<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
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<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>
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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).
6
<PAGE> 10
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
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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.
24
<PAGE> 28
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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<PAGE> 31
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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<PAGE> 32
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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<PAGE> 37
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
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<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."
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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.
43
<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.
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<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.
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<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
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<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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<PAGE> 55
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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<PAGE> 57
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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<PAGE> 58
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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<PAGE> 59
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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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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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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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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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
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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.
II-3
<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.
II-4
<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.
II-5
<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.
<PAGE> 1
Exhibit 4.1
PRIVILEGED AND CONFIDENTIAL
Waterlink, Inc.
and
American Stock Transfer & Trust Company,
Rights Agent
Rights Agreement
DATED AS of May 23, 1997
TABLE OF CONTENTS
Section 1. Certain Definitions
Section 2. Appointment of Rights Agent
Section 3. Issue of Right Certificates
Section 4. Form of Right Certificate
Section 5. Countersignature and Registration
Section 6. Transfer, Split-Up, Combination and Exchange of Right Certificates;
Mutilated, Destroyed, Lost or Stolen Right Certificate
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights
Section 8. Cancellation and Destruction of Right Certificates
Section 9. Reservation and Availability of Preferred Shares
Section 10. Preferred Shares Record Date
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number
of Rights
Section 12. Certificate of Adjusted Purchase Price or Number of Shares
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power
Section 14. Fractional Rights and Fractional Shares
Section 15. Rights of Action
Section 16. Right Certificate Holder Not Deemed a Stockholder
Section 17. Concerning the Rights Agent
Section 18. Merger or Consolidation or Change of Name of Rights Agent
Section 19. Duties of Rights Agent
Section 20. Change of Rights Agent
Section 21. Issuance of New Right Certificates
Section 22. Redemption and Termination
Section 23. Exchange
Section 24. Notice of Certain Events
Section 25. Notices
Section 26. Supplements and Amendments
Section 27. Determination and Actions by the Board of Directors, etc.
Section 28. Successors
Section 29. Benefits of this Agreement
Section 30. Severability
Section 31. Governing Law
Section 32. Counterparts
<PAGE> 2
Section 33. Descriptive Headings
Signatures
Exhibit A--Certificate of Designation, Preferences and Rights
Exhibit B--Form of Rights Certificate
Exhibit C--Summary of Rights to Purchase Preferred Shares
2
<PAGE> 3
RIGHTS AGREEMENT
THIS AGREEMENT, dated as of May 23, 1997 (the "Agreement"),
between Waterlink, Inc., a Delaware corporation (the "Corporation"), and
American Stock Transfer & Trust Company (the "Rights Agent").
WITNESSETH THAT:
WHEREAS, the Board of Directors of the Corporation has authorized and
declared a dividend of one preferred share purchase right (a "Right") for each
Common Share (as hereinafter defined) of the Corporation outstanding at the
close of business on the day on which the SEC declares the Company's
Registration Statement on Form S-1 effective (the "Record Date"), each Right
representing the right to purchase one one-hundredth of a Preferred Share (as
hereinafter defined), upon the terms and subject to the conditions herein set
forth, and has further authorized and directed the issuance of one Right with
respect to each Common Share that shall become outstanding between the Record
Date and the earliest of the Distribution Date, the Redemption Date or the
Final Expiration Date (as such terms are hereinafter defined); provided,
however, that Rights may be issued with respect to Common Shares that shall
become outstanding after the Distribution Date and prior to the earlier of the
Redemption Date and the Final Expiration Date in accordance with the provisions
of Section 22 of this Agreement.
Accordingly, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the Beneficial
Owner of 15% or more of the then outstanding Common Shares (other than as a
result of a Permitted Offer) or was such a Beneficial Owner at any time after
the date hereof, whether or not such person continues to be the Beneficial
Owner of 15% or more of the then outstanding Common Shares. Notwithstanding the
foregoing, (A) the term "Acquiring Person" shall not include (i) the
Corporation, (ii) any Subsidiary of the Corporation, (iii) any employee benefit
plan of the Corporation or of any Subsidiary of the Corporation, (iv) any
Person or entity organized, appointed or established by the Corporation for or
pursuant to the terms of any such plan, (v) any Person, who or which together
with all Affiliates and Associates of such Person becomes the Beneficial Owner
of 15% or more of the then outstanding Common Shares as a result of the
acquisition of Common Shares directly from the Corporation, or (vi) an Exempt
Person, and (B) no Person shall be deemed to be an "Acquiring Person" either
(X) as a result of the acquisition of Common Shares by the Corporation which,
by reducing the number of Common Shares outstanding, increases the proportional
number of shares beneficially owned by such Person together with all Affiliates
and Associates of such Person; except that if (i) a Person would become an
Acquiring Person (but for the operation of this subclause X) as a result of the
acquisition
<PAGE> 4
of Common Shares by the Corporation, and (ii) after such share acquisition by
the Corporation, such Person, or an Affiliate or Associate of such Person,
becomes the Beneficial Owner of any additional Common Shares, then such Person
shall be deemed an Acquiring Person, or (Y) if (i) within 8 days after such
Person would otherwise have become an Acquiring Person (but for the operation
of this subclause Y), such Person notifies the Board of Directors that such
Person did so inadvertently and (ii) within 2 days after such notification,
such Person is the Beneficial Owner of less than 10% of the outstanding Common
Shares.
The phrase "then outstanding," when used with reference to a Person's
Beneficial Ownership of securities of the Corporation, shall mean the number of
such securities then issued and outstanding together with the number of such
securities not then actually issued and outstanding which such Person would be
deemed to own beneficially hereunder.
(b) "Act" shall mean the Securities Act of 1933, as amended and as in
effect on the date of this Agreement.
(c) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act.
(d) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (whether or not in writing), or upon the exercise
of conversion rights, exchange rights, rights (other than the Rights), warrants
or options, or otherwise; provided, however, that a Person shall not be deemed
the Beneficial Owner of, or to beneficially own, securities tendered pursuant
to a tender or exchange offer made by or on behalf of such Person or any of
such Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (B) the right to vote pursuant to any
agreement, arrangement or understanding (whether or not in writing); provided,
however, that a Person shall not be deemed the Beneficial Owner of, or to
beneficially own, any security if the agreement, arrangement or understanding
to vote such security (I) arises solely from a revocable proxy or consent
given to such Person in response to a public proxy or consent solicitation made
pursuant to, and in accordance with, the applicable rules and regulations
promulgated under the Exchange Act and (2) is not also then reportable on
Schedule 13D under the Exchange Act (or any comparable or successor report); or
2
<PAGE> 5
(iii) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such Person (or
any of such Person's Affiliates or Associates) has any agreement, arrangement or
understanding (whether or not in writing) (other than customary agreements with
and between underwriters and selling group members with respect to a bona fide
public offering of securities) relating to the acquisition, holding, voting
(except to the extent contemplated by the proviso to Section l(d)(ii)(B)) or
disposing of any securities of the Corporation.
(e) "Business Day" shall mean any day other than a Saturday, Sunday or
U.S. federal holiday.
(f) "Close of Business" on any given date shall mean 5:00 P.M., New
York time, on such date; provided, however, that if such date is not a Business
Day it shall mean 5:00 P.M., New York time, on the next succeeding Business
Day.
(g) "Common Shares" when used with reference to the Corporation shall
mean the shares of Common Stock, par value $.001 per share, of the Corporation
or, in the event of a subdivision, combination or consolidation with respect to
such shares of Common Stock, the shares of Common Stock resulting from such
subdivision, combination or consolidation. "Common Shares" when used with
reference to any Person other than the Corporation shall mean the capital stock
(or equity interest) with the greatest voting power of such other Person or, if
such other Person is a Subsidiary of another Person, the Person or Persons
which. ultimately control such first-mentioned Person.
(h) "Disinterested Director" shall mean any member of the
Corporation's Board of Directors who is not an Acquiring Person or an
Affiliate, Associate, nominee, or representative of an Acquiring Person and who
was a member of the Corporation's Board of Directors prior to the time that the
Acquiring Person became an Acquiring Person or is recommended to succeed a
Disinterested Director by a majority of Disinterested Directors.
(i) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(k) "Exempt Person" shall mean any Person who is the Beneficial Owner
of 15% or more of the outstanding Common Shares on the date of this Rights
Agreement, provided, that, if (i) the Exempt Person, together with its
Affiliates and Associates, increases its Beneficial Ownership of the then
outstanding Common Shares by 1% or more of the then outstanding Common Shares;
(ii) there is any change in the Beneficial Ownership or management control of
such Exempt Person, other than a change of Beneficial Ownership of 40% or less
of interests in the Exempt Person, which interests have no management control
or voting rights with respect to the Exempt Person; (iii) such Exempt Person,
or any of the Affiliates or Associates of such Exempt Person, commence or
publicly announce the intention to commence a tender or exchange offer
3
<PAGE> 6
the consummation of which would increase the number of outstanding Common
Shares Beneficially Oned by such Exempt Person's, or any of its Affiliates or
Associates; or (iv) the Corporation shall enter into an event which would
constitute a Section 13 Event, but for the fact that the Exempt Person is not
considered to be an Acquiring Person, then in any such case the Exempt Person
shall immediately cease to be an Exempt Person and shall be considered to be an
Acquiring Person for all purposes of this Agreement.
(l) "Final Expiration Date" shall mean the tenth anniversary of the
Record Date.
(m) "Interested Stockholder" shall mean any Acquiring Person or any
Affiliate or Associate of an Acquiring Person or any other Person in which any
such Acquiring Person, Affiliate or Associate has an interest, or any other
Person acting directly or indirectly on behalf of or in concert with any such
Acquiring Person, Affiliate or Associate.
(n) "Permitted Offer" shall mean a tender or exchange offer which is
for all outstanding Common Shares at a price and on terms determined, prior to
the purchase of shares under such tender or exchange offer, by at least a
majority of the Disinterested Directors, to be adequate (taking into account
all factors that such Directors deem relevant including, without limitation,
prices that could reasonably be achieved if the Corporation or its assets were
sold on an orderly basis designed to realize maximum value) and otherwise in
the best interests of the Corporation and its stockholders (other than the
Person or any Affiliate or Associate thereof on whose basis the offer is being
made) taking into account all factors that such directors may deem relevant.
(o) "Person" shall mean any individual, firm, partnership,
corporation, trust, association, joint venture or other entity, and shall
include any successor (by merger or otherwise) of such entity.
(p) "Preferred Shares" shall mean shares of Series 1 Preferred Stock,
with a par value of $.001 per share of the Corporation.
(q) "Redemption Date" shall mean the time at which the Rights are
redeemed as provided in Section 22 hereof.
(r) "Section 11(a)(ii) Event" shall mean any event described in
Section 11(a)(ii) hereof.
(s) "Section 13 Event" shall mean any event described in clause (x) or
(y) of Section 13(a) hereof.
(t) "Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to the Exchange Act) by the Corporation or
an Acquiring Person that an Acquiring Person has become such; provided, that,
if such Person is determined not to
4
<PAGE> 7
have become an Acquiring Person pursuant to Section l(a)(Y) hereof, then no
Shares Acquisition Date shall be deemed to have occurred.
(u) "Subsidiary" of any Person shall mean any corporation or other
Person of which a majority of the voting power or equity interest is owned,
directly or indirectly, by such Person, or which is otherwise controlled by
such Person.
(v) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
Section 2. Appointment of Rights Agent. The Corporation hereby
appoints the Rights Agent to act as agent for the Corporation and the holders
of the Rights (who, in accordance with Section 3 hereof, shall prior to the
Distribution Date also be the holders of Common Shares) in accordance with the
terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. The Corporation may from time to time appoint such co-Rights
Agents as it may deem necessary or desirable.
Section 3. Issuance of Right Certificates. (a) Until the earlier of
(i) the Shares Acquisition Date or (ii) the Close of Business on the tenth day
(or such later date as may be determined by action of the Disinterested
Directors) after the date any Person (other than the Corporation, any
Subsidiary of the Corporation, any employee benefit plan of the Corporation or
of any Subsidiary of the Corporation or any Person or entity organized,
appointed or established by the Corporation for or pursuant to the terms of any
such plan) commences, or first publicly announces its intention to commence
(which intention to commence remains in effect for five Business Days after
such announcement), a tender or exchange offer the consummation of which would
result in any Person becoming an Acquiring Person (including, in the case of
both (i) and (ii), any such date which is after the date of this Agreement and
prior to the issuance of the Rights), the earlier of such dates being herein
referred to as the "Distribution Date," (x) the Rights will be evidenced
(subject to the provisions of Section 3(b) hereof) by the certificates for
Common Shares registered in the names of the holders thereof (which
certificates shall also be deemed to be Right Certificates) and not by separate
Right Certificates, and (y) the Rights will be transferable only in connection
with the transfer of the underlying Common Shares (including a transfer to the
Corporation); provided, however, that if a tender offer is abandoned prior to
the occurrence of a Distribution Date, then no Distribution Date shall occur as
a result of such tender offer. As soon as practicable after the Distribution
Date, the Corporation will prepare and execute, the Rights Agent will
countersign, and the Corporation will send or cause to be sent by first-class,
postage-prepaid mail, to each record holder of Common Shares as of the Close of
Business on the Distribution Date, at the address of such holder shown on the
records of the Corporation, a Right Certificate, substantially in the form of
Exhibit B hereto (a "Right Certificate"), evidencing one Right for each Common
Share so held. As of and after the Distribution Date, the Rights will be
evidenced solely by such Right Certificates.
5
<PAGE> 8
(b) As promptly as practicable following the Record Date, the
Corporation will send a copy of a Summary of Rights to Purchase Preferred
Shares, in substantially the form of Exhibit C hereto (the "Summary of Rights"),
by first-class, postage-prepaid mail, to each record holder of Common Shares as
of the close of business on the Record Date, at the address of such holder shown
on the records of the Corporation. With respect to certificates for Common
Shares outstanding as of the Record Date, until the Distribution Date, the
Rights will be evidenced by the certificates for Common Shares with or without a
copy of the Summary of Rights attached thereto. Until the Distribution Date (or
the earlier of the Redemption Date or the Final Expiration Date), the surrender
for transfer of any certificate for Common Shares outstanding on the Record
Date, with or without a copy of the Summary of Rights attached thereto, shall
also constitute the transfer of the Rights associated with such Common Shares.
(c) Certificates for Common Shares issued after the Record Date
(including, without limitation, reacquired Common Shares referred to in the
last sentence of this paragraph (c)) but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date, shall be
deemed also to be certificates for Rights, and shall bear the following legend:
This certificate also evidences and entitles the holder hereof to
certain rights as set forth in a Rights Agreement between Waterlink,
Inc. and American Stock Transfer & Trust Company, dated as of May 23,
1997 (the "Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on file at the
principal executive offices of Waterlink, Inc. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will
be evidenced by separate certificates and will no longer be evidenced
by this certificate. Waterlink, Inc. will mail to the holder of this
certificate a copy of the Rights Agreement without charge after
receipt of a written request therefor. Under certain circumstances set
forth in the Rights Agreement, Rights issued to, or held by, any
Person who is, was or becomes an Acquiring Person or an Affiliate or
Associate thereof (as defined in the Rights Agreement) and certain
related persons, whether currently held by or on behalf of such Person
or by any subsequent holder, may become null and void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby.
In the event that the Corporation purchases or acquires any Common Shares after
the Record Date but prior to the Distribution Date, any Rights associated with
such Common Shares shall be deemed cancelled and retired so that the
Corporation shall not be entitled to exercise any Rights associated with the
Common Shares which are no longer outstanding.
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Section 4. Form of Right Certificate. (a) The Right Certificates (and
the forms of election to purchase and of assignment to be printed on the reverse
thereof) shall be substantially in the form set forth in Exhibit B hereto and
may have such marks of identification or designation and such legends, summaries
or endorsements printed thereon as the Corporation may deem appropriate and as
are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any applicable law or with any rule or regulation made
pursuant thereto or with any rule or regulation of any stock exchange on which
the Rights may from time to time be listed, or to conform to usage. Subject to
the provisions of Section 11 and Section 22 hereof, the Right Certificates shall
entitle the holders thereof to purchase such number of one-hundredths of a
Preferred Share as shall be set forth therein at the price per one one-hundredth
of a Preferred Share set forth therein (the "Purchase Price"), but the amount
and type of securities purchasable upon the exercise of each Right and the
Purchase Price thereof shall be subject to adjustment as provided herein.
(b) Any Right Certificate issued pursuant to Section 3(a) or Section
22 hereof that represents Rights which are null and void pursuant to Section
7(e) of this Agreement and any Right Certificate issued pursuant to Section 6
or Section 11 hereof upon transfer, exchange, replacement or adjustment of any
other Right Certificate referred to in this sentence, shall contain (to the
extent feasible) the following legend:
The Rights represented by this Right Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person
or an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Right Certificate
and the Rights represented hereby are null and void.
Provisions of Section 7(e) of this Rights Agreement shall be operative whether
or not the foregoing legend is contained on any such Right Certificate.
Section 5. Countersignature and Registration. The Right Certificates
shall be executed on behalf of the Corporation by its Chairman of the Board,
its Chief Executive Officer, its President, any of its Vice Presidents, or its
Treasurer, either manually or by facsimile signature, shall have affixed
thereto the Corporation's seal or a facsimile thereof, and shall be attested by
the Secretary or an Assistant Secretary of the Corporation, either manually or
by facsimile signature. The Right Certificates shall be countersigned by the
Rights Agent and shall not be valid for any purpose unless so countersigned. In
case any officer of the Corporation who shall have signed any of the Right
Certificates shall cease to be such officer of the Corporation before
countersignature by the Rights Agent and issuance and delivery by the
Corporation, such Right Certificates may nevertheless be countersigned by the
Rights Agent and issued and delivered by the Corporation with the same force
and effect as though the person who signed such Right Certificates had not
ceased to be such officer of the Corporation.
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Following the Distribution Date, the Rights Agent will keep or cause
to be kept, at its principal office or offices designated as the appropriate
place for surrender of such Right Certificate or transfer, books for
registration and transfer of the Right Certificates issued hereunder. Such books
shall show the names and addresses of the respective holders of the Right
Certificates, the number of Rights evidenced on its face by each of the Right
Certificates and the certificate number and the date of each of the Right
Certificates.
Subject to Section 6 and Section 7(c) hereof, the Corporation and the
Rights Agent may deem and treat the person in whose name the Right Certificate
(or, prior to the Distribution Date, the associated Common Shares certificate)
is registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Right Certificate
or the associated Common Shares certificate made by anyone other than the
Corporation or the Rights Agent) for all purposes whatsoever, and neither the
Corporation nor the Rights Agent, subject to the last sentence of Section 7(e)
hereof, shall be affected by any notice to the contrary.
Section 6. Transfer, Split-Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificate.. Subject
to the provisions of Section 4(b), Section 7(e) and Section 14 hereof, at any
time after the Close of Business on the Distribution Date, and at or prior to
the Close of Business on the earlier of the Redemption Date or the Final
Expiration Date, any Right Certificate or Right Certificates may be
transferred, split up, combined or exchanged for another Right Certificate or
Right Certificates, entitling the registered holder to purchase a like number
of one one-hundredth of a Preferred Share (or, following a Triggering Event,
other securities, as the case may be) as the Right Certificate or Right
Certificates surrendered then entitled such holder (or former holder in the
case of a transfer) to purchase. Any registered holder desiring to transfer,
split up, combine or exchange any Right Certificate or Right Certificates shall
make such request in writing delivered to the Rights Agent, and shall surrender
the Right Certificate or Right Certificates to be transferred, split up,
combined or exchanged at the principal office of the Rights Agent designated
for such purpose. Neither the Rights Agent nor the Corporation shall be
obligated to take any action whatsoever with respect to the transfer of any
such surrendered Right Certificate until the registered holder shall have
completed and signed the certificate contained in the form of assignment on the
reverse side of such Right Certificate and shall have provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner)
or Affiliates or Associates thereof as the Corporation shall reasonably
request. Thereupon the Rights Agent shall, subject to Section 4(b), Section
7(e) and Section 14 hereof, countersign and deliver to the Person entitled
thereto a Right Certificate or Right Certificates, as the case may be, as so
requested. The Corporation may require payment of a sum sufficient to cover any
tax or governmental charge that may be imposed in connection with any transfer,
split up, combination or exchange of Right Certificates.
Upon receipt by the Corporation and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation
of a Right Certificate, and,
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<PAGE> 11
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to them, and, at the Corporation's request, reimbursement to the
Corporation and the Rights Agent of all reasonable expenses incidental thereto,
and upon surrender to the Rights Agent and cancellation of the Right
Certificate if mutilated, the Corporation will execute and deliver a new Right
Certificate of like tenor to the Rights Agent for countersignature and delivery
to the registered holder in lieu of the Right Certificate so lost, stolen,
destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights. (a) Subject to Section 7(e) hereof, the registered holder of any Right
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein) in whole or in part at any time after the Distribution Date
upon surrender of the Right Certificate, with the form of election to purchase
and the certificate on the reverse side thereof duly executed, to the Rights
Agent at the principal office of the Rights Agent designated for such purpose,
together with payment of the aggregate Purchase Price for the total number of
one one-hundredth of a Preferred Share (or other securities, as the case may
be) as to which such surrendered Rights are exercised, at or prior to the
earliest of (i) the close of business on the Final Expiration Date, or (ii) the
Redemption Date.
(b) The Purchase Price for each one one-hundredth of a Preferred Share
pursuant to the exercise of a Right shall initially be $65.00, shall be
subject to adjustment from time to time as provided in the next sentence and in
Sections 11 and 13(a) hereof and shall be payable in accordance with paragraph
(c) below. Anything in this Agreement to the contrary notwithstanding, in the
event that at any time after the date of this Agreement and prior to the
Distribution Date, the Corporation shall (i) declare or pay any dividend on the
Common Shares payable in Common Shares or (ii) effect a subdivision,
combination or consolidation of the Common Shares (by reclassification or
otherwise than by payment of dividends in Common Shares) into a greater or
lesser number of Common Shares, then in any such case, each Common Share
outstanding following such subdivision, combination or consolidation shall
continue to have a Right associated therewith and the Purchase Price following
any such event shall be proportionately adjusted to equal the result obtained
by multiplying the Purchase Price immediately prior to such event by a fraction
the numerator of which shall be the total number of Common Shares outstanding
immediately prior to the occurrence of the event and the denominator of which
shall be the total number of Common Shares outstanding immediately following
the occurrence of such event. The adjustment provided for in the preceding
sentence shall be made successively whenever such a dividend is declared or
paid or such a subdivision, combination or consolidation is effected.
(c) Upon receipt of a Right Certificate representing exercisable
Rights, with the form of election to purchase and the certificate duly
executed, accompanied by payment of the Purchase Price for the Preferred Shares
(or other securities, as the case may be) to be purchased and an amount equal
to any applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 6 hereof by certified check, cashier's
check or money order payable to the order of the Corporation, the Rights
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<PAGE> 12
Agent shall thereupon promptly (i) (A) requisition from any transfer agent of
the Preferred Shares certificates for the number of Preferred Shares to be
purchased and the Corporation hereby irrevocably authorizes its transfer agent
to comply with all such requests, or (B) if the Corporation, in its sole
discretion, shall have elected to deposit the Preferred Shares issuable upon
exercise of the Rights hereunder into a depositary, requisition from the
depositary agent depositary receipts representing such number of Preferred
Shares as are to be purchased (in which case certificates for the Preferred
Shares represented by such receipts shall be deposited by the transfer agent
with the depositary agent) and the Corporation will direct the depositary agent
to comply with such requests, (ii) when appropriate, requisition from the
Corporation the amount of cash to be paid in lieu of issuance of fractional
shares in accordance with Section 14 hereof, (iii) after receipt of such
certificates or depositary receipts, cause the same to be delivered to or upon
the order of the registered holder of such Right Certificate, registered in
such name or names as may be designated by such holder, and (iv) when
appropriate, after receipt thereof, deliver such cash to or upon the order of
the registered holder of such Right Certificate. In the event that the
Corporation is obligated to issue other securities (including Common Shares) of
the Corporation pursuant to Section 11(a) hereof, the Corporation will make all
arrangements necessary so that such other securities are available for
distribution by the Rights Agent, if and when appropriate. Neither the Rights
Agent nor the Corporation shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise of
the Rights unless such registered holder shall have provided such evidence of
the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates
or Associates thereof as the Corporation shall reasonably request.
In addition, in the case of an exercise of the Rights by a holder
pursuant to Section 11(a)(ii), the Rights Agent shall return such Right
Certificate to the registered holder thereof after imprinting, stamping or
otherwise indicating thereon that the rights represented by such Right
Certificate no longer include the rights provided by Section 11(a)(ii) of the
Rights Agreement and if less than all the Rights represented by such Right
Certificate were so exercised, the Rights Agent shall indicate on the Right
Certificate the number of Rights represented thereby which continue to include
the rights provided by Section 11(a)(ii).
(d) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be
issued by the Rights Agent to the registered holder of such Right Certificate
or to his duly authorized assigns, subject to the provisions of Section 14
hereof, or the Rights Agent shall place an appropriate notation on the Right
Certificate with respect to those Rights exercised.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Section 11(a)(ii) Event, any Rights
beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of
an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any
Affiliate or Associate thereof) who becomes a transferee
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<PAGE> 13
after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring
Person (or of any Affiliate or Associate thereof) who becomes a transferee
prior to or concurrently with the Acquiring Person becoming such and receives
such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom the Acquiring Person has a
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Disinterested Directors have determined is
part of a plan, arrangement or understanding which has as a primary purpose or
effect the avoidance of this Section 7(e), shall become null and void without
any further action and no holder of such Rights shall have any rights
whatsoever with respect to such Rights, whether under any provision of this
Agreement or otherwise. The Corporation shall use all reasonable efforts to
insure that the provisions of this Section 7(e) and Section 4(b) hereof are
complied with, but shall have no liability to any holder of Right Certificates
or other Person as a result of its failure to make any determinations with
respect to an Acquiring Person or its Affiliates, Associates or transferees
hereunder.
Section 8. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Corporation or to any of
its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no
Right Certificates shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Rights Agreement. The Corporation
shall deliver to the Rights Agent for cancellation and retirement, and the
Rights Agent shall so cancel and retire, any other Right Certificate purchased
or acquired by the Corporation otherwise than upon the exercise thereof. The
Rights Agent shall deliver all cancelled Right Certificates to the Corporation,
or shall, at the written request of the Corporation, destroy such cancelled
Right Certificates, and in such case shall deliver a certificate of destruction
thereof to the Corporation.
Section 9. Reservation and Availability of Preferred Shares. The
Corporation covenants and agrees that at all times prior to the occurrence of a
Section 11(a)(ii) Event it will cause to be reserved and kept available out of
its authorized and unissued Preferred Shares, or any authorized and issued
Preferred Shares held in its treasury, the number of Preferred Shares that will
be sufficient to permit the exercise in full of all outstanding Rights and,
after the occurrence of a Section 11(a)(ii) Event, shall, to the extent
reasonably practicable, so reserve and keep available a sufficient number of
Common Shares (and/or other securities) which may be required to permit the
exercise in full of the Rights.
So long as the Preferred Shares (and, after the occurrence of a
Section 11(a)(ii) Event, Common Shares or any other securities) issuable upon
the exercise of the Rights may be listed on any national securities exchange,
the Corporation shall use its best efforts to cause, from and after such time
as the Rights become exercisable, all shares reserved for such issuance to be
listed on such exchange upon official notice of issuance upon such exercise.
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<PAGE> 14
The Corporation covenants and agrees that it will take all such action
as may be necessary to ensure that all Preferred Shares (or Common Shares
and/or other securities, as the case may be) delivered upon exercise of Rights
shall, at the time of delivery of the certificates for such shares or other
securities (subject to payment of the Purchase Price), be duly and validly
authorized and issued and fully paid and non-assessable shares or securities.
The Corporation further covenants and agrees that it will pay when due
and payable any and all U.S. federal and state transfer taxes and charges which
may be payable in respect of the issuance or delivery of the Right Certificates
or of any Preferred Shares (or Common Shares and/or other securities, as the
case may be) upon the exercise of Rights. The Corporation shall not, however,
be required to pay any transfer tax which may be payable in respect of any
transfer or delivery of Right Certificates to a person other than, or the
issuance or delivery of certificates or depository receipts for the Preferred
Shares (or Common Shares and/or other securities, as the case may be) in a name
other than that of, the registered holder of the Right Certificate evidencing
Rights surrendered for exercise, or to issue or to deliver any certificates or
depositary receipts for Preferred Shares (or Common Shares and/or other
securities, as the case may be) upon the exercise of any Rights, until any such
tax shall have been paid (any such tax being payable by the holder of such
Right Certificate at the time of surrender) or until it has been established to
the Corporation's reasonable satisfaction that no such tax is due.
The Corporation shall use its best efforts to (i) file, as soon as
practicable following the Shares Acquisition Date, a registration statement
under the Act, with respect to the securities purchasable upon exercise of the
Rights on an appropriate form, (ii) cause such registration statement to become
effective as soon as practicable after such filing, and (iii) cause such
registration statement to remain effective (with a prospectus at all times
meeting the requirements of the Act and the rules and regulations thereunder)
until the date of the expiration of the rights provided by Section 11(a)(ii).
The Corporation will also take such action as may be appropriate under the blue
sky laws of the various states.
Section 10. Preferred Shares Record Date. Each person in whose name
any certificate for Preferred Shares (or Common Shares and/or other securities,
as the case may be) is issued upon the exercise of Rights shall for all
purposes be deemed to have become the holder of record of the Preferred Shares
(or Common Shares and/or other securities, as the case may be) represented
thereby on, and such certificate shall be dated, the date upon which the Right
Certificate evidencing such Rights was duly surrendered and payment of the
Purchase Price (and any applicable transfer taxes) was made; provided, however,
that, if the date of such surrender and payment is a date upon which the
Preferred Shares (or Common Shares and/or other securities, as the case may be)
transfer books of the Corporation are closed, such person shall be deemed to
have become the record holder of such shares on, and such certificate shall be
dated, the next
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succeeding Business Day on which the Preferred Shares (or Common Shares and/or
other securities, as the case may be) transfer books of the Corporation are
open.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number and kind of shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a) (i) In the event the Corporation shall at any time after the date
of this Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine
the outstanding Preferred Shares into a smaller number of Preferred Shares or
(D) issue any shares of its capital stock in a reclassification of the
Preferred Shares (including any such reclassification in connection with a
consolidation or merger in which the Corporation is the continuing or surviving
corporation), except as otherwise provided in this Section 11(a) and Section
7(e) hereof, the Purchase Price in effect at the time of the record date for
such dividend or of the effective date of such subdivision, combination or
reclassification, and the number and kind of shares of capital stock issuable
on such date, shall be proportionately adjusted so that the holder of any Right
exercised after such time shall be entitled to receive the aggregate number and
kind of shares of capital stock which if such Right had been exercised
immediately prior to such date and at a time when the Preferred Shares transfer
books of the Corporation were open, such holder would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision,
combination or reclassification; provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Corporation issuable
upon exercise of one Right. If an event occurs which would require an
adjustment under both Section 11(a)(i) and Section 11(a)(ii), the adjustment
provided for in this Section 11(a)(i) shall be in addition to, and shall be
made prior to, any adjustment required pursuant to Section 11(a)(ii).
(ii) In the event any Person, alone or together with its Affiliates
and Associates, shall become an Acquiring Person, then proper provision shall
be made so that each holder of a Right (except as provided below and in Section
7(e) hereof) shall, for a period of 60 days after the later of the occurrence
of any such event or the effective date of an appropriate registration
statement under the Act pursuant to Section 9 hereof, have a right to receive,
upon exercise thereof at a price equal to the then current Purchase Price, in
accordance with the terms of this Agreement, such number of Common Shares (or,
in the discretion of the Disinterested Directors, one one-hundredth of a
Preferred Share) as shall equal the result obtained by (x) multiplying the then
current Purchase Price by the then number of one one-hundredths of a Preferred
Share for which a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event, and dividing that product by (y) 50%
of the then current per share market price of the Corporation's Common Shares
(determined pursuant to Section 11(d) hereof) on the date of such first
occurrence (such number of shares being referred to as the "Adjustment
Shares"); provided, however, that if the transaction that would otherwise give
rise to the foregoing
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adjustment is also subject to the provisions of Section 13 hereof, then only
the provisions of Section 13 hereof shall apply and no adjustment shall be made
pursuant to this Section 11(a)(ii). The exercise of Rights under this Section
11(a)(ii) shall only result in the loss of rights under Section 11(a)(ii) to
the extent so exercised and shall not otherwise affect the rights represented
by the Rights under this Rights Agreement, including the rights represented by
Section 13.
(iii) In the event that there shall not be sufficient treasury shares
or authorized but unissued (and unreserved) Common Shares to permit the
exercise in full of the Rights in accordance with the foregoing subparagraph
(ii) and the Rights become so exercisable, notwithstanding any other provision
of this Agreement, to the extent necessary and permitted by applicable law,
each Right shall thereafter represent the right to receive, upon exercise
thereof at the then current Purchase Price, (x) a number of (or fractions of)
Common Shares (up to the maximum number of Common Shares which may permissibly
be issued) and (y) one one-hundredth of a Preferred Share or a number of, or
fractions of other equity securities of the Corporation (or, in the discretion
of the Disinterested Directors, debt) which the Disinterested Directors have
determined to have the same aggregate current market value (determined pursuant
to Section-11(d)(i) and (ii) hereof, to the extent applicable,) as one Common
Share (such number of, or fractions of, Preferred Shares, debt, or other equity
securities or debt of the Corporation being referred to as a "capital stock
equivalent"), equal in the aggregate to the number of Adjustment Shares;
provided, however, if sufficient Common Shares and/or capital stock equivalents
are unavailable, then the Corporation shall, to the extent permitted by
applicable law, take all such action as may be necessary to authorize
additional Common Shares or capital stock equivalents for issuance upon
exercise of the Rights, including the calling of a meeting of stockholders; and
provided, further, that if the Corporation is unable to cause sufficient Common
Shares and/or capital stock equivalents to be available for issuance upon
exercise in full of the Rights, then each Right shall thereafter represent the
right to receive the Adjusted Number of Shares upon exercise at the Adjusted
Purchase Price (as such terms are hereinafter defined). As used herein, the
term "Adjusted Number of Shares" shall be equal to that number of (or fractions
of) Common Shares (and/or capital stock equivalents) equal to the product of
(x) the number of Adjustment Shares and (y) a fraction, the numerator of which
is the number of Common Shares (and/or capital stock equivalents) available for
issuance upon exercise of the Rights and the denominator of which is the
aggregate number of Adjustment Shares otherwise issuable upon exercise in full
of all Rights (assuming there were a sufficient number of Common Shares
available) (such fraction being referred to as the "Proration Factor"). The
"Adjusted Purchase Price" shall mean the product of the Purchase Price and the
Proration Factor. The Disinterested Directors may, but shall not be required
to, establish procedures to allocate the right to receive Common Shares and
capital stock equivalents upon exercise of the Rights among holders of Rights.
(b) If the Corporation shall fix a record date for the issuance of
rights (other than the Rights), options or warrants to all holders of Preferred
Shares entitling them (for a period expiring within 45 calendar days after such
record date) to subscribe for or
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<PAGE> 17
purchase Preferred Shares (or shares having the same rights, privileges and
preferences as the Preferred Shares ("equivalent preferred shares") or
securities convertible into Preferred Shares or equivalent preferred shares at
a price per Preferred Share or equivalent preferred share (or having a
conversion price per share, if a security convertible into Preferred Shares or
equivalent preferred shares) less than the then current per share market price
of the Preferred Shares (as determined pursuant to Section 11(d) hereof) on
such record date, the Purchase Price shall be adjusted by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the number of Preferred Shares outstanding on
such record date plus the number of Preferred Shares which the aggregate
offering price of the total number of Preferred Shares and/or equivalent
preferred shares so to be offered (and/or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at such
current per share market price, and the denominator of which shall be the
number of Preferred Shares outstanding on such record date plus the number of
additional Preferred Shares and/or equivalent preferred shares to be offered
for subscription or purchase (or into which the convertible securities so to be
offered are initially convertible). In case such subscription price may be paid
in a consideration part or all of which shall be in a form other than cash, the
value of such consideration shall be determined in good faith by the
Disinterested Directors, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent. Preferred
Shares owned by or held for the account of the Corporation shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall be
made successively whenever such a record date is fixed; and in the event that
such rights, options or warrants are not so issued, the Purchase Price shall be
adjusted to be the Purchase Price which would then be in effect if such record
date had not been fixed.
(c) If the Corporation shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Corporation is the continuing or surviving corporation) of evidences of
indebtedness or assets (other than a regular quarterly cash dividend or a
dividend payable in Preferred Shares) or subscription rights or warrants
(excluding those referred to in Section 11(b) hereof), the Purchase Price shall
be adjusted by multiplying the Purchase Price in effect immediately prior to
such record date by a fraction, the numerator of which shall be the then
current per share market price (as determined pursuant to Section 11(d) hereof)
of the Preferred Shares on such record date, less the fair market value (as
determined in good faith by the Disinterested Directors, whose determination
shall be described in a statement filed with the Rights Agent and shall be
binding on the Rights Agent) of the portion of the assets or evidences of
indebtedness so to be distributed or of such subscription rights or warrants
applicable to the Preferred Shares and the denominator of which shall be such
current per share market price of the Preferred Shares. Such adjustments shall
be made successively whenever such a record date is fixed; and in the event
that such distribution is not so made, the Purchase Price shall again be
adjusted to be the Purchase Price which would then be in effect if such record
date had not been fixed.
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(d) (i) For the purpose of any computation hereunder, the "current per
share market price" of any security (a "Security" for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the thirty (30) consecutive
Trading Days (as is hereinafter defined) immediately prior to such date;
provided, however, that in the event that the current per share market price of
the Security is determined during a period following the announcement by the
issuer of such Security of (A) a dividend or distribution on such Security
payable in shares of such Security or securities convertible into such shares,
or (B) any subdivision, combination or reclassification of such Security and
prior to the expiration of thirty (30) Trading Days after the ex-dividend date
for such dividend or distribution, or the record date for such subdivision,
combination or reclassification, then, and in each such case, the current per
share market price shall be appropriately adjusted to reflect the current market
price per share equivalent of such Security. The closing price for each day
shall be the last sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the Security is not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Security is listed or admitted to trading or,
if the Security is not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations System
("NASDAQ") or such other system then in use, or, if on any such date the
Security is not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the Security selected by the Disinterested Directors. If on any such date no
such market maker is making market in the Security, the fair value of the
Security on such date as determined in good faith by the Disinterested Directors
shall be used and shall be binding on the Rights Agent. The term "Trading Day"
shall mean a day on which the principal national securities exchange on which
the Security is listed or admitted to trading is open for the transaction of
business or, if the Security is not listed or admitted to trading on any
national securities exchange, a Business Day.
(ii) If the Preferred Shares are not publicly traded, the "current per
share market price" of a Preferred Share shall be conclusively deemed to be the
current per share market price of the Common Shares as determined pursuant to
Section 11(d)(i) multiplied by one hundred.
(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Purchase Price; provided, however,
that any adjustments which by reason of this Section 11(e) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest one one-hundredth of a Preferred
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Share or one ten-thousandth of any other share or security as the case may be.
Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i)
three (3) years from the date of the transaction which mandates such adjustment
or (ii) the Final Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a)(ii)
or Section 13(a) hereof, the holder of any Right thereafter exercised shall
become entitled to receive any shares of capital stock of the Corporation other
than Preferred Shares, thereafter the number of other shares so receivable upon
exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Shares contained in Section 11(a) through (c),
inclusive, and the provisions of Sections 7, 9, 10, 13 and 14 with respect to
the Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Corporation subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) The Corporation may elect on or after the date of any adjustment
of the Purchase Price to adjust the number of Rights, in lieu of any adjustment
in the number of Preferred Shares purchasable upon the exercise of a Right. Each
of the Rights outstanding after such adjustment of the number of Rights shall be
exercisable for the number of one one-hundredths of a Preferred Share for which
a Right was exercisable immediately prior to such adjustment. Each Right held of
record prior to such adjustment shall become that number of Rights (calculated
to the nearest one ten-thousandth) obtained by dividing the Purchase Price in
effect immediately prior to adjustment of the Purchase Price by the Purchase
Price in effect immediately after adjustment of the Purchase Price. The
Corporation shall make a public announcement of its election to adjust the
number of Rights, indicating the record date for the adjustment, and, if known
at the time, the amount of the adjustment to be made. This record date may be
the date on which the Purchase Price is adjusted or any day thereafter, but, if
the Right Certificates have been issued, shall be at least ten (10) days later
than the date of the public announcement. If Right Certificates have been
issued, upon each adjustment of the number of Rights pursuant to this Section
11(h), the Corporation shall, as promptly as practicable, cause to be
distributed to holders of record of Right Certificates on such record date Right
Certificates evidencing, subject to Section 14 hereof, the additional Rights to
which such holders shall be entitled as a result of such adjustment, or, at the
option of the Corporation, shall cause to be distributed to such holders of
record in substitution and replacement for the Right Certificates held by such
holders prior to the date of adjustment, and upon surrender thereof, if required
by the Corporation, new Right Certificates evidencing all the Rights to which
such holders shall be entitled after such adjustment. Right Certificates so to
be distributed shall be issued, executed and countersigned in the manner
provided for herein and shall be registered in the names of
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<PAGE> 20
the holders of record of Right Certificates on the record date specified in the
public announcement.
(i) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-hundredths of a Preferred Share issuable upon the
exercise of the Rights, the Right Certificates theretofore and thereafter
issued may continue to express the Purchase Price and the number of one
one-hundredths of a Preferred Share which were expressed in the initial Right
Certificates issued hereunder.
(j) Before taking any action that would cause an adjustment reducing
the Purchase Price below the par value, if any, of the number of one
one-hundredths of a Preferred Share, Common Shares or other securities issuable
upon exercise of the Rights, the Corporation shall take any corporate action
which may, in the opinion of its counsel, be necessary in order that the
Corporation may validly and legally issue such number of fully paid and
non-assessable one one-hundredths of a Preferred Share, Common Shares or other
securities at such adjusted Purchase Price.
(k) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Corporation may elect to defer until the occurrence of
such event the issuance to the holder of any Right exercised after such record
date the Preferred Shares, Common Shares or other securities of the
Corporation, if any, issuable upon such exercise over and above the Preferred
Shares, Common Shares or other securities of the Corporation, if any, issuable
upon exercise on the basis of the Purchase Price in effect prior to such
adjustment; provided, however, that the Corporation shall deliver to such
holder a due bill or other appropriate instrument evidencing such holder's
right to receive such additional shares upon the occurrence of the event
requiring such adjustment.
(l) Anything in this Section 11 to the contrary notwithstanding, the
Corporation shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that (i) any consolidation or subdivision of the Preferred Shares, (ii)
issuance wholly for cash of Preferred Shares at less than the current market
price, (iii) issuance wholly for cash of Preferred Shares or securities which
by their terms are convertible into or exchangeable for Preferred Shares, (iv)
stock dividends or (v) issuance of rights, options or warrants referred to in
this Section 11, hereafter made by the Corporation to holders of its Preferred
Shares shall not be taxable to such stockholders.
(m) The Corporation shall not, at any time after the Distribution
Date, (x) (i) consolidate with, (ii) merge with or into, or (iii) sell,
mortgage or transfer (or permit any Subsidiary to sell, mortgage or transfer),
in one or more transaction, assets or earning power aggregating more than 50%
of the assets or earning power of the Corporation and its Subsidiaries (taken
as a whole) (y) to any other Person or Persons (other than in each case, the
Corporation and/or any of its Subsidiaries in one or more transactions each of
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<PAGE> 21
which does not violate Section 11(n) hereof), if (x) at the time of or
immediately after such consolidation, merger, sale or transfer there are any
charter or by-law provisions or any rights, warrants or other instruments or
securities outstanding or agreements in effect or other actions taken, which
would materially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately
after such consolidation, merger or sale, the stockholders of the Person who
constitutes, or would constitute, the "Principal Party" for purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates. The Corporation shall not
consummate any such consolidation, merger, sale or transfer unless prior
thereto the Corporation and such other Person shall have executed and delivered
to the Rights Agent a supplemental agreement evidencing compliance with this
Section 11(m).
(n) The Corporation shall not at any time after the Distribution Date,
except as permitted by Section 22 or Section 26 hereof, take (or permit any
Subsidiary to take) any action the purpose or effect of which is to materially
diminish or otherwise eliminate the benefits intended to be afforded by the
Rights.
Section 12. Certificate of Adjusted Purchase Price or Number of
Shares. Whenever an adjustment is made as provided in Sections 11 or 13
hereof, the Corporation shall promptly (a) prepare a certificate setting forth
such adjustment, and a brief statement of the facts resulting in such
adjustment, (b) file with the Rights Agent and with each transfer agent for the
Common Shares and the Preferred Shares a copy of such certificate and (c) mail
a brief summary thereof to each holder of a Right Certificate in accordance
with Section 26 hereof. The Rights Agent shall be fully protected in relying on
any such certificate and on any adjustment therein contained and shall not be
deemed to have knowledge of such adjustment unless and until it shall have
received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power. (a) In the event that, on or following the Shares Acquisition
Date, directly or indirectly, (x) the Corporation shall consolidate with, or
merge with and into, any Interested Stockholder, or if in such merger or
consolidation all holders of Common Shares are not treated alike, any other
Person (whether or not the Corporation shall be the continuing or surviving
corporation of such consolidation or merger) (other than a merger or
consolidation which would result in all of the securities generally entitled to
vote in the election of directors ("voting securities") of the Corporation
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into securities of the surviving
entity) all of the voting securities of the Corporation or such surviving
entity outstanding immediately after such merger or consolidation and the
holders of such securities not having changed as a result of such merger or
consolidation), or (y) the Corporation shall sell, mortgage or otherwise
transfer (or one or more of its Subsidiaries shall sell, mortgage or otherwise
transfer), in one or more transactions other than in the ordinary course of
business, assets or earning power aggregating more than 50% of the assets or
earning power of the Corporation and its Subsidiaries (taken as a whole) to any
Interested Stockholder(s) or, if in such transaction
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<PAGE> 22
all holders of Common Shares are not treated alike, any other Person (other
than the Corporation or any Subsidiary of the Corporation in one or more
transactions each of which does not violate Section 11(n) hereof), then, and in
each such case (except as provided in Section 13(d) hereof), proper provision
shall be made so that (i) each holder of a Right, except as provided in Section
7(e) hereof, shall thereafter have the right to receive, upon the exercise
thereof at the then current Purchase Price, and in lieu of Preferred Shares,
such number of freely tradable Common Shares of the Principal Party (as
hereinafter defined), not subject to any liens, encumbrances, rights of first
refusal or other adverse claims, as shall equal the result obtained by (A)
multiplying the then current Purchase Price by the number of one one-hundredths
of a Preferred Share for which a Right is then exercisable (without taking into
account any adjustment previously made pursuant to Section 11(a)(ii)) and
dividing that product by (B) 50% of the then current per share market price of
the Common Shares of such Principal Party (determined pursuant to Section 11(d)
hereof) on the date of consummation of such Section 13 Event; (ii) such
Principal Party shall thereafter be liable for, and shall assume, by virtue of
such Section 13 Event, all the obligations and duties of the Corporation
pursuant to this Agreement; (iii) the term "Corporation" shall thereafter be
deemed to refer to such Principal Party, it being specifically intended that
the provisions of Section 11 hereof shall apply only to such Principal Party
following the first occurrence of a Section 13 Event; and (iv) such Principal
Party shall take such steps (including, but not limited to, the reservation of
a sufficient number of its Common Shares) in connection with the consummation
of any such transaction as may be necessary to assure that the provisions
hereof shall thereafter be applicable, as nearly as reasonably may be, in
relation to the Common Shares thereafter deliverable upon the exercise of the
Rights.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause (x) or (y) of
the first sentence of Section 13(a), the Person that is the issuer of any
securities into which Common Shares of the Corporation are converted in such
merger or consolidation, and if no securities are so issued, the Person that is
the other party to such merger or consolidation (including, if applicable, the
Corporation if it is the surviving corporation); and
(ii) in the case of any transaction described in clause (z) of the
first sentence of Section 13(a), the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to such
transaction or transactions;
provided, however, that in either case described in subclause (i) or (ii)
above, (1) if the Common Shares of such Person are not at such time and have
not been continuously over the preceding twelve (12) month period registered
under Section 12 of the Exchange Act, and such Person is a direct or indirect
Subsidiary of another Person the Common Shares of which are and have been so
registered, "Principal Party" shall refer to such other Person; (2) in case
such Person is a Subsidiary, directly or indirectly, of more than one Person,
the Common Shares of two or more of which are and have been so registered,
"Principal Party" shall refer to whichever of such Persons is the issuer of the
Common
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Shares having the greatest aggregate market value; and (3) in case such Person
is owned, directly or indirectly, by a joint venture formed by two or more
Persons that are not owned, directly or indirectly, by the same Person, the
rules set forth in (1) and (2) above shall apply to each of the chains of
ownership having an interest in such joint venture as if such party were a
"Subsidiary" of both or all of such joint venturers and the Principal Parties
in each such chain shall bear the obligations set forth in this Section 13 in
the same ratio as their direct or indirect interests in such Person bear to the
total of such interests.
(c) The Corporation shall not consummate any Section 13 Event unless
the Principal Party shall have a sufficient number of its authorized Common
Shares which have not been issued or reserved for issuance to permit the
exercise in full of the Rights in accordance with this Section 13 and unless
prior thereto the Corporation and such Principal Party shall have executed and
delivered to the Rights Agent a supplemental agreement providing for the terms
set forth in paragraphs (a) and (b) of this Section 13 and further providing
that, as soon as practicable after the date of any Section 13 Event the
Principal Party at its own expense shall:
(i) prepare and file a registration statement under the Act with
respect to the Rights and the securities purchasable upon exercise of the
Rights on an appropriate form, and will use its best efforts to cause such
registration statement to (A) become effective as soon as practicable after
such filing and (B) remain effective (with a prospectus at all times meeting
the requirements of the Act) until the Final Expiration Date;
(ii) use its best efforts to qualify or register the Rights and the
securities purchasable upon exercise of the Rights under the blue sky laws of
such jurisdictions as may be necessary or appropriate; and
(iii) deliver to holders of the Rights historical financial statements
for the Principal Party which comply in all respects with the requirements for
registration on Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers. The rights under this
Section 13 shall be in addition to the rights to exercise Rights and
adjustments under Section 11(a)(ii) and shall survive any exercise thereof.
(d) Notwithstanding anything in this Agreement to the contrary,
Section 13 shall not be applicable to a transaction described in subparagraphs
(x) and (y) of Section 13(a) if: (i) such transaction is consummated with a
Person or Persons who acquired Common Shares pursuant to a Permitted Offer (or
a wholly owned Subsidiary of any such Person or Persons); (ii) the price per
Common Share offered in such transaction is not less than the price per Common
Share paid to all holders of Common Shares whose shares were purchased pursuant
to such Permitted Offer; and (iii) the form of consideration offered in such
transaction is the same as the form of consideration paid pursuant to such
Permitted
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<PAGE> 24
Offer. Upon consummation of any such transaction contemplated by this Section
13(d), all Rights hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares. (a) The
Corporation shall not be required to issue fractions of Rights or to distribute
Right Certificates which evidence fractional Rights. In lieu of such fractional
Rights, there shall be paid to the registered holders of the Right Certificates
with regard to which such fractional Rights would otherwise be issuable, an
amount in cash equal to the same fraction of the current market value of a
whole Right. For the purposes of this Section 14(a), the current market value
of a whole Right shall be the closing price of the Rights (as determined
pursuant to the provisions set forth in Section 11(d)(i) hereof) for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable.
(b) The Corporation shall not be required to issue fractions of
Preferred Shares (other than fractions which are one one-hundredth or integral
multiples of one one-hundredth of a Preferred Share) upon exercise of the
Rights or to distribute certificates which evidence fractional Preferred Shares
(other than fractions which are one one-hundredth or integral multiples of one
one-hundredth of a Preferred Share). Fractions of Preferred Shares in integral
multiples of one one-hundredth of a Preferred Share may, at the election of the
Corporation, be evidenced by depositary receipts, pursuant to an appropriate
agreement between the Corporation and a depositary selected by it; provided
that such agreement shall provide that the holders of such depositary receipts
shall have the rights, privileges and preferences to which they are entitled as
beneficial owners of the Preferred Shares represented by such depositary
receipts. In lieu of fractional Preferred Shares that are not one one-hundredth
or integral multiples of one one-hundredth of a Preferred Share, the
Corporation shall pay to the registered holders of Right Certificates at the
time such Rights are exercised as herein provided an amount in cash equal to
the same fraction of the current market value of one Preferred Share,
determined pursuant to Section 11(d)(ii) hereof) for the Trading Day
immediately prior to the date of such exercise.
(c) Following the occurrence of a Section 11(a)(ii) Event, the
Corporation shall not be required to issue fractions of shares or units of such
Common Shares, capital stock equivalents or other securities upon exercise of
the Rights or to distribute certificates which evidence fractions of such
Common Shares, capital stock equivalents or other securities. In lieu of
fractional shares or units of such Common Shares, capital stock equivalents or
other securities, the Corporation may pay to the registered holders of Right
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current market value of a share or
unit of such Common Shares, capital stock equivalents or other securities. For
purposes of this Section 14(c), the current market value shall be determined in
the manner set forth in Section 1l(d) hereof for the Trading Day immediately
prior to the date of such exercise and, if such capital stock equivalent is not
traded, each such capital stock equivalent shall have the value of one
one-hundredth of a Preferred Share.
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(d) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional share upon
exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of
the Common Shares); and any registered holder of any Right Certificate (or,
prior to the Distribution Date, of the Common Shares), without the consent of
the Rights Agent or of the holder of any other Right Certificate (or, prior to
the Distribution Date, of the Common Shares), may, in his own behalf and for
his own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Corporation to enforce, or otherwise act in respect of,
his right to exercise the Rights evidenced by such Right Certificate in the
manner provided in such Right Certificate and in this Agreement. Without
limiting the foregoing or any remedies available to the holders of Rights, it
is specifically acknowledged that the holders of Rights would not have an
adequate remedy at law for any breach of this Agreement and will be entitled to
specific performance of the obligations under, and injunctive relief against
actual or threatened violations of the obligations of any Person subject to,
this Agreement.
Notwithstanding anything in this Agreement to the contrary, neither
the Corporation nor the Rights Agent shall have any liability to any holder of
a Right or a beneficial interest in a Right or other Person as a result of its
inability to perform any of its obligations under this Agreement by reason of
any preliminary or permanent injunction or other order, decree or ruling issued
by a court of competent jurisdiction or by a governmental, regulatory or
administrative agency or commission, or any statute, rule, regulation or
executive order promulgated or enacted by any governmental authority,
prohibiting or otherwise restraining performance of such obligation; provided,
however, the Corporation must use its best efforts to have any such order.
decree or ruling lifted or otherwise overturned as soon as possible.
Section 16. Right Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or
any other securities of the Corporation which may at any time be issuable on
the exercise of the Rights represented thereby, nor shall anything contained
herein or in any Right Certificate be construed to confer upon the holder of
any Right Certificate, as such, any of the rights of a stockholder of the
Corporation or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting stockholders (except as provided in Section 24 hereof), or to
receive dividends or other distributions or to exercise any preemptive or
subscription rights, or otherwise, until the Right or Rights evidenced by such
Right Certificate shall have been exercised in accordance with the provisions
hereof.
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Section 17. Concerning the Rights Agent. The Corporation agrees to pay
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the
administration and execution of this Agreement and the exercise and performance
of its duties hereunder. The Corporation also agrees to indemnify the Rights
Agent for, and to hold it harmless against, any loss, liability, or expense,
incurred without negligence, bad faith or willful misconduct on the part of the
Rights Agent, for anything done or omitted by the Rights Agent in connection
with the acceptance and administration of this Agreement, including the costs
and expenses of defending against any claim of liability arising therefrom. The
indemnity provided for herein shall survive the expiration of the Rights and
the termination of this Agreement.
The Rights Agent shall be protected and shall incur no liability for,
or in respect of, any action taken, suffered or omitted by it in connection
with, its administration of this Agreement in reliance upon any Right
Certificate or certificate for Common Shares or for other securities of the
Corporation, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
Person or Persons.
Section 18. Merger or Consolidation or Change of Name of Rights Agent.
Any corporation into which the Rights Agent or any successor Rights Agent may
be merged or with which it may be consolidated, or any corporation resulting
from any merger or consolidation to which the Rights Agent or any successor
Rights Agent shall be a party, or any corporation succeeding to the stock
transfer or all or substantially all of the corporate trust business of the
Rights Agent or any successor Rights Agent, shall be the successor to the
Rights Agent under this Agreement without the execution or filing of any paper
or any further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor Rights Agent under
the provisions of Section 20 hereof. In case at the time such successor Rights
Agent shall succeed to the agency created by this Agreement, any of the Right
Certificates shall have been countersigned but not delivered, any such
successor Rights Agent may adopt the countersignature of a predecessor Rights
Agent and deliver such Right Certificates so countersigned: and in case at that
time any of the Right Certificates shall not have been countersigned, any
successor Rights Agent may countersign such Right Certificates either in the
name of the predecessor or in the name of the successor Rights Agent; and in
all such cases such Right Certificates shall have the full force provided in
the Right Certificates and in this Agreement.
In case at any time the name of the Rights Agent shall be changed and
at such time any of the Right Certificates shall have been countersigned but
not delivered, the Rights Agent may adopt the countersignature under its prior
name and deliver Right Certificates so countersigned; and in case at that time
any of the Right Certificates shall not have been countersigned, the Rights
Agent may countersign such Right Certificates
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<PAGE> 27
either in its prior name or in its changed name; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.
Section 19. Duties of Rights Agent. The Rights Agent undertakes only
those duties and obligations imposed by this Agreement upon the following terms
and conditions, by all of which the Corporation and the holders of Right
Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Corporation), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of an Acquiring Person and the
determination of the current market price of any Security) be proved or
established by the Corporation prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board,
the Chief Executive Officer, the President, any Vice President, the Treasurer
or the Secretary of the Corporation and delivered to the Rights Agent; and such
certificate shall be full authorization to the Rights Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Corporation only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Corporation of any covenant or
condition contained in this Agreement or in any Rights Certificate; nor shall
it be responsible for any change in the exercisability of the Rights (including
the Rights becoming void pursuant to Section 7(e) hereof) or any adjustment
required under the provisions of Section 11 or Section 13 hereof or responsible
for the manner, method or amount of any such adjustment or the ascertaining of
the existence of facts that would require any such adjustment (except with
respect to the exercise of Rights evidenced by Right Certificates after receipt
of the certificate described in Section
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12 hereof); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
Preferred Shares or Common Shares to be issued pursuant to this Agreement or
any Right Certificate or as to whether any Preferred Shares or Common Shares
will, when issued, be validly authorized and issued, fully paid and
non-assessable.
(f) The Corporation agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Treasurer or the Secretary of the Corporation, and to
apply to such officers for advice or instructions in connection with its
duties, and shall not be liable for any action taken or suffered by it in good
faith or lack of action in accordance with instructions of any such officer or
for any delay in acting while waiting for those instructions. Any application
by the Rights Agent for written instructions from the Corporation may, at the
option of the Rights Agent, set forth in writing any action proposed to be
taken or omitted by the Rights Agent under this Rights Agreement and the date
on or after which such action shall be taken or such omission shall be
effective. The Rights Agent shall not be liable for any action taken by, or
omission of, the Rights Agent in accordance with a proposal included in any
such application on or after the date specified in such application (which date
shall not be less than five Business Days after the date any officer of the
Corporation actually receives such application, unless any such officer shall
have consented in writing to an earlier date) unless, prior to taking any such
action (or the effective date in the case of an omission), the Rights Agent
shall have received written instruction in response to such application
specifying the action to be taken or omitted.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Corporation or become pecuniarily interested in any
transaction in which the Corporation may be interested, or contract with or
lend money to the Corporation or otherwise act as fully and freely as though it
were not Rights Agent under this Agreement. Nothing herein shall preclude the
Rights Agent from acting in any other capacity for the Corporation or for any
other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such
attorneys or agents or for any loss to the Corporation resulting from any such
act, default, neglect or misconduct, provided reasonable care was exercised in
the selection and continued employment thereof.
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<PAGE> 29
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has not been
completed, the Rights Agent shall not take any further action with respect to
such requested exercise of transfer without first consulting with the
Corporation.
Section 20. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing mailed to the Corporation and to each
transfer agent of the Common Shares or Preferred Shares by registered or
certified mail, and to the holders of the Right Certificates by first-class
mail. The Corporation may remove the Rights Agent or any successor Rights Agent
upon thirty (30) days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent of the
Common Shares or Preferred Shares by registered or certified mail, and to
holders of the Right Certificates by first-class mail. If the Rights Agent
shall resign or be removed or shall otherwise become incapable of acting, the
Corporation shall appoint a successor to the Rights Agent. If the Corporation
shall fail to make such appointment within a period of sixty (60) days after
giving notice of such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Rights Agent or by
the holder of a Right Certificate (who shall, with such notice, submit his
Right Certificate for inspection by the Corporation), then the registered
holder of any Right Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor Rights
Agent, whether appointed by the Corporation or by such a court, shall be a
corporation organized and doing business under the laws of the United States
(or of any other state of the United States so long as such corporation is
authorized to do business as a banking institution in the State of Ohio), in
good standing, having an office in the State of Ohio, which is authorized under
such laws to exercise corporate trust or stock transfer powers and is subject
to supervision or examination by federal or state authority and which has at
the time of its appointment as Rights Agent a combined capital and surplus of
at least $100,000,000. After appointment, the successor Rights Agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver
any further assurance, conveyance, act or deed necessary for the purpose. Not
later than the effective date of any such appointment the Corporation shall
file notice thereof in writing with the predecessor Rights Agent and each
transfer agent of the Common Shares or Preferred Shares, and mail a notice
thereof in writing to the registered holders of the Right Certificates. Failure
27
<PAGE> 30
to give any notice provided for in this Section 20, however, or any defect
therein, shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent,
as the case may be.
Section 21. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the
Corporation may, at its option, issue new Right Certificates evidencing Rights
in such form as may be approved by its Board of Directors to reflect any
adjustment or change in the Purchase Price and the number or kind or class of
shares or other securities or property purchasable under the Right Certificates
made in accordance with the provisions of this Agreement. In addition, in
connection with the issuance or sale of Common Shares following the
Distribution Date and prior to the earlier of the Redemption Date and the Final
Expiration Date, the Corporation (a) shall with respect to Common Shares so
issued or sold pursuant to the exercise of stock options or under any employee
plan or arrangement, or upon the exercise, conversion or exchange of
securities, notes or debentures issued by the Corporation, and (b) may, in any
other case, if deemed necessary or appropriate by the Board of Directors of the
Corporation, issue Right Certificates representing the appropriate number of
Rights in connection with such issuance or sale; provided, however, that (i)
the Corporation shall not be obligated to issue any such Right Certificates if,
and to the extent that, the Corporation shall be advised by counsel that such
issuance would create a significant risk of material adverse tax consequences
to the Corporation or the Person to whom such Right Certificate would be
issued, and (ii) no Right Certificate shall be issued if, and to the extent
that, appropriate adjustment shall otherwise have been made in lieu of the
issuance thereof.
Section 22. Redemption and Termination.
(a) (i) The Disinterested Directors may, at their option, redeem all
but not less than all the then outstanding Rights at a redemption price of $.01
per Right, as such amount may be appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(such redemption price being hereinafter referred to as the "Redemption
Price"), at any time prior to the earlier of (x) the occurrence of a Section
11(a)(ii) Event, or (y) the Final Expiration Date. The Corporation may, at its
option, pay the Redemption Price either in Common Shares (based on the "current
per share market price," as defined in Section 11(d) hereof, of the Common
Share at the time of redemption) or cash; provided that if the Corporation
elects to pay the Redemption Price in Common Shares, the Corporation shall not
be required to issue any fractional Common Shares and the number of Common
Shares issuable to each holder of Rights shall be rounded down to the next
whole share.
