercise of warrants outstanding as of the closing of the
Offering or which the Company is obligated to issue as part of the 1997
Warrants, (iv) pursuant to the conversion of the Company's preferred stock and
(v) pursuant to or in connection with the Company's Rights Plan.
Prior to the Offering, there has not been any public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
shares of Common Stock included in the Offering has been determined by
negotiations between the Company and the Representatives. Among the factors
considered in determining such price are the history of and prospects for the
Company's business and the industry in which it competes, an assessment of the
Company's management and the present state of the Company's development, the
past and present revenues and earnings of the Company, the prospects for the
growth of the Company's revenues and earnings, the current state of the economy
in the United States and the current level of economic activity in the industry
in which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities in the securities markets,
including current market valuations of publicly traded companies that are
comparable to the Company.
On June 27, 1996, in a private placement of 1,150,000 shares of Series C
Preferred Stock by the Company for $4.00 per share, a Managing Director of Smith
Barney Inc., one of the Representatives, purchased 25,000 shares and two private
investment funds purchased an aggregate of 625,000 shares. The general partner
of the two private investment funds is Environmental Opportunities Management
Co., LLC, in which Sanders Morris Mundy, one of the Representatives, owns a 75%
interest. Shares of Series C Preferred Stock will convert on a one-for-one basis
into Common Stock on or prior to the closing of the Offering.
In March 1997, the Company entered into the Note Purchase Agreement to
issue the 1997 Notes and entered into the 1997 Warrant Agreement to issue the
1997 Warrants. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and "Description
of Capital Stock -- 1997 Warrants." The two investment funds affiliated with
Sanders Morris Mundy, one of the Representatives, are parties to the Note
Purchase Agreement and are holders of 1997 Warrants.
The Company has agreed to indemnify the Underwriters and certain related
persons against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof.
The Representatives have advised the Company that, pursuant to Regulation M
under the Exchange Act, certain persons participating in the Offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, which may have the effect of stabilizing or
maintaining the market price of the Common Stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the Common Stock on behalf of the Underwriters for the purpose
of fixing or maintaining the price of the Common Stock. A "syndicate covering
transaction" is the bid for or the purchase of the Common Stock on behalf of the
Underwriters to reduce a short position incurred by the Underwriters in
connection with the Offering. A "penalty bid" is an arrangement permitting the
Representatives to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the Offering if the Common
Stock originally sold by such Underwriter or syndicate member is purchased by
the Representatives in a syndicate covering transaction and has therefore not
been effectively placed by such Underwriter or syndicate member. The
Representatives have advised the Company that such transactions may be effected
on The New York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
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LEGAL MATTERS
The validity, authorization and issuance of the Common Stock offered hereby
will be passed upon for the Company by Benesch, Friedlander, Coplan & Aronoff
LLP of Cleveland, Ohio. Certain legal matters will be passed on for the
Underwriters by Morgan, Lewis & Bockius LLP, New York, New York.
EXPERTS
The consolidated financial statements of Waterlink, Inc. and subsidiaries;
the financial statements of Mass Transfer Systems, Inc. and the consolidated
financial statements of Water Equipment Technologies, Inc. appearing in this
Prospectus and Registration Statement (as defined below) have been audited by
Ernst & Young LLP, independent auditors, to the extent indicated in their
reports thereon also appearing elsewhere herein and in the Registration
Statement. Such financial statements have been included herein in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Nordic Water Products Group
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young AB, independent auditors, to the extent indicated in their report
thereon also appearing elsewhere herein and in the Registration Statement. Such
financial statements have been included herein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Bioclear Technology, Inc.
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young, independent auditors, to the extent indicated in their report
thereon also appearing elsewhere herein and in the Registration Statement. Such
financial statements have been included herein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The financial statements of Great Lakes Environmental, Inc. appearing in
this Prospectus and Registration Statement have been audited by Dennis D. Tysl &
Company, Ltd., independent auditors, to the extent indicated in their report
thereon appearing also appearing elsewhere herein and in the Registration
Statement. Such financial statements have been included herein in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The combined financial statements of Aero-Mod, Inc. and affiliates
appearing in this Prospectus and Registration Statement have been audited by
Sink, Gillmore & Gordon LLP, independent auditors, to the extent indicated in
their report thereon also appearing elsewhere herein and in the Registration
Statement. Such financial statements have been included herein in reliance upon
such report given upon authority of such firm as experts in accounting and
auditing.
The financial statements of Lanco Environmental Products, Inc. appearing in
this Prospectus and Registration Statement have been audited by Plante & Moran,
LLP, independent auditors, to the extent indicated in their report thereon also
appearing elsewhere herein and in the Registration Statement. Such financial
statements have been included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The Company has filed a
Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act with the SEC with respect to this Offering. This Prospectus,
filed as a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, or the exhibits and
schedules thereto, in accordance with the rules and regulations of the SEC, and
reference is hereby made to such omitted information. The statements made in
this Prospectus concerning documents filed as exhibits to the Registration
Statement accurately describe the material provisions of such documents and are
qualified in their entirety by reference to such exhibits for complete
statements of their provisions. The Registration Statement and the exhibits and
schedules thereto may be inspected, without
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<PAGE> 67
charge, at the public reference facilities of the SEC at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549, and
its regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and at 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of all or any portion of the Registration Statement can be
obtained at prescribed rates from the Public Reference Section of the SEC at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. The SEC maintains an Internet web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC. The address of that site is
http://www.sec.gov.
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<PAGE> 68
SYSTEMS, EQUIPMENT AND SERVICES GLOSSARY
AERATION SYSTEMS: The Company is a leader in the field of design,
manufacture and installation of JET AERATION and jet mixing systems for
industrial and municipal customers. It also offers a line of lower-cost
SUBMERGED MECHANICAL MIXERS for less demanding applications. Jet systems are
used to accomplish aeration, primarily for biological effluent treatment
processes but also for mixing, by creating high-velocity jets of air and process
water, or process water without air. Jet aeration accomplishes highly efficient
oxygen transfer and mixing to the process water or mixing alone if air
compressors are not operated. The high oxygen transfer rate of jet aeration can
increase the throughput capacity of a wastewater plant by 2-3 times compared to
fine bubble or coarse bubble aeration systems. In addition to higher aeration
efficiency, jet systems offer land use savings when applied to deep tank
applications, lower energy use, reduced aerosols, low installation costs,
convenient maintenance, and reduced clogging compared to conventional systems.
Industries in which jet aeration are well established include
chemical-petrochemical processing, food processing, pulp and paper plants,
refineries, and pharmaceutical plants, and municipal waste treatment.
Applications include conventional biological reactors, sequential batch reactors
(SBRs), autothermic thermophilic aerobic digesters (ATADs), complete mix
activated sludge, flow and organic equalization, as well as others. The
Company's jet aeration systems are provided by its Mass Transfer subsidiary and
are incorporated into the plant designs of Aero-Mod and Bioclear.
CLARIFIERS: The Company, designs, builds and installs clarifiers for its
industrial and municipal customers. These devices remove, through gravity
settling, particulates from process water, producing a water which is clearer
than the influent and making it suitable for use in many industrial and
municipal applications. Particulates which are separated from the water are
settled to and removed from the bottom of the clarifier or raised to and removed
from the surface, most often in the form of a sludge. Although there are a
number of clarifier designs available in the marketplace, the Company utilizes a
patented technology in its all stainless steel CLARATOR(R)/SPLIT CLARATOR(TM)
clarifiers. The Company also manufactures INCLINED PARALLEL PLATE clarifiers,
which utilize a series of parallel plates mounted at an angle such that, as the
influent flows at a controlled rate up and over the plates, solids settle out
onto the plates, from which they slide downward to a sludge collection and
removal system. The advantage of an inclined plate clarifier is that the area
required for clarification is much smaller than that for a conventional
clarifier of equal removal capacity, saving up to 90% of space compared with a
conventional clarifier. The Company's Nordic Group, Great Lakes and Lanco
subsidiaries offer various application-specific clarifier configurations.
CONTRACT OPERATIONS: The Company operates water purification and wastewater
treatment facilities for municipal customers under contract for varying time
periods. The Company currently operates small municipal wastewater treatment
facilities in the United States and Chile through its Aero-Mod subsidiary. In
addition, through its Bioclear subsidiary, the Company undertakes remote
monitoring of sequential batch reactor wastewater treatment systems for
industrial and municipal customers in the United States and Canada.
CUTTING FLUID RECOVERY SYSTEMS: The Company's Sanborn Technologies
subsidiary manufactures separation systems for waste minimization and cutting
fluid recovery for machine tools and for treating similar industrial process
streams. Some of these systems incorporate membrane technology while others
incorporate centrifugal technology in the separation process. In both cases, the
Company's systems permit the removal and concentration of waste products from
the working fluid, leading to savings in both cutting fluid expense and disposal
costs.
DESIGN/BUILD: The Company designs and constructs water purification and
wastewater treatment plants for a wide variety of applications. The Company's
design/build operations incorporate the Company's systems, equipment and
services, such as membrane systems, continuous recirculating sand filters,
sequential batch reactors, inclined plate clarifiers, sludge scrapers, and
aeration or mixing systems. The Company designs and constructs water
purification and wastewater treatment plants at its Axel-Johnson Engineering
GmbH, Bioclear, Aero-Mod and Waterlink Technologies subsidiaries.
DEWATERING SYSTEMS: The Company offers many systems for dewatering sludge
from municipal and industrial treatment facilities. The Company manufactures
DECANTING CENTRIFUGES for the separation of solids
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from sanitary sludge and industrial slurries. Decanters are utilized to achieve
a high level of dry solids in order to minimize waste volume and weight. The
Company's decanting centrifuges are capable of delivering up to 35% dry solids
because of very low differential speeds between the drum and shaft, providing
the Company a competitive advantage in cases where landfill disposal costs are
high. Decanting centrifuges, in addition to reducing disposal costs, are an
attractive alternative to other dewatering systems because they simplify plant
housekeeping, provide an improved working environment for operating personnel,
are highly reliable, are more compact and therefore require less floor space.
The Company's decanting centrifuges are manufactured by its Noxon subsidiaries.
They are marketed in Europe by Noxon and by the company's Sanborn Technologies
subsidiary in the Americas.
The Company is the exclusive sales agent in North and South America for the
DRAIMAD(TM) DEWATERING-BAG SYSTEMS and the MONOBELT(TM) FILTER PRESSES
manufactured by Teknofanghi SA of Italy pursuant to a five-year agreement
expiring June 1, 2001. The MONOBELT(TM) is an all-stainless steel belt filter
press. In the MONOBELT(TM) system, the pressed sludge is scraped off the belt
and into a trough for disposal. The Company's belt filter presses are made or
distributed by its Aero-Mod subsidiary. The Company also manufactures
specialized manual and automatic PLATE AND FRAME FILTER PRESSES designed for
processing metal hydroxide sludges from metal finishing operations. Ancillary
products include steam and electric sludge dryers for eliminating even more
moisture prior to disposal. These presses are manufactured by Lanco. The
DRAIMAD(TM) dewatering-bag system is an all stainless steel, self-contained
system which delivers sludge under a slight pressure into porous bags from which
water is drained and returned to the treatment plant, whereas the
sludge-containing bags can be disposed of in a landfill. DRAIMAD(TM) systems are
marketed by Aero-Mod.
FILTERS: The Company offers a wide range of filters. With over 10,000
installations, the Company believes its CONTINUOUS RECIRCULATING SAND filter is
one of the best-known and respected filters in the world. Its unique design,
with no moving parts, produces a uniform, high quality filtrate. This filter is
used for the final filtration of biological wastewater plants, and can
accomplish phosphorous precipitation and nitrogen removal. Industrial
applications include effluent treatment for chemical, food processing, and
cellulose plants, metal hydroxide removal, mill scale recovery, and many others.
The continuous recirculating sand filter is normally supplied in multiple units
and can be fabricated from stainless steel, carbon steel, or can be designed for
concrete tanks. The Company's continuous recirculating sand filters are
manufactured by its Nordic Group subsidiary. They are marketed in Europe by the
Nordic Group and Axel Johnson Engineering GmbH. In the Americas they are
marketed by Waterlink Technologies. Multi-cell, multimedia automatic backwashing
TERTIARY POLISHING filters suitable for use on dissolved air flotation effluents
and inclined plate settler effluents are available from the Company's Great
Lakes subsidiary.
The Company's Great Lakes subsidiary also manufactures a specialty ROTARY
VACUUM PRECOAT filter that is precoated with diatomaceous earth. The filter then
revolves through a reservoir which contains difficult waste streams which may be
very high in solids or which may be oily sludges. The precoated rotating drum
collects the waste material on the surface of the diatomaceous earth which is
slowly carved away by a knife edge. The dry waste material is subsequently
processed for disposal. The Company's rotary precoat filters are completely
automatic, highly reliable, and can be coupled with chemical pretreatment
systems to optimize efficiency.
The Company's Waterlink Technologies subsidiary sells CARTRIDGE-REPLACEMENT
FILTERS and small water treatment systems to regional water treatment companies
that in turn sell to and service local commercial and residential customers.
ION EXCHANGE MEDIA: The Company designs and builds ion exchange MEDIA
RECHARGE products and services and demineralizing SYSTEMS. It also operates two
facilities in Florida that provide an exchange service for customers who use ion
exchange media for demineralizing water. These facilities reprocess the media to
restore its demineralizing capacity. The Company's Waterlink Technologies
subsidiary markets the ion exchange products and services.
MEMBRANE SEPARATION SYSTEMS: The Company's Waterlink Technologies
subsidiary designs and builds REVERSE OSMOSIS (RO) systems for DESALINATION,
drinking water treatment, wastewater reclamation, and process water production
for a wide variety of requirements including, for example, boiler feedwater, the
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beverage industry, and high purity applications for the pharmaceutical and
electronics industries. Desalination is the removal of inorganic solids (salts)
from a solution such as water to produce a liquid free of dissolved salts.
Desalination is typically accomplished by distillation, reverse osmosis, or
electrodialysis. The Company also produces ion exchange demineralizing systems,
microfiltration systems, and nanofiltration systems. In addition to large scale
industrial and municipal systems, the Company produces membrane systems for use
by commercial and residential customers which are normally sold through
distributors specializing in selling to and servicing a local customer base.
NUTRIENT REMOVAL PROCESS: The Company's patented SEQUOX(TM) process for
biological nutrient removal accomplishes nitrification and denitrification to
meet United States tertiary wastewater regulations. The process features several
benefits including good control of filamentous organisms, reduced energy
consumption, carbon removal, nitrogen removal, and phosphorous removal. The
aeration system normally recommended for SEQUOX(TM) installations is jet
aeration from Mass Transfer, but SEQUOX(TM) installations may utilize
fine-bubble or coarse-bubble diffusers if the customer prefers. This process is
provided by the Company's Aero-Mod subsidiary. The Company also markets a DENI
PROCESS version for denitrification and an OXY PROCESS version for nitrification
marketed by Waterlink Technologies.
OIL/WATER SEPARATORS: The Company has a complete range of oil water
separators that are suitable for applications from the petroleum industry to the
food industry. The Company offers large scale systems for flows up to 5000
gallons per minute and small systems for the 0-35 gallons per minute range.
These systems are capable of removing oil down to 10 parts per million and are
certified to the DIN 1999 International Standard. Tanks are available in
fiberglass, carbon steel, and stainless steel for corrosion compatibility.
Emulsion breaking systems are available, as are chemical pretreatment systems.
The Company provides these separators through its Great Lakes and Zickert
Products subsidiaries.
SEQUENTIAL BATCH REACTORS (SBRS): The Company manufactures sequential
batch reactors for sanitary waste treatment plants that are subject to cold
weather, low flows, and facilities with high flow variation such as those found
in resort and seasonal sites. Sequential batch reactors are gaining favor with
regulatory officials in the United States because they are relatively simple to
operate and have an acceptable performance track record. A sequential batch
reactor system processes waste in batches instead of continuously, and consumes
less space than do conventional treatment plants. These batch reactor systems
have remote monitoring capabilities, enabling customers to benefit from weekly
process audits and remotely initiated corrections without the need for site
visits. These facilities are managed under annual monitoring contracts. These
sequential batch reactor systems are manufactured by Bioclear and can utilize
Mass Transfer's jet aeration systems, as well as Noxon and Aero-Mod's dewatering
products.
SLUDGE SCRAPERS AND SKIMMERS: The Company manufactures hydraulically and
electrically operated stainless steel surface and air flotation units. These are
employed in water treatment plants to remove sludge resulting from clarifiers,
either conventional or inclined plate settlers, from the surface of dissolved
air flotation tanks, and from rectangular wastewater plant clarifiers. The
market for scrapers is very competitive, and management believes that the
Company's offerings are at the high end with respect to quality, reliability,
and cost. These scrapers are typically sold on industrial systems or as
retrofits in the municipal market. These products are offered through the
Company's Zickert Products subsidiary in Europe and Asia Pacific and Waterlink
Technologies in the Americas.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
Basis of Presentation............................................................... F-3
Unaudited Pro Forma Condensed Consolidated Balance Sheet at March 31, 1997.......... F-4
Unaudited Pro Forma Consolidated Statement of Operations for the year ended
September 30, 1996................................................................ F-5
Unaudited Pro Forma Consolidated Statement of Operations for the six months ended
March 31, 1996.................................................................... F-6
Unaudited Pro Forma Consolidated Statement of Operations for the six months ended
March 31, 1997.................................................................... F-7
Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.................. F-8
HISTORICAL FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
Report of Independent Auditors...................................................... F-11
Consolidated Balance Sheets at September 30, 1995 and 1996 and March 31, 1997
(Unaudited)....................................................................... F-12
Consolidated Statements of Operations for the period from December 7, 1994 (date of
incorporation) to September 30, 1995, the year ended September 30, 1996, and the
six months ended March 31, 1996 and 1997 (Unaudited).............................. F-14
Consolidated Statements of Shareholders' Equity for the period from December 7, 1994
(date of incorporation) to September 30, 1995, the year ended September 30, 1996
and the six months ended March 31, 1997 (Unaudited)............................... F-15
Consolidated Statements of Cash Flows for the period from December 7, 1994 (date of
incorporation) to September 30, 1995, the year ended September 30, 1996, and the
six months ended March 31, 1996 and 1997 (Unaudited).............................. F-16
Notes to Consolidated Financial Statements.......................................... F-17
GREAT LAKES ENVIRONMENTAL, INC.
Report of Independent Auditors...................................................... F-29
Balance Sheets at December 31, 1994 and August 31, 1995............................. F-30
Statements of Income for the year ended December 31, 1994 and the eight months ended
August 31, 1995................................................................... F-31
Statements of Shareholders' Equity for the year ended December 31, 1994 and the
eight months ended August 31, 1995................................................ F-32
Statements of Cash Flows for the year ended December 31, 1994 and the eight months
ended August 31, 1995............................................................. F-33
Notes to Financial Statements....................................................... F-34
MASS TRANSFER SYSTEMS, INC.
Report of Independent Auditors...................................................... F-37
Balance Sheets at December 31, 1994, December 31, 1995 and January 31, 1996......... F-38
Statements of Operations for the year ended February 28, 1994, the ten months ended
December 31, 1994, the year ended December 31, 1995 and the month ended January
31, 1996.......................................................................... F-39
Statements of Shareholders' Equity for the year ended February 28, 1994, the ten
months ended December 31, 1994, the year ended December 31, 1995 and the month
ended January 31, 1996............................................................ F-40
Statements of Cash Flows for the year ended February 28, 1994, the ten months ended
December 31, 1994, the year ended December 31, 1995 and the month ended January
31, 1996.......................................................................... F-41
Notes to Financial Statements....................................................... F-42
</TABLE>
F-1
<PAGE> 72
<TABLE>
<CAPTION>
PAGE
<S> <C>
AERO-MOD, INC. AND AFFILIATES
Independent Auditor's Report........................................................ F-46
Combined Balance Sheets at October 31, 1994 and 1995, and April 26, 1996............ F-47
Combined Statements of Income and Retained Earnings for the years ended October 31,
1994 and 1995 and for the period ended April 26, 1996............................... F-49
Combined Statements of Cash Flows for the years ended October 31, 1994 and 1995 and
for the period ended April 26, 1996................................................. F-50
Notes to Financial Statements....................................................... F-51
WATER EQUIPMENT TECHNOLOGIES, INC. AND SUBSIDIARY
Report of Independent Auditors...................................................... F-58
Consolidated Balance Sheets at September 30, 1995 and 1996.......................... F-59
Consolidated Statements of Operations for each of the three years in the period
ended September 30, 1996............................................................ F-60
Consolidated Statements of Shareholders' Equity for each of the three years in the
period ended September 30, 1996..................................................... F-61
Consolidated Statements of Cash Flows for each of the three years in the period
ended September 30, 1996............................................................ F-62
Notes to Consolidated Financial Statements.......................................... F-63
NORDIC WATER PRODUCTS GROUP
Report of Independent Auditors...................................................... F-68
Combined Balance Sheets at March 31, 1996 and February 28, 1997..................... F-69
Statements of Combined Operations for each of the two years in the period ended
March 31, 1996 and the eleven months ended February 28, 1997........................ F-70
Combined Statements of Shareholders' Equity for each of the two years in the period
ended March 31, 1996 and the eleven months ended February 28, 1997.................. F-71
Combined Statements of Cash Flows for each of the two years in the period ended
March 31, 1996 and the eleven months ended February 28, 1997........................ F-72
Notes to Combined Financial Statements.............................................. F-73
LANCO ENVIRONMENTAL PRODUCTS, INC.
Independent Auditors' Report........................................................ F-80
Balance Sheets at December 31, 1995 and 1996, and March 31, 1997 (Unaudited)........ F-81
Statements of Income for the six months ended June 30 and December 31, 1995, the
year ended December 31, 1996, and the three months ended March 31, 1996 and 1997
(Unaudited)......................................................................... F-82
Statements of Changes in Stockholder's Equity for the six months ended December 31,
1995, the year ended December 31, 1996, and the three months ended March 31, 1997
(Unaudited)......................................................................... F-83
Statements of Cash Flows for the six months ended June 30 and December 31, 1995, the
year ended December 31, 1996, and the three months ended March 31, 1996 and 1997
(Unaudited)......................................................................... F-84
Notes to Financial Statements....................................................... F-85
BIOCLEAR TECHNOLOGY, INC.
Auditors' Report.................................................................... F-88
Consolidated Balance Sheets at August 31, 1995 and 1996, and March 31, 1997
(Unaudited)......................................................................... F-89
Consolidated Statements of Income and Retained Earnings for each of the three years
in the period ended August 31, 1996 and the seven months ended March 31, 1996 and
1997 (Unaudited).................................................................... F-90
Consolidated Statements of Cash Flows for each of the three years in the period
ended August 31, 1996 and the seven months ended March 31, 1996 and 1997
(Unaudited)......................................................................... F-91
Notes to Consolidated Financial Statements.......................................... F-92
</TABLE>
F-2
<PAGE> 73
WATERLINK, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
BASIS OF PRESENTATION
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of March 31, 1997 adjusts the Company's historical balance sheet to give effect
to the following as if they occurred as of March 31, 1997 (i) the completion of
the Pending Acquisitions, (ii) the conversion of all outstanding preferred
stock, and (iii) the sale of the 4,500,000 shares of Common Stock by the Company
in the Offering and the application of the estimated net proceeds therefrom as
described under "Use of Proceeds." The following Unaudited Pro Forma
Consolidated Statements of Operations for fiscal 1996 and the six months ended
March 31, 1996 and 1997 adjust the Company's historical statements of operations
to give effect to the events discussed in (i), (ii), and (iii) above and the
acquisitions completed during fiscal 1996 and fiscal 1997 as if they had
occurred as of October 1, 1995.
The pro forma financial statements have been derived in part from the
historical financial statements included elsewhere in this Prospectus. In
preparing the pro forma financial statements, the historical financial
statements of the completed acquisitions and Pending Acquisitions were converted
to a September 30 fiscal year end, except for Bioclear Technologies, Inc. which
has an August 31 fiscal year end.
The pro forma financial statements have been prepared by the Company based
in part on historical financial information provided by the management of the
Pending Acquisitions for periods prior to the consummation of these acquisitions
with respect to the historical results of operations and financial position of
Bioclear and Lanco. The related pro forma adjustments have been prepared by the
Company's management based on its assumptions and using the best available
information provided by the management of the Pending Acquisitions.