(ii) In addition, the Disinterested Directors may, at their option, at
any time following the occurrence of a Section 11(a)(ii) Event and the
expiration of any period during which the holder of Rights may exercise the
rights under Section 11(a)(ii) but prior to any Section 13 Event, redeem all
but not less than all of the then outstanding Rights at the Redemption Price
(x) in connection with any merger, consolidation or sale
28
<PAGE> 31
or other transfer (in one transaction or in a series of related transactions)
of assets or earning power aggregating 50% or more of the earning power of the
Corporation and its subsidiaries (taken as a whole) in which all holders of
Common Shares are treated alike and not involving (other than as a holder of
Common Shares being treated like all other such holders) an Interested
Stockholder or (y) if and for so long as the Acquiring Person is not thereafter
the Beneficial Owner of 15% of the Common Shares, and at the time of redemption
no other Persons are Acquiring Persons.
(b) In the case of a redemption permitted under Section 22(a)(i),
immediately upon the date for redemption set forth (or determined in the manner
specified in) in a resolution of the Disinterested Directors ordering the
redemption of the Rights, evidence of which shall have been filed with the
Rights Agent, and without any further action and without any notice, the right
to exercise the Rights will terminate and the only right thereafter of the
holders of Rights shall be to receive the Redemption Price for each Right so
held. In the case of a redemption permitted only under Section 22(a)(ii),
evidence of which shall have been filed with the Rights Agent, the right to
exercise the Rights will terminate and represent only the right to receive the
Redemption Price upon the later of ten Business Days following the giving of
such notice or the expiration of any period during which the rights may be
exercised under Section 11(a)(ii). The Corporation shall promptly give public
notice of any such redemption; provided, however, that the failure to give, or
any defect in, any such notice shall not affect the validity of such
redemption. Within ten (l0) days after such date for redemption set forth in a
resolution of the Disinterested Directors ordering the redemption of the
Rights, the Corporation shall mail a notice of redemption to all the holders of
the then outstanding Rights at their last addresses as they appear upon the
registry books of the Rights Agent or, prior to the Distribution Date, on the
registry books of the transfer agent for the Common Shares Any notice which is
mailed in the manner herein provided shall be deemed given, whether or not the
holder receives the notice. Each such notice of redemption will state the
method by which the payment of the Redemption Price will be made. Neither the
Corporation nor any of its Affiliates or Associates may redeem, acquire or
purchase for value any Rights at any time in any manner other than that
specifically set forth in this Section 22 and other than in connection with the
purchase of Common Shares prior to the Distribution Date.
(c) The Corporation may, at its option, discharge all of its
obligations with respect to the Rights by (i) issuing a press release
announcing the manner of redemption of the Rights in accordance with this
Agreement and (ii) mailing payment of the Redemption Price to the registered
holders of the Rights at their last addresses as they appear on the registry
books of the Rights Agent or, prior to the Distribution Date, on the registry
books of the Transfer Agent of the Common Shares, and upon such action, all
outstanding Rights and Right Certificates shall be null and void without any
further action by the Corporation.
Section 23. Exchange. (a) The Disinterested Directors may, at their
option, at any time after any Person becomes an Acquiring Person, exchange all
or part of the then
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<PAGE> 32
outstanding and exercisable Rights (which shall not include Rights that have
become void pursuant to the provisions of Section 7(e) hereof) for Common
Shares of the Corporation at an exchange ratio of one Common Share per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio"). Notwithstanding the
foregoing, the Disinterested Directors shall not be empowered to effect such
exchange at any time after any Person (other than the Corporation, any
Subsidiary of the Corporation, any employee benefit plan of the Corporation, or
any such Subsidiary, any entity holding Common Shares for or pursuant to the
terms of any such a plan), together with all Affiliates and Associates of such
Person, becomes the Beneficial Owner of 50% or more of the Common Shares then
outstanding.
(b) Immediately upon the action of the Board of Directors of the
Corporation ordering the exchange of any Rights pursuant to subsection (a) of
this Section 23 and without any further action and without any notice, the
right to exercise such Rights shall terminate and the only right thereafter of
a holder of such Rights shall be to receive that number of Common Shares equal
to the number of such Rights held by such holder multiplied by the Exchange
Ratio. The Corporation shall promptly give public notice of any such exchange;
provided, however, that the failure to give, or any defect in, such notice
shall not affect the validity of such exchange. The Corporation shall promptly
mail a notice of any such exchange to all of the holders of such Rights at
their last addresses as they appear upon the registry books of the Rights
Agent. Any notice which is mailed in the manner herein provided shall be deemed
given, whether or not the holder receives the notice. Each such notice of
exchange will state the method by which the exchange of the Common Shares for
Rights will be effected and, in the event of any partial exchange, the number
of Rights which will be exchanged. Any partial exchange shall be effected pro
rata based on the number of Rights (other than Rights which have become void
pursuant to the provisions of Section 7(e) hereof ) held by each holder of
Rights.
(c) In any exchange pursuant to this Section 23, the Corporation may
substitute Preferred Shares (or equivalent preferred shares, as such term is
defined in Section 11 (b) hereof ) for some or all of the Common Shares
exchangeable for Rights, at the initial rate of one one-hundredth of a
Preferred Share (or equivalent preferred share) for each Common Share, as
appropriately adjusted to reflect adjustments in the voting rights of the
Preferred Shares pursuant to the terms thereof, so that the fraction of a
Preferred Share delivered in lieu of each Common Share shall have the same
voting rights as one Common Share.
(d) In the event that there shall not be sufficient Common Shares or
Preferred Shares issued but not outstanding or authorized but unissued to
permit any exchange of Rights as contemplated in accordance with this Section
23, the Corporation shall take all such action as may be necessary to authorize
additional Common Shares or Preferred Shares for issuance upon exchange of the
Rights.
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<PAGE> 33
Section 24. Notice of Certain Events. (a) In case the Corporation
shall propose (i) to pay any dividend payable in stock of any class to the
holders of its Preferred Shares or to make any other distribution to the
holders of its Preferred Shares (other than a regularly quarterly cash
dividend), (ii) to offer to the holders of its Preferred Shares rights or
warrants to subscribe for or to purchase any additional Preferred Shares or
shares of stock of any class or any other securities, rights or options, (iii)
to effect any reclassification of its Preferred Shares (other than a
reclassification involving only the subdivision of outstanding Preferred
Shares), (iv) to effect any consolidation or merger into or with, or to effect
any sale, mortgage or other transfer (or to permit one or more of its
Subsidiaries to effect any sale, mortgage or other transfer) in one or more
transactions, of 50% or more of the assets or earning power of the Corporation
and its Subsidiaries (taken as a whole) to any other Person or Persons (other
than, in each case, the Corporation and/or any of its Subsidiaries in one or
more transactions each of which does not violate Section 11(m) hereof), or (v)
to effect the liquidation, dissolution or winding up of the Corporation, then,
in each such case, the Corporation shall give to each holder of a Right
Certificate, in accordance with Section 25 hereof, a notice of such proposed
action and file a certificate with the Rights Agent to that effect, which
notice and certificate shall specify the record date for the purposes of such
stock dividend, or distribution of rights or warrants, or the date on which
such reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Preferred Shares, if any such date is to be
fixed, and such notice shall be so given in the case of any action covered by
clause (i) or (ii) above at least twenty (20) days prior to the record date for
determining holders of the Preferred Shares for purposes of such action, and in
the case of any such other action, at least twenty (20) days prior to the date
of the taking of such proposed action or the date of participation therein by
the holders of the Preferred Shares, whichever shall be the earlier.
(b) In case of a Section 11(a)(ii) Event, then (i) the Corporation
shall as soon as practicable thereafter give to each holder of a Right
Certificate, in accordance with Section 25 hereof, a notice of the occurrence
of such event, which notice shall describe such event and the consequences of
such event to holders of Rights under Section 11(a)(ii) hereof, and (ii) all
references in the preceding paragraph (a) to Preferred Shares shall be deemed
thereafter to refer also to Common Shares and/or. if appropriate, other
securities of the Corporation.
Section 25. Notices. Notices or demands authorized by this Agreement
to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Corporation shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Rights Agent) as follows:
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<PAGE> 34
Waterlink, Inc.
4100 Holiday Street, N.W. - Suite 201
Canton, OH 44718
Attention: Chief Executive Officer
-------------------------
Subject to the provisions of Section 20 hereof, any notice or demand authorized
by this Agreement to be given or made by the Corporation or by the holder of
any Right Certificate to or on the Rights Agent shall be sufficiently given or
made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Corporation) as follows:
American Stock Transfer & Trust Company
40 Wall Street
-------------------------------
New York, New York 10005
-------------------------------
Attention:__________
Notices or demands authorized by this Agreement to be given or made by the
Corporation or the Rights Agent to the holder of any Right Certificate or, if
prior to the Distribution Date, to the holder of certificates representing
Common Shares shall be sufficiently given or made if sent by first-class mail,
postage prepaid, addressed to such holder at the address of such holder as
shown on the registry books of the Corporation.
Section 26. Supplements and Amendments. Prior to the Distribution
Date, the Corporation and the Rights Agent shall, if the Corporation so
directs, supplement or amend any provision of this Agreement without the
approval of any holders of certificates representing Common Shares. From and
after the Distribution Date, the Corporation and the Rights Agent shall, if the
Corporation so directs, supplement or amend this Agreement without the approval
of any holders of Right Certificates in order (i) to cure any ambiguity, (ii)
to correct or supplement any provision contained herein which may be defective
or inconsistent with any other provisions herein, (iii) to shorten or lengthen
any time period hereunder or (iv) to change or supplement the provisions
hereunder in any manner which the Corporation may deem necessary or desirable
and which shall not adversely affect the interests of the holders of Right
Certificates (other than an Acquiring Person or an Affiliate or Associate of an
Acquiring Person); provided, however, that this Agreement may not be
supplemented or amended to lengthen, pursuant to clause (iii) of this sentence,
(A) a time period relating to when the Rights may be redeemed at such time as
the Rights are not then redeemable, or (B) any other time period unless such
lengthening is for the purpose of protecting, enhancing or clarifying the
rights of, and/or the benefits to, the holders of Rights. Upon the delivery of
a certificate from an appropriate officer of the Corporation which states that
the proposed supplement or amendment is in compliance with the terms of this
Section 26, the Rights Agent shall execute such supplement or amendment,
provided that such supplement or amendment does not adversely affect the rights
or obligations of the Rights Agent under Section 17 or Section 19 of this
Agreement. Prior to the Distribution Date, the interests of the holders of
Rights shall be deemed coincident with the interests of the holders of Common
Shares.
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<PAGE> 35
Section 27. Determination and Actions by the Board of Directors, etc.
The Disinterested Directors shall have the exclusive power and authority to
administer this Agreement and to exercise all rights and powers specifically
granted to the Board, or the Corporation, or as may be necessary or advisable
in the administration of this Agreement, including, without limitation, the
right and power to (i) interpret the provisions of this Agreement, and (ii)
make all determinations deemed necessary or advisable for the administration of
this Agreement (including, without limitation, a determination to redeem or not
redeem the Rights or to amend the Agreement and whether any proposed amendment
adversely affects the interests of the holders of Right Certificates). For all
purposes of this Agreement, any calculation of the number of Common Shares or
other securities outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding Common Shares or any
other securities of which any Person is the Beneficial Owner, shall be made in
accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules
and Regulations under the Exchange Act as in effect on the date of this
Agreement. All such actions, calculations, interpretations and determinations
(including, for purposes of clause (y) below, all omissions with respect to the
foregoing) which are done or made by the Disinterested Directors in good faith,
shall (x) be final, conclusive and binding on the Corporation, the Rights
Agent, the holders of the Right Certificates and all other parties, and (y) not
subject the Board or the Disinterested Directors to any liability to the
holders of the Right Certificates.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Corporation or the Rights Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
Section 29. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the
Corporation, the Rights Agent and the registered holders of the Right
Certificates (and, prior to the Distribution Date, the Common Shares) any legal
or equitable right, remedy or claim under this Agreement; but this Agreement
shall be for the sole and exclusive benefit of the Corporation, the Rights
Agent and the registered holders of the Right Certificates (and, prior to the
Distribution Date, the Common Shares).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement, each Right and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance
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<PAGE> 36
with the laws of such State applicable to contracts to be made and performed
entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and attested, all as of the date and year first above written.
WATERLINK, INC.
<TABLE>
<CAPTION>
Attest:
<S> <C>
By________________________________ By________________________________________
Name: Kathleen S. Donatini Name: Chet S. Ross
Title: Secretary Title: President & Chief Executive Officer
Attest: American Stock Transfer & Trust Company
By________________________________ By________________________________________
Name: Name:
Title: Title:
</TABLE>
34
<PAGE> 37
PREFERRED
EXHIBIT A
FORM OF
CERTIFICATE OF DESIGNATION, PREFERENCES AND
RIGHTS OF SERIES 1 PREFERRED STOCK
of
WATERLINK, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
Waterlink, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware, in accordance with the provisions of
Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors of
the Fourth Amended and Restated Certificate of Incorporation of the said
Corporation, the said Board of Directors on May 23, 1997, adopted the
following resolution creating a series of Preferred Stock designated as Series
1 Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of this Corporation in accordance with the provisions of its Fifth Amended and
Restated Certificate of Incorporation, a series of Preferred Stock of the
Corporation is hereby created and that the designation and amount thereof and
the voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series 1 Preferred Stock" (the "Series 1 Preferred Stock"), and
the number of shares constituting such series shall be 40,000; provided,
however, that, if more than a total of 40,000 shares of Series 1 Preferred
Stock shall be issuable upon the exercise of Rights (the "Rights") issued
pursuant to the Rights Agreement, dated as of May 23, 1997, between the
Corporation and American Stock Transfer & Trust Company, as Rights Agent (as
amended from time to time) (the "Rights Agreement"), the Board of Directors of
the Corporation, pursuant to Section 151 of the General Corporation Law of the
State of Delaware, shall direct by resolution or resolutions that a certificate
be properly executed, acknowledged and filed providing for the total number of
shares of Series 1 Preferred Stock authorized to be issued to be increased (to
the extent that the Certificate of Incorporation then permits) to the largest
number of whole shares (rounded up to the nearest whole number) issuable upon
exercise of the Rights.
<PAGE> 38
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares of
Series 1 Preferred Stock with respect to dividends, the holders of shares of
Series 1 Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors out of assets legally available for the purpose,
quarterly dividends payable in cash on the fifteenth business day of January,
April, July and October in each year (each such date being referred to herein
as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share or fraction of a
share of Series 1 Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision
for adjustment hereinafter set forth, 100 times the aggregate per share amount
of all cash dividends, and 100 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of Common Stock, par value $.001 per share, of the
Corporation (the "Common Stock") or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series 1 Preferred Stock.
(B) The Corporation shall declare a dividend or distribution on the Series
1 Preferred Stock as provided in paragraph (A) above immediately after it
declares a dividend or distribution on the Common Stock (other than a dividend
payable in shares of Common Stock); provided that, in the event no dividend or
distribution shall have been declared on the Common Stock during the period
between any Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $1.00 per share on the Series 1 Preferred
Stock shall nevertheless be payable on such subsequent Quarterly Dividend
Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series 1 Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares of Series 1 Preferred Stock,
unless the date of issue of such shares is prior to the record date for the
first Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless the date
of issue is a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of shares of Series 1 Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue
and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series 1
Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board
of Directors may fix a record date for the determination of holders of shares
of Series 1 Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
2
<PAGE> 39
Section 3. Voting Rights The holders of shares of Series 1 Preferred Stock
shall have the following voting rights:
(A) Except as provided in paragraph C of this Section 3 and subject to the
provision for adjustment hereinafter set forth, each share of Series 1
Preferred Stock shall entitle the holder thereof to 100 votes on all matters
submitted to a vote of the stockholders of the Corporation.
(B) Except as otherwise provided herein or by law, the holders of shares
of Series 1 Preferred Stock and the holders of shares of Common Stock shall
vote together as one class on all matters submitted to a vote of stockholders
of the Corporation.
(C) (i) If, on the date used to determine stockholders of record for any
meeting of stockholders for the election of directors, a default in preference
dividends (as defined in subparagraph (v) below) on the Series 1 Preferred
Stock shall exist, the holders of the Series 1 Preferred Stock shall have the
right, voting as a class as described in subparagraph (ii) below, to elect two
directors (in addition to the directors elected by holders of Common Stock or
any other class or series of Preferred Stock of the Corporation). Such right
may be exercised until there is no longer a default in preference dividends (a)
at any meeting of stockholders for the election of directors or (b) at a
meeting of the holders of shares of the Series 1 Preferred Stock, called for
such purpose. Upon the occurrence of a default in preference dividends on the
Series 1 Preferred Shares, the Chief Executive Officer or the Secretary shall
call a special meeting of the holders of the Series 1 Preferred Shares for the
purpose of the exercise of the voting rights described in this Section 3(C),
unless the next annual meeting of stockholders for the election of directors is
scheduled to be held within sixty (60) days of the date on which the default in
preference dividends occurred.
(ii) The right of the holders of Series 1 Preferred Stock to elect two
directors, as described above, shall be exercised as a class independently of
any rights of holders of any other series of Preferred Stock upon which voting
rights to elect such directors have been conferred and are then exercisable.
(iii) Each director elected by the holders of shares of Series 1 Preferred
Stock shall be referred to herein as a "Series 1 Preferred Director." A Series
1 Preferred Director so elected shall continue to serve as such director for a
term of one year, except that upon any termination of the right of all of such
holders to vote as a class for Series 1 Preferred Directors, the term of office
of such directors shall terminate. Any Series 1 Preferred Director may be
removed by, and shall not be removed except by, the vote of the holders of
record of a majority of the outstanding shares of Series 1 Preferred Stock then
entitled to vote for the election of directors, present (in person or by proxy)
and voting together as a single class (a) at a meeting of the stockholders, or
(b) at a meeting of the holders of shares of such Series 1 Preferred Stock,
called for the purpose in accordance with the By-laws of the Corporation, or
(c) by written consent signed by the holders of a majority of the then
outstanding shares of Series 1 Preferred Stock then entitled to vote for the
election of directors, taken together as a single class.
(iv) So long as a default in any preference dividends on the Series 1
Preferred Stock shall exist or the holders of any other series of Series 1
Preferred Stock shall be entitled to elect Series
3
<PAGE> 40
1 Preferred Directors, (a) any vacancy in the office of a Series 1 Preferred
Director may be filled (except as provided in the following clause (b)) by an
instrument in writing signed by the remaining Series 1 Preferred Director and
filed with the Corporation and (b) in the case of the removal of any Series 1
Preferred Director, the vacancy may be filled by the vote or written consent of
the holders of a majority of the outstanding shares of Series 1 Preferred Stock
then entitled to vote for the election of directors, present (in person or by
proxy) and voting together as a single class, at such time as the removal shall
be effected. Each director appointed as aforesaid by the remaining Series 1
Preferred Director shall be deemed, for all purposes hereof, to be a Series 1
Preferred Director. Whenever no default in preference dividends on the Series 1
Preferred Stock shall exist, then the number of directors constituting the
Board of Directors of the Corporation shall be reduced by two.
(v) For purposes hereof, a "default in preference dividends" on the Series
1 Preferred Stock shall be deemed to have occurred whenever the amount of
cumulative and unpaid dividends on the Series 1 Preferred Stock shall be
equivalent to six full quarterly dividends or more (whether or not
consecutive), and, having so occurred, such default shall be deemed to exist
thereafter until, but only until, all cumulative dividends on all shares of the
Series 1 Preferred Stock then outstanding shall have been paid through the last
Quarterly Dividend Payment Date or until, but only until, non-cumulative
dividends have been paid regularly for at least one year.
(E) Except as set forth herein (or as otherwise required by applicable
law), holders of Series 1 Preferred Stock shall have no special voting rights
and their consent shall not be required (except to the extent they are entitled
to vote with the holders of the Common Stock as set forth herein) for taking
any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series 1 Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series 1 Preferred Stock
outstanding shall have been paid in full, the Corporation shall not
(i) declare or pay dividends, or make any other distributions, on any
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series 1 Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series 1 Preferred Stock,
except dividends paid ratably on the Series 1 Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration (except as
provided in (iv) below) shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series 1
Preferred Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for shares of
4
<PAGE> 41
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series 1 Preferred Stock;
(iv) redeem or purchase or otherwise acquire for consideration any shares
of Series 1 Preferred Stock, or any shares of stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding up) with the Series
1 Preferred Stock, except in accordance with a purchase offer made in writing
or by publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after consideration of
the respective annual dividend rates and other relative rights and preferences
of the respective series and classes, shall determine in good faith will result
in fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section
4, purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series 1 Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, in any other Certificate of Amendment creating a
series of Preferred Stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Subject to the prior and superior rights of holders of any shares of
any series of Preferred Stock ranking prior and superior to the shares of
Series 1 Preferred Stock with respect to rights upon liquidation, dissolution
or winding up (voluntary or otherwise), no distribution shall be made (x) to
the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series 1 Preferred Stock unless,
prior thereto, the holders of shares of Series 1 Preferred Stock shall have
received an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, plus an amount
equal to the greater of (1) $100 per share, or (2) an aggregate amount per
share equal to 100 times the aggregate amount to be distributed per share to
the holders of Common Stock, or (y) to the holders of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with
the Series 1 Preferred Stock, except distributions made ratably on the Series 1
Preferred Stock and all other such parity stock in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up (the "Series 1 Liquidation Preference").
Following the payment of the full amount of the Series 1 Liquidation
Preference, no additional distributions shall be made to the holders of shares
of Series 1 Preferred Stock.
(B) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series 1 Liquidation Preference and the
liquidation preferences of all other series of
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<PAGE> 42
preferred stock, if any, which rank on a parity with the Series 1 Preferred
Stock, then such remaining assets shall be distributed ratably to the holders
of Series 1 Preferred Stock and the holders of such parity shares in proportion
to their respective liquidation preferences. In the event, however, that there
are not sufficient assets available to permit payment in full of the Capital
Adjustment, then such remaining assets shall be distributed ratably to the
holders of Common Stock.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series 1 Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 100 times the aggregate amount of stock.
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
Section 8. No Redemption. The shares of Series 1 Preferred Stock shall not
be redeemable.
Section 9. Ranking. The Series 1 Preferred Stock shall rank junior to all
other series of the Corporation's Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.
Section 10. Amendment. The Certificate of Incorporation of the Corporation
shall not be further amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series 1 Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of a majority or more of the outstanding shares of Series 1 Preferred
Stock, voting separately as a class.
IN WITNESS WHEREOF, this Certificate is executed on behalf of the
Corporation by its Chairman of the Board and attested by its Secretary this _
day of ______________, 1997.
WATERLINK, INC.
-----------------------------------
Attest:
- -----------------------------------
Kathleen S. Donatini, Secretary
6
<PAGE> 43
EXHIBIT B
FORM OF RIGHT CERTIFICATE
CERTIFICATE
NO. R- _____ RIGHTS
NOT EXERCISABLE AFTER _________, ___________ OR EARLIER IF REDEEMED BY THE
CORPORATION. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01 PER RIGHT ON THE
TERMS SET FORTH IN THE RIGHTS AGREEMENT. THE RIGHTS REPRESENTED BY THIS
CERTIFICATE WERE ISSUED TO A PERSON WHO WAS OR BECOMES AN ACQUIRING PERSON,
THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME VOID UNDER
CERTAIN CIRCUMSTANCES AS SPECIFIED IN SECTION 7(e) OF THE RIGHTS AGREEMENT.
RIGHT CERTIFICATE
WATERLINK, INC.
This certifies that ________, or registered assigns, is the registered
owner of the number of Rights set forth above, each of which entitles the owner
thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of May 23, 1997 (the "Rights Agreement "), between
Waterlink, Inc., a Delaware corporation (the "Corporation"), and American Stock
Transfer & Trust Company (the "Rights Agent"), to purchase from the Corporation
at any time after the Distribution Date (as such term is defined in the Rights
Agreement) and prior to 5:00 P.M., New York time, on _______, 2007, unless the
Rights evidenced hereby shall have been previously redeemed by the Corporation,
at the principal office or offices of the Rights Agent designated for such
purpose, or at the office of its successor as Rights Agent, one one-hundredth
of a fully paid non-assessable share of Series 1 Preferred Stock, without par
value (the "Preferred Shares"), of the Corporation, at a purchase price of
$65.00 per one one-hundredth of Preferred Share (the "Purchase Price"), upon
presentation and surrender of this Right Certificate with the Form of Election
to Purchase duly executed. The number of Rights evidenced by this Right
Certificate (and the number of one one-hundredths of a Preferred Share which
may be purchased upon exercise hereof) set forth above, and the Purchase Price
set forth above, are the number and Purchase Price as of ___________, 1997,
based on the Preferred Shares as constituted at such date.
Upon the occurrence of a Section 11(a)(ii) Event (as such term is defined
in the Rights Agreement), if the Rights evidenced by this Right Certificate are
beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of
any such Acquiring Person (as such terms are defined in the Rights Agreement),
(ii) a transferee of any such Acquiring Person, Associate or Affiliate who
becomes a transferee after the Acquiring Person becomes such, or (iii) under
certain circumstances specified in the Rights Agreement, a transferee of any
such Acquiring Person, Associate or Affiliate who becomes a transferee prior to
or concurrently with the Acquiring Person becoming such, such Rights shall
become null and void and no holder hereof shall have any right with respect to
such Rights from and after the occurrence of such Section 11(a)(ii) Event.
<PAGE> 44
As provided in the Rights Agreement, the Purchase Price and the number of
one one-hundredth of a Preferred Share or other securities which may be
purchased upon the exercise of the Rights evidenced by this Right Certificate
are subject to modification and adjustment upon the happening of certain
events, including Triggering Events (as such term is defined in the Rights
Agreement).
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Corporation and the holders of the Right Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the principal executive offices
of the Corporation and the principal office or offices of the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares or other securities as the Rights evidenced by the Right
Certificate or Right Certificates surrendered shall have entitled such holder
to purchase. If this Right Certificate shall be exercised in part, the holder
shall be entitled to receive upon surrender hereof another Right Certificate or
Right Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate may be redeemed by the Corporation at a redemption price of
$.01 per Right (subject to adjustment as provided in the Rights Agreement)
payable in cash.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are one
one-hundredth or integral multiples of one one-hundredth of a Preferred Share,
which may, at the election of the Corporation, be evidenced by depositary
receipts), but in lieu thereof a cash payment will be made, as provided in the
Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or receive
dividends or be deemed for any purpose the holder of the Preferred Shares or of
any other securities of the Corporation which may at any time be issuable on
the exercise hereof, nor shall anything contained in the Rights Agreement or
herein be construed to confer upon the holder hereof, as such, any of the
rights of a stockholder of the Corporation or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or other
distributions or to exercise any preemptive or subscription rights, or
otherwise, until the
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<PAGE> 45
Right or Rights evidenced by this Right Certificate shall have been exercised
as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Corporation
and its corporate seal. Dated as of __________, 1997.
[SEAL
ATTEST:] WATERLINK, INC.
___________________________________ By:________________________________
Name: Name:
Title: Title:
Countersigned:
American Stock Transfer & Trust Company
By:________________________________
Authorized Signatory
Name:
Title:
3
<PAGE> 46
---------------------
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED ______________ hereby sells, assigns and transfers
unto___________________________________________________________________________
(Please print name and address of transferee)
________________________________________________________________________________
this Right Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________ Attorney, to
transfer the within Right Certificate on the books of the within-named
Corporation, with full power of substitution.
Dated: ___________,_______
----------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
The undersigned hereby certifies that (1) the Rights evidenced by this
Right Certificate are not being sold, assigned or transferred by or on behalf
of a Person who is or was an Acquiring Person or an Affiliate or Associate
thereof (as such terms are defined in the Right Agreement) and (2) after due
inquiry and to the best knowledge of the undersigned, the undersigned did not
acquire the Rights evidenced by this Right Certificate from any Person who is
or was an Acquiring Person or an Affiliate or Associate thereof (as such terms
are defined in the Rights Agreement).
----------------------------------
Signature
4
<PAGE> 47
FORM OF ELECTION TO PURCHASE
(To be executed by the registered holder
if such holder desires to exercise Rights
represented by the Right Certificate.)
To the Rights Agent:
The undersigned hereby irrevocably elects to exercise ____ Rights
represented by this Right Certificate to purchase the Preferred Shares, Common
Shares or other securities issuable upon the exercise of such Rights and
requests that certificates for such Preferred Shares, Common Shares or other
securities be issued in the name of: Please insert social security or other
identifying number _________________________________________________
_____________________________________________________________________________
(Please print name and address)
_____________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social ecurity
or other identifying number_________________________________________________
____________________________________________________________________________
(Please print name and address)
____________________________________________________________________________
Dated: __________,________
----------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
The undersigned hereby certifies that (1) the Rights evidenced by this
Right Certificate are not being exercised by or on behalf of a Person who is or
was an Acquiring Person or an Affiliate or Associate thereof (as such terms are
defined in the Rights Agreement) and (2) after due inquiry and to the best
knowledge of the undersigned, the undersigned did not acquire the
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<PAGE> 48
Rights evidenced by this Rights Certificate from any Person who is or was an
Acquiring Person or an Affiliate or Associate thereof (as such terms are
defined in the Rights Agreement).
---------------------------------
Signature
- -------------------------------------------------------------------------------
NOTICE
The signature on the foregoing Forms of Assignment and Election and
certificates must conform to the name as written upon the face of this Right
Certificate in every particular, without alteration or enlargement or any
change whatsoever.
In the event the certification set forth above in the Form of Assignment
or the Form of Election to Purchase, as the case may be, is not completed, the
Corporation and the Rights Agent will deem the Beneficial Owner of the Rights
evidenced by this Right Certificate to be an Acquiring Person or an Affiliate
or Associate thereof (as such terms are defined in the Rights Agreement) and
such Assignment or Election to Purchase will not be honored.
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<PAGE> 49
PREFERRED
EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On May 23, 1997, the Board of Directors of Waterlink, Inc. (the
"Corporation") declared a dividend distribution of one preferred share purchase
right (a "Right") for each outstanding share of Common Stock, par value $.001
per share (the "Common Shares"), of the Corporation. The dividend is payable to
the stockholders of record on the day on which the SEC declares the Company's
Registration Statement on Form S-1 effective, (the "Record Date"), and with
respect to Common Shares issued thereafter until the Distribution Date (as
defined below) and, in certain circumstances, with respect to Common Shares
issued after the Distribution Date. Except as set forth below, each Right, when
it becomes exercisable, entitles the registered holder to purchase from the
Corporation one one-hundredth of a share of Series 1 Preferred Stock, without
par value (the "Preferred Shares"), of the Corporation at a price of $65.00
per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Corporation and American Stock
Transfer & Trust Company, as Rights Agent (the "Rights Agent"), dated as of May
23, 1997.
Initially, the Rights will attach to all certificates representing Common
Shares then outstanding, and no separate Right Certificates will be
distributed. The Rights will separate from the Common Shares upon the earliest
to occur of (i) a person or group of affiliated or associated persons
(excluding certain Exempt Persons, as defined in the Rights Agreement) having
acquired beneficial ownership of 15% or more of the outstanding Common Shares
(except pursuant to a Permitted Offer, as hereinafter defined); or (ii) 10 days
(or such later date as the Board may determine) following the commencement of,
or announcement of an intention to make a tender offer or exchange offer the
consummation of which would result in a person or group becoming an Acquiring
Person (as hereinafter defined) (the earliest of such dates being called the
"Distribution Date"). A person or group whose acquisition of Common Shares
causes a Distribution Date pursuant to clause (i) above is an "Acquiring
Person." The date that a person or group becomes an Acquiring Person is the
"Shares Acquisition Date."
The Rights Agreement provides that, until the Distribution Date, the
Rights will be transferred with and only with the Common Shares. Until the
Distribution Date (or earlier redemption or expiration of the Rights) new
Common Share certificates issued after the Record Date upon transfer or new
issuance of Common Shares 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
Common Shares outstanding as of the Record Date, even without such notation or
a copy of this Summary of Rights being attached thereto, will also constitute
the transfer of the Rights associated with the Common Shares represented by
such certificate. As soon as practicable following the Distribution Date,
separate certificates evidencing the Rights ("Right Certificates") will be
mailed to holders of record of the Common Shares as of the close of business on
the Distribution Date (and to each initial record holder of certain Common
Shares issued after the Distribution Date), and such separate Right
Certificates alone will evidence the Rights.
<PAGE> 50
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on _____, 2007, unless earlier redeemed by the
Corporation as described below.
In the event that any person becomes an Acquiring Person (except pursuant
to a tender or exchange offer which is for all outstanding Common Shares at a
price and on terms which a majority of certain members of the Board of
Directors determines to be adequate and in the best interests of the
Corporation, its stockholders and other relevant constituencies, other than
such Acquiring Person, its affiliates and associates (a "Permitted Offer")),
each holder of a Right will thereafter have the right (the "Flip-In Right") to
receive upon exercise the number of Common Shares or of one one-hundredths of a
Preferred Share (or, in certain circumstances, other securities of the
Corporation) having a value (immediately prior to such triggering event) equal
to two times the exercise price of the Right. Notwithstanding the foregoing,
following the occurrence of the event described above, all Rights that are, or
(under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person or any affiliate or associate
thereof will be null and void.
In the event that, at any time following the Shares Acquisition Date, (i)
the Corporation is acquired in a merger or other business combination
transaction in which the holders of all of the outstanding Common Shares
immediately prior to the consummation of the transaction are not the holders of
all of the surviving corporation's voting power, or (ii) more than 50% of the
Corporation's assets or earning power is sold or transferred, in either case
with or to an Acquiring Person or any affiliate or associate or any other
person in which such Acquiring Person, affiliate or associate has an interest
or any person acting on behalf of or in concert with such Acquiring Person,
affiliate or associate, or, if in such transaction all holders of Common Shares
are not treated alike, any other person, then each holder of a Right (except
Rights which previously have been voided as set forth above) shall thereafter
have the right (the "Flip-Over Right") to receive, upon exercise, common
shares of the acquiring company having a value equal to two times the exercise
price of the Right. The holder of a Right will continue to have the Flip-Over
Right whether or not such holder exercises or surrenders the Flip-In Right.
The Purchase Price payable, and the number of Preferred Shares, Common
Shares or other securities issuable, upon exercise of the Rights are 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
Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of
certain rights or warrants to subscribe for or purchase Preferred Shares at a
price or securities convertible into Preferred Shares with a conversion price,
less than the then current market price of the Preferred Shares or (iii) upon
the distribution to holders of the Preferred Shares of evidences of
indebtedness or assets (excluding regular quarterly cash dividends) or of
subscription rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such
case, prior to the Distribution Date.
2
<PAGE> 51
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $1.00 per share but, if greater, will be entitled
to an aggregate dividend per share of 100 times the dividend declared per
Common Share. In the event of liquidation, the holders of the Preferred Shares
will be entitled to a minimum preferential liquidation payment of an amount
equal to accrued and unpaid dividends thereon, plus an amount equal to the
greater of (1) $100 per share, or (2) 100 times all amounts distributed per
share to the holders of the Common Shares. Finally, in the event of any merger,
consolidation or other transaction in which Common Shares are exchanged, each
Preferred Share will be entitled to receive 100 times the amount received per
Common Share. These rights are protected by customary antidilution provisions.
In the event that the amount of accrued and unpaid dividends on the Preferred
Shares is equivalent to six full quarterly dividends or more, the holders of
the Preferred Shares shall have the right, voting as a class, to elect two
directors in addition to the directors elected by the holders of the Common
Shares until all cumulative dividends on the Preferred Shares have been paid
through the last quarterly dividend payment date or until non-cumulative
dividends have been paid regularly for at least one year.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are one one-hundredth or integral multiples of one
one-hundredth of a Preferred Share, which may, at the election of the
Corporation, be evidenced by depositary receipts) and in lieu thereof, an
adjustment in cash will be made based on the market price of the Preferred
Shares on the last trading day prior to the date of exercise.
At any time prior to the earlier to occur of (i) a person becoming an
Acquiring Person or (ii) the expiration of the Rights, and under certain other
circumstances, the Corporation may redeem the Rights in whole, but not in part,
at a price of $.01 per Right (the "Redemption Price") which redemption shall be
effective upon the action of the Board of Directors. Additionally, following
the Shares Acquisition Date, the Corporation may redeem the then outstanding
Rights in whole, but not in part, at the Redemption Price, provided that such
redemption is in connection with a merger or other business combination
transaction or series of transactions involving the Corporation in which all
holders of Common Shares are treated alike but not involving an Acquiring
Person or its affiliates or associates.
All of the provisions of the Rights Agreement may be amended by the Board
of Directors of the Corporation prior to the Distribution Date. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board in order to cure any ambiguity, defect or inconsistency, to make changes
which do not adversely affect the interests of holders of Rights (excluding the
interests of any Acquiring Person), or, subject to certain limitations, to
shorten or lengthen any time period under the Rights Agreement.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Corporation, including, without limitation, the
right to vote or to receive dividends. While the distribution of the Rights
will not be taxable to stockholders of the Corporation, stockholders
3
<PAGE> 52
may, depending upon the circumstances, recognize taxable income should the
Rights become exercisable or upon the occurrence of certain events thereafter.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form S-1. A
copy of the Rights Agreement is available free of charge from the Corporation.
This summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement, which is
hereby incorporated herein by reference.
4
<PAGE> 1
Exhibit 5.1
[LOGO] 2300 BP America Building
200 Public Square
Cleveland, Ohio 44114-2378
(216) 363-4500
Fax (216) 363-4588
May 23, 1997
Board of Directors
Waterlink, Inc.
4100 Holiday Street N.W.
Suite 201
Canton, OH 44718-2532
Gentlemen:
Waterlink, Inc., a Delaware corporation (the "Company"), has filed
with the Securities and Exchange Commission under the Securities Act of 1933,
as amended, a Registration Statement on Form S-1 (Registration No. 333-25249)
(the "Registration Statement") relating to a proposed public offering of an
aggregate of 4,500,000 shares (including 675,000 shares subject to an
underwriters' over-allotment option) (the "Shares") of the Company's common
stock, par value $.001 per share. The Shares are to be sold in accordance with
the terms of an underwriting agreement to be executed by the Company, Smith
Barney Inc., Oppenheimer & Co. Inc. and Sanders Morris Mundy, in substantially
the form filed as Exhibit 1.1 to the Registration Statement (the "Underwriting
Agreement").
You have requested our opinion in connection with the Company's filing
of the Registration Statement. In this connection, we have examined and relied
upon originals or copies, certified or otherwise identified to our satisfaction
as being true copies, of all such records of the Company, all such agreements,
certificates of officers of the Company and others, and such other documents,
certificates and corporate or other records as we have deemed necessary as a
basis for the opinion expressed in this letter, including, without limitation,
the Company's Fifth Amended and Restated Certificate of Incorporation (the
"Certificate")(which is to be filed with the Secretary of State of the State of
Delaware on or before the date of the issuance and sale of the Common Stock),
the Registration Statement, the related prospectus which forms a part of the
Registration Statement (the "Prospectus") and the Underwriting Agreement.
In our examination, we have assumed the genuineness of all signatures,
the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals and the conformity to authentic original documents
of all documents submitted to us as certified or photostatic copies. In
rendering our opinion, we have also assumed the timely filing of the
Certificate as described above.
<PAGE> 2
[LOGO]
Board of Directors
Waterlink, Inc.
May 23, 1997
Page 2
We have investigated such questions of law for the purpose of
rendering the opinion in this letter as we have deemed necessary. We express no
opinion in this letter concerning any law other than the General Corporation
Law of the State of Delaware and the federal law of the United States of
America.
On the basis of and in reliance on the foregoing, we are of the
opinion that the Shares, when and if issued and paid for in accordance with the
terms of the Underwriting Agreement, will be legally issued, fully paid and
non-assessable.
The opinion in this letter is rendered only to the Company in
connection with the filing of the Registration Statement. We consent to the
filing of this letter as an exhibit to the Registration Statement and to being
named in the Prospectus under the heading "Legal Matters" as counsel for the
Company. The opinion may not be relied upon by the Company for any other
purpose. This letter may not be paraphrased, quoted or summarized, nor may it
be duplicated or reproduced in part.
Very truly yours,
/s/ BENESCH, FRIEDLANDER, COPLAN & ARONOFF LLP
------------------------------------------
Benesch, Friedlander, Coplan & Aronoff LLP
<PAGE> 1
Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as
of this 23rd day of May, 1997, by and between Waterlink, Inc., a Delaware
corporation (the "Company"), and Chet S. Ross ("Executive").
W I T N E S S E T H :
WHEREAS, Executive has been employed by the Company, for the
past several years, and is currently the President and Chief Executive Officer
of the Company;
WHEREAS, the Company desires to assure itself of Executive's
continued employment in an executive capacity and to compensate him for such
employment;
WHEREAS, Executive is willing to continue to be employed by
the Company upon the terms and subject to the conditions contained in this
Agreement;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
adequacy and receipt of which are hereby acknowledged, the parties agree as
follows:
1. EMPLOYMENT. The Company agrees to continue to employ
Executive and Executive hereby agrees to continue to serve the Company for the
Term (as defined in Section 2 below) of this Agreement, in the position and with
the duties and responsibilities set forth in Section 3 below, and upon the other
terms and subject to the conditions hereinafter stated.
2. TERM. The initial term (the "Initial Term") of this
Agreement shall commence on the date hereof and shall continue until the third
anniversary of the date hereof (the "Initial Expiration Date"); provided,
however, that this Agreement at all times shall be subject to earlier
termination in accordance with the provisions hereof. On the Initial Expiration
Date and each anniversary of the Initial Expiration Date, the term of this
Agreement automatically shall be extended for an additional one year term (the
"Extended Term"). For purposes of this Agreement, "Term" means the Initial Term
and, as so extended, the Extended Term.
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3. POSITION, DUTIES AND RESPONSIBILITIES.
3.1 POSITION, DUTIES AND RESPONSIBILITIES. During the Term,
Executive shall serve as the President and Chief Executive Officer of the
Company, and shall be responsible for the duties attendant to such office, which
duties will be generally consistent with his position as an executive officer of
the Company and which will generally utilize his experience with the Company
prior to the date hereof, and such other managerial duties and responsibilities
with the Company, its affiliates, subsidiaries or divisions as may be assigned
by the Chairman of the Board of Directors and/or the Board of Directors of the
Company (the "Board") consistent with Executive's position, duties and
responsibilities with the Company. Executive will report directly to the
Chairman of the Board and the Board. The Company intends that Executive will,
and the Company shall use its best efforts to cause Executive to, continue to be
elected to and serve as a member of the Board. Executive shall also serve as an
officer and/or member of the Board of Directors of any subsidiary or affiliate
of the Company, if the Board should so request; provided, that the duties,
authority and responsibilities of Executive with such subsidiaries or affiliates
shall be commensurate, and in all events not less than, Executive's duties,
authority and responsibilities with the Company as set forth in this Agreement.
Executive's duties shall be performed principally at the Company's executive
offices which are located in the Canton, Ohio Metropolitan Area (as defined
below), and Executive shall not be required to perform duties which would
necessitate changing his present residence, unless Executive otherwise agrees in
writing. For purposes of this Agreement, the term "Canton, Ohio Metropolitan
Area" shall encompass the City of Canton and the territory within fifteen (15)
miles from that city in any direction. The Company will promptly pay (or
reimburse Executive for) all reasonable moving expenses incurred by Executive
relating to a change of Executive's residences in connection with any such
relocation to which Executive has consented. Executive acknowledges and agrees
that, in connection with his employment hereunder, he may be required to travel
on behalf of the Company.
3.2 SERVICES TO BE PROVIDED. During the Term, Executive shall
devote all of his working time, attention and energies to the affairs of the
Company and its subsidiaries, affiliates and divisions and use his best efforts
in the performance of his duties to promote its and their best interests;
provided, however, that nothing herein shall preclude Executive from (i) serving
on the boards of directors of a reasonable number of other corporations, trade
associations or charitable organizations, (ii) engaging in charitable activities
and community affairs or (iii) managing his personal investments and affairs;
provided, however, that such activities do not materially interfere with the
performance of Executive's duties under the Agreement.
4. SALARY.
4.1 BASE SALARY. During the Term, Executive shall be paid a
base salary (the "Base Salary"), payable in equal installments at such intervals
as the other executive officers of the Company are paid but not less often than
bi-weekly, at an annual rate of two hundred forty thousand dollars ($240,000)
until the first anniversary of the date hereof. For each succeeding
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year during the Term, the annual rate of the Base Salary shall be increased (but
not decreased) by such amount, if any, as may be determined by the Board.
4.2 ANNUAL BONUS. During the Term, Executive shall participate
in any long term and annual incentive compensation programs as may be maintained
by the Company for the benefit of its executives. The Company shall establish an
annual incentive bonus plan pursuant to which Executive may earn, in each year
during the Term, commencing with fiscal 1998, an amount ranging from 0% to 150%
of his Base Salary, subject to the achievement of certain performance goals
established by the Board, such performance goals to be derived from the
Company's annual operating plan.
4.3 EQUITY OPPORTUNITY. During the Term, Executive shall be
eligible for stock option grants and similar awards under existing plans of the
Company, and under any future plans in which executive officers of the Company
are entitled to participate. In addition, upon the execution of this Agreement,
Executive shall be granted a non-qualified option (the "Stock Option") to
purchase 300,000 shares of the common stock, $.001 par value per share (the
"Common Stock"), of the Company, at an initial exercise price of $12.00 per
share. The Stock Option will be exercisable in cumulative annual increments of
25% of the shares subject thereto, commencing on the first anniversary of the
date hereof, provided, however, that the Stock Option shall become exercisable
in full, without regard to the vesting criteria otherwise contained herein or
therein, upon the occurrence of a Change of Control (as hereinafter defined) or
the termination of Executive's employment hereunder (x) by the Company, other
than for Cause, death or disability or (y) by the Executive for Good Reason. If
the Company consummates a public offering of its capital stock (the "Public
Offering") within six months of the date hereof, and the initial public offering
price per share is less than or greater than the then current exercise price of
the Stock Option, such exercise price will be adjusted to equal the initial
public offering price per share.
4.4 SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFITS. During the
Term, Executive shall be eligible to participate in any supplemental executive
retirement plan(s), if any, made available to senior executive officers of the
Company.
5. EMPLOYEE BENEFITS.
5.1 BENEFIT PROGRAMS. During the Term, Executive shall
participate with other members of senior management of the Company in any
pension, profit-sharing, stock option or similar plan or program of the Company
now existing or established hereafter for the benefit of its employees or senior
executives of the Company or its subsidiaries generally, to the extent that he
remains eligible under the general provisions thereof. Executive shall also be
entitled to participate in any group insurance, hospitalization, medical, health
and accident, disability or similar or nonsimilar plan or program of the Company
now existing or established hereafter for the benefit of its employees or senior
executives of the Company and its subsidiaries generally, to the extent that he
is eligible under the general provisions thereof.
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5.2 AUTOMOBILE. In furtherance of and not in limitation of
Section 5.1 hereof, the Company will provide Executive with an automobile, such
automobile not to be more than three years old, to be used by him in connection
with Company business, and the Company shall be responsible for all costs of
repairing, maintaining and insuring such automobile; provided, however, that the
costs of leasing such automobile shall not exceed $1,000 per month.
5.3 INSURANCE. During the Term, the Company, at its sole
expense, shall purchase and maintain (a) a life insurance policy on the life of
Executive in the amount of $100,000, the beneficiary or beneficiaries of which
shall be designated by Executive, and (b) a long-term disability insurance
policy which shall provide that, upon the occurrence of a "disability" as
defined in such disability insurance policy, Executive shall be entitled to
long-term disability benefits each year thereafter, up to the age of 65, in an
amount equal to 662/3% of Base Salary per month.
5.4 VACATION; PERSONAL DAYS. During the Term, Executive shall
be entitled to annual vacation with pay during each year of his employment
hereunder provided that the vacation days taken are commensurate with past
practice for Executive and do not materially interfere with the operations of
the Company.
5.5 INSURANCE. Executive agrees that the Company may at any
time and for the Company's own benefit, apply for and take out life, health,
accident, and/or other insurance covering Executive either independently or
together with others in any amount which the Company deems to be in its best
interests and the Company may maintain any existing insurance policies on the
life of Executive owned by the Company. The Company shall own all rights in any
such insurance policies and in the cash values and proceeds thereof and, except
as otherwise provided, Executive shall not have any right, title or interest
therein. Executive agrees to assist the Company at the Company's expense in
obtaining any such insurance by, among other things, submitting to the customary
examinations and correctly preparing, signing and delivering such applications
and other documents as may be required by insurers.
6. EXPENSES. The Company shall reimburse Executive upon
presentation of appropriate vouchers or receipts and in accordance with the
Company's expense reimbursement policies, for all reasonable expenses incurred
by Executive in connection with the performance of his duties under this
Agreement.
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7. TERMINATION. Executive's employment under this Agreement
may be terminated without any breach of this Agreement only under the following
circumstances:
7.1 DEATH. Executive's employment shall terminate upon his
death.
7.2 DISABILITY. In the event Executive shall be unable to
render the services or perform his duties hereunder by reason of illness, injury
or incapacity (whether physical, mental, emotional or psychological) for a
period of either (i) one hundred eighty (180) consecutive days or (ii) two
hundred seventy (270) days in any consecutive three hundred sixty-five (365) day
period (either of such events shall constitute a "Disability" for purposes of
this Agreement), the Company shall have the right to terminate this Agreement.
7.3 TERMINATION OF EMPLOYMENT OF EXECUTIVE BY THE COMPANY FOR
CAUSE. The Company may terminate the employment of Executive for Cause (as
hereinafter defined). The term "Cause," as used herein, shall mean (a)
Executive's willful misconduct or gross neglect in the performance of his duties
hereunder which in either case has resulted, or is likely to result, in material
economic damage to the Company, (b) the material breach of this Agreement by
Executive which has resulted, or is likely to result, in material economic
damage to the Company or (c) the final, non-appealable conviction of Executive
of a felony which constitutes a crime of moral turpitude. For purposes of
Section 7.3(a), no act, or failure to act, on Executive's part, will be
considered "willful" unless done or omitted to be done by him not in good faith
and without a reasonable belief that his action or omission was in furtherance
of the Company's business.
Executive shall not be deemed to have been
terminated for Cause unless and until, after reasonable notice to Executive and
an opportunity for him to be heard before the Board, the Board has determined
that Executive was guilty of the conduct described in clause (a) or (b) of the
preceding paragraph, and delivered to Executive a Notice of Termination (as
defined below) stating such determination and specifying the particulars
thereof in detail.
7.4 TERMINATION OF EMPLOYMENT BY EXECUTIVE. Executive may
terminate his employment hereunder for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean (A) any assignment to Executive of any
duties inconsistent in any material respect with his present duties as President
and Chief Executive Officer of the Company or a change in his position, duties,
authority or responsibilities without his express written consent or any other
action by the Company which results in a material diminution of the position,
duties, authority, or responsibility of Executive, (B) any removal of Executive
without his consent from, or any failure to re-elect Executive to, the office of
President and Chief Executive Officer of the Company, except in connection with
termination of Executive's employment for Cause or as a result of his death or
disability or by him other than for Good Reason, (C) any failure of the Board to
nominate Executive for election to the Board, except in connection with the
termination of Executive's employment for Cause or as a result of his death or
disability or by him other than for Good Reason, (D) a reduction in Executive's
Base Salary as in effect on the date of this
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<PAGE> 6
Agreement or as the same may be increased from time to time, or a reduction in
Executive's other benefits unless, with respect to a reduction of benefits, all
members of senior management of the Company are similarly affected, (E) the
Company shall materially breach any provision of this Agreement, which breach
shall continue unremedied for ten (10) days after the Company shall have been
given notice of such breach, or (F) failure of the Company to obtain from any
successor the assumption of or the agreement to perform this Agreement (as
contemplated in Section 15 hereof), or (G) any purported termination of the
Executive's employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 7.6. In addition, Executive may terminate
his employment hereunder other than for Good Reason.
7.5 RETIREMENT. Executive's employment under this Agreement
shall terminate upon Executive's attainment of age 65 (such termination being
referred to herein as "Mandatory Retirement").
7.6 NOTICE OF TERMINATION. Any termination of Executive's
employment by the Company or by Executive (other than a termination pursuant to
Sections 7.1 above) shall be communicated by written Notice of Termination to
the other party. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall indicate the specific provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. Any purported termination not satisfying the
requirements of this Section 7.6 shall not be effected.
7.7 DATE OF TERMINATION. "Date of Termination" shall mean (i)
if Executive's employment is terminated by his death, the date of his death,
(ii) if Executive's employment is terminated pursuant to Section 7.5 above, the
date Executive attains age 65, (iii) if the Executive's employment is terminated
pursuant to Section 7.6 above, the date specified in the Notice of Termination,
and (iv) if Executive's employment is terminated for any other reason, the date
on which a Notice of Termination is given; provided that if within thirty (30)
days after the Notice of Termination is given pursuant to Sections 7.3, the
party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding and final arbitration award or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal having expired and no appeal having been perfected); provided, further
that if the Company's prevails in its determination to terminate Executive for
Cause in such arbitration or litigation, the Date of Termination shall be the
date specified in the Notice of Termination.
8. COMPENSATION UPON TERMINATION.
8.1 COMPENSATION UPON TERMINATION UPON DEATH. In the event of
the death of Executive during the Term, Executive's designated beneficiary, or,
in the absence of such designation, the estate or other legal representative of
Executive (collectively, the "Estate"), shall
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be paid within thirty (30) days of Executive's death, an amount equal to the sum
of Executive's unpaid Base Salary through the month in which Executive's death
occurred, as well as all accrued bonus compensation through the date of death.
Executive, or the Estate, shall be entitled to other death benefits in
accordance with the terms of the Company's benefit programs and plans and the
other provisions of this Agreement.
8.2 COMPENSATION UPON TERMINATION FOR DISABILITY. If
Executive's employment hereunder is terminated for Disability, Executive shall
be paid an amount equal to the sum of (x) any unpaid Base Salary for the month
in which the termination occurred and for a period of six months thereafter plus
(y) an amount equal to the product of (1) the bonus, if any, paid to Executive
pursuant to Section 4.2 hereof with respect to the fiscal year in which
Executive's employment is terminated pursuant to Section 7.2 (including any
bonus deemed to have been paid as set forth below), provided that such annual
bonus is calculable as of the Date of Termination, and if such annual bonus is
not then calculable, then the bonus, if any, paid to Executive with respect to
the fiscal year immediately preceding the year in which Executive's employment
is terminated (which for fiscal 1996 and fiscal 1997 shall be deemed to be
$240,000), and (2) a fraction, the numerator of which is the number of days
during which Executive rendered services and performed his duties hereunder
during the fiscal year in which his employment hereunder is terminated and the
denominator of which is 365; such amounts to be payable to Executive in twelve
(12) equal bimonthly installments on the fifteenth and last day of each month
commencing on the fifteenth day of the month following the month in which
Executive's employment is terminated. The amount provided for above shall be
reduced by any disability benefits received by Executive under plans maintained
by the Company. Executive shall be entitled to other disability compensation and
benefits in accordance with the Company's benefit programs and plans and the
other provisions of this Agreement.
8.3 COMPENSATION UPON TERMINATION BY THE COMPANY FOR CAUSE OR
BY EXECUTIVE FOR OTHER THAN GOOD REASON OR UPON MANDATORY RETIREMENT. If
Executive's employment is terminated by the Company for Cause or by Executive
for other than Good Reason or upon Mandatory Retirement, the Company shall pay
Executive his Base Salary through the Date of Termination at the rate in effect
at the time Notice of Termination is given, as well as all accrued bonus
compensation through the Date of Termination, and the Company shall have no
further obligations to Executive under this Agreement, except as may be
specifically provided herein.
8.4 IMPROPER TERMINATION; GOOD REASON. (a) Subject to the
provisions of Section 8.4(b) hereof, if (x) in breach of this Agreement, the
Company shall terminate Executive's employment other than pursuant to Section
7.3 (it being understood that a purported termination pursuant to Section 7.3
which is disputed and finally determined not to have been proper shall be a
termination by the Company in breach of this Agreement) or (y) Executive shall
terminate his employment for Good Reason, then
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(i) The Company shall pay Executive his
full Base Salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, as well as all accrued bonus compensation
through the Date of Termination.
(ii) In lieu of all salary and incentive
compensation payments which Executive would have earned under this Agreement but
for his termination, the Company shall pay to Executive, as liquidated damages,
an amount equal to the product of (A) the sum of (1) the Base Salary in effect
as of the Date of Termination and (2) the annual bonus, if any, paid to
Executive pursuant to Section 4.2 hereof (including any bonus deemed to have
been paid as set forth below) with respect to the fiscal year in which
Executive's employment is terminated, provided that such annual bonus is
calculable as of the Date of Termination, and if such annual bonus is not then
calculable, then the bonus, if any, paid to Executive with respect to the fiscal
year immediately preceding the year in which Executive's employment is
terminated (which for fiscal 1996 and fiscal 1997 shall be deemed to be
$240,000), and (B) two (2), such amounts to be payable to Executive in forty
eight (48) equal bi-monthly installments on the fifteenth and last day of each
month, commencing on the fifteenth day of the month following the month in which
the Date of Termination occurs. If the Company fails to make, within five (5)
days of the dates specified above, any two (2) payments required to be made
pursuant to this Section 8.4(a)(i) or (ii), the Company shall pay to Executive,
within ten (10) days of the date of such second failure, in a lump sum, an
amount equal to the sum of the remaining payments (including any payments that
the Company failed to make) to which Executive would have been entitled pursuant
to Section 8.4(a)(i) and (ii) if such failures had not occurred.
(b) If, within one (1) year after the occurrence of a Change
of Control, (x) in breach of this Agreement, the Company shall terminate
Executive's employment other than pursuant to Section 7.3 (it being understood
that a purported termination pursuant to Section 7.3 which is disputed and
finally determined not to have been proper shall be a termination by the Company
in breach of this Agreement) or (y) Executive shall terminate his employment for
Good Reason, then
(i) The Company shall pay Executive his
full Base Salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, as well as all accrued bonus compensation
through the Date of Termination.
(ii) In lieu of all salary and incentive
compensation payments which Executive would have earned under this Agreement but
for his termination, the Company shall pay to Executive as liquidated damages a
lump sum amount equal to the present value, based on the Applicable Federal Rate
(as defined in Section 1274(d) of the Internal Revenue Code of 1986, as amended
(the "Code")), of the product of (A) the sum of (1) the Base Salary in effect as
of the Date of Termination and (2) the annual bonus, if any, paid to Executive
pursuant to Section 4.2 hereof (including any bonus deemed to have been paid as
set forth below) with respect to the fiscal year in which Executive's employment
is terminated, provided that such annual bonus is calculable as of the Date of
Termination, and if such annual bonus is not then calculable, then the
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<PAGE> 9
bonus, if any, paid to Executive with respect to the fiscal year immediately
preceding the year in which Executive's employment is terminated (which for
fiscal 1996 and fiscal 1997 shall be deemed to be $240,000), and (B) two (2)
(such payment being referred to as the "Termination Payment"). All payments
under this Section 8.4(b) shall be made on or before the fifth day following the
Date of Termination. In addition, if the receipt of the lump sum pursuant to the
foregoing sentence would cause Executive to pay federal income tax for the year
of receipt at a higher marginal rate than Executive would have paid for such
year had Executive's employment not been terminated (the "Original Marginal
Amount"), Executive shall receive an additional amount such that the amount
retained by executive after the payment of federal income taxes on such lump sum
shall be the same as if such lump sum had been taxed at the Original Marginal
Rate. Executive shall not be required to mitigate the amount of compensation
payable to Executive hereunder, by securing other employment or otherwise, nor
will such compensation be reduced by reason of Executive securing other
employment or for any other reason.
(iii) In the event that executive becomes
entitled to the Termination Payment provided for in Section 8.4(b)(ii), if any
of the Termination Payment will be subject to the tax (the "Excise Tax") imposed
by Section 4999 of the Code, the Company shall pay to Executive at the time
specified below, an additional amount (the "Gross-Up Payment") such that the net
amount retained by Executive, after deduction of any Excise Tax on the
Termination Payment and any federal, state and local income tax and Excise Tax
upon the payment provided for by this paragraph, shall be equal to the
Termination Payment. For purposes of determining whether any of the Termination
Payment will be subject to the Excise Tax and the amount of such Excise Tax, (x)
any other payments or benefits received or to be received by Executive in
connection with a change in control of the Company or the termination of
Executive's employment (whether pursuant to the terms of this Agreement or any
other plan, arrangement or agreement with the Company, any person whose actions
result in a change in control or any person having such a relationship with the
Company or such person as to require attribution of stock ownership between the
parties under section 318(a) of the Code) shall be treated as "parachute
payments" within the meaning of section 280G(b)(2) of the Code, and all "excess
parachute payments" within the meaning of section 280G(b)(1) shall be treated as
subject to the Excise Tax, unless in the opinion of tax counsel selected by the
Company's independent auditors and acceptable to Executive such other payments
or benefits (in whole or in part) do not constitute parachute payments, or such
excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered within the meaning of Section
280G(b)(4) of the Code, (y) the amount of the Termination Payment which shall be
treated as subject to the Excise Tax shall be equal to the lesser of (A) the
total amount of the Termination Payment or (B) the amount of excess parachute
payments within the meaning of Sections 280G(b)(1) and (4) (after applying
clause (x), above, and after deducting any excess parachute payments in respect
of which payments have been made under this Section 8.4(y)), and (z) the value
of any non-cash benefits or any deferred payment or benefit shall be determined
by the Company's independent auditors in accordance with the principles of
Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount
of the Gross-Up Payment, Executive shall be deemed to pay federal income taxes
at the highest marginal rate of federal income taxation in the calendar year in
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which the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rates of taxation in the state and locality of your residence
upon the Date of Termination, net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state and local taxes. In
the event that the Excise Tax is subsequently determined to be less than the
amount taken into account hereunder at the time of termination of Executive's
employment, Executive shall repay to the Company at the time that the amount of
such reduction in Excise Tax is finally determined the portion of the Gross-Up
Payment attributable to such reduction plus interest on the amount of such
repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the
event that the Excise Tax is determined to exceed the amount taken into account
hereunder at the time of the termination of Executive's employment (including by
reason of any payment the existence or amount of which cannot be determined at
the time of the Gross-Up Payment), the Company shall make an additional gross-up
payment in respect of such excess (plus any interest payable with respect to
such excess) at the time that the amount of such excess is finally determined.
For purposes of this Agreement, a "Change in
Control" of the Company shall mean (i) the acquisition of beneficial
ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), directly or indirectly, by any "person" (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than
the Company or Executive or an entity directly or indirectly controlled by
Executive, of securities of the Company representing a majority or more of the
combined voting power of the Company's then outstanding securities, (ii) the
failure, for any reason, of the individuals who presently constitute the Board
of Directors (the "Incumbent Board") to constitute at least a majority thereof,
provided that any director whose election has been approved in advance by
directors representing at least two-thirds (2/3) of the directors comprising the
Incumbent Board or by Executive shall be considered, for these purposes, as
though such director were a member of the Incumbent Board, (iii) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least a majority of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, and
such merger or consolidation occurs; or (iv) the stockholders of the Company
approve a plan of complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially all of the Company's
assets.
(c) If termination of Executive's employment arises
out of a breach by the Company of this Agreement, the Company shall pay all
other damages for any and all loss of benefits which Executive would have
received under the Company's employee benefit plans if the Company had not
breached this Agreement and had Executive's employment continued for the full
Term as then in effect (including without limitation benefits Executive would
have been entitled to receive pursuant to any of the Company's pension plans had
his employment continued for such
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<PAGE> 11
Term at the rate of compensation specified herein), and including all legal fees
and expenses incurred by him as a result of such termination and in enforcing
his rights.
8.5 CONTINUED MAINTENANCE OF BENEFIT PLANS. Unless
Executive is terminated for Cause, death, Mandatory Retirement or by Executive
for other than Good Reason, the Company shall maintain in full force and effect,
for the continued benefit of Executive for two (2) years commencing upon the
Date of Termination, all medical, hospitalization, health and accident insurance
benefits, plans or programs in which Executive was entitled to participate
immediately prior to the Date of Termination. In the event that Executive's
participation in any such benefits, plan or program is barred, the Company shall
arrange to provide Executive with benefits substantially similar to those which
Executive would otherwise have been entitled to receive under such plans and
programs.
9. INDEMNIFICATION.
9.1 The Company agrees to indemnify Executive to the
fullest extent permitted by applicable law consistent with the Company's
Certificate of Incorporation and ByLaws as in effect on the date hereof with
respect to any acts or non-acts he may have committed while he was an officer,
director, and/or employee (i) of the Company or any subsidiary thereof, or (ii)
at the request of the Company, of any other entity.
9.2 The Company agrees to maintain for Executive, during
the Term and for a period of five (5) years thereafter, a directors' and
officers' liability insurance policy not less favorable than any policy that the
Company maintains for its directors and executive officers in general.
10. CONFIDENTIAL INFORMATION.
10.1 Executive hereby acknowledges that, in the course of his
employment by the Company, he has had and will have access to secret and
confidential information which relates to or affects all aspects of the business
and affairs of the Company, its subsidiaries, affiliates or divisions, and which
are not available to the general public ("Confidential Information"). Without
limiting the generality of the foregoing, Confidential Information shall include
information relating to inventions, developments, specifications, technical and
engineering data, information concerning the filing or pendency of patent
applications, business ideas, trade secrets, products under development,
production methods and processes, sources of supply, marketing plans, and the
names of any customers or prospective customers or of any persons who have or
shall have traded or dealt with the Company. Accordingly, Executive agrees that,
except as required by the performance of his duties hereunder, he will not, at
any time during the Term and for a period commencing on the Date of Termination
and concluding upon the earlier to occur of (a) two (2) years after such Date of
Termination and (b) the date subsequent to such Date of Termination upon which
the Company is in material breach of any material provision of this Agreement
(provided that Executive notifies the Company in writing of such breach and the
Company does
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<PAGE> 12
not cure such breach within ten (10) days of the receipt of such notice from
Executive), disclose or furnish any Confidential Information to any person,
firm, corporation or other entity without the express prior written consent of
the Company. Notwithstanding the foregoing, the term Confidential Information
shall not include information or data which (i) is now or hereafter in the
public domain, other than as a result of the breach of this Section 10 by
Executive, (ii) prior to the date of commencement of Executive's employment by
the Company was known to Executive, (iii) is, after the Date of Termination,
lawfully acquired by Executive from a third party who, to Executive's
knowledge, is not prohibited from disclosing such data or information to
Executive or (iv) is required to be disclosed by court order or other legal
process. In the event that Executive receives a request or demand to disclose
all or any part of the Confidential Information under the terms of a subpoena or
order issued by a court of competent jurisdiction or otherwise, Executive agrees
to (x) promptly notify the Company of the existence, terms and circumstances
surrounding such a request so that the Company may seek a protective order or
other appropriate relief or remedy and (y) if disclosure of such information is
required, disclose such information and, subject to reimbursement by the Company
of Executive's expenses, cooperate with the Company in its efforts to obtain an
order or other reliable assurance that confidential treatment will be accorded
to such portion of the disclosed information which the Company so designates.
10.2 Executive hereby acknowledges and agrees that any and all
models, prototypes, notes, memoranda, notebooks, drawings, records, plans,
documents or other material in physical form which contain or embody
Confidential Information, whether created or prepared by Executive or by others
("Confidential Materials"), which are in Executive's possession or under his
control, are the sole property of the Company. Accordingly, Executive hereby
agrees that, upon the termination of his employment with the Company, whether
pursuant to this Agreement or otherwise, or at the Company's earlier request,
Executive shall return to the Company all Confidential Materials and all copies
thereof in his possession or under his control and shall not retain any copies
of Confidential Materials.
11. NON-COMPETITION.
11.1 Executive agrees that he shall not, so long as he shall
be employed by the Company in any capacity (whether pursuant to this Agreement
or otherwise) own, manage, operate, control or participate in the ownership,
management, operation or control or be employed by or connected in any manner
with, any business, firm or corporation which is or may be in competition with
the business of the Company, its subsidiaries, affiliates or divisions without
the express written consent of the Company.
11.2 Executive agrees that for a period commencing on the
effective Date of the Termination and concluding upon the earlier to occur of
(a) twenty four (24) months after such Date of Termination and (b) the date
subsequent to such Date of Termination upon which the Company is in material
breach of any material provision of this Agreement (provided that Executive
notifies the Company in writing of such breach and the Company does not cure
such breach within ten (10) days of the receipt of such notice from Executive),
Executive shall not
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<PAGE> 13
own, manage, operate, control or participate in the ownership, management,
operation or control, or be employed by or connected in any manner with, any
business, firm or corporation which is engaged in or competes with the business
of the Company, its subsidiaries, affiliates or divisions as such business is
constituted on the Date of Termination.
11.3 Anything to the contrary herein notwithstanding, the
provisions of this Section 11 shall not be deemed violated by the purchase
and/or ownership by Executive of shares of any class of equity securities (or
options, warrants or rights to acquire such securities, or any securities
convertible into or exchangeable or exercisable for such securities) (x) of the
Company (or any successor thereto), (y) representing (together with any
securities which would be acquired upon the exercise of any such options,
warrants or rights or upon the conversion of any other security convertible into
or exchangeable or exercisable for such securities) three percent (3%) or less
of the outstanding shares of any such class of equity securities of any issuer
whose securities are traded on a national securities exchange or listed by
NASDAQ, the National Quotation Bureau Incorporated or any similar organization;
provided, however, that Executive shall not be otherwise connected with or
active in the business of the issuers described in this Section 11.3 or (z) of
any entity which is then employing Executive.
12. REMEDY FOR BREACH. Executive hereby acknowledges that in
the event of any breach or threatened breach by him of any of the provisions of
Sections 10 or 11 of this Agreement, the Company would have no adequate remedy
at law and could suffer substantial and irreparable damage. Accordingly,
Executive hereby agrees that, in such event, the Company shall be entitled, and
notwithstanding any election by the Company to claim damages, to obtain a
temporary and/or permanent injunction to restrain any such breach or threatened
breach or to obtain specific performance of any such provisions, all without
prejudice to any and all other remedies which the Company may have at law or in
equity.
13. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been given if delivered
personally or sent by registered or certified mail (return receipt requested),
postage prepaid, or by telecopy (immediately followed by telephone confirmation
of delivery of such telecopy with the intended recipient of such notice and by
notice in writing sent promptly by registered or certified mail as provided
above) to the parties to this Agreement at the following addresses or at such
other address for a party as shall be specified by like notice:
To the Company: Waterlink, Inc.
4100 Holiday Street, N.W.
Canton, OH 44718-2532
Telephone: (330) 649-4000
Telecopy: (330) 649-4008
Attention: Chairman of the Board
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<PAGE> 14
With copies to: Ira C. Kaplan, Esq.
Benesch, Friedlander, Coplan &
Aronoff, LLP
2300 BP America Bldg.
200 Public Square
Cleveland, OH 44114
Telephone: (216) 363-4567
Telecopy: (216) 363-4588
To Executive: Chet S. Ross
7857 Pine Ridge Street N.W.
North Canton, OH 44720
Telephone: (330) 497-2297
Telecopy: (330) 497-2298
With a copy to: Scott M. Zimmerman, Esq.
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, NY 10022
Telephone: (212) 758-9500
Telecopy: (212) 758-9526
All such notices and communications shall be deemed to have
been received on the date of personal delivery, on the date that the telecopy is
confirmed as having been received or on the third business day after the mailing
thereof, as the case may be.
14. ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties hereto with respect to the employment matters
contemplated herein and supersedes all prior agreements or understandings among
the parties related to such employment matters, including, without limitation,
the Employment Agreement, dated June 1, 1995, between the Company and Executive.
Notwithstanding the foregoing, all stock option agreements between Executive and
the Company shall remain in full force and effect.
15. BINDING EFFECT; THIRD PARTY BENEFICIARIES. Except as
otherwise provided herein, this Agreement shall be binding upon and inure to the
benefit of the Company and its successors and assigns and upon Executive.
"Successors and assigns" shall mean, in the case of the Company, any successor
pursuant to a merger, consolidation, or sale, or other transfer of all or
substantially all of the assets of the Company. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement in form and substance satisfactory to Executive, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such
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<PAGE> 15
succession shall be a breach of this Agreement and shall entitle Executive to
compensation from the Company in the same amount and on the same terms as if
Executive terminated his employment for Good Reason, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used in this Agreement,
"Company" shall mean Waterlink, Inc. and any successor to its business and/or
assets.
16. NO ASSIGNMENT. Except as contemplated by Section 15 above,
this Agreement shall not be assignable or otherwise transferable by either
party.
17. AMENDMENT OR MODIFICATION; WAIVER. No provision of this
Agreement may be amended or waived unless such amendment or waiver is authorized
by the Chairman of the Board or the Board and is agreed to in writing, signed by
Executive and by an officer of the Company thereunto duly authorized. Except as
otherwise specifically provided in this Agreement, no waiver by either party
hereto of any breach by the other party hereto of any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of a
similar or dissimilar provision or condition at the same or at any prior or
subsequent time.
18. FEES AND EXPENSES. The Company will reimburse Executive
for the reasonable attorney's fees incurred by him in connection with the
negotiation and preparation of this Agreement. If either party institutes any
action or proceedings to enforce any rights the party has under this Agreement,
or for damages by reason of any alleged breach of any provision of this
Agreement, or for a declaration of each party's rights or obligations hereunder
or to set aside any provision hereof, or for any other arbitral or judicial
remedy, each party shall be responsible for its own costs and expenses incurred
thereby, including but not limited to, attorneys' fees and disbursements;
provided, however, that if the employment of Executive is purported to be
terminated for Cause subsequent to the occurrence of a Change of Control, the
Company shall promptly pay and be solely responsible for all fees and expenses
incurred by Executive in contesting such purported termination or the grounds
therefor, including, without limitation, attorneys' fees and disbursements.
19. GOVERNING LAW; ARBITRATION. The validity, interpretation,
construction, performance and enforcement of this Agreement shall be governed by
the internal laws of the State of Ohio, without regard to its conflicts of law
rules. Any controversy or claim arising out of or relating to this Agreement,
shall be settled by arbitration in accordance with the rules of the American
Arbitration Association, and judgment upon such award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof. The
arbitration shall be held in Canton, Ohio or such other place as may be agreed
upon at the time by the parties to the arbitration. Subject to Section 18
hereof, the expense of such arbitration shall be borne by the Company.
20. TITLES. Titles to the Sections and subsections in this
Agreement are intended solely for convenience and no provision of this Agreement
is to be construed by reference to the title of any Section.
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<PAGE> 16
21. COUNTERPARTS. This Agreement may be executed in one or
more counter parts, which together shall constitute one agreement. It shall not
be necessary for each party to sign each counterpart so long as each party has
signed at least one counterpart.
22. SEVERABILITY. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms and provisions of this Agreement in any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first set forth above.
WATERLINK, INC.
By: /s/ Theodore F. Savastano
------------------------------------
Name: Theodore F. Savastano
Title: Chairman of the Board
/s/ Chet S. Ross
---------------------------------------
Chet S. Ross
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<PAGE> 1
Exhibit 10.2
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT (the "Agreement") is made and entered into as
of this 23rd day of May, 1997, by and between Waterlink, Inc., a Delaware
corporation (the "Company"), and Theodore F. Savastano ("Executive").
W I T N E S S E T H :
---------------------
WHEREAS, Executive has been employed by the Company, for the
past several years, and is currently the Chairman of the Board of Directors of
the Company;
WHEREAS, the Company desires to assure itself of Executive's
continued employment in an executive capacity and to compensate him for such
employment;
WHEREAS, Executive is willing to continue to be employed by
the Company upon the terms and subject to the conditions contained in this
Agreement;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
adequacy and receipt of which are hereby acknowledged, the parties agree as
follows:
1. EMPLOYMENT. The Company agrees to continue to employ
Executive and Executive hereby agrees to continue to serve the Company for the
Term (as defined in Section 2 below) of this Agreement, in the position and
with the duties and responsibilities set forth in Section 3 below, and upon the
other terms and subject to the conditions hereinafter stated.
2. TERM. The initial term (the "Initial Term") of this
Agreement shall commence on the date hereof and shall continue until the third
anniversary of the date hereof (the "Initial Expiration Date"); provided,
however, that this Agreement at all times shall be subject to earlier
termination in accordance with the provisions hereof. On the Initial Expiration
Date and each anniversary of the Initial Expiration Date, the term of this
Agreement automatically shall be extended for an additional one year term (the
"Extended Term"). For purposes of this Agreement, "Term" means the Initial Term
and, as so extended, the Extended Term.
<PAGE> 2
3. POSITION, DUTIES AND RESPONSIBILITIES.
3.1 POSITION, DUTIES AND RESPONSIBILITIES. During the Term,
Executive shall serve as the Chairman of the Board of Directors of the Company,
and shall be responsible for the duties attendant to such office, which duties
will be generally consistent with his position as an executive officer of the
Company and which will generally utilize his experience with the Company prior
to the date hereof, and such other managerial duties and responsibilities with
the Company, its affiliates, subsidiaries or divisions as may be assigned by
the Board of Directors of the Company (the "Board") consistent with Executive's
position, duties and responsibilities with the Company. Executive will report
directly to the Board. The Company intends that Executive will, and the Company
shall use its best efforts to cause Executive to, continue to be elected to and
serve as a member of the Board. Executive shall also serve as an officer and/or
member of the Board of Directors of any subsidiary or affiliate of the Company,
if the Board should so request; provided, that the duties, authority and
responsibilities of Executive with such subsidiaries or affiliates shall be
commensurate, and in all events not less than, Executive's duties, authority
and responsibilities with the Company as set forth in this Agreement.
Executive's duties shall be performed principally at the Company's executive
offices which are located in the Canton, Ohio Metropolitan Area (as defined
below), and Executive shall not be required to perform duties which would
necessitate changing his present residence, unless Executive otherwise agrees
in writing. For purposes of this Agreement, the term "Canton, Ohio Metropolitan
Area" shall encompass the City of Canton and the territory within fifteen (15)
miles from that city in any direction. The Company will promptly pay (or
reimburse Executive for) all reasonable moving expenses incurred by Executive
relating to a change of Executive's residence in connection with any such
relocation to which Executive has consented. Executive acknowledges and agrees
that, in connection with his employment hereunder, he may be required to travel
on behalf of the Company.
3.2 SERVICES TO BE PROVIDED. During the Term, Executive shall
devote all of his working time, attention and energies to the affairs of the
Company and its subsidiaries, affiliates and divisions and use his best efforts
in the performance of his duties to promote its and their best interests;
provided, however, that nothing herein shall preclude Executive from (i)
serving on the boards of directors of a reasonable number of other
corporations, trade associations or charitable organizations, (ii) engaging in
charitable activities and community affairs or (iii) managing his personal
investments and affairs; provided, however, that such activities do not
materially interfere with the performance of Executive's duties under the
Agreement.
4. SALARY.
4.1 BASE SALARY. During the Term, Executive shall be paid a
base salary (the "Base Salary"), payable in equal installments at such intervals
as the other executive officers of the Company are paid but not less often than
bi-weekly, at an annual rate of two hundred forty thousand dollars ($240,000)
until the first anniversary of the date hereof. For each succeeding
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<PAGE> 3
year during the Term, the annual rate of the Base Salary shall be increased (but
not decreased) by such amount, if any, as may be determined by the Board.
4.2 ANNUAL BONUS. During the Term, Executive shall
participate in any long term and annual incentive compensation programs as may
be maintained by the Company for the benefit of its executives. The Company
shall establish an annual incentive bonus plan pursuant to which Executive may
earn, in each year during the Term, commencing with fiscal 1998, an amount
ranging from 0% to 150% of his Base Salary, subject to the achievement of
certain performance goals established by the Board, such performance goals to
be derived from the Company's annual operating plan.
4.3 EQUITY OPPORTUNITY. During the Term, Executive shall be
eligible for stock option grants and similar awards under existing plans of the
Company, and under any future plans in which executive officers of the Company
are entitled to participate. The Company and Brantley Venture Partners III, L.P.
("Brantley") agree that, upon the earlier to occur of a Change of Control (as
hereinafter defined) or the consummation of an underwritten public offering of
any of the Company's capital stock pursuant to an effective registration
statement filed under the Securities Act of 1933, as amended, all rights they or
either of them may have had, including those contained in the Employment
Agreement among Executive, the Company and Brantley, made as of December 9, 1994
(the "Prior Employment Agreement"), to acquire, retain or cancel any shares of
common stock of the Company, or any options, warrants or other rights to acquire
such shares, owned by Executive, shall be terminated and of no further force or
effect.
4.4 SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFITS. During the
Term, Executive shall be eligible to participate in any supplemental executive
retirement plan(s), if any, made available to senior executive officers of the
Company.
4.5 INCENTIVE STOCK OPTION. The provisions of Section 3(c) of
the Prior Employment Agreement shall remain in full force and effect and are
hereby affirmed by the parties hereto; provided, however, that clause (iv)
thereof is hereby amended and restated, and as so amended and restated shall
read in its entirety "(iv) Savastano's employment is terminated in breach of
the Employment Agreement between Savastano and the Company, dated as of April
__, 1997 (the "Restated Agreement") or Savastano terminates his employment for
Good Reason (as defined in the Restated Agreement)."
5. EMPLOYEE BENEFITS.
5.1 BENEFIT PROGRAMS. During the Term, Executive shall
participate with other members of senior management of the Company in any
pension, profit-sharing, stock option or similar plan or program of the Company
now existing or established hereafter for the benefit of its employees or senior
executives of the Company or its subsidiaries generally, to the extent that he
remains eligible under the general provisions thereof. Executive shall also be
entitled to participate in any group insurance, hospitalization, medical, health
and accident, disability or
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<PAGE> 4
similar or nonsimilar plan or program of the Company now existing or established
hereafter for the benefit of its employees or senior executives of the Company
and its subsidiaries generally, to the extent that he is eligible under the
general provisions thereof.
5.2 AUTOMOBILE. In furtherance of and not in limitation of
Section 5.1 hereof, the Company will provide Executive with an automobile, such
automobile not to be more than three years old, to be used by him in connection
with Company business, and the Company be responsible for all costs of
repairing, maintaining and insuring such automobile; provided, however, that the
cost of leasing such automobile shall not exceed $1,000 per month.
5.3 INSURANCE. During the Term, the Company, at its sole
expense, shall purchase and maintain (a) a life insurance policy on the life of
Executive in the amount of $100,000, the beneficiary or beneficiaries of which
shall be designated by Executive, and (b) a long-term disability insurance
policy which shall provide that, upon the occurrence of a "disability" as
defined in such disability insurance policy, Executive shall be entitled to
long-term disability benefits each year thereafter, up to the age of 65, in an
amount equal to 66 2/3% of Base Salary per month.
5.4 VACATION; PERSONAL DAYS. During the Term, Executive shall
be entitled to annual vacation with pay during each year of his employment
hereunder provided that the vacation days taken are commensurate with past
practice for Executive and do not materially interfere with the operations of
the Company.
5.5 INSURANCE. Executive agrees that the Company may at any
time and for the Company's own benefit, apply for and take out life, health,
accident, and/or other insurance covering Executive either independently or
together with others in any amount which the Company deems to be in its best
interests and the Company may maintain any existing insurance policies on the
life of Executive owned by the Company. The Company shall own all rights in any
such insurance policies and in the cash values and proceeds thereof and, except
as otherwise provided, Executive shall not have any right, title or interest
therein. Executive agrees to assist the Company at the Company's expense in
obtaining any such insurance by, among other things, submitting to the customary
examinations and correctly preparing, signing and delivering such applications
and other documents as may be required by insurers.
6. EXPENSES. The Company shall reimburse Executive upon
presentation of appropriate vouchers or receipts and in accordance with the
Company's expense reimbursement policies, for all reasonable expenses incurred
by Executive in connection with the performance of his duties under this
Agreement.
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<PAGE> 5
7. TERMINATION. Executive's employment under this Agreement
may be terminated without any breach of this Agreement only under the following
circumstances:
7.1 DEATH. Executive's employment shall terminate upon his
death.
7.2 DISABILITY. In the event Executive shall be unable to
render the services or perform his duties hereunder by reason of illness,
injury or incapacity (whether physical, mental, emotional or psychological) for
a period of either (i) one hundred eighty (180) consecutive days or (ii) two
hundred seventy (270) days in any consecutive three hundred sixty-five (365)
day period (either of such events shall constitute a "Disability" for purposes
of this Agreement), the Company shall have the right to terminate this
Agreement.
7.3 TERMINATION OF EMPLOYMENT OF EXECUTIVE BY THE COMPANY FOR
CAUSE. The Company may terminate the employment of Executive for Cause (as
hereinafter defined). The term "Cause," as used herein, shall mean (a)
Executive's willful misconduct or gross neglect in the performance of his
duties hereunder which in either case has resulted, or is likely to result, in
material economic damage to the Company, (b) the material breach of this
Agreement by Executive which has resulted, or is likely to result, in material
economic damage to the Company or (c) the final, non-appealable conviction of
Executive of a felony which constitutes a crime of moral turpitude. For
purposes of Section 7.3(a), no act, or failure to act, on Executive's part,
will be considered "willful" unless done or omitted to be done by him not in
good faith and without a reasonable belief that his action or omission was in
furtherance of the Company's business.
Executive shall not be deemed to have been terminated for
Cause unless and until after reasonable notice to Executive and an opportunity
for him to be heard before the Board, the Board has determined that Executive
was guilty of the conduct described in clause (a) or (b) of the preceding
paragraph, and delivered to Executive a Notice of Termination (as defined
below) stating such determination and specifying the particulars thereof in
detail.
7.4 TERMINATION OF EMPLOYMENT BY EXECUTIVE. Executive may
terminate his employment hereunder for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean (A) any assignment to Executive of any
duties inconsistent in any material respect with his present duties as Chairman
of the Board of the Company or a change in his present position, duties,
authority or responsibilities without his express written consent or any other
action by the Company which results in a material diminution of the position,
duties, authority, or responsibility of Executive, (B) any removal of Executive
without his consent from, or any failure to re-elect Executive to, the office of
Chairman of the Board of the Company, except in connection with termination of
Executive's employment for Cause or as a result of his death or disability or by
him other than for Good Reason, (C) a reduction in Executive's Base Salary as in
effect on the date of this Agreement or as the same may be increased from time
to time, or a reduction in Executive's other benefits unless, with respect to a
reduction of benefits, all members of senior management of the Company are
similarly affected, (D) the Company shall materially breach any provision of
this
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<PAGE> 6
Agreement, which breach shall continue unremedied for ten (10) days after the
Company shall have been given notice of such breach, or (E) failure of the
Company to obtain from any successor the assumption of or the agreement to
perform this Agreement (as contemplated in Section 15 hereof), or (F) any
purported termination of the Executive's employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of Section 7.6.
In addition, Executive may terminate his employment hereunder other than for
Good Reason.
7.5 RETIREMENT. Executive's employment under this Agreement
shall terminate upon Executive's attainment of age 65 (such termination being
referred to herein as "Mandatory Retirement").
7.6 NOTICE OF TERMINATION. Any termination of Executive's
employment by the Company or by Executive (other than a termination pursuant to
Sections 7.1 above) shall be communicated by written Notice of Termination to
the other party. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. Any purported termination not
satisfying the requirements of this Section 7.6 shall not be effected.
7.7 DATE OF TERMINATION. "Date of Termination" shall mean (i)
if Executive's employment is terminated by his death, the date of his death,
(ii) if the Executive's employment is terminated pursuant to Section 7.6 above,
the date specified in the Notice of Termination, and (iii) if Executive's
employment is terminated for any other reason, the date on which a Notice of
Termination is given; provided that if within thirty (30) days after the Notice
of Termination is given pursuant to Sections 7.3, the party receiving such
Notice of Termination notifies the other party that a dispute exists concerning
the termination, the Date of Termination shall be the date on which the dispute
is finally determined, either by mutual written agreement of the parties, by a
binding and final arbitration award or by a final judgment, order or decree of
a court of competent jurisdiction (the time for appeal having expired and no
appeal having been perfected); provided, further that if the Company prevails
in its determination to terminate Executive for Cause in such arbitration or
litigation, the Date of Termination shall be the date specified in the Notice
of Termination.
8. COMPENSATION UPON TERMINATION.
8.1 COMPENSATION UPON TERMINATION UPON DEATH. In the event of
the death of Executive during the Term, Executive's designated beneficiary, or,
in the absence of such designation, the estate or other legal representative of
Executive (collectively, the "Estate"), shall be paid within thirty (30) days
of Executive's death, an amount equal to the sum of Executive's unpaid Base
Salary through the month in which Executive's death occurred, as well as all
accrued bonus compensation through the date of death. Executive, or the Estate,
shall be entitled to other
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<PAGE> 7
death benefits in accordance with the terms of the Company's benefit programs
and plans and the other provisions of this Agreement.
8.2 COMPENSATION UPON TERMINATION FOR DISABILITY. If
Executive's employment hereunder is terminated for Disability, Executive shall
be paid an amount equal to the sum of (x) any unpaid Base Salary for the month
in which the termination occurred and for a period of six months thereafter and
(y) an amount equal to the product of (1) the annual bonus, if any, paid to
Executive pursuant to Section 4.2 hereof with respect to the fiscal year in
which Executive's employment is terminated pursuant to Section 7.2 (including
any bonus deemed to have been paid as set forth below), provided that such
annual bonus is calculable as of the Date of Termination, and if such annual
bonus is not then calculable, then the bonus, if any, paid to Executive with
respect to the fiscal year immediately preceding the year in which Executive's
employment is terminated (which, for fiscal 1996 and fiscal 1997 shall be
deemed to be $240,000) and (2) a fraction, the numerator of which is the number
of days during which Executive rendered services and performed his duties
hereunder during the fiscal year in which his employment hereunder is
terminated and the denominator of which is 365; such amounts to be payable to
Executive in twelve (12) equal bimonthly installments on the fifteenth and last
day of each month commencing on the fifteenth day of the month following the
month in which Executive's employment is terminated. The amount provided for
above shall be reduced by any disability benefits received by Executive under
plans maintained by the Company. Executive shall be entitled to other
disability compensation and benefits in accordance with the Company's benefit
programs and plans and the other provisions of this Agreement.
8.3 COMPENSATION UPON TERMINATION BY THE COMPANY FOR CAUSE OR
BY EXECUTIVE FOR OTHER THAN GOOD REASON OR UPON MANDATORY RETIREMENT. If
Executive's employment is terminated by the Company for Cause or by Executive
for other than Good Reason or upon Mandatory Retirement, the Company shall pay
Executive his Base Salary through the Date of Termination at the rate in effect
at the time Notice of Termination is given, as well as all accrued bonus
compensation through the Date of Termination, and the Company shall have no
further obligations to Executive under this Agreement, except as may be
specifically provided herein.
8.4 IMPROPER TERMINATION; GOOD REASON. (a) Subject to the
provisions of Section 8.4(b) hereof, if (x) in breach of this Agreement, the
Company shall terminate Executive's employment other than pursuant to Section
7.3 (it being understood that a purported termination pursuant to Section 7.3
which is disputed and finally determined not to have been proper shall be a
termination by the Company in breach of this Agreement) or (y) Executive shall
terminate his employment for Good Reason, then
(i) The Company shall pay Executive his
full Base Salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, as well as all accrued bonus compensation
through the Date of Termination.
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<PAGE> 8
(ii) In lieu of all salary and incentive
compensation payments which Executive would have earned under this Agreement
but for his termination, the Company shall pay to Executive, as liquidated
damages, an amount equal to the product of (A) the sum of (1) the Base Salary
in effect as of the Date of Termination and (2) the annual bonus, if any, paid
to Executive pursuant to Section 4.2 hereof with respect to the fiscal year in
which Executive's employment is terminated (including any bonus deemed to have
been paid as set forth below), provided that such annual bonus is calculable as
of the Date of Termination, and if such annual bonus is not then calculable,
then the bonus, if any, paid to Executive with respect to the fiscal year
immediately preceding the year in which Executive's employment is terminated
(which, for fiscal 1996 and fiscal 1997 shall be deemed to be $240,000), and
(B) two (2), such amounts to be payable to Executive in forty eight (48) equal
bi-monthly installments on the fifteenth and last day of each month, commencing
on the fifteenth day of the month following the month in which the Date of
Termination occurs. If the Company fails to make, within five (5) days of the
dates specified above, any two (2) payments required to be made pursuant to
this Section 8.4(a)(i) or (ii), the Company shall pay to Executive, within ten
(10) days of the date of such second failure, in a lump sum, an amount equal to
the sum of the remaining payments (including any payments that the Company
failed to make) to which Executive would have been entitled pursuant to Section
8.4(a)(i) and (ii) if such failures had not occurred.
(b) If, within one (1) year after the occurrence of a Change
of Control, (x) in breach of this Agreement, the Company shall terminate
Executive's employment other than pursuant to Section 7.3 (it being understood
that a purported termination pursuant to Section 7.3 which is disputed and
finally determined not to have been proper shall be a termination by the
Company in breach of this Agreement) or (y) Executive shall terminate his
employment for Good Reason, then
(i) The Company shall pay Executive his
full Base Salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, as well as all accrued bonus compensation
through the Date of Termination.
(ii) In lieu of all salary and incentive
compensation payments which Executive would have earned under this Agreement
but for his termination, the Company shall pay to Executive as liquidated
damages a lump sum amount equal to the present value, based on the Applicable
Federal Rate (as defined in Section 1274(d) of the Internal Revenue Code of
1986, as amended (the "Code")), of the product of (A) the sum of (1) the Base
Salary in effect as of the Date of Termination and (2) the annual bonus, if
any, paid to Executive pursuant to Section 4.2 hereof with respect to the
fiscal year in which Executive's employment is terminated (including any bonus
deemed to have been paid as set forth below), provided that such annual bonus
is calculable as of the Date of Termination, and if such annual bonus is not
then calculable, then the bonus, if any, paid to Executive with respect to the
fiscal year immediately preceding the year in which Executive's employment is
terminated (which, for fiscal 1996 and fiscal 1997 shall be deemed to be
$240,000), and (B) two (2) (such payment being referred to as the "Termination
Payment"). All payments under this Section 8.4(b) shall be made on or before
the fifth day
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<PAGE> 9
following the Date of Termination. In addition, if the receipt of the lump sum
pursuant to the foregoing sentence would cause Executive to pay federal income
tax for the year of receipt at a higher marginal rate than Executive would have
paid for such year had Executive's employment not been terminated (the "Original
Marginal Amount"), Executive shall receive an additional amount such that the
amount retained by executive after the payment of federal income taxes on such
lump sum shall be the same as if such lump sum had been taxed at the Original
Marginal Rate. Executive shall not be required to mitigate the amount of
compensation payable to Executive hereunder, by securing other employment or
otherwise, nor will such compensation be reduced by reason of Executive securing
other employment or for any other reason.
(iii) In the event that executive becomes
entitled to the Termination Payment provided for in Section 8.4(b)(ii), if any
of the Termination Payment will be subject to the tax (the "Excise Tax")
imposed by Section 4999 of the Code, the Company shall pay to Executive at the
time specified below, an additional amount (the "Gross-Up Payment") such that
the net amount retained by Executive, after deduction of any Excise Tax on the
Termination Payment and any federal, state and local income tax and Excise Tax
upon the payment provided for by this paragraph, shall be equal to the
Termination Payment. For purposes of determining whether any of the Termination
Payment will be subject to the Excise Tax and the amount of such Excise Tax,
(x) any other payments or benefits received or to be received by Executive in
connection with a change in control of the Company or the termination of
Executive's employment (whether pursuant to the terms of this Agreement or any
other plan, arrangement or agreement with the Company, any person whose actions
result in a change in control or any person having such a relationship with the
Company or such person as to require attribution of stock ownership between the
parties under section 318(a) of the Code) shall be treated as "parachute
payments" within the meaning of section 280G(b)(2) of the Code, and all "excess
parachute payments" within the meaning of section 280G(b)(1) shall be treated
as subject to the Excise Tax, unless in the opinion of tax counsel selected by
the Company's independent auditors and acceptable to Executive such other
payments or benefits (in whole or in part) do not constitute parachute
payments, or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered within the meaning of
Section 280G(b)(4) of the Code, (y) the amount of the Termination Payment which
shall be treated as subject to the Excise Tax shall be equal to the lesser of
(A) the total amount of the Termination Payment or (B) the amount of excess
parachute payments within the meaning of Sections 280G(b)(1) and (4) (after
applying clause (x), above, and after deducting any excess parachute payments
in respect of which payments have been made under this Section 8.4(y)), and (z)
the value of any non-cash benefits or any deferred payment or benefit shall be
determined by the Company's independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, Executive shall be deemed to
pay federal income taxes at the highest marginal rate of federal income
taxation in the calendar year in which the Gross-Up Payment is to be made and
state and local income taxes at the highest marginal rates of taxation in the
state and locality of your residence upon the Date of Termination, net of the
maximum reduction in federal income taxes which could be obtained from
deduction of such state and local taxes. In the event that the Excise Tax is
subsequently determined to be less
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<PAGE> 10
than the amount taken into account hereunder at the time of termination of
Executive's employment, Executive shall repay to the Company at the time that
the amount of such reduction in Excise Tax is finally determined the portion of
the Gross-Up Payment attributable to such reduction plus interest on the amount
of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In
the event that the Excise Tax is determined to exceed the amount taken into
account hereunder at the time of the termination of Executive's employment
(including by reason of any payment the existence or amount of which cannot be
determined at the time of the Gross-Up Payment), the Company shall make an
additional gross-up payment in respect of such excess (plus any interest payable
with respect to such excess) at the time that the amount of such excess is
finally determined.
For purposes of this Agreement, a "Change in Control" of the
Company shall mean (i) the acquisition of beneficial ownership (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), directly or indirectly, by any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), other than the Company or
Executive or an entity directly or indirectly controlled by Executive, of
securities of the Company representing a majority or more of the combined
voting power of the Company's then outstanding securities, (ii) the failure,
for any reason, of the individuals who presently constitute the Board of
Directors (the "Incumbent Board") to constitute at least a majority thereof,
provided that any director whose election has been approved in advance by
directors representing at least two-thirds (2/3) of the directors comprising
the Incumbent Board or by Executive shall be considered, for these purposes, as
though such director were a member of the Incumbent Board, (iii) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least a majority
of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation,
and such merger or consolidation occurs; or (iv) the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets.
(c) If termination of Executive's employment arises out of a
breach by the Company of this Agreement, the Company shall pay all other
damages for any and all loss of benefits which Executive would have received
under the Company's employee benefit plans if the Company had not breached this
Agreement and had Executive's employment continued for the full Term as then in
effect (including without limitation benefits Executive would have been
entitled to receive pursuant to any of the Company's pension plans had his
employment continued for such Term at the rate of compensation specified
herein), and including all legal fees and expenses incurred by him as a result
of such termination and in enforcing his rights.
8.5 CONTINUED MAINTENANCE OF BENEFIT PLANS. Unless Executive
is terminated for Cause, death, Mandatory Retirement or by Executive other than
for Good Reason,
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<PAGE> 11
the Company shall maintain in full force and effect, for the continued benefit
of Executive for two (2) years, commencing upon the Date of Termination, all
medical, hospitalization, health and accident insurance benefits, plans or
programs in which Executive was entitled to participate immediately prior to the
Date of Termination. In the event that Executive's participation in any such
benefits, plan or program is barred, the Company shall arrange to provide
Executive with benefits substantially similar to those which Executive would
otherwise have been entitled to receive under such benefits, plans and programs.
9. INDEMNIFICATION.
9.1 The Company agrees to indemnify Executive to the fullest
extent permitted by applicable law consistent with the Company's Certificate of
Incorporation and By-Laws as in effect on the date hereof with respect to any
acts or non-acts he may have committed while he was an officer, director,
and/or employee (i) of the Company or any subsidiary thereof, or (ii) at the
request of the Company, of any other entity.
9.2 The Company agrees to maintain for Executive, during the
Term and for a period of five (5) years thereafter, a directors' and officers'
liability insurance policy not less favorable than any policy that the Company
maintains for its directors and executive officers in general.
10. CONFIDENTIAL INFORMATION.
10.1 Executive hereby acknowledges that, in the course of his
employment by the Company, he has had and will have access to secret and
confidential information which relates to or affects all aspects of the
business and affairs of the Company, its subsidiaries, affiliates or divisions,
and which are not available to the general public ("Confidential Information").
Without limiting the generality of the foregoing, Confidential Information
shall include information relating to inventions developments, specifications,
technical and engineering data, information concerning the filing or pendency
of patent applications, business ideas, trade secrets, products under
development, production methods and processes, sources of supply, marketing
plans, and the names of any customers or prospective customers or of any
persons who have or shall have traded or dealt with the Company. Accordingly,
Executive agrees that, except as required by the performance of his duties
hereunder, he will not, at any time during the Term and for a period commencing
on the Date of the Termination and concluding upon the earlier to occur of (a)
two (2) years after such Date of Termination and (b) the date subsequent to
such Date of Termination upon which the Company is in material breach of any
material provision of this Agreement (provided that Executive notifies the
Company in writing of such breach and the Company does not cure such breach
within ten (10) days of the receipt of such notice from Executive), disclose or
furnish any Confidential Information to any person, firm, corporation or other
entity without the express prior written consent of the Company.
Notwithstanding the foregoing, the term Confidential Information shall not
include information or data which (i) is now or hereafter in the public domain,
other than as a result of the breach of this Section 10 by Executive, (ii)
prior to the
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<PAGE> 12
date of commencement of Executive's employment by the Company was known to
Executive, (iii) is, after the Date of Termination, lawfully acquired by
Executive from a third party who, to Executive' s knowledge, is not prohibited
from disclosing such data or information to Executive or (iv) is required to be
disclosed by court order or other legal process. In the event that Executive
receives a request or demand to disclose all or any part of the Confidential
Information under the terms of a subpoena or order issued by a court of
competent jurisdiction or otherwise, Executive agrees to (x) promptly notify the
Company of the existence, terms and circumstances surrounding such a request so
that the Company may seek a protective order or other appropriate relief or
remedy and (y) if disclosure of such information is required, disclose such
information and, subject to reimbursement by the Company of Executive's
expenses, cooperate with the Company in its efforts to obtain an order or other
reliable assurance that confidential treatment will be accorded to such portion
of the disclosed information which the Company so designates.
10.2 Executive hereby acknowledges and agrees that any and
all models, prototypes, notes, memoranda, notebooks, drawings, records, plans,
documents or other material in physical form which contain or embody
Confidential Information, whether created or prepared by Executive or by others
("Confidential Materials"), which are in Executive's possession or under his
control, are the sole property of the Company. Accordingly, Executive hereby
agrees that, upon the termination of his employment with the Company, whether
pursuant to this Agreement or otherwise, or at the Company's earlier request,
Executive shall return to the Company all Confidential Materials and all copies
thereof in his possession or under his control and shall not retain any copies
of Confidential Materials.
11. NON-COMPETITION.
11.1 Executive agrees that he shall not, so long as he shall
be employed by the Company in any capacity (whether pursuant to this Agreement
or otherwise) own, manage, operate, control or participate in the ownership,
management, operation or control or be employed by or connected in any manner
with, any business, firm or corporation which is or may be in competition with
the business of the Company, its subsidiaries, affiliates or divisions without
the express written consent of the Company.
11.2 Executive agrees that for a period commencing on the
effective Date of the Termination of his employment with the Company (for any
reason whatsoever) and concluding upon the earlier to occur of (a) twenty four
(24) months after such Date of Termination and (b) the date subsequent to such
Date of Termination upon which the Company is in material breach of any material
provision of this Agreement (provided that Executive notifies the Company in
writing of such breach and the Company does not cure such breach within ten (10)
days of the receipt of such notice from Executive), Executive shall not own,
manage, operate, control or participate in the ownership, management, operation
or control, or be employed by or connected in any manner with, any business,
firm or corporation which is engaged in or competes with the business of the
Company, its subsidiaries, affiliates or divisions as such business is
constituted on the Date of Termination.
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<PAGE> 13
11.3 Anything to the contrary herein notwithstanding, the
provisions of this Section 11 shall not be deemed violated by the purchase
and/or ownership by Executive of shares of any class of equity securities (or
options, warrants or rights to acquire such securities, or any securities
convertible into or exchangeable or exercisable for such securities) (x) of
the Company (or any successor thereto), (y) representing (together with any
securities which would be acquired upon the exercise of any such options,
warrants or rights or upon the conversion of any other security convertible
into or exchangeable or exercisable for such securities) three percent (3%) or
less of the outstanding shares of any such class of equity securities of any
issuer whose securities are traded on a national securities exchange or listed
by NASDAQ, the National Quotation Bureau Incorporated or any similar
organization; provided, however, that Executive shall not be otherwise
connected with or active in the business of the issuers described in this
Section 11.3 or (z) of any entity which is then employing Executive.
12. REMEDY FOR BREACH. Executive hereby acknowledges that in
the event of any breach or threatened breach by him of any of the provisions of
Sections 10 or 11 of this Agreement, the Company would have no adequate remedy
at law and could suffer substantial and irreparable damage. Accordingly,
Executive hereby agrees that, in such event, the Company shall be entitled, and
notwithstanding any election by the Company to claim damages, to obtain a
temporary and/or permanent injunction to restrain any such breach or threatened
breach or to obtain specific performance of any such provisions, all without
prejudice to any and all other remedies which the Company may have at law or in
equity.
13. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been given if delivered
personally or sent by registered or certified mail (return receipt requested),
postage prepaid, or by telecopy (immediately followed by telephone
confirmation of delivery of such telecopy with the intended recipient of such
notice and by notice in writing sent promptly by registered or certified mail
as provided above) to the parties to this Agreement at the following addresses
or at such other address for a party as shall be specified by like notice:
To the Company: Waterlink, Inc.
4100 Holiday Street, N.W.
Canton, OH 44718-2532
Telephone: (330) 649-4000
Telecopy: (330) 649-4008
Attention: President and Chief
Executive Officer
With copies to: Ira C. Kaplan, Esq.
Benesch, Friedlander, Coplan &
Aronoff, LLP
2300 BP America Bldg.
200 Public Square
Cleveland, OH 44114
Telephone: (216) 363-4567
Telecopy: (216) 363-4588
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<PAGE> 14
Telecopy: (330) 456-5756
To Executive: Theodore F. Savastano
2436 Brentwood Road N.W.
Canton, Ohio 44708
Telephone: (330) 477-2186
With a copy to: Scott M. Zimmerman, Esq.
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, NY 10022
Telephone: (212) 758-9500
Telecopy: (212) 758-9526
All such notices and communications shall be deemed to have
been received on the date of personal delivery, on the date that the telecopy
is confirmed as having been received or on the third business day after the
mailing thereof, as the case may be.
14. ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties hereto with respect to the employment matters
contemplated herein and supersedes all prior agreements or understandings
among the parties related to such employment matters, including, without
limitation, the Prior Employment Agreement. Notwithstanding the foregoing, all
stock option agreements between Executive and the Company, including those
contained in Section 3(c) of the Prior Employment Agreement, shall remain in
full force and effect.
15. BINDING EFFECT; THIRD PARTY BENEFICIARIES. Except as
otherwise provided herein, this Agreement shall be binding upon and inure to
the benefit of the Company and its successors and assigns and upon Executive.
"Successors and assigns" shall mean, in the case of the Company, any successor
pursuant to a merger, consolidation, or sale, or other transfer of all or
substantially all of the assets of the Company. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement in form and substance satisfactory to Executive, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Executive to compensation from the Company in the
same amount and on the same terms as if Executive terminated his employment
for Good Reason, except that for purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be deemed the Date
of Termination. As
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<PAGE> 15
used in this Agreement, "Company" shall mean Waterlink, Inc. and any successor
to its business and/or assets.
16. NO ASSIGNMENT. Except as contemplated by Section 15
above, this Agreement shall not be assignable or otherwise transferable by
either party.
17. AMENDMENT OR MODIFICATION; WAIVER. No provision of this
Agreement may be amended or waived unless such amendment or waiver is
authorized by the Chairman of the Board or the Board and is agreed to in
writing, signed by Executive and by an officer of the Company thereunto duly
authorized. Except as otherwise specifically provided in this Agreement, no
waiver by either party hereto of any breach by the other party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar provision or condition at
the same or at any prior or subsequent time.
18. FEES AND EXPENSES. The Company will reimburse Executive
for the reasonable attorney's fees incurred by him in connection with the
negotiation and preparation of this Agreement. If either party institutes any
action or proceedings to enforce any rights the party has under this Agreement,
or for damages by reason of any alleged breach of any provision of this
Agreement, or for a declaration of each party's rights or obligations hereunder
or to set aside any provision hereof, or for any other arbitral or judicial
remedy, each party shall be responsible for its own costs and expenses incurred
thereby, including but not limited to, attorneys' fees and disbursements;
provided, however, that if the employment of Executive is purported to be
terminated for Cause subsequent to the occurrence of a Change of Control, the
Company shall promptly pay and be solely responsible for all fees and expenses
incurred by Executive in contesting such purported termination or the grounds
therefor, including, without limitation, attorneys' fees and disbursements.
19. GOVERNING LAW; ARBITRATION. The validity, interpretation,
construction, performance and enforcement of this Agreement shall be governed
by the internal laws of the State of Ohio, without regard to its conflicts of
law rules. Any controversy or claim arising out of or relating to this
Agreement, shall be settled by arbitration in accordance with the rules of the
American Arbitration Association, and judgment upon such award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof. The
arbitration shall be held in Canton, Ohio or such other place as may be agreed
upon at the time by the parties to the arbitration. Subject to Section 18
hereof, the expense of such arbitration shall be borne by the Company.
20. TITLES. Titles to the Sections and subsections in this
Agreement are intended solely for convenience and no provision of this
Agreement is to be construed by reference to the title of any Section.
21. COUNTERPARTS. This Agreement may be executed in one or
more counter parts, which together shall constitute one agreement. It shall not
be necessary for each party to sign each counterpart so long as each party has
signed at least one counterpart.
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<PAGE> 16
22. SEVERABILITY. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms and provisions of this Agreement in any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first set forth above.
WATERLINK, INC.
By: /s/ Chet S. Ross
---------------------------------------
Name: Chet S. Ross
Title: President and Chief Executive Officer
/s/ Theodore F. Savastano
------------------------------------------
Theodore F. Savastano
BRANTLEY VENTURE PARTNERS III,
L.P., a Delaware limited partnership, with
respect to the second sentence of Section 4.3
only
By: /s/ Brantley Venture Partners III, L.P.
---------------------------------------
Brantley Venture Partners III, L.P.,
its general partner
By: /s/ Pinkas Family Partners, L.P.
---------------------------------------
Pinkas Family Partners, L.P.,
its general partner
By: /s/ Robert F. Pinkas
---------------------------------------
Robert F. Pinkas, general partner
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<PAGE> 1
Exhibit 10.3
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT (the "Agreement") is made and entered into as
of this 23rd day of May, 1997, by and between Waterlink, Inc., a Delaware
corporation (the "Company"), and Michael J. Vantusko ("Executive").
W I T N E S S E T H :
-------------------
WHEREAS, Executive has been employed by and is currently the
Chief Financial Officer of the Company;
WHEREAS, the Company desires to assure itself of Executive's
continued employment in an executive capacity and to compensate him for such
employment;
WHEREAS, Executive is willing to continue to be employed by
the Company upon the terms and subject to the conditions contained in this
Agreement;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
adequacy and receipt of which are hereby acknowledged, the parties agree as
follows:
1. EMPLOYMENT. The Company agrees to continue to employ
Executive and Executive hereby agrees to continue to serve the Company for the
Term (as defined in Section 2 below) of this Agreement, in the position and with
the duties and responsibilities set forth in Section 3 below, and upon the other
terms and subject to the conditions hereinafter stated.
2. TERM. The initial term (the "Initial Term") of this
Agreement shall commence on the date hereof and shall continue until the third
anniversary of the date hereof (the "Initial Expiration Date"); provided,
however, that this Agreement at all times shall be subject to earlier
termination in accordance with the provisions hereof. On the Initial Expiration
Date and each anniversary of the Initial Expiration Date, the term of this
Agreement automatically shall be extended for an additional one year term (the
"Extended Term"); unless either party hereto shall have provided written notice
to the other party hereto of its, or his, intent not to extend this Agreement
not less one (1) year prior to the end of the Initial Term or the Extended Term,
as the case may be. For purposes of this Agreement, "Term" means the Initial
Term and, if so extended, the Extended Term.
<PAGE> 2
3. POSITION, DUTIES AND RESPONSIBILITIES.
3.1 POSITION, DUTIES AND RESPONSIBILITIES. During the Term,
Executive shall serve as the Chief Financial Officer of the Company, and shall
be responsible for the duties attendant to such office, which duties will be
generally consistent with his position as an executive officer of the Company
and which will generally utilize his experience with the Company prior to the
date hereof, and such other managerial duties and responsibilities with the
Company, its affiliates, subsidiaries or divisions as may be assigned by the
President and Chief Executive Officer of the Company and/or the Board of
Directors of the Company (the "Board") consistent with Executive's position,
duties and responsibilities with the Company. Executive will report directly to
the President and Chief Executive Officer of the Company, as well as to the
Board. There will be no employee of the Company who shall have greater
authority, responsibilities or duties than Executive with respect to matters
customarily within the scope of the authority, responsibilities or duties of a
chief financial officer. Executive shall also serve as an officer and/or member
of the Board of Directors of any subsidiary or affiliate of the Company, if the
Board should so request; provided, that the duties, authority and
responsibilities of Executive with such subsidiaries or affiliates shall be
commensurate, and in all events not less than, Executive's duties, authority and
responsibilities with the Company as set forth in this Agreement. Executive's
duties shall be performed principally at the Company's executive offices which
are located in the Canton, Ohio Metropolitan Area (as defined below), and
Executive shall not be required to perform duties which would necessitate
changing his present residence, unless Executive otherwise agrees in writing.
For purposes of this Agreement, the term "Canton, Ohio Metropolitan Area" shall
encompass the City of Canton and the territory within fifteen (15) miles from
that city in any direction. The Company will promptly pay (or reimburse
Executive for) all reasonable moving expenses incurred by Executive relating to
a change of Executive's residences in connection with any such relocation to
which Executive has consented. In connection with any such change of residences,
the Company shall, at the request of Executive, purchase from Executive the
residence which he is required to vacate; provided, however, that such request
must be made within six months of his commencement of full-time employment at
the Company's relocated executive offices. The purchase price of such residence
shall be the average of the appraisals rendered by two appraisers retained by
the Company, one of whom shall be selected by Executive. Executive acknowledges
and agrees that, in connection with his employment hereunder, he may be required
to travel on behalf of the Company. To the extent that any Executive relocation
benefit program maintained by the Company, and in which Executive is entitled to
participate, is more favorable to Executive than the provisions of this
Agreement with respect to relocation, Executive shall be entitled to such
additional relocation benefits. In furtherance and not in limitation of the
foregoing, the Company acknowledges that Executive has not yet relocated his
personal residence to be more proximate to the Company's principal executive
offices. The Company agrees that should Executive determine to relocate to
within the Canton, Ohio Metropolitan Area, he shall be entitled to the
relocation benefits provided in this paragraph.
3.2 SERVICES TO BE PROVIDED. During the Term, Executive
shall devote all of his working time, attention and energies to the affairs of
the Company and its subsidiaries, affiliates
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and divisions and use his best efforts in the performance of his duties to
promote its and their best interests; provided, however, that nothing herein
shall preclude Executive from (i) serving on the boards of directors of a
reasonable number of other corporations, trade associations or charitable
organizations, (ii) engaging in charitable activities and community affairs or
(iii) managing his personal investments and affairs; provided, however, that
such activities do not materially interfere with the performance of Executive's
duties under the Agreement.
4. SALARY.
4.1 BASE SALARY. During the Term, Executive shall be paid a
base salary (the "Base Salary"), payable in equal installments at such intervals
as the other executive officers of the Company are paid but not less often than
bi-weekly, at an annual rate of one hundred fifty thousand dollars ($150,000)
until the first anniversary of the date hereof. For each succeeding year during
the Term, the annual rate of the Base Salary shall be increased (but not
decreased) by such amount, if any, as may be determined by the Board.
4.2 ANNUAL BONUS. During the Term, Executive shall participate
in any long term and annual incentive compensation programs as may be maintained
by the Company for the benefit of its executives. The Company shall establish an
annual incentive bonus plan pursuant to which Executive may earn, in each year
during the Term, commencing with fiscal 1998, an amount ranging from 0% to 150%
of his Base Salary, subject to the achievement of certain performance goals
established by the Board, such performance goals to be derived from the
Company's annual operating plan.
4.3 EQUITY OPPORTUNITY. During the Term, Executive shall be
eligible for stock option grants and similar awards under existing plans of the
Company, and under any future plans in which Executive officers of the Company
are entitled to participate.
In addition, upon the execution of this Agreement,
Executive shall be granted a non-qualified option (the "Stock Option")
exercisable to purchase 100,000 shares of the common stock, $.001 par value per
share (the "Common Stock"), of the Company, at an initial exercise price of
$12.00 per share. The Stock Option will be exercisable in cumulative annual
increments of 25% of the shares subject thereto, commencing on the first
anniversary of the date hereof, provided, however, that the Stock Option shall
become exercisable in full, without regard to the vesting criteria otherwise
contained herein or therein, upon the occurrence of a Change of Control (as
hereinafter defined) or the termination of Executive's employment hereunder (x)
by the Company, other than for Cause, death or disability or (y) by the
Executive for Good Reason. If the Company consummates a public offering of its
capital stock within six months of the date hereof, and the initial public
offering price per share is less than or greater than the then current exercise
price of the Stock Option, such exercise price will be adjusted to equal the
initial public offering price per share.
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5. EMPLOYEE BENEFITS.
5.1 BENEFIT PROGRAMS. During the Term, Executive shall
participate with other members of senior management of the Company in any
pension, profit-sharing, stock option or similar plan or program of the Company
now existing or established hereafter for the benefit of its employees or senior
executives of the Company or its subsidiaries generally, to the extent that he
remains eligible under the general provisions thereof. Executive shall also be
entitled to participate in any group insurance, hospitalization, medical, health
and accident, disability or similar or nonsimilar plan or program of the Company
now existing or established hereafter for the benefit of its employees or senior
executives of the Company and its subsidiaries generally, to the extent that he
is eligible under the general provisions thereof.
5.2 AUTOMOBILE. In furtherance of and not in limitation of
Section 5.1 hereof, the Company will pay to Executive, on the first business day
of each month during the Term, a monthly automobile allowance of $500.00 for the
expenses associated with Executive's costs of repairing, maintaining and
insuring an automobile in connection with the Company's business.
5.3 INSURANCE. During the Term, the Company, at its sole
expense, shall purchase and maintain a life insurance policy on the life of
Executive in the amount of $100,000, the beneficiary or beneficiaries of which
shall be designated by Executive.
5.4 VACATION; PERSONAL DAYS. During the Term, Executive shall
be entitled to four (4) weeks annual vacation with pay during each year of his
employment hereunder provided that the vacation days taken do not materially
interfere with the operations of the Company. Such vacation may be taken, in
Executive's discretion, at such time or times as are not inconsistent with the
reasonable business needs of the Company.
5.5 INSURANCE. Executive agrees that the Company may at any
time and for the Company's own benefit, apply for and take out life, health,
accident, and/or other insurance covering Executive either independently or
together with others in any amount which the Company deems to be in its best
interests and the Company may maintain any existing insurance policies on the
life of Executive owned by the Company. The Company shall own all rights in any
such insurance policies and in the cash values and proceeds thereof and, except
as otherwise provided, Executive shall not have any right, title or interest
therein. Executive agrees to assist the Company at the Company's expense in
obtaining any such insurance by, among other things, submitting to the customary
examinations and correctly preparing, signing and delivering such applications
and other documents as may be required by insurers.
6. EXPENSES. The Company shall reimburse Executive upon
presentation of appropriate vouchers or receipts and in accordance with the
Company's expense reimbursement policies, for all reasonable expenses incurred
by Executive in connection with the performance of his duties under this
Agreement.
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7. TERMINATION. Executive's employment under this Agreement
may be terminated without any breach of this Agreement only under the following
circumstances:
7.1 DEATH. Executive's employment shall terminate upon his
death.
7.2 DISABILITY. In the event Executive shall be unable to
render the services or perform his duties hereunder by reason of illness, injury
or incapacity (whether physical, mental, emotional or psychological) for a
period of either (i) one hundred eighty (180) consecutive days or (ii) two
hundred seventy (270) days in any consecutive three hundred sixty-five (365) day
period (either of such events shall constitute a "Disability" for purposes of
this Agreement), the Company shall have the right to terminate this Agreement.
7.3 TERMINATION OF EMPLOYMENT OF EXECUTIVE BY THE COMPANY FOR
CAUSE. The Company may terminate the employment of Executive for Cause (as
hereinafter defined). The term "Cause," as used herein, shall mean (a)
Executive's willful misconduct or gross neglect in the performance of his duties
hereunder which in either case has resulted, or is likely to result, in material
economic damage to the Company, (b) the material breach of this Agreement by
Executive which has resulted, or is likely to result, in material economic
damage to the Company or (c) the final, non-appealable conviction of Executive
of a felony which constitutes a crime of moral turpitude. For purposes of
Section 7.3(a), no act, or failure to act, on Executive's part, will be
considered "willful" unless done or omitted to be done by him not in good faith
and without a reasonable belief that his action or omission was in furtherance
of the Company's business.
Executive shall not be deemed to have been terminated
for Cause unless and until, after reasonable notice to Executive and an
opportunity for him to be heard before the Board. The Board has determined that
Executive was guilty of the conduct described in clause (a) or (b) of the
preceding paragraph, and delivered to Executive a Notice of Termination
(as defined below) stating such determination and specifying the particulars
thereof in detail.
7.4 TERMINATION OF EMPLOYMENT BY EXECUTIVE. Executive may
terminate his employment hereunder for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean (A) any assignment to Executive of any
duties inconsistent in any material respect with his present duties as Chief
Financial Officer of the Company or a change in his position, duties, authority
or responsibilities without his express written consent or any other action by
the Company which results in a material diminution of the position, duties,
authority, or responsibility of Executive, (B) any removal of Executive without
his consent from, or any failure to re-elect Executive to, the office of Chief
Financial Officer of the Company, except in connection with termination of
Executive's employment for Cause or as a result of his death or disability or by
him other than for Good Reason, (C) a reduction in Executive's Base Salary as in
effect on the date of this Agreement or as the same may be increased from time
to time, or a reduction in Executive's other benefits unless, with respect to a
reduction of benefits, all members of senior management of the Company are
similarly affected, (D) the Company shall materially breach any provision of
this
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Agreement, which breach shall continue unremedied for ten (10) days after the
Company shall have been given notice of such breach, or (E) failure of the
Company to obtain from any successor the assumption of or the agreement to
perform this Agreement (as contemplated in Section 15 hereof), or (F) any
purported termination of the Executive's employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of Section 7.5.
In addition, Executive may terminate his employment hereunder other than for
Good Reason.
7.5 NOTICE OF TERMINATION. Any termination of
Executive's employment by the Company or by Executive (other than a termination
pursuant to Sections 7.1 above) shall be communicated by written Notice of
Termination to the other party. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. Any purported termination not
satisfying the requirements of this Section 7.5 shall not be effected.
7.6 DATE OF TERMINATION. "Date of Termination"
shall mean (i) if Executive's employment is terminated by his death, the date
of his death, (ii) if the Executive's employment is terminated pursuant to
Section 7.5 above, the date specified in the Notice of Termination, and (iii)
if Executive's employment is terminated for any other reason, the date on which
a Notice of Termination is given; provided that if within thirty (30) days
after the Notice of Termination is given pursuant to Sections 7.3, the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be the date on
which the dispute is finally determined, either by mutual written agreement of
the parties, by a binding and final arbitration award or by a final judgment,
order or decree of a court of competent jurisdiction (the time for appeal
having expired and no appeal having been perfected); provided, further that if
the Company prevails in its determination to terminate Executive for Cause in
such arbitration or litigation, the Date of Termination shall be the date
specified in the Notice of Termination.
8. COMPENSATION UPON TERMINATION.
8.1 COMPENSATION UPON TERMINATION UPON DEATH. In
the event of the death of Executive during the Term, Executive's designated
beneficiary, or, in the absence of such designation, the estate or other legal
representative of Executive (collectively, the "Estate"), shall be paid within
thirty (30) days of Executive's death, an amount equal to the sum of Executive's
unpaid Base Salary through the month in which Executive's death occurred, as
well as all accrued bonus compensation through the date of death. Executive, or
the Estate, shall be entitled to other death benefits in accordance with the
terms of the Company's benefit programs and plans and the other provisions of
this Agreement.
8.2 COMPENSATION UPON TERMINATION FOR DISABILITY.
If Executive's employment hereunder is terminated for Disability, Executive
shall be paid an amount equal to the
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sum of (x) any unpaid Base Salary for the month in which the termination
occurred and for a period of six months thereafter and (y) an amount equal to
the product of (1) the annual bonus, if any, paid to Executive pursuant to
Section 4.2 hereof with respect to the fiscal year in which Executive's
employment is terminated pursuant to Section 7.2 (including any bonus deemed to
have been paid as set forth below), provided that such annual bonus is
calculable as of the Date of Termination, and if such annual bonus is not then
calculable, then the bonus, if any, paid to Executive with respect to the fiscal
year immediately preceding the year in which Executive's employment is
terminated (which, for fiscal 1996 and fiscal 1997 shall be deemed to be
$150,000) and (2) a fraction, the numerator of which is the number of days
during which Executive rendered services and performed his duties hereunder
during the fiscal year in which his employment hereunder is terminated and the
denominator of which is 365; such amounts to be payable to Executive in twelve
(12) equal bimonthly installments on the fifteenth and last day of each month
commencing on the fifteenth day of the month following the month in which
Executive's employment is terminated. The amount provided for above shall be
reduced by any disability benefits received by Executive under plans maintained
by the Company. Executive shall be entitled to other disability compensation and
benefits in accordance with the Company's benefit programs and plans and the
other provisions of this Agreement.
8.3 COMPENSATION UPON TERMINATION BY THE COMPANY FOR
CAUSE OR BY EXECUTIVE FOR OTHER THAN GOOD REASON. If Executive's employment is
terminated by the Company for Cause or by Executive for other than Good Reason,
the Company shall pay Executive his Base Salary through the Date of Termination
at the rate in effect at the time Notice of Termination is given, as well as all
accrued bonus compensation through the Date of Termination, and the Company
shall have no further obligations to Executive under this Agreement, except as
may be specifically provided herein.
8.4 IMPROPER TERMINATION; GOOD REASON. (a) Subject
to the provisions of Section 8.4(b) hereof, if (x) in breach of this Agreement,
the Company shall terminate Executive's employment other than pursuant to
Section 7.3 (it being understood that a purported termination pursuant to
Section 7.3 which is disputed and finally determined not to have been proper
shall be a termination by the Company in breach of this Agreement) or (B)
Executive shall terminate his employment for Good Reason, then
(i) The Company shall pay Executive his
full Base Salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, as well as all accrued bonus compensation
through the Date of Termination.
(ii) In lieu of all salary and incentive
compensation payments which Executive would have earned under this Agreement but
for his termination, the Company shall pay to Executive, as liquidated damages,
an amount equal to the product of (A) the sum of (1) the Base Salary in effect
as of the Date of Termination and (2) the annual bonus, if any, paid to
Executive pursuant to Section 4.2 hereof with respect to the fiscal year in
which Executive's employment is terminated (including any bonus deemed to have
been paid as set forth below),
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<PAGE> 8
provided that such annual bonus is calculable as of the Date of Termination, and
if such annual bonus is not then calculable, then the bonus, if any, paid to
Executive with respect to the fiscal year immediately preceding the year in
which Executive's employment is terminated (which, for fiscal 1996 and fiscal
1997 shall be deemed to be $150,000) and (B) one (1.0), such amounts to be
payable to Executive in twelve (12) equal bi-monthly installments on the
fifteenth and last day of each month, commencing on the fifteenth day of the
month following the month in which the Date of Termination occurs. If the
Company fails to make, within five (5) days of the dates specified above, any
payments required to be made pursuant to this Section 8.4(a)(i) or (ii), the
Company shall pay to Executive, within ten (10) days of the date of such second
failure, in a lump sum, an amount equal to the sum of the remaining payments
(including any payments that the Company failed to make) to which Executive
would have been entitled pursuant to Section 8.4(a)(i) and (ii) if such failures
had not occurred.
(b) If, within one (1) year after the occurrence of
a Change of Control, (x) in breach of this Agreement, the Company shall
terminate Executive's employment other than pursuant to Section 7.3 (it being
understood that a purported termination pursuant to Section 7.3 which is
disputed and finally determined not to have been proper shall be a termination
by the Company in breach of this Agreement) or (y) Executive shall terminate his
employment for Good Reason, then
(i) The Company shall pay Executive his
full Base Salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, as well as all accrued bonus compensation
through the Date of Termination.