The financial information for companies located outside the United States
(Nordic Group and Bioclear) have been presented in accordance with United States
generally accepted accounting principles. The exchange rates used to present
such financial information is located on page F-79 for the Nordic Group and
pages F-96 and F-97 for Bioclear.
The Unaudited Pro Forma Condensed Consolidated Financial Data has been
prepared by the Company's management. This pro forma data does not purport to
represent the Company's financial position or results of operations had the
aforementioned transactions been completed as of the beginning of the periods
indicated, or to project the Company's results of operations at any future date
or for any future period. The Unaudited Pro Forma Condensed Consolidated
Financial Data should be read in conjunction with the Consolidated Financial
Statements and the notes thereto of the Company, the completed acquisitions and
the Pending Acquisitions, contained elsewhere in this Prospectus.
F-3
<PAGE> 74
WATERLINK, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
---------------------- ADJUSTMENTS
PENDING(1) PRO FORMA FROM PRO FORMA
COMPANY ACQUISITIONS ADJUSTMENTS PRO FORMA OFFERING AS ADJUSTED
------- ------------ ----------- --------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.... $4,298 $ 81 $ (130)(2) $ 4,249 $ 293(3) $ 4,542
Accounts receivable.......... 18,570 1,558 -- 20,128 -- 20,128
Inventories.................. 8,818 447 -- 9,265 -- 9,265
Other current assets......... 5,507 234 -- 5,741 -- 5,741
------- -------- ------- ------- --------- -------
Total current assets........... 37,193 2,320 (130) 39,383 293 39,676
Property, plant and equipment,
net.......................... 3,111 2,311 -- 5,422 -- 5,422
Other assets:
Goodwill and other
intangibles, net........... 20,567 -- 19,346(2) 39,913 -- 39,913
Other assets................. 1,816 -- -- 1,816 (622) (4) 1,194
------- -------- ------- ------- --------- -------
22,383 -- 19,346 41,729 (622) 41,107
------- -------- ------- ------- --------- -------
Total assets................... $62,687 $ 4,631 $19,216 $86,534 $ (329) $86,205
======= ======== ======= ======= ========= =======
Liabilities and shareholders'
equity
Current liabilities:
Accounts payable............. $12,053 $ 779 $ -- $12,832 $ -- $12,832
Accrued expenses............. 5,286 34 -- 5,320 -- 5,320
Other current liabilities.... 1,872 366 -- 2,238 (267)(4) 1,971
Current portion of long-term
debt....................... 2,019 2,413 -- 4,432 (2,019)(3) 2,413
------- -------- ------- ------- --------- -------
Total current liabilities...... 21,230 3,592 -- 24,822 (2,286) 22,536
Long-term obligations:
Long-term debt............... 21,729 -- -- 21,729 (21,729)(3) --
Notes payable-related
parties.................... 3,100 -- -- 3,100 (3,100)(3) --
Pro forma cash consideration
due to former owners of
Pending Acquisitions....... -- -- 16,644(2) 16,644 (16,644)(3) --
Other long-term
liabilities................ 1,181 -- -- 1,181 -- 1,181
------- -------- ------- ------- --------- -------
26,010 -- 16,644 42,654 (41,473) 1,181
Redeemable preferred stock..... 8,500 -- -- 8,500 (8,500)(5) --
Shareholders' equity........... 6,947 1,039 2,572(2) 10,558 51,930(3)(4)(5) 62,488
------- -------- ------- ------- --------- -------
Total liabilities and
shareholders' equity......... $62,687 $ 4,631 $19,216 $86,534 $ (329) $86,205
======= ======== ======= ======= ========= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 75
WATERLINK, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------- ADJUSTMENTS PRO
FISCAL 1996 NORDIC PENDING PRO FORMA PRO FROM FORMA AS
COMPANY ACQUISITIONS GROUP ACQUISITIONS ADJUSTMENTS FORMA OFFERING ADJUSTED
-------- ------------ ------- ------------ ----------- -------- ----------- --------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $ 19,801 $ 13,264 $32,098 $ 10,239 $(2,715)(6) $72,687 $72,687
Cost of sales......... 11,233 8,226 22,465 4,936 (2,175)(6)(9) 44,685 44,685
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.......... 8,568 5,038 9,633 5,303 (540) 28,002 28,002
Selling, general and
administrative
expenses(15)........ 7,029 4,498 7,665 4,872 (2,847)(7)(8)(9) 21,217 21,217
Amortization.......... 307 13 54 -- 686(10) 1,060 1,060
------- ------- ------- ------- ------- ------- ------- -------
Operating income...... 1,232 527 1,914 431 1,621 5,725 5,725
Other income
(expense):
Interest expense.... (877) (86) (77) -- (2,746)(9)(11) (3,786) $ 3,686(13) (100)
Other -- net........ (44) (28) 14 41 -- (17) (17)
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes............... 311 413 1,851 472 (1,125) 1,922 3,686 5,608
Income taxes.......... 5 11 -- 226 585(12) 827 1,585(12) 2,412
------- ------- ------- ------- ------- ------- ------- -------
Net income............ $ 306 $ 402 $ 1,851 $ 246 $(1,710) $ 1,095 $ 2,101 $ 3,196
======= ======= ======= ======= ======= ======= ======= =======
Pro forma net income
per share(14)....... $ 0.05 $ 0.16 $ 0.28
======= ======= =======
Number of shares used
to compute pro forma
per share
data(14)............ 6,428 6,756 11,256
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 76
WATERLINK, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------- ADJUSTMENTS PRO
FISCAL 1996 NORDIC PENDING PRO FORMA PRO FROM FORMA AS
COMPANY ACQUISITIONS GROUP ACQUISITIONS ADJUSTMENTS FORMA OFFERING ADJUSTED
-------- ------------ ------- ------------ ----------- -------- ----------- --------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $ 8,243 $ 8,459 $20,599 $ 3,179 $(4,653)(6) $35,827 $35,827
Cost of sales......... 4,821 5,115 14,099 1,644 (3,662)(6)(9) 22,017 22,017
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.......... 3,422 3,344 6,500 1,535 (991) 13,810 13,810
Selling, general and
administrative
expenses(15)........ 2,897 2,926 3,779 1,147 313(7)(8)(9) 11,062 11,062
Amortization.......... 117 13 27 -- 374(10) 531 531
------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss).............. 408 405 2,694 388 (1,678) 2,217 2,217
Other income
(expense):
Interest expense.... (354) (66) (53) -- (1,490)(9)(11) (1,963) $ 1,913(13) (50)
Other -- net........ (33) (32) -- 7 -- (58) (58)
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes............... 21 307 2,641 395 (3,168) 196 1,913 2,109
Income taxes.......... 2 145 -- 189 (251)(12) 85 822(12) 907
------- ------- ------- ------- ------- ------- ------- -------
Net income............ $ 19 $ 162 $ 2,641 $ 206 $(2,917) $ 111 $ 1,091 $ 1,202
======= ======= ======= ======= ======= ======= ======= =======
Pro forma net income
per share(14)....... $ -- $ 0.02 $ 0.11
======= ======= =======
Number of shares used
to compute pro forma
per share
data(14)............ 6,424 6,752 11,252
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 77
WATERLINK, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------- ADJUSTMENTS PRO
NORDIC PENDING PRO FORMA PRO FROM FORMA AS
COMPANY GROUP ACQUISITIONS ADJUSTMENTS FORMA OFFERING ADJUSTED
------- ------- ------------ ----------- -------- ----------- --------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $24,727 $11,697 $ 2,670 $ 2,462(6) $41,556 $41,556
Cost of sales........................... 14,800 7,752 1,450 1,926(6) 25,928 25,928
------- -------- -------- ------- ------- ------- -------
Gross profit............................ 9,927 3,945 1,220 536 15,628 15,628
Selling, general and administrative
expenses(15).......................... 7,478 3,368 1,041 (48)(7) 11,839 11,839
Amortization............................ 280 23 -- 262(10) 565 565
------- -------- -------- ------- ------- ------- -------
Operating income........................ 2,169 554 179 322 3,224 3,224
Other income (expense):
Interest expense...................... (612) (93) -- (1,061)(9)(11) (1,766) $ 1,716(13) (50)
Other -- net.......................... 75 15 99 -- 189 -- 189
------- -------- -------- ------- ------- ------- -------
Income before income taxes.............. 1,632 476 278 (739) 1,647 1,716 3,363
Income taxes............................ 647 28 94 (61)(12) 708 738(12) 1,446
------- -------- -------- ------- ------- ------- -------
Net income.............................. $ 985 $ 448 $ 184 $ (678) $ 939 $ 978 $ 1,917
======= ======== ======== ======= ======= ======= =======
Pro forma net income per common
share(14)............................. $ 0.15 $ 0.13 $ 0.17
======= ======= =======
Number of shares used to compute pro
forma per share data(14).............. 6,665 6,993 11,493
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 78
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET ADJUSTMENTS
The Unaudited Pro Forma Condensed Consolidated Balance Sheet has been adjusted
to reflect the above as follows:
(1) To record the historical assets acquired and liabilities assumed in
connection with the acquisitions of Bioclear and Lanco.
(2) To reflect adjustments to assets acquired and liabilities assumed in
connection with the Pending Acquisitions based on their estimated fair
values under the purchase method of accounting. The estimated combined
purchase price relating to these acquisitions is $20,385,000,
including acquisition related expenses of approximately $130,000. The
allocation of the purchase price is preliminary and assumes the
historical book value of tangible assets approximates fair value. The
actual allocation will be based on management's final evaluation of
such assets and liabilities. Some portion of the excess of the
purchase price over the historical cost of net assets acquired may
ultimately be allocated to specific tangible and intangible assets and
liabilities. The final allocation of the purchase price and the
resulting effect on net income may differ significantly from the pro
forma amounts included herein. These pro forma adjustments are
reflected as follows (in thousands of dollars):
<TABLE>
<S> <C>
Decrease cash for payment of acquisition related expenses....... $ (130)
Increase goodwill for the excess of the purchase price over the
net assets acquired........................................... 19,346
Reflect pro forma cash consideration due to former owners of
Pending Acquisitions.......................................... 16,644
Increase shareholders' equity for 328,270 shares of common stock
(assuming an initial public offering price of $11.00 per
share) to be issued in connection with the Pending
Acquisitions.................................................. 3,611
Decrease shareholders' equity to eliminate historical equity of
the Pending Acquisitions...................................... (1,039)
</TABLE>
(3) To record the issuance of 4,500,000 shares of Common Stock in
connection with the Offering and application of estimated proceeds
therefrom of $43,785,000 as described under "Use of Proceeds."
(4) To reflect the write-off of unamortized debt issuance costs and
discounts associated with the Company's Credit Agreement and
Subordinated Notes agreement to be repaid with net proceeds from the
Offering (in thousands of dollars):
<TABLE>
<S> <C>
Decrease other assets for write-off of deferred financing
costs......................................................... $ (622)
Decrease other current liabilities for tax effect of the
write-off..................................................... (267)
Decrease shareholders' equity for extraordinary, non-cash charge
for the write-off of deferred financing costs to be recorded
in the quarter in which the Offering becomes effective........ (355)
</TABLE>
(5) To record the conversion of all outstanding shares of Preferred Stock
into 3,250,000 shares of Common Stock concurrently with the closing of
this Offering.
F-8
<PAGE> 79
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA (CONTINUED)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS
The historical results for the Company include the operations of the Completed
Acquisitions for the periods subsequent to the respective dates of acquisition
in accordance with the purchase method of accounting. The dates of acquisition
of the Completed Acquisitions are as follows:
<TABLE>
<CAPTION>
<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
</TABLE>
The historical operating results of the fiscal 1996 acquisitions and the Nordic
Group acquisition as presented reflect the operations of the acquired companies
prior to the respective dates of acquisition. Historical operating results for
the Pending Acquisitions reflect their operations for the periods presented.
The Unaudited Pro Forma Consolidated Statements of Operations give effect to the
following adjustments:
(6) To recognize revenue on the percentage of completion method of
accounting at the Nordic Group which was previously recognized on the
completed contract method as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL MARCH 31,
1996 1996 1997
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Increase (decrease) net sales............. $(2,715) $(4,653) $ 2,462
Increase (decrease) cost of sales......... (2,069) (3,556) 1,926
------- ------- -------
Increase (decrease) gross profit.......... $ (646) $(1,097) $ 536
======= ======= =======
</TABLE>
(7) To adjust selling, general and administrative expenses for certain
adjustments in salaries and benefits to the former owners of the
acquisitions completed in fiscal 1996 and the Pending Acquisitions to
levels specified in the employment agreements entered into as part of
the business combinations as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL MARCH 31,
1996 1996 1997
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
(Decrease) selling, general and
administrative expenses................. $(3,518) $ (112) $ (25)
</TABLE>
(8) To adjust corporate offices expenses to current levels as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL MARCH 31,
1996 1996 1997
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Increase selling, general and
administrative expenses................. $ 605 $ 349 $ --
</TABLE>
F-9
<PAGE> 80
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA (CONTINUED)
3. UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS
(CONTINUED)
(9) To reclassify amounts for certain acquired companies to conform to the
classifications of the registrant:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL MARCH 31,
1996 1996 1997
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Decrease cost of sales.................... $ (106) $ (106) $ --
Increase selling, general and
administrative expenses................. 66 76 --
Increase interest expense................. 40 30 23
</TABLE>
(10) To record incremental amortization of the goodwill to be recorded as a
result of the acquisitions completed in fiscal 1996, the acquisition of
the Nordic Group and the Pending Acquisitions over a 40 year period.
(11) To record interest expense of $2,706,000 in fiscal 1996, and $1,460,000
and $1,038,000 for the six months ended March 31, 1996 and 1997,
respectively, relating to debt assumed to be issued in connection with
the Completed Acquisitions and Pending Acquisitions.
(12) To adjust income taxes to an effective rate of 43%.
(13) To reduce interest expense resulting from the application of the
estimated net proceeds of the Offering, as described under "Use of
Proceeds."
(14) Pro forma net income per share is computed by dividing net income by the
number of shares used to compute pro forma per share data. For
historical purposes, share data for the Company includes shares of
Common Stock outstanding, shares of Common Stock to be issued upon the
conversion of all outstanding Preferred Stock and the assumed exercise
of outstanding stock options and warrants using the treasury stock
method. For pro forma purposes, share data also includes shares of
Common Stock to be issued in connection with the Pending Acquisitions.
For pro forma as adjusted purposes, share data also includes shares of
Common Stock to be issued in connection with the Offering. Shares
associated with options, warrants, the Offering and the Pending
Acquisitions were computed using an assumed initial public offering
price of $11.00 per share.
(15) The pro forma Statements of Operations exclude a special charge to
operations of approximately $2.6 million ($0.13 per share, after tax),
assuming an initial public offering price of $11.00 per share, which
will be incurred in the quarter in which the Offering is completed. Such
charge results primarily from the issuance by the Company of certain
compensatory stock options to an officer of the Company pursuant to the
terms of an employment agreement. Of this amount, approximately $1.1
million is non-cash, and approximately $1.5 million represents cash
payments relating principally to the reimbursement of income taxes
resulting from this stock option issuance.
F-10
<PAGE> 81
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
WATERLINK, INC.
We have audited the accompanying consolidated balance sheets of Waterlink,
Inc. and subsidiaries as of September 30, 1995 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the period from December 7, 1994 (date of incorporation) to September 30, 1995
and for the year ended September 30, 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 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, 1995 and 1996, and the
consolidated results of their operations and their cash flows for the period
from December 7, 1994 to September 30, 1995 and for the year ended September 30,
1996 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Canton, Ohio
November 27, 1996, except for
Notes 2 and 5, as to which
the date is March 5, 1997
F-11
<PAGE> 82
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------- MARCH 31,
1995 1996 1997
------- ------- -------------
(Unaudited)
(Thousands of dollars)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 995 $ 119 $ 4,298
Accounts receivable:
Trade, less allowance of $10 at September 30, 1995,
$101 at September 30, 1996 and $112 at March 31,
1997.............................................. 1,130 5,699 18,195
Other............................................... 128 378 375
Inventories............................................ 1,175 3,231 8,818
Costs in excess of billings............................ -- 1,447 5,058
Prepaid expenses....................................... 98 172 449
------ ------ ------
Total current assets..................................... 3,526 11,046 37,193
Property, plant and equipment, at cost:
Land, building and improvements........................ -- 750 792
Machinery and equipment................................ 80 383 1,554
Office equipment....................................... 89 747 984
------ ------ ------
169 1,880 3,330
Less accumulated depreciation.......................... 8 103 219
------ ------ ------
161 1,777 3,111
Other assets:
Goodwill, net of amortization of $15 at September 30,
1995, $287 at September 30, 1996 and $511 at March
31, 1997............................................ 7,007 15,029 20,001
Patents, net of amortization of $18 at September 30,
1996 and $41 at March 31, 1997...................... -- 749 566
Demonstration units.................................... 110 155 123
Other assets........................................... 15 235 1,693
------ ------ ------
7,132 16,168 22,383
------ ------ ------
Total assets............................................. $10,819 $28,991 $62,687
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-12
<PAGE> 83
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------
SEPTEMBER 30, PRO FORMA(1)
------------------- SHAREHOLDERS'
1995 1996 HISTORICAL EQUITY
------- ------- ---------- -------------
(Unaudited)
(Thousands of dollars)
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade...................... $ 229 $ 2,076 $ 12,053
Accrued expenses............................. 295 1,931 5,286
Additional purchase consideration payable.... -- 1,013 --
Billings in excess of cost................... 341 559 1,285
Accrued income taxes......................... 26 60 587
Current portion of long-term obligations..... 571 1,969 2,019
------- ------- -------
Total current liabilities...................... 1,462 7,608 21,230
Long-term obligations:
Long-term debt............................... 3,968 4,676 21,729
Notes payable -- related parties............. 1,500 3,100 3,100
Convertible subordinated notes -- related
parties................................... -- 2,400 --
Other -- related party....................... -- 300 1,181
------- ------- -------
5,468 10,476 26,010
Redeemable Preferred Stock..................... 3,900 8,500 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 -- 9,537,000 shares
Issued outstanding -- 1,450,000 shares at
September 30, 1995; 1,999,996 shares at
September 30, 1996; and 2,814,284 shares
at March 31, 1997 (unaudited);
Pro forma -- 6,064,284 shares........... 1 2 3 6
Additional paid-in capital................... 500 2,611 6,380 14,877
Foreign currency translation adjustment...... -- -- (215) (215)
Retained earnings (deficit).................. (512) (206) 779 779
------- ------- ------- -------
Total shareholders' equity (deficit)........... (11) 2,407 6,947 $15,447
------- ------- ------- =======
Total liabilities and shareholders' equity..... $10,819 $28,991 $ 62,687
======= ======= =======
</TABLE>
(1) The unaudited pro forma consolidated balance sheet above gives effect to the
conversion of all outstanding shares of redeemable preferred stock into
3,250,000 shares of Common Stock.
The accompanying notes are an integral part of these statements.
F-13
<PAGE> 84
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 7,
1994 TO YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1995 1996 1996 1997
------------- ------------- -------- --------
(Unaudited)
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Net sales..................................... $ 2,684 $ 19,801 $ 8,243 $ 24,727
Cost of sales................................. 1,857 11,233 4,821 14,800
------- ------- ------- -------
Gross profit.................................. 827 8,568 3,422 9,927
Selling, general and administrative
expenses.................................... 1,178 7,029 2,897 7,478
Amortization.................................. 15 307 117 280
------- ------- ------- -------
Operating income (loss)....................... (366) 1,232 408 2,169
Other income (expense):
Interest expense............................ (144) (877) (354) (612)
Other--net.................................. 33 (44) (33) 75
------- ------- ------- -------
Income (loss) before income taxes............. (477) 311 21 1,632
Income taxes.................................. 35 5 2 647
------- ------- ------- -------
Net income (loss)............................. $ (512) $ 306 $ 19 $ 985
======= ======= ======= =======
Pro forma net income per share................ $ 0.05 $ -- $ 0.15
======= ======= =======
Number of shares used to compute pro forma per
share data.................................. 6,428 6,424 6,665
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-14
<PAGE> 85
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN TOTAL
ADDITIONAL RETAINED CURRENCY SHAREHOLDERS'
COMMON PAID-IN EARNINGS TRANSLATION EQUITY
STOCK CAPITAL (DEFICIT) ADJUSTMENT (DEFICIT)
------ ---------- -------- ----------- -------------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
PERIOD FROM DECEMBER 7, 1994 TO SEPTEMBER 30,
1995
Sale of 1,200,000 shares of Common Stock
(initial capitalization)................... $ 1 $ 1
Issuance of 250,000 shares of Common Stock 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 stock options for 50,000 shares
of Common Stock............................ 5 5
Issuance of 499,996 shares of Common Stock 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
SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
Conversion of subordinated notes for 600,000
shares of Common Stock..................... 1 2,516 2,517
Issuance of 111,788 shares of Common Stock in
connection with acquisition of
subsidiary................................. 476 476
Exercise of stock options.................... 360 360
Issuance of Common Stock warrants in
connection with debt agreements............ 413 413
Net income................................... 985 985
Other........................................ 4 $(215) (211)
------ ---------- -------- ----------- -------------
Balance at March 31, 1997.................... $ 3 $6,380 $ 779 $(215) $ 6,947
====== ======= ====== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-15
<PAGE> 86
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 7, SIX MONTHS ENDED
1994 TO YEAR ENDED MARCH 31,
SEPTEMBER 30, SEPTEMBER 30, ------------------
1995 1996 1996 1997
------------- ------------- -------- -------
<S> <C> <C> <C> <C>
(Unaudited)
<CAPTION>
(Thousands of dollars)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $ (512) $ 306 $ 19 $ 985
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization................... 30 442 163 442
Changes in working capital:
Accounts receivable.......................... (1,258) (700) (941) (6,020)
Inventories.................................. 290 432 (56) 2,325
Cost in excess of billings................... -- (1,390) -- (3,611)
Prepaids and other assets.................... (112) (80) (17) (1,053)
Accounts payable............................. 229 390 627 2,067
Accrued expenses............................. 295 896 317 1,498
Billings in excess of cost................... 168 (276) (302) 726
Accrued income taxes......................... 26 (34) (17) 669
------------- ------------- -------- -------
Net cash used by operating activities............. (844) (14) (207) (1,972)
INVESTING ACTIVITIES
Purchases of equipment............................ (93) (423) (300) (439)
Purchases of subsidiaries, net of cash acquired... (6,508) (5,557) (1,805) (8,750)
------------- ------------- -------- -------
Net cash used in investing activities............. (6,601) (5,980) (2,105) (9,189)
FINANCING ACTIVITIES
Proceeds from long-term borrowings................ 4,539 1,841 2,101 21,367
Payments on long-term borrowings.................. -- (1,304) (300) (6,388)
Proceeds from sale of Common Stock................ 1 5 -- 360
Proceeds from sale of Preferred Stock............. 3,900 4,576 -- --
------------- ------------- -------- -------
Net cash provided by financing activities......... 8,440 5,118 1,801 15,339
------------- ------------- -------- -------
Effect of exchange rate changes on cash........... -- -- -- 1
Increase (decrease) in cash and cash
equivalents..................................... 995 (876) (511) 4,179
Cash and cash equivalents at beginning of
period.......................................... -- 995 995 119
------------- ------------- -------- -------
Cash and cash equivalents at end of period........ $ 995 $ 119 $ 484 $ 4,298
========== ========== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-16
<PAGE> 87
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Information as of March 31, 1997 and for the six
months ended March 31, 1996 and 1997 is unaudited)
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Waterlink, Inc. (the "Company") operates in a single business segment, providing
integrated water and wastewater treatment solutions to industry and
municipalities worldwide, with sales primarily in the United States, Europe and
Latin America. Export sales represented more than one-third of sales in fiscal
1996. The Company has a strategy of acquisition and internal growth to provide
integrated products, technologies and services to water users globally.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated upon consolidation.
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 been within management's expectations.
FINANCIAL INSTRUMENTS
The carrying value of cash, cash equivalents, accounts receivable and accounts
payable are a reasonable estimate of their fair value due to the short-term
nature of these instruments. The Company's long-term debt, except for the notes
payable -- related parties, has a variable rate and cost approximates fair value
at September 30, 1996. The notes payable -- related parties do not have a ready
market and cost is assumed to approximate fair value. The carrying amount of
these notes is $3,100,000 at September 30, 1996, with interest rates ranging
from 5.61% to 10% and various maturity dates through April 2002.
F-17
<PAGE> 88
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(Information as of March 31, 1997 and for the six
months ended March 31, 1996 and 1997 is unaudited)
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 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.
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 was necessary in 1995
or 1996.
DEMONSTRATION UNITS
Demonstration units are valued at cost and are amortized using the straight-line
method over a period of five years. Accumulated amortization on demonstration
units was $7,000 at September 30, 1995, $41,000 at September 30, 1996 and
$50,000 at March 31, 1997.
EMPLOYEE BENEFIT PLAN
Effective February 1, 1996, the Company implemented a defined contribution plan
which covers substantially all employees. No Company contributions were made to
the plan during the year ended September 30, 1996 or the six months ended March
31, 1997.
STOCK 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 accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognizes no compensation expense for such stock option
grants. In certain instances where the exercise price is below fair value at the
date of grant, the Company recognizes compensation expense based on the
difference between the exercise price and fair value of such options ratably
over the vesting period.
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
F-18
<PAGE> 89
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(Information as of March 31, 1997 and for the six
months ended March 31, 1996 and 1997 is unaudited)
1. ACCOUNTING POLICIES (CONTINUED)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is computed by dividing net income by the pro
forma weighted-average number of shares of Common Stock outstanding. These
shares include common shares outstanding, common shares to be issued upon the
conversion of outstanding Series A, Series B and Series C Preferred Stock and
the assumed exercise of outstanding stock options and warrants (using the
treasury stock method and an estimated initial public offering price of $11.00
per share). Historical per share amounts are not presented because such data is
not meaningful.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, which provides an alternative to APB Opinion No. 25,
Accounting for Stock Issued to Employees, in accounting for stock-based
compensation issued to employees. The Company accounts for stock options in
accordance with APB Opinion No. 25. The disclosure requirements of SFAS No. 123
will be adopted as required for the Company's fiscal 1997 financial statements.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS No. 128
replaces the presentation of primary earnings per share (EPS) under Accounting
Principles 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. The Company is required to adopt SFAS No. 128 during the first
quarter of fiscal 1998. The Company has not completed its evaluation of the
potential impact of this new standard on EPS in future periods.
INTERIM FINANCIAL INFORMATION
The accompanying consolidated balance sheet as of March 31, 1997, the related
consolidated statements of operations and cash flows for the six months ended
March 31, 1996 and 1997, and the consolidated statement of shareholders' equity
for the six months ended March 31, 1997 ("interim financial statements") have
been prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments, considered necessary for a fair
presentation of the results of interim periods. Operating results for the
six-month period ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the year ended September 30, 1997.
2. ACQUISITIONS
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
F-19
<PAGE> 90
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(Information as of March 31, 1997 and for the six
months ended March 31, 1996 and 1997 is unaudited)
2. ACQUISITIONS (CONTINUED)
approximately $7,600,000, consisting of $3,100,000 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 $2,400,000, consisting of $1,000,000
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
$5,300,000, consisting of $2,700,000 in cash and $2,600,000 in Waterlink Common
Stock (611,784 shares valued at $4.25 per share.) The purchase price and related
allocation for Water Equipment Technologies, which was preliminary at September
30,1996, was finalized during the second quarter of 1997. The aggregate purchase
price of the 1996 acquisitions includes approximately $8,600,000 million of
goodwill (Mass Transfer Systems -- $5,200,000; Aero-Mod -- $100,000 and Water
Equipment Technologies -- $3,300,000), which is 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 was purchased effective March 31, 1995 for cash of approximately
$800,000. Great Lakes Environmental 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 $500,000 in Waterlink Common Stock (250,000 shares at $2.00 per
share). The purchase price of the Great Lakes acquisition includes approximately
$7,800,000 million of goodwill, which is amortized on a straight-line basis over
40 years.
Under the terms of the Mass Transfer Systems, Inc. and Aero-Mod, Inc. and
Affiliates purchase agreements, the Company may be required to make additional
payments of up to $800,000 contingent upon the achievement of certain operating
results through September 30, 1997. In addition, the Water Equipment
Technologies agreement provides for payment of contingent consideration at
September 30, 1997 and 1998 if certain specified targets are achieved. Any such
increases to the purchase price of the acquired companies will be recorded as
additional goodwill.
On March 5, 1997, the Company acquired the Nordic Water Products Group for
approximately $12,100,000, consisting of $11,100,000 in cash and $1,000,000 of
seller notes. The purchase price includes approximately $4,100,000 of goodwill,
which will be amortized on a straight-line basis over 40 years. The purchase
price allocation has been based on preliminary estimates, which may be revised
at a later date. Further, in conjunction with its planned initial public
offering expected to be completed during the third quarter of fiscal 1997, the
Company anticipates acquiring two additional businesses, Bioclear Technology,
Inc. and Lanco Environmental Products, Inc. The combined purchase price of these
pending acquisitions is expected to total approximately $20,400,000, consisting
of $16,800,000 in cash and 328,270 shares of the Company's Common Stock
aggregating $3,600,000 (assuming an estimated initial public offering price of
$11.00 per share.)
These acquisitions were accounted for as purchases. 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.
F-20
<PAGE> 91
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(Information as of March 31, 1997 and for the six
months ended March 31, 1996 and 1997 is unaudited)
2. ACQUISITIONS (CONTINUED)
The following unaudited pro forma information presents the consolidated results
of operations of the Company assuming the completed and pending acquisitions
discussed above were completed on December 7, 1994:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 7,
1994, TO YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1995 1996 1996 1997
------------- ------------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Net sales........................................ $59,778 $72,687 $35,827 $41,556
Operating profit................................. 2,362 5,725 2,217 3,224
Income before taxes.............................. 527 1,922 196 1,647
Net income....................................... 300 1,095 111 939
</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.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------- MARCH 31,
1995 1996 1997
------ ------ ---------
(Thousands of dollars)
<S> <C> <C> <C>
Raw materials and supplies...................................... $1,099 $1,864 $ 4,486
Work in process and finished goods.............................. 76 1,367 4,332
------ ------ ---------
$1,175 $3,231 $ 8,818
====== ====== =======
</TABLE>
4. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------- MARCH 31,
1995 1996 1997
------ ------ ---------
(Thousands of dollars)
<S> <C> <C> <C>
Contract costs incurred to date................................. $ -- $1,957 $ 4,434
Estimated profits............................................... -- 1,864 3,196
------ ------ ---------
Contract revenue earned to date................................. -- 3,821 7,630
Less billings to date........................................... 341 2,933 3,857
------ ------ ---------
Cost and estimated earnings in excess of billings, net.......... $ (341) $ 888 $ 3,773
====== ====== =======
</TABLE>
F-21
<PAGE> 92
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(Information as of March 31, 1997 and for the six
months ended March 31, 1996 and 1997 is unaudited)
4. CONTRACT BILLING STATUS (CONTINUED)
The above amounts are included in the accompanying consolidated balance sheet
as:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------- MARCH 31,
1995 1996 1997
------ ------ ---------
(Thousands of dollars)
<S> <C> <C> <C>
Costs in excess of billings..................................... $ -- $1,447 $ 5,058
Billings in excess of costs..................................... 341 559 1,285
------ ------ ---------
$ (341) $ 888 $ 3,773
====== ====== =======
</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 $158,000
at September 30, 1995, $528,000 at September 30, 1996 and $431,000 at March 31,
1997, respectively. Substantially all retained balances are collectible within
one year.
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996 1997
------ ------- ---------
(Thousands of dollars)
<S> <C> <C> <C>
LONG-TERM DEBT
Term note payable to a bank, payable in quarterly
installments commencing at $400,000 and increasing to
$750,000. Interest is payable monthly at designated
variable rates. (7.87% at March 31, 1997)................. $ -- $ -- $11,000
Revolving credit agreements with a bank, due February 18,
2000. Interest is payable monthly at designated variable
rates. (7.11% at March 31, 1997).......................... -- -- 10,110
Subordinated note to former parent of acquired business due
October 1, 1999. Interest is payable at maturity at a rate
of 7% per annum........................................... -- -- 1,000
Term note payable to a bank in monthly installments of
$59,524, plus interest at prime plus 1.5% (9.75% at
September 30, 1996), with the balance due March 31,
1997...................................................... 4,000 4,643 --
Revolving credit agreement due March 31, 1997 with interest
due monthly at prime plus 1% (9.25% at September 30,
1996)..................................................... 539 672 --
Note payable to bank due March 31, 1997 with interest due
monthly at prime plus 1.5% (9.75% at September 30,
1996)..................................................... -- 450 --
Other notes payable to various parties with interest ranging
from 3.9% to 10.6%........................................ -- 80 1,238
</TABLE>
F-22
<PAGE> 93
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(Information as of March 31, 1997 and for the six
months ended March 31, 1996 and 1997 is unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996 1997
------ ------- ---------
(Thousands of dollars)
<S> <C> <C> <C>
5. LONG-TERM OBLIGATIONS (CONTINUED)
NOTES PAYABLE -- RELATED PARTIES
Subordinated note payable to former shareholders of Great
Lakes Environmental, Inc., due in equal annual
installments of $500,000 plus interest at 7% beginning on
September 1, 1998......................................... 1,500 1,500 1,500
Subordinated note payable to former shareholders of Mass
Transfer Systems, Inc., due February 1, 2001, with
interest payable annually at 5.61%........................ -- 1,300 1,300
Subordinated note payable to former shareholders of Mass
Transfer Systems, Inc. with interest at 7%, due December
31, 1996.................................................. -- 400 --
Note payable to former shareholder of Mass Transfer Systems,
Inc. with interest at 10%, due August 1, 1997............. 400 400
Subordinated note payable to former shareholders of Aero-Mod,
Inc., due April 26, 2001, with interest payable annually
at 7%..................................................... -- 300 300
CONVERTIBLE SUBORDINATED NOTES -- RELATED PARTIES
Note payable to former shareholders of Mass Transfer System,
Inc., due February 1, 2003. Interest accrues at 5.61% per
annum with payments commencing February 1, 1999........... -- 2,000 --
Note payable to former shareholders of Aero-Mod, Inc., due
April 26, 2003. Interest accrues at 5.45% per annum with
payments commencing April 26, 1999........................ -- 400 --
------ ------- ---------
6,039 12,145 26,848
Less current maturities........................................ 571 1,969 2,019
------ ------- ---------
$5,468 $10,176 $24,829
====== ======= =======
</TABLE>
No interest was paid by the Company in 1995. In 1996, interest paid approximated
$631,000.
On February 19, 1997, the Company entered into a long-term credit facility with
a bank to refinance the obligations due to its existing senior bank leaders
which were due to mature on March 31, 1997. As such, $4,667,000 at September 30,
1996 was classified as long-term debt.
The new credit facility ("Credit Facility") provides the Company with a
revolving line-of-credit of up to $8,000,000 and a term loan of $11,000,000. The
revolving line-of-credit has a sublimit of $6,000,000 for letters of credit and
can be used for working capital and other general corporate purposes. Loans
under the Credit Facility bear interest at a designated variable base rate plus
spreads ranging from zero to 50 basis points and 25 to 75 basis points,
respectively, depending on the ratio of total consolidated indebtedness to its
earnings before interest, taxes, depreciation and amortization. At the Company's
option, the loans under the Credit Facility may bear interest based on a
designated London interbank offering rate plus spreads ranging from 175 to 225
basis points and 200 to 250 basis points, respectively, based on the same ratio.
The revolving line-of-credit terminates in February 2000, and the term loan
matures in February 2002. The term loan has mandatory
F-23
<PAGE> 94
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(Information as of March 31, 1997 and for the six
months ended March 31, 1996 and 1997 is unaudited)
5. LONG-TERM OBLIGATIONS (CONTINUED)
quarterly repayments commencing June 30, 1997 in amounts ranging from $400,000
to $750,000 per repayment. The Credit Facility prohibits or restricts the
Company from many actions, including paying dividends and incurring or assuming
other indebtedness or liens.
Obligations under the Credit Facility are secured by substantially all of the
Company's assets, including equipment, inventory, accounts receivable and
general intangibles and a pledge of most of the stock of the Company's
subsidiaries.
As part of the Credit Facility, two of the foreign subsidiaries of the Company
have separate facilities of $2,000,000 and $3,800,000, respectively, for
borrowings in local currencies. Each separate facility is guaranteed by the
Company. Both of these facilities mature in February 2000, with outstanding
amounts bearing interest based on a designated London interbank offering rate
plus a spread of 250 basis points.
As additional consideration for the Credit Facility, the Company entered into a
warrant agreement dated February 19, 1997, (the "Bank Warrant Agreement")
pursuant to which the Bank has been granted 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
warrant) will be treated as an original issue discount and amortized on a
straight-line basis through interest expense over the life of the Credit
Facility.
Additionally, in March 1997, the Company entered into a note purchase agreement
(the "Note Purchase Agreement") pursuant to which the Company may issue, and
several purchasers have committed to purchase, five year subordinated notes in
the principal amount of up to $10,000,000 (the "1997 Notes"). The 1997 Notes
will be issued in $1,000,000 increments at the discretion of the Company. The
obligation of purchasers to purchase the 1997 Notes expires on December 31, 1997
(or earlier in the event of a prepayment event). As of March 5, 1997, no amounts
are outstanding under the 1997 Notes. In addition, purchasers of the 1997 Notes
have been granted warrants to purchase 125,000 shares of the Company's Common
Stock at a purchase price of $4.50 per share. The aggregate fair value of the
125,000 warrants issued of $147,000 ($1.18 per warrant) will be capitalized as
deferred financing costs and amortized on a straight-line basis over the life of
the Note Purchase Agreement. Under the Note Purchase Agreement, warrants will be
granted for each $1,000,000 Note issued to purchase 30,000 shares of the
Company's Common Stock at a purchase price of $4.50 per share. The fair value of
any additional warrants will be determined at the date of issuance and will be
treated as an original issue discount, amortized on a straight-line basis
through interest expense over the life of the Note.
Future maturities of long-term obligations, giving effect to this refinancing,
for the five years subsequent to September 30, 1996 are as follows:
1997 -- $1,969,000; 1998 -- $2,108,000; 1999 -- $2,851,000; 2000 -- $1,217,000
and 2001 -- $1,600,000.
The $400,000 of convertible notes were converted into 100,000 shares of common
stock in October 1996 and the $2,000,000 of convertible notes were converted
into 500,000 shares of common stock in January 1997.
6. LEASES
The Company leases certain facilities and equipment under operating leases, some
of which are with an entity controlled by related parties. 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 $64,000 in 1995 and
F-24
<PAGE> 95
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(Information as of March 31, 1997 and for the six
months ended March 31, 1996 and 1997 is unaudited)
6. LEASES (CONTINUED)
$241,000 in 1996. With regard to 1996, $116,000 of rent expense was with related
parties. Aggregate future minimum lease payments under noncancelable operating
leases at September 30, 1996 are as follows:
<TABLE>
<CAPTION>
RELATED
PARTY OTHER
LEASES LEASES TOTAL
------- ------ ------
(Thousands of dollars)
<S> <C> <C> <C>
1997.................................... $ 458 $152 $ 610
1998.................................... 462 152 614
1999.................................... 466 159 625
2000.................................... 471 160 631
2001.................................... 338 160 498
Thereafter.............................. -- 21 21
------- ------ ------
$ 2,195 $804 $2,999
====== ===== ======
</TABLE>
7. REDEEMABLE PREFERRED STOCK
Preferred stock consists of 400,000 shares of Series A Preferred Stock (issued
in fiscal 1995), 1,700,000 shares of Series B Preferred Stock (issued in fiscal
1995) and 1,150,000 shares of Series C Preferred Stock (issued in fiscal 1996).
These shares have 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.
Holders of Preferred Stock may, at their option, convert their shares into
Common Stock on a one-for-one basis. Such conversion is required if the Company
consummates an underwritten public offering of Common Stock at a price of at
least $6 a share and gross proceeds to the Company exceed $10 million. The
holders of Preferred Shares are entitled to the number of votes equal to the
number of Common Shares into which the Preferred Shares could be converted.
Dividends begin to accrue on the third anniversary of original issuance, which
is December 9, 1997 for Series A Preferred Stock, September 15, 1998 for Series
B Preferred Stock and June 27, 1999 for Series C Preferred Stock. Dividends
accrue at a rate of 8% per annum, payable in either additional Preferred Shares
or cash, at the option of the individual holder. All accrued and unpaid
dividends shall become payable upon conversion into Common Stock; repurchase or
redemption of the Preferred Shares by the Company or the liquidation or winding
up of affairs of the Company.
The majority of the holders of all series of Preferred Stock, treated as a
single class, may require the Company to redeem the outstanding Preferred Shares
in the case of a consolidation or merger in which the Company is not the
surviving corporation. The Company may redeem the Preferred Shares at anytime
with the consent of shareholders owning at least 60% of the outstanding
Preferred Shares.
F-25
<PAGE> 96
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(Information as of March 31, 1997 and for the six
months ended March 31, 1996 and 1997 is unaudited)
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 7,
1994 TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
(Thousands of dollars)
<S> <C> <C>
Current:
Federal.............................................. $-- $ --
State................................................ 35 5
--- ------
35 5
Deferred............................................... -- 99
Reduction in valuation allowance....................... -- (99)
--- ------
$35 $ 5
========== ==========
</TABLE>
The Company made income tax payments of approximately $9,000 in 1995 and $40,000
in 1996.
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>
PERIOD FROM
DECEMBER 7,
1994 TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
(Thousands of dollars)
<S> <C> <C>
Provision (credit) for income taxes at the statutory
federal rate......................................... $(162) $ 106
Adjustments:
State and local income taxes......................... 35 5
Change in valuation allowance........................ 163 (99)
Other................................................ (1) (7)
------------- -------------
Provision for income taxes............................. $ 35 $ 5
========== ==========
Effective income tax rate.............................. (7%) 2%
========== ==========
</TABLE>
F-26
<PAGE> 97
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(Information as of March 31, 1997 and for the six
months ended March 31, 1996 and 1997 is unaudited)
8. INCOME TAXES (CONTINUED)
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 purposes. The tax effects of the net
operating loss carryforward and temporary differences are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1996
----- -----
(Thousands of
dollars)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward............................... $ 85 $ 152
Other......................................................... 78 133
Valuation allowance........................................... (163) (64)
----- -----
-- 221
Deferred tax liabilities:
Amortization of goodwill...................................... -- (164)
Other......................................................... -- (57)
----- -----
-- (221)
----- -----
Net deferred tax liability...................................... $ -- $ --
===== =====
</TABLE>
As of September 30, 1996, the Company has deferred tax assets attributable to
operating loss carryforwards and other temporary differences. Realization of
these carryforwards and other temporary differences is considered uncertain and
a valuation allowance has been recorded. The Company has a net operating loss
carryforward of $447,000 for income tax purposes which expires in the year 2011.
9. STOCK COMPENSATION PLANS
During 1995, the Board of Directors approved the Waterlink, Inc. 1995 Stock
Option Plan which provides for the granting of stock options to key employees
for the purchase of shares of the Company's Common Stock. The maximum aggregate
number of shares to which options may be granted under the Plan was increased
from 800,000 shares to 1,300,000 shares in December 1996. The number of stock
options granted and the purchase price thereof is determined by the Compensation
Committee of the Board of Directors.
F-27
<PAGE> 98
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(Information as of March 31, 1997 and for the six
months ended March 31, 1996 and 1997 is unaudited)
9. STOCK COMPENSATION PLANS (CONTINUED)
The following table summarizes activity under this plan:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 7,
1994 TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
--------------------- ----------------------
NUMBER OPTION NUMBER OPTION
OF PRICE PER OF PRICE PER
SHARES SHARE SHARES SHARE
------- --------- ------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year................ -- -- 215,000 $ .10
Granted......................................... 215,000 $ .10 501,500 $.10-$4.40
Exercised....................................... -- -- (50,000) $ .10
Canceled........................................ -- -- -- --
------- ------- -------
Outstanding at end of year...................... 215,000 $ .10 666,500 $.10-$4.40
======= ======= =======
Exercisable at end of year...................... -- -- 3,750 $ .10
======= ======= =======
Reserved for future options..................... 185,000 -- 83,500 --
======= ======= =======
</TABLE>
The Company has reserved 5,273,000 shares of Common Stock for possible
conversion of the convertible subordinated notes described in Note 5, the
possible conversion of the Preferred Shares described in Note 7 and the exercise
of outstanding stock options.
A special charge to operations of approximately $2.6 million ($0.13 per share,
after tax), assuming an initial public offering price of $11.00 per share, will
be incurred in the quarter in which the Offering is completed. Such charge
results primarily from the issuance upon completion of the Offering by the
Company of a ten year option to purchase 100,000 shares of Common Stock at a
price of $.10 per share to an officer of the Company pursuant to the terms of an
employment agreement. Of this amount, approximately $1.1 million is non-cash,
and approximately $1.5 million represents cash payments related principally to
the reimbursement of income taxes resulting from this stock option issuance.
F-28
<PAGE> 99
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
GREAT LAKES ENVIRONMENTAL, INC.
We have audited the accompanying balance sheets of GREAT LAKES
ENVIRONMENTAL, INC. as of December 31, 1994 and August 31, 1995 and the related
statements of income, shareholders' equity and cash flows for the year ended
December 31, 1994 and the eight months ended August 31, 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 financial statements referred to above present fairly,
in all material respects, the financial position of GREAT LAKES ENVIRONMENTAL,
INC. at December 31, 1994 and August 31, 1995 and the results of its operations
and its cash flows for the year ended December 31, 1994 and the eight months
ended August 31, 1995, in conformity with generally accepted accounting
principles.
Dennis D. Tysl & Company, Ltd.
Palatine, Illinois
February 23, 1997
F-29
<PAGE> 100
GREAT LAKES ENVIRONMENTAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1994 1995
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $1,084,188 $ 786,716
Trade receivables, less allowance of $60,000................... 1,707,092 1,739,149
Inventories.................................................... 724,130 677,984
Deposits and prepaid expenses.................................. 31,300 43,794
Note receivables--shareholders................................. 18,664 19,484
---------- ----------
Total current assets............................................. 3,565,374 3,267,127
Equipment........................................................ 224,628 276,136
Less accumulated depreciation.................................... (187,202) (214,936)
---------- ----------
37,426 61,200
---------- ----------
Total assets..................................................... $3,602,800 $3,328,327
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 543,149 $ 766,674
Commissions payable............................................ 212,443 220,408
Customer deposits.............................................. 71,652 28,602
Accrued profit-sharing......................................... 61,513 29,832
Accrued expenses............................................... 109,899 35,339
Accrued state income taxes..................................... 22,691 16,809
---------- ----------
Total current liabilities........................................ 1,021,347 1,097,664
Shareholders' equity:
Common stock, no par value:
Authorized, issued and outstanding, 645 shares.............. 1,000 1,000
Paid-in capital................................................ 380,000 380,000
Retained earnings.............................................. 2,200,453 1,849,663
---------- ----------
Total shareholders' equity....................................... 2,581,453 2,230,663
---------- ----------
Total liabilities and shareholders' equity....................... $3,602,800 $3,328,327
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE> 101
GREAT LAKES ENVIRONMENTAL, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, AUGUST 31,
1994 1995
------------ ------------
<S> <C> <C>
Net sales........................................................ $8,566,316 $5,724,860
Cost of sales.................................................... 5,754,175 3,829,553
---------- ----------
Gross profit..................................................... 2,812,141 1,895,307
Selling, general and administrative expenses..................... 1,393,224 864,105
---------- ----------
Income before taxes.............................................. 1,418,917 1,031,202
State and local income taxes..................................... 21,000 16,500
---------- ----------
Net income....................................................... $1,397,917 $1,014,702
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE> 102
GREAT LAKES ENVIRONMENTAL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ -------- ---------- -------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Balance at January 1, 1994.............. $1,000 $380,000 $1,755,629 $ 2,136,629
Dividends paid.......................... (953,093) (953,093)
Net income.............................. 1,397,917 1,397,917
------ -------- ----------- ------------
Balance at December 31, 1994............ 1,000 380,000 2,200,453 2,581,453
EIGHT MONTHS ENDED AUGUST 31, 1995
Dividends paid.......................... (1,365,492) (1,365,492)
Net income.............................. 1,014,702 1,014,702
------ -------- ----------- ------------
Balance at August 31, 1995.............. $1,000 $380,000 $1,849,663 $ 2,230,663
====== ======== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE> 103
GREAT LAKES ENVIRONMENTAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, AUGUST 31,
1994 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $1,397,917 $ 1,014,702
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................. 37,430 27,734
Changes in working capital:
Accounts receivable........................................ (465,439) (32,057)
Inventories................................................ (222,938) 46,146
Other current assets....................................... 7,385 (13,314)
Accounts payable and accrued expenses...................... 308,384 148,965
Other current liabilities.................................. (175,649) (72,648)
---------- ----------
Net cash provided by operating activities....................... 887,090 1,119,528
INVESTING ACTIVITIES
Purchase of equipment........................................... (28,218) (51,508)
FINANCING ACTIVITIES
Payment of dividends............................................ (953,093) (1,365,492)
---------- ----------
Net decrease in cash and cash equivalents....................... (94,221) (297,472)
Cash and cash equivalents at beginning of year.................. 1,178,409 1,084,188
---------- ----------
Cash and cash equivalents at end of year........................ $1,084,188 $ 786,716
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-33
<PAGE> 104
GREAT LAKES ENVIRONMENTAL, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1995
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
Great Lakes Environmental, Inc. (the "Company"), located in Addison, Illinois,
operates in a single business segment designing oil/water separation equipment
and systems. The Company's products are used by industrial customers primarily
in the manufacturing, food processing and refinery/petrochemical sectors.