(ii) In lieu of all salary and incentive
compensation payments which Executive would have earned under this Agreement but
for his termination, the Company shall pay to Executive as liquidated damages a
lump sum amount equal to the present value, based on the Applicable Federal Rate
(as defined in Section 1274(d) of the Internal Revenue Code of 1986, as amended
(the "Code")), of the product of (A) the sum of (1) the Base Salary in effect as
of the Date of Termination and (2) the annual bonus, if any, paid to Executive
pursuant to Section 4.2 hereof with respect to the fiscal year in which
Executive's employment is terminated (including any bonus deemed to have been
paid as set forth below), provided that such annual bonus is calculable as of
the Date of Termination, and if such annual bonus is not then calculable, then
the bonus, if any, paid to Executive with respect to the fiscal year immediately
preceding the year in which Executive's employment is terminated (which, for
fiscal 1996 and fiscal 1997 shall be deemed to be $150,000) and (B) one (1.0)
(such payment being referred to as the "Termination Payment"). All payments
under this Section 8.4(b) shall be made on or before the fifth day following the
Date of Termination. In addition, if the receipt of the lump sum pursuant to the
foregoing sentence would cause Executive to pay federal income tax for the year
of receipt at a higher marginal rate than Executive would have paid for such
year had Executive's employment not been terminated (the "Original Marginal
Amount"), Executive shall receive an additional amount such that the amount
retained by executive after the payment of federal income taxes on such lump sum
shall be the same as if such lump sum had been taxed at the Original Marginal
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Rate. Executive shall not be required to mitigate the amount of compensation
payable to Executive hereunder, by securing other employment or otherwise, nor
will such compensation be reduced by reason of Executive securing other
employment or for any other reason.
(iii) In the event that executive becomes
entitled to the Termination Payment provided for in Section 8.4(b)(ii), if any
of the Termination Payment will be subject to the tax (the "Excise Tax") imposed
by Section 4999 of the Code, the Company shall pay to Executive at the time
specified below, an additional amount (the "Gross-Up Payment") such that the net
amount retained by Executive, after deduction of any Excise Tax on the
Termination Payment and any federal, state and local income tax and Excise Tax
upon the payment provided for by this paragraph, shall be equal to the
Termination Payment. For purposes of determining whether any of the Termination
Payment will be subject to the Excise Tax and the amount of such Excise Tax, (x)
any other payments or benefits received or to be received by Executive in
connection with a change in control of the Company or the termination of
Executive's employment (whether pursuant to the terms of this Agreement or any
other plan, arrangement or agreement with the Company, any person whose actions
result in a change in control or any person having such a relationship with the
Company or such person as to require attribution of stock ownership between the
parties under section 318(a) of the Code) shall be treated as "parachute
payments" within the meaning of section 280G(b)(2) of the Code, and all "excess
parachute payments" within the meaning of section 280G(b)(1) shall be treated as
subject to the Excise Tax, unless in the opinion of tax counsel selected by the
Company's independent auditors and acceptable to Executive such other payments
or benefits (in whole or in part) do not constitute parachute payments, or such
excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered within the meaning of Section
280G(b)(4) of the Code, (y) the amount of the Termination Payment which shall be
treated as subject to the Excise Tax shall be equal to the lesser of (A) the
total amount of the Termination Payment or (B) the amount of excess parachute
payments within the meaning of Sections 280G(b)(1) and (4) (after applying
clause (x), above, and after deducting any excess parachute payments in respect
of which payments have been made under this Section 8.4(y)), and (z) the value
of any non-cash benefits or any deferred payment or benefit shall be determined
by the Company's independent auditors in accordance with the principles of
Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount
of the Gross-Up Payment, Executive shall be deemed to pay federal income taxes
at the highest marginal rate of federal income taxation in the calendar year in
which the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rates of taxation in the state and locality of your residence
upon the Date of Termination, net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state and local taxes. In
the event that the Excise Tax is subsequently determined to be less than the
amount taken into account hereunder at the time of termination of Executive's
employment, Executive shall repay to the Company at the time that the amount of
such reduction in Excise Tax is finally determined the portion of the Gross-Up
Payment attributable to such reduction plus interest on the amount of such
repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the
event that the Excise Tax is determined to exceed the amount taken into account
hereunder at the time of the termination of Executive's employment (including
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by reason of any payment the existence or amount of which cannot be determined
at the time of the Gross-Up Payment), the Company shall make an additional
gross-up payment in respect of such excess (plus any interest payable with
respect to such excess) at the time that the amount of such excess is finally
determined.
For purposes of this Agreement, a "Change in
Control" of the Company shall mean (i) the acquisition of beneficial ownership
(as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), directly or indirectly, by any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company or
Executive or an entity directly or indirectly controlled by Executive, of
securities of the Company representing a majority or more of the combined voting
power of the Company's then outstanding securities, (ii) the failure, for any
reason, of the individuals who presently constitute the Board of Directors (the
"Incumbent Board") to constitute at least a majority thereof, provided that any
director whose election has been approved in advance by directors representing
at least two-thirds (2/3) of the directors comprising the Incumbent Board or by
Executive shall be considered, for these purposes, as though such director were
a member of the Incumbent Board, (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least a majority of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation and such merger or consolidation occurs; or (iv)
the stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
(c) If termination of Executive's employment arises
out of a breach by the Company of this Agreement, the Company shall pay all
other damages for any and all loss of benefits which Executive would have
received under the Company's employee benefit plans if the Company had not
breached this Agreement and had Executive's employment continued for the full
Term as then in effect (including without limitation benefits Executive would
have been entitled to receive pursuant to any of the Company's pension plans had
his employment continued for such Term at the rate of compensation specified
herein), and including all legal fees and expenses incurred by him as a result
of such termination and in enforcing his rights.
8.5 CONTINUED MAINTENANCE OF BENEFIT PLANS. Unless
Executive is terminated for Cause, death or by Executive other than for Good
Reason, the Company shall maintain in full force and effect, for the continued
benefit of Executive for twelve (12) months, commencing upon the Date of
Termination, all medical, hospitalization, health and accident insurance
benefits, plans or programs in which Executive was entitled to participate
immediately prior to the Date of Termination. In the event that Executive's
participation in any such benefit, plan or program is barred, the Company shall
arrange to provide Executive with benefits
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substantially similar to those which Executive would otherwise have been
entitled to receive under such benefits, plans and programs.
9. INDEMNIFICATION.
9.1 The Company agrees to indemnify Executive to the fullest
extent permitted by applicable law consistent with the Company's Certificate of
Incorporation and By-Laws as in effect on the date hereof with respect to any
acts or non-acts he may have committed while he was an officer, director, and/or
employee (i) of the Company or any subsidiary thereof, or (ii) at the request of
the Company, of any other entity.
9.2 The Company agrees to maintain for Executive, during the
Term and for a period of five (5) years thereafter, a directors' and officers'
liability insurance policy not less favorable than any policy that the Company
maintains for its directors and executive officers in general.
10. CONFIDENTIAL INFORMATION.
10.1 Executive hereby acknowledges that, in the course of his
employment by the Company, he has had and will have access to secret and
confidential information which relates to or affects all aspects of the business
and affairs of the Company, its subsidiaries, affiliates or divisions, and which
are not available to the general public ("Confidential Information"). Without
limiting the generality of the foregoing, Confidential Information shall include
information relating to inventions, developments, specifications, technical and
engineering data, information concerning the filing or pendency of patent
applications, business ideas, trade secrets, products under development,
production methods and processes, sources of supply, marketing plans, and the
names of any customers or prospective customers or of any persons who have or
shall have traded or dealt with the Company. Accordingly, Executive agrees that,
except as required by the performance of his duties hereunder, he will not, at
any time during the Term and for a period commencing on the Date of the
Termination and concluding upon the earlier to occur of (a) two (2) years after
such Date of Termination and (b) the date subsequent to such Date of Termination
upon which the Company is in material breach of any material provision of this
Agreement (provided that Executive notifies the Company in writing of such
breach and the Company does not cure such breach within ten (10) days of the
receipt of such notice from Executive), disclose or furnish any Confidential
Information to any person, firm, corporation or other entity without the express
prior written consent of the Company. Notwithstanding the foregoing, the term
Confidential Information shall not include information or data which (i) is now
or hereafter in the public domain, other than as a result of the breach of this
Section 10 by Executive, (ii) prior to the date of commencement of Executive's
employment by the Company was known to Executive, (iii) is, after the Date of
Termination, lawfully acquired by Executive from a third party who, to
Executive' s knowledge, is not prohibited from disclosing such data or
information to Executive or (iv) is required to be disclosed by court order or
other legal process. In the event that Executive receives a request or demand to
disclose all or any part of the Confidential Information
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under the terms of a subpoena or order issued by a court of competent
jurisdiction or otherwise, Executive agrees to (x) promptly notify the Company
of the existence, terms and circumstances surrounding such a request so that the
Company may seek a protective order or other appropriate relief or remedy and
(y) if disclosure of such information is required, disclose such information
and, subject to reimbursement by the Company of Executive's expenses, cooperate
with the Company in its efforts to obtain an order or other reliable assurance
that confidential treatment will be accorded to such portion of the disclosed
information which the Company so designates.
10.2 Executive hereby acknowledges and agrees that any and all
models, prototypes, notes, memoranda, notebooks, drawings, records, plans,
documents or other material in physical form which contain or embody
Confidential Information, whether created or prepared by Executive or by others
("Confidential Materials"), which are in Executive's possession or under his
control, are the sole property of the Company. Accordingly, Executive hereby
agrees that, upon the termination of his employment with the Company, whether
pursuant to this Agreement or otherwise, or at the Company's earlier request,
Executive shall return to the Company all Confidential Materials and all copies
thereof in his possession or under his control and shall not retain any copies
of Confidential Materials.
11. NON-COMPETITION.
11.1 Executive agrees that he shall not, so long as he shall
be employed by the Company in any capacity (whether pursuant to this Agreement
or otherwise) own, manage, operate, control or participate in the ownership,
management, operation or control or be employed by or connected in any manner
with, any business, firm or corporation which is or may be in competition with
the business of the Company, its subsidiaries, affiliates or divisions without
the express written consent of the Company.
11.2 Executive agrees that for a period commencing on the
effective Date of the Termination and concluding upon the earlier to occur of
(a) twelve (12) months after such Date of Termination and (b) the date
subsequent to such Date of Termination upon which the Company is in material
breach of any material provision of this Agreement (provided that Executive
notifies the Company in writing of such breach and the Company does not cure
such breach within ten (10) days of the receipt of such notice from Executive),
Executive shall not own, manage, operate, control or participate in the
ownership, management, operation or control, or be employed by or connected in
any manner with, any business, firm or corporation which is engaged in or
competes with the business of the Company its subsidiaries, affiliates or
divisions as such business is constituted on the Date of Termination.
11.3 Anything to the contrary herein notwithstanding, the
provisions of this Section 11 shall not be deemed violated by the purchase
and/or ownership by Executive of shares of any class of equity securities (or
options, warrants or rights to acquire such securities, or any securities
convertible into or exchangeable or exercisable for such securities) (x) of the
Company (or any successor thereto), (y) representing (together with any
securities which would be acquired
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<PAGE> 13
upon the exercise of any such options, warrants or rights or upon the conversion
of any other security convertible into or exchangeable or exercisable for such
securities) three percent (3%) or less of the outstanding shares of any such
class of equity securities of any issuer whose securities are traded on a
national securities exchange or listed by NASDAQ, the National Quotation Bureau
Incorporated or any similar organization; provided, however, that Executive
shall not be otherwise connected with or active in the business of the issuers
described in this Section 11.3 or (z) of any entity which is then employing
Executive.
12. REMEDY FOR BREACH. Executive hereby acknowledges that in
the event of any breach or threatened breach by him of any of the provisions of
Sections 10 or 11 of this Agreement, the Company would have no adequate remedy
at law and could suffer substantial and irreparable damage. Accordingly,
Executive hereby agrees that, in such event, the Company shall be entitled, and
notwithstanding any election by the Company to claim damages, to obtain a
temporary and/or permanent injunction to restrain any such breach or threatened
breach or to obtain specific performance of any such provisions, all without
prejudice to any and all other remedies which the Company may have at law or in
equity.
13. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been given if delivered
personally or sent by registered or certified mail (return receipt requested),
postage prepaid, or by telecopy (immediately followed by telephone confirmation
of delivery of such telecopy with the intended recipient of such notice and by
notice in writing sent promptly by registered or certified mail as provided
above) to the parties to this Agreement at the following addresses or at such
other address for a party as shall be specified by like notice:
To the Company: Waterlink, Inc.
4100 Holiday Street, N.W.
Canton, OH 44718-2532
Telephone: (330) 649-4000
Telecopy: (330) 649-4008
Attention: President and Chief Executive
Officer
With copies to: Ira C. Kaplan, Esq.
Benesch, Friedlander, Coplan &
Aronoff, LLP
2300 BP America Bldg.
200 Public Square
Cleveland, OH 44114
Telephone: (216) 363-4567
Telecopy: (216) 363-4588
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<PAGE> 14
To Executive: Michael J. Vantusko
8594 Somerset Drive
Broadview Heights, OH 44147
Canton, OH 44702
Telephone: (216) 582-3916
Telecopy: (216) 582-3932
With a copy to: Scott M. Zimmerman, Esq.
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, NY 10022
Telephone: (212) 758-9500
Telecopy: (212) 758-9526
All such notices and communications shall be deemed to have
been received on the date of personal delivery, on the date that the telecopy is
confirmed as having been received or on the third business day after the mailing
thereof, as the case may be.
14. ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties hereto with respect to the employment matters
contemplated herein and supersedes all prior agreements or understandings among
the parties related to such employment matters, including, without limitation,
the Employment Agreement, dated November 21, 1996, between the Company and
Executive.
15. BINDING EFFECT; THIRD PARTY BENEFICIARIES. Except as
otherwise provided herein, this Agreement shall be binding upon and inure to the
benefit of the Company and its successors and assigns and upon Executive.
"Successors and assigns" shall mean, in the case of the Company, any successor
pursuant to a merger, consolidation, or sale, or other transfer of all or
substantially all of the assets of the Company. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement in form and substance satisfactory to Executive, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Executive to compensation from the Company in the
same amount and on the same terms as if Executive terminated his employment for
Good Reason, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement, "Company" shall mean Waterlink, Inc. and
any successor to its business and/or assets.
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<PAGE> 15
16. NO ASSIGNMENT. Except as contemplated by Section 15
above, this Agreement shall not be assignable or otherwise transferable by
either party.
17. AMENDMENT OR MODIFICATION; WAIVER. No provision of this
Agreement may be amended or waived unless such amendment or waiver is authorized
by the Chairman of the Board or the Board and is agreed to in writing, signed by
Executive and by an officer of the Company thereunto duly authorized. Except as
otherwise specifically provided in this Agreement, no waiver by either party
hereto of any breach by the other party hereto of any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of a
similar or dissimilar provision or condition at the same or at any prior or
subsequent time.
18. FEES AND EXPENSES. The Company will reimburse Executive
for the reasonable attorney's fees incurred by him in connection with the
negotiation and preparation of this Agreement. If either party institutes any
action or proceedings to enforce any rights the party has under this Agreement,
or for damages by reason of any alleged breach of any provision of this
Agreement, or for a declaration of each party's rights or obligations hereunder
or to set aside any provision hereof, or for any other arbitral or judicial
remedy, each party shall be responsible for its own costs and expenses incurred
thereby, including but not limited to, attorneys' fees and disbursements;
provided, however, that if the employment of Executive is purported to be
terminated for Cause subsequent to the occurrence of a Change of Control, the
Company shall promptly pay and be solely responsible for all fees and expenses
incurred by Executive in contesting such purported termination or the grounds
therefor, including, without limitation, attorneys' fees and disbursements.
19. GOVERNING LAW; ARBITRATION. The validity, interpretation,
construction, performance and enforcement of this Agreement shall be governed by
the internal laws of the State of Ohio, without regard to its conflicts of law
rules. Any controversy or claim arising out of or relating to this Agreement,
shall be settled by arbitration in accordance with the rules of the American
Arbitration Association, and judgment upon such award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof. The
arbitration shall be held in Canton, Ohio or such other place as may be agreed
upon at the time by the parties to the arbitration. Subject to Section 18
hereof, the expense of such arbitration shall be borne by the Company.
20. TITLES. Titles to the Sections and subsections in this
Agreement are intended solely for convenience and no provision of this Agreement
is to be construed by reference to the title of any Section.
21. COUNTERPARTS. This Agreement may be executed in one or
more counter parts, which together shall constitute one agreement. It shall not
be necessary for each party to sign each counterpart so long as each party has
signed at least one counterpart.
22. SEVERABILITY. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such
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<PAGE> 16
invalidity or unenforceability without rendering invalid or unenforceable the
remaining terms and provisions of this Agreement or affecting the validity or
enforceability of any of the terms and provisions of this Agreement in any other
jurisdiction.
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<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first set forth above.
WATERLINK, INC.
By: /s/ Chet S. Ross
---------------------------------
Name: Chet S. Ross
Title: President and Chief Executive Officer
/s/ Michael J. Vantusko
-------------------------------------
Michael J. Vantusko
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<PAGE> 1
Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as
of this 23rd day of May, 1997, by and between Waterlink, Inc., a Delaware
corporation (the "Company"), and Dean Hertert ("Executive").
W I T N E S S E T H :
WHEREAS, Executive has been employed by and is currently the
Vice President - of the Company;
WHEREAS, the Company desires to assure itself of Executive's
continued employment in an executive capacity and to compensate him for such
employment;
WHEREAS, Executive is willing to continue to be employed by
the Company upon the terms and subject to the conditions contained in this
Agreement;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
adequacy and receipt of which are hereby acknowledged, the parties agree as
follows:
1. EMPLOYMENT. The Company agrees to continue to employ
Executive and Executive hereby agrees to continue to serve the Company for the
Term (as defined in Section 2 below) of this Agreement, in the position and with
the duties and responsibilities set forth in Section 3 below, and upon the other
terms and subject to the conditions hereinafter stated.
2. TERM. The initial term (the "Initial Term") of this
Agreement shall commence on the date hereof and shall continue until the third
anniversary of the date hereof (the "Initial Expiration Date"); provided,
however, that this Agreement at all times shall be subject to earlier
termination in accordance with the provisions hereof. On the Initial Expiration
Date and each anniversary of the Initial Expiration Date, the term of this
Agreement automatically shall be extended for an additional one year term (the
"Extended Term"); unless either party hereto shall have provided written notice
to the other party hereto of its, or his, intent not to extend this Agreement
not less one (1) year prior to the end of the Initial Term or the Extended Term,
as the case may be. For purposes of this Agreement, "Term" means the Initial
Term and, if so extended, the Extended Term.
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<PAGE> 2
3. POSITION, DUTIES AND RESPONSIBILITIES.
3.1 POSITION, DUTIES AND RESPONSIBILITIES. During the Term,
Executive shall serve as the Vice President of the Company, and shall be
responsible for the duties attendant to such office, which duties will be
generally consistent with his position as an executive officer of the Company
and which will generally utilize his experience with the Company prior to the
date hereof, and such other managerial duties and responsibilities with the
Company, its affiliates, subsidiaries or divisions as may be assigned by the
President and Chief Executive Officer of the Company and/or the Board of
Directors of the Company (the "Board") consistent with Executive's position,
duties and responsibilities with the Company. Executive will report directly to
the President and Chief Executive Officer of the Company, as well as to the
Board. Executive shall also serve as an officer and/or member of the Board of
Directors of any subsidiary or affiliate of the Company, if the Board should so
request; provided, that the duties, authority and responsibilities of Executive
with such subsidiaries or affiliates shall be commensurate, and in all events
not less than, Executive's duties, authority and responsibilities with the
Company as set forth in this Agreement. Executive's duties shall be performed
principally at the Company's executive offices which are located in the Canton,
Ohio Metropolitan Area (as defined below), and Executive shall not be required
to perform duties which would necessitate changing his present residence, unless
Executive otherwise agrees in writing. For purposes of this Agreement, the term
"Canton, Ohio Metropolitan Area" shall encompass the City of Canton and the
territory within fifteen (15) miles from that city in any direction. The Company
will promptly pay (or reimburse Executive for) all reasonable moving expenses
incurred by Executive relating to a change of Executive's residences in
connection with any such relocation to which Executive has consented. Executive
acknowledges and agrees that, in connection with his employment hereunder, he
may be required to travel on behalf of the Company.
3.2 SERVICES TO BE PROVIDED. During the Term, Executive shall
devote all of his working time, attention and energies to the affairs of the
Company and its subsidiaries, affiliates and divisions and use his best efforts
in the performance of his duties to promote its and their best interests;
provided, however, that nothing herein shall preclude Executive from (i) serving
on the boards of directors of a reasonable number of other corporations, trade
associations or charitable organizations, (ii) engaging in charitable activities
and community affairs or (iii) managing his personal investments and affairs;
provided, however, that such activities do not materially interfere with the
performance of Executive's duties under the Agreement.
4. SALARY.
4.1 BASE SALARY. During the Term, Executive shall be paid a
base salary (the "Base Salary"), payable in equal installments at such intervals
as the other executive officers of the Company are paid but not less often than
bi-weekly, at an annual rate of one hundred forty thousand dollars ($140,000)
until the first anniversary of the date hereof. For each succeeding year during
the Term, the annual rate of the Base Salary shall be increased (but not
decreased) by such amount, if any, as may be determined by the Board.
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<PAGE> 3
4.2 ANNUAL BONUS. During the Term, Executive shall
participate in any long term and annual incentive compensation programs as may
be maintained by the Company for the benefit of its executives. The Company
shall establish an annual incentive bonus plan pursuant to which Executive may
earn, in each year during the Term, commencing with fiscal 1998, an amount
ranging from 0% to 150% of his Base Salary, subject to the achievement of
certain performance goals established by the Board, such performance goals to be
derived from the Company's annual operating plan.
4.3 EQUITY OPPORTUNITY. During the Term, Executive shall be
eligible for stock option grants and similar awards under existing plans of the
Company, and under any future plans in which executive officers of the Company
are entitled to participate. In addition, upon the execution of this Agreement,
Executive shall be granted a non-qualified option (the "Stock Option")
exercisable to purchase 50,000 shares of the common stock, $.001 par value per
share (the "Common Stock"), of the Company, at an initial exercise price of
$12.00 per share. The Stock Option will be exercisable in cumulative annual
increments of 25% of the shares subject thereto, commencing on the first
anniversary of the date hereof, provided, however, that the Stock Option shall
become exercisable in full, without regard to the vesting criteria otherwise
contained herein or therein, upon the occurrence of a Change of Control (as
hereinafter defined) or the termination of Executive's employment hereunder (x)
by the Company, other than for Cause, death or disability or (y) by the
Executive for Good Reason. If the Company consummates a public offering of its
capital stock within six months of the date hereof, and the initial public
offering price per share is less than or greater than the then current exercise
price of the Stock Option, such exercise price will be adjusted to equal the
initial public offering price per share.
5. EMPLOYEE BENEFITS.
5.1 BENEFIT PROGRAMS. During the Term, Executive shall
participate with other members of senior management of the Company in any
pension, profit-sharing, stock option or similar plan or program of the Company
now existing or established hereafter for the benefit of its employees or senior
executives of the Company or its subsidiaries generally, to the extent that he
remains eligible under the general provisions thereof. Executive shall also be
entitled to participate in any group insurance, hospitalization, medical, health
and accident, disability or similar or nonsimilar plan or program of the Company
now existing or established hereafter for the benefit of its employees or senior
executives of the Company and its subsidiaries generally, to the extent that he
is eligible under the general provisions thereof.
5.2 AUTOMOBILE. In furtherance of and not in limitation of
Section 5.1 hereof, the Company will pay to Executive, on the first business day
of each month during the Term, a monthly automobile allowance of $500.00 for the
expenses associated with Executive's costs of repairing, maintaining and
insuring an automobile in connection with the Company's business.
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<PAGE> 4
5.3 INSURANCE. During the Term, the Company, at its sole
expense, shall purchase and maintain a life insurance policy on the life of
Executive in the amount of $100,000, the beneficiary or beneficiaries of which
shall be designated by Executive.
5.4 VACATION; PERSONAL DAYS. During the Term, Executive shall
be entitled to four (4) weeks annual vacation with pay during each year of his
employment hereunder provided that the vacation days taken do not materially
interfere with the operations of the Company. Such vacation may be taken, in
Executive's discretion, at such time or times as are not inconsistent with the
reasonable business needs of the Company.
5.5 INSURANCE. Executive agrees that the Company may at any
time and for the Company's own benefit, apply for and take out life, health,
accident, and/or other insurance covering Executive either independently or
together with others in any amount which the Company deems to be in its best
interests and the Company may maintain any existing insurance policies on the
life of Executive owned by the Company. The Company shall own all rights in any
such insurance policies and in the cash values and proceeds thereof and, except
as otherwise provided, Executive shall not have any right, title or interest
therein. Executive agrees to assist the Company at the Company's expense in
obtaining any such insurance by, among other things, submitting to the customary
examinations and correctly preparing, signing and delivering such applications
and other documents as may be required by insurers.
6. EXPENSES. The Company shall reimburse Executive upon
presentation of appropriate vouchers or receipts and in accordance with the
Company's expense reimbursement policies, for all reasonable expenses incurred
by Executive in connection with the performance of his duties under this
Agreement.
7. TERMINATION. Executive's employment under this Agreement
may be terminated without any breach of this Agreement only under the following
circumstances:
7.1 DEATH. Executive's employment shall terminate upon his
death.
7.2 DISABILITY. In the event Executive shall be unable to
render the services or perform his duties hereunder by reason of illness, injury
or incapacity (whether physical, mental, emotional or psychological) for a
period of either (i) one hundred eighty (180) consecutive days or (ii) two
hundred seventy (270) days in any consecutive three hundred sixty-five (365) day
period (either of such events shall constitute a "Disability" for purposes of
this Agreement), the Company shall have the right to terminate this Agreement.
7.3 TERMINATION OF EMPLOYMENT OF EXECUTIVE BY THE COMPANY FOR
CAUSE. The Company may terminate the employment of Executive for Cause (as
hereinafter defined). The term "Cause," as used herein, shall mean (a)
Executive's willful misconduct or gross neglect in the performance of his duties
hereunder which in either case has resulted, or is likely to result, in material
economic damage to the Company, (b) the material breach of this Agreement by
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<PAGE> 5
Executive which has resulted, or is likely to result, in material economic
damage to the Company or (c) the final, non-appealable conviction of Executive
of a felony which constitutes a crime of moral turpitude. For purposes of
Section 7.3(a), no act, or failure to act, on Executive's part, will be
considered "willful" unless done or omitted to be done by him not in good faith
and without a reasonable belief that his action or omission was in furtherance
of the Company's business.
Executive shall not be deemed to have been terminated for
Cause unless and until, after reasonable notice to Executive and an opportunity
for him to be heard before the Board, the Board has determined that Executive
was guilty of the conduct described in clause (a) or (b) of the preceding
paragraph, and delivered to Executive a Notice of Termination (as defined
below) stating such determination and specifying the particulars thereof in
detail.
7.4 TERMINATION OF EMPLOYMENT BY EXECUTIVE FOR GOOD REASON.
Executive may terminate his employment hereunder for Good Reason. For purposes
of this Agreement, "Good Reason" shall mean (A) any assignment to Executive of
any duties inconsistent in any material respect with his present duties as Vice
President of the Company or a change in his position, duties, authority or
responsibilities without his express written consent or any other action by the
Company which results in a material diminution of the position, duties,
authority, or responsibility of Executive, (B) any removal of Executive without
his consent from, or any failure to re-elect Executive to, the office of Vice
President of the Company, except in connection with termination of Executive's
employment for Cause or as a result of his death or disability or by him other
than for Good Reason, (C) a reduction in Executive's Base Salary as in effect on
the date of this Agreement or as the same may be increased from time to time, or
a reduction in Executive's other benefits unless, with respect to a reduction of
benefits, all members of senior management of the Company are similarly
affected, (D) the Company shall materially breach any provision of this
Agreement, which breach shall continue unremedied for ten (10) days after the
Company shall have been given notice of such breach, or (E) failure of the
Company to obtain from any successor the assumption of or the agreement to
perform this Agreement (as contemplated in Section 15 hereof), or (F) any
purported termination of the Executive's employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of Section 7.5.
In addition, Executive may terminate his employment hereunder other than for
Good Reason.
7.5 NOTICE OF TERMINATION. Any termination of Executive's
employment by the Company or by Executive (other than a termination pursuant to
Sections 7.1 above) shall be communicated by written Notice of Termination to
the other party. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall indicate the specific provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. Any purported termination not satisfying the
requirements of this Section 7.5 shall not be effected.
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<PAGE> 6
7.6 DATE OF TERMINATION. "Date of Termination" shall mean (i)
if Executive's employment is terminated by his death, the date of his death,
(ii) if the Executive's employment is terminated pursuant to Section 7.5 above,
the date specified in the Notice of Termination, and (iii) if Executive's
employment is terminated for any other reason, the date on which a Notice of
Termination is given; provided that if within thirty (30) days after the Notice
of Termination is given pursuant to Sections 7.3, the party receiving such
Notice of Termination notifies the other party that a dispute exists concerning
the termination, the Date of Termination shall be the date on which the dispute
is finally determined, either by mutual written agreement of the parties, by a
binding and final arbitration award or by a final judgment, order or decree of a
court of competent jurisdiction (the time for appeal having expired and no
appeal having been perfected); provided, further that if the Company prevails in
its determination to terminate Executive for Cause in such arbitration or
litigation, the Date of Termination shall be the date specified in the Notice of
Termination.
8. COMPENSATION UPON TERMINATION.
8.1 COMPENSATION UPON TERMINATION UPON DEATH. In the event of
the death of Executive during the Term, Executive's designated beneficiary, or,
in the absence of such designation, the estate or other legal representative of
Executive (collectively, the "Estate"), shall be paid within thirty (30) days of
Executive's death, an amount equal to the sum of Executive's unpaid Base Salary
through the month in which Executive's death occurred, as well as all accrued
bonus compensation through the date of death. Executive, or the Estate, shall be
entitled to other death benefits in accordance with the terms of the Company's
benefit programs and plans and the other provisions of this Agreement.
8.2 COMPENSATION UPON TERMINATION FOR DISABILITY. If
Executive's employment hereunder is terminated for Disability, Executive shall
be paid an amount equal to the sum of (x) any unpaid Base Salary for the month
in which the termination occurred and for a period of six months thereafter and
(y) an amount equal to the product of (1) the annual bonus, if any, paid to
Executive pursuant to Section 4.2 hereof with respect to the fiscal year in
which Executive's employment is terminated pursuant to Section 7.2 (including
any bonus deemed to have been paid as set forth below), provided that such
annual bonus is calculable as of the Date of Termination, and if such annual
bonus is not then calculable, then the bonus, if any, paid to Executive with
respect to the fiscal year immediately preceding the year in which Executive's
employment is terminated (which, for fiscal 1996 and fiscal 1997 shall be deemed
to be $140,000) and (2) a fraction, the numerator of which is the number of days
during which Executive rendered services and performed his duties hereunder
during the fiscal year in which his employment hereunder is terminated and the
denominator of which is 365; such amounts to be payable to Executive in twelve
(12) equal bimonthly installments on the fifteenth and last day of each month
commencing on the fifteenth day of the month following the month in which
Executive's employment is terminated. The amount provided for above shall be
reduced by any disability benefits received by Executive under plans maintained
by the Company. Executive shall be
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<PAGE> 7
entitled to other disability compensation and benefits in accordance with the
Company's benefit programs and plans and the other provisions of this Agreement.
8.3 COMPENSATION UPON TERMINATION FOR CAUSE OR BY EXECUTIVE
FOR OTHER THAN GOOD REASON. If Executive's employment is terminated by the
Company for Cause or by Executive for other than Good Reason, the Company shall
pay Executive his Base Salary through the Date of Termination at the rate in
effect at the time Notice of Termination is given, as well as all accrued bonus
compensation through the Date of Termination, and the Company shall have no
further obligations to Executive under this Agreement, except as may be
specifically provided herein.
8.4 IMPROPER TERMINATION; GOOD REASON. (a) Subject to the
provisions of Section 8.4(b) hereof, if (x) in breach of this Agreement, the
Company shall terminate Executive's employment other than pursuant to Section
7.3 (it being understood that a purported termination pursuant to Section 7.3
which is disputed and finally determined not to have been proper shall be a
termination by the Company in breach of this Agreement) or (y) Executive shall
terminate his employment for Good Reason, then
(i) The Company shall pay Executive his full Base Salary
through the Date of Termination at the rate in effect at the time Notice of
Termination is given, as well as all accrued bonus compensation through the Date
of Termination.
(ii) In lieu of all salary and incentive compensation
payments which Executive would have earned under this Agreement but for his
termination, the Company shall pay to Executive, as liquidated damages, an
amount equal to the product of (A) the sum of (1) the Base Salary in effect as
of the Date of Termination and (2) the annual bonus, if any, paid to Executive
pursuant to Section 4.2 hereof with respect to the fiscal year in which
Executive's employment is terminated (including any bonus deemed to have been
paid as set forth below), provided that such annual bonus is calculable as of
the Date of Termination, and if such annual bonus is not then calculable, then
the bonus, if any, paid to Executive with respect to the fiscal year immediately
preceding the year in which Executive's employment is terminated (which, for
fiscal 1996 and fiscal 1997 shall be deemed to be $140,000) and (B) one and
one-half (1.5), such amounts to be payable to Executive in thirty six (36) equal
bi-monthly installments on the fifteenth and last day of each month, commencing
on the fifteenth day of the month following the month in which the Date of
Termination occurs. If the Company fails to make, within five (5) days of the
dates specified above, any payments required to be made pursuant to this Section
8.4(a)(i) or (ii), the Company shall pay to Executive, within ten (10) days of
the date of such second failure, in a lump sum, an amount equal to the sum of
the remaining payments (including any payments that the Company failed to make)
to which Executive would have been entitled pursuant to Section 8.4(a)(i) and
(ii) if such failures had not occurred.
(b) If, within one (1) year after the occurrence of a
Change of Control, (x) in breach of this Agreement, the Company shall terminate
Executive's employment other than
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<PAGE> 8
pursuant to Section 7.3 (it being understood that a purported termination
pursuant to Section 7.3 which is disputed and finally determined not to have
been proper shall be a termination by the Company in breach of this Agreement)
or (y) Executive shall terminate his employment for Good Reason, then
(i) The Company shall pay Executive his full
Base Salary through the Date of Termination at the rate in effect at the time
Notice of Termination is given, as well as all accrued bonus compensation
through the Date of Termination.
(ii) In lieu of all salary and incentive
compensation payments which Executive would have earned under this Agreement but
for his termination, the Company shall pay to Executive as liquidated damages a
lump sum amount equal to the present value, based on the Applicable Federal Rate
(as defined in Section 1274(d) of the Internal Revenue Code of 1986, as amended
(the "Code")), of the product of (A) the sum of (1) the Base Salary in effect as
of the Date of Termination and (2) the annual bonus, if any, paid to Executive
pursuant to Section 4.2 hereof with respect to the fiscal year in which
Executive's employment is terminated (including any bonus deemed to have been
paid as set forth below), provided that such annual bonus is calculable as of
the Date of Termination, and if such annual bonus is not then calculable, then
the bonus, if any, paid to Executive with respect to the fiscal year immediately
preceding the year in which Executive's employment is terminated (which, for
fiscal 1996 and fiscal 1997 shall be deemed to be $140,000) and (B) one and
one-half (1.5) (such payment being referred to as the "Termination Payment").
All payments under this Section 8.4(b) shall be made on or before the fifth day
following the Date of Termination. In addition, if the receipt of the lump sum
pursuant to the foregoing sentence would cause Executive to pay federal income
tax for the year of receipt at a higher marginal rate than Executive would have
paid for such year had Executive's employment not been terminated (the "Original
Marginal Amount"), Executive shall receive an additional amount such that the
amount retained by executive after the payment of federal income taxes on such
lump sum shall be the same as if such lump sum had been taxed at the Original
Marginal Rate. Executive shall not be required to mitigate the amount of
compensation payable to Executive hereunder, by securing other employment or
otherwise, nor will such compensation be reduced by reason of Executive securing
other employment or for any other reason.
(iii) In the event that executive becomes
entitled to the Termination Payment provided for in Section 8.4(b)(ii), if any
of the Termination Payment will be subject to the tax (the "Excise Tax") imposed
by Section 4999 of the Code, the Company shall pay to Executive at the time
specified below, an additional amount (the "Gross-Up Payment") such that the net
amount retained by Executive, after deduction of any Excise Tax on the
Termination Payment and any federal, state and local income tax and Excise Tax
upon the payment provided for by this paragraph, shall be equal to the
Termination Payment. For purposes of determining whether any of the Termination
Payment will be subject to the Excise Tax and the amount of such Excise Tax, (x)
any other payments or benefits received or to be received by Executive in
connection with a change in control of the Company or the termination of
Executive's employment (whether pursuant to the terms of this Agreement or any
other plan, arrangement or
- 8 -
<PAGE> 9
agreement with the Company, any person whose actions result in a change in
control or any person having such a relationship with the Company or such person
as to require attribution of stock ownership between the parties under section
318(a) of the Code) shall be treated as "parachute payments" within the meaning
of section 280G(b)(2) of the Code, and all "excess parachute payments" within
the meaning of section 280G(b)(1) shall be treated as subject to the Excise Tax,
unless in the opinion of tax counsel selected by the Company's independent
auditors and acceptable to Executive such other payments or benefits (in whole
or in part) do not constitute parachute payments, or such excess parachute
payments (in whole or in part) represent reasonable compensation for services
actually rendered within the meaning of Section 280G(b)(4) of the Code, (y) the
amount of the Termination Payment which shall be treated as subject to the
Excise Tax shall be equal to the lesser of (A) the total amount of the
Termination Payment or (B) the amount of excess parachute payments within the
meaning of Sections 280G(b)(1) and (4) (after applying clause (x), above, and
after deducting any excess parachute payments in respect of which payments have
been made under this Section 8.4(y)), and (z) the value of any non-cash benefits
or any deferred payment or benefit shall be determined by the Company's
independent auditors in accordance with the principles of Sections 280G(d)(3)
and (4) of the Code. For purposes of determining the amount of the Gross-Up
Payment, Executive shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation in the calendar year in which the
Gross-Up Payment is to be made and state and local income taxes at the highest
marginal rates of taxation in the state and locality of your residence upon the
Date of Termination, net of the maximum reduction in federal income taxes which
could be obtained from deduction of such state and local taxes. In the event
that the Excise Tax is subsequently determined to be less than the amount taken
into account hereunder at the time of termination of Executive's employment,
Executive shall repay to the Company at the time that the amount of such
reduction in Excise Tax is finally determined the portion of the Gross-Up
Payment attributable to such reduction plus interest on the amount of such
repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the
event that the Excise Tax is determined to exceed the amount taken into account
hereunder at the time of the termination of Executive's employment (including by
reason of any payment the existence or amount of which cannot be determined at
the time of the Gross-Up Payment), the Company shall make an additional gross-up
payment in respect of such excess (plus any interest payable with respect to
such excess) at the time that the amount of such excess is finally determined.
For purposes of this Agreement, a "Change in
Control" of the Company shall mean (i) the acquisition of beneficial ownership
(as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), directly or indirectly, by any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company or
Executive or an entity directly or indirectly controlled by Executive, of
securities of the Company representing a majority or more of the combined voting
power of the Company's then outstanding securities, (ii) the failure, for any
reason, of the individuals who presently constitute the Board of Directors (the
"Incumbent Board") to constitute at least a majority thereof, provided that any
director whose election has been approved in advance by directors representing
at least two-thirds (2/3) of the directors comprising the Incumbent Board or by
- 9 -
<PAGE> 10
Executive shall be considered, for these purposes, as though such director were
a member of the Incumbent Board, (iii) the stockholders of the Company approve
a merger or consolidation of the Company with any other corporation, other than
a merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into voting securities of the
surviving entity) at least a majority of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation and such merger or consolidation
occurs; or (iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
(c) If termination of Executive's employment arises
out of a breach by the Company of this Agreement, the Company shall pay all
other damages for any and all loss of benefits which Executive would have
received under the Company's employee benefit plans if the Company had not
breached this Agreement and had Executive's employment continued for the full
Term as then in effect (including without limitation benefits Executive would
have been entitled to receive pursuant to any of the Company's pension plans had
his employment continued for such Term at the rate of compensation specified
herein), and including all legal fees and expenses incurred by him as a result
of such termination and in enforcing his rights.
8.5 CONTINUED MAINTENANCE OF BENEFIT PLANS. Unless
Executive is terminated for Cause, death or by Executive other than for Good
Reason, the Company shall maintain in full force and effect, for the continued
benefit of Executive for eighteen (18) months, commencing upon the Date of
Termination, all medical, hospitalization, health and accident insurance
benefits, plans or programs in which Executive was entitled to participate
immediately prior to the Date of Termination. In the event that Executive's
participation in any such benefit, plan or program is barred, the Company shall
arrange to provide Executive with benefits substantially similar to those which
Executive would otherwise have been entitled to receive under such benefits,
plans and programs.
9. INDEMNIFICATION.
9.1 The Company agrees to indemnify Executive to the fullest
extent permitted by applicable law consistent with the Company's Certificate of
Incorporation and By-Laws as in effect on the date hereof with respect to any
acts or non-acts he may have committed while he was an officer, director, and/or
employee (i) of the Company or any subsidiary thereof, or (ii) at the request of
the Company, of any other entity.
9.2 The Company agrees to maintain for Executive a directors'
and officers' liability insurance policy not less favorable than any policy that
the Company maintains for its directors and executive officers in general.
- 10 -
<PAGE> 11
10. CONFIDENTIAL INFORMATION.
10.1 Executive hereby acknowledges that, in the course of his
employment by the Company, he has had and will have access to secret and
confidential information which relates to or affects all aspects of the business
and affairs of the Company, its subsidiaries, affiliates or divisions, and which
are not available to the general public ("Confidential Information"). Without
limiting the generality of the foregoing, Confidential Information shall include
information relating to inventions, developments, specifications, technical and
engineering data, information concerning the filing or pendency of patent
applications, business ideas, trade secrets, products under development,
production methods and processes, sources of supply, marketing plans, and the
names of any customers or prospective customers or of any persons who have or
shall have traded or dealt with the Company. Accordingly, Executive agrees that,
except as required by the performance of his duties hereunder, he will not, at
any time during the Term and for a period commencing on the Date of the
Termination and concluding upon the earlier to occur of (a) two (2) years after
such Date of Termination and (b) the date subsequent to such Date of Termination
upon which the Company is in material breach of any material provision of this
Agreement (provided that Executive notifies the Company in writing of such
breach and the Company does not cure such breach within ten (10) days of the
receipt of such notice from Executive), disclose or furnish any Confidential
Information to any person, firm, corporation or other entity without the express
prior written consent of the Company. Notwithstanding the foregoing, the term
Confidential Information shall not include information or data which (i) is now
or hereafter in the public domain, other than as a result of the breach of this
Section 10 by Executive, (ii) prior to the date of commencement of Executive's
employment by the Company was known to Executive, (iii) is, after the Date of
Termination, lawfully acquired by Executive from a third party who, to
Executive' s knowledge, is not prohibited from disclosing such data or
information to Executive or (iv) is required to be disclosed by court order or
other legal process. In the event that Executive receives a request or demand to
disclose all or any part of the Confidential Information under the terms of a
subpoena or order issued by a court of competent jurisdiction or otherwise,
Executive agrees to (x) promptly notify the Company of the existence, terms and
circumstances surrounding such a request so that the Company may seek a
protective order or other appropriate relief or remedy and (y) if disclosure of
such information is required, disclose such information and, subject to
reimbursement by the Company of Executive's expenses, cooperate with the Company
in its efforts to obtain an order or other reliable assurance that confidential
treatment will be accorded to such portion of the disclosed information which
the Company so designates.
10.2 Executive hereby acknowledges and agrees that any and all
models, prototypes, notes, memoranda, notebooks, drawings, records, plans,
documents or other material in physical form which contain or embody
Confidential Information, whether created or prepared by Executive or by others
("Confidential Materials"), which are in Executive's possession or under his
control, are the sole property of the Company. Accordingly, Executive hereby
agrees that, upon the termination of his employment with the Company, whether
pursuant to this Agreement or otherwise, or at the Company's earlier request,
Executive shall return to the Company all
- 11 -
<PAGE> 12
Confidential Materials and all copies thereof in his possession or under his
control and shall not retain any copies of Confidential Materials.
11. NON-COMPETITION.
11.1 Executive agrees that he shall not, so long as he shall
be employed by the Company in any capacity (whether pursuant to this Agreement
or otherwise) own, manage, operate, control or participate in the ownership,
management, operation or control or be employed by or connected in any manner
with, any business, firm or corporation which is or may be in competition with
the business of the Company, its subsidiaries, affiliates or divisions without
the express written consent of the Company.
11.2 Executive agrees that for a period commencing on the
effective Date of the Termination and concluding upon the earlier to occur of
(a) twelve (12) months after such Date of Termination and (b) the date
subsequent to such Date of Termination upon which the Company is in material
breach of any material provision of this Agreement (provided that Executive
notifies the Company in writing of such breach and the Company does not cure
such breach within ten (10) days of the receipt of such notice from Executive),
Executive shall not own, manage, operate, control or participate in the
ownership, management, operation or control, or be employed by or connected in
any manner with, any business, firm or corporation which is engaged in or
competes with the business of the Company its subsidiaries, affiliates or
divisions as such business is constituted on the Date of Termination.
11.3 Anything to the contrary herein notwithstanding, the
provisions of this Section 11 shall not be deemed violated by the purchase
and/or ownership by Executive of shares of any class of equity securities (or
options, warrants or rights to acquire such securities, or any securities
convertible into or exchangeable or exercisable for such securities) (x) of the
Company (or any successor thereto), (y) representing (together with any
securities which would be acquired upon the exercise of any such options,
warrants or rights or upon the conversion of any other security convertible into
or exchangeable or exercisable for such securities) three percent (3%) or less
of the outstanding shares of any such class of equity securities of any issuer
whose securities are traded on a national securities exchange or listed by
NASDAQ, the National Quotation Bureau Incorporated or any similar organization;
provided, however, that Executive shall not be otherwise connected with or
active in the business of the issuers described in this Section 11.3 or (z) of
any entity which is then employing Executive.
12. REMEDY FOR BREACH. Executive hereby acknowledges that in
the event of any breach or threatened breach by him of any of the provisions of
Sections 10 or 11 of this Agreement, the Company would have no adequate remedy
at law and could suffer substantial and irreparable damage. Accordingly,
Executive hereby agrees that, in such event, the Company shall be entitled, and
notwithstanding any election by the Company to claim damages, to obtain a
temporary and/or permanent injunction to restrain any such breach or threatened
breach or to
- 12 -
<PAGE> 13
obtain specific performance of any such provisions, all without prejudice to any
and all other remedies which the Company may have at law or in equity.
13. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been given if delivered
personally or sent by registered or certified mail (return receipt requested),
postage prepaid, or by telecopy (immediately followed by telephone confirmation
of delivery of such telecopy with the intended recipient of such notice and by
notice in writing sent promptly by registered or certified mail as provided
above) to the parties to this Agreement at the following addresses or at such
other address for a party as shall be specified by like notice:
To the Company: Waterlink, Inc.
4100 Holiday Street, N.W.
Canton, OH 44718-2532
Telephone: (330) 649-4000
Telecopy: (330) 649-4008
Attention: President and Chief Executive
Officer
With copies to: Ira C. Kaplan, Esq.
Benesch, Friedlander, Coplan &
Aronoff, LLP
2300 BP America Bldg.
200 Public Square
Cleveland, OH 44114
Telephone: (216) 363-4567
Telecopy: (216) 363-4588
To Executive: Dean Hertert
8236 Strausser Street N.W.
Massillon, Ohio 44646
Telephone: (330) 854-0740
Telecopy: (330) 854-0750
With a copy to: Scott M. Zimmerman, Esq.
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, NY 10022
Telephone: (212) 758-9500
Telecopy: (212) 758-9526
- 13 -
<PAGE> 14
All such notices and communications shall be deemed to have
been received on the date of personal delivery, on the date that the telecopy is
confirmed as having been received or on the third business day after the mailing
thereof, as the case may be.
14. ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties hereto with respect to the employment matters
contemplated herein and supersedes all prior agreements or understandings among
the parties related to such employment matters.
15. BINDING EFFECT; THIRD PARTY BENEFICIARIES. Except as
otherwise provided herein, this Agreement shall be binding upon and inure to the
benefit of the Company and its successors and assigns and upon Executive.
"Successors and assigns" shall mean, in the case of the Company, any successor
pursuant to a merger, consolidation, or sale, or other transfer of all or
substantially all of the assets of the Company. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement in form and substance satisfactory to Executive, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Executive to compensation from the Company in the
same amount and on the same terms as if Executive terminated his employment for
Good Reason, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement, "Company" shall mean Waterlink, Inc. and
any successor to its business and/or assets.
16. NO ASSIGNMENT. Except as contemplated by Section 15 above,
this Agreement shall not be assignable or otherwise transferable by either
party.
17. AMENDMENT OR MODIFICATION; WAIVER. No provision of this
Agreement may be amended or waived unless such amendment or waiver is authorized
by the Chairman of the Board or the Board and is agreed to in writing, signed by
Executive and by an officer of the Company thereunto duly authorized. Except as
otherwise specifically provided in this Agreement, no waiver by either party
hereto of any breach by the other party hereto of any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of a
similar or dissimilar provision or condition at the same or at any prior or
subsequent time.
18. FEES AND EXPENSES. The Company will reimburse Executive
for the reasonable attorney's fees incurred by him in connection with the
negotiation and preparation of this Agreement. If either party institutes any
action or proceedings to enforce any rights the party has under this Agreement,
or for damages by reason of any alleged breach of any provision of this
Agreement, or for a declaration of each party's rights or obligations hereunder
or to set aside any provision hereof, or for any other arbitral or judicial
remedy, each party shall be responsible for its own costs and expenses incurred
thereby, including but not limited to, attorneys' fees and
- 14 -
<PAGE> 15
disbursements; provided, however, that if the employment of Executive is
purported to be terminated for Cause subsequent to the occurrence of a Change of
Control, the Company shall promptly pay and be solely responsible for all fees
and expenses incurred by Executive in contesting such purported termination or
the grounds therefor, including, without limitation, attorneys' fees and
disbursements.
19. GOVERNING LAW; ARBITRATION. The validity, interpretation,
construction, performance and enforcement of this Agreement shall be governed by
the internal laws of the State of Ohio, without regard to its conflicts of law
rules. Any controversy or claim arising out of or relating to this Agreement,
shall be settled by arbitration in accordance with the rules of the American
Arbitration Association, and judgment upon such award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof. The
arbitration shall be held in Canton, Ohio or such other place as may be agreed
upon at the time by the parties to the arbitration. Subject to Section 18, the
expense of such arbitration shall be borne by the Company.
20. TITLES. Titles to the Sections and subsections in this
Agreement are intended solely for convenience and no provision of this Agreement
is to be construed by reference to the title of any Section.
21. COUNTERPARTS. This Agreement may be executed in one or
more counter parts, which together shall constitute one agreement. It shall not
be necessary for each party to sign each counterpart so long as each party has
signed at least one counterpart.
22. SEVERABILITY. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms and provisions of this Agreement in any other jurisdiction.
- 15 -
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first set forth above.
WATERLINK, INC.
By: /s/ Chet S. Ross
------------------------------------
Name: Chet S. Ross
Title: President and Chief Executive Officer
/s/ Dean Hertert
---------------------------------------
Dean Hertert
- 16 -
<PAGE> 1
Exhibit 10.5
ANSTALLNINGSAVTAL
-----------------
Mellan Axel Johnson Engineering AB, har nedan kallat Bolaget, och direktor Hans
F. Larsson har foljande anstallningsavtal traffats.
Larsson tilltrader den 1 juli 1987 som verkstallande direktor i Bolaget.
Larsson skall atnjuta en fast lon av trehundratrettiosextusen (336.000) kronor
per ar. Lonen utbetalas med en tolftedel (1/12) manadsvis i efterskott. Lonen
ar harmed faststalld till och med 1987. Darefter skall Larsson komma i
atnjutande av lonejusteringar pa samma niva som andra chefstjansteman i
Nordstjernan-koncernen.
Bolaget skall foresia Nordstjernans styrelse att Larsson tillforsakras fran och
med arsskiftet 1987/88 tre andelar i Nordstjernan-koncernens vinstandelssystem.
Villkoren for detta vinstandelssystem faststalles av Nordstjernans styrelse.
Larsson tillforsakras tillaggspension enligt gallande ITP-avtal mellan SAF samt
SIF, SALF resp. HTF. Vidare omfattas larsson av gallande avtal om
tjanstegrupplivforsakring som traffats mellan namnda organisationer.
Semester utgar med 30 dagar per intjanandear. Lopande kalenderar raknas som
intjanandear.
Anstallningsformaner i ovrigt utgar enligt for Bolaget gallande avtal for
tjansteman.
bolaget staller tjanstebil typ Volvo 740 eller motsvarande till Larssons
forfogande. Bilen far aven anvandas for privata resor.
For resor i Bolagets tjanst tillampas bolagets resereglemente. Vid
representation i och utom hemmet ersattes Larsson for uppkomna verkliga
kostnader, vilka skall specificeras och sa vitt mojligt verifieras, allt pa det
satt som ar praxis inom Bolaget.
<PAGE> 2
Gor Larsson uppfinning under anstallningstiden eller inom ett ar efter det
anstallningen upphort och faller uppfinningens utnyttjande inom Bolagets eller
annat till Nordstjernan-koncernen horande foretags verksamhetsomrade utan
begransning till nagot land, ager Bolaget helt eller delvis intrada sasom
rattsinnehavare med avseende pa uppfinningen.
I ovrigt galler lagen orn ratt till arbetstagares uppfinningar, dock att om
overenskommelse ej kan uppnas rorande storleken av ersattning, vartill Larsson
enligt namnda lag kan bli berattigad, fragan skall hanskjutas till skiljenamnd
enligt lagen om skiljeman.
Larsson forbinder sig att icke utan Bolagets medgivande i varje sarskilt fall
ataga sig annat uppdrag vid sidan av sin befattning i Bolagets tjanst eller
bedriva eller deltaga i annan verksamhet for egen eller annans rakning i det
fall detta kan menligt inverka pa Larssons arbete for Bolaget eller pa annat
satt skada Bolagets verksamhet.
Larsson forbinder sig att icke for ovidkommande yppa nagot rorande
Bolagets/Nordstjernan-koncernens affarer och forhallanden. Dena forbindelse
galler aven efter anstallningens upphorande.
Detta avtal galler med en omsesidig uppsagningstid av sex manader.
Skulle Bolaget uppsaga detta avtal inom 12 manader efter det att Bolaget bytt
agare, skall Larssons uppsagningstid vara 12 manader. For att denna langre
uppsagningstid skall galla, skall Larsson, om Bolaget sa fordrar, for sin del
medge Bolaget en lika lang uppsagningstid.
Tvist angaende tolkninger eller tillampningen av detta avtal skall avgoras av
skiljenamnd enligt lagen om skiljeman.
Stockholm den
AXEL JOHNSON ENGINEERING AB
/s/ Hans F. Larsson /s/ Christer Lindberg
Hans F. Larsson Christer Lindberg
<PAGE> 3
[NORDSTJERNAN AB Letterhead]
Direktor Hans F. Larsson
Nordanvagen 68
137 00 VASTERHANINGE
Our Ref. Date Your Ref.
ChL/KS 1987-06-22
Broder,
I anslutning till Ditt anstallningsavtal med Axel Johnson Engineering vill jag
dartill informera om foljande rutiner for telefonkostnader m.m.
1. Som ersattning for Dina privata samtal i tjansten fran hemmet betalar
bolaget Din rorliga telefonkostnad utover 4000 markeringar per ar.
2. Bolaget svarar for kostnaden for en daglig tidning, att adresseras till Din
hemadress.
Med vanlig halsning
AXEL JOHNSON ENGINEERING AB
/s/ Christer Lindberg
Christer Lindberg
<PAGE> 4
[NORDSTJERNAN INDUSTRIES AB LETTERHEAD]
CHRISTER LINDBERG
VICE PRESIDENT
Dir. Hans F. Larsson
Nordanvagen 68
137 38 VASTERHANINGE
1991-02-13
Broder!
Komplettering av Ditt anstallningsavtal med
Axel Johnson Engineering AB
- --------------------------------------------
Vi bekraftar harmed att fran och med den 21 januari 1991 loper Ditt
anstallningsavtal med en uppsagningstid fran arbetsgivaren pa 18 manader.
Jag vill samtidigt ta tillfallet i akt att tacka Dig och uttrycka uppskattning
for Din medverkan i det pagaenda strukturprojektet.
Med vanlig halsning
AXEL JOHNSON ENGINEERING AB
/s/ Christer Lindberg
Christer Lindberg
<PAGE> 5
[NORDSTJERNAN INDUSTRIES AB LETTERHEAD]
GORAN W IJKMARK
PRESIDENT
1992-01-22
PERSONLIGT OCH KONFIDENTIELLT
Hans F. Larsson
Axel Johnson Engineering AB
Box 1004
149 25 NYNASHAMN
Broder!
Sasom VD i Nordic Water Products AB med ett vidgat ansvarsomrade vill jag
harmed meddela att Din lon fr.o.m. 1 januari 1992 utgar med 46 000 kr/manad.
Antal semesterdagar uppgar till 32 dagar.
I ovrigt kvarstar ovriga anstallningsforhallanden. Som VD i Nordic Water
Products AB kommer Du ocksa att inga i Nordic Waters ledningsgrupp.
Jag onskar Dig lycka till och ser fram emot ett intressant samarbete.
Med vanlig halsning
/s/ Goran Wijkmark
Goran Wijkmark
Styrelseordforande
Axel Johnson Engineering AB
Nordic Water Products AB
<PAGE> 6
EMPLOYMENT AGREEMENT
--------------------
Axel Johnson Engineering AB, hereinafter referred to as the company, and
Director Hans F. Larsson have entered into the following employment agreement.
Larsson shall commence his employment on 1 July 1987 as managing director of
the Company.
Larsson shall receive a fixed salary of three hundred thirty six thousand
(336,000) krona per year. The salary is paid with one twelfth (1/12) monthly
in arrears. The salary is hereby determined for and including 1987. Larsson
shall thereafter receive salary adjustments equal to the adjustments made with
respect to other executive managers within the Nordstjernan group.
The Company shall propose to the Nordstjernan board that Larsson is guaranteed
three parts in the Nordstjernan group's profit sharing system as of the year
end 1987/88. The conditions for the profit sharing system are determined by
the board of Nordstjernan.
Larsson is guaranteed additional pension in accordance with the applicable
ITP-agreement between SAF and SIF, SALF respectively HTF. Furthermore, Larsson
is covered by the applicable agreement on company group life insurance which
was entered into between the above mentioned organisations.
Vacation consists of 30 days for each year during which vacation benefits are
accrued. Each calendar year constitutes a year during which pension benefits
are accrued.
<PAGE> 7
2
Employment benefits, in general, are payable in accordance with the Company's
applicable agreement for officers.
A company car of the make Volvo 740, or one of equal value, is made available
for Larsson by the Company. The car may be used for private travels.
For travel on behalf of the Company, the Company's travel policy is applicable.
For entertainment in his residence or outside his residence, Larsson shall be
compensated for his true costs. Such costs shall be specified and verified to
the fullest extent possible, as is customary within the Company.
Should Larsson make an invention during his term of employment or within one (1)
year after his employment has been terminated and the invention falls within
the scope of the business area of the Company or companies of the Nordstjernan
group, without any restriction to any country, the Company may, wholly or
partially, take Larsson's place with respect to his rights to the invention.
Moreover, the Act on the Right to Employees' Inventions is applicable, however,
if an agreement cannot be reached with respect to the amount of compensation,
whereby Larsson, in accordance with the law referred to, may be entitled, the
question shall be submitted to an arbitration tribunal in accordance with the
Arbitration Act.
Larsson undertakes not to, without the Company's consent in each individual
case, accept any other work outside his employment in the Company or carry on or
participate, for his own behalf or on behalf of others, in business activities
in case this may affect on Larsson's work for the Company or is detrimental to
the Company's business in some way.
Larsson undertakes not to disclose any information regarding the
Company's/Nordstjernan's group business or circumstances. This undertaking
shall also apply after termination of the employment.
<PAGE> 8
3
This agreement shall apply with a mutual notice period of six months.
Should the Company terminate this agreement within 12 months after the Company
changes ownership, Larsson's notice of termination shall be 12 months. In order
for this period of termination to be valid, Larsson shall, if the Company so
whishes, also give 12 months notice to the Company.
Disputes with respect to the interpretation or application of this agreement
shall be decided by an arbitration tribunal in accordance with the Arbitration
Act.
Stockholm
AXEL JOHNSON ENGINEERING AB
Hans F. Larsson
Christer Lindberg
<PAGE> 9
4
Director Hans F. Larsson
Nordanvagen 68
137 00 VASTERHANINGE
Our ref Date
ChL/KS 22 June 1987
Dear Hans,
In connection to your employment agreement with Axel Johnson Engineering, I
would like to inform you of the following routines for telephone costs etc.
1. As compensation for your calls for business reasons, made from the home,
the company will pay your telephone costs exceeding 4000 metre charge
units per year.
2. The Company shall also pay for a daily newspaper delivered to your home
address.
Yours sincerely,
AXEL JOHNSON ENGINEERING AB
Christer Lindberg
<PAGE> 10
5
Director Hans F. Larsson
Nordanvagen 68
137 38 VASTERHANINGE
13 February 1991
Dear Hans,
Supplement to your employment agreement with Axel Johnson Engineering AB
- ------------------------------------------------------------------------
We hereby confirm that as of 21 January 1991, the notice period from the
employer is extended to 18 months under the employment contract.
I would, at the same time, like to take the opportunity to thank you and
express my appreciation for your work in the current structure project.
Yours sincerely,
AXEL JOHNSON ENGINEERING AB
Christer Lindberg
<PAGE> 11
6
PRIVATE AND CONFIDENTIAL
Hans F. Larsson
Axel Johnson Engineering AB
Box 1004
149 25 NYNASHAMN
Dear Hans,
In your capacity as managing director of Nordic Water Products AB with an
increased area of responsibility, I would herewith like to notify you that your
salary from 1 January 1992 is 46,000 krona per month.
The number of vacation days is extended to 32 days.
Your remaining employment conditions are the same. As managing director of
Nordic Water Products AB you will also be included in the management group of
Nordic Water.
I wish you good luck and look forward to an interesting working relationship.
Yours sincerely,
Goran Wijkmark
Chairman of the Board
Axel Johnson Engineering AB
Nordic Water Products AB
<PAGE> 1
Exhibit 10.14
WATERLINK INC.
1997 OMNIBUS INCENTIVE PLAN
SECTION 1. PURPOSE
The purposes of this Waterlink Inc. 1997 Omnibus Incentive Plan (the
"Plan") are to encourage selected employees, directors or consultants of
Waterlink Inc. (together with any successor thereto, the "Company") and its
Affiliates (as defined below) to acquire a proprietary interest in the growth
and performance of the Company, to generate an increased incentive to
contribute to the Company's future success and prosperity, thus enhancing the
value of the Company for the benefit of its stockholders, and to enhance the
ability of the Company and its Affiliates to attract and retain qualified
individuals upon whom, in large measure, the sustained progress, growth and
profitability of the Company depend.
SECTION 2. DEFINITIONS
As used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Affiliate" shall mean any entity that, directly or through one or
more intermediaries, is controlled by, controls or is under common control with
the Company.
(b) "Award" shall mean any Option, Stock Appreciation Right,
Restricted Stock, Restricted Stock Unit, Performance Award, Dividend
Equivalent, or other Stock Award or Stock-Based Award granted under the Plan.
(c) "Award Agreement" shall mean a written agreement, contract, or
other instrument or document evidencing an Award granted under the Plan.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Cause" shall mean (i) the Participant's willful misconduct, gross
negligence or dishonesty in the performance of his or her duties on behalf of
the Company, (ii) the neglect, failure or refusal of the Participant to carry
out any reasonable request of the Board or other officer or supervisor having
supervisory authority over the Participant, (iii) the material breach of any
provision of any employment, consulting or other services contract between the
Participant and the Company, (iv) the entering of a plea of guilty or nolo
contendere to, or the Participant's conviction of, a felony or other crime
involving moral turpitude, dishonesty, theft or unethical business conduct.