Effective January 1, 1989, the Company elected, by unanimous consent of its
shareholders, to be taxed under the provisions of Subchapter S of the Internal
Revenue Code. Under these provisions, the Company does not pay federal corporate
income taxes on its income. Instead, the shareholders are liable for individual
federal income taxes on their respective shares of the Company's income. This
election was terminated as a result of the business combination with Waterlink,
Inc. described below.
On August 31, 1995, Waterlink, Inc. purchased certain assets and assumed certain
liabilities of Great Lakes Environmental, Inc.
2. ACCOUNTING POLICIES
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
Sales are recognized when products are shipped.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
EQUIPMENT
Property and equipment is recorded 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 accelerated methods based on the estimated useful lives of the assets,
which range from 3 to 7 years.
EMPLOYEE RETIREMENT PLAN
The Company sponsors a profit-sharing plan which covers substantially all
employees with more than one full year of service. The Company's contributions
to the plan are at the discretion of the Board of Directors. The amount charged
to operations relating to the plan was $100,000 for the year ended December 31,
1994 and $60,000 for the eight months ended August 31, 1995.
FINANCIAL INSTRUMENTS
The carrying value of cash, cash equivalents, accounts receivable and accounts
payable are a reasonable estimate of their fair value due to the short-term
nature of these instruments.
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents and trade receivables. The
Company maintains its cash in bank deposit
F-34
<PAGE> 105
GREAT LAKES ENVIRONMENTAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1995
2. ACCOUNTING POLICIES (CONTINUED)
accounts which, at times, exceed federally insured limits. The Company has not
experienced any losses in such accounts. Management believes it is not exposed
to any significant credit risk on cash and cash equivalents.
Concentrations of credit risk with respect to trade receivables are limited by
the Company collecting customer deposits in conjunction with larger contracts.
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 been within management's
expectations.
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.
RECLASSIFICATIONS
Certain items in the 1994 financial statements have been reclassified to agree
with the 1995 classifications.
3. INVENTORIES
Inventories were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1994 1995
------------ ----------
<S> <C> <C>
Raw materials...................................................... $242,294 $ 463,616
Work in process.................................................... 481,836 214,368
-------- ---------
$724,130 $ 677,984
======== =========
</TABLE>
4. NOTES RECEIVABLE--SHAREHOLDERS
The notes receivable--shareholders represents demand notes due from two
shareholders in connection with the purchase and retirement of shares of the
Company's common stock. The notes bear interest, which is paid monthly, at a
variable rate (5.88% at August 31, 1995).
5. LEASES
As part of the business combination with Waterlink, Inc., the Company entered
into a five year lease agreement with the former majority shareholder for its
principal office, warehouse and production facility in Addison, Illinois. Prior
to this time, the Company leased these facilities from the shareholder on a
month-to-month basis. The Company believes that the rents due under the related
party lease agreement are comparable to those which would be charged by an
unrelated party. Rent expense totaled $44,400 for the year ended December 31,
1994 and $29,600 for the eight months ended August 31, 1995.
F-35
<PAGE> 106
GREAT LAKES ENVIRONMENTAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1995
5. LEASES (CONTINUED)
Aggregate future minimum lease payments under noncancelable related party
operating leases at August 31, 1995 are as follows:
<TABLE>
<S> <C>
Remainder of 1995............................................ $ 43,600
1996......................................................... 130,800
1997......................................................... 134,700
1998......................................................... 138,800
1999......................................................... 142,900
2000......................................................... 147,200
--------
$738,000
========
</TABLE>
F-36
<PAGE> 107
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Mass Transfer Systems, Inc.
We have audited the accompanying balance sheets of Mass Transfer Systems,
Inc. as of December 31, 1994, December 31, 1995 and January 31, 1996 and the
related statements of operations, shareholders' equity and cash flows for the
year ended February 28, 1994, ten month period ended December 31, 1994, year
ended December 31, 1995 and the month ended January 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Mass Transfer Systems, Inc.
at December 31, 1994, December 31, 1995 and January 31, 1996 and the results of
its operations and its cash flows for the year ended February 28, 1994, ten
month period ended December 31, 1994, year ended December 31, 1995 and the month
ended January 31, 1996 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Canton, Ohio
February 28, 1997
F-37
<PAGE> 108
MASS TRANSFER SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY
------------------------- 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $1,327,835 $1,691,883 $ 842,922
Accounts receivable, less allowance of $13,000..... 1,935,299 1,426,585 1,760,541
Notes receivable--shareholder...................... 125,043 -- --
Inventories........................................ 334,786 294,747 423,141
Prepaid expenses................................... 35,739 32,406 24,637
---------- ---------- ----------
Total current assets................................. 3,758,702 3,445,621 3,051,241
Property, plant and equipment:
Cost............................................... 1,108,021 1,074,722 1,080,290
Less accumulated depreciation...................... 323,767 321,988 327,536
---------- ---------- ----------
784,254 752,734 752,754
Other assets:
Intangible assets, less accumulated amortization of
$67,000 in 1994, $134,000 in 1995 and $139,600
in 1996......................................... 134,000 67,000 61,417
Deposits........................................... -- 17,532 17,532
---------- ---------- ----------
134,000 84,532 78,949
---------- ---------- ----------
Total assets......................................... $4,676,956 $4,282,887 $3,882,944
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade............................ $ 438,454 $ 456,083 $ 557,661
Accrued expenses................................... 348,781 512,503 452,235
Customer deposits.................................. 853,082 457,494 366,592
Current portion of long-term obligations........... 106,437 112,042 112,405
---------- ---------- ----------
Total current liabilities............................ 1,746,754 1,538,122 1,488,893
Long-term obligations:
Long-term debt..................................... 150,668 104,504 100,566
Note payable--shareholder.......................... 900,000 1,200,000 1,200,000
Other.............................................. 67,000 -- --
---------- ---------- ----------
1,117,668 1,304,504 1,300,566
Shareholders' equity:
Capital stock, no par common:
Authorized shares--12,500
Issued and outstanding--100 shares.............. 10,000 10,000 10,000
Retained earnings.................................. 1,802,534 1,430,261 1,083,485
---------- ---------- ----------
Total shareholders' equity........................... 1,812,534 1,440,261 1,093,485
---------- ---------- ----------
Total liabilities and shareholders' equity........... $4,676,956 $4,282,887 $3,882,944
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE> 109
MASS TRANSFER SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED MONTH ENDED
FEBRUARY 28, DECEMBER 31, DECEMBER 31, JANUARY 31,
1994 1994 1995 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales.................................... $ 5,788,295 $6,171,344 $8,796,689 $ 620,140
Cost of goods sold........................... 2,982,743 3,068,971 4,719,545 406,814
------------ ------------ ------------ -----------
Gross profit................................. 2,805,552 3,102,373 4,077,144 213,326
Selling, general and administrative
expenses................................... 1,942,848 2,131,136 2,687,952 279,565
------------ ------------ ------------ -----------
Operating income (loss)...................... 862,704 971,237 1,389,192 (66,239)
Other income (expense):
Interest expense........................... (18,253) (102,262) (134,664) (11,760)
Interest income............................ 24,787 21,613 25,846 4,017
Other-net.................................. (10,994) (15,140) 38,669 (19,794)
------------ ------------ ------------ -----------
Income (loss) before income taxes............ 858,244 875,448 1,319,043 (93,776)
State and local income taxes................. 1,080 35,904 38,170 --
------------ ------------ ------------ -----------
Net income (loss)............................ $ 857,164 $ 839,544 $1,280,873 $ (93,776)
========= ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE> 110
MASS TRANSFER SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------- ---------- -------------
<S> <C> <C> <C>
YEAR ENDED FEBRUARY 28, 1994
Balance at March 1, 1993........................... $10,000 $2,336,175 $ 2,346,175
Net income......................................... 857,164 857,164
Distributions to shareholders...................... (1,932,284) (1,932,284)
-------- ----------- -----------
Balance at February 28, 1994....................... 10,000 1,261,055 1,271,055
TEN MONTHS ENDED DECEMBER 31, 1994
Net income......................................... 839,544 839,544
Distributions to shareholders...................... (298,065) (298,065)
-------- ----------- -----------
Balance at December 31, 1994....................... 10,000 1,802,534 1,812,534
YEAR ENDED DECEMBER 31, 1995
Net income......................................... 1,280,873 1,280,873
Distributions to shareholders...................... (1,653,146) (1,653,146)
-------- ----------- -----------
Balance at December 31, 1995....................... 10,000 1,430,261 1,440,261
MONTH ENDED JANUARY 31, 1996
Net loss........................................... (93,776) (93,776)
Distributions to shareholders...................... (253,000) (253,000)
-------- ----------- -----------
Balance at January 31, 1996........................ $10,000 $1,083,485 $ 1,093,485
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE> 111
MASS TRANSFER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED MONTH ENDED
FEBRUARY 28, DECEMBER 31, DECEMBER 31, JANUARY 31,
1994 1994 1995 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................... $ 857,164 $ 839,544 $ 1,280,873 $ (93,776)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation........................ 67,552 56,294 69,192 5,548
Amortization........................ 11,170 55,830 67,000 5,583
Loss on sale of property............ 15,616 -- 11,151 --
Changes in working capital:
Accounts receivable.............. (514,638) (658,222) 508,714 (333,956)
Notes receivable--shareholder.... -- (125,043) 125,043 --
Inventories...................... (165,535) (80,331) 40,039 (128,394)
Other current assets............. 4,083 (6,141) 3,333 7,769
Accounts payable................. 333,703 6,778 17,629 101,578
Other current liabilities........ 28,149 870,542 (231,865) (151,170)
Other assets..................... (139,083) 251,672 (17,532) --
--------- --------- ---------- ---------
Net cash (used) provided by operating
activities.......................... 498,181 1,210,923 1,873,577 (586,818)
INVESTING ACTIVITIES
Purchase of property, plant and
equipment--net...................... (64,293) (40,306) (48,824) (5,568)
FINANCING ACTIVITIES
Payments of long-term debt............ (38,419) (99,052) (107,559) (3,575)
Proceeds from issuance of long-term
debt................................ 201,000 -- -- --
Note payable--shareholder............. -- (266,510) -- --
Distributions to shareholders......... (765,617) (298,065) (1,353,146) (253,000)
--------- --------- ---------- ---------
Net cash used in financing
activities.......................... (603,036) (663,627) (1,460,705) (256,575)
--------- --------- ---------- ---------
(Decrease) increase in cash and cash
equivalents......................... (169,148) 506,990 364,048 (848,961)
Cash and cash equivalents at beginning
of year............................. 989,993 820,845 1,327,835 1,691,883
--------- --------- ---------- ---------
Cash and cash equivalents at end of
year................................ $ 820,845 $1,327,835 $ 1,691,883 $ 842,922
========= ========= ========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash financing activities:
Issuance of notes
payable--officer................. $ 1,166,667 -- $ 300,000 --
Distributions to shareholders....... (1,166,667) -- (300,000) --
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE> 112
MASS TRANSFER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1996
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
Mass Transfer Systems, Inc. (the "Company"), located in Fall River,
Massachusetts, operates in a single business segment, designing customized jet
aeration systems to introduce oxygen into a wastewater stream in order to
accelerate the biological digestion process. The Company's products are used by
industrial and municipal customers worldwide to increase the efficiency of
processing waste water, with sales primarily in the United States, the United
Kingdom and Canada. Export sales represented approximately two-thirds of total
sales for all periods presented.
Effective March 1, 1987, the Company elected, by unanimous consent of its
shareholders, to be taxed under the provisions of Subchapter S of the Internal
Revenue Code. Under these provisions, the Company does not pay federal corporate
income taxes on its income. Instead, the shareholders are liable for individual
federal income taxes on their respective shares of the Company's income. This
election was terminated as a result of the business combination with Waterlink,
Inc. described below.
At the close of business on January 31, 1996, Waterlink, Inc. purchased
substantially all of the assets and assumed certain liabilities of the Company.
2. ACCOUNTING POLICIES
PERIODS INCLUDED IN FINANCIAL STATEMENTS
The Company changed its year end in 1994 from February 28 to December 31. In
addition, the accompanying financial statements include the one month period in
1996 prior to the business combination with Waterlink, Inc. Reference to these
various periods in the notes to the financial statements are: 1996--the one
month ended January 31, 1996; 1995--the year ended December 31, 1995; 1994--the
ten months ended December 31, 1994; and 1993--the year ended February 28, 1994.
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
Sales are recognized when products are shipped.
ACCOUNTS RECEIVABLE
Accounts 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 $360,000,
$360,000 and $349,000 at December 31, 1994, December 31, 1995 and January 31,
1996, respectively. Substantially all retained balances are collected within one
year.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
F-42
<PAGE> 113
MASS TRANSFER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996
2. ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded 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 the assets.
The useful lives range from 15 to 31 years for buildings and improvements; 5 to
10 years for machinery and equipment and 3 to 10 years for furniture and
fixtures.
INTANGIBLE ASSET
The intangible asset is a covenant-not-to-compete contract with a former
shareholder and is carried at cost. Amortization is recorded using the
straight-line method over the life of the contract of three years.
FOREIGN CURRENCY TRANSLATION
Some transactions of the Company are made in currencies different from its own.
Gains and losses from these transactions are included in income as they occur.
Net foreign currency transaction gains and (losses) included in income before
taxes totaled ($18,000) in 1993, ($15,000) in 1994, $54,000 in 1995 and
($20,000) in 1996.
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.
3. INVENTORIES
Inventories were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY
----------------------- 31,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Raw materials........................................ $ 141,191 $ 268,422 $ 407,165
Work in process...................................... 193,595 26,325 15,976
--------- --------- ---------
$ 334,786 $ 294,747 $ 423,141
========= ========= =========
</TABLE>
F-43
<PAGE> 114
MASS TRANSFER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY
----------------------- 31,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Land................................................. $ 80,435 $ 80,435 $ 80,435
Building and improvements............................ 618,538 620,735 626,303
Machinery and equipment.............................. 111,640 116,980 116,980
Furniture and fixtures............................... 297,408 256,572 256,572
--------- --------- ---------
1,108,021 1,074,722 1,080,290
Less accumulated depreciation........................ 323,767 321,988 327,536
--------- --------- ---------
$ 784,254 $ 752,734 $ 752,754
========= ========= =========
</TABLE>
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY
----------------------- 31,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Mortgage payable to a bank in monthly installments of
$4,723, plus interest at prime plus 1/2% (9.0% at
January 31, 1996), secured by land and building.... $ 190,105 $ 149,546 $ 145,971
Note payable-shareholder, due February 1, 2001 with
interest at 10%.................................... 900,000 1,200,000 1,200,000
Non-compete agreement, expires December 31, 1996..... 134,000 67,000 67,000
--------- --------- ---------
1,224,105 1,416,546 1,412,971
Less current portion................................. 106,437 112,042 112,405
--------- --------- ---------
$1,117,668 $1,304,504 $1,300,566
========= ========= =========
</TABLE>
The note payable-shareholder represents a promissory note due to the majority
shareholder for unpaid distributions. Through January 31, 1996, the note was
unsecured and due on demand. The terms of the note were revised to provide a due
date of February 1, 2001 in connection with the business combination with
Waterlink, Inc. Accordingly, the note was reclassified to long-term obligations
for all periods presented. Interest expense on the note payable-shareholder was
as follows: 1994--$90,900; 1995--$103,600 and 1996--$10,000.
The non-compete agreement between the Company and a previous minority
shareholder provides for semi-annual installments on June 30 and December 31 of
each year over a three year period.
Approximate future maturities of long-term debt obligations for the five years
subsequent to January 31, 1996 are as follows: 1997--$112,000; 1998--$50,000;
1999--$51,000; 2000--$-0-and 2001--$1,200,000.
Interest expense approximates interest paid for all periods presented.
F-44
<PAGE> 115
MASS TRANSFER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996
6. FINANCIAL INSTRUMENTS
The carrying value of cash, cash equivalents, accounts receivable and accounts
payable are a reasonable estimate of their fair value due to the short-term
nature of these instruments. The Company's long-term debt, except for notes
payable to related parties, has a variable rate and cost approximates fair value
at January 31, 1996. The notes payable to related parties do not have a ready
market and cost is assumed to approximate fair value.
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents and trade receivables. The
Company maintains its cash in bank deposit accounts which, at times, exceed
federally insured limits. The Company has not experienced any losses in such
accounts. Management believes it is not exposed to any significant credit risk
on cash and cash equivalents.
Concentrations of credit risk with respect to trade receivables are limited by
the Company collecting customer deposits in conjunction with larger contracts.
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 been within management's
expectations.
The Company issues letters of credit as guarantees for various performance
obligations. Under the terms of these letters of credit, approximately $143,000
and $140,000 of cash was restricted at December 31, 1995 and January 31, 1996,
respectively. The letters of credit outstanding at January 31, 1996 are
scheduled to expire at various times through June of 1997.
The Company periodically enters into foreign exchange contracts to hedge certain
operational exposures against changes in foreign currency exchange rates.
Because the impact of movements in currency exchange rates on foreign exchange
contracts offsets the related impact on the underlying items being hedged, these
instruments do not subject the Company to risk that would not otherwise result
from changes in currency exchange rates. At December 31, 1995 and January 31,
1996, the Company had a foreign exchange contract outstanding which exchanged
U.S. dollars for Canadian dollars. The contract, which matured in February 1996,
had a notional amount of approximately $150,000 and an unrealized gain of $3,000
at January 31, 1996.
7. CONTINGENCIES
The Company is involved in certain legal actions arising in the ordinary course
of business. In the opinion of management, such litigation and claims will be
resolved without a material effect on the Company's financial position, cash
flows or results of operations.
F-45
<PAGE> 116
INDEPENDENT AUDITOR'S REPORT
April 3, 1997
To the Board of Directors
Aero-Mod, Inc, and Affiliates
I have audited the accompanying combined balance sheets of Aero-Mod, Inc.
and Affiliates as of October 31, 1994, October 31, 1995, and April 26, 1996 and
the related combined statements of income, retained earnings, and cash flows for
the years ended October 31, 1994 and 1995; and the period beginning November 1,
1995 and ended April 26, 1996. These financial statements are the responsibility
of the companies' management. My responsibility is to express an opinion on
these financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I 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.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Aero-Mod,
Inc. and Affiliates at October 31, 1994, October 31, 1995, and April 26, 1996,
and the results of operations and cash flows on a combined basis for the periods
then ended in conformity with generally accepted accounting principles.
Sink, Gillmore & Gordon LLP
James L. Gordon, C.P.A.
Manhattan, Kansas
F-46
<PAGE> 117
AERO-MOD, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER OCTOBER
31, 31, APRIL 26,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash........................................... $ 111,275 $ 355,759 $ 233,249
Accounts receivable--trade..................... 485,587 832,830 506,597
Bid bonding.................................... 3,404 3,405 --
Inventory...................................... 467,556 704,710 570,721
Costs and estimated profits in excess of
billings on uncompleted projects............. 467,242 195,617 496,138
---------- ---------- ----------
Total Current Assets...................... 1,535,064 2,092,321 1,806,705
FIXED ASSETS
Property, plant & equipment....................... 525,621 542,760 592,680
Accumulated depreciation--property, plant &
equipment...................................... (291,119) (344,654) (357,623)
---------- ---------- ----------
Net Book Value of Fixed Assets............ 234,502 198,106 235,057
OTHER ASSETS
Life insurance--cash value..................... 30,123 36,038 35,036
Other deposits................................. -- 33,132 18,912
Notes receivable--stockholder.................. 75,838 79,707 79,707
Notes receivable--other........................ -- -- 2,817
Intangibles.................................... 71,961 75,131 82,736
Accumulated amortization--intangibles.......... (8,793) (11,716) (12,561)
---------- ---------- ----------
Total Other Assets........................ 169,129 212,292 206,647
---------- ---------- ----------
TOTAL ASSETS...................................... $1,938,695 $2,502,719 $2,248,409
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE> 118
AERO-MOD, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER OCTOBER
31, 31, APRIL 26,
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable--trade........................ $ 325,739 $ 271,170 $ 178,887
Accrued expenses............................... 163,303 225,085 88,929
Billings in excess of costs and estimated
earnings on uncompleted contracts............ -- 22,769 --
Accrued income taxes........................... 35,662 16,842 32,976
Other payables................................. 295 19,483 965
Deferred income taxes.......................... 85,023 118,697 127,697
Current portion of long-term liabilities....... 533,580 702,042 717,606
---------- ---------- ----------
Total Current Liabilities................. 1,143,602 1,376,088 1,147,060
LONG-TERM LIABILITIES
Long-term notes payable........................ 7,758 -- 3,003
Deferred income taxes.......................... 11,484 13,231 12,001
---------- ---------- ----------
Total Long-Term Liabilities............... 19,242 13,231 15,004
---------- ---------- ----------
Total Liabilities......................... 1,162,844 1,389,319 1,162,064
STOCKHOLDER'S EQUITY
Capital stock.................................. 43,960 43,960 43,960
Additional paid-in capital..................... 33,201 33,201 33,201
Retained earnings.............................. 698,690 1,036,239 1,009,184
---------- ---------- ----------
Total Stockholder's Equity................ 775,851 1,113,400 1,086,345
---------- ---------- ----------
Total Liabilities and Stockholder's Equity.......... $1,938,695 $2,502,719 $2,248,409
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE> 119
AERO-MOD, INC. AND AFFILIATES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------- FOR THE
OCTOBER 31, OCTOBER 31, PERIOD ENDED
1994 1995 APRIL 26, 1996
----------- ----------- --------------
<S> <C> <C> <C>
Sales................................................. $ 4,594,381 $ 3,122,102 $1,881,903
Cost of Sales......................................... 3,549,150 1,861,304 1,285,170
---------- ---------- ----------
Gross Profit.......................................... 1,045,231 1,260,798 596,733
Selling, General & Administrative Expenses............ 799,837 908,058 436,771
---------- ---------- ----------
NET INCOME (LOSS) FROM OPERATIONS..................... 245,394 352,740 159,962
OTHER INCOME AND EXPENSE:
Interest income..................................... 3,311 3,999 1,391
Municipal lease income.............................. 9,625 12,500 4,375
Consulting income................................... -- 17,306 876
Other (net)......................................... 25,821 4,107 844
---------- ---------- ----------
TOTAL OTHER INCOME AND EXPENSE................... 38,757 37,912 7,486
INCOME (LOSS) BEFORE INCOME TAXES..................... 284,151 390,652 167,448
INCOME TAX:
Income tax expense.................................. 123,982 17,682 37,401
Deferred income tax expense (benefit)............... (18,478) 35,421 7,770
---------- ---------- ----------
TOTAL INCOME TAX................................. 105,504 53,103 45,171
---------- ---------- ----------
NET INCOME............................................ 178,647 337,549 122,277
RETAINED EARNINGS -- BEGINNING OF PERIOD.............. 520,043 698,690 1,036,239
Dividend Distributions Paid........................... -- -- (149,332)
---------- ---------- ----------
RETAINED EARNINGS -- END OF PERIOD.................... $ 698,690 $ 1,036,239 $1,009,184
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE> 120
AERO-MOD, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED PERIOD ENDED
------------------------------- APR. 26,
OCT. 31, 1994 OCT. 31, 1995 1996
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................ $ 178,647 $ 337,549 $ 122,277
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation................................... 53,746 53,535 12,969
Amortization................................... 2,866 3,176 845
Deferred income taxes.......................... (18,478) 35,421 7,770
Change in other prepaids....................... (904) (33,133) 14,808
Change in accounts receivable.................. (30,526) (347,243) 326,234
Change in costs and estimated earnings in
excess of billings........................... 232,084 271,625 (300,521)
Change in inventory............................ (78,596) (237,154) 133,989
Change in accounts payable..................... 102,707 (54,568) (92,284)
Change in billings in excess of costs and
estimated earnings........................... (40,000) 22,769 (22,769)
Change in accrued expenses..................... 7,062 61,781 (136,155)
Change in accrued income taxes................. (52,128) (18,820) 16,134
Change in accrued other payable................ 11 19,189 (18,518)
--------- --------- ---------
Net Cash Flows from Operating Activities..... 356,491 114,127 64,779
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets and intangibles (net)... (101,908) (20,564) (57,525)
Change in cash surrender value of life
insurance...................................... (8,795) (5,915) 1,002
Change in notes receivable-stockholder............ (9,432) (3,868) --
--------- --------- ---------
Net Cash Flows from Investing Activities..... (120,135) (30,347) (56,523)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.......................... 490,600 667,950 697,055
Principle payments on notes payable............... (651,128) (507,246) (678,489)
S corporation distributions....................... -- -- (149,332)
--------- --------- ---------
Net Cash Flows from Financing Activities..... (160,528) 160,704 (130,766)
--------- --------- ---------
Increase (Decrease) in Cash......................... 75,828 244,484 (122,510)
Cash at Beginning of Period......................... 35,447 111,275 355,759
--------- --------- ---------
Cash at End of Period............................... $ 111,275 $ 355,759 $ 233,249
========= ========= =========
Supplementary Information
Interest paid..................................... $ 64,736 $ 60,837 $ 64,736
========= ========= =========
Income taxes paid................................. $ 176,110 $ 36,502 $ 176,110
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE> 121
AERO-MOD, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
APRIL 26, 1996
NOTE A--NATURE OF OPERATIONS
Aero-Mod, Inc. and Affiliates refers to the combined activities of Aero-Mod,
Inc., Resi-Tech, Inc., and Blue Water Services, Inc.
Aero-Mod, Inc. is a Kansas corporation incorporated December 19, 1980 with its
principal office in Manhattan, Kansas. The company constructs wastewater
treatment systems.
Resi-Tech, Inc. is a Kansas corporation incorporated July 17, 1991 with its
principal office in Manhattan, Kansas. The company distributes sludge dewatering
systems.
Blue Water Services, Inc. is a Kansas corporation incorporated July 17, 1991
with its principal office in Manhattan, Kansas. The company conducts operations
for water and wastewater utilities.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in
understanding the companies' financial statements. These accounting policies
conform to generally accepted accounting principles and have been consistently
applied in preparation of the financial statements.
1. OPERATING CYCLE
Assets and liabilities related to contracts are included as current assets and
current liabilities on the accompanying balance sheets, as they will normally be
completed within the following fiscal year.
2. FINANCIAL STATEMENT PERIODS
The periods reported on these financial statements are the years ended October
31, 1994, and October 31, 1995 and the period beginning November 1, 1995 and
ended April 26, 1996 (referred to as "the period ended April 26, 1996"
throughout).
3. REVENUE AND COST RECOGNITION
Revenues from construction contracts are recognized on the
percentage-of-completion method, measured by contract costs incurred to date by
phase in relation to total estimated contract costs when contracts have
progressed sufficiently to allow for estimation.
Contract costs include all direct material, labor, subcontracts and those
indirect costs related to contract performance, such as gas, oil supplies,
travel, equipment rent and allocations of indirect construction costs.
Estimated losses on contracts in progress are recorded in the period such losses
are determined. Changes in job performance, job conditions, estimated
profitability and final contract settlement may result in revisions to costs and
income and are recognized when determined.
The asset "Costs and estimated earnings in excess of billings on uncompleted
contracts", represents revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings on uncompleted
contracts", represents billings in excess of revenues received.
4. INVENTORY
Inventory is generally stated at the lower of cost (first-in, first-out method)
or market. Capitalized Section 263A costs are as follows:
F-51
<PAGE> 122
AERO-MOD, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 26, 1996
NOTE B--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
OCT. 31, OCT. 31, APR. 26,
1994 1995 1996
- -------- -------- --------
<S> <C> <C>
$ 2,136 $ 14,153 $ 3,389
======= ======== =======
</TABLE>
5. FIXED ASSETS
Fixed assets are stated at cost. Major improvements and betterments to existing
fixed assets have been capitalized. Expenditures for maintenance and repairs
which do not extend the life of the applicable assets have been charged to
expense as incurred.
Depreciation is provided principally by the straight-line and accelerated
methods over the estimated useful lives of the assets, which are generally five
to ten years (10 to 40 years for leasehold improvements).
6. AMORTIZATION OF INTANGIBLES
The cost of patents acquired are being amortized on the straight-line method
over 17 years.
7. INCOME TAX EXPENSE (BENEFIT)
Resi-Tech, Inc. (except for FYE October 31, 1994) and Blue Water Services, Inc.
are subchapter S corporations, and, therefore, do not pay income tax at the
corporate level. The companies' corporate income tax expense (benefit) is as
follows:
<TABLE>
<CAPTION>
OCT. 31, OCT. 31, APR. 26,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current income tax expense (benefit)..................... $123,982 $ 17,682 $ 37,401
Deferred income tax expense (benefit):
Contract related....................................... (27,869) 33,674 9,000
Property and equipment related......................... 9,391 1,747 (1,230)
-------- -------- --------
Income Tax Expense (Benefit)............................. $105,504 $ 53,103 $ 45,171
======== ======== ========
</TABLE>
The components of the balance of accrued income taxes payable were:
<TABLE>
<CAPTION>
OCT. 31, OCT. 31, APR. 26,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Currently payable........................................ $123,982 $ 17,682 $ 37,401
Less estimated tax payments.............................. (88,320) (840) (4,425)
-------- -------- --------
Total accrued income taxes............................... $ 35,662 $ 16,842 $ 32,976
======== ======== ========
</TABLE>
The components of the balance of deferred income taxes were:
<TABLE>
<CAPTION>
OCT. 31, OCT. 31, APR. 26,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Contract related......................................... $ 85,023 $118,697 $127,697
Property and equipment related........................... 11,484 13,231 12,001
-------- -------- --------
Total deferred income taxes.............................. $ 96,507 $131,928 $139,698
======== ======== ========
</TABLE>
F-52
<PAGE> 123
AERO-MOD, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 26, 1996
NOTE B--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Contracts in progress are reported for financial statement purposes using the
percentage-of-completion method whereas for tax reporting purposes, the
completed contract method of accounting is utilized.
On April 26, 1996, the companies had state income tax credits in the amount of
$11,990 to carryforward.
8. CASH SURRENDER VALUE OF LIFE INSURANCE
The companies and stockholder's spouse are beneficiaries of insurance policies
on the life of the 100% stockholder.
9. USE OF ESTIMATES
The preparation of financial statements under generally accepted accounting
principles requires management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly, actual results could
differ from those estimates.
10. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The companies have elected to use the direct write-off method to account for bad
debts. This is not in conformity with generally accepted accounting principles;
however, the difference is not considered material.
NOTE C--CONTRACT RECEIVABLES
Contract receivables included in "Accounts receivable-trade" are as follows:
<TABLE>
<CAPTION>
OCT. 31, OCT. 31, APR. 26,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Contract receivables--
Billed:
Completed contracts.............................. $ 48,370 $ 469,665 $ 278,012
Contracts in progress............................ 186,750 -- --
Unbilled: -- -- --
--------- --------- ---------
Total Contract Receivables............................ $ 235,120 $ 469,665 $ 278,012
========= ========= =========
</TABLE>
NOTE D--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
OCT. 31, OCT. 31, APR. 26,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Costs incurred on uncompleted contracts............... $ 434,959 $ 319,074 $ 330,091
Estimated earnings.................................... 218,853 296,572 328,685
--------- --------- ---------
Subtotal............................................ 653,812 615,646 658,776
Less billings to date................................. (186,570) (442,798) (162,638)
--------- --------- ---------
Total............................................... $ 467,242 $ 172,848 $ 496,138
========= ========= =========
</TABLE>
Included in accompanying balance sheet under the following captions:
F-53
<PAGE> 124
AERO-MOD, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 26, 1996
NOTE D--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (CONTINUED)
<TABLE>
<CAPTION>
OCT. 31, OCT. 31, APR. 26,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... $ 467,242 $ 195,617 $ 496,138
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... -- (22,769) --
-------- -------- --------
Total................................................. $ 467,242 $ 172,848 $ 496,138
======== ======== ========
</TABLE>
NOTE E--RELATED PARTY TRANSACTIONS
The companies lease facilities from the sole stockholder. The lease is an
operating lease, which is renewed monthly, requiring monthly payments of $5,500
as of April 26, 1996.
The note receivable from stockholder carries no repayment schedule or assigned
rate of interest.
The companies paid the stockholder $34,250, $68,700, and $33,300 for the years
ended October 31, 1994, and October 31, 1995, and the period ended April 26,
1996, respectively.
The companies paid the stockholder $45,000 in royalties for the years ended
October 31, 1994 and October 31, 1995.
F-54
<PAGE> 125
AERO-MOD, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 26, 1996
NOTE F--NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
OCT. 31, OCT. 31, APR. 26,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
1. Contract advance on purchase of corporate assets
from Waterlink, Inc. See subsequent events (NOTE
M) for further explanation....................... $ -- $ -- $ 689,059
2. 7.715% note to Security Mutual Life Insurance
Company, due November 1, subsequent to the
balance sheet date, secured by cash value of
officer life insurance........................... 20,615 20,615 20,615
3. Various notes on vehicle and equipment purchases,
secured by vehicles and equipment................ $ 14,606 $ 5,718 $ 10,935
4. Non-interest bearing note payable through October
31, 1996 in annual installments of $7,759 to
Robert K. Holdeman in settlement of claim,
secured by company stock. This note was settled
in full prior to April 26, 1996.................. 15,517 7,759 --
5. 10.00% note revolving line of credit payable to
First National Bank of Wamego, due on demand or
March 8, 1996, and March 8, 1995, line of credit
limit $160,000, secured by accounts receivable,
inventory and equipment.......................... 160,000 160,000 --
6. 9.30% note, revolving line of credit payable to
First National Bank of Wamego, due on demand or
March 8, 1995, line of credit limit $278,000,
secured by contracts receivable, inventory,
equipment and other assets....................... 278,000 -- --
7. 9.00% note, revolving line of credit payable to
First National Bank of Wamego, due on demand or
March 8, 1996, and March 9, 1995, line of credit
limit $520,000 and $159,375, secured by contracts
receivable, inventory, equipment and other
assets........................................... 52,600 507,950 --
------- ------- -------
Subtotal......................................... 541,338 702,042 720,609
Less: Current portion............................ (533,580) (702,042) (717,606)
------- ------- -------
Total Long-Term Notes Payable.................... $ 7,758 $ -- $ 3,003
======= ======= =======
</TABLE>
Maturities of notes payable are as follows:
<TABLE>
<CAPTION>
OCT. 31, OCT. 31, APR. 26,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Year One.......................................... $ 533,580 $ 702,042 $ 717,606
Year Two.......................................... 7,758 -- 3,003
---------- ---------- ----------
Total........................................... $ 541,338 $ 702,042 $ 720,609
========== ========== ==========
</TABLE>
F-55
<PAGE> 126
AERO-MOD, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 26, 1996
NOTE G--BACKLOG
Following is a reconciliation of backlog of signed contracts:
<TABLE>
<CAPTION>
OCT. 31, OCT. 31, APR. 26,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance--Beginning of Period...................... $ 806,321 $ 90,388 $ 929,084
Add: New contracts and change orders during
period.......................................... 2,479,046 2,469,007 1,922,635
Less: Contract revenues earned during period...... (3,194,979) (1,630,311) (1,477,645)
---------- ---------- ----------
Balance--End of Period............................ $ 90,388 $ 929,084 $1,374,074
========== ========== ==========
</TABLE>
NOTE H--STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON PREFERRED PREFERRED
-------- --------- ---------
<S> <C> <C> <C>
a. AERO-MOD, INC.
Number of authorized shares........................... 150,000 30,000 20,000
Par value per share................................... $ 10 $ 10 $ 10
Number of shares issued and outstanding............... 3,846 -- --
Additional paid-in capital............................ $ 33,201
b. RESI-TECH, INC.
Number of authorized shares........................... 20,000
Par value per share................................... $ 5
Number of shares issued and outstanding............... 100
c. BLUE WATER SERVICES, INC.
Number of authorized shares........................... 10,000
Par value per share................................... $ 1
Number of shares issued and outstanding............... 5,000
</TABLE>
NOTE I--SIMPLIFIED EMPLOYEE PENSION PLAN
The companies sponsor a simplified employee pension plan for qualifying
employees in which discretionary contributions are made to eligible
participant's individual IRA account. Contributions are based on a percentage of
each covered employee's salary. For the years ended October 31, 1994 and October
31, 1995, a 5.0% contribution had been made. For the period beginning November
1, 1995 and ended April 26, 1996, no decision had been made relating to pension
contributions.
NOTE J--MAJOR CUSTOMERS AND RISK CONCENTRATIONS
The companies currently grant credit to its customers. Management believes that
its contract acceptance, billing, and collection policies are adequate to
minimize potential credit risk. The companies conduct a large portion of their
business with large corporations and various municipalities. The stability of
these entities should also minimize potential credit risk.
F-56
<PAGE> 127
AERO-MOD, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 26, 1996
NOTE K--CONCENTRATIONS OF CREDIT RISK
The companies maintain their cash balances in one financial institution located
in Manhattan, Kansas. These balances are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. The companies' uninsured cash
balances are as follows:
<TABLE>
<CAPTION>
OCT. 31, OCT. 31, APR. 26,
1994 1995 1996
- -------- -------- --------
<S> <C> <C>
$18,355 $337,440 $139,362
======= ======== ========
</TABLE>
NOTE L--CONTINGENCY/FOREIGN CURRENCY CONTRACTS
Aero-Mod, Inc. was engaged in one foreign contract stated in terms of foreign
currency. The fluctuation of the exchange rates between the foreign currency and
the U.S. dollar resulted in a foreign currency transaction loss in the amount of
$49,867, which is reflected in gross sales for the period ended April 26, 1996.
Since the amount of gain or loss relating to this contract could not be
reasonably estimated as of October 31, 1995, no adjustment was made to the
books. The contract price, however, was adjusted to reflect the October 31, 1995
exchange rate when calculating percentage-of-completion amounts for
work-in-progress.
NOTE M--SUBSEQUENT EVENTS
Substantially all of the assets and liabilities of Aero-Mod, Inc. and Affiliates
were acquired by Waterlink, Inc. (a Delaware corporation), A-M Acquisitions
Corp., (a Delaware corporation and wholly-owned subsidiary of Waterlink, Inc.),
and B-W Acquisition Corp. (a Delaware corporation and wholly-owned subsidiary of
Waterlink, Inc.), on April 26, 1996, subsequent to the amounts reported in these
financial statements.
The items listed above, along with other assets owned personally by Lawrence A.
Schmid, the sole stockholder of the companies, were involved in the transaction.
Lawrence A. Schmid, the sole stockholder of the companies, is currently bound by
employment and non-compete contracts with A-M Acquisitions Corp.
Lawrence A. Schmid currently receives monthly rent in the amount of $5,500 from
A-M Acquisitions Corp. for the use of buildings and real estate which he
continues to own personally.
F-57
<PAGE> 128
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Water Equipment Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Water
Equipment Technologies, Inc. and subsidiary as of September 30, 1995 and 1996,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended September 30, 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 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
Water Equipment Technologies, Inc. and subsidiary at September 30, 1995 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1996, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Canton, Ohio
March 7, 1997
F-58
<PAGE> 129
WATER EQUIPMENT TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 169,541 $ 64,360
Accounts receivable, less allowance of $50,000.................. 1,208,262 1,518,002
Accounts receivable -- related parties.......................... 3,063 288,660
Inventories..................................................... 985,089 1,016,225
Costs in excess of billings..................................... 19,268 57,416
Refundable income taxes......................................... 31,685 --
Deferred income taxes........................................... 45,297 118,884
Prepaid expenses and other assets............................... -- 15,878
---------- -----------
Total current assets.............................................. 2,462,205 3,079,425
Property, plant and equipment, net................................ 322,389 242,532
Deferred income taxes............................................. 3,300 7,628
Other assets...................................................... 15,019 12,082
---------- -----------
Total assets...................................................... $2,802,913 $3,341,667
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 578,393 $ 551,042
Note payable to bank............................................ 150,000 --
Note payable -- related party................................... 402,833 --
Accrued expenses................................................ 71,572 535,189
Income taxes payable............................................ -- 32,840
Billings in excess of cost...................................... 118,786 104,841
Current portion of long-term debt............................... 11,670 8,664
---------- -----------
Total current liabilities......................................... 1,333,254 1,232,576
Long-term debt.................................................... 280,193 --
Shareholders' equity:
Common stock, $.001 par value
Authorized shares -- 2,000,000
Issued and outstanding shares -- 1,000,000 in 1995 and
1,105,000 in 1996........................................... 200 221
Additional paid-in capital...................................... 13,776 1,025,568
Retained earnings............................................... 1,175,490 1,083,302
---------- -----------
Total shareholders' equity........................................ 1,189,466 2,109,091
---------- -----------
Total liabilities and shareholders' equity........................ $2,802,913 $ 3,341,667
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE> 130
WATER EQUIPMENT TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales............................................ $6,692,973 $8,425,934 $8,441,293
Cost of sales........................................ 4,311,571 5,788,548 5,496,649
---------- ---------- ----------
Gross profit......................................... 2,381,402 2,637,386 2,944,644
Selling, general and administrative expenses......... 2,327,591 2,475,054 2,024,763
Stock compensation................................... -- -- 1,011,813
---------- ---------- ----------
Operating income (loss).............................. 53,811 162,332 (91,932)
Other income (expense):
Interest expense................................... (30,561) (71,405) (46,790)
Other -- net....................................... 71,756 3,519 7,658
---------- ---------- ----------
Income (loss) before income taxes.................... 95,006 94,446 (131,064)
Provision (credit) for income taxes.................. 37,638 37,745 (38,876)
---------- ---------- ----------
Net income (loss).................................... $ 57,368 $ 56,701 $ (92,188)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-60
<PAGE> 131
WATER EQUIPMENT TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1994
Balance at October 1, 1993........................ $200 $ 13,776 $1,061,421 $1,075,397
Net income........................................ -- -- 57,368 57,368
---- ---------- ---------- ----------
Balance at September 30, 1994..................... 200 13,776 1,118,789 1,132,765
YEAR ENDED SEPTEMBER 30, 1995
Net income........................................ -- -- 56,701 56,701
---- ---------- ---------- ----------
Balance at September 30, 1995..................... 200 13,776 1,175,490 1,189,466
YEAR ENDED SEPTEMBER 30, 1996
Issuance of 105,000 shares of
common stock as compensation.................... 21 1,011,792 -- 1,011,813
Net loss.......................................... -- -- (92,188) (92,188)
---- ---------- ---------- ----------
Balance at September 30, 1996..................... $221 $1,025,568 $1,083,302 $2,109,091
==== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-61
<PAGE> 132
WATER EQUIPMENT TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................................... $ 57,368 $ 56,701 $ (92,188)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization.................... 92,740 120,864 107,735
Deferred taxes................................... 469 31,829 (77,915)
Stock compensation............................... -- -- 1,011,813
Changes in working capital:
Accounts receivable............................ (697,715) 54,071 (309,740)
Accounts receivable -- related parties......... 150 (2,388) (285,597)
Inventories.................................... (37,079) 51,661 (31,136)
Cost in excess of billings..................... 92,930 (19,268) (38,148)
Prepaids and other assets...................... (5,630) (19,980) 18,744
Accounts payable............................... 48,212 (313,806) (27,351)
Other accrued expenses......................... (25,479) (28,231) 496,457
Billings in excess of cost..................... 16,007 (59,697) (13,945)
--------- --------- ---------
Net cash provided (used) by operating activities...... (458,027) (128,244) 758,729
INVESTING ACTIVITIES
Purchases of equipment -- net......................... (181,897) (114,436) (27,878)
FINANCING ACTIVITIES
Payments on long-term borrowings...................... (13,651) (8,799) (283,199)
Proceeds from long-term debt.......................... 26,318
Notes payable to banks -- net......................... -- 150,000 (150,000)
Payments on notes payable -- related parties.......... -- (509,775) (402,833)
Proceeds from notes payable -- related parties........ -- 700,000 --
--------- --------- ---------
Net cash (used) provided by financing activities...... 12,667 331,426 (836,032)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents...... (627,257) 88,746 (105,181)
Cash and cash equivalents at beginning of year........ 708,052 80,795 169,541
--------- --------- ---------
Cash and cash equivalents at end of year.............. $ 80,795 $ 169,541 $ 64,360
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-62
<PAGE> 133
WATER EQUIPMENT TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Water Equipment Technologies, Inc. (the "Company"), located in West Palm Beach,
Florida, operates in a single business segment designing and building water
treatment filters and reverse osmosis systems and related equipment. The
Company's products are used worldwide by industrial, municipal and residential
customers, with sales primarily in the United States, United Kingdom, Middle
East and Pacific Rim. Export sales represented approximately one-third of total
sales for all periods presented.
At the close of business on September 30, 1996, the Company merged with
Waterlink, Inc. in a transaction in which the Company exchanged all of its
common stock for a combination of cash and shares of common stock in Waterlink,
Inc. Immediately prior to the merger transaction, the Company's wholly-owned
subsidiary, Ultra Pure Water, was spun-off in the form of a dividend to the
shareholders' of the Company. The accompanying financial statements include only
the accounts and operations of Water Equipment Technologies, Inc. and its
wholly-owned subsidiary, Water Equipment Technologies (Europe) Limited, which
were acquired by Waterlink, Inc. on September 30, 1996 as described above. Water
Equipment Technologies (Europe) Limited become inactive on December 31, 1994.
All significant intercompany balances and transactions have been eliminated.
2. ACCOUNTING POLICIES
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 principal business of the Company is to design and produce water and
wastewater treatment systems, the majority of which are custom designed and take
a number of months to complete. Revenue for significant contracts is recognized
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. Sales of membrane filters in the residential market are recognized
when shipped.
FINANCIAL INSTRUMENTS
The carrying value of cash, cash equivalents, accounts receivable and accounts
payable are a reasonable estimate of their 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 Company's credit policy which generally requires deposits at signing of
the contract and letters of credit for all customers outside the United States.
The Company grants credit to domestic 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.
F-63
<PAGE> 134
WATER EQUIPMENT TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
2. 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 declining-balance and straight-line methods over the estimated useful
lives of assets. The useful lives are 5 years for leasehold improvements; 5 to 7
years for machinery and equipment and 7 years for furniture and fixtures.
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.
3. INVENTORIES
Inventories were as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Raw materials..................................................... $ 505,744 $ 515,539
Work in progress.................................................. 59,877 11,726
Finished goods.................................................... 419,468 488,960
--------- ----------
$ 985,089 $1,016,225
========= ==========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Leasehold improvements............................................ $ 99,328 $ 86,515
Machinery and equipment........................................... 600,735 580,297
Furniture and fixtures............................................ 265,048 286,287
---------- ----------
965,111 953,099
Less accumulated depreciation..................................... 642,722 710,567
---------- ----------
$ 322,389 $ 242,532
========== ==========
</TABLE>
F-64
<PAGE> 135
WATER EQUIPMENT TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
5. FINANCING ARRANGEMENTS
Long-term debt was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1995 1996
-------- ------
<S> <C> <C>
10% convertible debentures, repaid in September 1996................... $275,000 $ --
Note payable in monthly installments of $822, including principal and
interest at 7.5% through August 1997, collateralized by a vehicle.... 16,863 8,664
-------- ------
291,863 8,664
Less current portion of long-term debt................................. 11,670 8,664
-------- ------
$280,193 $ --
======== ======
</TABLE>
Note payable -- related party at September 30, 1995 represents a 10% demand note
payable to the majority shareholder. The note was repaid in September 1996 in
anticipation of the merger with Waterlink, Inc.