(f) "Change in Control" of the Company shall mean (i) the acquisition
of beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")), directly or indirectly, by any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act), other than the Company, of securities of the
<PAGE> 2
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 2
Company representing a majority or more of the combined voting power of the
Company's then outstanding securities, (ii) the failure, for any reason, of the
individuals who presently constitute the Board of Directors (the "Incumbent
Board") to constitute at least a majority thereof, provided that any director
whose election has been approved in advance by directors representing at least
two-thirds (2/3) of the directors comprising the Incumbent Board shall be
considered, for these purposes, as though such director were a member of the
Incumbent Board, (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least a majority of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, and such merger or
consolidation occurs; or (iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(h) "Committee" shall mean a committee of the Board designated by the
Board to administer the Plan and composed of not less than two directors, each
of whom qualifies both as a "disinterested person" within the meaning of Rule
16b-3 and an "outside director" as that term is defined for purposes of Section
162(m) of the Code.
(i) "Covered Employee" shall mean an employee of the Company if either
(i) as of the close of the fiscal year, such employee is the chief executive
officer of the Company or is an individual acting in such capacity, or (ii) the
total compensation of such employee for the fiscal year is required to be
reported to shareholders under the Securities Exchange Act of 1934 by reason of
such employee being among the four highest compensated officers for the taxable
year (other than the chief executive officer).
(j) "Dividend Equivalent" shall mean any right granted under Section
6(d) of the Plan.
(k) "Fair Market Value" means, with respect to the Shares, (a) if the
Shares are listed or admitted for trading on any national securities exchange
or included in The Nasdaq National Market or Nasdaq SmallCap Market, the last
reported sales price of the Shares on the last business day prior to the date
the value is to be determined as reported on such exchange; (b) if the Shares
are not listed or admitted for trading on any national securities exchange or
included
<PAGE> 3
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 3
in The Nasdaq National Market or Nasdaq SmallCap Market, the average of the
last reported closing bid and asked quotation for the Shares on the last
business day prior to the date the value is to be determined as reported on the
Automated Quotation System of NASDAQ or a similar service if NASDAQ is not
reporting such information; (c) if the Shares are not listed or admitted for
trading on any national securities exchange or included in The Nasdaq National
Market or Nasdaq SmallCap Market or quoted by NASDAQ or a similar service, the
average of the last reported bid and asked quotation for the Shares on the last
business day prior to the date the value is to be determined as quoted by a
market maker in the Shares (or if there is more than one market maker, the bid
and asked quotation shall be obtained from two market makers and the average of
the lowest bid and highest asked quotation shall be the "Fair Market Value");
or (d) if the Shares are not listed or admitted for trading on any national
securities exchange or included in The Nasdaq National Market or Nasdaq
SmallCap Market or quoted by NASDAQ and there is no market maker in the Shares,
the fair market value of the Shares as determined by the Committee in good
faith.
(l) "Incentive Stock Option" shall mean an option granted under
Section 6(a) of the Plan that meets the requirements of Section 422 of the Code
or any successor provision thereto.
(m) "Key Employee" shall mean any employee who is a regular employee
of the Company or its present and future Affiliates.
(n) "Non-Qualified Stock Option" shall mean an option granted under
Section 6(a) of the Plan that is not an Incentive Stock Option.
(o) "Option" shall mean an Incentive Stock Option or a Non-Qualified
Stock Option.
(p) "Participant" shall mean a Key Employee, director or consultant
who has been granted an Award under the Plan.
(q) "Performance Award" shall mean any right granted under Section
6(f) of the Plan.
(r) "Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, or
government or political subdivision thereof.
<PAGE> 4
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 4
(s) "Released Securities" shall mean securities that were Restricted
Securities with respect to which all applicable restrictions have expired,
lapsed, or been waived.
(t) "Restricted Securities" shall mean Restricted Stock or any other
Award under which issued and outstanding Shares are held subject to
restrictions imposed by the terms of the Award.
(u) "Restricted Stock" shall mean any Share granted under Section 6(c)
of the Plan.
(v) "Restricted Stock Unit" shall mean any right granted under Section
6(c) of the Plan that is denominated in Shares.
(w) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended,
or any successor rule or regulation thereto.
(x) "Shares" shall mean the common stock of the Company, $.01 par
value per share, and such other securities or property as may become the
subject of Awards pursuant to an adjustment made under Section 4(b) of the
Plan.
(y) "Stock Appreciation Right" shall mean any right granted under
Section 6(b) of the Plan.
(z) "Stock Award" shall mean an Award of an Option, Restricted Stock,
or other right or security consisting of or convertible into Shares.
(aa) "Stock-Based Award" shall mean an Award of a Stock Appreciation
Right, Dividend Equivalent, Restricted Stock Unit or other right, the value of
which is determined by reference to Shares.
(bb) "Tandem Option" shall mean a Non-Qualified Option issued in
tandem with a Stock Appreciation Right.
SECTION 3. ADMINISTRATION
(a) Generally. The Plan shall be administered by the Committee. Unless
otherwise expressly provided in the Plan, all designations, determinations,
interpretations and other decisions under or with respect to the Plan or any
Award shall be within the sole discretion of the
<PAGE> 5
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 5
Committee, may be made at any time, and shall be final, conclusive and binding
upon all Persons, including the Company, any Affiliate, any Participant, any
holder or beneficiary of any Award, any stockholder of the Company
("Stockholder") and any employee of the Company or of any Affiliate.
Notwithstanding anything to the contrary contained herein, prior to the date
upon which the Company first registers its Shares under Section 12 of the
Securities Exchange Act of 1934, as amended, the Plan may be administered by
the Board of Directors, and the Board shall have all of the rights, privileges,
and authority conferred upon the Committee pursuant to the Plan.
(b) Powers. Subject to the terms of the Plan and applicable law, the
Committee shall have full power and authority to: (i) designate Participants;
(ii) determine the type or types of Awards to be granted to each Participant
under the Plan; (iii) determine the number of Shares to be covered by (or with
respect to which payments, rights or other matters are to be calculated in
connection with) Awards; (iv) determine the terms and conditions of any Award;
(v) determine whether, to what extent, and under what circumstances Awards may
be settled or exercised in cash, Shares, other Awards, or other property, or
canceled, forfeited, or suspended, and the method or methods by which Awards
may be settled, exercised, canceled, forfeited, or suspended; (vi) determine
whether, to what extent, and under what circumstances cash, Shares, other
Awards, other property, and other amounts payable with respect to an Award
under the Plan shall be deferred; (vii) accelerate the vesting of Awards;
(viii) amend Awards (subject to Section 8); (ix) interpret and administer the
Plan and any instruments or agreements relating to, or Award made under, the
Plan; (x) establish, amend, suspend, or waive such rules and regulations and
appoint such agents as it shall deem appropriate for the proper administration
of the Plan; and (xi) make any other determination and take any other action
that the Committee deems necessary or desirable for the administration of the
Plan.
(c) Reliance, Indemnification. The Committee may employ attorneys,
consultants, accountants or other persons and the Committee, the Company and
its officers and directors shall be entitled to rely upon the advice, opinions
or valuations of any such persons. No member of the Committee shall be
personally liable for any action, determination or interpretation taken or made
in good faith with respect to the Plan, or Awards made thereunder, and all
members of the Committee shall be fully indemnified and protected by the
Company in respect of any such action, determination or interpretation.
SECTION 4. SHARES AVAILABLE FOR AWARDS
(a) Shares Available. Subject to adjustment as provided in Section
4(b):
(i) LIMITATION ON NUMBER OF SHARES. Awards issuable under the Plan
are limited such that the maximum aggregate number of Shares which may
issued pursuant to,
<PAGE> 6
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 6
or by reason of, Stock Awards and Stock-Based Awards is 500,000 per
Participant in any fiscal year, and the aggregate maximum for all
Participants in all years is the lesser of (x) the greater of (A)
1,750,000 or (B) 12.5% of the number of Shares 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 this Plan and the
Company's 1995 Stock Option Plan (collectively, the "Employee Stock
Plans")); in either case (A) or (B) above, less that number of Shares that
are issued under the Employee Stock Plans after the effective date of this
Plan or are subject to outstanding awards under the Employee Stock Plans
and plus the number of any Shares surrendered to the Company in payment of
the exercise price of options issued under any of the Employee Stock
Plans, or (y) 5,000,000. All or any number of such Shares may be the
subject of Incentive Stock Options, in the sole discretion of the
Committee. To the extent that an Award ceases to remain outstanding by
reason of termination (as opposed to vesting or exercise) of rights
granted thereunder, forfeiture or otherwise, the Shares subject to such
Award shall again become available for Award under the Plan; provided,
however, that in the case of an Award which is terminated or otherwise
cancelled in the same fiscal year in which it is granted (or for purposes
of determining the aggregate maximum number of Shares which may be subject
to Awards granted to any Participant during the term of the Plan, an Award
is terminated or otherwise cancelled at any time) both the new Award and
the terminated Award shall be counted for purposes of determining whether
the Participant has received the maximum number of Awards permitted under
this Plan.
(ii) Accounting for Awards. For purposes of this Section 4, for any
Award which is denominated in, or with respect to, Shares, the number of
Shares covered by such Award, or to which such Award relates, shall be
counted on the date of grant of such Award against the aggregate number of
Shares available for granting Awards under the Plan; provided, however,
that Awards that operate in tandem with (whether granted simultaneously
with or at a different time from), or that are substituted for, other
Awards may be counted or not counted under procedures adopted by the
Committee in order to avoid double counting. Any Shares that are delivered
by the Company pursuant to any Award, and any Awards that are granted by,
or become obligations of, the Company, through the assumption by the
Company or an Affiliate of, or in substitution for, outstanding awards
previously granted by an acquired company shall be counted against the
Shares available for granting Awards under the Plan.
(iii) Sources of Shares Deliverable Under Awards. Any Shares
delivered pursuant to an Award may consist, in whole or in part, of
authorized and unissued Shares or of treasury shares.
<PAGE> 7
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 7
(b) Adjustments. In the event that the Committee shall determine that
any (i) subdivision or consolidation of Shares, (ii) dividend or other
distribution (in the form of Shares or an extraordinary cash dividend), (iii)
recapitalization or other capital adjustment of the Company or (iv) merger,
consolidation or other reorganization of the Company or other rights to
purchase Shares or other securities of the Company, or other similar corporate
transaction or event described in Treasury Regulation Section
1.162-27(e)(2)(iii)(C), affects the Shares such that an adjustment is
determined by the Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan, then the Committee shall, in such manner as it may deem
equitable, adjust any or all of (x) the number and type of Shares (or other
securities or property) which thereafter may be made the subject of Awards, (y)
the number and type of Shares (or other securities or property) subject to
outstanding Awards, and (z) the grant, purchase, or exercise price with respect
to any Award or, if deemed appropriate, make provision for a cash payment to
the holder of an outstanding Award; provided, however, in each case, no such
adjustment shall be authorized to the extent that such adjustment would (i)
cause the Plan to violate Section 422 of the Code, (ii) would constitute a
material modification of the Plan, within the meaning of Treasury Regulation
Section 1.162- 27(f)(2)(ii) and (h)(1)(iii), prior to the expiration of the
"reliance period" set forth in Treasury Regulation Section 1.162-27(f)(2) or
(iii) after the expiration of said reliance period, would constitute a
termination and reissuance as described in Treasury Regulation Section 1.162-
27(e)(2)(vi)(C); and provided further, however, that the number of Shares
subject to any Award denominated in Shares shall always be a whole number.
SECTION 5. ELIGIBILITY
Eligibility for Awards. Awards may be granted only to Key Employees,
directors or consultants. In determining the employees to whom Awards shall be
granted and the number of shares or units to be covered by each Award, the
Committee shall take into account the nature of employees' duties, their
present and potential contributions to the success of the Company and such
other factors as it shall deem relevant in connection with accomplishing the
purposes of the Plan. A director of the Company or an Affiliate who is not also
a Key Employee will not be eligible to receive an Award. A Key Employee,
director or consultant who has been granted an Award or Awards under the Plan
may be granted an additional Award or Awards, subject to such limitations as
may be imposed by the Code on the grant of Incentive Stock Options. Except as
provided in Section 5(b), no member of the Committee shall be eligible to
receive an Award under the Plan. Notwithstanding anything to the contrary
herein, Incentive Stock Options may be granted only to employees of this
Company, or its present of future parent or subsidiary corporations (as defined
in Section 424 of the Code).
<PAGE> 8
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 8
SECTION 6. AWARDS
(a) Options. The Committee is hereby authorized to grant Options to
Participants with the following terms and conditions and with such additional
terms and conditions, in either case not inconsistent with the provisions of
the Plan, as the Committee shall determine:
(i) Exercise Price. The purchase price per Share purchasable under
an Option shall be the Fair Market Value of a Share on the date of grant
unless otherwise determined by the Committee; provided however, that the
purchase price per Share purchasable under an Incentive Stock Option shall
not be less than 100% of the Fair Market Value of a Share on the date of
grant of an Incentive Stock Option (110% in the case of an Incentive Stock
Option granted to 10-percent shareholder within the meaning of Code
Section 422(c)(5)).
(ii) Option Term. The term of each Non-Qualified Stock Option shall
be fixed by the Committee but generally shall not exceed 10 years from the
date of grant. The term of each Incentive Stock Option shall in no event
be more than 10 years from the date of grant (5 years in the case of a
10-percent shareholder within the meaning of Code Section 422(c)(5)).
(iii) Time and Method of Exercise. The Committee shall determine
the time or times at which an Option may be exercised in whole or in part,
and the method or methods by which, and the form or forms (including,
without limitation, cash, Shares, outstanding Awards or other
consideration, or any combination thereof, having a Fair Market Value on
the exercise date equal to the relevant option price) in which, payment of
the option price with respect thereto may be made or deemed to have been
made.
(iv) Early Termination. The Committee shall determine the events
upon which the unexercised portion of any Option granted under the Plan
will be terminated.
(v) Change of Control. Notwithstanding anything to the contrary,
upon the occurrence of a Change of Control, the Board may, in its
discretion, determine on a case by case basis, that each Option granted
under the Plan shall terminate 30 days after the occurrence of such Change
in Control, but, in the event of any such termination, the Participant
shall have the right, exercisable during the 30 day period preceding the
occurrence of such Change of Control, and, in addition, with respect to a
Change of Control described in clauses (i) and (ii) of the definition
thereof, within 30 days after the occurrence of such Change of Control, to
exercise in whole or in part his Options without regard to the vesting
provisions thereof. The Company will mail or cause to be mailed to
<PAGE> 9
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 9
each Participant a notice specifying the date that is to be fixed as of
which all holders of record shall be entitled to exchange their Shares for
securities, cash or other property issuable or deliverable pursuant to a
Change of Control described in clauses (iii) or (iv) of the definition
thereof. In the event any Option is not exercised in its entirety on or
prior to the date specified therein, any and all remaining rights under
such Options shall terminate as of said date.
(vi) Incentive Stock Options. All terms of any Incentive Stock
Option granted under the Plan shall comply in all respects with the
provisions of Section 422 of the Code, or any successor provision thereto,
and any regulations promulgated thereunder. The Fair Market Value of
Shares subject to Incentive Stock Options (determined as of the date such
Incentive Stock Options are granted) exercisable for the first time by any
individual during any calendar year shall in no event exceed $100,000.
(b) Stock Appreciation Rights. The Committee is authorized to grant
Stock Appreciation Rights to Participants. Subject to the terms of the Plan and
any applicable Award Agreement, a Stock Appreciation Right granted under the
Plan shall confer upon the holder thereof a right to receive, upon exercise
thereof, an amount in cash equal of the excess of (i) the Fair Market Value of
one Share on the date of exercise over (ii) the Fair Market Value of one Share
on the date of grant of the Stock Appreciation Right. Subject to the terms of
the Plan and any applicable Award Agreement, the grant price, term, methods of
exercise, methods of settlement, and any other terms and conditions of any
Stock Appreciation Right shall be as determined by the Committee. The Committee
may impose such conditions or restrictions on the exercise of any Stock
Appreciation Right as it may deem appropriate, including, but not limited to
the following: (i) no aggregate payment by the Company during any fiscal year
upon the exercise of Stock Appreciation Rights may exceed $100,000 without
Committee approval ratified by the Board, and (ii) a Participant may not
exercise a Stock Appreciation Right if the aggregate amount to be received as a
result of his or her exercise of Stock Appreciation Rights in the preceding 12
month period exceeds such Participant's current base salary.
(c) Restricted Stock and Restricted Stock Units. The Committee is
hereby authorized to grant Awards of Restricted Stock and Restricted Stock
Units to Participants upon such conditions and subject to such restrictions as
the Committee may impose (including, without limitation, any limitation on the
right to vote a Share of Restricted Stock or the right to receive any dividend
or other right or property), which restrictions may lapse separately or in
combination at such time or times, in such installments or otherwise, as the
Committee may deem appropriate but not inconsistent with the provisions of the
Plan:
<PAGE> 10
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 10
(i) Registration. Any Restricted Stock granted under the Plan may
be evidenced in such manner as the Committee may deem appropriate,
including, without limitation, book-entry registration or issuance of a
stock certificate or certificates. In the event any stock certificate is
issued in respect of shares of Restricted Stock granted under the Plan,
such certificate shall be registered in the name of the Participant and
shall bear an appropriate legend referring to the terms, conditions, and
restrictions applicable to such Restricted Stock.
(ii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of employment (as determined under criteria established
by the Committee) for any reason during the applicable restriction period,
all shares of Restricted Stock and all Restricted Stock Units still, in
either case, subject to restriction shall be forfeited to and reacquired
by the Company; provided, however, that the Committee may, when it finds
that a waiver would be in the best interests of the Company, waive in
whole, or in part, any or all remaining restrictions with respect to
shares of Restricted Stock or Restricted Stock Units.
(iii) Lapse of Restrictions. Unrestricted Shares, evidenced in such
manner as the Committee shall deem appropriate, shall be delivered to the
holder of Restricted Stock promptly after such Restricted Stock shall
become Released Securities.
(d) Dividend Equivalents. The Committee is hereby authorized to grant
Awards to Participants under which the holders thereof shall be entitled to
receive payments equivalent to dividends with respect to a number of Shares and
payable on such date or dates as determined by the Committee, and the Committee
may provide that such amounts (if any) shall be deemed to have been reinvested
in additional Shares or otherwise reinvested. Subject to the terms of the Plan
and any applicable Award Agreement, such Awards may have such terms and
conditions as the Committee shall determine.
(e) Other Awards. The Committee is hereby authorized, to the extent
permitted under Rule 16b-3 and applicable law, to grant to Participants such
other Awards that are denominated or payable in, valued in whole or in part by
reference to, or otherwise based on or related to, Shares (including, without
limitation, securities convertible into Shares), as are deemed by the Committee
to be consistent with the purposes of the Plan. Subject to the terms of the
Plan and any applicable Award Agreement, the Committee shall determine the
terms and conditions of such Awards. Shares or other securities delivered to a
Participant pursuant to a purchase right granted under this Section 6(e) shall
be purchased for such consideration, which may be paid by such method or
methods and in such form or forms, including, without limitation, cash, Shares,
<PAGE> 11
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 11
outstanding Awards, or other consideration, or any combination thereof, as the
Committee shall determine.
(f) Performance Awards. The Committee is hereby authorized to grant
Performance Awards to Participants. Subject to the terms of the Plan and any
applicable Award Agreement, a Performance Award granted under the Plan (i) may
be denominated as a Stock Award or a Stock-Based Award and payable in cash,
Shares, other securities or other property and (ii) shall confer on the holder
thereof rights valued as determined by the Committee and payable to, or
exercisable by, the holder of the Performance Award, in whole or in part, upon
the achievement of such performance goals and during such performance periods
as the Committee shall establish. Subject to the terms of the Plan and any
applicable Award Agreement, the performance goals to be achieved during any
performance period, the length of any performance period, and the amount of any
payment or transfer to be made pursuant to any Performance Award shall be
determined by the Committee. Prior to granting any Performance Award, the
Committee shall, if it intends for such Awards to be exempt from the
limitations of Section 162(m) of the Code, take such action as is necessary to
qualify such Awards as performance-based compensation, within the meaning of
Section 162(m) of the Code. For example, after the "reliance period" as defined
in Treasury Regulation Section 1.162-27(f)(2), the material terms of the
performance goals must be disclosed to and approved by the public stockholders
of the Company prior to any payments with respect to such an Award.
(g) General.
(i) No Cash Consideration for Awards. Awards shall be granted for
no cash consideration or such minimal cash consideration as may be
required by applicable law.
(ii) Awards May Be Granted Separately or Together. Awards may, in
the discretion of the Committee, be granted either alone or in addition
to, in tandem with, or in substitution for any other Award or any award
granted under any other plan of the Company or any Affiliate. Awards
granted in addition to or in tandem with other Awards, or in addition to
or in tandem with awards granted under any other plan of the Company or
any Affiliate, may be granted either at the same time as or at a different
time from the grant of such other Awards or awards; provided, that any
Tandem Option shall be subject to the following provisions: upon exercise
of an Option issued as part of a Tandem Option, the Participant shall be
entitled to a credit toward the option exercise price equal to the value
of the Stock Appreciation Rights issued in tandem with the Option
exercised, but not in an amount that would exceed the amount of the
federal income tax deduction allowed to the Company in respect of such
Stock Appreciation Rights. Upon such exercise of a Tandem Option, the
related Stock Appreciation Right shall terminate and the
<PAGE> 12
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 12
value of such Stock Appreciation Right shall be limited to such credit.
Upon the exercise of a Stock Appreciation Right issued as part of a Tandem
Option, the Option to which such Stock Appreciation Right relates shall
cease to be exercisable to the extent of the number of Shares with respect
to which the Stock Appreciation Right was exercised.
(iii) Forms of Payment Under Awards. Subject to the terms of the
Plan and of any applicable Award Agreement, payment or transfers to be
made by the Company or an Affiliate upon the grant or exercise of an Award
may be made in such form or forms as the Committee shall determine,
including, without limitation, cash, Shares, other securities, other
Awards, or other property, or any combination thereof, and may be made in
a single payment or transfer, in installments, or on a deferred basis, in
each case in accordance with rules and procedures established by the
Committee. Such rules and procedures may include, without limitation,
provisions for the payment or crediting of reasonable interest on
installment or deferred payments or the grant of crediting of Dividend
Equivalents in respect of installment or deferred payments denominated in
Shares or other securities.
(iv) Limits on Transfer of Awards. No Award (other than Released
Securities), and no right under any such Award, shall be assignable,
alienable, saleable, or transferable by a Participant otherwise than by
will or by the laws of descent and distribution (or, in the case of an
Award of Restricted Securities, to the Company); provided, however, that,
if so determined by the Committee, a Participant may, in the manner
established by the Committee, designate a beneficiary or beneficiaries to
exercise the rights of the Participant, and to receive any property
distributable, with respect to any Award upon the death of the
Participant. Each Award, and each right under any Award, shall be
exercisable, during the Participant's lifetime, only by the Participant
or, if permissible under the Code and applicable law with respect to any
Award, by the Participant's guardian or legal representative. No Award
(other than Released Securities), and no right under any such Award, may
be pledged, alienated, attached, or otherwise encumbered, and any
purported pledge, alienation, attachment, or encumbrance thereof shall be
void and unenforceable against the Company or any Affiliate.
(v) Term of Awards. Except as set forth in Section 6(a)(ii), the
term of each Award shall be for such period as may be determined by the
Committee.
(vi) Share Certificates. All certificates for Shares or other
securities of the Company or any Affiliate delivered under the Plan
pursuant to any Award or the exercise thereof shall be subject to such
stop transfer orders and other restrictions as the Committee may deem
advisable under the Plan or the rules, regulations, and other restrictions
of the Securities and Exchange Commission, any stock exchange upon which
<PAGE> 13
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 13
such Shares or other securities are then listed, and any applicable Federal
or state securities laws, and the Committee may cause a legend or legends
to be put on any such certificates to make appropriate reference to such
restrictions.
SECTION 7. COMPANY DEDUCTION FOR AWARD
Prior to the expiration of the "reliance period," as defined in
Treasury Regulation Section 1.162-278(f)(2), the Committee shall, if it
determines to qualify compensation payable under the Plan as performance based
compensation within the meaning of Code Section 162(m), take such actions as it
deems necessary to qualify compensation payable under the Plan as performance
based compensation.
SECTION 8. AMENDMENT AND TERMINATION
Except to the extent prohibited by applicable law and unless otherwise
expressly provided in an Award Agreement or in the Plan:
(a) Amendments to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan without the consent of any Stockholder,
Participant, other holder or beneficiary of an Award, or other Person;
provided, however, that notwithstanding any other provision of the Plan or any
Award Agreement, without the approval of the Stockholders no amendment,
alteration, suspension, discontinuation, or termination shall be made that
would: (i) increase the total number of Shares available for Awards under the
Plan, except as provided in Section 4 of the Plan; (ii) materially increase the
benefits accruing to Participants under the Plan; or (iii) materially modify
the requirements as to eligibility for participation in the Plan, or where
shareholder approval would be required under Section 422 of the Code in order
for Incentive Stock Options to qualify thereunder or under Section 162(m) of
the Code. Notwithstanding the discretionary authority granted to the Board, no
amendment of the Plan or any Award granted under the Plan shall impair any of
the rights of any holder, without such holder's consent, under any Award
theretofore granted under the Plan.
(b) Correction of Defects, Omissions, and Inconsistencies. The
Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem desirable to carry the Plan into effect.
<PAGE> 14
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 14
SECTION 9. GENERAL PROVISIONS
(a) No Rights to Awards. No Participant shall have any claim to be
granted any Award under the Plan, and there is no obligation for uniformity of
treatment of Participants, or holders or beneficiaries of Awards under the
Plan. The terms and conditions of Awards need not be the same with respect to
each Participant.
(b) Withholding. The Company or any Affiliate shall be authorized to
withhold from any Award granted or any payment due or transfer made under any
Award or under the Plan the amount (in cash, Shares, other securities, or other
property) of withholding taxes due in respect of an Award, its exercise, or any
payment or transfer under such Awards or under the Plan and to take such other
action as may be necessary in the opinion of the Company to satisfy all
obligations for the payment of such taxes. In case of Awards paid in Shares,
the Participant or other person receiving such Shares may be required to pay
the Company or Affiliate, as appropriate, the amount of any such withholding
taxes which is required to be withheld with respect to such Shares before the
certificate for such Shares is delivered pursuant to the Award. Furthermore,
the Company may elect to deduct such withholding taxes from any other amounts
payable in cash or in shares or from any other amounts payable at any time
thereafter to the Participant. If a Participant disposes Shares acquired upon
exercise of an Incentive Stock Option in any transaction considered to be a
disqualifying disposition under Section 421 or 422 of the Code, the Participant
shall promptly notify the Company of such transfer.
(c) No Limit on Other Plans. Nothing contained in the Plan shall
prevent the Company or any Affiliate from adopting or continuing in effect
other or additional compensation arrangements and such arrangements may be
either generally applicable or applicable only in specific cases.
(d) No Right to Employment. The grant of an Award shall not be
construed as giving a Participant the right to be retained in the employ of the
Company or any Affiliate. Further, the Company or an Affiliate may at any time
dismiss a Participant from employment, free from any liability, or any claim
under the Plan, unless otherwise expressly provided in the Plan or in any Award
Agreement.
(e) Governing Law. The validity, construction, and effect of the Plan
and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of Delaware and applicable Federal law.
(f) Severability. If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction, or would disqualify the Plan or
<PAGE> 15
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 15
any Award under any law deemed applicable by the Committee, such provision
shall be construed or deemed amended to conform to applicable laws, or if it
cannot be construed or deemed amended without, in the determination of the
Committee, materially altering the intent of the Plan, such provision shall be
deemed void, stricken and the remainder of the Plan and any such Award shall
remain in full force and effect.
(g) No Trust or Fund Created. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a Participant
or any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.
(h) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee shall determine
whether cash, other securities, or other property shall be paid or transferred
in lieu of any fractional Shares or whether such fractional Shares or any
rights thereto shall be canceled, terminated, or otherwise eliminated.
(i) Headings. Headings are given to the Sections and subsections of
the Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision hereof.
SECTION 10. TERM OF THE PLAN
The Plan shall continue until the earliest of (i) the date on which
all Stock Awards and Stock-Based Awards issuable hereunder have been issued,
(ii) the termination of the Plan by the Board or (iii) May 23, 2007, 10 years
from the date of adoption of the Plan by the Board. However, unless otherwise
expressly provided in the Plan or in an applicable Award Agreement, any Award
theretofore granted may extend beyond such date and the authority of the
Committee to amend, alter, adjust, suspend, discontinue, or terminate any such
Award or to waive any conditions or rights under any such Award, and the
authority of the Board to amend the Plan, shall extend beyond such date.
SECTION 12. EFFECTIVENESS OF THE PLAN
The Plan shall become effective on the date specified by the Board.
Following approval by the Board, the plan shall be submitted to the Company's
stockholders for approval and unless the Plan is approved by the affirmative
votes of the holders of shares having a majority of the voting power of the
shares represented at a meeting duly held in accordance with Delaware
<PAGE> 16
Waterlink Inc.
1997 Omnibus Incentive Plan
Page 16
Law within twelve (12) months after being approved by the Board, the Plan and
all Options granted under it shall be void and of no force and effect.
<PAGE> 1
Exhibit 10.22
STOCK PURCHASE AGREEMENT
BETWEEN
WATERLINK, INC.
"PURCHASER"
AND
DAVID ROMANOW,
JOE ROMANOW
BRIAN TOPNIK, AND
ROBERT JENKYNS
"SELLERS"
CONCERNING THE ACQUISITION OF
ALL THE OUTSTANDING SHARES OF
BIOCLEAR TECHNOLOGY, INC.
APRIL 15, 1997
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I PURCHASE PRICE OF SHARES: MANNER OF PAYMENT.....................................................1
1.1 Purchase Price - Alternatives...................................................................1
1.2 Purchase of Shares; Purchase Price Alternative - 1..............................................1
1.3 Manner of Payment...............................................................................2
1.4 Earn-out Payments; Performance Incentives Payments..............................................3
ARTICLE II REPRESENTATIONS, WARRANTIES
AND AGREEMENTS OF SELLERS.....................................................................6
2.1 Organization and Standing.......................................................................6
2.2 Authority; Conflicts; Consents..................................................................6
2.3 Capital Stock...................................................................................7
2.4 Title to Shares; Investments of the Corporation.................................................7
2.5 Outstanding Options and Warrants................................................................7
2.6 Business Relations..............................................................................8
2.7 Real Property...................................................................................8
2.8 Title to and Condition of Assets...............................................................10
2.9 Financial Statements...........................................................................10
2.10 Absence of Certain Changes.....................................................................11
2.11 Absence of Undisclosed Liabilities.............................................................12
2.12 Taxes..........................................................................................13
2.13 Indebtedness to Officers, Directors and Shareholders...........................................14
2.14 Articles of Amalgamation and Incorporation and By-laws or Regulation...........................14
2.15 Corporate Minutes..............................................................................14
2.16 Brokerage and Finder's Fees....................................................................14
2.17 Accounts Receivable............................................................................14
2.18 Employment Matters.............................................................................15
2.19 No Defaults....................................................................................16
2.20 Material Contracts.............................................................................16
2.21 Purchase Orders................................................................................17
2.22 Indebtedness...................................................................................17
2.23 Litigation.....................................................................................17
2.24 Insurance......................................................................................17
2.25 Transactions with Officers, Etc................................................................18
2.26 Employees......................................................................................18
2.27 Trademarks, Copyrights and Similar Matters.....................................................18
2.28 Employee Benefit Plans and Other Plans.........................................................19
2.29 Bank Accounts..................................................................................22
2.30 Compliance with Laws...........................................................................23
2.31 Power of Attorney..............................................................................23
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
2.32 Licenses and Rights............................................................................23
2.33 Products.......................................................................................23
2.34 Casualty Occurrences...........................................................................23
2.35 Inventory......................................................................................23
2.36 Capital Expenditure Plans......................................................................24
2.37 Material Misstatements or Omissions............................................................24
2.38 Stock Dividends................................................................................24
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER....................................................25
3.1 Organization and Good Standing of Purchaser....................................................25
3.2 Authority of Purchaser.........................................................................25
3.3 Investment Purpose.............................................................................25
ARTICLE IV CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER...............................................25
4.1 Representations True...........................................................................25
4.2 All Consents Obtained..........................................................................25
4.3 Performance and Obligations....................................................................25
4.4 Receipt of Documents by Purchaser..............................................................26
4.5 No Litigation..................................................................................28
4.6 Employment Agreements..........................................................................28
4.7 Delivery of Books and Records..................................................................28
4.8 Absence of Changes.............................................................................28
4.9 Escrow Agreement...............................................................................28
4.11 Purchaser's Review.............................................................................28
4.12 Non-Competition Agreement......................................................................28
4.13 Shareholder's Agreement........................................................................28
ARTICLE V CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLERS.................................................29
5.1 Representations True...........................................................................29
5.2 Receipt of Documents by Sellers................................................................29
5.3 No Litigation..................................................................................30
5.4 Employment Agreements..........................................................................30
5.5 Escrow Agreement...............................................................................30
ARTICLE VI CLOSING........................................................................................30
ARTICLE VII TERMINATION OF AGREEMENT.......................................................................30
ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES:
INDEMNIFICATION: DISPUTES....................................................................32
8.1 Survival of Representations and Warranties.....................................................32
8.2 Sellers' Indemnification.......................................................................32
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
8.3 Defense of Claim...............................................................................32
8.4 Purchaser's Indemnification....................................................................33
8.5 Indemnification Basket.........................................................................33
ARTICLE IX CONDUCT PRIOR TO CLOSING DATE..................................................................33
9.1 Continuation of Business.......................................................................33
9.2 Preservation of Business.......................................................................35
9.3 Consents and Approvals.........................................................................35
ARTICLE X ASSIGNMENT, THIRD PARTIES, BINDING EFFECT......................................................35
ARTICLE XI EXPENSES.......................................................................................36
ARTICLE XII NOTICES........................................................................................36
ARTICLE XIII REMEDIES NOT EXCLUSIVE.........................................................................37
ARTICLE XIV RESERVED.......................................................................................37
ARTICLE XV MISCELLANEOUS..................................................................................37
15.1 Counterparts...................................................................................37
15.2 Captions and Section Headings..................................................................37
15.3 Waivers........................................................................................37
15.4 Right of Inspection............................................................................37
15.5 Amendments, Supplements or Modifications.......................................................38
15.6 Entire Agreement...............................................................................38
15.7 Governing Laws.................................................................................38
15.8 Knowledge......................................................................................38
15.9 Press Releases.................................................................................38
15.10 Currency.......................................................................................38
15.11 Schedules......................................................................................38
15.12 Consent........................................................................................39
15.13 Investment Canada Filing.......................................................................39
</TABLE>
iii
<PAGE> 5
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement") is made this 15th day of
April, 1997, between Waterlink, Inc., a Delaware U.S.A. corporation ("Waterlink"
or "Purchaser") and David Romanow, Joe Romanow, Brian Topnik, and Robert Jenkyns
(each a "Seller" and collectively, "Sellers") being all the shareholders of
Bioclear Technology, Inc., a corporation organized under the laws of Canada (the
"Corporation").
R E C I T A L S:
----------------
A. Sellers own all the issued and outstanding shares of capital stock
of the Corporation.
B. On the terms and subject to the conditions of this Agreement, and
subject to the performance by the parties of their respective obligations under
this Agreement, Sellers desire to sell, and Purchaser desires to purchase, all
the issued and outstanding shares of capital stock of the Corporation at the
"Closing" (as hereinafter defined) for the purchase price described in Article I
of this Agreement.
NOW, THEREFORE, Purchaser and Sellers, intending to be legally bound,
agree as follows:
ARTICLE I
---------
PURCHASE PRICE OF SHARES: MANNER OF PAYMENT
-------------------------------------------
1.1 PURCHASE PRICE - ALTERNATIVES. If at the time of the Closing,
Waterlink is subject to the reporting requirements of the United States
Securities Exchange Act of 1934 (the "Exchange Act") and the common stock, par
value US $.001 per share (the "Waterlink Common Stock") is subject to an
effective registration statement under the Exchange Act and is listed on a
national securities exchange or is quoted on an automated quotation system such
as the National Association of Securities Dealers Automated Quotation System
"NASDAQ", then Purchaser shall purchase all the Shares for the Purchase Price in
the amount (subject to adjustment) and manner as set forth in Sections 1.2, 1.3
and 1.4 below (the "Purchase Price - Alternative 1"). If, at the time of the
Closing, the conditions contained in the preceding sentence are not met, then
Purchaser shall purchase all the Shares for the Purchase Price in the amount
(subject to adjustment) and manner as set forth in alternative Sections 1.2, 1.3
and 1.4 on EXHIBIT "A" attached hereto ("Purchase Price - Alternative 2"). In no
event shall Purchaser be obligated to pay BOTH the Purchase Price - Alternative
1 and the Purchase Price - Alternative 2. As used throughout this Agreement,
"Purchase Price" shall mean the Purchase Price - Alternative 1 or the Purchase
Price - Alternative 2, whichever is applicable.
1.2 PURCHASE OF SHARES; PURCHASE PRICE - ALTERNATIVE 1. On the terms
and subject to the conditions of this Agreement, Sellers shall, with all
transfer taxes of any kind prepaid, convey, assign and transfer to Purchaser at
the Closing all the Shares (as defined in Section 2.3), free and clear of all
liens, charges, security interests, adverse claims, pledges, encumbrances and
demands
1
<PAGE> 6
whatsoever. Purchaser shall purchase all the Shares for an aggregate purchase
price of Thirty Million Dollars ($30,000,000), subject to adjustment as set
forth below, PLUS the additional consideration, if any, set forth below. Of the
total Purchase Price, Four Million Eight Hundred Ninety Six Thousand Dollars
($4,896,000.00) shall be applied to the purchase of all the Preferred Shares (as
defined below) and the remainder of the Purchase Price shall be applied to the
purchase of all the Common Shares (as defined below).
1.3 MANNER OF PAYMENT. The Purchase Price - Alternative 1, will be paid
by Purchaser for all the Shares as follows:
(a) Five Hundred Thousand Dollars ($500,000.00) deposit
payable to Sellers in the aggregate upon the execution of this
Agreement. The Deposit shall be returned to Purchaser or forfeited to
Sellers in accordance with the terms of Article VII below.
(b) Seventeen Million Five Hundred Thousand Dollars
($17,500,000.00) payable to Sellers in the aggregate at the Closing by
certified or official bank checks in immediately available funds or by
wire transfer to accounts designated by Sellers.
(c) Two Million Dollars ($2,000,000.00) by certified or bank
check in immediately available funds or by wire transfer to a bank
chosen by Sellers that is reasonably satisfactory to Purchaser, as
escrow agent in connection with an interest-bearing escrow fund
established pursuant to an Escrow Agreement in substantially the form
attached to this Agreement as EXHIBIT "B" for the purpose of securing
Sellers' indemnification obligations hereunder (the "Escrow
Agreement").
(d) The Earn-out Payments, if any, in the maximum aggregate
amount of Five Million Dollars ($5,000,000.00), payable to Sellers, in
the aggregate, in accordance with the provisions of Section 1.4(c)
below.
(e) The Performance Incentives, if any, payable to Sellers, in
the aggregate, in accordance with the provisions of Section 1.4(d)
below.
(f) The maximum number of shares of Waterlink Common Stock
having an aggregate value of not more than Five Million Dollars
($5,000,000.00), determined by the initial public offering price to the
public of the Waterlink Common Stock, to be issued by Waterlink to
Sellers (on a pro rata basis determined for each Seller in accordance
with the percentage that such Seller's Shares bears to the total number
of Shares owned by all Sellers) in the aggregate. For purposes of this
Section 1.3(f), the initial public offering price of the Waterlink
Common Stock shall be converted into Canadian Dollars based on the
exchange rate published in the WALL STREET JOURNAL on the date of the
closing of Waterlink's initial public offering.
2
<PAGE> 7
1.4 EARN-OUT PAYMENTS; PERFORMANCE INCENTIVES PAYMENTS.
(a) If the Purchase Price - Alternative 1 is applicable, then
as a portion of the Purchase Price, Purchaser shall pay to Sellers (on
a pro rata basis determined for each Seller in accordance with the
percentage that such Seller's Shares bears to the total number of
Shares owned by all Sellers), in the aggregate, the Earn-out Payments,
if any, set forth in Section 1.4(c) below and the Performance Incentive
Payments, if any, set forth in Section 1.4(d) below, each based on the
earnings before income and taxes ("EBIT") (as more fully defined below)
of the Corporation for the periods specified therein.
(b) "EBIT" for any period of determination shall mean the
earnings before interest and taxes, determined in accordance with
generally accepted accounting principals as determined by the Canadian
Institute of Chartered Accountants ("Canadian GAAP") applied in a
manner consistent with the Corporation's past practices. In determining
EBIT for purposes of this Section 1.4, no effect shall be given to (i)
any extraordinary expenses incurred without the consent of Sellers by
the Corporation outside the normal course of business as operated prior
to the Closing including (A) expenses allocated by Waterlink or any
other direct or indirect parent corporation of the Corporation unless
such expenses (x) are comparable to and replace expenses incurred by
the Corporation prior to the Closing or (y) are incurred for sales,
marketing, product development or similar purposes which provide
commensurate benefits to the Corporation's operations, and (B) expenses
incurred in connection with new projects or ventures outside the normal
course of business, and (ii) any increased or decreased expenses
resulting from purchase accounting adjustments required, or permitted,
by Canadian GAAP or generally accepted accounting principals in the
United States solely as a result of the transactions contemplated by
this Agreement. It is the intent of the parties that EBIT, determined
for purposes of computing the Earn-out Payments and Performance
Incentive Payments described below, be an equitable measurement of the
performance of the business of the Corporation being acquired hereby
without giving effect to extraordinary revenues and expenses associated
with the operation of such business by the Purchaser and Waterlink
after the Closing and each party agrees to cooperate in good faith
toward the determination of EBIT in a manner consistent with such
intent.
(c) In accordance with the following table, Earn-out Payments
shall be payable by Purchaser to Sellers (on a pro rata basis) in the
aggregate, by certified or official bank checks or wire transfers to
accounts designated by Sellers in immediately available funds if the
EBIT of the Corporation exceeds the thresholds set forth below for the
period beginning immediately after the Closing Date and ending
September 30, 1998 (the "First Earn-out Period") and each of the
twelve-month periods ending September 30, 1999 and 2000. In no event
shall the aggregate Earn-out Payments paid or payable to Sellers, in
the aggregate, exceed $5,000,000.00.
3
<PAGE> 8
<TABLE>
<CAPTION>
MAXIMUM EARN-OUT
----------------
PAYMENT PER EARN-OUT
--------------------
EARN-OUT PERIOD EARN-OUT PAYMENT PERIOD
- --------------- ---------------- ------
<S> <C> <C>
First Earn-out Period 50% of the Corporation's EBIT $3,000,000.00
during the First Earn-out Period
in excess of the product of $4,000,000.00
multiplied by the fraction x/12, where
x=the number of full calendar months in
the First Earn-out Period. Such product
is referred to as the "First EBIT Target."
Twelve-month period 50% of the Corporation's EBIT $1,000,000.00 plus the
ending September 30, during the Second Earn-out Period amount by which the Earn-
1999 ("Second Earn- in excess of the greater of (a) out Payment earned for the
out Period"). $4,000,000.00 and (b) First Earn-out Period was less
$4,000,000.00 plus the amount by than $3,000,000.00.
which EBIT for the First Earn-out
Period was less than the First EBIT Target.
Twelve-month period 50% of the Corporation's EBIT $1,000,000.00 plus the
ending September 30, during the Third Earn-out Period in amount by which the
2000 ("Third Earn-out excess of the greater of (a) aggregate Earn-out Payments
Period"). $4,000,000.00 and (b) earned for the First and
$4,000,000.00 plus (i) the amount Second Earn-out Periods
by which the aggregate EBIT for were less than $4,000,000.00.
the First and Second Earn-out Periods was less
than the sum of $4,000,000.00 plus the First
EBIT Target.
</TABLE>
(d) In accordance with the following table, Performance
Incentive Payments shall be payable by Purchaser to Sellers (on a pro
rata basis), in the aggregate, by certified or official bank checks or
wire transfers to accounts designated by Sellers in immediately
available funds if the EBIT of the Corporation exceeds the thresholds
set forth below for each of the twelve-month periods ending September
30, 1999 and 2000.
4
<PAGE> 9
<TABLE>
<CAPTION>
MAXIMUM PERFORMANCE
-------------------
PERFORMANCE INCENTIVE INCENTIVE PAYMENT PER
- --------------------- ---------------------
PERIOD PERFORMANCE INCENTIVE PAYMENT PERFORMANCE INCENTIVE PERIOD
- ------ ----------------------------- ----------------------------
<S> <C> <C>
Twelve-month period 20% of the Corporation's EBIT during None.
ending September 30, the First Performance Incentive Period
1999 ("First Performance in excess of the greater of (a)
Incentive Period"). $10,000,000.00 and (b) $10,000,000.00
plus the amount by which EBIT for the
twelve-month period ending September 30, 1998
was less than $10,000,000.00.
Twelve-month period 20% of the Corporation's EBIT during None.
ending September 30, the Second Performance Incentive
2000 ("Second Period in excess of the greater of (a)
Performance Incentive $10,000,000.00 and (b) $10,000,000.00
Period"). plus the amount by which the total
EBIT for the twelve-month period ending
September 30, 1998 and the First Performance
Incentive Period was less than $20,000,000.00.
</TABLE>
(e) Purchaser shall deliver to Sellers within ninety (90) days
of September 30, 1998, 1999 and 2000, (i) the Corporation's financial
statements covering the applicable Earn-out Period and Performance
Incentive Period, and (ii) statements setting forth the computation and
amount of EBIT for such Earn-out Period and such Performance Incentive
Period (the "EBIT Statement") (as reviewed and concurred to by the
Waterlink's independent public accountants) and shall pay the Earn-out
Payment, if any, and the Performance Incentive Payment, if any, to
Sellers (on a pro rata basis) within thirty (30) days of the delivery
of the EBIT Statement.
(f) Sellers shall have thirty (30) days from the date the EBIT
Statements are delivered to it to furnish Purchaser with a letter
requesting access to the books and records of the Corporation necessary
to compute the EBIT amount and upon receipt of such request, Purchaser
shall promptly make available such books and records to David Romanow,
as agent for the Sellers ("Sellers' Representative"). Sellers shall
have sixty (60) days after such access is granted to cause Sellers'
Representative to furnish Purchaser with a letter setting forth those
items with which the Sellers disagree and the reasons for each such
disagreement. The parties shall promptly seek to reconcile any such
disagreement; if they fail to reach an agreement within thirty (30)
days of receipt by Purchaser of such letter, then an independent public
accounting firm shall be retained by the parties to settle any
remaining disagreement, and the decision of said firm shall be final
and binding on all parties to this Agreement. If Sellers'
Representative and Purchaser cannot agree on an accounting firm to
settle any
5
<PAGE> 10
remaining disagreement within such thirty (30) day period, then
Sellers' Representative and Purchaser shall each designate an
independent public accounting firm and the two (2) firms so designated
shall select a third independent public accounting firm and the
decision of said firm shall be final and binding on all parties to this
Agreement. The fees of all accounting firms involved shall be borne
equally between Purchaser on the one hand and Sellers on the other
hand. The payment of the portion of the Earn-out Payment or Performance
Incentive Payment in dispute, if any, ultimately determined (pursuant
to the procedures set forth in this paragraph) to be due the Sellers
shall be made within fifteen (15) days of such determination.
ARTICLE II
----------
REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF SELLERS
-----------------------------------------------------
Sellers, jointly and severally, represent and warrant to, and agree
with, Purchaser as follows:
2.1 ORGANIZATION AND STANDING.
(a) The Corporation is a corporation duly organized, validly
existing and in good standing under the laws of Canada. Each of the
Subsidiaries (as defined in Section 2.4(b)) is a corporation duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation. Each of the Corporation and
each Subsidiary has full power and authority to carry on its business
as and where now conducted and to own or lease and operate its
properties at and where now owned or leased and operated by it, and is
duly qualified to do business and is in good standing in every
jurisdiction in which the property owned, leased or operated by it, or
the nature of the business conducted by it, makes such qualification
necessary.
(b) Set forth on Schedule 2.1 is a true and correct list of
all jurisdictions in which the Corporation and each Subsidiary is
qualified to do business as a foreign corporation and each jurisdiction
where the Corporation and each Subsidiary does business or owns or
leases property.
2.2 AUTHORITY; CONFLICTS; CONSENTS.
(a) Sellers are duly authorized to execute, deliver and
consummate the transactions contemplated by this Agreement and at the
Closing Date (as defined below), no action will be necessary on the
part of Sellers to make this Agreement valid and binding on Sellers and
enforceable against Sellers in accordance with its terms.
(b) Except as set forth on Schedule 2.2(b), the execution,
delivery and consummation of this Agreement by Sellers (i) does not now
and will not, with the passage of time, the giving of notice or
otherwise, result in a violation or breach of, or constitute a default
under, any term or provision of any indenture, mortgage, deed of trust,
lease, instrument, order, judgment, decree, rule, regulation, law,
contract, agreement or any other
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restriction to which Sellers, the Corporation or any Subsidiary are a
party or to which Sellers or any of Sellers' assets are subject or
bound or to which the Corporation or any of its assets is subject or
bound, or to which any Subsidiary or any of its assets is subject or
bound, (ii) will not result in the creation of any lien or other charge
upon any assets of the Corporation or any Subsidiary, and (iii) will
not result in any acceleration or termination of any loan or security
interest agreement to which the Corporation or any Subsidiary is a
party or to which the Corporation, any Subsidiary or any of their
assets is subject or bound.
(c) Except as may be listed on Schedule 2.2(c), no approval or
consent of any person, firm or other entity or governmental body is or
was required to be obtained by Sellers for the authorization of this
Agreement or the consummation by Sellers of the transactions
contemplated by this Agreement.
2.3 CAPITAL STOCK. The Corporation is authorized to issue an unlimited
number of Class A Common Shares, without par value, of which 944,486 shares are
issued and outstanding (the "Common Shares"), an unlimited number of Class B
Common Shares, none of which are issued and outstanding, and an unlimited number
of Preferred Shares, without par value, of which 4,896,000 shares are issued and
outstanding (the "Preferred Shares" and together with the Common Shares, the
"Shares"). All the Shares are duly authorized, validly issued, fully paid and
nonassessable and were not issued in violation of preemptive or any other
rights, including any rights under any federal, state or provincial securities
laws, of any shareholder. The Corporation owns all the outstanding capital stock
of the Subsidiaries.
2.4 TITLE TO SHARES; INVESTMENTS OF THE CORPORATION.
(a) All the Shares are owned by Sellers of record and
beneficially with good and marketable title thereto, free and clear of
all liens, charges, security interests, adverse claims, pledges,
encumbrances and demands whatsoever. Each Seller owns the number of
Common Shares and Preferred Shares set forth on Schedule 2.4.
(b) Other than Bioclear Tech Sales, Inc., a corporation
organized under the laws of Canada ("BTS") and Bioclear Technology
U.S.A., Inc., a corporation organized under the laws of California,
U.S.A. ("Bioclear USA" and together with BTS, the "Subsidiaries"), the
Corporation has no direct or indirect equity, debt or other interest in
any entity, corporate or otherwise, or any right, warrant or option to
acquire any such interest.
2.5 OUTSTANDING OPTIONS AND WARRANTS. There are no subscriptions,
options, warrants, rights, puts, calls, commitments or agreements (respecting
issuance, redemption, repurchase, voting or otherwise) relating to, nor any
outstanding securities convertible into, any shares of capital stock or other
equity interest of the Corporation or any Subsidiary, or into any such
convertible securities, and neither Sellers, the Corporation nor any Subsidiary
has agreed to issue, purchase, sell or transfer any of same, except as provided
in this Agreement.
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2.6 BUSINESS RELATIONS. Other than as set forth on Schedule 2.6(a),
neither the Corporation nor any Subsidiary is required, in the ordinary course
of business, to provide any bonding or any other financial security arrangements
in connection with any transactions with any customers or suppliers. Neither
Sellers nor the Corporation has received any notice of any disruption
(including, without limitation, delayed deliveries or allocations by suppliers)
in the availability of any materials or products used in the Corporation's
business and has no reason to believe that any such disruption will occur. There
are no sole source suppliers of goods, equipment or services used by the
Corporation (other than public utilities) with respect to which practical
alternative sources of supply are unavailable.
2.7 REAL PROPERTY.
(a) Schedule 2.7 is a true and complete list of (i) all real
property owned by the Corporation or any Subsidiary, including, without
limitation, all buildings, structures and improvements thereon and all
appurtenances thereto and the rights and privileges of the Corporation
in all rights of way, licenses or easements, (ii) all real property
leases to which the Corporation or any Subsidiary is a party, and (iii)
all options, deeds of trust, deeds of declaration, mortgages and land
contracts pursuant to or in which the Corporation or any Subsidiary has
any interest (collectively, the "Real Property"). Sellers have
furnished to Purchaser or its counsel true and complete copies of each
written contract and a written description of each oral contract
relating to the list set forth on Schedule 2.7.
(b) Except as set forth on Schedule 2.7, with respect to the
Real Property:
(i) The Real Property is occupied under valid and
current certificates of occupancy or the like, and the
transactions contemplated by this Agreement will not require
the issuance of any new or amended certificates of occupancy
or the like; there are no facts known to Sellers which would
prevent each location from being occupied after the "Closing
Date" (as hereinafter defined) in substantially the same
manner as before;
(ii) The Real Property does not violate, and all
improvements are constructed in compliance with, any
applicable federal, state or local statutes, laws, ordinances,
regulations, rules, codes, orders or requirements, including,
without limitation, any building, zoning, fire or
environmental laws or codes (the "Laws and Ordinances");
(iii) The Corporation has obtained all appropriate
licenses, permits, building permits and occupancy permits that
are required with respect to the Real Property by the Laws and
Ordinances;
(iv) There are no outstanding variances or special
use permits affecting the Real Property or its uses;
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(v) No notice of a violation of any Laws and
Ordinances, or of any covenant, condition, easement or
restriction affecting the Real Property or relating to its use
or occupancy has been given, nor are Sellers aware of any such
violation;
(vi) The Real Property has and will have as of the
Closing Date adequate water supply, storm and sanitary sewage
facilities, telephone, gas, electricity, fire protection,
means of ingress and egress to and from public highways and,
without limitation, other required public utilities. All
utility lines and facilities presently serving the Real
Property are serviced and maintained by the appropriate public
or quasi-public entity. All utilities enter the Real Property
through adjoining public streets or, if they pass through
adjoining private land, they do so in accordance with valid
public easements. Sellers have no knowledge of any increase in
the applicable rate for any utility service being furnished to
the Real Property from the rate in effect with respect to the
most recent bill that the Corporation has received for such
service;
(vii) Sellers have no knowledge of improvements made
or contemplated to be made by any public or private authority,
the costs of which are to be assessed as special taxes or
charges against the Real Property, and there are no present
assessments;
(viii) All improvements constituting the Real
Property are without structural defects, were constructed in
conformity with all plans and specifications;
(ix) The Real Property either (a) is freely
accessible directly from all public streets on which it abuts,
or (b) uses adjoining private land to access the same in
accordance with valid public easements. Sellers have no
knowledge of any condition which would result in the
termination of such access;
(x) The Corporation does not have a boundary or water
drainage dispute with the owners of any premises adjacent to
the Real Property and has no knowledge of any such dispute
involving former owners of the Real Property;
(xi) None of Sellers or the Corporation has notice of
outstanding requirements or recommendations by the insurance
companies who issued the insurance policies insuring the Real
Property, or by any board of fire underwriters or other body
exercising similar functions requiring or recommending any
repairs or work to be done on the Real Property;
(xii) there are no leases, subleases, licenses,
concessions, or other agreements, written or oral, granting to
any person the right of use or occupancy of any portion of the
Real Property;
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(xiii) there are no encroachments upon such property
by buildings or other structures or improvements belonging to
owners of adjacent or adjoining properties and the Real
Property is not subject to claims by adjoining owners;
(xiv) all improvements on the Real Property are
wholly situated within boundaries of the Real Property and do
not encroach onto any adjacent or adjoining lands;
(xv) the Real Property has not been condemned,
expropriated, dedicated or otherwise taken by public authority
and, to Sellers' knowledge, no such condemnation,
expropriation, dedication or taking is threatened; and
(xvi) the current and intended use of the Real
Property does not violate in any material respect any law or
any instrument of record or agreement affecting such Real
Property. There is no violation of any covenant, condition,
restriction, easement, license, or agreement affecting the
Real Property or order of any governmental authority having
jurisdiction over the Real Property that materially affects
the Real Property or the use or occupancy thereof.
2.8 TITLE TO AND CONDITION OF ASSETS. Except as set forth on Schedule
2.8, each of the Corporation and each Subsidiary owns and possesses all right,
title and interest in and to its assets, including, without limitation (i) good
and marketable title in fee simple to all its Real Property, and (ii) good and
merchantable title to all properties and assets other than the Real Property, in
each case free and clear of all conveyances, conditions, easements, liens,
charges, security interests, adverse claims, encumbrances, encroachments,
reservations, easements, limitations, servitudes, other title defects or
restrictions of any nature. All tangible assets of the Corporation and the
Subsidiaries are in the Corporation's or such Subsidiary's possession or under
its respective control, and all equipment used by the Corporation or any
Subsidiary is in good operating condition and repair, subject only to routine
maintenance, and is fit and adequate for the purposes intended. The Corporation
enjoys peaceful and quiet possession of its assets pursuant to or by all of the
deeds, bills of sale, leases, licenses and other agreements under which it is
operating its business.
2.9 FINANCIAL STATEMENTS. Prior to the date of this Agreement, Sellers
have provided Purchaser with the financial statements of the Corporation listed
below (the "Financial Statements") and will provide to Purchaser monthly
financial statements for the months after December 31, 1996 (the "New Monthly
Financial Statements") as soon as practicable after the end of each month:
(a) Audited Consolidated Balance Sheets at August 31, 1994,
1995 and 1996;
(b) Audited Consolidated Statement of Operations for the years
ended August 31, 1994, 1995 and 1996.
(c) Unaudited Consolidated Balance Sheet at December 31, 1996;
and
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(d) Unaudited Consolidated Statement of Operations for the
four-month period ended December, 1996.
The Financial Statements, other than the unaudited Financial Statements
for the reasons specified on Schedule 2.9, have been prepared in accordance with
Canadian GAAP applied on a consistent basis during the periods. The Financial
Statements (and, with respect to the New Monthly Financial Statements, when
delivered, will or will be as the content may require) (i) present fairly in all
material respects, the Corporation's and the Subsidiaries' consolidated
financial position, results of its operations and cash flows at and for the
periods therein specified, (ii) are true and complete, and (iii) are consistent
with the books and records of the Corporation and the Subsidiaries.
2.10 ABSENCE OF CERTAIN CHANGES. Since August 31, 1996, the Corporation
and the Subsidiaries have actively conducted its business in the ordinary and
regular course consistent with past practice. Since such date, there has not
been any material adverse change in the business, condition (financial or
otherwise), assets, liabilities, results of operations or prospects of the
Corporation and the Subsidiaries, taken as a whole. To Sellers' knowledge, there
has not occurred any event or governmental regulation or order which could cause
such a change, nor, to Sellers' knowledge, is the occurrence of any such event,
regulation or order threatened. Except as set forth on Schedule 2.10, without
limiting the generality of the foregoing, since August 31, 1996, there has not
been:
(a) Any increase made or promised in the compensation or other
remuneration payable or to become payable by the Corporation or any
Subsidiary to any of its employees, agents or partners other than
annual increases made in the ordinary course of business consistent
with the Corporation's past practices;
(b) Any mortgage or pledge of, or any other lien, charge or
encumbrance of any kind, on any of the assets, tangible or intangible,
of the Corporation or any Subsidiary;
(c) Any sale or transfer of any assets, except for sales of
inventory in the ordinary course of business, or settlement,
cancellation or release of any indebtedness owing to the Corporation or
any Subsidiary or of any other claims of the Corporation or any
Subsidiary;
(d) Any sale, license, assignment or transfer by the
Corporation or any Subsidiary of any patents, trademarks, trade names
or other similar intangible assets;
(e) Any amendments or termination of any material contract,
agreement or license to which the Corporation or any Subsidiary is a
party or to which the Corporation or any Subsidiary or any of their
respective assets are subject or bound;
(f) Any commitment made (through negotiations or otherwise) or
any liability incurred to any labor organization by the Corporation or
any Subsidiary;
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(g) Other than those permitted by this Agreement, if any, any
payment, declaration or setting aside by the Corporation of dividends
or a return of capital or any distribution by the Corporation of any
cash or other assets to any shareholder in redemption of or as the
purchase price for any of the Corporation's capital stock or equity or
in discharge or cancellation in whole or in part of any indebtedness
owing (whether in payment of principal, interest or otherwise) to any
shareholder;
(h) Any discharge or satisfaction by the Corporation or any
Subsidiary of any lien, encumbrance, obligation or liability (accrued,
absolute, fixed or contingent), other than those shown on the December
31, 1996 balance sheet of the New Monthly Financial Statements that
have been discharged or satisfied in the ordinary course without
acceleration and other than those incurred and discharged in the
ordinary course of business consistent with past practice;
(i) Any material transaction entered into by the Corporation
or any Subsidiary other than in the ordinary course of business
consistent with past practice;
(j) Any institution by the Corporation or any Subsidiary of a
bonus, stock option, profit-sharing, pension plan or similar
arrangement or any changes in any such existing plans;
(k) Any incurrence by the Corporation or any Subsidiary
(whether discharged or not) of any obligation or liability (whether
accrued, absolute, fixed or contingent) other than current liabilities
incurred, and obligations entered into, in the ordinary course of
business consistent with past practice;
(l) Any adverse change in collection loss experience;
(m) Any material loss, damage or destruction to any of the
Corporation's or any Subsidiary's properties (whether or not covered by
insurance) or any labor trouble;
(n) Any payments in cash or otherwise by the Corporation or
any Subsidiary to Sellers or any affiliate pursuant to a tax sharing
arrangement or any other type of intercompany agreement; or
(o) Any change in accounting principles or practices from
those utilized in the preparation of the audited Financial Statements.
2.11 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth on the
December 31, 1996 balance sheet of the New Monthly Financial Statements, or on
Schedule 2.11, neither the Corporation nor any Subsidiary is obligated for, nor
are any of their respective assets or properties subject to, any liabilities or
adverse claims or obligations, absolute or contingent, except those incurred in
the ordinary course of business since December 31, 1996, and neither the
Corporation nor any Subsidiary is in default with respect to any terms or
conditions of any liability or obligation.
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There are no facts known to Sellers that might reasonably serve as a basis, in
whole or in part, for any material liabilities or obligations not disclosed in
this Agreement, in the Financial Statements, in the New Monthly Financial
Statements or in the Schedules attached hereto.
2.12 TAXES.
(a) Each of the Corporation and each Subsidiary, has filed,
and will file, on a timely basis, all returns and reports of every
nature required to be filed by it in respect of all taxes or
withholdings of any nature whatsoever due to taxing authorities in all
jurisdictions applicable to the Corporation and each Subsidiary ("Tax
Returns"), and has paid in full or made adequate provision in the
Financial Statements and the New Monthly Financial Statements for the
payment of all taxes (including penalties, additions to tax and
interest) for which it has or may have liability. All such Tax Returns
are true, correct and complete in all material respects. Sellers have
no knowledge of any unassessed tax deficiency proposed or threatened
against the Corporation or any Subsidiary as a result of the operation
of its business. There are no liens on the Corporation's or any
Subsidiary's assets as a result of any tax liabilities except for taxes
not yet due and payable. There are, and after the date of this
Agreement will be, no tax deficiencies (including penalties, additions
to tax and interest) of any kind assessed against or relating to the
Corporation or any Subsidiary with respect to any taxable period ending
on or before the Closing Date. There are, and after the date of this
Agreement, will be no other tax deficiencies relating to Tax Returns
which include the Corporation or any Subsidiary for periods ending on
or before the Closing Date. As to all tax periods, or portions thereof,
which end prior to, or include, the Closing Date for which no Tax
Returns are yet due, the liability of the Corporation and each
Subsidiary for taxes allocable to periods (or portions thereof) ending
on or before the Closing Date does not exceed the amount accrued on the
Financial Statements for such taxes. The liability of the Corporation
and each Subsidiary for taxes has not increased since August 31, 1996,
except in the ordinary course of business.
(b) The Corporation is not a party to any action or proceeding
by any governmental authority for the assessment or collection of
taxes, nor has any such event been asserted or threatened. There are no
outstanding assessments or reassessments or written enquiries that have
been issued or raised by any governmental authority relating to any
taxes.
(c) Except as set forth on Schedule 2.12, there are no
outstanding agreements or waivers extending the statutory period of
limitations or providing for an extension of time with respect to the
assessment, reassessment or levying of any taxes against the
Corporation or any Subsidiary or the filing of any tax return or
payment of any taxes by the Corporation or any Subsidiary. Neither the
Corporation nor any Subsidiary has ever been audited by the Revenue
Canada, the Internal Revenue Service of the United States or any
provincial, state, local or foreign taxing authority.
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(d) Each of the Corporation and each Subsidiary is in
compliance with all registration, timely reporting and remittance
obligations in respect of all provincial and federal sales and excise
tax legislation and the federal goods and services tax.
(e) Schedule 2.12 sets forth all tax elections made by the
Corporation and each Subsidiary, all adjustments which will affect the
taxes of Purchaser for all taxable years which end on or after the
Closing Date and all tax rulings to which the Corporation or any
Subsidiary is a party. Schedule 2.12 sets forth all jurisdictions in
which the Corporation and each Subsidiary has filed or will file income
or sales tax returns for each taxable period, or portion thereof,
ending on or before the Closing Date.
(f) There are no tax liens currently in existence with respect
to the Corporation. or any Subsidiary. There are no tax sharing
agreements or similar arrangements in effect that include the
Corporation or any Subsidiary.
2.13 INDEBTEDNESS TO OFFICERS, DIRECTORS AND SHAREHOLDERS. Except as
set forth on Schedule 2.13, neither the Corporation nor any Subsidiary is
indebted to any of its shareholders, officers or directors (or to members of
their immediate families) in any amount whatever other than for salaries payable
or for expenses incurred on behalf of the Corporation in the ordinary course of
business.
2.14 ARTICLES OF AMALGAMATION AND INCORPORATION AND BY-LAWS OR
REGULATIONS. True, accurate and complete copies of the Articles of Amalgamation
or Incorporation, as the case may be, and By-laws or Regulations, as the case
may be, of the Corporation and each Subsidiary, together with all amendments
thereto, have been delivered to Purchaser or its counsel.
2.15 CORPORATE MINUTES. Sellers have furnished or made available to
Purchaser and its counsel the corporate record books of the Corporation and each
Subsidiary and the same are accurate and complete and reflect all resolutions
adopted and all actions taken, authorized or ratified by the shareholders and
directors of the Corporation and each Subsidiary. Copies of all corporate
minutes of meetings held and of all written actions taken after the date of this
Agreement will be furnished to Purchaser promptly, and in all events, prior to
the Closing Date.
2.16 BROKERAGE AND FINDER'S FEES. Neither Sellers nor any officer,
director or agent of the Corporation or any Subsidiary has incurred any
liability to any broker, finder or agent for any brokerage fees, finder's fees,
or commissions with respect to the transactions contemplated by this Agreement.
2.17 ACCOUNTS RECEIVABLE. Sellers have previously delivered to
Purchaser an aging schedule as of a date not more than [thirty (30)] days prior
to the date of this Agreement, which is true, correct and complete, of the
accounts receivables, both trade and non-trade, of the Corporation as of that
date. Sellers will update the list as of a date not more than five (5) days
prior to the Closing Date. There will be no reserves for doubtful receivables
and uncollectible accounts reflected on the books of the Corporation as of the
Closing Date. The accounts receivable as reflected on the books of the
Corporation as of the Closing Date will be fully collectible in the
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ordinary course of business within ninety (90) days after the Closing Date,
without resort to legal proceedings. All of such accounts receivable will
represent valid claims that have arisen in the ordinary course of business. In
the event that Sellers indemnify Purchaser pursuant to Section 8.2 of this
Agreement by reason of Sellers' breach of the representations and warranties
contained in this Section 2.17, Purchaser will cause the Corporation to assign
to Seller all the Corporation's rights, title and interest in and to the
uncollected accounts receivable giving rise to the breach and any other
documentation related thereto and necessary for Sellers' collection of same.
2.18 EMPLOYMENT MATTERS.
(a) Except as set forth in Schedule 2.18, neither the
Corporation nor any Subsidiary is a party to any collective bargaining
agreement, and no employees have formed any employee association, union
or collective bargaining unit and, to the best of Sellers' knowledge,
there are no current union organizing activities among the
non-unionized employees.
(b) Except as set forth in Schedule 2.18, there is no unfair
labor practice, charge or complaint pending or, to the best of Sellers'
knowledge, threatened against the Corporation or any Subsidiary arising
out of its activities, nor is there any labor strike, work stoppage,
grievance or other labor dispute pending or, to the best of the
Sellers' knowledge, threatened against the Corporation or any
Subsidiary, nor has any such labor strike, work stoppage, grievance or
other labor dispute occurred in the past. The Corporation and each
Subsidiary has complied with all laws in respect of employment matters.
(c) Except as set forth in Schedule 2.18, neither the
Corporation nor any Subsidiary is a party to any employment or
consulting agreement or party to any agreement, plan or arrangement
providing for severance payments to any current or former employee upon
termination of employment or which provide benefits (including
accelerated vesting, forgiveness of indebtedness, payments or the
inability to amend or terminate any Benefit Arrangement) upon a change
in ownership or control or a sale of assets of the Corporation.
Schedule 2.18 sets forth a list of all current employees as of the
dates set forth therein and the current rate of annual cash
compensation of each such current or former employee.
(d) Schedule 2.18 lists all Benefit Arrangements, and true and
complete copies thereof, where in writing, have previously been made
available to Purchaser. None of the employees, officers or directors of
the Corporation or any Subsidiary is or has ever been subject to or
covered under any retirement or pension plan of the Corporation or any
Subsidiary. Each Benefit Arrangement has been established and
maintained in accordance with all applicable Laws.
(e) Except as set forth in Schedule 2.18, neither the
Corporation nor any Subsidiary is in default in the payment of any
amounts required to be paid pursuant to any Benefit Arrangement, or any
wages, overtime wages, holiday pay, severance or termination payments
or source deductions required by law, and all such payments have been
made.
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(f) "BENEFIT ARRANGEMENT" means each and all pension,
supplemental pension, accidental death and dismemberment, life or
health insurance and benefits (including medical, dental and
hospitalization), savings, bonus, deferred compensation, incentive
compensation, holiday, vacation, severance pay, salary continuation,
sick pay, sick leave, short and long term disability, tuition refund,
service award, company car, scholarship, relocation, fringe benefit and
other employee benefit arrangements, plans, contracts (other than
individual employment, consulting or severance contracts), policies or
practices of the Corporation providing employee or executive
compensation or benefits to current or former employees or directors of
the Corporation.
2.19 NO DEFAULTS. Neither the Corporation nor any Subsidiary is in
default (nor is any such default alleged to exist) under the terms of any
written or oral contract, agreement, lease, license, mortgage, deed of trust,
note, guaranty, instrument or understanding (collectively, "Contracts") to which
it is a party or to which any of its assets, business or operations is subject,
nor, to the best of Sellers' knowledge, is any condition or event threatened,
which, after notice or the passage of time, or both, would constitute a default
under any Contract. To Sellers' knowledge, no such default, condition or event
exists or is alleged to exist with respect to the performance of any obligation
of any other party to any of such Contracts.
2.20 MATERIAL CONTRACTS.
(a) Schedule 2.20(a) is a true and correct list of each
Contract to which the Corporation or any Subsidiary is a party or by
which any of their respective assets, businesses or operations is bound
or affected. Schedule 2.20(a) includes a description of any consents or
approvals required of third parties under the terms of such Contracts
for the consummation of the transactions contemplated by this
Agreement. Schedule 2.20(a) excludes any Contract that (i) may be
cancelled by the Corporation or such Subsidiary on thirty (30) days'
notice or less without incurring a liability or obligation on the part
of the Corporation or such Subsidiary for such cancellation, or (ii)
involves or is reasonably expected to involve the payment of
consideration having an aggregate value of less than Fifteen Thousand
Dollars ($15,000), unless such contract is otherwise material to the
business or financial condition of the Corporation and the
Subsidiaries, taken as a whole. A true, correct and complete copy of
each written, and a description of each oral, Contract, so listed has
been delivered to Purchaser or its counsel.
(b) Schedule 2.20(b) is a true and correct list of each
Contract with a customer of the Corporation or any Subsidiary that
contains provisions (i) providing for payment terms to the Corporation
or such Subsidiary of forty-five (45) days or greater, (ii) permitting
the customer to retain any portion of the purchase price for the
products or services to be provided thereby as security for warranty
claims or for any other purpose, or (iii) providing for liquidated or
stipulated damages.
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2.21 PURCHASE ORDERS. Schedule 2.21 is a true and complete list of all
purchase orders under which the Corporation or any Subsidiary is or will become
obligated to pay any particular vendor an aggregate sum in excess of Ten
Thousand Dollars ($10,000).
2.22 INDEBTEDNESS. Schedule 2.22 is a true and complete list of all
indebtedness, including, without limitation, trade accounts payable owed or to
be owed by the Corporation or any Subsidiary, including a description of the
terms of payment, and, if such indebtedness is secured, a description of all
properties or other assets pledged, mortgaged or otherwise hypothecated
(voluntarily or involuntarily) as security.
2.23 LITIGATION. Schedule 2.23 is a true and complete list of all
administrative or judicial proceedings to which the Corporation or any
Subsidiary is a party or, to the knowledge of Sellers, to which it is threatened
to be made a party which relate, directly or indirectly, to any of the
Corporation's or the Subsidiaries' assets, including, without limitation,
proceedings that could affect title to or interests in the assets. There is no
action, suit, claim, demand, arbitration or other proceeding or investigation,
administrative or judicial, pending or threatened against or affecting the
Corporation or any Subsidiary or any of their respective assets, including,
without limitation, any relating to so-called product liability, which, if
adversely determined or resolved, would have an adverse effect on the business,
assets, condition (financial or otherwise), results of operations or prospects
of the Corporation and the Subsidiaries, taken as a whole, or any provisions of,
or the validity of, or rights under, any leases or other operating agreements,
licenses, permits or grants of authority of the Corporation or any Subsidiary.
Neither Sellers nor the Corporation has received notice that the Corporation or
any Subsidiary is the subject of any governmental investigation and neither the
Corporation nor any Subsidiary is subject to, nor are they or have they been in
default with respect to, any order, writ, injunction or decree of any court, or
of any federal, state, local or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign. Schedule 2.23
indicates which of the matters listed are covered by valid insurance and the
extent of such coverage.
2.24 INSURANCE. Schedule 2.24 is a true and correct list of all the
policies of insurance covering the business, properties and assets of the
Corporation and the Subsidiaries presently in force (including as to each (i)
risk insured against, (ii) name of carrier, (iii) policy number, (iv) amount of
coverage, (v) amount of premium, (vi) expiration date and (vii) the property, if
any, insured), indicating as to each whether it insures on an "occurrence" or a
"claims made" basis. The insurance described on Schedule 2.24 insures the
Corporation and the Subsidiaries in the amounts and against such perils as are
generally maintained for comparable businesses. All of the insurance policies
set forth on Schedule 2.24 are in full force and effect and all premiums,
retention amounts and other related expenses due have been paid, and neither the
Corporation nor any Subsidiary has received any notice of cancellations with
respect to any of the policies. Neither the Corporation nor any Subsidiary has
been refused any insurance by any insurance carrier to which it has applied for
insurance during the last five (5) years. There are no circumstances existing
which would enable any insurer to avoid liability under any of the Corporation's
or Subsidiaries' policies.
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2.25 TRANSACTIONS WITH OFFICERS, ETC.
(a) Schedule 2.25(a) is a true and correct list of the
ownership of the Corporation in any entity that has any existing
contractual relationship, oral or written, or other business
relationship with Sellers.
(b) Schedule 2.25(b) is a true and correct list of all
Contracts (oral or written), including, but not limited to, any loans
(other than those set forth on Schedule 2.13 of this Agreement or not
required to be set forth thereon) or leases, to which the Corporation
or any Subsidiary is a party and to which any of the officers,
directors or other employees or shareholders of the Corporation or any
Subsidiary, or members of their immediate families or other
corporations, partnerships or other entities in which any of them has a
material interest, is also a party. Schedule 2.25(b) includes a list of
indebtedness of any such person or entity to the Corporation or any
Subsidiary.
(c) Except as set forth on Schedule 2.25(c) none of the
Corporation, any Subsidiary or any officer, director, employee or
shareholder of the Corporation or any Subsidiary, or members of their
immediate families or other corporations, partnerships or other
entities in which any of them has a material interest, has any direct
or indirect interest in any competitor, supplier or customer of the
Corporation or any Subsidiary or in any person, firm or entity from
whom or to whom the Corporation or any Subsidiary leases any
property, or in any other person, firm or entity with whom the
Corporation or any Subsidiary transacts business of any nature.
2.26 EMPLOYEES. Schedule 2.26 is a true and correct list of all
employees of the Corporation and the Subsidiaries (as used in this Agreement,
the term "employees" includes employees, salesmen, agents, sales representatives
and all other persons associated with the Corporation (whose current annual rate
of fixed compensation exceeds Fifty Thousand Dollars ($50,000) their accrued
vacation and sick pay, the nature of their duties and the date and amount of
their last increase in compensation. A true, correct and complete copy of each
written employment contract and a description of each oral employment agreement
with any employee has been delivered to Purchaser or its counsel.
2.27 TRADEMARKS, COPYRIGHTS AND SIMILAR MATTERS.
(a) Schedule 2.27(a) sets forth all details of all registered
Canadian and foreign patents, trademarks, trade names, copyrights and
applications therefor which are owned, licensed or used by the
Corporation or any Subsidiary (the "Patents, Copyrights and
Trademarks"). Except as set forth on Schedule 2.27(a), (a) the
Corporation or the Subsidiary, as the case may be, is the sole owner or
exclusive licensee of the Patents, Copyrights, and Trademarks and has
good title to and full rights to use, free and clear of any
encumbrances, the Patents, Copyrights, and Trademarks, including each
of the following: (i) shop rights, patent disclosures, inventions,
discoveries, improvements, compositions, drawings, designs, patterns,
processes, formulae, trade secrets, proprietary rights, ideas and
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<PAGE> 23
know how, whether or not patentable, (ii) confidential business
information and computer software data and documentation (including
electronic media), and (iii) copies and tangible embodiments thereof,
in each case, owned, licensed or used by the Corporation or a
Subsidiary, whether or not registrable (together with the Patents,
Copyrights and Trademarks, the "Intellectual Property Rights"); (b) to
the knowledge of Sellers, none of the Intellectual Property Rights is
being infringed upon or appropriated by others; (c) all Patents,
Copyrights and Trademarks have been duly registered or filed for, and
such registrations have been properly maintained and renewed in
accordance with all applicable laws, and all fees associated therewith
have been paid; (d) the Corporation has not, nor has any Subsidiary,
received notice of any claim or demand and the Sellers have no
knowledge of any possible claim or demand of any person relating to any
litigation, pending or threatened, that challenges the exclusive right
of the Corporation, or a Subsidiary, to use any of the Intellectual
Property Rights; (e) no aspect of the Intellectual Property Rights is
subject to any outstanding order of any tribunal of with appropriate
jurisdiction; (f) the Corporation is not, nor is any Subsidiary,
engaged in any litigation and, to the knowledge of Sellers, no
litigation is threatened, with respect to any of the Intellectual
Property Rights; (g) the Corporation has not, nor has any Subsidiary,
registered or filed for any customer's intellectual property used or
held for use in the conduct of the business of the Corporation or any
Subsidiary; and (h) to the knowledge of Sellers, the conduct of the
business of the Corporation and each Subsidiary as now being conducted
has not, does not, and as currently proposed to be conducted will not,
infringe or otherwise conflict with any patents, trademarks, service
marks, trade names, copyrights or other intellectual property or
proprietary rights of others.
(b) The Corporation and each Subsidiary is the sole and
exclusive owner of its respective corporate name. Except as set forth
on Schedule 2.27(b), the Corporation does not, nor does any Subsidiary,
use such name by consent of any other person or entity, and owns such
name free and clear of any attachments, liens, claims, encumbrances or
agreements. There are no claims or demands of any other person or
entity pertaining to the use of the name and no proceedings have been
instituted or, to the knowledge of Sellers, are threatened, which
challenge the right of the Corporation or any Subsidiary in respect of
its respective names and the use of such name by the Corporation and
the Subsidiary does not infringe on or, to the knowledge of Sellers, is
not being infringed on by others, and is not subject to any outstanding
order, decree, judgment, stipulation or agreement restricting the scope
of its use.
(c) True, correct and complete copies of all patents,
trademarks, service marks, trade names and copyrights, and of all
related applications or registrations, that are listed on Schedule
2.27(a) have been delivered to Purchaser or its counsel.
2.28 ENVIRONMENTAL MATTERS.
(a) Except as set forth in Schedule 2.28, the Corporation and
each Subsidiary at all times have been operated, and are, in compliance
with all Environmental Laws.
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(b) Except as set forth in Schedule 2.28, the Corporation and
each Subsidiary have obtained, and are in compliance with, all Permits
and other governmental consents required by applicable Environmental
Laws ("Environmental Permits"), including those regulating emissions,
discharges, or releases of Hazardous Substances, or the use, storage,
treatment, transportation, release, emission and disposal of raw
materials, by-products, wastes and other substances used or produced by
or otherwise relating to the Corporation's business but not relating to
the activities of its or their customers.
(c) Except as set forth in Schedule 2.28, all Environmental
Permits are in full force and effect, and the Corporation and each
Subsidiary have made all appropriate filings for issuance or renewal of
such Environmental Permits.
(d) Except as set forth an Schedule 2.28, the Real Property
and, to the best of Sellers' knowledge, any real property formerly
owned, occupied, operated, used or controlled or leased by the
Corporation or any Subsidiary or any of their predecessors, are free of
any Hazardous Substance (except those authorized pursuant to and in
accordance with Environmental Permits) and free of all contamination
arising from, relating to, or resulting from any such Hazardous
Substances.
(e) Except as set forth in Schedule 2.28, there are no orders
or litigation or other notices or claims pending or, to the best of
Sellers' knowledge, threatened, that are based on or related to any
Environmental Matters or the failure to have any required Environmental
Permits.
(f) Except as set forth in Schedule 2.28, there are no past or
present conditions, events, circumstances, facts, activities,
practices, incidents, actions, omissions or plans: (i) that may
interfere with or prevent continued compliance by the Corporation or
any Subsidiary with Environmental Laws and the requirements of
Environmental Permits, (ii) that may give rise to any liability or
other obligation under any Environmental Laws or that may require the
Corporation or any Subsidiary to incur any actual or potential
Environmental Costs, or (iii) that may form the basis of Litigation
against or involving the Corporation or any Subsidiary based on or
related to any Environmental Matter.
(g) Except as set forth in Schedule 2.28, there are no
underground or aboveground storage tanks, incinerators or surface
impoundments at, on, or about, under or within the Real Property.
Schedule 2.28 also lists all underground or aboveground storage tanks,
incinerators or surface impoundments that were removed from any such
properties. Any removal of underground or aboveground storage tanks,
incinerators or surface impoundments has been conducted in accordance
with all applicable Environmental Laws.
(h) Except as set forth in Schedule 2.28, neither the
Corporation nor any Subsidiary (i) has been requested or required by
any Governmental Authority to perform any investigatory or remedial
activity or other action in connection with any Environmental Matter,
or (ii) has received any notice or other communication that any of them
is or may be
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a potentially responsible person or otherwise liable in connection with
any waste disposal site or Real Property allegedly containing any
Hazardous Substances, or other location used for the disposal of any
Hazardous Substances, or notice of any failure of the Corporation to
comply in any material respect with any Environmental Law or the
requirements of any Environmental Permit.
(i) Except as set forth on Schedule 2.28, neither the
Corporation nor any Subsidiary has used any waste disposal site, or
otherwise disposed of, transported, or arranged for the transportation
of, any Hazardous Substances to any place or location, in violation of
any Environmental Laws.
(j) Except as set forth in Schedule 2.28, no encumbrance
exists, and no condition exists which could result in the filing of an
Encumbrance, against the Real Property or any other property of the
Corporation or any Subsidiary under any Environmental Law or relating
to any Environmental Matter.
(k) Except as set forth in Schedule 2.28, there has been no
release, migration onto or other dissemination at any time of any
Hazardous Substances at, on, or about, under or within the Real
Property or any real property formerly owned, occupied, leased,
operated, used or controlled by the Corporation or any Subsidiary or
any predecessor of the Corporation or any Subsidiary (other than
pursuant to and in accordance with permits held by the Corporation, any
Subsidiary or any such predecessor and other than such release or other
dissemination which occurred after the Corporation, such Subsidiary or
any such predecessor ceased to own, occupy, lease, operate, use or
control such real property), or migration, release or other
dissemination from the Real Property onto any other real property.
For the purposes of this Section 2.28, the following terms shall have the
meanings indicated:
"ENVIRONMENTAL COSTS" means any actual or potential investigation, cleanup,
remediation, removal, or other response costs (which shall include costs to
cause the Corporation or any Subsidiary to come into compliance with
Environmental Laws), expenses (including fees and disbursements of consultants,
counsel, and other experts in connection with any environmental investigation,
testing, audits or studies, response actions, or litigation), losses,
liabilities or obligations (including liabilities or obligations under any lease
or other contract), payments, damages (including any actual, punitive or
consequential damages under any law, common law cause of action or contractual
obligations or otherwise, including damages (a) of third parties for personal
injury or property damage, or (b) to natural resources), civil or criminal fines
or penalties, judgments, and amounts paid in settlement arising out of or
relating to or resulting from any Environmental Matter.
"ENVIRONMENTAL MATTER" means any matter arising out of, relating to, or
resulting from pollution, contamination, protection of the environment
(including the health of plants and animals), human health or safety, health or
safety of employees, sanitation, and any matters relating to emissions,
discharges, disseminations, migrations, releases or threatened releases, of
Hazardous Substances into
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the air (indoor and outdoor), surface water, groundwater, soil, land surface or
subsurface, buildings, facilities, real or personal property or fixtures or
otherwise arising out of, relating to, or resulting from the manufacture,
processing, distribution, use, treatment, storage, disposal, transport,
handling, release or threatened release of Hazardous Substances.
"HAZARDOUS SUBSTANCES" means any pollutants, contaminants, toxic or hazardous or
extremely hazardous substances, materials, wastes, constituents, compounds,
chemicals, natural or man-made elements or forces (including petroleum or any
by-products or fractions thereof, any form of natural gas, Bevill Amendment
materials, lead, asbestos and asbestos-containing materials ("ACM"), building
construction materials and debris, polychlorinated biphenyls (PCBs) and
PCB-containing equipment, radon and other radioactive elements, ionizing
radiation, electromagnetic field radiation and other non-ionizing radiation,
sonic forces and other natural forces, infectious, carcinogenic, mutagenic, or
etiologic agents, pesticides, defoliants, explosives, flammables, corrosives and
urea formaldehyde foam insulation) that are regulated by, or may now or in the
future form a basis of liability under, any Environmental Laws.
"ENVIRONMENTAL LAWS" means Environmental Act (Manitoba), Dangerous Good Handling
and Transportation Act (Manitoba), Public Health Act (Manitoba), Ozone Depleting
Substances Act (Manitoba), the Contaminated Sites Remediation and Consequential
Amendments Act (Manitoba) before or after proclamation, the City of Winnipeg
Sewer By-Law, as well as publicly disclosed guidelines issued by Manitoba
Environment, including "A Guideline for the Environmental Investigation and
Remediation of Petroleum Storage Suites in Manitoba" and "Treatment and Disposal
of Petroleum Contaminated Soil", Transportation of Dangerous Goods Act (Canada),
Canadian Environmental Protection Act (Canada), and all environmental laws of
the United States and any state therein, as the same may be applicable to the
Corporation or any past or present operations of the Corporation, as any of the
above Laws or guidelines have been or may be amended from time to time, all
rules and regulations promulgated pursuant to any of the above statutes, and any
other law governing Environmental Matters, as the same have been or may be
amended from time to time, including any common law cause of action providing
any right or remedy relating to Environmental Matters, all indemnity agreements
and other contractual obligations (including leases, asset purchase and merger
agreements) relating to environmental matters, and all applicable judicial and
administrative decisions, orders, and decrees relating to Environmental Matters.
For the purposes of this Section 2.28, "REAL PROPERTY" means all real property
currently owned, occupied, operated, controlled, used or leased by the
Corporation and any buildings, facilities, machinery, equipment, furniture,
leasehold and other improvements, fixtures, vehicles, structures, any related
capital items and other tangible property located on, in, under, or above such
real property.
2.29 BANK ACCOUNTS. Schedule 2.29 is a true and correct list of the
name of each bank, savings and loan, or other financial institution in which the
Corporation or any Subsidiary has an account or safe deposit box, the names of
all persons authorized to draw on each account or to have access to each box,
the number of signatures required to be given for a withdrawal and a description
of the type of account.
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2.30 COMPLIANCE WITH LAWS. Each of the Corporation and each Subsidiary
has complied with all laws, regulations, rules and orders of any governmental
department or agency or any other commission, board, agency or instrumentality,
federal, state or local, or other requirements of law affecting its business and
operations and is not in default under or in violation of any provision of any
federal, state or local law, regulation, rule or order.
2.31 POWERS OF ATTORNEY. Neither the Corporation nor any Subsidiary has
given any power of attorney (irrevocable or otherwise) that is presently in
effect to any person or entity for any purpose.
2.32 LICENSES AND RIGHTS. Each of the Corporation and each Subsidiary
possesses all franchises, licenses, easements, permits and other authorizations
from governmental or regulatory authorities and from all other persons or
entities that are necessary to permit it to engage in its business as presently
conducted in and at all locations and places where it is presently operating.
Such franchises, licenses, permits and other authorizations are listed on
Schedule 2.32.
2.33 PRODUCTS.
(a) The products sold by the Corporation and each Subsidiary
conform to and meet or exceed the standards required by all applicable
laws, ordinances and regulations now in effect and, to Sellers'
knowledge, there is no pending legislation, ordinance or regulation
which if adopted or enacted would have a material adverse effect on
such products or the Corporation's business.
(b) Schedule 2.33 contains a written statement accurately
describing the Corporation's and each Subsidiary's warranties and
customer service policies and any recurring warranty problems. Neither
the Corporation nor any Subsidiary has outstanding contracts or
proposals that depart from the warranty and customer service policy and
practice described in such Schedule. Except as may be listed on
Schedule 2.33, no claims of customers or others based on an alleged or
admitted defect of material, workmanship or design or otherwise in or
in respect of any of the Corporation's or any Subsidiary's products are
presently pending or, to the knowledge of Sellers, threatened.
2.34 CASUALTY OCCURRENCES. Schedule 2.34 is a true and correct list of
occurrences during the last five (5) years of damages to persons or property
involving any defects or alleged defects in any of the Corporation's or any
Subsidiary's products or their respective designs. All such occurrences are
fully and adequately covered by paid-for insurance.
2.35 INVENTORY. Except as set forth on Schedule 2.35, the inventories
of the Corporation and each Subsidiary consist only of items of a quality and
quantity usable and saleable in the ordinary course of business, consistent with
past practice, within the Corporation's and the Subsidiaries' normal inventory
"turn" experience and do not include any item of inventory which has previously
been written off by the Corporation or any Subsidiary. Items of below-standard
quality
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and items not previously readily saleable in the ordinary course of business
have been written down in value in accordance with generally accepted accounting
principles to estimated net realizable market values. The value at which the
inventories are carried on the Corporation's books reflects the lower of
specific cost or estimated net realizable market value, and is based on
quantities determined by physical count.
2.36 CAPITAL EXPENDITURE PLANS. Schedule 2.37 sets forth a description
of each capital expenditure program of the Corporation and each Subsidiary
involving the expenditure of at least Fifty Thousand Dollars ($50,000) as to
which the expenditure of funds is incomplete, setting forth (i) the budgeted
expenditures and (ii) the actual amounts expended, if any.
2.37 MATERIAL MISSTATEMENTS OR OMISSIONS. No representations or
warranties made by Sellers in this Agreement or in any document, statement,
certificate, Schedule, chart, list, letter, compilation or other document
furnished or to be furnished to Purchaser or its counsel pursuant to this
Agreement, or in connection with the transactions contemplated under this
Agreement (collectively, the "Documents"), contain or will contain any untrue
statement of a material fact, or omit or will omit to state a material fact
necessary to make the statements of fact contained therein not misleading. All
statements of fact made and data presented by Sellers in any Document are deemed
to be representations and warranties made under this Agreement by Sellers.
References in any Document, or in any Contract, a copy of which has been
provided to Purchasers or its counsel, to any other Document or Contract as to
which Sellers prior to the date of this Agreement have not provided to Purchaser
or its counsel a true copy or, if oral, a written summary, will not be deemed
for any purposes of this Agreement to be a disclosure of any term, provision or
statement of fact of, or relating to, such other Document or Contract.
2.38 STOCK DIVIDENDS. In the event that the Corporation declares and
pays a dividend on the any of its outstanding shares payable in any of its
shares, then (a) the dividend will be duly authorized by the Corporation and
will not contravene any of the articles or by-laws of the Corporation, or any
applicable laws including, without limitation, the Canada Business Corporations
Act, (b) Sellers will attach hereto as Schedule 2.38 the number of shares issued
in connection with such dividend and a description of the rights attaching to
the shares issued in such dividend, (c) and the shares upon which the dividend
was paid are not and will not be as a result of the entering into of this
Agreement, "short-term preferred shares" or "taxable preferred shares" (as
defined in the INCOME TAX ACT (CANADA)).
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ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
Purchaser warrants and represents to, and agrees with, Sellers as
follows:
3.1 ORGANIZATION AND GOOD STANDING OF PURCHASER. Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of Delaware, U.S.A. Purchaser has full power and authority to carry on its
business as and where now conducted and to own or lease and operate its
properties at and where now owned or leased and operated by it, and is duly
qualified to do business and is in good standing in every jurisdiction in which
the property owned, leased or operated by it, or the nature of the business
conducted by it, makes such qualification necessary.
3.2 AUTHORITY OF PURCHASER. The execution, delivery and consummation of
this Agreement by Purchaser has been duly authorized by the board of directors
of Purchaser in accordance with all applicable laws, the Certificate of
Incorporation and By-Laws of Purchaser, and at the Closing Date no further
corporate action will be necessary on the part of Purchaser to make this
Agreement valid and binding on Purchaser and enforceable against Purchaser in
accordance with its terms.
3.3 INVESTMENT PURPOSE. The shares of capital stock of the Corporation
purchased pursuant to this Agreement will be acquired for investment and not
with a view toward the resale or distribution thereof.
ARTICLE IV
----------
CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
------------------------------------------------
The obligations of Purchaser under this Agreement are, at its option,
subject to satisfaction of the following conditions at or prior to the Closing
Date:
4.1 REPRESENTATIONS TRUE. The representations and warranties of Sellers
contained in this Agreement are true, complete and accurate in all material
respects on and as of the Closing Date to the same extent and with the same
force and effect as if made on such date, except as affected by the transactions
contemplated under this Agreement.
4.2 ALL CONSENTS OBTAINED. All necessary approvals or consents required
to be obtained by Sellers or Purchaser have been obtained from all local, state
and federal departments and agencies, from all other commissions, boards,
agencies and from any other person or entity whose approval or consent is
necessary to consummate the transactions contemplated under this Agreement
including, without limitation, such consents as may be listed or required to be
listed on Schedule 2.2.
4.3 PERFORMANCE AND OBLIGATIONS. Sellers have duly performed all
obligations, covenants and agreements undertaken by Sellers in this Agreement
and have complied with all terms and
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conditions applicable to Sellers under this Agreement to be performed and
complied with on or before the Closing Date.
4.4 RECEIPT OF DOCUMENTS BY PURCHASER. Purchaser has received:
(a) a certificate executed by Sellers certifying as to the
fulfillment of the matters contained in Sections 4.1, 4.2, 4.3 and 4.5.
(b) a true and correct copy of the Corporation's [Articles]
[Certificate] of Incorporation, certified by the [appropriate
governmental authority] of [jurisdiction] as of a date not more than
___________ (______) days prior to the Closing Date, and a true and
correct copy of the Corporation's [By-Laws] [Regulations] certified by
the Secretary of the Corporation as of the Closing Date.
(c) a written opinion from counsel for Sellers (who must be
satisfactory to Purchaser and its counsel), containing such
assumptions, qualifications and exceptions as are customary and
appropriate in transactions of this type, dated as of the Closing Date,
addressed to Purchaser, satisfactory to Purchaser and its counsel in
form and substance, to the effect that:
(i) The Corporation and each Subsidiary is duly
incorporated, validly existing and is in good standing under
the laws of its respective jurisdiction of incorporation, has
full corporate power and authority to carry on its business as
and where now conducted, and to own or lease and operate its
properties at and where now owned or leased and operated by
it, and is qualified to do business as a foreign corporation
and is in good standing in every jurisdiction in which the
property owned, leased or operated by it, or the nature of the
business conducted by it, makes such qualification necessary;
(ii) The Corporation is authorized to issue
_________________ shares of _____________ shares, without par
value, of which _________________________ shares are duly and
validly issued and outstanding, fully paid and nonassessable
and were not issued in violation of any pre-emotive or any
other rights, including any rights under any federal or state
securities laws. There are no other shares of stock,
convertible or other securities or rights, warrants or options
with respect to any shares of stock or securities of the
Corporation authorized, issued or outstanding;
(iii) Sellers are the record and beneficial owners of all
the Shares and have full right and lawful authority to convey,
transfer and assign the Shares to Purchaser as provided in
this agreement. Sellers have good and marketable title to the
Shares free and clear of any lien, claim, charge, option,
security interest, restriction on transfer, encumbrances or
other defect in title. On the consummation of the
transactions contemplated by the Agreement, Purchaser will
acquire good and
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marketable title to the Shares free and clear of any lien,
claim, charge, option, security interest, restriction on
transfer, encumbrance or other defect in title;
(iv) This Agreement constitutes the legal, valid and
binding obligation of Sellers, and is enforceable against
Sellers in accordance with its terms;
(v) Except as set forth in this Agreement or in any
Schedule, the execution and delivery of this Agreement and the
consummation of the transactions contemplated under this
Agreement by Sellers (a) are not in conflict with the
[Articles] [Certificate] of Incorporation or [By-Laws]
[Regulations] of the Corporation, (b) do not (with or without
notice or the passage of time or both) constitute a default
under, and are not in conflict with, any Contract known to
such counsel to which the Corporation is a party or to which
any of its assets are subject, (c) do not violate any order,
judgment or decree or any rule, regulation or law, or any
other restriction known to such counsel to which the
Corporation is a party or to which any of their respective
assets are subject and (d) will not (with or without notice or
the passage of time or both) result in the creation of any
lien or any charge on or any loss of any assets of the
Corporation or in the acceleration or termination of any loan,
security interest or other agreement known to such counsel to
which the Corporation is a party or to which any of its assets
are subject;
(vi) Except with respect to those matters as may be
disclosed in any Schedule, such counsel has no knowledge of
any action, suit, claim, demand, arbitration or other
proceeding or investigation, administrative or judicial,
pending or threatened against or affecting the Corporation or
any of its assets at law or in equity, or before or by any
federal, state, municipal or other governmental department or
by any other commission, board, agency or instrumentality,
domestic or foreign, that can reasonably be expected to have
any adverse effect on the business, assets, condition
(financial or otherwise), results of operations or prospects
of the Corporation;
(vii) Such other material matters which Purchaser or its
counsel reasonably requests;
(d) the resignations of such officers and directors of the
Corporation as may be requested by Purchaser;
(e) certificates representing all of the Shares, with stock
powers covering such shares duly endorsed in blank; and
(f) a general release of all claims of Sellers against the
Corporation, in the form of EXHIBIT "C" to this Agreement.
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4.5 NO LITIGATION. No suit, action, or other proceeding is threatened
or pending before any court or governmental agency (a) in which it will be or it
is sought to restrain or prohibit or to obtain material damages or relief in
connection with this Agreement or the consummation of this Agreement, or (b)
which is likely to materially and adversely affect the value of the business or
assets of the Corporation.
4.6 EMPLOYMENT AGREEMENTS. Each of David Romanow, Brian Topnik and
Robert Jenkyns has entered into an Employment Agreement substantially in the
forms of EXHIBITS "D", "E" AND "F", respectively, to this Agreement
(collectively, the "Employment Agreements").
4.7 DELIVERY OF BOOKS AND RECORDS. Sellers have delivered or made
available to Purchaser all books and records of the Corporation and each
Subsidiary relating to or reasonably required for the operation of the business
of the Corporation and each Subsidiary, including, without limitation, copies of
all Contracts, financial and accounting records, files and records relating to
employees, and all related correspondence.
4.8 ABSENCE OF CHANGES. There has been no material adverse change in
the business (financial or otherwise), assets, liabilities, results of
operations or prospects of the Corporation and each Subsidiary, taken as a
whole, since the date of this Agreement.
4.9 ESCROW AGREEMENT. Sellers have entered into the Escrow Agreement.
4.10 INVESTMENT, LOCK-UP AND REGULATION S LETTER. If the Purchase Price
- - Alternative 1 is applicable, Purchaser shall have received from each Seller an
agreement and acknowledgment substantially in the form of EXHIBIT "G" attached
hereto.
4.11 PURCHASER'S REVIEW. Purchaser has conducted a review of the
business, assets, books and records of the Corporation and each Subsidiary and
has found the results of such review to be satisfactory to Purchaser, in its
sole discretion.
4.12 NON-COMPETITION AGREEMENT. Joe Romanow has entered into a non-
competition agreement substantially in the form attached hereto as EXHIBIT "H".
4.13 SHAREHOLDER'S AGREEMENT. The unanimous Shareholder's Agreement
relating to the Shares between Sellers and the Corporation has been terminated
on terms satisfactory to Purchaser.
28
<PAGE> 33
ARTICLE V
---------
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLERS
----------------------------------------------
The obligations of Sellers under this Agreement are, at the option of
Sellers, subject to satisfaction of the following conditions at or prior to the
Closing Date:
5.1 REPRESENTATIONS TRUE. The representations and warranties of
Purchaser contained in this Agreement are true, complete and accurate in all
material respects on and as of the Closing Date to the same extent and with the
same force and effect as if made on such date, except as affected by the
transactions contemplated under this Agreement.
5.2 RECEIPT OF DOCUMENTS BY SELLERS. Sellers have received:
(a) the Purchase Price as provided in Sections 1.2 and;
(b) a certificate executed by the President and Secretary or
Treasurer of Purchaser certifying as to the fulfillment of the matters
contained in Section 5.1 of this Article;
(c) a written opinion from counsel for Purchaser, dated as of
the Closing Date, addressed to Sellers, satisfactory to Sellers and its
counsel in form and substance, to the effect that:
(i) Purchaser is duly incorporated, validly existing
and is in good standing under the laws of Canada, has full
corporate power and authority to carry on its business as and
where now conducted, and to own or lease and operate its
properties at and where now owned or leased and operated by
it;
(ii) Purchaser has all requisite corporate power to
execute, deliver and carry out its obligations under this
Agreement and the execution, delivery and performance of this
Agreement by Purchaser have been duly authorized by all
requisite corporate action;
(iii) The execution and delivery of this Agreement and
the consummation of the transactions contemplated under this
Agreement by Purchaser are not in conflict with the
[Certificate of Incorporation] or [By-Laws] of Purchaser; and
(iv) This Agreement constitutes the legal, valid, and
binding obligation of Purchaser, and is enforceable against
Purchaser in accordance with its terms;
(d) certified copies of resolutions duly adopted by the Board
of Directors of Purchaser approving this Agreement and the transactions
contemplated under it.
29
<PAGE> 34
5.3 NO LITIGATION. No suit, action, or other proceeding is threatened
or pending before any court or governmental agency in which it will be or it is
sought to obtain material damages from Sellers in connection with this Agreement
or the consummation of this Agreement.
5.4 EMPLOYMENT AGREEMENTS. Purchaser has caused the Corporation to
enter into the Employment Agreements.
5.5 ESCROW AGREEMENT. Purchaser has entered into the Escrow Agreement.
ARTICLE VI
----------
CLOSING
-------
The closing of the transactions contemplated by this Agreement (the
"Closing") will take place at the offices of Benesch, Friedlander, Coplan &
Aronoff LLP, 2300 B.P. America Bldg., 200 Public Square, Cleveland, Ohio 44114,
on the date specified in a notice provided by Waterlink to Sellers, such date to
be not less than five (5) business days after the date such notice is duly given
in accordance with Article XII hereof or on such other date mutually agreeable
to the parties (the "Closing Date"). If the Closing has not taken place by such
date by reason of failure of fulfillment of any condition or conditions
contained in this Agreement, then the non-fulfilling party may, by written
notice to the other party, extend the Closing Date for a period of fourteen (14)
days to permit fulfillment of such condition or conditions. If the Closing has
not occurred by June 30, 1997, (unless the Closing did not occur by reason of
Sellers not fulfilling any of their conditions contained in this Agreement
notwithstanding the fact that Waterlink delivered a notice to Sellers in
accordance with this Article VI specifying a Closing Date before June 30, 1997)
notwithstanding the provisions of Section 9.1(f) to the contrary, Sellers may
cause the Corporation to declare and pay a cash dividend on the outstanding
Common Shares in an aggregate amount not to exceed the lesser of (i) the maximum
amount permitted by law and (ii) the amount which, after giving effect to the
payment of such dividend, would result in the stockholders' equity of the
Corporation, as determined by Canadian GAAP, to be less than $910,620.00 on the
Closing Date (any adjustment, if necessary, to be made on the Closing Date to
ensure compliance with this clause (ii)). Unless the parties otherwise agree in
writing, if the Closing has not occurred prior to September 30, 1997, then this
Agreement will be deemed to have been terminated and abandoned, subject to the
legal rights and remedies of either party arising out of the other party's
breach of any of the provisions of this Agreement. The parties will in good
faith use all reasonable efforts to achieve the Closing except that the parties
acknowledge that Purchaser has no obligation whatsoever to close the
transactions contemplated herein.
30
<PAGE> 35
ARTICLE VII
-----------
TERMINATION OF AGREEMENT
------------------------
This Agreement and the transactions contemplated under it may be
terminated and abandoned at any time prior to the Closing Date (unless otherwise
specified below):
(a) by mutual consent in writing of Purchaser and Sellers;
(b) by Purchaser if there has been a material
misrepresentation or breach of warranty in the representation and
warranties of Sellers made under this Agreement;
(c) by Purchaser if all or a material portion of the
Corporation's assets have been materially damaged or destroyed before
the Closing;
(d) by Purchaser if any of the Real Property has been taken,
in whole or in part, by eminent domain or by conveyance in lieu of
eminent domain;
(e) by Purchaser, if any of the conditions contained in
Article IV, or by Sellers, if any of the conditions contained in
Article V, respectively, have not been fulfilled in all respects in
each case at or prior to the Closing Date.
Any termination pursuant to this Article VII will not affect the obligations of
the parties under Article XI or Section 15.4, and will be without prejudice to
the terminating party's legal rights and remedies by reason of any breach of
this Agreement occurring prior to such termination. In the event this Agreement
is terminated by Purchaser pursuant to Sections (b), (c), (d) or (e) of this
Article VII (other than a termination pursuant to Section (e) above solely as a
result of any of the conditions contained in Sections 4.5(b), 4.8 or 4.11 of
Article IV not being fulfilled, in which case Purchaser shall forfeit and
Sellers shall retain the Deposit), Sellers will return to Purchaser the Deposit
within three (3) days of such termination. In the event of any other termination
of this Agreement by Purchaser, Purchaser shall forfeit and Sellers shall retain
the Deposit, it being the agreement of the parties that forfeiture of the
Deposit shall constitute the sole and exclusive remedy against the Purchaser for
failing to consummate the transactions contemplated hereby, and for any other
breach of this Agreement by Purchaser that prevents the Closing from occurring,
all other remedies being hereby expressly waived by each of the Sellers.
Notwithstanding anything in this Agreement to the contrary, if, on the Closing
Date, Purchaser (i) has complied with all of the conditions to Closing contained
in Article V, (ii) has notified Sellers of its intention to consummate the
transactions contemplated under this Agreement, and (iii) is ready and able to
pay Sellers the Purchase Price and furnishes evidence to that effect to Sellers,
and if the Closing does not then occur due to the refusal of Sellers to so
consummate the transactions contemplated under this Agreement, Purchaser will be
entitled to specifically enforce the terms of this Agreement in a court of
competent jurisdiction, it being acknowledged that monetary damages due
Purchaser in such case cannot be adequately determined at law.
31
<PAGE> 36
ARTICLE VIII
------------
SURVIVAL OF REPRESENTATIONS
---------------------------
AND WARRANTIES: INDEMNIFICATION: DISPUTES
-----------------------------------------
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Notwithstanding the
Closing of the transactions contemplated under this Agreement, or any
investigation made by or on behalf of Sellers or Purchaser, the representations
and warranties of Sellers and Purchaser contained in this Agreement or in any
certificate, Schedule, chart, list, letter, compilation or other document
furnished or to be furnished pursuant to this Agreement, will survive the
Closing for a period of two (2) years, except that the representations and
warranties of Sellers contained in Sections 2.4 and 2.12 with respect to title
and tax matters will survive for so long as any applicable statute of
limitations has not expired, been suspended or been waived or extended, and for
thirty (30) days after and the representations and warranties of Sellers
contained in Sections 2.18 and 2.28 relating to employee benefit matters and
environmental matters will survive the Closing for a period of five (5) years.
However, as to any breach of, or misstatement in, any such representation or
warranty as to which Purchaser has given notice to Sellers on or prior to the
expiration of the applicable period, as above set forth, the same will continue
to survive beyond said period, but only as to the matters contained in such
notice.
8.2 SELLERS' INDEMNIFICATION. Sellers, jointly and severally, will
indemnify and save harmless Purchaser and its subsidiaries, shareholders,
directors, officers, employees and agents from any and all costs, expenses,
losses, damages and liabilities incurred or suffered, directly or indirectly, by
any of them (including, without limitation, reasonable legal fees and expenses)
resulting from or attributable to the breach of, or misstatement in, any one or
more of the representations, warranties and covenants of Sellers made in or
pursuant to this Agreement. Purchaser shall have the right to set-off any
amounts owed by Sellers to Purchaser for indemnification pursuant to this
Section 8.2 against any Earn-out Payments or Performance Incentive Payments
earned by Sellers pursuant to Section 1.4 of this Agreement. Sellers'
indemnification obligations under this Agreement shall be secured by the funds
held in escrow pursuant to the Escrow Agreement.
8.3 DEFENSE OF CLAIM. If Purchaser has received actual notice of any
claim asserted or any action or administrative or other proceeding commenced in
respect of which claim, action or proceeding indemnity properly may be sought
against Sellers pursuant to this Agreement, Purchaser will give notice in
writing to Sellers. Within fifteen (15) days after the earlier of (i) receipt of
such notice or (ii) receipt of actual notice by Sellers from sources other than
Purchaser, Sellers, acting through the Sellers' representative, may give
Purchaser written notice of their election to conduct the defense of such claim,
action or proceeding at its own expense. If Sellers have given Purchaser such
notice of election to conduct the defense, Sellers may conduct the defense at
its expense, but Purchaser will nevertheless have the right to participate in
the defense, but such participation will be solely at the expense of Purchaser,
without a right of further reimbursement. If Sellers have not so notified
Purchaser in writing (within the time above provided) of its election to conduct
the defense of such claim, action or proceeding, Purchaser may (but need not)
conduct (at Sellers'
32
<PAGE> 37
expense) the defense of such claim, action or proceeding. Purchaser may at any
time notify Sellers of Purchaser's intention to settle, compromise or satisfy
any such claim, action or proceeding (the defense of which Sellers have not
previously elected to conduct) and may make such settlement, compromise or
satisfaction (at Sellers' expense) unless Sellers notify Purchaser in writing
(within seven (7) days after receipt of such notice of intention to settle,
compromise or satisfy) of its election to assume (at its sole expense) the
defense of any such claim, action or proceeding and promptly take appropriate
action to implement such defense. Any settlement, compromise or satisfaction
made by Purchaser, or any such final judgment or decree entered in, any claim,
action or proceeding defended only by Purchaser, regardless of the amount or
terms, will be deemed to have been consented to by, and will be binding on,
Sellers as fully as though they alone had assumed the defense and a final
judgment or decree had been entered in such proceeding or action by a court of
competent jurisdiction in the amount of such settlement, compromise,
satisfaction, judgment or decree. If Sellers have elected under this Section 8.3
to conduct the defense of any claim, action or proceeding, then Sellers will be
obligated to pay the amount of any adverse final judgment or decree rendered
with respect to such claim, action or proceeding. If Sellers elect to settle,
compromise or satisfy any claim, action or proceeding defended by them, the cost
of any such settlement, compromise or satisfaction will be borne entirely by
Sellers and may be made only with the consent of Purchaser. Purchaser and
Sellers will use all reasonable efforts to cooperate fully with respect to the
defense of any claim, action or proceeding covered by this Section 8.3.
8.4 PURCHASER'S INDEMNIFICATION. Purchaser covenants and agrees to
indemnify and save harmless Sellers from any and all costs, expenses, losses,
damages and liabilities incurred or suffered by Sellers (including reasonable
legal fees and costs) resulting from or attributable to the breach of, or
misstatement in, any one or more of the representations, warranties or covenants
of Purchaser made in or pursuant to this Agreement to the same extent as
provided in Clauses (a) and (b) of Section 8.2, and in the same manner as
provided in Section 8.3, of this Article VIII.
8.5 INDEMNIFICATION BASKET. Any of the foregoing notwithstanding, no
party will have any right to indemnification unless and until the aggregate
damages indemnifiable by the indemnifying party exceed One Hundred Fifty
Thousand Dollars ($150,000.00) and thereafter will be entitled to the full
extent of the damages including the first One Hundred Fifty Thousand Dollars
($150,000.00).
ARTICLE IX
----------
CONDUCT PRIOR TO CLOSING DATE
-----------------------------
9.1 CONTINUATION OF BUSINESS. Until the Closing Date, Sellers will
cause the Corporation and each Subsidiary to continue to conduct its business in
the ordinary and usual course consistent with past practice, and, without
limiting the generality of this undertaking, Sellers will not, and will
33
<PAGE> 38
cause the Corporation and each Subsidiary not to, do or suffer to be done any of
the following, whether or not in the ordinary and usual course, without the
prior written consent of Purchaser, such consent not to be unreasonably
withheld:
(a) Dispose or contract to dispose of, or acquire or contract
to acquire, any Real Property or other assets (except for inventory
disposed of or acquired in the ordinary course of business), or any
interest in any Real Property or other capital assets;
(b) Borrow any money;
(c) Enter into any lease;
(d) Encumber any assets;
(e) Enter into any contract, commitment or arrangement of the
type required by Section 2.20 above to be listed on Schedule 2.20;
(f) Subject to the provisions of Article VI, declare or pay
any dividend (other than a dividend payable in Common Shares not to
exceed ____________ Common Shares) or declare or make any other
distribution to shareholders;
(g) Purchase or redeem any shares, notes or other securities;
(h) Increase the rate or amount of compensation or the amount
or type of other remuneration to any of its directors, officers,
employees, agents or other representatives, or agree to do so;
(i) Form or cause to be formed, or dispose or contract to
dispose of, any Subsidiary, or any interest in any Subsidiary or
acquire any stock or equity interest in any corporation or other
entity;
(j) Reclassify, split or combine its shares, or issue, sell,
distribute or dispose of any shares, notes or other securities, or
issue or make any changes to any options, warrants or rights with
respect to its shares, or commit itself to do so;
(k) Make any new commitments or agree to make commitments for
capital improvements or significantly alter standing commitments for
capital improvements;
(l) Make any single expenditure or agree to make any single
expenditure, or series of expenditures in excess of Twenty Thousand
Dollars ($20,000) in the aggregate;
(m) Negotiate with anyone other than Purchaser for, or
participate with anyone other than Purchaser in, the acquisition of
the Shares;
34
<PAGE> 39
(n) Amend, or permit to be amended, in any way, its Articles
of Amalgamation or By-Laws or merge or consolidate with any other
corporation or other entity or change the character of its business; or
(o) Make any material change in accounting methods.
9.2 PRESERVATION OF BUSINESS. Sellers will cause the Corporation and
each Subsidiary to (i) preserve intact its present business organization and
personnel, (ii) preserve its business, actual and potential, and its
advantageous relationships with all persons having business dealings with it,
and (iii) preserve and maintain in force all its licenses, certificates, leases,
contracts, permits, registrations, franchises, confidential information,
patents, trademarks, trade names, service marks and copyrights, and applications
for any of the same, and other similar rights. Sellers will cause the
Corporation to maintain in force all property, casualty, crime, life, directors,
officers and other forms of insurance and bonds which it presently carries.
9.3 CONSENTS AND APPROVALS. Sellers will use all reasonable efforts to
obtain all necessary consents and approvals of all persons, firms, entities and
governmental authorities to the consummation of the transactions contemplated by
this Agreement.
ARTICLE X
---------
ASSIGNMENT, THIRD PARTIES, BINDING EFFECT
-----------------------------------------
Subject to the following sentence, the rights under this Agreement are
not assignable nor are the duties delegable by a party without the written
consent of the other party first having been obtained, and any attempted
assignment or delegation without such consent will be null and void. Waterlink
may assign any or all of its rights hereunder or delegate any or all of its
duties hereunder to one or more wholly-owned subsidiaries whether now existing
or formed in the future. Upon any such assignment or delegation, the assignee
shall execute and deliver to Sellers a writing agreeing to be bound by the terms
of this Agreement. Nothing contained in this Agreement is intended to convey
upon any person or entity, other than the parties hereto and their successors in
interest and permitted assigns, any rights or remedies under or by reason of
this Agreement unless expressly stated. All covenants, agreements,
representations and warranties of the parties contained in this Agreement are
binding on and will inure to the benefit of Purchaser, on the one hand and
Sellers, on the other, and their respective successors and permitted assigns.
35
<PAGE> 40
ARTICLE XI
----------
EXPENSES
--------
Purchaser, on the one hand, and Sellers, on the other, will bear their
own respective expenses, including, without limitation, counsel and accountants'
fees, in connection with the preparation and negotiation of, and transactions
contemplated under, this Agreement.
ARTICLE XII
-----------
NOTICES
-------
All notices, requests, demands and other communications under this
Agreement must be in writing and will be deemed duly given, unless otherwise
expressly indicated to the contrary in this Agreement, (i) when personally
delivered, (ii) upon receipt of a telephonic facsimile transmission with a
confirmed telephonic transmission answer back, (iii) three (3) days after having
been deposited in the United States or Canadian mail, certified or registered,
return receipt requested, postage prepaid, or (iv) one (1) business day after
having been dispatched by a nationally recognized overnight courier service,
addressed to the parties or their permitted assigns at the following addresses
(or at such other address or number as is given in writing by either party to
the other) as follows:
To Purchaser: c/o Waterlink, Inc.
------------ 4100 Holiday Street, N.W.
Canton, Ohio, USA 44702
Facsimile No.: (330) 455-8134
Attention: Theodore F. Savastano, Chairman
With a copy to: Benesch, Friedlander,
Coplan & Aronoff LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio, USA 44114
Facsimile No.: (216) 363-4588
Attention: Ira C. Kaplan
To Sellers: c/o Bioclear Technology, Inc.
----------- 1218 Redonda Street
Winnipeg, Manitoba, Canada R3C 2Z2
Facsimile No.:(204) 222-6563
Attention: David Romanow
36
<PAGE> 41
With a copy to: Fillmore & Riley
1700 - 360 Main Street
Winnipeg, Manitoba, Canada R3C 3Z3
Facsimile No.:(204) 957-0516
Attention: W. G. Ryall
ARTICLE XIII
------------
REMEDIES NOT EXCLUSIVE
----------------------
No remedy conferred by any of the specific provisions of this Agreement
is intended to be exclusive of any other remedy, and each and every remedy will
be cumulative and will be in addition to every remedy given under this Agreement
or now or subsequently existing, at law or in equity, by statute or otherwise.
The election of any one or more remedies by Purchaser or Sellers will not
constitute a waiver of the right to pursue other available remedies.
ARTICLE XIV
-----------
[RESERVED]
ARTICLE XV
----------
MISCELLANEOUS
-------------
15.1 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original but all of which
together will constitute one and the same document.
15.2 CAPTIONS AND SECTION HEADINGS. Captions and section headings are
for convenience only, are not a part of this Agreement and may not be used in
construing it.
15.3 WAIVERS. Any failure by any of the parties to comply with any of
the obligations, agreements or conditions set forth in this Agreement may be
waived by the other party or parties, but any such waiver will not be deemed a
waiver of any other obligation, agreement or condition contained herein.
15.4 RIGHT OF INSPECTION. From and after the date of this Agreement to
the Closing Date, Sellers will give to Purchaser and its counsel, accountants
and other representatives, full access during normal business hours to the
offices, properties, agreements, records and affairs of the Corporation, and
will furnish copies of all Contracts and other instruments as Purchaser or its
counsel may reasonably request. Such investigation will not affect the
warranties and representations of Sellers under this Agreement. All such
information will be treated confidentially
37
<PAGE> 42
and will be used only for the purposes intended. If the transactions
contemplated under this Agreement do not take place, all documents and other
property of the Corporation or Sellers will be returned and all disclosures and
information given to Purchaser as contemplated under this Agreement will be
treated as confidential and not disclosed to others unless disclosed publicly by
Sellers or other third parties without fault on the part of Purchaser, or unless
otherwise required by law.
15.5 AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS. Each of the parties
agrees to cooperate in the effectuation of the transactions contemplated under
this Agreement and to execute any and all additional documents to take such
additional action as is reasonably necessary or appropriate for such purposes.
15.6 ENTIRE AGREEMENT. This Agreement, including any certificate,
schedule, exhibit or other document delivered pursuant to its terms, constitutes
the entire agreement between the parties. There are no verbal agreements,
representations, warranties, undertakings or agreements between the parties, and
this Agreement may not be amended or modified in any respect, except by a
written instrument signed by the parties to this Agreement.
15.7 GOVERNING LAWS. This Agreement is to governed by and construed in
accordance with the internal laws of Manitoba, Canada.
15.8 KNOWLEDGE. All references to "knowledge" or "best knowledge", of a
party or "known to" a party means the actual knowledge of a party, or the
knowledge which a party would have if performing such party's duties in a
reasonable and prudent manner. Actual knowledge of any officer, director or
supervisory employee of a party will be imputed to, and deemed to be actual
knowledge of, that party.
15.9 PRESS RELEASES. Prior to the Closing, neither party will issue or
cause the publication of any press release or other public announcement with
respect to this Agreement or the transactions contemplated under this Agreement
without the prior consent of the other party first obtained; provided, however,
that nothing in this Agreement will prohibit either party from issuing or
causing publication of any press release or public announcement to the extent
that such party determines, on advice on counsel, that such action is required
by law, in which case the party making such determination will, if practicable
under the circumstances, use reasonable efforts to allow the other party
reasonable time to comment on such release or announcement in advance of its
issuance.
15.10 CURRENCY. Unless indicated to the contrary, all references in
this Agreement to Dollars and $ shall mean Canadian Dollars.
15.11 SCHEDULES. Any particular matter disclosed on a Schedule to this
Agreement shall be deemed to be disclosed on every other Schedule to this
Agreement, provided such other Schedule or Schedules relate to similar subject
matters.
38
<PAGE> 43
15.12 CONSENT. By their execution hereof, each of the Corporation and
each Seller consent to Waterlink's inclusion of the information concerning the
Corporation and the transactions contemplated by this Agreement in Waterlink's
registration statement to be filed with the United States Securities and
Exchange Commission in connection with Waterlink's initial public offering.
15.13 INVESTMENT CANADA FILING. Purchaser shall file with Investment
Canada within the prescribed time a notice of the transactions contemplated by
this Agreement.
39
<PAGE> 44
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date first above written.
WATERLINK, INC.
By: /S/ MICHAEL J. VANTUSKO
------------------------------
Its: /S/ CFO
------------------------------
"PURCHASER"
/s/ David Romanow
------------------------------------
David Romanow
/s/ Joe Romanow
------------------------------------
Joe Romanow
/s/ Brian Topnik
------------------------------------
Brian Topnik
/s/ Robert Jenkyns
------------------------------------
Robert Jenkyns
"SELLERS"
BIOCLEAR TECHNOLOGY, INC.
By: /s/ David Romanow
------------------------------
Its: /s/ Chairman, Sec./treas.
------------------------------
"CORPORATION"
40
<PAGE> 1
Exhibit 10.23
STOCK PURCHASE AGREEMENT
between
GREAT LAKES ENVIRONMENTAL, INC.
and
DAVID M. RICE
CONCERNING THE ACQUISITION OF
ALL THE OUTSTANDING SHARES OF
LANCO ENVIRONMENTAL PRODUCTS, INC.
April 14, 1997
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I PURCHASE PRICE OF SHARES: MANNER
OF PAYMENT.................................................................................1
1.1 Purchase Price of Shares.....................................................1
1.2 Manner of Payment............................................................1
ARTICLE II REPRESENTATIONS, WARRANTIES AND
AGREEMENTS OF SELLER.......................................................................2
2.1 Organization and Standing....................................................2
2.2 Conflicts; Consents..........................................................2
2.3 Capital Stock................................................................3
2.4 Title to Shares; Investments of the Corporation..............................3
2.5 Outstanding Options and Warrants.............................................3
2.6 Business Relations...........................................................3
2.7 Real Property................................................................3
2.8 Title to and Condition of Assets.............................................5
2.9 Financial Statements.........................................................5
2.10 Absence of Certain Changes...................................................5
2.11 Absence of Undisclosed Liabilities...........................................7
2.12 Taxes........................................................................7
2.13 Indebtedness to Officers, Directors and Shareholders.........................8
2.14 Articles of Incorporation and Bylaws........................................8
2.15 Corporate Minutes............................................................9
2.16 Brokerage and Finder's Fees..................................................9
2.17 Accounts Receivable..........................................................9
2.18 Employment Matters...........................................................9
2.19 No Defaults.................................................................10
2.20 Material Contracts..........................................................10
2.21 Purchase Orders.............................................................11
2.22 Indebtedness................................................................11
2.23 Litigation..................................................................11
2.24 Insurance...................................................................11
2.25 Transactions with Officers, Etc.............................................12
2.26 Employees...................................................................12
2.27 Trademarks, Copyrights and Similar Matters..................................12
2.28 Employee Benefit Plans and Other Plans......................................13
2.29 Environmental Matters.......................................................16
2.30 Bank Accounts...............................................................17
2.31 Compliance with Laws........................................................17
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
2.32 Powers of Attorney..........................................................17
2.33 Licenses and Rights.........................................................17
2.34 Schedule of Government Reports..............................................18
2.35 Products....................................................................18
2.36 Casualty Occurrences........................................................18
2.37 Inventory...................................................................18
2.38 Capital Expenditure Plans...................................................19
2.39 Material Misstatements or Omissions.........................................19
ARTICLE III REPRESENTATIONS AND WARRANTIES OF
PURCHASER.................................................................................19
3.1 Organization and Good Standing of Purchaser.................................19
3.2 Authority of Purchaser......................................................19
3.3 Investment Purpose..........................................................19
ARTICLE IV CONDITIONS PRECEDENT TO OBLIGATIONS
OF PURCHASER..............................................................................20
4.1 Representations True........................................................20
4.2 All Consents Obtained.......................................................20
4.3 Performance and Obligations.................................................20
4.4 Receipt of Documents by Purchaser...........................................20
4.5 No Litigation...............................................................22
4.6 Employment Agreement........................................................22
4.7 Delivery of Books and Records...............................................22
4.8 Absence of Changes..........................................................22
4.9 Real Property Lease.........................................................22
4.10 Escrow Agreement............................................................22
4.11 Purchaser's Review..........................................................22
4.12 Trade Name Assignment.......................................................22
4.13 Equipment Lease.............................................................23
4.14 Management Agreement........................................................23
ARTICLE V CONDITIONS PRECEDENT TO OBLIGATIONS
OF SELLER.................................................................................23
5.1 Representations True........................................................23
5.2 Receipt of Documents by Seller..............................................23
5.3 No Litigation...............................................................24
5.4 Real Property Lease.........................................................24
5.5 Agreements Regarding Sales Commissions and
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Used Equipment..............................................................24
5.6 Escrow Agreement............................................................24
5.7 License Agreement...........................................................24
ARTICLE VI CLOSING...................................................................................24
ARTICLE VII TERMINATION OF AGREEMENT..................................................................25
ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND
WARRANTIES: INDEMNIFICATION: DISPUTES...................................................26
8.1 Survival of Representations and Warranties..................................26
8.2 Seller's Indemnification....................................................26
8.3 Defense of Claim............................................................26
8.4 Purchaser's Indemnification.................................................27
8.5 Indemnification Basket......................................................27
8.6 Limitation on Indemnification...............................................27
ARTICLE IX CONDUCT PRIOR TO CLOSING DATE.............................................................28
9.1 Continuation of Business....................................................28
9.2 Preservation of Business....................................................29
9.3 Consents and Approvals......................................................29
ARTICLE X ASSIGNMENT, THIRD PARTIES, BINDING EFFECT.................................................30
ARTICLE XI EXPENSES..................................................................................30
ARTICLE XII NOTICES...................................................................................30
ARTICLE XIII REMEDIES NOT EXCLUSIVE....................................................................31
ARTICLE XIV NON-COMPETITION...........................................................................31
14.1 Non-Competition Agreement...................................................31
14.2 Disclosure of Confidential Information......................................32
ARTICLE XV MISCELLANEOUS.............................................................................33
15.1 Counterparts................................................................33
15.2 Captions and Section Headings...............................................33
15.3 Waivers.....................................................................33
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15.4 Right of Inspection.........................................................33
15.5 Amendments, Supplements or Modifications....................................33
15.6 Entire Agreement............................................................33
15.7 Governing Laws..............................................................33
15.8 Knowledge...................................................................33
15.9 Press Releases..............................................................34
</TABLE>
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement") is made this 14th day of
April, 1997, between Great Lakes Environmental, Inc., a Delaware corporation
("Purchaser") and David M. Rice ("Seller") the sole shareholder of Lanco
Environmental Products, Inc., a Michigan corporation (the "Corporation").