Interest expense approximates interest paid for each of three years in the
period ended September 30, 1996. Interest paid to related parties amounted to
$21,700 in 1994, $30,700 in 1995 and $20,100 in 1996.
6. LEASES
In connection with the merger with Waterlink, Inc., the Company entered into a
five year lease agreement with the former majority shareholder for its principal
office, warehouse and production facility in Florida. Prior to this time, the
Company leased certain of these facilities from the shareholder on a
month-to-month basis. The Company believes that the rents due under the related
party lease agreement are comparable to those which would be charged by an
unrelated party. Rent expense totaled $142,500 in 1994, $162,300 in 1995 and
$124,400 in 1996.
Aggregate future minimum lease payments under noncancelable related party
operating leases at September 30, 1996 are as follows:
<TABLE>
<S> <C>
1997................................................... $ 254,521
1998................................................... 254,521
1999................................................... 254,521
2000................................................... 254,521
2001................................................... 254,521
----------
$1,272,605
==========
</TABLE>
F-65
<PAGE> 136
WATER EQUIPMENT TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
7. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1995 1996
-------- ----------
<S> <C> <C>
Costs incurred on uncompleted contracts............................ $ 38,265 $ 495,626
Estimated earnings................................................. 18,743 480,785
-------- ----------
57,008 976,411
Less billings to date.............................................. 156,526 1,023,836
-------- ----------
$(99,518) $ (47,425)
======== =========
</TABLE>
These amounts are included in the accompanying balance sheets under the
following captions:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Costs in excess of billings...................................... $ 19,268 $ 57,416
Billings in excess of costs...................................... (118,786) (104,841)
---------- ----------
$ (99,518) $ (47,425)
========== ==========
</TABLE>
8. STOCK COMPENSATION
On September 25, 1996, in contemplation of the merger with Waterlink, the Board
of Directors approved issuance of 105,000 shares of the Company's common stock
to certain key employees as compensation for prior services rendered. In
addition, the majority shareholder of the Company provided 110,000 of his shares
to two employees as consideration for prior services. Based on the fair value of
the Company's stock at September 25, 1996 as determined by the final purchase
price by Waterlink, stock compensation expense of approximately $1,012,000 was
recorded by the Company, with a corresponding increase to common stock and
additional paid-in capital.
9. INCOME TAXES
The provision (credit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal................................................ $ 30,667 $ 4,472 $ 33,840
State.................................................. 6,502 1,444 5,199
-------- -------- --------
37,169 5,916 39,039
Deferred................................................. 469 31,829 (77,915)
-------- -------- --------
Provision (credit) for income taxes...................... $ 37,638 $ 37,745 $(38,876)
======== ======== ========
</TABLE>
Income taxes paid were $49,400 in 1994, $25,400 in 1995 and $4,700 in 1996.
F-66
<PAGE> 137
WATER EQUIPMENT TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
9. INCOME TAXES (CONTINUED)
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 purposes. The tax effects of the temporary
differences are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Non-deductible accruals............................................ $ 29,350 $ 37,035
Stock compensation................................................. -- 62,588
Other.............................................................. 19,247 26,889
-------- --------
Net deferred tax asset............................................... $ 48,597 $126,512
======== ========
</TABLE>
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>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Provision (credit) for income taxes at the statutory
federal rate........................................... $ 32,302 $ 32,112 $(44,562)
Adjustments:
State and local income taxes, net of federal tax
benefit............................................. 4,291 953 3,432
Non-deductible expenses................................ 1,045 4,680 2,254
-------- -------- --------
Provision (credit) for income taxes...................... $ 37,638 $ 37,745 $(38,876)
======== ======== ========
Effective income tax rate................................ 40% 40% (30%)
======== ======== ========
</TABLE>
Management has determined, based on the Company's history of prior earnings,
that operating results of the Company will more likely than not be sufficient to
recognize fully the net deferred tax asset. Accordingly, no valuation allowance
for deferred tax assets is required.
10. CONTINGENCIES
The Company is involved in certain legal actions arising in the ordinary course
of business. In the opinion of management, such litigation and claims will be
resolved without a material effect on the Company's financial position, cash
flows or results of operations.
F-67
<PAGE> 138
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Nordic Water Products Group
We have audited the accompanying combined balance sheets of the Nordic
Water Products Group as of March 31, 1996 and February 28, 1997, and the related
combined statement of operations, shareholders' equity and cash flows for each
of the two years in the period ended March 31, 1996, and for the eleven months
ended February 28, 1997. These financial statements, which are expressed in
Swedish Kronor, 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 in Sweden which, in all material respects, conform to generally
accepted auditing standards in the United States. 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of the Nordic Water
Products Group at March 31, 1996, and February 28, 1997, and the combined
results of their operations and their cash flows for the two years in the period
ended March 31, 1996, and for the eleven months ended February 28, 1997 in
conformity with generally accepted accounting principles in Sweden.
Generally accepted accounting principles in Sweden vary in certain respects
from generally accepted accounting principles in the United States. Application
of generally accepted accounting principles in the United States would have
affected net income for each of the two years in the period ended March 31, 1996
and for the eleven months ended February 28, 1997, and shareholders' equity as
of March 31, 1996 and February 28, 1997, to the extent summarized in Note 13, to
the combined financial statements.
ERNST & YOUNG AB
Torbjorn Hanson
Stockholm, Sweden
May 12, 1997
F-68
<PAGE> 139
NORDIC WATER PRODUCTS GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, FEBRUARY 28,
1996 1997
--------- ------------
KSEK KSEK
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. 5,545 25,453
Accounts receivable, net.............................................. 33,143 36,757
Accounts receivable -- related party.................................. 5,895 1,772
Inventories........................................................... 41,497 60,210
Prepaid expenses...................................................... 16,739 10,197
Other current assets.................................................. 3,222 2,160
------- -------
Total current assets.................................................... 106,041 136,549
Property, plant and equipment, less accumulated depreciation............ 8,271 7,308
Intangible assets, net.................................................. 2,728 2,974
Investment in affiliated company........................................ 6,909 --
Other assets............................................................ 6,186 6,093
------- -------
Total assets............................................................ 130,135 152,924
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade............................................. 16,671 13,787
Accounts payable -- related party..................................... 6,060 4,027
Accrued expenses...................................................... 24,348 29,074
Customer deposits..................................................... 24,619 36,260
Accrued income taxes.................................................. 335 80
------- -------
Total current liabilities............................................... 72,033 83,228
Notes payable -- related party.......................................... 30,435 43,002
Deferred income taxes................................................... 486 501
Pensions................................................................ 7,750 7,850
Other non-current obligations........................................... 100 880
------- -------
Total non-current liabilities........................................... 38,771 52,233
Shareholders' equity:
Common stock.......................................................... 4,000 4,000
Restricted reserves................................................... 5,428 5,432
Retained earnings..................................................... 9,903 8,031
------- -------
Total shareholders' equity.............................................. 19,331 17,463
------- -------
Total liabilities and shareholders' equity.............................. 130,135 152,924
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-69
<PAGE> 140
NORDIC WATER PRODUCTS GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN
MONTHS
YEAR ENDED MARCH ENDED
31, FEBRUARY 28,
1995 1996 1997
------- ------- ------------
KSEK KSEK KSEK
<S> <C> <C> <C>
Net sales.................................................... 170,265 207,416 157,281
Cost of sales................................................ 118,432 145,547 104,750
------- ------- -------
Gross profit................................................. 51,833 61,869 52,531
Selling, general and administrative expenses................. 57,436 54,413 54,166
------- ------- -------
Operating income (loss)...................................... (5,603) 7,456 (1,635)
Other income (expense):
Interest expense -- related party.......................... (1,620) (1,813) (1,373)
Interest income............................................ 849 588 660
Other income (expense)..................................... (109) 133 (183)
------- ------- -------
Income (loss) before income taxes............................ (6,483) 6,364 (2,531)
Provision for income taxes................................... 463 1,512 434
------- ------- -------
Net income (loss)............................................ (6,946) 4,852 (2,965)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-70
<PAGE> 141
NORDIC WATER PRODUCTS GROUP
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
NUMBER COMMON RESTRICTED RETAINED SHAREHOLDERS'
OF SHARES STOCK RESERVES EARNINGS EQUITY
--------- ------ ---------- -------- -------------
KSEK KSEK KSEK KSEK
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1995
Balance at April 1, 1994....................... 40,000 4,000 4,853 12,025 20,878
Net loss....................................... (6,946) (6,946)
Transfer....................................... 325 (325) --
Contributed capital............................ 3,193 3,193
Distribution to shareholder.................... (436) (436)
Translation adjustment......................... (663) (663)
------ ----- ------ ------ ------
Balance at March 31, 1995...................... 40,000 4,000 5,178 6,848 16,026
YEAR ENDED MARCH 31, 1996
Net income..................................... 4,852 4,852
Transfer....................................... 250 (250) --
Contributed capital............................ 928 928
Distribution to shareholder.................... (2,914) (2,914)
Translation adjustment......................... 439 439
------ ----- ------ ------ ------
Balance at March 31, 1996...................... 40,000 4,000 5,428 9,903 19,331
ELEVEN MONTHS ENDED
FEBRUARY 28, 1997
Net loss....................................... (2,965) (2,965)
Transfer....................................... 4 (4) --
Contributed capital............................ 1,437 1,437
Translation adjustment......................... (340) (340)
------ ----- ------ ------ ------
Balance at February 28, 1997................... 40,000 4,000 5,432 8,031 17,463
====== ===== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-71
<PAGE> 142
NORDIC WATER PRODUCTS GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED MARCH ENDED
31, FEBRUARY 28,
----------------- -------------
1995 1996 1997
------- ------- -------------
KSEK KSEK KSEK
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss).............................................. (6,946) 4,852 (2,965)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization.................................. 4,388 4,232 3,270
Deferred income taxes.......................................... 123 977 15
Changes in assets and liabilities:
Accounts receivable.......................................... (652) (6,281) (3,614)
Accounts receivable -- related party......................... (8,272) 18,126 4,123
Inventories.................................................. (1,255) 13,995 (18,713)
Prepaid and other assets..................................... 600 (6,963) 6,542
Other assets................................................. (950) (842) 1,063
Accounts payable............................................. 631 (7,539) (2,885)
Accounts payable-related party............................... 9,054 (433) 5,041
Accrued expenses and other................................... (3,730) 2,448 4,726
Customer deposits............................................ (1,088) (18,307) 11,641
Accrued income taxes......................................... 88 247 (255)
------- ------- -------
Net cash provided by (used in) operating activities............ (8,009) 4,512 7,989
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment......................................... (3,307) (2,172) (2,063)
Investment in affiliated company............................... (3,068) -- 6,737
Proceeds from sales of equipment............................... 357 127 --
------- ------- -------
Net cash provided by (used in) investing activities............ (6,018) (2,045) 4,674
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable--related party..................... 391 368 6,466
Payments on notes payable--related party....................... (106) (532) --
Distribution to shareholder.................................... (606) (4,047) --
Capital contributions received................................. 3,193 928 1,437
------- ------- -------
Net cash provided by (used in) financing activities............ 2,872 (3,283) 7,903
Effect of exchange rate changes on cash........................ (633) 1,921 (658)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........... (11,788) 1,105 19,908
Cash and cash equivalents at beginning of year................. 16,228 4,440 5,545
------- ------- -------
Cash and cash equivalents at end of year....................... 4,440 5,545 25,453
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-72
<PAGE> 143
NORDIC WATER PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
The Nordic Water Products Group of companies (the "Group") operates in a single
business segment, designing and producing water and waste water treatment
equipment used by industrial and municipal customers. The Group's sales are made
predominately in Europe, with a concentration in the Scandinavian countries and
Germany.
The combined financial statements include the financial statements of the
companies purchased by Waterlink, Inc. in a transaction which was consummated on
March 5, 1997. During the periods included in these financial statements there
was no single holding company for the Group, with the companies all ultimately
owned by Anglian Water International ("Anglian"). The companies which comprise
the Nordic Water Products Group are as follows:
<TABLE>
<CAPTION>
OPERATING COMPANY COUNTRY
----------------------------------------------------- --------
<S> <C>
Nordic Water Products AB............................. Sweden
Axel Johnson Engineering GmbH........................ Germany
Noxon AB............................................. Sweden
Zickert Products AB.................................. Sweden
Zickert Milijo AS.................................... Denmark
Nordic Water Products SL............................. Spain
</TABLE>
2. BASIS OF PRESENTATION
The accompanying combined financial statements have been prepared in accordance
with Swedish generally accepted accounting principles for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission located in the United States of America. A reconciliation of net
income and shareholders' equity between Swedish GAAP and U.S. GAAP is performed
in Note 13.
The figures presented in these financial statements have been prepared by
combining the historical results of the entities listed in Note 1, except for
the provision of income taxes discussed below. All inter-group transactions and
balances have been eliminated on combination.
3. ACCOUNTING POLICIES
REVENUE RECOGNITION
Sales are primarily recorded when products are shipped. Revenues for contracts
are recognized using the completed-contract method of accounting.
FISCAL YEAR END
The Group's fiscal year ends on March 31. References in the footnotes to the
years 1995 and 1996 refer to the fiscal years ended March 31, 1995, and 1996,
respectively. For accounting purposes, the Group was assumed to be acquired on
March 1, 1997. References in the footnotes to the year 1997 refers to the eleven
months ended February 28, 1997.
CASH EQUIVALENTS
The Group considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
F-73
<PAGE> 144
NORDIC WATER PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
3. ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Group to concentrations of
credit risk consist principally of cash equivalents and trade receivables. The
Group places its cash equivalents with high quality financial institutions.
Concentrations of credit risk with respect to trade receivables are limited due
to the Group's large number of customers and their dispersion across many
different regions and industries. The Group 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 been within management's expectations.
FINANCIAL INSTRUMENTS
The carrying value of cash, cash equivalents, accounts receivable and accounts
payable are a reasonable estimate of their fair value due to the short-term
nature of these instruments. The notes payable -- related party do not have a
ready market and cost is assumed to approximate fair value.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the average cost method.
AMORTIZATION OF INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill which is amortized on a
straight-line basis over ten years.
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 16 to 50 years for building and improvements; 5 to 10
years for machinery, equipment and furniture.
INCOME TAXES
On a historical basis, the taxable income of certain companies in the Group was
included in the tax return of the Anglian tax paying group of which it was a
part. The provision for income taxes in these financial statements was
calculated on a standalone basis for all companies using the appropriate enacted
tax rate for each country. The deferred tax provision was provided for temporary
differences between the financial reporting basis and the statutory tax basis of
the Group's assets and liabilities.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred and amounted
to KSEK 6,293 in 1995, KSEK 5,152 in 1996 and KSEK 5,531 in 1997.
FOREIGN CURRENCY TRANSLATION
Local currencies of the countries indicated in Note 1 above are considered the
functional currencies of the companies included in the combined financial
statements. Assets and liabilities are translated at the rate of
F-74
<PAGE> 145
NORDIC WATER PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
3. ACCOUNTING POLICIES (CONTINUED)
exchange in effect on the balance sheet dates, while income and expense items
are translated at average rates of exchange prevailing during the applicable
period. The related translation adjustments are reflected in shareholder's
equity. Foreign currency exchange gains or (losses) recorded in the statement of
operations were KSEK (94) in 1995, KSEK 701 in 1996 and KSEK (183) in 1997.
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.
4. ACCOUNTS RECEIVABLE
Accounts receivable are stated net of allowances for doubtful accounts of KSEK
762 at March 31, 1996 and KSEK 520 at February 28, 1997.
5. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, FEBRUARY 28,
1996 1997
--------- ------------
<S> <C> <C>
KSEK KSEK
Raw material and supplies........................................... 8,991 10,179
Work in progress.................................................... 14,327 36,009
Finished goods...................................................... 18,179 14,022
------- -------
41,497 60,210
======= =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is as follows:
<TABLE>
<CAPTION>
MARCH 31, FEBRUARY 28,
1996 1997
--------- ------------
<S> <C> <C>
KSEK KSEK
Buildings and improvements.......................................... 3,015 3,272
Machinery, furniture and equipment.................................. 19,687 22,726
-------- --------
22,702 25,998
Less accumulated depreciation....................................... (14,431) (18,690)
-------- --------
8,271 7,308
======== ========
</TABLE>
F-75
<PAGE> 146
NORDIC WATER PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
7. INTANGIBLE ASSETS
Intangible assets are as follows:
<TABLE>
<CAPTION>
MARCH 31, FEBRUARY 28,
1996 1997
--------- ------------
<S> <C> <C>
KSEK KSEK
Goodwill............................................................ 5,259 4,304
Other intangible assets............................................. 5 1,986
------- -------
5,264 6,290
Less accumulated depreciation....................................... (2,536) (3,316)
------- -------
2,728 2,974
======= =======
</TABLE>
8. NOTES PAYABLE -- RELATED PARTY
Notes payable -- related party represent amounts due to entities in the Anglian
Group not included in these financial statements. Terms of these notes are
subject to a formal agreement with each related entity at interest rates ranging
from 0% to 7%. The notes have no stated maturity date and repayment is not
expected within the next year. Accordingly, the entire amount of the notes are
classified as long-term.
Interest expense approximates interest paid for all periods presented.
9. LEASES
The Group leases certain facilities and equipment under operating leases. Rent
expense totaled KSEK 4,914 in 1995, KSEK 5,046 in 1996 and KSEK 3,886 in 1997.
Aggregate future minimum lease payments under noncancelable operating leases at
February 28, 1997 are as follows: 1998 -- KSEK 4,229; 1999 -- KSEK 3,196;
2000 -- KSEK 1,779; 2001 -- KSEK 1,195; 2002 -- KSEK 1,176 and thereafter KSEK
1,176.
10. PENSION OBLIGATIONS
Substantially all employees of Nordic Water Products AB and Zickert AB in Sweden
participate in defined benefit pension plans. These plans provide benefits based
on employee's compensation and are not required to be funded.
The following information is provided in accordance with the U.S. GAAP
disclosure requirements of Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions." Assumptions used to calculate costs and
actuarial present value include an assumed discount rate of 7.5% in 1996 and
1997. The assumed rate of increase in future compensation was 4.5% in 1996 and
1997.
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, ELEVEN MONTHS ENDED
------------- FEBRUARY 28,
1995 1996 1997
----- ----- -------------------
KSEK KSEK KSEK
<S> <C> <C> <C>
Service cost of benefits earned during the year.............. 131 208 217
Interest cost on projected benefit obligation................ 437 430 448
Net amortization and deferral................................ (113) (129) (141)
---- ---- ----
Net periodic pension cost.................................... 455 509 524
==== ==== ====
</TABLE>
F-76
<PAGE> 147
NORDIC WATER PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
10. PENSION OBLIGATIONS (CONTINUED)
The following table sets forth the accrued pension costs recognized in the
combined balance sheets:
<TABLE>
<CAPTION>
MARCH 31, FEBRUARY 28,
1996 1997
--------- ------------
KSEK KSEK
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation............ 5,818 5,992
===== =====
Projected benefit obligation for service
rendered to date.......................... 5,978 6,157
Unrecognized net gain....................... 100 111
Unrecognized net asset at transition........ 1,672 1,582
----- -----
Accrued pension cost........................ 7,750 7,850
===== =====
</TABLE>
11. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, ELEVEN MONTHS ENDED
-------------- FEBRUARY 28,
1995 1996 1997
---- ----- -------------------
KSEK KSEK KSEK
<S> <C> <C> <C>
Current taxes:
Sweden................................................ 30 120 49
Non-Sweden............................................ 310 396 370
--- ----- ---
340 516 419
Deferred taxes:
Sweden................................................ 123 996 15
--- ----- ---
Provision for income taxes.............................. 463 1,512 434
=== ===== ===
</TABLE>
The effective tax rate differs from the federal statutory rate as set forth in
the following reconciliation:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, ELEVEN MONTHS ENDED
--------------- FEBRUARY 28,
1995 1996 1997
----- ----- -------------------
<S> <C> <C> <C>
Swedish statutory income tax rate....................... (28.0%) 28.0% (28.0%)
Non-deductible expenses................................. 0.5 0.4 0.5
Non-utilized operating loss............................. 22.7 4.9 11.4
Utilized operating loss................................. 0.4 (12.5) 0.0
Other................................................... (2.7) 3.0 (1.0)
----- ----- -----
Effective income tax rates.............................. (7.1%) 23.8% (17.1%)
===== ===== =====
</TABLE>
F-77
<PAGE> 148
NORDIC WATER PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
11. INCOME TAXES (CONTINUED)
The effect of temporary differences giving rise to deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31, FEBRUARY 28,
1996 1997
--------- ------------
KSEK KSEK
<S> <C> <C>
Deferred tax assets:
Foreign operating loss carryforwards.............................. 8,205 8,205
Other temporary differences....................................... 3,999 4,005
-------- ---------
12,204 12,210
Valuation allowance................................................. (12,204) (12,210)
-------- ---------
-- --
Deferred tax liabilities:
Other temporary differences....................................... 486 501
-------- ---------
Net deferred tax liability.......................................... 486 501
======== =========
</TABLE>
As of February 28, 1997, the Group has deferred tax assets attributable to
operating loss carryforwards and other temporary differences in Germany.
Realization of these carryforwards and other temporary differences is considered
uncertain and a valuation allowance has been recorded. For statutory tax
purposes, the foreign operating loss carryforwards amounted to KSEK 15,878 at
February 28, 1997 and have an indefinite expiration period.
12. CONTINGENCIES
The Group is involved in certain legal actions arising in the ordinary course of
business. In the opinion of management, such litigation and claims will be
resolved without a material effect on the Group's financial position, cash flows
or results of operations.
13. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES
Application of U.S. GAAP would have the following approximate effect on the
combined net income and stockholders' equity.
Reconciliation of Net Income
<TABLE>
<CAPTION>
MARCH 31,
---------------- FEBRUARY 28,
1995 1996 1997
------ ----- ------------
KSEK KSEK KSEK
<S> <C> <C> <C>
Net income (loss) as reported................................ (6,946) 4,852 (2,965)
Accounting for contracts..................................... (1,960) 1,417 2,196
------- ----- -------
Approximate net income (loss) as per U.S. GAAP............... (8,906) 6,269 (769)
======= ===== =======
</TABLE>
Reconciliation of Shareholders' Equity
<TABLE>
<CAPTION>
MARCH 31, FEBRUARY 28,
1996 1997
--------- ------------
KSEK KSEK
<S> <C> <C>
Shareholders' equity as reported.................................... 19,331 17,463
Accounting for contracts............................................ (3,559) (1,276)
------- -------
Approximate shareholders' equity as per U.S. GAAP................... 15,772 16,187
======= =======
</TABLE>
F-78
<PAGE> 149
NORDIC WATER PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
13. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (CONTINUED)
The application of U.S. GAAP would not have significantly affected the other
reported balance sheet items in the combined balance sheet.
Accounting for Contracts
Under U.S. GAAP, income from significant contracts is permitted to be recognized
using the percentage-of-completion method of accounting in the proportion that
costs bear to total estimated costs at completion. Under Swedish GAAP, income is
generally recorded using the completed contract method. This adjustment was made
to conform to Waterlink's policy of using the percentage-of-completion method.
Restricted Reserves and Retained Earnings
Under Swedish law, restricted reserves are not available for distribution but
are required to be held to meet statutory requirements. Translation gain or loss
on conversion of foreign financial statements is included in restricted reserves
and retained earnings, as applicable.
Exchange Rate Data
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 Swedish Kronor ("SEK"). 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 transfers in foreign
currencies. On April 11, 1997, the closing ratio of United States Dollars per
Swedish Kronor was .130.
<TABLE>
<CAPTION>
AT AND FOR
THE
YEAR ENDING AT END FOR THE
MARCH 31, ELEVEN MONTHS ENDED
------------- FEBRUARY 28,
1995 1996 1997
---- ---- -------------------
<S> <C> <C> <C>
Ratio of US$ per SEK
Exchange rate at end of period.......................... .135 .150 .134
Average exchange rate during period..................... .132 .143 .147
Highest exchange rate during period..................... .139 .152 .152
Lowest exchange rate during period...................... .128 .136 .133
</TABLE>
F-79
<PAGE> 150
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Lanco Environmental Products, Inc.