R E C I T A L S:
----------------
A. Seller owns all the issued and outstanding shares of capital stock
of the Corporation.
B. On the terms and subject to the conditions of this Agreement, and
subject to the performance by the parties of their respective obligations under
this Agreement, Seller desires to sell, and Purchaser desires to purchase, all
of the issued and outstanding shares of capital stock of the Corporation at the
"Closing" (as hereinafter defined) for the purchase price described in Article I
of this Agreement.
NOW, THEREFORE, Purchaser and Seller, intending to be legally bound,
agree as follows:
ARTICLE I
---------
PURCHASE PRICE OF SHARES: MANNER OF PAYMENT
-------------------------------------------
1.1 PURCHASE PRICE OF SHARES. On the terms and subject to the
conditions of this Agreement, Seller shall, with all transfer taxes of any kind
prepaid, convey, assign and transfer to Purchaser at the Closing all the Shares
(as defined in Section 2.3), free and clear of all liens, charges, security
interests, adverse claims, pledges, encumbrances and demands whatsoever.
Purchaser shall purchase all the Shares for a purchase price of Two Million Two
Hundred Thousand Dollars ($2,200,000.00) (the "Purchase Price").
1.2 MANNER OF PAYMENT. The Purchase Price will be paid as follows:
(a) One Hundred Thousand Dollars ($100,000.00) deposit which
has been paid and received by Seller upon the execution and delivery of
this Agreement (the "Deposit").
(b) Two Million Dollars ($2,000,000.00) payable to Seller at
the Closing by certified or official bank check in immediately
available funds or by wire transfer to an account designated by Seller.
(c) One Hundred Thousand Dollars ($100,000.00) by certified or
bank check in immediately available funds or by wire transfer to a bank
chosen by Seller that is reasonably satisfactory to Purchaser, as
escrow agent in connection with an interest bearing escrow fund
<PAGE> 7
established pursuant to an Escrow Agreement in substantially the form
attached to this Agreement as EXHIBIT "A" (the "Escrow Agreement").
ARTICLE II
----------
REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF SELLER
----------------------------------------------------
Seller, represents and warrants to, and agrees with, Purchaser as
follows:
2.1 ORGANIZATION AND STANDING.
(a) The Corporation is a corporation duly organized, validly
existing and in good standing under the laws of the State of Michigan.
The Corporation has full power and authority to carry on its business
as and where now conducted and to own or lease and operate its
properties at and where now owned or leased and operated by it, and is
duly qualified to do business and is in good standing in every
jurisdiction in which the property owned, leased or operated by it, or
the nature of the business conducted by it, makes such qualification
necessary.
(b) Set forth on Schedule 2.1 is a true and correct list of
all jurisdictions in which the Corporation is qualified to do business
as a foreign corporation and each jurisdiction where the Corporation
does business or owns or leases property.
2.2 CONFLICTS; CONSENTS.
(a) The execution, delivery and consummation of this Agreement
by Seller (i) does not now and will not, with the passage of time, the
giving of notice or otherwise, result in a violation or breach of, or
constitute a default under, any term or provision of any indenture,
mortgage, deed of trust, lease, instrument, order, judgment, decree,
rule, regulation, law, contract, agreement or any other restriction to
which Seller or the Corporation is a party or to which Seller or any of
Seller's assets is subject or bound or to which the Corporation or any
of its assets is subject or bound, (ii) will not result in the creation
of any lien or other charge upon any assets of the Corporation, and
(iii) will not result in any acceleration or termination of any loan or
security interest agreement to which the Corporation is a party or to
which the Corporation or any of its assets is subject or bound.
(b) Except as may be listed on Schedule 2.2, no approval or
consent of any person, firm or other entity or governmental body is or
was required to be obtained by Seller for the authorization of this
Agreement or the consummation by Seller of the transactions
contemplated by this Agreement. Seller is authorized to enter into this
Agreement and consummate the transaction contemplated hereby and upon
the execution hereof, this Agreement will constitute the legal, valid
and binding obligation of Seller enforceable against Seller in
accordance with its terms.
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<PAGE> 8
2.3 CAPITAL STOCK. The Corporation is authorized to issue 60,000 Common
Shares without par value of which 1,000 shares are issued and outstanding (the
"Shares"). All the Shares are duly authorized, validly issued, fully paid and
nonassessable and were not issued in violation of preemptive or any other
rights, including any rights under any federal or state securities laws, of any
shareholder.
2.4 TITLE TO SHARES; INVESTMENTS OF THE CORPORATION.
(a) All the Shares are owned by Seller of record and
beneficially with good and marketable title thereto, free and clear of
all liens, charges, security interests, adverse claims, pledges,
encumbrances and demands whatsoever.
(b) The Corporation has no direct or indirect equity, debt or
other interest in any entity, corporate or otherwise, or any right,
warrant or option to acquire any such interest.
2.5 OUTSTANDING OPTIONS AND WARRANTS. There are no subscriptions,
options, warrants, rights, puts, calls, commitments or agreements (respecting
issuance, redemption, repurchase, voting or otherwise) relating to, nor any
outstanding securities convertible into, any shares of capital stock or other
equity interest of the Corporation, or into any such convertible securities, and
neither Seller nor the Corporation has agreed to issue, purchase, sell or
transfer any of same, except as provided in this Agreement.
2.6 BUSINESS RELATIONS. Other than as set forth on Schedule 2.6(a), the
Corporation is not required, in the ordinary course of business, to provide any
bonding or any other financial security arrangements in connection with any
transactions with any customers or suppliers. Neither Seller nor the Corporation
has received any notice of any disruption (including, without limitation,
delayed deliveries or allocations by suppliers) in the availability of any
materials or products used in the Corporation's business and has no reason to
believe that any such disruption will occur. There are no sole source suppliers
of goods, equipment or services used by the Corporation (other than public
utilities) with respect to which practical alternative sources of supply are
unavailable. Other than as set forth on Schedule 2.6(b), no single customer of
the Corporation accounted for greater than five percent (5%) of the
Corporation's gross revenues for either the most recently completed fiscal year
or the portion of the current fiscal year ended February 28, 1997.
2.7 REAL PROPERTY.
(a) Schedule 2.7(a) is a true and complete list of (i) all
real property leases to which the Corporation is a party and (ii) all
options, deeds of trust, deeds of declaration, mortgages and land
contracts pursuant to or in which the Corporation has any interest
(collectively, the "Real Property"). Seller has furnished to Purchaser
or its counsel true and complete copies of each written contract and a
written description of each oral contract relating to the list set
forth on Schedule 2.7(a). The Corporation owns no real property.
3
<PAGE> 9
(b) With respect to the leased property comprising the Real
Property including all leasehold improvements (collectively, the
"Leased Property"), except as set forth on Schedule 2.7(b):
(i) All leases are in writing and are duly executed
and, where required, witnessed, acknowledged and recorded to
make them valid and binding and in full force and effect for
their full term, and none have been modified, amended, sublet
or assigned;
(ii) The rental set forth in each such lease is the
actual rental being paid, and there are no separate agreements
or understandings with respect to the same not set forth on
Schedule 2.7(b);
(iii) Where the Corporation is the lessee, the lessee
under each such lease has the full right to exercise any
renewal option and on due exercise will be entitled to enjoy
the use of the leased premises for the full term of such
renewal option, and such renewal option does not terminate on
assignment of such lease;
(iv) There is no default by the Corporation or any other
party which affects the Leased Property;
(v) Where the Corporation is the lessee, on performance
by the lessee of the terms of each lease (all of which terms
have been fully performed by the lessee as of the date of this
Agreement and will have been fully performed as of the Closing
Date), the lessee has the full right to enjoy the use of the
premises demised for the full term of the lease without
disturbance by any other party, and there are no written or
oral contracts between the Corporation and any third party
relating to any claim by such third party of any right to all
or any part of the interest of the Corporation in any
leasehold estate or otherwise relating to the use and
occupancy by the Corporation of such estate;
(vi) Except as set forth on Schedule 2.7(b), all
security deposits required by such leases have been made and
have not been refunded or returned, or their forfeiture
claimed, in whole or in part, by any lessor;
(vii) Where the Corporation is the lessee, all leasehold
improvements are in good operating or working condition and
repair, after taking into account ordinary wear and tear, and
are adequate for the operation of the business of the
Corporation as presently conducted. All contributions required
to have been paid by any lessor of property in respect of any
leasehold improvements have been paid;
(c) The Corporation will obtain from all lessors of any
leasehold interests comprising the Real Property a so-called "estoppel
certificate" (the "Estoppel Certificates") in the form attached as
EXHIBIT "B" to this Agreement.
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<PAGE> 10
2.8 TITLE TO AND CONDITION OF ASSETS. Except as set forth on Schedule
2.8, the Corporation owns and possesses all right, title and interest in and to
its assets, including, without limitation (i) valid and subsisting leasehold
interests in all leasehold estates comprising the Real Property, and (ii) good
and merchantable title to all properties and assets other than the Real
Property, in each case free and clear of all conveyances, conditions, easements,
liens, charges, security interests, adverse claims, encumbrances, encroachments,
reservations, easements, limitations, servitudes, other title defects or
restrictions of any nature. All tangible assets of the Corporation are in the
Corporation's possession or under its control, and to the best of Seller's
knowledge, information and belief, all equipment used by the Corporation is in
good operating condition and repair, subject only to routine maintenance, and is
fit and adequate for the purposes intended. The Corporation enjoys peaceful and
quiet possession of its assets pursuant to or by all of the deeds, bills of
sale, leases, licenses and other agreements under which it is operating its
business and such assets constitute all of the property or assets necessary to
conduct the business of the Corporation as now conducted.
2.9 FINANCIAL STATEMENTS. Prior to the date of this Agreement, Seller
has provided Purchaser with the financial statements of the Corporation listed
below (the "Financial Statements") and will provide to Purchaser monthly
financial statements for the months after December 31, 1996 (the "New Monthly
Financial Statements") as soon as practicable after the end of each month:
(a) Audited Balance Sheets at December 31, 1995 and 1996; and
(b) Audited Statement of Operations for the years ended
December 31, 1995 and 1996.
The Financial Statements (and, with respect to the New Monthly
Financial Statements, when delivered, will or will be as the content may
require) (i) have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods, (ii) present fairly
in all material respects, the Corporation's financial position, results of its
operations and changes in stockholder's equity and cash flows at and for the
periods therein specified, (iii) are true and complete, and (iv) are consistent
with the books and records of the Corporation.
2.10 ABSENCE OF CERTAIN CHANGES. Since December 31, 1996, the
Corporation has actively conducted its business in the ordinary and regular
course consistent with past practice. Since such date, there has not been any
material adverse change in the business, condition (financial or otherwise),
assets, liabilities, results of operations or prospects of the Corporation. To
Seller's knowledge, there has not occurred any event or governmental regulation
or order which could cause such a change, nor, to Seller's knowledge, is the
occurrence of any such event, regulation or order threatened. Except as set
forth on Schedule 2.10, without limiting the generality of the foregoing, since
December 31, 1996, there has not been:
(a) Any increase made or promised in the compensation or other
remuneration payable or to become payable by the Corporation to any of
its employees, agents or partners;
5
<PAGE> 11
(b) Any mortgage or pledge of, or any other lien, charge or
encumbrance of any kind, on any of the assets, tangible or intangible,
of the Corporation;
(c) Any sale or transfer of any assets, except for sales of
inventory in the ordinary course of business, or settlement,
cancellation or release of any indebtedness owing to the Corporation or
of any other claims of the Corporation;
(d) Any sale, license, assignment or transfer by the
Corporation of any patents, trademarks, trade names or other similar
intangible assets;
(e) Any amendments or termination of any material contract,
agreement or license to which the Corporation is a party or to which
the Corporation or any of its assets are subject or bound;
(f) Any commitment made (through negotiations or otherwise) or
any liability incurred to any labor organization by the Corporation;
(g) Any payment, declaration or setting aside by the
Corporation of dividends or a return of capital or any distribution by
the Corporation of any cash or other assets to any shareholder in
redemption of or as the purchase price for any of the Corporation's
capital stock or equity or in discharge or cancellation in whole or in
part of any indebtedness owing (whether in payment of principal,
interest or otherwise) to any shareholder;
(h) Any discharge or satisfaction by the Corporation of any
lien, encumbrance, obligation or liability (accrued, absolute, fixed or
contingent), other than those shown on the February 28, 1997 balance
sheet of the New Monthly Financial Statements that have been discharged
or satisfied in the ordinary course without acceleration and other than
those incurred and discharged in the ordinary course of business
consistent with past practice;
(i) Any material transaction entered into by the Corporation
other than in the ordinary course of business consistent with past
practice;
(j) Any institution by the Corporation of a bonus, stock
option, profit-sharing, pension plan or similar arrangement or any
changes in any such existing plans;
(k) Any incurrence by the Corporation (whether discharged or
not) of any obligation or liability (whether accrued, absolute, fixed
or contingent) other than current liabilities incurred, and obligations
entered into, in the ordinary course of business consistent with past
practice;
(l) Any adverse change in collection loss experience;
(m) Any material loss, damage or destruction to any of the
Corporation's properties (whether or not covered by insurance) or any
labor trouble;
6
<PAGE> 12
(n) Any payments in cash or otherwise by the Corporation to
Seller or any affiliate pursuant to a tax sharing arrangement or any
other type of intercompany agreement; or
(o) Any change in accounting principles or practices from
those utilized in the preparation of the Financial Statements.
2.11 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth on the
December 31, 1996 balance sheet of the New Monthly Financial Statements, or on
Schedule 2.11, the Corporation is not obligated for, nor are any of its assets
or properties subject to, any liabilities or adverse claims or obligations,
absolute or contingent, except those incurred in the ordinary course of business
since December 31, 1996, and the Corporation is not in default with respect to
any terms or conditions of any material liability or obligation. There are no
facts known to Seller that might reasonably serve as a basis, in whole or in
part, for any material liabilities or obligations not disclosed in this
Agreement, in the Financial Statements, in the New Monthly Financial Statements
or in the Schedules attached hereto.
2.12 TAXES.
(a) The Corporation, has filed, and will file, on a timely
basis, all income, franchise, sales and other tax returns and reports
of every nature required to be filed by it (including any consolidated
or combined return required to be filed by it and any affiliated person
or entity) accurately reflecting all taxes owing to the United States
or any other government or any government subdivision, state or local,
or any other taxing authority ("Tax Returns"), and has paid in full or
made adequate provision in the Financial Statements and the New Monthly
Financial Statements for the payment of all taxes (including penalties,
additions to tax and interest) for which it has or may have liability.
All such Tax Returns are true, correct and complete in all respects.
Seller has no knowledge of any unassessed tax deficiency proposed or
threatened against the Corporation as a result of the operation of its
business. There are no liens on the Corporation's assets as a result of
any tax liabilities except for taxes not yet due and payable. There
are, and after the date of this Agreement will be, no tax deficiencies
(including penalties, additions to tax and interest) of any kind
assessed against or relating to the Corporation with respect to any
taxable period ending on or before the Closing Date. There are, and
after the date of this Agreement, will be no federal income tax
deficiencies assessed against the Corporation pursuant to Treasury
Regulations Section 1.1502-6. There are, and after the date of this
Agreement, will be no other tax deficiencies relating to Tax Returns
which include the Corporation for periods ending on or before the
Closing Date. As to all tax periods, or portions thereof, which end
prior to, or include, the Closing Date for which no Tax Returns are yet
due, the liability of the Corporation for taxes allocable to periods
(or portions thereof) ending on or before the Closing Date does not
exceed the amount accrued on the Financial Statements for such taxes.
The liability of the Corporation for taxes has not increased since
December 31, 1996, except in the ordinary course of business.
7
<PAGE> 13
(b) The Corporation is not a party to any action or proceeding
by any governmental authority for the assessment or collection of
taxes, nor has any such event been asserted or threatened. The
Corporation has not filed any consent of the type described under
Section 341(f) of the Internal Revenue Code of 1986, as amended (the
"Code"), nor is it subject to any accumulated earnings penalties. The
Corporation has not made any payments, is not obligated to make any
payments, or is not a party to any agreement that under certain
circumstances could oblige it to make any payments that would not be
deductible under Section 280G of the Code. The Corporation was never a
member of any unitary group for purposes of any state income or
franchise tax laws. The Corporation has not been a United States real
property holding corporation within the meaning of Code Section
897(c)(2) during the applicable period specified in Code Section
897(c)(1)(A)(ii).
(c) Except as set forth on Schedule 2.12, there are no
outstanding agreements or waivers extending the statutory period of
limitations applicable to any federal, state, local, or foreign Tax
Return of the Corporation for any period. Neither the Internal Revenue
Service nor any state, local or foreign taxing authority has audited
any tax return or report filed by the Corporation.
(d) The Corporation has furnished to Purchaser complete and
correct copies of all Tax Returns filed by the Corporation for all
taxable years beginning after December 31, 1994.
(e) Seller has furnished to Purchaser complete and correct
copies of all audit reports (or portions thereof) received by Seller
from the U.S. Treasury Department which relate to the Corporation for
any taxable period beginning after December 31, 1991. Seller has
furnished to Purchaser complete and correct copies of all audit reports
(or portions thereof) received by Seller or the Corporation from any
state, local or foreign taxing authority, which relate to the
Corporation for any taxable period beginning after December 31, 1991.
(f) Schedule 2.12 sets forth all tax elections made by the
Corporation, all adjustments under Section 481(a) of the Code which
will affect the taxes of Purchaser for all taxable years which end on
or after the Closing Date and all tax rulings or closing agreements to
which the Corporation is a party. Schedule 2.12 sets forth all
jurisdictions in which the Corporation has filed or will file state
income or franchise tax returns for each taxable period, or portion
thereof, ending on or before the Closing Date.
(g) There are no tax liens currently in existence with respect
to the Corporation. There are no tax sharing agreements or similar
arrangements in effect that include the Corporation.
2.13 INDEBTEDNESS TO OFFICERS, DIRECTORS AND SHAREHOLDERS. Except as
set forth on Schedule 2.13, the Corporation is not indebted to any of its
shareholders, officers or directors (or to members
8
<PAGE> 14
of their immediate families) in any amount whatsoever other than for salaries
payable or for expenses incurred on behalf of the Corporation in the ordinary
course of business.
2.14 ARTICLES OF INCORPORATION AND BYLAWS. True, accurate and complete
copies of the Articles of Incorporation and Bylaws of the Corporation, together
with all amendments thereto, have been delivered to Purchaser or its counsel.
2.15 CORPORATE MINUTES. Seller has furnished or made available to
Purchaser and its counsel the corporate record books of the Corporation and the
same are accurate and complete and reflect all resolutions adopted and all
actions taken, authorized or ratified by the shareholders and directors of the
Corporation. Copies of all corporate minutes of meetings held and of all written
actions taken after the date of this Agreement will be furnished to Purchaser
promptly, and in all events, prior to the Closing Date.
2.16 BROKERAGE AND FINDER'S FEES. Neither Seller nor any officer,
director or agent of the Corporation has incurred any liability to any broker,
finder or agent for any brokerage fees, finder's fees, or commissions with
respect to the transactions contemplated by this Agreement.
2.17 ACCOUNTS RECEIVABLE.
(a) Seller has previously delivered to Purchaser an aging
schedule as of a date not more than thirty (30) days prior to the date
of this Agreement, which is true, correct and complete, of the accounts
receivables, both trade and non-trade, of the Corporation as of that
date. Seller will update the list as of a date not more than five (5)
days prior to the Closing Date. The reserves for doubtful receivables
and uncollectible accounts that will be reflected on the books of the
Corporation as of the Closing Date will not exceed the greater of (i)
five percent (5%) of the then aggregate accounts receivable, or (ii)
Twenty-five Thousand Dollars ($25,000.00), and will be sufficient to
provide for any losses that may arise in connection with the collection
of the accounts receivable. The accounts receivable as reflected on the
books of the Corporation as of the Closing Date, net of such reserves,
will be fully collectible in the ordinary course of business within
ninety (90) days after the Closing Date or such other period of time
per the payment terms related to such account receivable, if different,
as set forth on such aging schedule, without resort to legal
proceedings. All of such accounts receivable will represent valid
claims that have arisen in the ordinary course of business.
(b) Unless an invoice is delivered to the Corporation with a
payment indicating otherwise, all payments received by Purchaser will
be applied to a customer's oldest outstanding accounts receivable.
(c) In the event that Seller indemnifies Purchaser pursuant to
Section 8.2 of this Agreement by reason of Seller's breach of the
representations and warranties contained in this Section 2.17,
Purchaser will cause the corporation to assign to Seller all the
Corporation's right, title and interest in and to the uncollected
accounts receivable giving rise
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<PAGE> 15
to said breach, and any other documentation related thereto that is
necessary for Seller's collection of same.
2.18 EMPLOYMENT MATTERS.
(a) Except as set forth on Schedule 2.18, the Corporation is
not a party to, participant in, or bound by, any collective bargaining
agreement, union contract or employment, bonus, deferred compensation,
insurance, pension, profit sharing or similar personnel arrangement,
any stock purchase, stock option or other stock plans or programs or
any employee termination or severance arrangement.
(b) Except as set forth on Schedule 2.18, the employment by
the Corporation of any person (whether or not there is a written
employment agreement) may be terminated for any reason whatsoever not
inconsistent with current law, without penalty or liability of any kind
other than accrued vacation pay.
(c) Except as set forth on Schedule 2.18, there are no active,
pending or, to the best of Seller's knowledge, threatened
administrative or judicial proceedings under Title VII of the Civil
Rights Act of 1964, the Age Discrimination in Employment Act, the Fair
Labor Standards Act, the Occupational Safety and Health Act, the
National Labor Relations Act or any other foreign, federal, state or
local law (including common law), ordinance or regulation relating to
employees of the Corporation. For purposes of this subsection (c),
Seller's knowledge means the actual knowledge of Seller after
reasonable inquiry is made to Charles Meier ("Meier").
(d) There are no pending or, to the best of Seller's
knowledge, threatened, labor difficulties.
2.19 NO DEFAULTS. The Corporation is not in default (nor is any such
default alleged to exist) under the terms of any material written or oral
contract, agreement, lease, license, mortgage, deed of trust, note, guaranty,
instrument or understanding (collectively, "Contracts") to which it is a party
or to which any of its assets, business or operations is subject, nor, to the
best of Seller's knowledge, is any condition or event threatened, which, after
notice or the passage of time, or both, would constitute a default under any
Contract. To Seller's knowledge, no such default, condition or event exists or
is alleged to exist with respect to the performance of any obligation of any
other party to any of such Contracts. For purposes of this Section 2.19,
Seller's knowledge means the actual knowledge of Seller after reasonable inquiry
is made to Meier.
2.20 MATERIAL CONTRACTS.
(a) Schedule 2.20(a) is a true and correct list of each
Contract to which the Corporation is a party or by which any of its
assets, businesses or operations is bound or affected. Schedule 2.20(a)
includes a description of any consents or approvals required of third
parties under the terms of such Contracts for the consummation of the
transactions
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contemplated by this Agreement. Schedule 2.20(a) excludes any Contract
that (i) may be canceled by the Corporation on thirty (30) days' notice
or less without incurring a liability or obligation on the part of the
Corporation for such cancellation, or (ii) involves or is reasonably
expected to involve the payment of consideration having an aggregate
value of less than Fifteen Thousand Dollars ($15,000.00). A true,
correct and complete copy of each written, and a description of each
oral, Contract, so listed has been delivered to Purchaser or its
counsel.
(b) Schedule 2.20(b) is a true and correct list of each
Contract with a customer of the Corporation that contains provisions
(i) providing for payment terms to the Corporation of forty-five (45)
days or greater, (ii) permitting the customer to retain any portion of
the purchase price for the products or services to be provided thereby
as security for warranty claims or for any other purpose, or (iii)
providing for liquidated or stipulated damages.
2.21 PURCHASE ORDERS. Schedule 2.21 is a true and complete list of all
purchase orders under which the Corporation is or will become obligated to pay
any particular vendor an aggregate sum in excess of Ten Thousand Dollars
($10,000.00).
2.22 INDEBTEDNESS. Schedule 2.22 is a true and complete list of all
indebtedness, including, without limitation, trade accounts payable owed or to
be owed by the Corporation, including a description of the terms of payment,
and, if such indebtedness is secured, a description of all properties or other
assets pledged, mortgaged or otherwise hypothecated (voluntarily or
involuntarily) as security.
2.23 LITIGATION. Schedule 2.23 is a true and complete list of all
administrative or judicial proceedings to which the Corporation is a party or,
to the knowledge of Seller, to which it is threatened to be made a party which
relate, directly or indirectly, to any of the Corporation's assets, including,
without limitation, proceedings that could affect title to or interests in the
assets. There is no action, suit, claim, demand, arbitration or other proceeding
or investigation, administrative or judicial, pending or threatened against or
affecting the Corporation or any of its assets, including, without limitation,
any relating to so-called product liability, which, if adversely determined or
resolved, would have an adverse effect on the business, assets, condition
(financial or otherwise), results of operations or prospects of the Corporation,
or any provisions of, or the validity of, or rights under, any leases or other
operating agreements, licenses, permits or grants of authority of the
Corporation. Neither Seller nor the Corporation has received notice that the
Corporation is the subject of any governmental investigation and the Corporation
is not subject to, nor is it or has it been in default with respect to, any
order, writ, injunction or decree of any court, or of any federal, state, local
or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign. Schedule 2.23 indicates which of the
matters listed are covered by valid insurance and the extent of such coverage.
For purposes of this Section 2.23, Seller's knowledge means the actual knowledge
of Seller after reasonable inquiry is made to Meier.
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<PAGE> 17
2.24 INSURANCE. Schedule 2.24 is a true and correct list of all the
policies of insurance covering the business, properties and assets of the
Corporation presently in force (including as to each (i) risk insured against,
(ii) name of carrier, (iii) policy number, (iv) amount of coverage, (v) amount
of premium, (vi) expiration date and (vii) the property, if any, insured),
indicating as to each whether it insures on an "occurrence" or a "claims made"
basis. All of the insurance policies set forth on Schedule 2.24 are in full
force and effect and all premiums, retention amounts and other related expenses
due have been paid, and the Corporation has not received any notice of
cancellations with respect to any of the policies. The Corporation has not been
refused any insurance by any insurance carrier to which it has applied for
insurance during the last five (5) years. There are no circumstances existing
which would enable any insurer to avoid liability under any of the Corporation's
policies.
2.25 TRANSACTIONS WITH OFFICERS, ETC.
(a) Schedule 2.25(a) is a true and correct list of the
ownership of the Corporation in any entity that has any existing
contractual relationship, oral or written, or other business
relationship with Seller.
(b) Schedule 2.25(b) is a true and correct list of all
Contracts (oral or written), including, but not limited to, any loans
(other than those set forth on Schedule 2.13 of this Agreement or not
required to be set forth thereon) or leases, to which the Corporation
is a party and to which any of the officers, directors or other
employees or shareholders of the Corporation, or members of their
immediate families or other corporations, partnerships or other
entities in which any of them has a material interest, is also a party.
Schedule 2.25(b) includes a list of indebtedness of any such person or
entity to the Corporation.
(c) Except as set forth on Schedule 2.25(c), none of the
Corporation or any officer, director, employee or shareholder of the
Corporation, or members of their immediate families or other
corporations, partnerships or other entities in which any of them has a
material interest, has any direct or indirect interest in any
competitor, supplier or customer of the Corporation or in any person,
firm or entity from whom or to whom the Corporation leases any
property, or in any other person, firm or entity with whom the
Corporation transacts business of any nature.
2.26 EMPLOYEES. Schedule 2.26 is a true and correct list of all
employees of the Corporation, their accrued vacation and sick pay, the nature of
their duties and the date and amount of their last increase in compensation. A
true, correct and complete copy of each written employment contract and a
description of each oral employment agreement with any employee has been
delivered to Purchaser or its counsel. As used in this Agreement, the term
"employees" includes employees, salesmen, agents, sales representatives and all
other persons associated with the Corporation.
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2.27 TRADEMARKS, COPYRIGHTS AND SIMILAR MATTERS.
(a) The Corporation has never been charged with infringement
or violation of any patent, trademark, service mark, trade name or
copyright. The Corporation is not using or has not in any way made use
of any patentable or unpatentable invention, or any confidential
information or trade secret, of any former employer of any present or
past employee of the Corporation. All patents, trademarks, service
marks, trade names and copyrights (the "Specified Items"), and all
applications or registrations (including those whose use is limited to
one or more states of the United States), owned or used by the
Corporation are listed on Schedule 2.27 and, to the extent indicated,
have been duly registered in, filed in or issued by the United States
Patent Office or the corresponding agency or office of each of such
states. Except as indicated on Schedule 2.27, the Corporation is the
sole and exclusive owner of, or has the sole and exclusive right to
use, the Specified Items, except for the rights of licensees (whose
names and addresses are listed on Schedule 2.27). Except as set forth
on Schedule 2.27, the Corporation does not use any of the Specified
Items by consent of any other party and the same are free and clear of
any attachments, liens, claims, encumbrances or agreements. Except as
listed on Schedule 2.27, there are no claims or demands of any other
person, firm or corporation pertaining to any of the Specified Items,
and no proceedings have been instituted, are pending or, to the
knowledge of Seller, are threatened which challenge the right of the
Corporation in respect of any of the Specified Items. None of the
Specified Items infringes on, or, to the knowledge of Seller, is being
infringed on by others, and none of the Specified Items is subject to
any outstanding order, decree, judgment, stipulation or agreement
restricting the scope of its use.
(b) The Corporation has valid rights to use its corporate
name. The Corporation does not use such name by consent of any other
person or entity, and uses such name free and clear of any attachments,
liens, claims, encumbrances or agreements. There are no claims or
demands of any other person or entity pertaining to the use of the name
and no proceedings have been instituted or, to the knowledge of Seller,
are threatened, which challenge the right of the Corporation in respect
of such name; and the use of such name by the Corporation does not
infringe on or, to the knowledge of Seller, is not being infringed on
by others, and is not subject to any outstanding order, decree,
judgment, stipulation or agreement restricting the scope of its use.
(c) True, correct and complete copies of all patents,
trademarks, service marks, trade names and copyrights, and of all
related applications or registrations, that are listed on Schedule 2.27
have been delivered to Purchaser or its counsel.
2.28 EMPLOYEE BENEFIT PLANS AND OTHER PLANS. Except for the plans or
arrangements listed on Schedule 2.28 (hereinafter referred collectively to as
the "Plans" and individually as the "Plan"), the Corporation does not, directly
or indirectly, maintain, sponsor or have an obligation or liability with respect
to, any "employee benefit plan," as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), executive
compensation or incentive plan, bonus or severance arrangement, employment
contract, collective bargaining agreement, union
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contract, deferred compensation agreement, stock purchase or incentive plan or
arrangement, or other employee benefit plan or arrangement. For the purposes of
this Agreement, "Controlled Group" shall mean the Seller, the Corporation and
any trade or business, whether or not incorporated, which is treated together
with Seller or the Corporation under Section 4001(b)(1) of ERISA or Sections
414(b), (c), (m) or (o) of the Code. With respect to each Plan identified on
Schedule 2.28:
(a) All applicable ERISA and Code requirements with respect to
such Plan as to the filing of reports, documents and notices with the
Secretary of Labor, the Pension Benefit Guaranty Corporation, and the
Secretary of the Treasury, or the furnishing of such documents to
participants or beneficiaries, have been complied with in all respects
by such Plan or its administrators;
(b) No member of the Controlled Group, Plan, fiduciary of such
Plan or administrator of such Plan, has taken any action, or failed to
take any action, which action or failure could subject the Corporation,
or any employee of the Corporation to any liability for breach of any
fiduciary duty, or for any prohibited transaction (as defined in
Section 4975 of the Code), with respect to or in connection with such
Plan;
(c) There are no actions, suits or claims pending (other than
routine claims for benefits) or threatened against such Plan, the
Corporation, Seller, or against any fiduciary of such Plan;
(d) Such Plan, the fiduciaries of such Plan, Controlled Group
members and administrators of such Plan have at all times complied with
applicable requirements of ERISA, the Code, and any other applicable
law (including the Health Maintenance Organization Act of 1973, as
amended) governing such Plan, and such Plan has at all times been
properly administered in accordance with all such requirements of law
and in accordance with its terms to the extent consistent with all such
requirements of law;
(e) The Plan is not a "multiemployer plan" as described in
Section 3(37) of ERISA or Section 414(f) of the Code, nor is it subject
to Title IV of ERISA;
(f) All bonding required by applicable provisions of ERISA
with respect to the Plan has been obtained and is in full force and
effect;
(g) No trust associated with the Plan has earned any
"unrelated business taxable income" (as such term is defined in Section
512 of the Code and the regulations thereunder) or "unrelated debt
financed income" (as such term is defined in Section 514 of the Code
and regulations thereunder);
(h) If the Plan is an "employee pension benefit plan" (as
defined in ERISA Section 3(2)), the Plan and its associated trust
complies with the applicable provisions of the Code (including, but not
limited to, Code Sections 401(a), 401(a)(4), 410(b), 401(a)(26) and
501(a)), has received a favorable determination letter from the
Internal Revenue Service
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<PAGE> 20
stating that the Plan qualifies under Section 401(a) and that the
associated trust, if any, qualifies under Section 501(a), has been
timely amended (and the amendment has been submitted to the Internal
Revenue Service for a favorable determination letter) with respect to
changes required by the Tax Equity and Fiscal Responsibility Act of
1982, the Retirement Equity Act of 1984 and the Tax Reform Act of 1984
and is being maintained in accordance with the changes required by the
previously described Acts, the Tax Reform Act of 1986 and the Omnibus
Budget Reconciliation Act of 1987, and subsequent legislation and
regulations;
(i) The Plan has not incurred any "accumulated funding
deficiency," as defined in Section 301(a)(2) of ERISA whether or not
waived;
(j) The Plan does not (i) provide for non-terminable or
non-alterable medical benefits for employees, dependents or retirees or
(ii) provide any benefits for any person upon or following retirement
or termination of employment except as otherwise required by Part 6 of
Subtitle B of Title I of ERISA or Section 4980B of the Code (herein
collectively referred to as "COBRA"), and then only to the extent the
person pays the "applicable premium" (as defined in Code Section
4980B(f)(4)) for such coverage;
(k) No events or changes have occurred or are expected to
occur with respect to the Plan that would cause an increase in the cost
of providing the benefits under the Plan;
(l) Full payment has been made of all amounts which Seller,
the Corporation or other member of the Controlled Group, is required,
under applicable law or under the Plan, to have paid as a contribution
or a benefit for the plan years of the Plan ended prior to the date
hereof. All contributions required to be made by, and all other
liability of, the Corporation with respect to the Plan for the periods
covered by the Financial Statements shall have been set forth on the
appropriate Financial Statement in accordance with generally accepted
accounting principles. Benefits under the Plan are as represented and
have not been increased subsequent to the date as of which documents
have been provided;
(m) The consummation of the transactions contemplated by this
Agreement will not (i) entitle any current or former employee or
officer of the Corporation to severance pay, unemployment compensation
or any other payment, (ii) accelerate the time of payment or vesting
under the Plan, (iii) increase the amount of compensation due any such
employee or officer, (iv) except as specifically set forth herein,
directly or indirectly cause the Corporation to transfer or set aside
any assets to fund or otherwise provide for the benefits under the Plan
for any current or former employee, officer or director, or (v) result
in any non-exempt prohibited transaction described in ERISA Section 406
or Code Section 4975;
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<PAGE> 21
(n) Seller has delivered or caused to be delivered to
Purchaser or Purchaser's counsel true and correct copies of the
following with respect to the Plan:
(i) A copy of the Plan and amendments thereto to the
date hereof;
(ii) A copy of each trust agreement and insurance
contract pertaining to the investment of the assets, if any,
of the Plan or the payment of benefits thereunder, including
all amendments to such documents to the date hereof;
(iii) The most recent determination letter issued by the
Internal Revenue Service with respect to the Plan for which a
determination letter has been issued and any pending
determination letter request with respect to the Plan;
(iv) The three (3) most recent Internal Revenue Service
Form 5500 series annual return/reports, including all
applicable Schedules and audited financial statements, filed
with respect to the Plan; and
(v) A copy of the latest summary plan description
(within the meaning of Section 10(a)(1) of ERISA) for the Plan
and each summary of material modifications (within the meaning
of Section 101(b)(2) of ERISA) thereto, each of which has been
provided to employees and filed with the Department of Labor.
2.29 ENVIRONMENTAL MATTERS.
(a) Definitions. For purposes of this Section:
(i) "Contaminant" means any substance or waste
containing hazardous substances, pollutants or contaminants as
those terms are defined in the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section
U.S.C. 9601 ET SEQ., and any other substance similarly
defined or identified in any other federal, state or local
laws, rules or regulations governing the manufacture, import,
use, handling, storage, processing, release or disposal of
substances or wastes deemed hazardous, toxic, dangerous or
injurious to public health or to the environment. This
definition includes asbestos-containing material and
petroleum or petroleum-based products.
(ii) "Requirements of Law" means any federal, state or
local law, rule, regulation, permit, agreement, order or other
binding determination of any governmental authority relating
to the environment, public health or safety.
(iii) "Release" has the same meaning as in the
Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section U.S.C. 9601 ET SEQ.
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<PAGE> 22
(b) Except as set forth on Schedule 2.29(b):
(i) with the exception of the storage of paint and
paint related thinners, solvents and the like used in the
ordinary course of business, the Corporation has not caused or
allowed any Contaminant to be used, manufactured, stored,
placed, processed or released on or off-site of any of the
Real Property listed on Schedule 2.7(a);
(ii) the Real Property is in compliance with all
applicable Requirements of Law;
(iii) neither the Corporation, nor the Real Property, nor
any real property owned or leased by the Corporation in the
past or in which the Corporation has had any interest in the
past, are the subject of any notice, order or agreement
regarding any remedial action or the Release, threatened
Release or presence of a Contaminant; and
(iv) neither the Corporation, nor the Real Property are
subject to any contingent liability in connection with the
Release, threatened Release, or presence of any Contaminants
on or off-site of the Real Property.
(c) Except as set forth on Schedule 2.29(c):
(i) the Corporation has obtained all environmental,
health and safety permits necessary, and made all
notifications necessary, for the current use of its assets;
(ii) all such permits and notifications are in good
standing and the Corporation has made timely application for
renewal of such permits where necessary;
(iii) the Corporation is in compliance with all terms
and conditions of such permits and notifications; and
(iv) the Corporation's assets are in compliance with all
applicable Requirements of Law and are subject to no
contingent liability in connection with the Release,
threatened Release or presence of any Contaminants on or
off-site of such assets.
(d) There is not now on or in the Corporation's assets,
including but not limited to, the Real Property:
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<PAGE> 23
(i) any treatment, storage, recycling, disposal or
arrangement therefor, of any hazardous waste as that term is
defined under 40 CFR Part 261 or any state equivalent;
(ii) any underground storage tanks, in use or abandoned;
(iii) any asbestos-containing material;
(iv) any polychlorinated biphenyls (PCBs) in any
hydraulic oils, transformers, capacitors or other electrical
equipment.
2.30 BANK ACCOUNTS. Schedule 2.30 is a true and correct list of the
name of each bank, savings and loan, or other financial institution in which the
Corporation has an account or safe deposit box, the names of all persons
authorized to draw on each account or to have access to each box, the number of
signatures required to be given for a withdrawal and a description of the type
of account.
2.31 COMPLIANCE WITH LAWS. The Corporation has complied with all laws,
regulations, rules and orders of any governmental department or agency or any
other commission, board, agency or instrumentality, federal, state or local, or
other requirements of law affecting its business and operations and is not in
default under or in violation of any provision of any federal, state or local
law, regulation, rule or order.
2.32 POWERS OF ATTORNEY. The Corporation has not given any power of
attorney (irrevocable or otherwise) that is presently in effect to any person or
entity for any purpose.
2.33 LICENSES AND RIGHTS. The Corporation possesses all franchises,
licenses, easements, permits and other authorizations from governmental or
regulatory authorities and from all other persons or entities that are necessary
to permit it to engage in its business as presently conducted in and at all
locations and places where it is presently operating. Such franchises, licenses,
permits and other authorizations are listed on Schedule 2.33.
2.34 SCHEDULE OF GOVERNMENT REPORTS. Schedule 2.34 is a true and
correct list, and Seller has furnished to Purchaser or its counsel complete
copies of all reports, if any, filed since December 31, 1993, by the Corporation
with the Department of Labor, Equal Employment Opportunity Commission, Federal
Trade Commission, Department of Justice, Occupational Safety and Health
Administration, Internal Revenue Service (other than tax returns and standard
forms relating to compensation or remuneration of employees), Environmental
Protection Agency, Securities and Exchange Commission or Pension Benefit
Guarantee Corporation, or any similar state agency.
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<PAGE> 24
2.35 PRODUCTS.
(a) The products sold by the Corporation conform to and meet
or exceed the standards required by all applicable laws, ordinances and
regulations now in effect and, to Sellers' knowledge, there is no
pending legislation, ordinance or regulation which if adopted or
enacted would have a material adverse effect on such products or the
Corporation's business.
(b) Schedule 2.35 contains a written statement accurately
describing the Corporation's warranties and customer service policies
and any recurring warranty problems. The Corporation has no outstanding
contracts or proposals that depart from the warranty and customer
service policy and practice described in such Schedule. Except as may
be listed on Schedule 2.35, no claims of customers or others based on
an alleged or admitted defect of material, workmanship or design or
otherwise in or in respect of any of the Corporation's products are
presently pending or, to the knowledge of Seller, threatened other than
product warranty claims in the aggregate not in excess of Twenty
Thousand Dollars ($20,000.00). For purposes of this subsection (b),
Seller's knowledge means the actual knowledge of Seller after
reasonable inquiry is made to Meier.
2.36 CASUALTY OCCURRENCES. Schedule 2.36 is a true and correct list of
occurrences during the last five (5) years of damages to persons or property
involving any defects or alleged defects in any of the Corporation's products or
their respective designs. All such occurrences are fully and adequately covered
by paid-for insurance.
2.37 INVENTORY. Except as set forth on Schedule 2.37, the inventories
of the Corporation consist only of items of a quality and quantity usable and
saleable in the ordinary course of business, consistent with past practice,
within the Corporation's and the Subsidiaries' normal inventory "turn"
experience and do not include any item of inventory which has previously been
written off by the Corporation. Items of below-standard quality and items not
previously readily saleable in the ordinary course of business have been written
down in value in accordance with generally accepted accounting principles to
estimated net realizable market values. The value at which the inventories are
carried on the Corporation's books reflects the lower of cost (on a FIFO basis)
or estimated net realizable market value, and is based on quantities determined
by physical count.
2.38 CAPITAL EXPENDITURE PLANS. Schedule 2.38 sets forth a description
of each capital expenditure program of the Corporation involving the expenditure
of at least Ten Thousand Dollars ($10,000.00) as to which the expenditure of
funds is incomplete, setting forth (i) the budgeted expenditures and (ii) the
actual amounts expended, if any.
2.39 MATERIAL MISSTATEMENTS OR OMISSIONS. No representations or
warranties made by Seller in this Agreement or the Schedules hereto
(collectively, the "Documents"), contain or will contain any untrue statement of
a material fact, or omit or will omit to state a material fact necessary to make
the statements of fact contained therein not misleading. All statements of fact
made and data presented by Seller in any Document are deemed to be
representations and warranties made
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<PAGE> 25
under this Agreement by Seller. References in any Document, or in any Contract,
a copy of which has been provided to Purchaser or its counsel, to any other
Document or Contract as to which Seller prior to the date of this Agreement has
not provided to Purchaser or its counsel a true copy or, if oral, a written
summary, will not be deemed for any purposes of this Agreement to be a
disclosure of any term, provision or statement of fact of, or relating to, such
other Document or Contract.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
Purchaser warrants and represents to, and agrees with, Seller as
follows:
3.1 ORGANIZATION AND GOOD STANDING OF PURCHASER. Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, has full power and authority to carry on its business
as and where now conducted and to own or lease and operate its properties at and
where now owned or leased and operated by it, and is duly qualified to do
business and is in good standing in every jurisdiction in which the property
owned, leased or operated by it, or the nature of the business conducted by it,
makes such qualification necessary.
3.2 AUTHORITY OF PURCHASER. The execution, delivery and consummation of
this Agreement by Purchaser has been duly authorized by the board of directors
of Purchaser in accordance with all applicable laws and the Certificate of
Incorporation and By-Laws of Purchaser, and at the Closing Date no further
corporate action will be necessary on the part of Purchaser to make this
Agreement valid and binding on Purchaser and enforceable against Purchaser in
accordance with its terms.
3.3 INVESTMENT PURPOSE. The shares of capital stock of the Corporation
purchased pursuant to this Agreement will be acquired for investment and not
with a view toward the resale or distribution thereof.
ARTICLE IV
----------
CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
------------------------------------------------
The obligations of Purchaser under this Agreement are, at its option,
subject to satisfaction of the following conditions at or prior to the Closing
Date:
4.1 REPRESENTATIONS TRUE. The representations and warranties of Seller
contained in this Agreement are true, complete and accurate in all material
respects on and as of the Closing Date to the same extent and with the same
force and effect as if made on such date, except as affected by the transactions
contemplated under this Agreement.
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4.2 ALL CONSENTS OBTAINED. All necessary approvals or consents required
to be obtained by Seller have been obtained from all local, state and federal
departments and agencies, from all other commissions, boards, agencies and from
any other person or entity whose approval or consent is necessary to consummate
the transactions contemplated under this Agreement including, without
limitation, such consents as may be listed or required to be listed on Schedule
2.2.
4.3 PERFORMANCE AND OBLIGATIONS. Seller has duly performed all
obligations, covenants and agreements undertaken by Seller in this Agreement and
have complied with all terms and conditions applicable to Seller under this
Agreement to be performed and complied with on or before the Closing Date.
4.4 RECEIPT OF DOCUMENTS BY PURCHASER. Purchaser has received:
(a) a certificate executed by Seller certifying as to the
fulfillment of the matters contained in Sections 4.1, 4.2, 4.3 and 4.5
of this Article;
(b) a true and correct copy of the Corporation's Articles of
Incorporation, certified by the Secretary of State of Michigan as of a
date not more than seven (7) days prior to the Closing Date, and a true
and correct copy of the Corporation's Bylaws certified by the Secretary
of the Corporation as of the Closing Date;
(c) a written opinion from counsel for Seller (who must be
satisfactory to Purchaser and its counsel), dated as of the Closing
Date, addressed to Purchaser, satisfactory to Purchaser and its counsel
in form and substance, to the effect that:
(i) The Corporation is duly incorporated, validly
existing and is in good standing under the laws of the state
of Michigan, has full corporate power and authority to carry
on its business as and where now conducted, and to own or
lease and operate its properties at and where now owned or
leased and operated by it, and is qualified to do business as
a foreign corporation and is in good standing in every
jurisdiction in which the property owned, leased or operated
by it, or the nature of the business conducted by it, makes
such qualification necessary;
(ii) The Corporation is authorized to issue 60,000
shares of common stock, without par value, of which 1,000
shares are duly and validly issued and outstanding, fully paid
and nonassessable and were not issued in violation of any
preemptive or any other rights, including any rights under
any federal or state securities laws. There are no other
shares of stock, convertible or other securities or rights,
warrants or options with respect to any shares of stock or
securities of the Corporation authorized, issued or
outstanding;
(iii) Seller is the record and beneficial owner of all
the Shares and has full right and lawful authority to convey,
transfer and assign the Shares to Purchaser as provided in
this Agreement. Seller has good and marketable title to the
Shares free
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and clear of any lien, claim, charge, option, security
interest, restriction on transfer, encumbrances or other
defect in title. On the consummation of the transactions
contemplated by the Agreement, Purchaser will acquire good and
marketable title to the Shares free and clear of any lien,
claim, charge, option, security interest, restriction on
transfer, encumbrance or other defect in title;
(iv) This Agreement constitutes the legal, valid and
binding obligation of Seller, and is enforceable against
Seller in accordance with its terms;
(v) Except as set forth in this Agreement or in any
Schedule, the execution and delivery of this Agreement and the
consummation of the transactions contemplated under this
Agreement by Seller (a) are not in conflict with the Articles
of Incorporation or Bylaws of the Corporation, (b) do not
(with or without notice or the passage of time or both)
constitute a default under, and are not in conflict with, any
Contract known to such counsel to which the Corporation is a
party or to which any of its assets are subject, (c) do not
violate any order, judgment or decree or any rule, regulation
or law, or any other restriction known to such counsel to
which the Corporation is a party or to which any of their
respective assets are subject, and (d) will not (with or
without notice or the passage of time or both) result in the
creation of any lien or any charge on or any loss of any
assets of the Corporation or in the acceleration or
termination of any loan, security interest or other agreement
known to such counsel to which the Corporation is a party or
to which any of its assets are subject;
(vi) Except with respect to those matters as may be
disclosed in any Schedule, such counsel has no knowledge of
any action, suit, claim, demand, arbitration or other
proceeding or investigation, administrative or judicial,
pending or threatened against or affecting the Corporation or
any of its assets at law or in equity, or before or by any
federal, state, municipal or other governmental department or
by any other commission, board, agency or instrumentality,
domestic or foreign, that can reasonably be expected to have
any adverse effect on the business, assets, condition
(financial or otherwise), results of operations or prospects
of the Corporation; and
(vii) Such other material matters which Purchaser or
its counsel reasonably requests.
(d) the resignations of such officers and directors of the
Corporation as may be requested by Purchaser;
(e) certificates representing all of the Shares, with stock
powers covering such shares duly endorsed in blank; and
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<PAGE> 28
(f) a general release of all claims of Seller against the
Corporation, in the form of EXHIBIT "C" to this Agreement.
4.5 NO LITIGATION. No suit, action, or other proceeding is threatened
or pending before any court or governmental agency in which it will be or it is
sought to restrain or prohibit or to obtain material damages or relief in
connection with this Agreement or the consummation of this Agreement, or which
is likely to materially and adversely affect the value of the business or assets
of the Corporation.
4.6 EMPLOYMENT AGREEMENT. Meier has entered into an Employment
Agreement in the form of EXHIBIT "D" to this Agreement, and by his signature on
this Agreement, Meier has agreed to enter into such Employment Agreement on or
prior to the Closing.
4.7 DELIVERY OF BOOKS AND RECORDS. Seller has delivered or made
available to Purchaser all books and records of the Corporation relating to or
reasonably required for the operation of the business of the Corporation,
including, without limitation, copies of all Contracts, financial and accounting
records, files and records relating to employees, and all related
correspondence.
4.8 ABSENCE OF CHANGES. There has been no material adverse change in
the business (financial or otherwise), assets, liabilities, results of
operations or prospects of the Corporation since the date of this Agreement.
4.9 REAL PROPERTY LEASE. The David M. Rice Restated Trust U/A/D 6/8/83
has entered into a Real Property Lease in substantially the form of EXHIBIT "E"
to this Agreement (the "Lease").
4.10 ESCROW AGREEMENT. Seller has entered into the Escrow Agreement.
4.11 PURCHASER'S REVIEW. Purchaser has conducted a review of the
business, assets, books and records of the Corporation and has found the results
of such review to be satisfactory to Purchaser, in its sole discretion.
4.12 TRADE NAME ASSIGNMENT. Seller, Lanco Corporation and any of its
parents, subsidiaries or affiliates have executed a Trademark and Trade Name
Assignment in substantially the form of EXHIBIT "F" to this Agreement, whereby
all rights to the names "Lanco" and "Lanco Environmental Products" are assigned
to Purchaser.
4.13 EQUIPMENT LEASE. The Corporation has been released from any and
all of its obligations under the Equipment Lease dated July 1, 1995, as it
relates to any aircraft.
4.14 MANAGEMENT AGREEMENT. Any management agreement between the
Corporation and Lanco Corporation or Seller has been terminated, and the
Corporation has received a release from any and all obligations under same.
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<PAGE> 29
ARTICLE V
---------
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
---------------------------------------------
The obligations of Seller under this Agreement are, at the option of
Seller subject to satisfaction of the following conditions at or prior to the
Closing Date:
5.1 REPRESENTATIONS TRUE. The representations and warranties of
Purchaser contained in this Agreement are true, complete and accurate in all
material respects on and as of the Closing Date to the same extent and with the
same force and effect as if made on such date, except as affected by the
transactions contemplated under this Agreement.
5.2 RECEIPT OF DOCUMENTS BY SELLER. Seller has received:
(a) the Purchase Price as provided in Section 1.1;
(b) a certificate executed by the President and Secretary or
Treasurer of Purchaser certifying as to the fulfillment of the matters
contained in Section 5.1 of this Article;
(c) a written opinion from counsel for Purchaser, dated as of
the Closing Date, addressed to Seller, satisfactory to Seller and its
counsel in form and substance, to the effect that:
(i) Purchaser is duly incorporated, validly existing
and is in good standing under the laws of the State of
Delaware, has full corporate power and authority to carry on
its business as and where now conducted, and to own or lease
and operate its properties at and where now owned or leased
and operated by it;
(ii) Purchaser has all requisite corporate power to
execute, deliver and carry out its obligations under this
Agreement and the execution, delivery and performance of this
Agreement by Purchaser have been duly authorized by all
requisite corporate action;
(iii) The execution and delivery of this Agreement and
the consummation of the transactions contemplated under this
Agreement by Purchaser are not in conflict with the
Certificate of Incorporation or By-Laws of Purchaser; and
(iv) This Agreement constitutes the legal, valid, and
binding obligation of Purchaser, and is enforceable against
Purchaser in accordance with its terms.
(d) certified copies of resolutions duly adopted by the Board
of Directors of Purchaser approving this Agreement and the transactions
contemplated under it.
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<PAGE> 30
5.3 NO LITIGATION. No suit, action, or other proceeding is threatened
or pending before any court or governmental agency in which it will be or it is
sought to obtain material damages from Seller in connection with this Agreement
or the consummation of this Agreement.
5.4 REAL PROPERTY LEASE. Purchaser has entered into the Lease.
5.5 AGREEMENTS REGARDING SALES COMMISSIONS AND USED EQUIPMENT.
Purchaser has entered into two letter agreements in substantially the forms of
EXHIBITS "G" AND "H" to this Agreement.
5.6 ESCROW AGREEMENT. Purchaser has entered into the Escrow Agreement.
5.7 LICENSE AGREEMENT. Purchaser has entered into a Trademark and Trade
Name License Agreement with Seller in substantially the form of EXHIBIT "I" to
this Agreement, whereby Seller receives rights to use the name "Lanco."
ARTICLE VI
----------
CLOSING
-------
The closing of the transactions contemplated by this Agreement (the
"Closing") will take place at the offices of Benesch, Friedlander, Coplan &
Aronoff LLP on the date that Waterlink, Inc., the parent corporation of
Purchaser, closes its contemplated initial public offering at 10:00 A.M.
Cleveland Time, or on such other date mutually agreeable to the parties (the
"Closing Date"). If the Closing has not taken place by such date by reason of
failure of fulfillment of any condition or conditions contained in this
Agreement, then the non-fulfilling party may, by written notice to the other
party, extend the Closing Date for a period of fourteen (14) days to permit
fulfillment of such condition or conditions. Unless the parties otherwise agree
in writing, if the Closing has not occurred within [90] days from execution of
this Agreement, then this Agreement will be deemed to have been terminated and
abandoned, subject to the legal rights and remedies of either party arising out
of the other party's breach of any of the provisions of this Agreement. The
parties will in good faith use all reasonable efforts to achieve the Closing.
ARTICLE VII
-----------
TERMINATION OF AGREEMENT
------------------------
This Agreement and the transactions contemplated under it may be
terminated and abandoned at any time prior to the Closing Date (unless otherwise
specified below):
(a) by mutual consent in writing of Purchaser and Seller;
25
<PAGE> 31
(b) by Purchaser if there has been a material
misrepresentation or breach of warranty in the representation and
warranties of Seller made under this Agreement;
(c) by Purchaser if all or a material portion of the
Corporation's assets have been materially damaged or destroyed before
the Closing;
(d) by Purchaser if any of the Real Property has been taken,
in whole or in part, by eminent domain or by conveyance in lieu of
eminent domain;
(e) by Purchaser, if any of the conditions contained in
Article IV, or by Seller, if any of the conditions contained in Article
V, respectively, have not been fulfilled in all respects in each case
at or prior to the Closing Date.
Any termination pursuant to this Article VII will not affect the
obligations of the parties under Article XI or Section 15.4 below, and will be
without prejudice to the terminating party's legal rights and remedies by reason
of any breach of this Agreement occurring prior to such termination. In the
event this Agreement is terminated by Purchaser pursuant to Sections (b), (c),
(d) or (e) of this Article VII, (other than a termination pursuant to Section
(e) above solely as a result of the conditions contained in Section 4.11 of
Article IV not being fulfilled, in which case Purchaser shall forfeit, and
Seller shall retain, the Deposit), Seller will return to Purchaser the Deposit
within three (3) days of such termination. In the event of any other termination
of this Agreement, Seller shall retain the Deposit. Notwithstanding anything in
this Agreement to the contrary, if, on the Closing Date, Purchaser (i) has
complied with all of the conditions to Closing contained in Article V, (ii) has
notified Seller of its intention to consummate the transactions contemplated
under this Agreement, and (iii) is ready and able to pay Seller the Purchase
Price and furnishes evidence to that effect to Seller, and if the Closing does
not then occur due to the refusal of Seller to so consummate the transactions
contemplated under this Agreement, Purchaser will be entitled to specifically
enforce the terms of this Agreement in a court of competent jurisdiction, it
being acknowledged that monetary damages due Purchaser in such case cannot be
adequately determined at law.
ARTICLE VIII
------------
SURVIVAL OF REPRESENTATIONS
---------------------------
AND WARRANTIES: INDEMNIFICATION: DISPUTES
-----------------------------------------
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Notwithstanding the
Closing of the transactions contemplated under this Agreement, or any
investigation made by or on behalf of Seller or Purchaser, the representations
and warranties of Seller and Purchaser contained in this Agreement or in any
certificate, Schedule, chart, list, letter, compilation or other document
furnished or to be furnished pursuant to this Agreement, will survive the
Closing for a period of eighteen (18) months, except that the representations
and warranties of Seller contained in Sections 2.4, 2.12, 2.28 and 2.29 with
respect to title to Shares, tax matters, employee benefit matters and
environmental matters will survive for so long as any applicable statute of
limitations has not expired, been suspended or been waived or extended, and for
thirty (30) days thereafter. However, as to any breach of, or
26
<PAGE> 32
misstatement in, any such representation or warranty as to which Purchaser has
given notice to Seller on or prior to the expiration of the applicable period,
as above set forth, the same will continue to survive beyond said period, but
only as to the matters contained in such notice.
8.2 SELLER'S INDEMNIFICATION. Seller will indemnify and save harmless
Purchaser and its subsidiaries, shareholders, directors, officers, employees and
agents from any and all costs, expenses, losses, damages and liabilities
incurred or suffered, directly or indirectly, by any of them (including, without
limitation, reasonable legal fees and expenses) resulting from or attributable
to (a) the breach of, or misstatement in, any one or more of the representations
or warranties of Sellers made in or pursuant to this Agreement, (b) any claims,
demands, suits, investigations, proceedings or actions by any third party
containing or relating to allegations that, if true, would constitute a breach
of, or misstatement in, any one or more of the representations or warranties of
Sellers made in or pursuant to this Agreement, (c) the Corporation's treatment,
transport, recycling, storage or disposal, or any arrangement for any of same,
done or made prior to the Closing, of any Contaminant generated and transported
off-site from any facility owned or operated by the Corporation or any of its
predecessors, or (d) any defect in any product manufactured, shipped or
installed by the Corporation prior to the Closing.
8.3 DEFENSE OF CLAIM. If Purchaser has received actual notice of any
claim asserted or any action or administrative or other proceeding commenced in
respect of which claim, action or proceeding indemnity properly may be sought
against Seller pursuant to this Agreement, Purchaser will give notice in writing
to Seller. Within fifteen (15) days after the earlier of (i) receipt of such
notice or (ii) receipt of actual notice by Seller from sources other than
Purchaser, Seller may give Purchaser written notice of their election to conduct
the defense of such claim, action or proceeding at its own expense. If Seller
has given Purchaser such notice of election to conduct the defense, Seller may
conduct the defense at its expense, but Purchaser will nevertheless have the
right to participate in the defense, but such participation will be solely at
the expense of Purchaser, without a right of further reimbursement. If Seller
has not so notified Purchaser in writing (within the time above provided) of its
election to conduct the defense of such claim, action or proceeding, Purchaser
may (but need not) conduct (at Seller's expense) the defense of such claim,
action or proceeding. Purchaser may at any time notify Seller of Purchaser's
intention to settle, compromise or satisfy any such claim, action or proceeding
(the defense of which Seller has not previously elected to conduct) and may make
such settlement, compromise or satisfaction (at Seller's expense) unless Seller
notifies Purchaser in writing (within seven (7) days after receipt of such
notice of intention to settle, compromise or satisfy) of its election to assume
(at its sole expense) the defense of any such claim, action or proceeding and
promptly take appropriate action to implement such defense. Any settlement,
compromise or satisfaction made by Purchaser, or any such final judgment or
decree entered in, any claim, action or proceeding defended only by Purchaser,
regardless of the amount or terms, will be deemed to have been consented to by,
and will be binding on, Seller as fully as though they alone had assumed the
defense and a final judgment or decree had been entered in such proceeding or
action by a court of competent jurisdiction in the amount of such settlement,
compromise, satisfaction, judgment or decree. If Seller has elected under this
Section 8.3 to conduct the defense of any claim, action or proceeding, then
Seller will be obligated to pay the amount of any adverse final judgment or
decree rendered with respect to such claim, action or proceeding. If Seller
27
<PAGE> 33
elects to settle, compromise or satisfy any claim, action or proceeding defended
by them, the cost of any such settlement, compromise or satisfaction will be
borne entirely by Seller and may be made only with the consent of Purchaser,
such consent not to be unreasonably withheld. Purchaser and Seller will use all
reasonable efforts to cooperate fully with respect to the defense of any claim,
action or proceeding covered by this Section 8.3. Notwithstanding anything to
the contrary herein, Seller shall not have the right to assume the defense of
any claim, action or proceeding relating to a breach of Section 2.12 hereof, but
shall have the right to elect to jointly participate with Purchaser in the
defense of any such claim, action or proceeding by giving written notice of such
election within the time limits described in the second sentence of this Section
8.3.
8.4 PURCHASER'S INDEMNIFICATION. Purchaser covenants and agrees to
indemnify and save harmless Seller from any and all costs, expenses, losses,
damages and liabilities incurred or suffered by Seller (including reasonable
legal fees and costs) resulting from or attributable to the breach of, or
misstatement in, any one or more of the representations or warranties of
Purchaser made in or pursuant to this Agreement to the same extent as provided
in Clauses (a) and (b) of Section 8.2, and in the same manner as provided in
Section 8.3, of this Article VIII.