We have audited the accompanying balance sheet of Lanco Environmental
Products, Inc., as of December 31, 1995 and 1996, and the related statements of
income, changes in stockholder's equity and cash flows for the six-month periods
ended June 30, 1995 and December 31, 1995, and the year ended December 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 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 our audits provide 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., as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the six-month periods ended June 30, 1995 and
December 31, 1995, and the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
Plante & Moran, LLP
March 18, 1997
Grand Rapids, Michigan
F-80
<PAGE> 151
LANCO ENVIRONMENTAL PRODUCTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- ---------
1995 1996 1997
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................... $ 367,166 $ 25,948 $ 38,440
Trade accounts receivable -- Net of allowance for
doubtful accounts of $10,000, $25,000, and
$25,000, respectively........................... 426,084 512,440 326,598
Inventories (Note 2)............................... 252,591 477,959 412,700
Other.............................................. -- 6,335 39,529
---------- ---------- ----------
Total current assets............................ 1,045,841 1,022,682 817,267
LEASEHOLD IMPROVEMENTS AND EQUIPMENT (Note 3)........ 126,863 145,720 151,709
---------- ---------- ----------
Total assets.................................... $1,172,704 $1,168,402 $ 968,976
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Trade accounts payable............................. $ 214,527 $ 301,068 $ 327,478
Accounts payable -- Related parties (Note 6)....... 606,820 222,009 81,009
Customer deposits.................................. 4,556 41,323 12,321
Federal income taxes payable (Note 5).............. 9,900 -- --
Deferred taxes (Note 5)............................ 88,000 159,200 151,800
Accrued expenses................................... 15,703 29,377 34,121
---------- ---------- ----------
Total current liabilities....................... 939,506 752,977 606,729
STOCKHOLDER'S EQUITY
Common stock -- $1 par value:
Authorized -- 60,000 shares
Issued and outstanding -- 1,000 shares.......... 1,000 1,000 1,000
Additional paid-in capital......................... 166,838 166,838 166,838
Retained earnings.................................. 65,360 247,587 194,409
---------- ---------- ----------
Total stockholder's equity...................... 233,198 415,425 362,247
---------- ---------- ----------
Total liabilities and stockholder's equity...... $1,172,704 $1,168,402 $ 968,976
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE> 152
LANCO ENVIRONMENTAL PRODUCTS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED ENDED ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996 1996 1997
---------- ------------ ------------ ------------ ------------
(NOTE 1) (NOTE 1)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES.......................... $800,070 $1,402,401 $2,673,486 $401,839 $648,041
COST OF SALES...................... 574,899 1,007,733 1,763,231 280,281 549,740
-------- ---------- ---------- -------- --------
GROSS PROFIT....................... 225,171 394,668 910,255 121,558 98,301
SELLING, ADMINISTRATIVE AND GENERAL
EXPENSES......................... 215,735 314,498 710,412 140,532 177,979
-------- ---------- ---------- -------- --------
OPERATING INCOME (LOSS)............ 9,436 80,170 199,843 (18,974) (79,678)
OTHER INCOME -- Net................ -- 11,790 75,484 -- 6,500
-------- ---------- ---------- -------- --------
INCOME (LOSS) -- Before taxes on
income........................... 9,436 91,960 275,327 (18,974) (73,178)
FEDERAL INCOME TAXES (BENEFIT)
(Note 5)......................... 1,300 26,600 93,100 (4,400) (20,000)
-------- ---------- ---------- -------- --------
NET INCOME (LOSS).................. $ 8,136 $ 65,360 $ 182,227 (14,574) (53,178)
======== ========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE> 153
LANCO ENVIRONMENTAL PRODUCTS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
NUMBER ADDITIONAL
OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------- ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C>
BALANCE -- July 1, 1995 (Inception)........ 1,000 $1,000 $ 166,838 $ -- $167,838
Net income for the six months
ended December 31, 1995.................. -- -- -- 65,360 65,360
------- ------ ---------- --------- --------
BALANCE -- December 31, 1995............... 1,000 1,000 166,838 65,360 233,198
Net Income................................. -- -- -- 182,227 182,227
------- ------ ---------- --------- --------
BALANCE -- December 31, 1996............... 1,000 $1,000 166,838 247,587 415,425
Net income (loss) for the three months
ended March 31, 1997..................... -- -- -- (53,178) (53,178)
------- ------ ---------- --------- --------
BALANCE -- March 31, 1997.................. 1,000 $1,000 $ 166,838 $ 194,409 $362,247
======= ====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-83
<PAGE> 154
LANCO ENVIRONMENTAL PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED ENDED ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996 1996 1997
---------- ------------ ------------ ------------ ------------
(NOTE 1) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss).................. $ 8,136 $ 65,360 $ 182,227 $ (14,574) (53,178)
Adjustments to reconcile net income
(loss) to cash provided by
operating activities:
Provision for bad debts.......... -- 10,000 16,282 -- --
Depreciation and amortization.... 8,747 10,011 22,603 4,014 5,979
Deferred taxes................... 28,000 (10,000) 71,200 69,700 (7,400)
(Increase) decrease in assets:
Accounts receivable........... 159,088 (285,142) (102,638) 123,991 185,842
Inventories................... (90,067) 20,346 (225,368) (153,266) 65,259
Other current assets.......... -- -- (6,335) -- (20,594)
Increase (decrease) in
liabilities:
Trade accounts payable and
accrued expenses............ (35,293) 65,406 100,215 7,911 31,154
Federal income taxes
payable..................... (29,287) 30,900 (9,900) (87,060) (12,600)
Customer deposits............. -- 4,556 36,767 12,336 (29,002)
---------- ------------ ------------ ------------ ------------
Net cash provided by (used
in) operating
activities............... 49,324 (88,563) 85,053 (36,948) 165,460
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of equipment............ (2,000) (16,345) (41,460) (7,414) (11,968)
CASH FLOWS FROM FINANCING
ACTIVITIES
Advances from related company.... 187,695 62,900 110,365 31,000 31,750
Payments on advances from related
company....................... (91,218) (265,664) (495,176) (330,778) (172,750)
---------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities........ 96,477 (202,764) (384,811) (299,778) (141,000)
---------- ------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................. 143,801 (307,672) (341,218) (344,140) 12,492
CASH AND CASH EQUIVALENTS --
Beginning of period.............. 531,037 674,838 367,166 367,166 25,948
---------- ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS -- End of
period........................... $ 674,838 $ 367,166 $ 25,948 $ 23,026 38,440
========= ========== ========== ========== ==========
CASH PAID FOR INTEREST AND INCOME
TAXES
Interest......................... $ -- $ -- $ -- $ -- $ --
========= ========== ========== ========== ==========
Income taxes..................... $ 8,287 $ -- $ 37,160 $ 12,960 $ --
========= ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-84
<PAGE> 155
LANCO ENVIRONMENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Lanco Environmental Products, Inc., is engaged in manufacturing wastewater
treatment equipment and components. The Company grants credit to customers, the
majority of whom are United States manufacturers.
Basis of Presentation -- Lanco Environmental Products, Inc., was formed July 1,
1995, when the sole stockholder of Lanco Corporation transferred the assets and
liabilities of Lanco Corporation's Environmental Products Division into a
separate corporation owned by the stockholder. All assets and liabilities were
transferred at their historical carrying amount. These financial statements
present the operations of Lanco Environmental Products, Inc., for the six-month
period from July 1, 1995 to December 31, 1995, and the year ended December 31,
1996. Also presented, for comparative purposes, are statements of income and
cash flows for the Environmental Products Division of Lanco Corporation for the
six-month period January 1, 1995, to June 30, 1995.
The balance sheet as of March 31, 1997, the statement of operations and retained
earnings for the nine months ended March 31, 1996 and 1997 and the statements of
cash flows for the periods then ended are unaudited and reflect all adjustments,
which include, in the opinion of management, adjustments consisting only of
normal recurring adjustments necessary to present fairly the results of
operations for such periods. Results of interim periods are not necessarily
indicative of results to be expected for any other interim period or for the
year taken as a whole.
Cash Equivalents -- The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
Revenue and Cost Recognition -- Revenue from the sale of wastewater treatment
equipment contracts is generally recognized upon shipment. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, repairs and depreciation
costs. Selling and administrative costs are charged to expense as incurred.
Financial Instruments -- The carrying values of cash, cash equivalents, accounts
receivable and accounts payable are reasonable estimates of their fair market
values due to the short-term nature of these instruments.
Inventories -- Inventories of component parts and finished goods are stated at
the lower of cost, determined by the first-in, first-out method, or market.
Leasehold Improvements and Equipment -- Leasehold improvements and equipment are
recorded at cost. Depreciation is computed principally on the straight-line
method over the estimated useful lives of the assets. Costs of maintenance and
repairs are charged to expense when incurred.
Income Taxes -- The Company accounts for income taxes following the liability
method. A current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the year. Deferred tax liabilities or
assets are recognized for the estimated future tax effects of temporary
differences between book and tax accounting.
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.
F-85
<PAGE> 156
LANCO ENVIRONMENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 2 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH
DECEMBER 31, 31,
--------------------- --------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Component parts.......................................... $ 80,517 $191,087 $271,200
Finished goods........................................... 172,074 286,872 141,500
-------- -------- --------
Total inventories........................................ $252,591 $477,959 $412,700
======== ======== ========
</TABLE>
NOTE 3 -- PROPERTY, PLANT EQUIPMENT
Cost of property, plant and equipment and depreciable lives are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31, DEPRECIABLE
1995 1996 1997 LIFE-YEARS
-------- -------- --------- -----------
<S> <C> <C> <C> <C>
Leasehold improvements............................ $105,863 $105,863 $ 105,863 25
Automotive equipment.............................. 30,500 65,651 65,651 5
Shop equipment.................................... 67,040 68,737 72,099 10
Furniture and fixtures............................ 12,382 16,994 25,600 5-10
-------- -------- --------
Total cost........................................ 215,785 257,245 269,213
Accumulated depreciation.......................... 88,922 111,525 117,504
-------- -------- --------
Net carrying amount............................... $126,863 $145,720 $ 151,709
======== ======== =========
</TABLE>
NOTE 4 -- LINE OF CREDIT
The Company has a $100,000 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 bank's prime rate, an effective rate of 8.50 percent at March
31, 1997. There were no amounts outstanding under this arrangement during 1996
or 1997.
NOTE 5 -- FEDERAL INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED, YEAR ENDED THREE MONTHS ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996 1996 1997
-------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Current tax expense (benefit)........ $(26,700) $ 36,600 $ 21,900 $ (74,100) $ (12,600)
Deferred tax expense (benefit)....... 28,000 (10,000) 71,200 69,700 (7,400)
-------- -------- -------- -------- --------
Total tax expense.................... $ 1,300 $ 26,600 $ 93,100 $ (4,400) $ (20,000)
======== ======== ======== ========= =========
</TABLE>
A reconciliation of the provision for income taxes from continuing operations to
income taxes computed by applying the statutory federal tax rate to income
before taxes is as follows:
F-86
<PAGE> 157
LANCO ENVIRONMENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 5 -- FEDERAL INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED THREE MONTHS ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996 1996 1997
-------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Tax computed at 34% of pretax
income............................. $ 3,200 $ 31,300 $ 93,600 $ (6,400) $ (24,900)
Effect of nondeductible expenses..... 400 3,800 5,700 4,500 5,900
Effect of graduated rates and
other.............................. (2,300) (8,500) (6,200) (2,500) (1,000)
-------- -------- -------- --------- ---------
Total tax provision.................. $ 1,300 $ 26,600 $ 93,100 $ (4,400) $ (20,000)
======== ======== ======== ========= =========
</TABLE>
The details of the net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED THREE MONTHS ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996 1996 1997
-------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts......... $ -- $ (3,400) $ (8,500) $ (3,400) $ (8,500)
Inventory costs capitalized............. 92,900 85,400 161,700 155,100 140,300
Depreciation............................ 5,100 6,000 6,000 6,000 20,000
-------- -------- -------- --------- ---------
Net deferred tax liabilities............ $ 98,000 $ 88,000 $159,200 $ 157,700 $ 151,800
======== ======== ======== ========= =========
</TABLE>
NOTE 6 -- LEASES AND RELATED-PARTY TRANSACTIONS
The accounts payable to related party represent unsecured noninterest-bearing
advances from companies related by common ownership.
The Company pays an annual management fee to a related company of $100,000 for
administrative services. The two companies have the same stockholder.
The Company leases its operating facilities from the sole stockholder under an
operating lease arrangement that requires monthly rents of $5,000. The lease,
which terminates May 31, 1997, contains annual automatic renewal options. The
Company is required to pay all insurance, taxes and maintenance costs associated
with the property.
The Company also entered into noncancellable operating leases for vehicles and
machinery with a company that is wholly owned by the sole stockholder that
require monthly payments of $2,250. The leases terminate May 31, 1997.
Total rent expense was $27,057 and $22,400 for the six months ended June 30,
1995 and December 31, 1995, respectively, and $87,055 in 1996. Rent expense was
$21,000 and $21,750 for the three months ended March 31, 1996 and 1997,
respectively. All rent payments were made to related parties.
NOTE 7 -- SUBSEQUENT EVENT
The sole stockholder signed a letter of intent on February 17, 1997, to sell the
Company. The closing of the transaction is subject to satisfactory completion of
due diligence performed by the acquiring company.
F-87
<PAGE> 158
AUDITORS' REPORT
To the Directors of
Bioclear Technology Inc.
We have audited the consolidated balance sheet of Bioclear Technology Inc.
as at August 31, 1996 and 1995, and the consolidated statements of income and
retained earnings and cash flows for each of the years in the three-year period
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 audits.
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 at August 31,
1996 and 1995, and the results of its operations and the changes in its
financial position for each of the years in the three-year period ended August
31, 1996 in accordance with accounting principles generally accepted in Canada.
ERNST & YOUNG
Chartered Accountants
Winnipeg, Canada,
October 25, 1996, except for note 9 [b],
which is as of April 15, 1997.
F-88
<PAGE> 159
BIOCLEAR TECHNOLOGY INC.
Incorporated under the Canada Business Corporations Act
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS AT AUGUST 31,
----------------------- MARCH 31,
1995 1996 1997
C $ C $ C $
--------- --------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents............................. 1,715,677 2,350,094 58,741
Accounts receivable................................... 126,457 2,415,050 1,704,092
Income taxes recoverable.............................. -- 21,221 48,238
Inventory (at lower of specific cost and net
realizable value).................................. 50,745 -- 47,000
Prepaid expenses...................................... 80,514 69,926 222,702
--------- --------- ---------
Total current assets............................... 1,973,393 4,856,291 2,080,773
Fixed assets (Note 4)................................. 991,107 1,094,320 2,989,894
--------- --------- ---------
2,964,500 5,950,611 5,070,667
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Bank indebtedness (Note 3)............................ -- 331,000 2,973,629
Accounts payable and accrued charges (Note 6)......... 2,020,390 4,270,991 511,939
Deferred revenue...................................... -- 156,000 --
Income taxes payable.................................. 80,559 -- --
Due to shareholders................................... -- -- 367,113
Deferred income taxes................................. 108,500 282,000 280,000
--------- --------- ---------
Total current liabilities.......................... 2,209,449 5,039,991 4,132,681
--------- --------- ---------
SHAREHOLDERS' EQUITY
Share capital (Note 5)................................ 90,157 85,151 85,151
Retained earnings..................................... 664,894 825,469 852,835
--------- --------- ---------
Total shareholders' equity......................... 755,051 910,620 937,986
--------- --------- ---------
2,964,500 5,950,611 5,070,667
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-89
<PAGE> 160
BIOCLEAR TECHNOLOGY INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED AUGUST 31, MARCH 31,
---------------------------------- ---------------------
1994 1995 1996 1996 1997
C $ C $ C $ C $ C $
--------- --------- ---------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
SALES.................................... 2,906,831 7,448,964 10,507,190 3,023,985 1,776,384
COST OF SALES (Note 6)................... 1,762,875 3,332,146 4,368,223 1,328,494 694,904
--------- --------- ---------- --------- ---------
GROSS PROFIT............................. 1,143,956 4,116,818 6,138,967 1,695,491 1,081,480
--------- --------- ---------- --------- ---------
Expenses
Depreciation........................... 67,592 107,544 145,813 67,467 75,463
Interest............................... 40,077 15,240 16,816 2,415 31,535
Administrative......................... 901,038 4,228,081 5,323,641 998,204 954,093
--------- --------- ---------- --------- ---------
1,008,707 4,350,865 5,486,270 1,068,086 1,061,091
--------- --------- ---------- --------- ---------
Income (loss) from operations............ 135,249 (234,047) 652,697 627,405 20,389
--------- --------- ---------- --------- ---------
Other income (loss)
Interest............................... 14,116 111,967 71,953 21,070 24,767
Gain (loss) on foreign exchange........ -- 74,290 (16,029) -- (4,790)
Loss on sale of fixed assets........... (3,361) -- -- -- --
--------- --------- ---------- --------- ---------
10,755 186,257 55,924 21,070 19,977
--------- --------- ---------- --------- ---------
Income (loss) before income taxes........ 146,004 (47,790) 708,621 648,475 40,366
--------- --------- ---------- --------- ---------
Income tax expense (recovery)
Current................................ 45,000 87,000 72,555 31,000 15,000
Deferred............................... (5,000) (131,500) 173,500 187,500 (2,000)
--------- --------- ---------- --------- ---------
40,000 (44,500) 246,055 218,500 13,000
--------- --------- ---------- --------- ---------
NET INCOME (LOSS) FOR THE PERIOD......... 106,004 (3,290) 462,566 429,975 27,366
Retained earnings, beginning of period... 597,180 703,184 664,894 664,894 825,469
Excess of redemption price over stated
capital (Note 5)....................... -- -- (282,991) -- --
Refundable taxes paid (Note 7)........... -- (35,000) (19,000) -- --
--------- --------- ---------- --------- ---------
RETAINED EARNINGS, END OF PERIOD......... 703,184 664,894 825,469 1,094,869 852,835
========= ========= ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-90
<PAGE> 161
BIOCLEAR TECHNOLOGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED AUGUST 31, MARCH 31,
-------------------------------- -----------------------
1994 1995 1996 1996 1997
C $ C $ C $ C $ C $
-------- --------- --------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) for the period...... 106,004 (3,290) 462,566 429,975 27,366
Add charges (deduct credits) to
operations not requiring a current
cash payment
Depreciation and amortization.... 67,592 107,544 145,813 67,467 75,463
Deferred income tax (recovery)... (5,000) (131,500) 173,500 187,500 (2,000)
Loss on sale of fixed assets..... 3,361 -- -- -- --
--------- --------- ---------- ---------- ----------
171,957 (27,246) 781,879 684,942 100,829
Net change in non-cash working capital
balances related to operations (Note
8).................................... 250,794 2,319,947 77,561 18,791 (3,430,887)
--------- --------- ---------- ---------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES... 422,751 2,292,701 859,440 703,733 (3,330,058)
--------- --------- ---------- ---------- ----------
INVESTING ACTIVITIES
Purchase of fixed assets.............. (103,695) (339,595) (249,023) (69,398) (1,971,037)
Proceeds on sale of fixed assets...... 4,979 -- -- -- --
--------- --------- ---------- ---------- ----------
CASH USED IN INVESTING ACTIVITIES....... (98,716) (339,595) (249,023) (69,398) (1,971,037)
--------- --------- ---------- ---------- ----------
FINANCING ACTIVITIES
Refundable taxes paid (Note 7)........ -- (35,000) (19,000) -- --
Repayment of long-term debt........... (82,422) (477,957) -- -- --
Issuance of shares.................... 15,036 -- -- -- --
Redemption of shares (Note 5)......... -- -- (288,000) -- --
Decrease in due to shareholders....... (3,517) (1,429) -- -- 367,113
--------- --------- ---------- ---------- ----------
CASH USED IN FINANCING ACTIVITIES....... (70,903) (514,386) (307,000) -- 367,113
--------- --------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH DURING
THE PERIOD............................ 253,132 1,438,720 303,417 634,335 (4,933,982)
Cash position, beginning of period...... 23,825 276,957 1,715,677 1,715,677 2,019,094
--------- --------- ---------- ---------- ----------
CASH POSITION, END OF PERIOD............ 276,957 1,715,677 2,019,094 2,350,012 (2,914,888)
========= ========= ========== ========== ==========
</TABLE>
- ---------------
Cash position is comprised of cash and cash equivalents, net of bank
indebtedness.
The accompanying notes are an integral part of these statements.
F-91
<PAGE> 162
BIOCLEAR TECHNOLOGY INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AUGUST 31, 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE SEVEN MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.)
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
11, "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. Normal 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>
<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.
(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.
(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 using the
F-92
<PAGE> 163
BIOCLEAR TECHNOLOGY INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE SEVEN MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, depreciation and opening inventory
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. Also, Bioclear Technology Inc. was
formed on August 31, 1994 through the amalgamation of 3034321 Canada Ltd.,
Bioclear Technology Inc. and Bioclear Holdings Inc. The financial statements of
the company recognize the continuity of interest of the shareholders in the
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 years.
3. BANK INDEBTEDNESS
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 registered in Canada.
4. FIXED ASSETS
<TABLE>
<CAPTION>
1995 1996
------------------------------------ -------------------------------------
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.................... 668,464 156,889 511,575 711,550 178,213 533,337
Furniture and fixtures...... 56,825 23,554 33,271 68,144 31,251 36,893
Office equipment............ 160,690 36,555 124,135 140,620 61,706 78,914
Pilot plant................. 94,394 69,431 24,963 94,394 74,423 19,971
Shop equipment.............. 96,058 15,469 80,589 191,854 41,677 150,177
Bridge crane................ 105,474 38,574 66,900 130,651 54,472 76,179
Small tools................. 7,853 7,814 39 10,864 9,358 1,506
Trucks...................... 114,786 17,217 97,569 205,412 60,135 145,277
--------- ------- ------- --------- ------- ---------
1,356,610 365,503 991,107 1,605,555 511,235 1,094,320
========= ======= ======= ========= ======= =========
</TABLE>
F-93
<PAGE> 164
BIOCLEAR TECHNOLOGY INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE SEVEN MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.)
5. SHARE CAPITAL
<TABLE>
<CAPTION>
1994 1995 1996
C $ C $ C $
------ ------ ------
<S> <C> <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
$.10 per share redeemable at the option of the company or
shareholder at C $1 per share
ISSUED
944,486 Class A common shares (1995 and 1994 -- 1,000,008)....... 36 36 37
4,896,000 preference shares (1995 and 1994 -- 5,184,000)......... 90,121 90,121 85,114
------ ------ ------
90,157 90,157 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.
During 1994, one Class A common share was issued for cash consideration of C
$15,000. On February 18, 1994 all Class A common shares were purchased for
cancellation and 5,184,000 preference shares were issued as consideration for
the purchase. New common shares were issued for C $36. On August 31, 1994, at
the time of the amalgamation described in note 2, the 36 issued Class A common
shares were split 27,778 for each share and resulted in 1,000,008 Class A common
shares being issued.
6. RELATED PARTY TRANSACTIONS
During the year, the company had the following transactions with companies owned
by shareholders of Bioclear Technology Inc.:
<TABLE>
<CAPTION>
1994 1995 1996
C $ C $ C $
------- ------- ---------
<S> <C> <C> <C>
Cost of sales
Roman Equipment Services (1973) Ltd........................ 650,630 557,326 1,018,704
Jenkyns Electric Ltd....................................... -- 120,811 35,592
</TABLE>
Charges for these services were at estimated fair market value.
At year end, C $186,248 [1995 -- C $10,077; 1994 -- C $167,770] remains payable
to Roman Equipment Services (1973) Ltd. and is included in accounts payable.
7. REFUNDABLE INCOME TAXES
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.
F-94
<PAGE> 165
BIOCLEAR TECHNOLOGY INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE SEVEN MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.)
7. REFUNDABLE INCOME TAXES (CONTINUED)
When some part of these taxes becomes definitely refundable because of dividend
payments, the appropriate amount is transferred to income taxes recoverable. At
year end, the balance in the Company's refundable tax account was approximately
C $54,000 (1995 -- C $35,000; 1994 -- C $Nil).
8. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES RELATED TO OPERATIONS
<TABLE>
<CAPTION>
SEVEN-MONTH
PERIOD ENDED
YEAR ENDED AUGUST 31, MARCH 31,
------------------------------------ -------------------------
1994 1995 1996 1996 1997
C $ C $ C $ C $ C $
------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net decrease (increase) in
current assets
Accounts receivable.......... 356,686 661,806 (2,288,593) (766,424) 710,958
Income taxes recoverable..... (13,191) 13,191 (21,221) (46,678) (27,017)
Inventory.................... -- (50,745) 50,745 50,745 (47,000)
Prepaid expenses............. (23,956) (38,744) 10,588 (95,898) (152,776)
Net increase (decrease) in
current liabilities:
Accounts payable and accrued
charges................... (60,734) 1,653,880 2,250,601 (2,009,294) (3,759,052)
Deferred revenue............. -- -- 156,000 2,935,899 (156,000)
Income taxes payable......... (8,011) 80,559 (80,559) (49,559) --
------- --------- --------- ---------- ----------
250,794 2,319,947 77,561 18,791 (3,430,887)
======= ========= ========= ========== ==========
</TABLE>
9. SUBSEQUENT EVENTS
(a) Subsequent to year end, the company entered into contracts totaling
approximately C $1,200,000 for the expansion of the company's manufacturing
facility.
(b) On April 15, 1997, the shareholders of the Company signed a purchase and
sale agreement whereby they agreed to sell all the shares of the Company to
Waterlink, Inc.
10. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
presentation of the current year.
11. 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 statement
of cash flows as a component of cash and cash equivalents rather than as a
financing activity. If U.S. generally accepted
F-95
<PAGE> 166
BIOCLEAR TECHNOLOGY INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE SEVEN MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.)
11. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
accounting principles had been followed, the amounts on the consolidated
statement of cash flows would be adjusted as follows:
<TABLE>
<CAPTION>
SEVEN MONTH
PERIOD ENDED
YEAR ENDED AUGUST 31, MARCH 31,
------------------------------- ---------------------
1994 1995 1996 1996 1997
C $ C $ C $ C $ C $
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Cash provided by financing
activities....................... -- -- 331,000 77,725 2,642,629
Net increase in cash during the
period........................... -- -- 331,000 77,725 2,642,029
Cash position, end of period....... -- -- 331,000 408,725 2,973,629
</TABLE>
(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>
SEVEN MONTH
PERIOD ENDED
YEAR ENDED AUGUST 31, MARCH 31,
------------------------------- -------------------
1994 1995 1996 1996 1997
C $ C $ C $ C $ C $
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income taxes paid................... 17,917 1,397 172,572 127,237 42,017
</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, MARCH 31,
----------------- ------------
1995 1996 1997
C $ C $ C $
------ ------ ------------
<S> <C> <C> <C>
Redeemable preferred shares............................. 90,121 85,114 85,114
Common share capital.................................... 36 37 37
</TABLE>
(d) The accompanying consolidated balance sheet at March 31, 1997, the related
consolidated statements of income and retained earnings and cash flows for
the seven months ended March 31, 1996 and 1997 ("interim financial
statements") have been prepared by the Company in accordance with Canadian
generally accepted accounting principles for interim financial information
and are unaudited. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. The interim financial statements include all
adjustments, consisting of only normal recurring adjustments considered
necessary for a fair presentation of the results of interim periods.
Operating results for the seven months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year
ended August 31, 1997.
(e) 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 April 15, 1997, the closing ratio of
United States Dollar per Canadian Dollar was .716.
F-96
<PAGE> 167
BIOCLEAR TECHNOLOGY INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE SEVEN MONTHS
11. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
<TABLE>
<CAPTION>
AT AND FOR THE
SEVEN
AT AND FOR THE YEAR MONTHS ENDED
ENDED AUGUST 31, MARCH 31,
---------------------- ---------------
1994 1995 1996 1996 1997
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Ratio of US$ per C$
Exchange rate at end of period............... .729 .744 .731 .733 .722
Average exchange rate during period.......... .739 .728 .734 .737 .735
Highest exchange rate during period.......... .756 .746 .746 .746 .746
Lowest exchange rate during period........... .722 .710 .727 .728 .723
</TABLE>
F-97
<PAGE> 168
<TABLE>
[WATERLINK LOGO]
SELECT RECENT PROJECTS*
<S> <C>
Holland. Manufacture and install Finland. Provide 18 continuous sand filters for
decanter centrifuges and related equipment pulp and paper water supply treatment system.
for a municipal wastewater facility.
Germany. Design/build
Canada. Design/build 102,000 IGPD municipal 5400 cubic meters/hour
SBR wastewater treatment facility. process water supply
plant using continuous
USA. Pharmaceutical company. Design and sand filters.
furnish system to remove chrome and other
contaminants from groundwater, using inclined Poland. Manufacture and install
plate clarification and tertiary filtration. four decanter centrifuges to
dewater sludge at a municipal
USA. Provide slant rib wastewater facility.
coalescing oil/water
separators for treatment Russia. Design/
of washdown wastewater. build municipal
drinking water plant.
Taiwan. Provide slant rib
coalescing oil/water Austria. Provide
separators for a major 67 continuous
refinery. sand filters
for steel works
Korea. Design/build cooling water
4.4 MGD RO recycling system.
boiler feedwater treat-
ment system for a new United Arab Emirates.
steel manufacturing plant. [Picture of Globe with call outs] Provide 20 small RO
systems to convert
USA. Design/build sea water and brackish
100,000 GPD water into drinking water.
municipal wastewater
treatment facility. Oman. Furnish
four RO systems
Mexico. Design/ totaling 600,000
build 1.0 MGD GPD for a
municipal government facility.
wastewater
treatment facility. Saudi Arabia. Engineer,
manufacture and furnish
Mexico. Design/ five brackish water RO
build 1.2 MGD systems totaling 2 MGD
municipal for a large dairy.
wastewater
treatment facility. Pakistan. Furnish two RO
systems totaling 400,000
USA. Provide dual GPD for gold and copper
dissolved air flotation mining operation.
system for a large
poultry processing Egypt. Furnish one 132,000
facility. GPD sea water RO system
for a resort hotel.
USA. Provide 3.0 MGD
RO municipal UK. Design/install wastewater aeration system
water treatment for major Swiss pharmaceutical company.
system for color removal.
UK. Design/install dedicated large scale
USA. Provide 6.0 MGD wastewater aeration system serving
RO system multiple chemical manufacturing plants.
for drinking water
treatment project. Scotland. Design/install wastewater aeration
system for pharmaceutical company.
Colombia. Engineer, manufacture and furnish 1.8 MGD
RO water treatment system for brewery. Chile. International airport. Design/build/operate
2.2 MGD sanitary wastewater facility.
GPD = US gallons per day
MGD = US million gallons per day
*Projects include pending IGPD = Imperial gallons per day
acquisitions of Bioclear and Lanco.
WATER AND WASTEWATER
TREATMENT SOLUTIONS, WORLDWIDE.
</TABLE>
<PAGE> 169
================================== ======================================
NO DEALER, SALESPERSON OR ANY
OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY 4,500,000 SHARES
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS IN -----------------
CONNECTION WITH THE OFFER CONTAINED [WATERLINK LOGO]
HEREIN AND, IF GIVEN OR MADE, SUCH -----------------
INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF
THE UNDERWRITERS. THIS PROSPECTUS COMMON STOCK
DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THOSE TO WHICH IT RELATES IN
ANY STATE TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE SUCH OFFER IN
SUCH STATE. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 7
The Company............................. 14
Use of Proceeds......................... 16
Dividend Policy......................... 16
Capitalization.......................... 17 ---------------
Dilution................................ 18 PROSPECTUS
Selected and Pro Forma Consolidated , 1997
Financial Data........................ 19 ---------------
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 22
The Water Purification and Wastewater
Treatment Industry.................... 27
Business................................ 29
Management.............................. 37
Security Ownership...................... 48
Certain Transactions.................... 50
Shares Eligible For Future Sale......... 51
Description of Capital Stock............ 53
Underwriting............................ 61
Legal Matters........................... 63
Experts................................. 63
Additional Information.................. 63
Systems, Equipment and Services SMITH BARNEY INC.
Glossary.............................. 65
Index to Consolidated Financial OPPENHEIMER & CO., INC.
Statements............................ F-1
</TABLE> SANDERS MORRIS MUNDY
UNTIL , 1997 (25 DAYS
AFTER THE COMMENCEMENT OF THE
OFFERING), ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS,
WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS
ON SUBSCRIPTIONS.
================================== ======================================
<PAGE> 170
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses in connection with the issuance of
the Common Stock being registered. All of the amounts shown are estimates,
except the registration fee:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee.................................... $ 17,425
Listing expenses........................................ 100,770
Accounting fees and expenses............................ 750,000
Legal fees and expenses................................. 500,000
Blue Sky fees and expenses.............................. 15,000
Printing expenses....................................... 317,000
Miscellaneous expenses.................................. 549,805
----------
Total................................................... $2,250,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the DGCL permits the indemnification of the directors and
officers of the Company. The Company Bylaws provide that it will indemnify the
officers, directors, employees and agents of the Company to the extent permitted
by the DGCL.
The Company Certificate provides for the indemnification of directors and
officers of the Company, and persons who serve or served at the request of the
Company as a director, officer, employee or agent of another corporation,
including service with respect to employee benefit plans, against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties in amounts paid or to be paid in settlement) reasonably
incurred with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, provided, however, the Company shall
indemnify any such person seeking indemnification in connection with a
proceeding initiated by such person only if such proceeding was authorized by
the Company's Board. In the event a claim for indemnification by any person has
not been paid in full by the Company after written request has been received by
the Company, the claimant may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim and, if successful in whole or
in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. The right to indemnification conferred in the Company
Certificate is a contract right and shall include the right to be paid by the
Company the expenses incurred in defending any such proceeding in advance of its
final disposition. The Company maintains insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Company against any
such expense, liability or loss, whether or not the Company would have the power
to indemnify such person against such expense, liability or loss under state
law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years the Company issued and sold shares of its
capital stock without registration under the Securities Act of 1933, as amended
(the "Act"), in reliance on the exemption provided therefrom by Section 4(2) of
the Act, in the transactions described below. 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 Water Equipment
Technologies, Inc. acquisition), the Company obtained representations from the
investors that each was an "accredited investor," as defined in Regulation D
under the 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 Act.
On December 9, 1994, the Company issued and sold 1,200,000 shares of the
Common Stock and 400,000 shares of the Series A Preferred Stock in a private
placement to two accredited investors: (i) Brantley Venture
II-1
<PAGE> 171
Partners III, L.P. (400,000 shares of the Common Stock and 400,000 shares of the
Series A Preferred Stock), and (ii) Theodore F. Savastano (800,000 shares of
Common Stock). The total offering price was $501,200.
On August 30 and September 15, 1995, the Company issued and sold 1,700,000
shares of the Series B Preferred Stock in a private placement to three
accredited investors: (i) Brantley Venture Partners III, L.P. (950,000 shares),
(ii) River Cities Capital Fund Limited Partnership (375,000 shares), and (iii)
IPP95, L.P. (375,000 shares). The total offering price was $3,400,000.
On August 31, 1995, the Company issued 250,000 shares of the Common Stock
in connection with its acquisition of substantially all of the assets and
properties of Great Lakes Environmental, Inc. ("GLE"). The portion of the
purchase price attributable to the shares received by GLE as $500,000.
On June 27, 1996, the Company issued and sold 1,150,000 shares of the
Series C Preferred Stock in a private placement to five accredited investors:
(i) Brantley Venture Partners, III L.P. (250,000 shares), (ii) River Cities
Capital Fund Limited Partnership (250,000 shares), (iii) Environmental
Opportunities Fund, L.P. (556,062 shares), (iv) Environmental Opportunities Fund
(Cayman) L.P. (68,938 shares) and (v) Bruce Cummings (25,000 shares). The total
offering price was $4,600,000.
On September 30, 1996, the Company issued 499,996 shares of the Common
Stock in connection with its acquisition of all of the issued and outstanding
capital stock of Water Equipment Technologies, Inc. ("WET"). The shares of the
Common Stock were issued to 11 shareholders of WET upon the merger of WET with
and into a wholly-owned subsidiary of the Company (the "Merger"). The total
dollar value of the 499,996 shares of the Common Stock issued to the
shareholders of WET in the Merger was $2,124,983. On February 28, 1997, the
Company issued 111,788 additional shares of the Common Stock to the shareholders
of WET in payment of an adjustment to the purchase price paid by the Company for
the issued and outstanding shares of WET. The total dollar value of the 111,788
shares of Common Stock issued to the shareholders of WET as purchase price
adjustment was $475,099.
On October 15, 1996, the Company issued 100,000 shares of the Common Stock
to Lawrence M. Schmid ("Schmid") on Schmid's conversion of a convertible
subordinated promissory note in the principal amount of $400,000 (the "Schmid
Note") at a conversion price of $4.00 per share of the Common Stock. The Schmid
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 all of the business, assets and
goodwill of Aero-Mod Incorporated and Resi-Tech Inc.
On January 6, 1997, the Company issued 500,000 shares of the Common Stock
to Mark E. Neville (350,000 shares) and Frederick J. Siino (150,000 shares) on
their conversion of a convertible subordinated promissory note in the principal
amount of $2,000,000 (the "Mass Transfer Note") at a conversion price of $4.00
per share of the Common Stock. The Mass Transfer Note was issued to Mass
Transfer Systems, Inc. ("Mass Transfer") as part of the purchase price for the
Company's acquisition of all of the business assets and goodwill of Mass
Transfer. The Mass Transfer Note was distributed to Messrs. Neville and Siino,
the sole shareholders of Mass Transfer, following completion of the acquisition.
On February 19, 1997, the Company issued 25,000 shares of the Common Stock
to Wheat First Securities, Inc., a 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 "Bank Warrant"). The Bank Warrant was issued as additional
consideration for the provision of the Company's credit facility with Bank of
America. The Bank Warrant expires on February 19, 2002.
On March 12, 1997, in connection with its issuance of subordinated notes in
the principal amount of up to $10,000,000 (the "1997 Notes"), the Company agreed
to issue to purchasers of the 1997 Notes warrants to purchase up to 1,025,000
shares of the Common Stock (the "Base Warrant") and warrants to purchase up to
512,500 shares of the Common Stock (the "Additional Warrants" and together with
the Base Warrants, the
II-2
<PAGE> 172
"1997 Warrants"). Each 1997 Warrant entitles the holder to purchase one share of
Common Stock at an initial purchase price per share of $4.50 ("Exercise Price"),
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 N. 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.
As of the date of this Registration Statement, the Company has granted
options to acquire an aggregate 817,500 shares of the Common Stock pursuant to
its 1995 Stock Option Plan. In addition, the Company issued 77,500 shares of the
Common Stock to three employees of the Company upon the exercise of stock
options granted to them under the 1995 Stock Option Plan: (i) on March 1, 1996,
Nancy A. Hamerly, the former chief financial officer of the Company, purchased
5,000 shares of the Common Stock for an aggregate purchase price of $500 (or
$.10 per share), (ii) on June 1, 1996 Chet S. Ross purchased 45,000 shares of
the Common Stock for an aggregate purchase price of $4,500 (or $.10 per share),
(iii) 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), (iv) 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), and (v) on March 31, 1997,
Nancy A. Hamerly purchased 10,000 shares of the Common Stock for an aggregate
purchase price of $40,000 ($4.00 per share).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
**1.1 Form of Underwriting Agreement.
**3.1 Form of Fifth Amended and Restated Certificate of Incorporation of the
Company.
**3.2 Form of Amended and Restated By-Laws of the Company.
*4.1 Form of Rights Agreement, dated as of May 23, 1997, between the
Company and American Stock Transfer & Trust Company.
**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.
**4.3 Registration Rights Agreement, dated as of January 31, 1996, between
the Company and Mass Transfer Systems, Inc.
**4.4 Registration Rights Agreement, dated as of April 26, 1996, between the
Company and Lawrence A. Schmid.
**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.
*5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
*10.1 Employment Agreement, dated May 23, 1997, between the Company and Chet
S. Ross.
*10.2 Employment Agreement, dated May 23, 1997, between the Company and
Theodore F. Savastano.
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<PAGE> 173
*10.3 Employment Agreement, dated May 23, 1997, between the Company and
Michael J. Vantusko.
*10.4 Employment Agreement, dated May 23, 1997, between the Company and L.
Dean Hertert, Jr.
*10.5 Employment Agreement, dated July 1, 1987, between Nordic Water
Products AB and Dr. Hans F. Larsson.
**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.
**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.
**10.8 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.
**10.9 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.
**10.10 Common Stock Warrant Agreement, dated as of February 19, 1997,
between the Company and Bank of America Illinois.
**10.11 The Company's 1995 Stock Option Plan.
**10.12 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 Form of
Subordinated Note due 2002 attached thereto as Exhibit A.
**10.13 Warrant Agreement, dated as of March 6, 1997, among the Company and
each of the purchasers named therein, along with Form of Warrant to
Purchase Common Stock, attached thereto as Exhibit A.
*10.14 The Company's 1997 Omnibus Incentive Plan
**10.15 Asset Purchase Agreement, dated January 31, 1996, among the Company,
Waterlink Acquisition Corporation, Mass Transfer Systems, Inc., Mark
E. Neville and Frederick J. Siino.
**10.16 Asset Purchase Agreement, dated April 26, 1996, among the Company,
A-M Acquisitions Corp., Aero-Mod Incorporated, Resi-Tech, Inc. and
Lawrence A. Schmid.
**10.17 Asset Purchase Agreement, dated April 26, 1996, among the Company,
B-W Acquisition Corp., Blue Water Services, Inc. and Lawrence A.
Schmid.
**10.18 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.
**10.19 Share Purchase Agreement, dated March 4, 1997, among Waterlink
(Sweden) AB, Waterlink (Germany) GmbH, Awpe Svenska AB and Anglian
Water Holding GmbH.
**10.20 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.
**10.21 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.
*10.22 Stock Purchase Agreement, dated as of April 15, 1997, between
Waterlink, Inc. (the "Company") and Bioclear, Inc.
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<PAGE> 174
*10.23 Stock Purchase Agreement, dated as of April 14, 1997, between the
Company and Lanco Environmental Products, Inc.
*10.24 The Company's Employee Stock Purchase Plan.
*10.25 The Company's 1997 Non-Employee Director Stock Option Plan.
*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.
*23.3 Consent of Ernst & Young AB.
*23.4 Consent of Dennis D. Tysl & Company, Ltd.
*23.5 Consent of Sink, Gillmore & Gordon LLP.
*23.6 Consent of Plante & Moran, LLP.
*23.7 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (contained in
its Opinion filed as Exhibit 5.1 hereto).
**24.1 Powers of Attorney.
**27.1 Financial Data Schedule as of and for the year ended September 30,
1996.
*27.2 Financial Data Schedule as of and for the six months ended March
31, 1997.
- ---------------
* Filed herewith.
** Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules specified under Regulation S-X for the Company are omitted
because they are either not applicable or required under the instructions, or
because the information required is already set forth in the consolidated
financial statements or related notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrants
have been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by them is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
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<PAGE> 175
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CANTON, STATE OF OHIO,
MAY 23, 1997.
WATERLINK, INC.
/s/ CHET S. ROSS
--------------------------------------
By: Chet S. Ross
Its: Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------- ---------------------------------------- ---------------
<C> <S> <C>
* Chairman of the Board May 23, 1997
- -------------------------------------
Theodore F. Savastano
/s/ CHET S. ROSS President, Chief Executive May 23, 1997
- ------------------------------------- Officer and Director
Chet S. Ross (Principal Executive Officer)
/s/ MICHAEL J. VANTUSKO Chief Financial Officer May 23, 1997
- ------------------------------------- (Principal Financial and
Michael J. Vantusko Accounting Officer)
* Director May 23, 1997
- -------------------------------------
Robert P. Pinkas
* Director May 23, 1997
- -------------------------------------
John R. Miller
* Director May 23, 1997
- -------------------------------------
Rollin S. Reiter
* Director May 23, 1997
- -------------------------------------
Paul M. Sutton
*By /s/ CHET S. ROSS
- -------------------------------------
Chet S. Ross
By /s/ MICHAEL J. VANTUSKO
- -------------------------------------
Michael J. Vantusko
Attorneys-in-fact pursuant to the
powers of attorney previously
provided as part of this Registration
Statement.
</TABLE>
II-6
<PAGE> 176
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGINATION
BY
SEQUENTIAL
EXHIBIT EXHIBIT NUMBERING
NUMBER DESCRIPTION SYSTEM
- ------- --------------------------------------------------------------------------------- ----------
<C> <S> <C>
**1.1 Form of Underwriting Agreement.
**3.1 Form of Fifth Amended and Restated Certificate of Incorporation of the Company.
**3.2 Form of Amended and Restated By-Laws of the Company.
*4.1 Form of Rights Agreement, dated as of May 23, 1997, between the Company and
American Stock Transfer & Trust Company.
**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.
**4.3 Registration Rights Agreement, dated as of January 31, 1996, between the Company
and Mass Transfer Systems, Inc.
**4.4 Registration Rights Agreement, dated as of April 26, 1996, between the Company
and Lawrence A. Schmid.
**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.
*5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
*10.1 Employment Agreement, dated May 23, 1997, between the Company and Chet S. Ross.
*10.2 Employment Agreement, dated May 23, 1997, between the Company and Theodore F.
Savastano.
*10.3 Employment Agreement, dated May 23, 1997, between the Company and Michael J.
Vantusko.
*10.4 Employment Agreement, dated May 23, 1997, between the Company and L. Dean
Hertert, Jr.
*10.5 Employment Agreement, dated July 1, 1987, between Nordic Water Products AB and
Dr. Hans F. Larsson.
**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.
**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.
**10.8 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.
**10.9 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.
**10.10 Common Stock Warrant Agreement, dated as of February 19, 1997, between the
Company and Bank of America Illinois.
**10.11 The Company's 1995 Stock Option Plan.
**10.12 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 Form of Subordinated Note due 2002 attached thereto as
Exhibit A.
**10.13 Warrant Agreement, dated as of March 6, 1997, among the Company and each of the
purchasers named therein, along with Form of Warrant to Purchase Common Stock,
attached thereto as Exhibit A.
</TABLE>
<PAGE> 177
EXHIBIT INDEX -- CONTINUED
<TABLE>
<CAPTION>
PAGINATION
BY
SEQUENTIAL
EXHIBIT EXHIBIT NUMBERING
NUMBER DESCRIPTION SYSTEM
- ------- --------------------------------------------------------------------------------- ----------
<C> <S> <C>
*10.14 The Company's 1997 Omnibus Incentive Plan
**10.15 Asset Purchase Agreement, dated January 31, 1996, among the Company, Waterlink
Acquisition Corporation, Mass Transfer Systems, Inc., Mark E. Neville and
Frederick J. Siino.
**10.16 Asset Purchase Agreement, dated April 26, 1996, among the Company, A-M
Acquisitions Corp., Aero-Mod Incorporated, Resi-Tech, Inc. and Lawrence A.
Schmid.
**10.17 Asset Purchase Agreement, dated April 26, 1996, among the Company, B-W
Acquisition Corp., Blue Water Services, Inc. and Lawrence A. Schmid.
**10.18 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.
**10.19 Share Purchase Agreement, dated March 4, 1997, among Waterlink (Sweden) AB,
Waterlink (Germany) GmbH, Awpe Svenska AB and Anglian Water Holding GmbH.
**10.20 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.
**10.21 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.
*10.22 Stock Purchase Agreement, dated as of April 15, 1997, between Waterlink, Inc.
(the "Company") and Bioclear, Inc.
*10.23 Stock Purchase Agreement, dated as of April 14, 1997, between the Company and
Lanco Environmental Products, Inc.
*10.24 The Company's Employee Stock Purchase Plan.
*10.25 The Company's 1997 Non-Employee Director Stock Option Plan.
*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.
*23.3 Consent of Ernst & Young AB.
*23.4 Consent of Dennis D. Tysl & Company, Ltd.
*23.5 Consent of Sink, Gillmore & Gordon LLP.
*23.6 Consent of Plante & Moran, LLP.
*23.7 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (contained in its Opinion
filed as Exhibit 5.1 hereto).
**24.1 Powers of Attorney for the Company (included on signature page).
**27.1 Financial Data Schedule as of and for the year ended September 30, 1996.
*27.2 Financial Data Schedule as of and for the six months ended March 31, 1997.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