8.5 INDEMNIFICATION BASKET.
(a) Any of the foregoing notwithstanding, no party will have
any right to indemnification unless and until the aggregate damages
indemnifiable by the indemnifying party exceed Fifty Thousand Dollars
($50,000.00) and thereafter will be entitled to the full extent of the
damages including the first Fifty Thousand Dollars ($50,000.00).
(b) Any liability arising from Seller's breach of Section 2.12
hereof shall not be subject to this Fifty Thousand Dollar ($50,000.00)
limitation, and shall be recoverable from the First Dollar.
8.6 LIMITATION ON INDEMNIFICATION. Any of the foregoing
notwithstanding, in no event will the aggregate indemnification obligation of
either party pursuant to this Article VIII exceed the Purchase Price.
Notwithstanding the foregoing, the limitation on indemnification shall not apply
to any obligation of Seller to indemnify Purchaser as a result of a breach of
Section 2.12, for which there shall be no limitation on Seller's indemnification
obligation.
ARTICLE IX
----------
CONDUCT PRIOR TO CLOSING DATE
-----------------------------
9.1 CONTINUATION OF BUSINESS. Until the Closing Date, Seller will cause
the Corporation to continue to conduct its business in the ordinary and usual
course consistent with past practice, and, without limiting the generality of
this undertaking, Seller will not, and will cause the Corporation
28
<PAGE> 34
not to, do or suffer to be done any of the following, whether or not in the
ordinary and usual course, without the prior written consent of Purchaser:
(a) Dispose or contract to dispose of, or acquire or contract
to acquire, any Real Property or other assets (except for inventory
disposed of or acquired in the ordinary course of business), or any
interest in any Real Property or other capital assets;
(b) Borrow any money;
(c) Enter into any lease;
(d) Encumber any assets;
(e) Enter into any contract, commitment or arrangement of the
type required by Section 2.20 above to be listed on Schedule 2.20;
(f) Declare or pay any dividend or declare or make any other
distribution to shareholders;
(g) Purchase or redeem any shares, notes or other securities;
(h) Increase the rate or amount of compensation or the amount
or type of other remuneration to any of its directors, officers,
employees, agents or other representatives, or agree to do so;
(i) Form or cause to be formed, or dispose or contract to
dispose of, any subsidiary, or any interest in any subsidiary or
acquire any stock or equity interest in any corporation or other
entity;
(j) Reclassify, split or combine its shares, or issue, sell,
distribute or dispose of any shares, notes or other securities, or
issue or make any changes to any options, warrants or rights with
respect to its shares, or commit itself to do so;
(k) Make any new commitments or agree to make commitments for
capital improvements or significantly alter standing commitments for
capital improvements;
(l) Make any single expenditure or agree to make any single
expenditure, or series of expenditures in excess of Twenty Thousand
Dollars ($20,000.00) in the aggregate, except expenditures for raw
materials and supplies purchased in the ordinary course of business and
consistent with past practices;
(m) Negotiate with anyone other than Purchaser for, or
participate with anyone other than Purchaser in, the acquisition of the
Shares;
29
<PAGE> 35
(n) Amend, or permit to be amended, in any way, its Articles
of Incorporation or Bylaws or merge or consolidate with any other
corporation or other entity or change the character of its business; or
(o) Make any material change in accounting methods.
9.2 PRESERVATION OF BUSINESS. Seller will cause the Corporation to (i)
preserve intact its present business organization and personnel, (ii) preserve
its business, actual and potential, and its advantageous relationships with all
persons having business dealings with it, and (iii) preserve and maintain in
force all its licenses, certificates, leases, contracts, permits, registrations,
franchises, confidential information, patents, trademarks, trade names, service
marks and copyrights, and applications for any of the same, and other similar
rights. Seller will cause the Corporation to maintain in force all property,
casualty, crime, life, directors, officers and other forms of insurance and
bonds which it presently carries.
9.3 CONSENTS AND APPROVALS. Seller will use all reasonable efforts to
obtain all necessary consents and approvals of all persons, firms, entities and
governmental authorities to the consummation of the transactions contemplated by
this Agreement.
ARTICLE X
---------
ASSIGNMENT, THIRD PARTIES, BINDING EFFECT
-----------------------------------------
The rights under this Agreement are not assignable nor are the duties
delegable by a party without the written consent of the other party first having
been obtained, and any attempted assignment or delegation without such consent
will be null and void. Nothing contained in this Agreement is intended to convey
upon any person or entity, other than the parties hereto and their successors in
interest and permitted assigns, any rights or remedies under or by reason of
this Agreement unless expressly stated. All covenants, agreements,
representations and warranties of the parties contained in this Agreement are
binding on and will inure to the benefit of Purchaser, on the one hand and
Seller, on the other, and their respective successors and permitted assigns.
ARTICLE XI
----------
EXPENSES
--------
Purchaser, on the one hand, and Seller, on the other, will bear their
own respective expenses, including, without limitation, counsel and accountants'
fees, in connection with the preparation and negotiation of, and transactions
contemplated under, this Agreement, provided, however, that the Corporation may
bear and pay up to a maximum of Fifteen Thousand Dollars ($15,000.00) of such
expenses of Seller. Notwithstanding the foregoing, Purchaser agrees to bear the
costs of the audit
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<PAGE> 36
of the Corporation's Financial Statements required to have been conducted in
connection with Seller's representation and warranty contained in Section 2.9 of
this Agreement.
ARTICLE XII
-----------
NOTICES
-------
All notices, requests, demands and other communications under this
Agreement must be in writing and will be deemed duly given, unless otherwise
expressly indicated to the contrary in this Agreement, (i) when personally
delivered, (ii) upon receipt of a telephonic facsimile transmission with a
confirmed telephonic transmission answer back, (iii) three (3) days after having
been deposited in the United States mail, certified or registered, return
receipt requested, postage prepaid, or (iv) one (1) business day after having
been dispatched by a nationally recognized overnight courier service, addressed
to the parties or their permitted assigns at the following addresses (or at such
other address or number as is given in writing by either party to the other) as
follows:
To Purchaser: c/o Waterlink, Inc.
------------ 4100 Holiday Street, N.W.
Canton, Ohio 44702
Facsimile No.: (330) 455-8134
Attention: Theodore F. Savastano, Chairman
With a copy to: Benesch, Friedlander,
Coplan & Aronoff LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
Facsimile No.: (216) 363-4588
Attention: Ira C. Kaplan
To Seller: David M. Rice
---------- c/o Lanco Corporation
575 Byrne Industrial Drive
Rockford, Michigan 49341
Facsimile No.: (616) 866-8599
With a copy to: Borre, Peterson, Fowler & Reens
44 Lafayette, N.E.
P.O. Box 1767
Grand Rapids, Michigan 49501-1767
Facsimile No.:(616) 459-2393
Attention: Glen V. Borre
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<PAGE> 37
ARTICLE XIII
------------
REMEDIES NOT EXCLUSIVE
----------------------
No remedy conferred by any of the specific provisions of this Agreement
is intended to be exclusive of any other remedy, and each and every remedy will
be cumulative and will be in addition to every remedy given under this Agreement
or now or subsequently existing, at law or in equity, by statute or otherwise.
The election of any one or more remedies by Purchaser or Seller will not
constitute a waiver of the right to pursue other available remedies.
ARTICLE XIV
-----------
NON-COMPETITION
---------------
14.1 NON-COMPETITION AGREEMENT.
(a) For a period of five (5) years from and after the Closing
Date, but as to clauses (iv) and (v) at any time after the Closing
Date, Seller will not, directly or indirectly:
(i) engage in, carry on, be employed by or have any
interest in a business substantially similar to the business
as carried on by the Corporation on the Closing Date;
(ii) enter into, engage in, or be employed by or consult
with any business in competition with the Corporation on
matters substantially similar to the business as carried on by
the Corporation on the Closing Date;
(iii) employ, assist in employing or otherwise associate
in business with any present, former or future employee of the
Corporation now or subsequently existing until a period of at
least two (2) years has expired since such employee was
employed by the Corporation;
(iv) induce any person who is a present or future
employee, officer, agent, affiliate or customer of the
Corporation now or subsequently existing to terminate the
relationship; and
(v) induce any customer, supplier or any other party
with whom the Corporation does business to refuse to do
business with the Corporation on as favorable terms as
previously done with the Corporation.
The prohibitions in clauses (i) and (ii) will apply only to any place or
location set forth on EXHIBIT "J" to this Agreement. Seller acknowledges that
the length of time and geographic restriction pertaining to all prohibitions in
this Subsection (a) both are reasonable and necessary for the legitimate
protection of Purchaser's business and interests.
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<PAGE> 38
(b) Seller expressly agrees and understands that the remedy at
law for any breach by Seller of this Article XIV will be inadequate and
that the damages flowing from such breach are not readily susceptible
to being measured in monetary terms. Accordingly, it is acknowledged
that upon adequate proof of Seller's violation of this Article XIV,
Purchaser will be entitled, among other remedies, to immediate
injunctive relief and may obtain a temporary restraining order
restraining any threatened or further breach. Nothing in this
subsection (b) will be deemed to limit Purchaser's remedies at law or
in equity for any breach by Seller of any of the provisions of this
Agreement which may be pursued or availed of by Purchaser.
(c) In the event any court of competent jurisdiction
determines that the specified time period or geographical area set
forth in this Section 14.1 is unreasonable, arbitrary or against public
policy, then a lesser time period or geographical area that is
determined by the court to be reasonable, non-arbitrary and not against
public policy may be enforced.
(d) In the event Seller violates any legally enforceable
provision of this Section 14.1 as to which there is a specific time
period during which Seller is prohibited from taking certain actions or
engaging in certain activities, then, in such event the violation will
toll the running of the time period from the date of the violation
until the violation ceases.
(e) Notwithstanding the restrictions contained in Paragraph
14.1(a)(i) and (ii), Seller is expressly permitted to continue to
purchase, sell and recondition used equipment, whether or not of the
type manufactured or sold by the Corporation. Seller, however, shall
not knowingly interfere with any ongoing relationships between the
Corporation and any of its customers regarding the sales of new
equipment, or knowingly or intentionally injure or damage the ongoing
business operations of the Corporation. This language shall not be
construed as preventing Seller from making a competing bid to any
customer regarding used equipment
14.2 DISCLOSURE OF CONFIDENTIAL INFORMATION. Except as may be required
by law or necessary in connection with any dealings with any public agency or
authority, from and after the Closing Date, Seller will not disclose,
disseminate, divulge, discuss, copy or otherwise use or suffer to be used, in
competition with, or harmful to the interests of, the Corporation, any
information (written or oral), documents, lists or other data of or respecting
any aspect of the business being acquired by Purchaser from Seller under this
Agreement.
ARTICLE XV
----------
MISCELLANEOUS
-------------
15.1 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original but all of which
together will constitute one and the same
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<PAGE> 39
document.
15.2 CAPTIONS AND SECTION HEADINGS. Captions and section headings are
for convenience only, are not a part of this Agreement and may not be used in
construing it.
15.3 WAIVERS. Any failure by any of the parties to comply with any of
the obligations, agreements or conditions set forth in this Agreement may be
waived by the other party or parties, but any such waiver will not be deemed a
waiver of any other obligation, agreement or condition contained herein.
15.4 RIGHT OF INSPECTION. From and after the date of this Agreement to
the Closing Date, Seller will give to Purchaser and its counsel, accountants and
other representatives, full access during normal business hours to the offices,
properties, agreements, records and affairs of the Corporation, and will furnish
copies of all Contracts and other instruments as Purchaser or its counsel may
reasonably request. Such investigation will not affect the warranties and
representations of Seller under this Agreement. All such information will be
treated confidentially and will be used only for the purposes intended. If the
transactions contemplated under this Agreement do not take place, all documents
and other property of the Corporation or Seller will be returned and all
disclosures and information given to Purchaser as contemplated under this
Agreement will be treated as confidential and not disclosed to others unless
disclosed publicly by Seller or other third parties without fault on the part of
Purchaser, or unless otherwise required by law.
15.5 AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS. Each of the parties
agrees to cooperate in the effectuation of the transactions contemplated under
this Agreement and to execute any and all additional documents and to take such
additional action as is reasonably necessary or appropriate for such purposes.
15.6 ENTIRE AGREEMENT. This Agreement, including any certificate,
schedule, exhibit or other document delivered pursuant to its terms, constitutes
the entire agreement between the parties. There are no verbal agreements,
representations, warranties, undertakings or agreements between the parties, and
this Agreement may not be amended or modified in any respect, except by a
written instrument signed by the parties to this Agreement.
15.7 GOVERNING LAWS. This Agreement is to governed by and construed in
accordance with the internal laws of the State of Ohio.
15.8 KNOWLEDGE. All references to "knowledge" or "best knowledge" of a
party, or "known to" a party means the actual knowledge of a party.
15.9 PRESS RELEASES. Prior to the Closing, neither party will issue or
cause the publication of any press release or other public announcement with
respect to this Agreement or the transactions contemplated under this Agreement
without the prior consent of the other party first obtained; provided, however,
that nothing in this Agreement will prohibit either party from issuing or
causing publication of any press release or public announcement to the extent
that such party determines, on
34
<PAGE> 40
advice of counsel, that such action is required by law, in which case the party
making such determination will, if practicable under the circumstances, use
reasonable efforts to allow the other party reasonable time to comment on such
release or announcement in advance of its issuance.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date first above written.
GREAT LAKES ENVIRONMENTAL, INC.
By: /s/ Michael J. Vantusko
-----------------------------
"PURCHASER"
/s/ David M. Rice
--------------------------------
David M. Rice
"SELLER"
The undersigned hereby agrees to enter into an Employment Agreement in
the form of the attached as EXHIBIT "D" upon the closing of the transactions
evidenced by the above Agreement.
/s/ Charles Meier
--------------------------------
CHARLES MEIER
35
<PAGE> 41
EXHIBIT J
---------
LOCATION FOR NON-COMPETITION PROVISIONS
---------------------------------------
CONTAINED IN ARTICLE XIV
------------------------
The continental United States.
<PAGE> 1
Exhibit 10.24
EMPLOYEE STOCK PURCHASE PLAN
OF
WATERLINK, INC.
1. PURPOSE OF THE PLAN. This Employee Stock Purchase Plan of
Waterlink, Inc. adopted on this 23rd day of May, 1997, is intended to encourage
eligible employees of the Company and its current and/or future Subsidiaries,
who are designated by the Committee, as defined herein, to acquire or increase
their ownership of common stock of the Company on reasonable terms. The
opportunity so provided is intended to foster in participants a strong
incentive to put forth maximum effort for the continued success and growth of
the Company and its Subsidiaries, to aid in retaining individuals who put forth
such efforts, and to assist in attracting the best available individuals to the
Company and its Subsidiaries in the future. It is the Company's intention that
this Employee Stock Purchase Plan qualify as an "employee stock purchase Plan"
under Section 423 of the Code. Accordingly, the provisions of the Plan shall be
construed so as to extend and limit participation in a manner consistent with
the requirements of that section of the Code.
2. DEFINITIONS. When used herein, the following terms shall have the
meanings set forth below:
2.1 "Account" means the account maintained for an Employee who
elects to participate in any offering of Shares made under the Plan for
the purpose of recording the amounts withheld from his Annual Compensation
pursuant to Section 9 of the Plan.
2.2 "Annual Compensation" means an amount equal to the sum of (i)
the annual base rate of pay of an Employee as determined from the payroll
records of the Company on the first day of the Subscription Period of an
offering of Shares made pursuant to the Plan, and (ii) the amount paid to
the Employee by the Company or any of its Subsidiaries under any incentive
compensation plan or bonus plan during the twelve (12) month period
immediately preceding the first day of the Subscription Period of an
offering of Shares made pursuant to the Plan.
2.3 "Board" means the Board of Directors of Waterlink Inc.
2.4 "Code" means the Internal Revenue Code of 1986, as in effect at
the time of reference, or any successor revenue code which may hereafter
be adopted in lieu thereof, and reference to any specific provisions of
the Code shall refer to the corresponding provisions of the Code as it may
hereafter be amended or replaced.
<PAGE> 2
2.5 "Committee" means the Compensation Committee of the Board or
any other committee appointed by the Board which is invested by the Board
with responsibility for the administration of the Plan and whose members
meet the requirements for eligibility to serve as set forth in Rule 16b-3
and in the Plan.
2.6 "Company" means Waterlink, Inc.
2.7 "Employees" means persons employed by the Company or any of its
current or future Subsidiaries designated by the Committee on the first
day of the Subscription Period of any offering of Shares made pursuant to
the Plan; provided, however, that no person shall be considered an
Employee unless he (i) is normally employed by the Company or any of its
Subsidiaries for more than twenty (20) hours per week and more than five
(5) months in a calendar year and (ii) has been employed by the Company or
any of its Subsidiaries for at least six (6) months as of the first day of
the Subscription Period of any such offering.
2.8 "Fair Market Value means, with respect to the Shares, (a) if
the Common Stock is listed or admitted for trading on any national
securities exchange or included in The Nasdaq National Market or Nasdaq
SmallCap Market, the last reported sales price of the Shares on the last
business day prior to the date the value is to be determined as reported
on such exchange; (b) if the Common Stock is not listed or admitted for
trading on any national securities exchange or included in The Nasdaq
National Market or Nasdaq SmallCap Market, the average of the last
reported closing bid and asked quotation for the Common Stock on the last
business day prior to the date the value is to be determined as reported
on the Automated Quotation System of NASDAQ or a similar service if NASDAQ
is not reporting such information; (c) if the Common Stock is not listed
or admitted for trading on any national securities exchange or included in
The Nasdaq National Market or Nasdaq SmallCap Market or quoted by NASDAQ
or a similar service, the average of the last reported bid and asked
quotation for the Common Stock on the last business day prior to the date
the value is to be determined as quoted by a market maker in the Common
Stock (or if there is more than one market maker, the bid and asked
quotation shall be obtained from two market makers and the average of the
lowest bid and highest asked quotation shall be the "Fair Market Value");
or (d) if the Common Stock is not listed or admitted for trading on any
national securities exchange or included in The Nasdaq National Market or
Nasdaq SmallCap Market or quoted by NASDAQ and there is no market maker in
the Common Stock, the fair market value of the Shares as determined by the
Committee in good faith.
2.9 "Option" means the right granted to an Employee to purchase
Shares pursuant to an offering made under the Plan and pursuant to such
Employee's election to purchase Shares in such offering, at a price, and
subject to such limitations and restrictions as the Plan and the Committee
may impose.
2.10 "Parent" means any corporation, other than the employer
corporation, in an unbroken chain of corporations ending with the employer
corporation if each of the
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<PAGE> 3
corporations other than the employer corporation owns stock possessing
fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
2.11 "Plan" means the Company's Employee Stock Purchase Plan.
2.12 "Purchase Period" means the number of calendar months during
which installment payments for Shares purchased pursuant to options
granted under the Plan shall be made.
2.13 "Rule 16b-3" means Rule 16b-3 of the General Rules and
Regulations of the Securities Exchange Act of 1934, as in effect at the
time of reference, or any successor rules or regulations which may
hereafter be adopted in lieu thereof, and any reference to any specific
provisions of Rule 16b-3 shall refer to the corresponding provisions of
Rule 16b-3 as it may hereafter be amended or replaced.
2.14 "Shares" means shares of the Company's $.001 par value common
stock or, if by reason of the adjustment provisions contained herein, any
rights under the Plan pertain to any other security, such other security.
2.15 "Subscription Period" means that period of time prescribed in
any offering of Shares made pursuant to the Plan beginning on the first
day Employees may elect to participate in such offering and ending on the
last day such elections to participate are authorized to be received and
accepted.
2.16 "Subsidiary" or "Subsidiaries" means any corporation or
corporations other than the employer corporation in an unbroken chain of
corporations beginning with the employer corporation if each of the
corporations other than the last corporation in the unbroken chain owns
stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in such
chain.
2.17 "Successor" means the legal representative of the estate of a
deceased Employee or the person or persons who shall acquire the right to
exercise or receive an Option by bequest or inheritance or by reason of
the death of the Employee.
3. STOCK SUBJECT TO THE PLAN. There will be reserved for issuance,
upon the exercise of Options to be granted from time to time pursuant to
offerings made under the Plan, an aggregate of 500,000 Shares. The Shares
subject to Options may be, in whole or in part, as the Committee shall from
time to time determine, authorized but unissued Shares, or issued Shares which
shall have been reacquired by the Company. The number of Shares reserved under
the Plan may be issued pursuant to the exercise of Options granted pursuant to
one or more offerings made under the Plan. Any Shares subject to issuance upon
exercise of options but which are not issued because of
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<PAGE> 4
a surrender, lapse, expiration or termination of any such Option prior to
issuance of the Shares shall once again be available for issuance in
satisfaction of Options.
4. ADMINISTRATION OF THE PLAN. The Board shall appoint the Committee,
which shall consist of not less than two (2) disinterested persons as defined
in Rule 16b-3. Subject to the provisions of the Plan, the Committee shall have
full authority, in its discretion, to determine when Offerings shall be made
under the Plan, the number of Shares to be made available in any such offering,
the length of the Subscription Period and Purchase Period of any such offering
(provided, however, that in no event shall the Subscription Period and the
Purchase Period of any offering together exceed twenty-seven (27) months) and
such other terms and conditions not inconsistent with the Plan as may be
necessary or appropriate; to interpret the Plan; and to prescribe, amend and
rescind rules and regulations relating to the Plan; and generally to interpret
and determine any and all matters whatsoever relating to the administration of
the Plan. The Board may from time to time appoint members to the Committee in
substitution for or in addition to members previously appointed and may fill
vacancies, however caused, in the Committee. The Committee shall select one of
its members as its chairman and shall hold its meetings at such times and
places as it shall deem advisable. A majority of its members shall constitute a
quorum. Any action of the Committee may be taken by a written instrument
signed by all of the members, and any action so taken shall be fully as
effective as if it had been taken by a vote of a majority of the members at a
meeting duly called and held. The Committee shall make such rules and
regulations for the conduct of its business as it shall deem advisable and
shall appoint a Secretary who shall keep minutes of its meetings and records of
any action taken in writing. No member of the Committee shall be liable, in the
absence of bad faith, for any act or omission with respect to his service on
the Committee.
5. ELIGIBILITY TO PARTICIPATE IN OFFERINGS. All Employees shall be
eligible to participate in, and shall receive timely notice of, any offering of
Shares made under the Plan; provided, however, that the Committee may exclude
all, but not less than all, of the Employees of any specified Subsidiary from
any offering made under the Plan; and provided further, however, that the
Committee may determine that any offering of Shares made under the Plan will
not be extended to highly compensated Employees (within the meaning of Section
414(q) of the Code). Notice of any offering of Shares pursuant to the Plan
shall specify the Subscription Period and the Purchase Period of such offering
and shall be accompanied by a written form on which an Employee may elect to
participate in such offering. In order to participate in any offering of Shares
made pursuant to the Plan, an Employee must sign an election to participate in
such offering on the form provided by the Company for such purpose stating the
Employee's desire to purchase Shares under the Plan and showing the amount
which the Employee elects to have withheld from his pay for each payroll period
during the Purchase Period. The election to participate in any such offering
must be delivered on or before the last day of the Subscription Period to the
Chief Financial Officer of the Company.
6. GRANT OF OPTIONS. Subject to the limitations set forth in Section 7
of the Plan, each Employee who elects during the Subscription Period of any
offering made under the Plan to purchase Shares in such offering shall
automatically be granted an Option to purchase a fixed maximum number of Shares
determined by the following procedure:
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<PAGE> 5
Step 1 -- Determine the aggregate amount which will be withheld
(based on the Employee's election form) from the Employees pay during the
Purchase Period;
Step 2 -- Divide the amount determined in Step 1 by the exercise
price of the Option and round down the quotient to the nearest whole
number. This figure shall be the fixed maximum number of Shares for which
the Employee my be granted an Option to purchase.
The date on which the Option is granted to each participating Employee
shall be the first day of the Purchase Period of such offering. Notice that an
Option has been granted shall be given to each participating Employee and shall
show the maximum number of Shares subject to the Option and the amount to be
withheld from his pay for each payroll period during the Purchase Period of
such offering.
In the event the total maximum number of Shares resulting from all
elections to purchase under any offering of Shares made under the Plan exceeds
the number of Shares offered, the Company reserves the right to reduce the
maximum number of Shares which Employees may purchase pursuant to their
elections to purchase, to allot the Shares available in such manner as it shall
determine, but generally pro rata to subscriptions received, and to grant
Options to purchase only for such reduced number of Shares.
In the event an Employee's election to purchase Shares pursuant to an
offering made under the Plan is canceled, in whole or in part, pursuant to the
provisions of the Plan, a proportionate portion of the Option granted to such
Employee shall automatically terminate.
7. LIMITATIONS OF NUMBER OF SHARES WHICH MAY BE PURCHASED. The
following limitations shall apply with respect to the number of Shares which
may be purchased by each Employee who elects to participate in an offering made
under the Plan:
(a) No Employee may purchase, or elect to purchase, Shares during
any one Offering pursuant to the Plan for an aggregate purchase price in
excess of the lesser of (i) the percentage of the Annual Compensation
applicable to such offering as determined by the Committee, or (ii) twenty
percent (20%) of his Annual Compensation (in each event, which amount
shall be prorated in the event the Purchase Period is less, or more, than
twelve (12) months).
(b) No Employee shall be granted an Option to purchase Shares under
the Plan if such Employee immediately after such Option is granted, owns
stock, within the meaning of Section 424(d) of the Code, and including
stock subject to purchase under any outstanding options, possessing five
percent (5%) or more of the total combined voting power or value of all
classes of stock of the Company or, if applicable, any Subsidiary or, if
applicable, a Parent.
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<PAGE> 6
(c) No Employee shall be granted an Option to purchase Shares which
permits his right to purchase stock under the Plan and all other employee
stock purchase plans of the Company and, if applicable, a Subsidiary, and,
if applicable, a Parent, to accrue (as determined under Section 423(b)(8)
of the Code) at a rate which exceeds twenty-five thousand dollars
($25,000) of the Fair Market value of such stock (determined on the date
the option to purchase is granted) for each calendar year in which such
Option is outstanding at any time.
An Employee may elect to purchase less than the number of Shares which
he a entitled to elect to purchase.
8. EXERCISE PRICE. The per Share exercise price for Shares subject to
purchase under Options granted pursuant to an offering made under the Plan
shall be eighty-five percent (85%) of the Fair Market Value of the Shares on
the first day of the Purchase Period of such offering, unless the Committee, in
its discretion, determines that the per Share exercise price applicable to such
offering will be greater than eighty-five percent (85%), but not more than one
hundred percent (100%), of the Fair Market Value of the Shares on the first day
of the Purchase Period of such offering.
9. METHOD OF PAYMENT. Payment of the exercise price of any Option
granted pursuant to the Plan shall be made in installments through payroll
deductions, with no right of prepayment. Each Employee electing to participate
in an offering of Shares made under the Plan shall authorize the Company to
withhold a designated amount from his regular weekly, biweekly, semimonthly or
monthly pay for each payroll period during the Purchase Period. All such
payroll deductions made for an Employee shall be credited to his Account. No
interest shall accrue on the amounts credited to an Employee's Account pursuant
to this Section 9.
10. EXERCISE OF OPTIONS. As of the close of business on the last
business day of the Purchase Period of any offering of Shares made under the
Plan, each outstanding Option shall automatically be exercised. Upon the
exercise of an option, the aggregate amount of the payroll deductions credited
to the Account of each Employee as of that date will automatically be applied
to the exercise price for the purchase of that number of Shares, rounded to the
nearest whole share, equal to the Account balance divided by the exercise
price, not to exceed the maximum number of shares issuable under the Option. A
certificate representing the Shares so purchased shall be delivered to the
Employee or the Employee's Successor as soon as reasonably practicable after
the exercise of the Option. The remainder of the Account balance not applied to
purchase Shares shall be paid in cash to the Employee or the Employee's
Successor as soon as reasonably practicable after the exercise of the Option.
11. RIGHTS AS STOCKHOLDER. An Employee will become a stockholder of
the Company with respect to Shares for which payment has been completed at the
close of business on the last business day of the Purchase Period. An Employee
will have no rights as a stockholder with
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<PAGE> 7
respect to Shares under an election to purchase Shares until he has become a
stockholder as provided above.
12. CANCELLATION OF ELECTION TO PURCHASE. An Employee who has elected
to purchase Shares during the Subscription Period of any offering made under
the Plan may cancel his election in its entirety or may partially cancel his
election by reducing the amount which he has authorized the Company to withhold
from his pay for each payroll period during the Purchase Period. Any such full
or partial cancellation shall be effective upon the delivery by the Employee of
written notice of cancellation to the Chief Financial Officer of the Company.
Such notice of cancellation must be so delivered before the close of business
on the last business day of the Purchase Period. If an Employee partially
cancels his original election by reducing the amount authorized to be withheld
from his pay, he shall continue to make installment payments at the reduced
rate for the remainder of the Purchase Period. Only one partial cancellation
may be made during a Purchase Period.
An Employee's rights upon the full or partial cancellation of his election to
purchase Shares shall be limited to the following:
(a) He may receive in cash, as soon as practicable after delivery
of the notice of cancellation the amount then credited to his Account,
except that, in the case of a partial cancellation, he must retain in his
Account an amount equal to the amount of his new payroll deduction times
the number of payroll periods in the Purchase Period through the date of
cancellation, or
(b) He may have the amount credited to his Account at the time the
cancellation becomes effective applied to the purchase of the number of
Shares such amount will then purchase.
If option (b) is elected, installment payments must be continued for the month
in which the notice of cancellation is given. The cancellation and purchase of
Shares will become effective at the close of business on the last business day
of the Purchase Period.
13. LEAVE OF ABSENCE OR LAYOFF. An Employee purchasing Shares under
the Plan who is granted a leave of absence (including a military leave) or is
laid off during the Purchase Period may at that time (on a form provided by the
Company) elect one of the following:
(a) He may suspend payments during the leave of absence, or, in the
case of a layoff, he may suspend payments for not more than ninety (90)
days, but not in either case beyond the last month of the Purchase Period,
or
(b) He may make his installment payments in cash but not, in case
of leave of absence, for longer than his leave nor more than ninety (90)
days in case of a layoff, and in any event no later than the end of the
Purchase Period.
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<PAGE> 8
If option (a) is elected, the Employee at the end of the suspension period must
make up the deficiency in his Account either by immediate lump sum payment or
with increased installment payments so that payment for the maximum number of
Shares covered by his Option will be completed in the last month of the
Purchase Period. If the Employee elects to make increased installment payments,
he may, nevertheless, at any time before the end of the Purchase Period make up
his remaining deficiency by a lump sum payment.
If an Employee who has elected either of optional (a) or (b) does not return to
active service upon the expiration of his leave of absence or within ninety
(90) days from the date of his layoff, his election to purchase shall be deemed
to have been canceled at that time, and the Employee's only right will be to
receive in cash the amount credited to his Account.
14. EFFECT OF FAILURE TO MAKE PAYMENTS WHEN DUE. If in any payroll
period for any reason not set forth in Section 13, an Employee who has filed an
election to purchase Shares under the Plan has no pay, or his pay is
insufficient (after other authorized deductions) in any payroll period to
permit deduction of his installment payment, such payment may be made in cash
at the time. If not so made, the Company shall have the right, as set forth
below, to treat such failure as a cancellation of the Employee's election to
purchase Shares. If the Company does not treat such failure as a cancellation
of the Employee's election to purchase Shares, the Employee, when his pay is
again sufficient to permit the resumption of installment payments, must pay in
cash the amount of the deficiency in his Account or arrange for uniformly
increased installment payments so that payment for the maximum number of Shares
covered by his Option will be completed in the last month of the Purchase
Period. If the Employee elects to make increased installment payments, he may,
nevertheless, at any time prior to the end of the Purchase Period make up the
remaining deficiency by a lump sum payment.
Subject to the above and other provisions of the Plan permitting postponement,
the Company may treat the failure by an Employee to make any payment as a
cancellation of his election to purchase Shares. Such cancellation will be
affected by mailing notice to him at his last known business or home address.
Upon such mailing, the Employee's only right will be to receive in cash the
amount credited to his Account.
15. RETIREMENT. If an Employee who retires in a manner entitling him
to early, normal or late retirement benefits under the provisions of any
retirement plan of the Company or a Subsidiary in which the Employee
participates (or if no such plan then exists, at or after age sixty-five (65))
has an election to purchase Shares in effect at the time of his retirement, he
may, within three (3) months after the date of his retirement (but in no event
later than the end of the Purchase Period), by delivering written notice to the
Chief Financial Officer of the Company, elect to:
(a) Complete the remaining installment payments in cash,
(b) Make a lump sum payment in the amount of any deficiency for the
remaining portion of the Purchase Period, or
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<PAGE> 9
(c) Cancel his election to purchase Shares in accordance with the
provisions of Section 12.
If no such notice is given within such period, the election will be deemed
canceled as of the date of retirement and the only right of the Employee will
be to receive in cash the amount credited to his Account.
16. DEATH. If an Employee, including a retired Employee, dies and has
an election to purchase Shares in effect at the time of his death, the
Employee's Successor may, within three (3) months from the date of death (but
in no event later than the end of the Purchase Period), by delivering written
notice to the Chief Financial Officer of the Company, elect to:
(a) Complete the remaining installment payments in cash,
(b) Make a Lump sum payment in the amount of any deficiency for the
remaining portion of the Purchase Period, or
(c) Cancel the election to purchase Shares in accordance with the
provisions of Section 12.
If no such notice is given within such period, the election will be deemed
canceled as of the date of death, and the only right of such Successor will be
to receive in cash the amount credited to the Employee's Account.
17. TERMINATION OF EMPLOYMENT OTHER THAN FOR RETIREMENT OR DEATH. If
an Employee's employment is terminated for any reason other than retirement or
death prior to the end of the Purchase Period, his election to purchase shall
thereupon be deemed canceled as of the date on which his employment terminated.
In such an event, no further payments under such election will be permitted,
and the Employee's only right will be to receive in cash the amount credited to
his Account.
18. NONTRANSFERABILITY OF OPTIONS. An Option, or an Employee's right
to any amounts held for his Account under the Plan, shall not be transferable,
other than (a) by will or the laws of descent and distribution, and an Option
may be exercised, during the lifetime of the holder of the Option, only by the
holder or in the event of death, the holder's Successor or (b) 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.
19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of
changes in all of the outstanding Shares by reason of stock dividends, stock
splits, recapitalizations, mergers, consolidations, combinations, or exchanges
of shares, separations, reorganizations or liquidations, or similar events, or
in the event of extraordinary cash or non-cash dividends (as defined in
Treasury Regulation Section 1.162-27(e)(2)(iii)(C)) being declared with respect
to the Shares, or
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<PAGE> 10
similar transactions or events, the number and class of Shares available under
the Plan in the aggregate, the number and class of Shares subject to Options
theretofore granted, applicable purchase prices and all other applicable
provisions, shall, subject to the provisions of the Plan, be equitably adjusted
by the Committee to prevent expansion or dilution of such Options. The foregoing
adjustment and the manner of application of the foregoing provisions shall be
determined by the Committee in its sole discretion. Any such adjustment may
provide for the elimination of any fractional Share which might otherwise become
subject to an Option.
20. UNUSUAL CORPORATE EVENT. Notwithstanding anything to the contrary,
in the case of an unusual corporate event such as a liquidation, merger,
reorganization (other than a reorganization defined in Code Section
368(a)(1)(F)), or other business combination, acquisition or change in control
of the Company through a tender offer or otherwise, the Committee may, in its
sole discretion, elect to terminate the Purchase Period of any offering then in
effect as of the last day of the month during which the unusual corporate event
occurs. In the event of any such termination, an option holder shall have the
right, commencing at least five (5) days prior to such unusual corporate event,
to either make a lump sum payment in the amount equal to the remaining
installment payments to be made pursuant to his election to purchase Shares, or
to cancel his election to purchase Shares in the manner set forth in Section
12.
21. TAXES. The Employee, or his Successor, shall promptly notify the
Company of any disposition of Shares acquired pursuant to the exercise of an
Option under the Plan and the Company shall have the right to deduct any taxes
required by Law to be withheld as a result of such disposition from any amounts
otherwise payable then or at any time thereafter to the Employee. The Company
shall also have the right to require an Employee, or a Successor, entitled to
receive Shares pursuant to the exercise of an Option to pay the Company the
amount of any taxes which the Company is or will be required to withhold with
respect to the Shares before the certificate for such Shares is delivered
pursuant to the Option.
22. TERMINATION OF THE PLAN. The Plan shall terminate ten (10) years
from the date hereof, and an Option shall not be granted under the Plan after
that date although the terms of any Options may be amended at any date prior to
the end of its term in accordance with the Plan. Any Options outstanding at the
time of termination of the Plan shall continue in full force and effect
according to the terms and conditions of the Option and this Plan.
23. AMENDMENT OF THE PLAN. The Plan may be amended at any time and
from time to time by the Board, but no amendment without the approval of the
stockholders of the Company shall be made if stockholder approval under Section
423 of the Code or Rule 16b-3 would be required. Notwithstanding the
discretionary authority granted to the Committee in Section 4 of the Plan, no
amendment of the Plan or any Option granted under the Plan shall impair any of
the rights of any holder, without the holder's consent, under any Option
theretofore granted under the Plan.
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24. DELIVERY OF SHARES ON EXERCISE. Delivery of certificates for
Shares pursuant to the exercise of an Option may be postponed by the Company
for such period as may be required for it to comply with any applicable
requirements of any federal, state or local law or regulation or any
administrative or quasi-administrative requirement applicable to the sale,
issuance, distribution or delivery of such Shares. The Committee may, in its
sole discretion, require an Employee to furnish the Company with appropriate
representations and a written investment letter prior to the exercise of an
Option or the delivery of any Shares pursuant to the exercise of an Option.
25. FEES AND COSTS. The Company shall pay all original issue taxes on
the exercise of any Option granted under the Plan and all other fees and
expenses necessarily incurred by the Company in connection therewith.
26. NO CONTRACT OF EMPLOYMENT. Neither the adoption of this Plan nor
the grant of any Option shall be deemed to obligate the Company or any
Subsidiary to continue the employment of any Employee.
27. EFFECTIVENESS OF THE PLAN. The Plan shall become effective on the
date specified by the Board. Following approval by the Board, the Plan shall be
submitted to the Company's stockholders for approval and unless the Plan is
approved by the affirmative votes of the holders of shares having a majority of
the voting power of the shares represented at a meeting duly held in accordance
with Delaware Law within twelve (12) months after being approved by the Board,
the Plan and all Options granted under it shall be void and of no force and
effect.
28. OTHER PROVISIONS. As used in the Plan, and in other documents
prepared in implementation of the Plan, references to the masculine pronoun
shall be deemed to refer to the feminine or neuter, and references in the
singular or the plural shall refer to the plural or the singular, as the
identity of the person or persons or entity or entities being referred to may
require. The captions used in the Plan and in such other documents prepared in
implementation of the Plan are for convenience only and shall not affect the
meaning of any provision hereof or thereof.
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INSTRUCTIONS TO STOCK PURCHASE ELECTION AGREEMENT
1. Carefully read the Summary Plan Description of the Waterlink, Inc.
Employee Stock Purchase Plan as well as these instructions.
2. Indicate the amount to be deducted from your net pay during each of
the [ ] payroll periods during the Purchase Period. The Purchase
Period for the 1997/1998 offering under the Plan commences on the date
of the Company's initial public offering and ends on [ ], 1998. You
will receive a notice indicating the stock price and the maximum
number of shares which you can purchase under the Plan after you have
returned the completed Stock Purchase Election Agreement. The purchase
price will be 85% of the fair market value of the Company's Common
Stock on the first day of the Purchase Period.
Payroll deductions will commence with the first payroll after the
Company's initial public offering.
The aggregate amount to be deducted from your net pay during the Purchase
Period may not exceed 20% of your annual compensation. Annual compensation
with respect to the offering under the Plan is defined as the sum of (i)
your annual base rate of pay for the one year period commencing on the
date of the Company's initial public offering and (ii) the amount of any
bonus received during the one year period commencing on the date of the
Company's initial public offering.
3. Complete the employee information section of the form. Please print
the requested information. Be sure to include your complete home
address (including zip code) as correspondence regarding the Plan will
be sent to your home.
4. Complete the beneficiary information section. Please include the full
name of your designated beneficiary and indicate that person's
relationship to you.
5. Sign and date the form.
6. Return the completed Stock Purchase Election Agreement to [ ]. In
order to participate in the offering, the completed form must be
returned by Friday, [ ], 1997.
Attached is a summary of answers to common questions which employees have
asked regarding the Employee Stock Purchase Plan. If you have any
additional questions or require further information, please contact your
Benefits Administrator.
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EMPLOYEE STOCK PURCHASE PLAN OF WATERLINK, INC.
STOCK PURCHASE ELECTION FORM - 1997/1998
Please check one of the following boxes, sign this form and return it to [ ].
I do not wish to participate in this offering
_ (if you do not wish to participate simply sign this form on the line
at the bottom and return it to the designated person for your
division)
_ I elect to participate in this offering
(if you elect to participate in the offering please fill in the
information requested below, sign this form and return it to the
designated person for your division)
The undersigned employee of Waterlink, Inc. or one of its subsidiaries (the
"Company") elects to participate in the Company's 1997/1998 offering under its
Employee Stock Purchase Plan commencing on the date of the Company's initial
public offering through [the first anniversary thereof] (the "Purchase
Period"). The undersigned employee authorizes the Company to deduct the
following amount from his or her net pay during each of the 26 bi-weekly
payroll periods within the Purchase Period.
Bi-Weekly Deduction $____________
I understand that my purchase of Common Stock of the Company is subject to the
terms and conditions of the Plan and I acknowledge receipt of a summary of the
Plan and a copy of the Company's recent annual and quarterly periodic reports.
I understand that the shares to be purchased by me pursuant to the Plan will be
purchased at a 15% discount off of the market price on the first day of the
Purchase Period and that I will be notified of such price after that date.
Employee Information (please print)
Name______________________________________
Social Sec. Number________________________
Home Address______________________________
Division__________________________________
Beneficiary Information (Please print)
Name______________________________________
Social Sec. Number________________________
Home Address______________________________
Relationship to Employee__________________
________________________________________________ ______________________
Employee's Signature Date
13
<PAGE> 1
Exhibit 10.25
1997 NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN OF
WATERLINK, INC.
1. PURPOSE OF THE PLAN. This 1997 Non-Employee Director Stock Option
Plan of Waterlink, Inc. adopted on this 23rd day of May 1997, is intended to
encourage directors of the Company who are not officers or key employees of the
Company or any of its Subsidiaries to acquire or increase their ownership of
common stock of the Company. The opportunity so provided is intended to foster
in participants an incentive to put forth maximum effort for the continued
success and growth of the Company and its Subsidiaries, to aid in retaining
individuals who put forth such efforts, and to assist in attracting the best
available individuals to the Company in the future.
2. DEFINITIONS. When used herein, the following terms shall have the
meaning set forth below:
2.1 "Board" means the Board of Directors of Waterlink, Inc.
2.2 "Change in Control" of the Company means (i) the acquisition of
beneficial ownership (as defined in Rule 13d-3 under the Exchange Act,
directly or indirectly, by any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act), other than the Company, of
securities of the Company representing a majority or more of the combined
voting power of the Company's then outstanding securities, (ii) the
failure, for any reason, of the individuals who presently constitute the
Board of Directors (the "Incumbent Board") to constitute at least a
majority thereof, provided that any director whose election has been
approved in advance by directors representing at least two-thirds (2/3) of
the directors comprising the Incumbent Board shall be considered, for
these purposes, as though such director were a member of the Incumbent
Board, (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least a majority of the combined
voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, and
such merger or consolidation occurs; or (iv) the stockholders of the
Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
2.3 "Code" means the Internal Revenue Code of 1986, as in effect at
the time of reference, or any successor revenue code which may hereafter
be adopted in lieu thereof, and any reference to any specific provisions
of the Code shall refer to the corresponding provisions of the Code as it
may hereafter be amended or replaced.
2.4 "Committee" means the Compensation Committee of the Board or any
other committee appointed by the Board which is invested by the Board with
responsibility for the
<PAGE> 2
administration of the Plan and whose members meet the requirements for
eligibility to serve as set forth in Rule 16b-3 and in the Plan.
2.5 "Company" means Waterlink, Inc.
2.6 "Directors" means directors who serve on the Board and who are not
officers or key employees of the Company or any of its Subsidiaries.
2.7 "ERISA" means the Employee Retirement Income Security Act of 1974,
as in effect at the time of reference, or any successor law which may
hereafter be adopted in lieu thereof, and any reference to any specific
provisions of ERISA shall refer to the corresponding provisions of ERISA
as it may hereafter be amended or replaced.
2.8 "Exchange Act" means the Securities Exchange Act of 1934, as in
effect at the time of reference, or any successor law which may hereafter
be adopted in lieu thereof, and any reference to any specific provisions
of the Exchange Act shall refer to the corresponding provisions of the
Exchange Act as it may be amended or replaced.
2.9 "Fair Market Value" means, with respect to the Shares, (a) if the
Shares are listed or admitted for trading on any national securities
exchange or included in The Nasdaq National Market or Nasdaq SmallCap
Market, the last reported sales price of the Shares on the last business
day prior to the date the value is to be determined as reported on such
exchange; (b) if the Shares are not listed or admitted for trading on any
national securities exchange or included in The Nasdaq National Market or
Nasdaq SmallCap Market, the average of the last reported closing bid and
asked quotation for the Shares on the last business day prior to the date
the value is to be determined as reported on the Automated Quotation
System of NASDAQ or a similar service if NASDAQ is not reporting such
information; (c) if the Shares are not listed or admitted for trading on
any national securities exchange or included in The Nasdaq National Market
or Nasdaq SmallCap Market or quoted by NASDAQ or a similar service, the
average of the last reported bid and asked quotation for the Shares on the
last business day prior to the date the value is to be determined as
quoted by a market maker in the Shares (or if there is more than one
market maker, the bid and asked quotation shall be obtained from two
market makers and the average of the lowest bid and highest asked
quotation shall be the "Fair Market Value"); or (d) if the Shares are not
listed or admitted for trading on any national securities exchange or
included in The Nasdaq National Market or Nasdaq SmallCap Market or quoted
by NASDAQ and there is no market maker in the Shares, the fair market
value of the Shares as determined by the Committee in good faith.
2.10 "Option" means the right to purchase the number of Shares
specified by the Plan at a price and for a term fixed by the Plan, and
subject to such other limitations and restrictions as the Plan and the
Committee imposes.
2
<PAGE> 3
2.11 "Option Agreement" means a written agreement in such form as may
be, from time to time, hereafter approved by the Committee, which shall be
duly executed by the Company and the Director and which shall set forth
the terms and conditions of an Option under the Plan.
2.12 "Plan" means the 1997 Non-Employee Director Stock Option Plan of
Waterlink, Inc.
2.13 "Regulation T" means Part 220, chapter II, title 12 of the Code
of Federal Regulations, issued by the Board of Governors of the Federal
Reserve System pursuant to the Exchange Act, as amended from time to time.
2.14 "Rule 16b-3" means Rule 16b-3 of the General Rules and
Regulations of the Securities and Exchange Commission as in effect at the
time of reference, or any successor rules or regulations which may
hereafter be adopted in lieu thereof, and any reference to any specific
provisions of Rule 16b-3 shall refer to the corresponding provisions of
Rule 16b-3 as it may hereafter be amended or replaced.
2.15 "Shares" means shares of the Company's $.01 par value common
stock or, if by reason of the adjustment provisions contained herein, any
rights under an Option under the Plan pertain to any other security, such
other security.
2.16 "Subsidiary" or "Subsidiaries" means any corporation or
corporations other than the Company in an unbroken chain of corporations
beginning with the Company if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
2.17 "Successor" means the legal representative of the estate of a
deceased Director or the person or persons who shall acquire the right to
exercise or receive an Option by bequest or inheritance or by reason of
the death of the Director.
2.18 "Term" means the period during which a particular Option may be
exercised.
3. STOCK SUBJECT TO THE PLAN. There will be reserved for use, upon the
exercise of Options to be granted from time to time under the Plan, an
aggregate of 150,000 Shares, which Shares may be, in whole or in part, as the
Board shall from time to time determine, authorized but unissued Shares, or
issued Shares which shall have been reacquired by the Company. Any Shares
subject to issuance upon exercise of Options but which are not issued because
of a surrender, lapse, expiration or termination of any such Option prior to
issuance of the Shares shall once again be available for issuance in
satisfaction of Options.
3
<PAGE> 4
4. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Committee. Subject to the provisions of the Plan, the Committee shall have full
authority, in its discretion, to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, and generally to interpret
and determine any and all matters whatsoever relating to the administration of
the Plan and the granting of Options hereunder. The Board may, from time to
time, appoint members to the Committee in substitution for or in addition to
members previously appointed and may fill vacancies, however caused, in the
Committee. The Committee shall select one of its members as its chairman and
shall hold its meetings at such times and places as it shall deem advisable. A
majority of its members shall constitute a quorum. Any action of the Committee
may be taken by a written instrument signed by all of the members, and any
action so taken shall be fully as effective as if it had been taken by a vote
of a majority of the members at a meeting duly called and held. The Committee
shall make such rules and regulations for the conduct of its business as it
shall deem advisable and shall appoint a Secretary who shall keep minutes of
its meetings and records of all action taken in writing without a meeting. No
member of the Committee shall be liable, in the absence of bad faith, for any
act or omission with respect to his or her service on the Committee.
5. GRANT OF OPTIONS.
5.1 Existing Directors. On each anniversary date of the date the Plan
becomes effective, each Director who (i) was a Director on the date the
Plan became effective and (ii) is still a Director on such anniversary
date shall be granted an Option to purchase 5,000 Shares without further
action by the Board or the Committee.
5.2 Future Directors. Each Director who joins the Board after the date
the Plan becomes effective shall be granted an Option on the first day of
his initial term on the Board to purchase 3,000 Shares without further
action by the Board or the Committee. On each anniversary date of the date
the Plan becomes effective following the date the Director joined the
Board (which first anniversary date is at least six months following the
initial grant date hereunder), each such Director who is still a Director
on such anniversary date shall be granted an Option to purchase 5,000
Shares without further action by the Board or the Committee.
5.3 Limitations. If the number of Shares available to grant under the
Plan on a scheduled date of grant is insufficient to make all automatic
grants required to be made pursuant to the Plan on such date, then each
eligible Director shall receive an Option to purchase a pro rata number of
the remaining Shares available under the Plan; provided further, however,
that if such proration results in fractional Shares, then such Option
shall be rounded down to the nearest number of whole Shares.
4
<PAGE> 5
6. BASIC STOCK OPTION PROVISIONS.
6.1 Option Price. The option price per share of any Option granted
under the Plan shall be the Fair Market Value of the Shares covered by the
Option on the date the Option is granted.
6.2 Terms of Options.
(a) Options granted hereunder shall be exercisable for a Term of
ten (10) years from the date of grant thereof, but shall be subject to
earlier termination as hereinafter provided, and
(b) Except as otherwise provided in the Plan, prior to its
expiration or termination, any Option granted hereunder may be
exercised within the following time limitations:
(i) After one (1) year from the date of grant, it may be
exercised as to not more than twenty-five percent (25%) of the
Shares originally subject to the Option.
(ii) After two (2) years from the date of grant, it may be
exercised as to not more than an aggregate of fifty percent (50%)
of the Shares originally subject to the Option.
(iii) After three (3) years from the date of grant, it may be
exercised as to not more than an aggregate of seventy-five percent
(75%) of the Shares originally subject to the Option.
(iv) After four (4) years from the date of grant, it may be
exercised as to any part or all of the Shares originally subject
to the Option.
6.3 Termination of Directorship. In the event a Director ceases to be
a member of the Board (other than by reason of death or disability), then
(a) an Option may be exercised by the Director (to the extent that the
Director was entitled to do so at the termination of his or her
directorship) at any time within three (3) months after he or she ceases
to be a member of the Board, but not beyond the Term of the Option and (b)
the portion of the Option that has not vested as of the date the Director
ceases to be a member of the Board shall automatically terminate.
6.4 Death or Disability of Director. If a Director dies or becomes
disabled while he or she is a member of the Board, or within three (3)
months after the date he or she ceases to be a member of the Board, then
(a) an Option may be exercised (to the extent the Director shall have been
entitled to do so at the time of his or her death or disability), by his
or her Successor, in the event of death, or by him or her or his or her
personal representative, as the case may be, in the event of disability,
5
<PAGE> 6
at any time within one (1) year after his or her death or termination of
directorship by reason of disability, but not beyond the Term of the
Option, or before the approval of the Plan by the Company's stockholders
and (b) the portion of the Option that has not vested as of the date of
the Director's death or the termination of his or her directorship by
reason of disability shall automatically terminate as of such date.
7. EXERCISE OF RIGHTS UNDER AWARDS.
7.1 Notice of Exercise. A Director entitled to exercise an Option may
do so by delivery of a written notice to that effect specifying the number
of Shares with respect to which the Option is being exercised and any
other information the Committee may require. The notice shall be
accompanied by payment in full of the purchase price of any Shares to be
purchased, which payment shall be made in cash or by certificates of
Shares held for more than six (6) months, duly endorsed in blank, equal in
value to the purchase price of the Shares to be purchased based on their
Fair Market Value at the time of exercise or a combination thereof. No
Shares shall be issued upon exercise of an Option until full payment has
been made therefor. All notices or requests provided for herein shall be
delivered to the Company's President, or such other person as the
Committee may designate. No fractional Shares shall be issued.
7.2 Cashless Exercise Procedures. The Company, in its sole discretion,
may establish procedures whereby a Director, subject to the requirements
of Rule 16b-3, Regulation T, federal income tax laws, and other federal,
state and local tax and securities laws, can exercise an Option or a
portion thereof without making a direct payment of the option price to the
Company. If the Company so elects to establish a cashless exercise
program, the Company shall determine, in its sole discretion, and from
time to time, such administrative procedures and policies as it deems
appropriate and such procedures and policies shall be binding on any
Director wishing to utilize the cashless exercise program.
8. OTHER OPTION TERMS AND CONDITIONS. Each Option or each Option
Agreement evidencing the grant of an Option shall contain such other terms and
conditions not inconsistent herewith as shall be approved by the Committee.
9. RIGHTS OF OPTION HOLDER. The holder of an Option shall not have any
of the rights of a stockholder with respect to the Shares subject to purchase
or receipt under his or her Option, except to the extent that one or more
certificates for such Shares shall be issuable to the holder upon the due
exercise of the Option and the payment in full of the purchase price therefor.
10. NONTRANSFERABILITY OF OPTIONS. An Option shall not be
transferable, other than: (a) by will or the laws of descent and distribution,
and an Option may be exercised, during the lifetime of the holder of the
Option, only by the holder, or in the event of death, the holder's Successor,
or in the event of disability, the holder's personal representative, or (b)
pursuant to a qualified domestic relation order, as defined in the Code or
ERISA or the rules thereunder.
6
<PAGE> 7
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of
changes in all of the outstanding Shares by reason of stock dividends, stock
splits, reclassifications, recapitalizations, mergers, consolidations,
combinations, or exchanges of shares, separations, reorganizations or
liquidations, or similar events, or in the event of extraordinary cash or
non-cash dividends being declared with respect to the Shares, or similar
transactions or events, the number and class of Shares available under the Plan
in the aggregate, the number and class of Shares subject to Options theretofore
granted, applicable purchase prices and all other applicable provisions, shall,
subject to the provisions of the Plan, be equitably adjusted by the Committee
(which adjustment may, but need not, include payment to the holder of an
Option, in cash or in shares, in an amount equal to the difference between the
price at which such Option may be exercised and the then current fair market
value of the Shares subject to such Option as equitably determined by the
Committee). The foregoing adjustment and the manner of application of the
foregoing provisions shall be determined by the Committee, in its sole
discretion. Any such adjustment may provide for the elimination of any
fractional share which might otherwise become subject to an Option.
12. CHANGE IN CONTROL. Notwithstanding anything to the contrary herein
or in any Option Agreement, in the case of a Change in Control of the Company,
each Option granted under the Plan shall terminate ninety (90) days after the
occurrence of such Change in Control, and an Option holder shall have the
right, commencing at least five (5) days prior to such Change in Control and
subject to any other limitation on exercise of an Option in effect on the date
of exercise, to immediately exercise any Option in full, without regard to any
vesting limitations, to the extent it shall not have been previously exercised.
13. FORMS OF OPTIONS. An Option shall be granted hereunder on the date
or dates specified in the Plan. Whenever the Plan provides for the receipt of
an Option by a Director, the Company's President or such other person as the
Committee shall appoint, shall forthwith send notice thereof to the Director,
in such form as the Committee shall approve, stating the number of Shares
subject to the Option, its Term, and the other terms and conditions thereof.
The notice shall be accompanied by a written Option Agreement, in such form as
may from time to time hereafter be approved by the Committee, which shall have
been duly executed by or on behalf of the Company. Execution by the Director to
whom such Option is granted of said Option Agreement in accordance with the
provisions set forth in this Plan shall be a condition precedent to the
exercise of any Option.
14. TAXES.
14.1 Right to Withhold Required Taxes. The Company shall have the
right to require a person entitled to receive Shares pursuant to the
exercise of an Option under the Plan to pay the Company the amount of any
taxes which the Company is or will be required to withhold, if any, with
respect to such Shares before the certificate for such Shares is delivered
pursuant to the Option. Furthermore, the Company may elect to deduct such
taxes from any other amounts then payable in cash or in shares or from any
other amounts payable any time thereafter to the Director.
7
<PAGE> 8
14.2 Director Election to Withhold Shares. A Director may satisfy the
withholding tax liability, if any, with respect to the exercise of an
Option, by having the Company withhold Shares otherwise issuable upon
exercise of the Option if such Director makes an election to do so which
satisfies the requirements of Rule 16b-3.
15. TERMINATION OF THE PLAN. The Plan shall terminate ten (10) years
from the date the Plan becomes effective, and an Option shall not be granted
under the Plan after that date although the terms of any Option may be amended
at any date prior to the end of its Term in accordance with the Plan. Any
Option outstanding at the time of termination of the Plan shall continue in
full force and effect according to the terms and conditions of the Option and
this Plan.
16. AMENDMENT OF THE PLAN. The Plan may be amended at any time and
from time to time by the Board, but no amendment without the approval of the
stockholders of the Company shall be made if stockholder approval under Rule
16b-3 would be required. Notwithstanding the discretionary authority granted to
the Committee in Section 4 of the Plan, no amendment of the Plan or any Option
granted under the Plan shall impair any of the rights of any holder, without
the holder's consent, under any Option theretofore granted under the Plan.
17. DELIVERY OF SHARES ON EXERCISE. Delivery of certificates for
Shares pursuant to an Option exercise may be postponed by the Company for such
period as may be required for it with reasonable diligence to comply with any
applicable requirements of any federal, state or local law or regulation or any
administrative or quasi-administrative requirement applicable to the sale,
issuance, distribution or delivery of such Shares. The Committee may, in its
sole discretion, require a Director to furnish the Company with appropriate
representations and a written investment letter prior to the exercise of an
Option or the delivery of any Shares pursuant thereto.
18. FEES AND COSTS. The Company shall pay all original issue taxes on
the exercise of any Option granted under the Plan and all other fees and
expenses necessarily incurred by the Company in connection therewith.
19. EFFECTIVENESS OF THE PLAN. The Plan shall become effective on the
date specified by the Board.
20. OTHER PROVISIONS. As used in the Plan, and in Option Agreements
and other documents prepared in implementation of the Plan, references to the
masculine pronoun shall be deemed to refer to the feminine or neuter, and
references in the singular or the plural shall refer to the plural or the
singular, as the identity of the person or persons or entity or entities being
referred to may require. The captions used in the Plan and in such Option
Agreements and other documents prepared in implementation of the Plan are for
convenience only and shall not affect the meaning of any provision hereof or
thereof.
8
<PAGE> 9
21. DELAWARE LAW TO GOVERN. This Plan shall be governed by and
construed in accordance with the laws of the State of Delaware.
9
<PAGE> 1
Exhibit 11.1
WATERLINK, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31,
September 30, ------------------------------
1996 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Average Common Shares Outstanding 1,469,290 1,450,847 2,363,607
Net effect of the following (as if outstanding
for all periods presented):
Shares issued in connection with acquisition of
Waterlink Technologies 610,418 611,784 92,133
Shares issued in connection with exercise of options
to purchase Common Stock 115,000 115,000 104,423
Conversion of convertible subordinated notes
into Common Stock 100,000 100,000 7,692
Conversion of Preferred Stock into
Common Stock (1) 3,250,000 3,250,000 3,250,000
Impact of outstanding stock options and warrants
(using treasury stock method) (2) 883,088 896,427 847,274
---------- ---------- ----------
Number of shares used to compute pro forma earnings
per share data 6,427,796 6,424,058 6,665,130
========== ========== ==========
Net income $ 306,000 $ 19,000 $ 985,000
========== ========== ==========
Pro Forma Net Income per Share $ 0.05 $ 0.00 $ 0.15
========== ========== ==========
<FN>
(1) Assumes conversion of Series A, Series B and Series C Preferred Stock into
Common Stock on a one-for-one basis.
(2) Using an initial public offering price of $11.00 per share.
</TABLE>
<PAGE> 1
Exhibit 21.1
LIST OF SUBSIDIARIES OF WATERLINK, INC.
---------------------------------------
1. Aero-Mod Incorporated, a Delaware corporation
2. Great Lakes Environmental, Inc., a Delaware corporation
3. Mass Transfer Systems, Inc., a Delaware corporation
4. San Tech Equipment, Inc., an Ohio corporation
5. Waterlink Management, Inc., an Ohio corporation
6. Waterlink Technologies, Inc., a Delaware corporation
7. Water Equipment Technologies (Europe) Limited, a UK corporation
8. Waterlink Operational Services, Inc., a Delaware corporation
9. Waterlink (UK) Ltd., a UK corporation
10. Waterlink (Germany) GmbH, a German corporation
11. Axel Johnson Engineering GmbH, a German corporation
12. Waterlink (Sweden) AB, a Swedish corporation
13. Nordic Water Products AB, a Swedish corporation
14. Nordic Water Products Spain S.L., a Spanish corporation
15. Noxon AB, a Swedish corporation
16. Nordic Water Products OY, a Finish corporation
17. Zickert Miljo A/S, a Danish corporation
18. Zickert Products AB, a Swedish corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of (i) our report dated November 27, 1996 (except Notes 2 and 5, as to which
the date is March 5, 1997), with respect to the consolidated financial
statements of Waterlink, Inc.; (ii) our report dated February 28 ,1997 with
respect to the financial statements of Mass Transfer Systems, Inc.; and (iii)
our report dated March 7, 1997 with respect to the consolidated financial
statements of Water Equipment Technologies, Inc. in Amendment No.1 to the
Registration Statement (Form S-1 No. 333-25249) and related Prospectus of
Waterlink, Inc. for the registration of 4,500,000 shares of its common stock.
ERNST & YOUNG LLP
Canton, Ohio
May 22, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated October 25, 1996 (except Note 9(b), which is as of April
15, 1997), with respect to the consolidated financial statements of Bioclear
Technology, Inc. included in Amendment No. 1 to the Registration Statement (Form
S-1 No. 333-25249) and related Prospectus of Waterlink, Inc. dated May 23, 1997.
ERNST & YOUNG
Chartered Accountants
Winnipeg, Canada
May 22, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 12, 1997 with respect to the combined financial
statements of Nordic Water Products Group included in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-25249) and related Prospectus of
Waterlink, Inc. for the registration of its common stock.
ERNST & YOUNG AB
Torbjorn Hanson
Stockholm, Sweden
May 22, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 23, 1997 with respect to the financial
statements of Great Lakes Environmental, Inc. included in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-25249) and related Prospectus of
Waterlink, Inc. for the registration of shares of its common stock.
Dennis D. Tysl & Company, Ltd.
Palatine, Illinois
May 22, 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated April 3, 1997 with respect to the combined financial
statements of Aero-Mod, Inc. and Affiliates included in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-25249) and related Prospectus of
Waterlink, Inc. for the registration of shares of its common stock.
Sincerely
Sink, Gillmore & Gordon LLP
James L. Gordon, C.P.A.
Manhattan, Kansas
May 22, 1997
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 18, 1997 with respect to the financial statements
of Lanco Environmental Products, Inc. included in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-25249) and related Prospectus of
Waterlink, Inc. for the registration of shares of its common stock.
Plante & Moran LLP
Grand Rapids, Michigan
May 23, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS OF WATERLINK, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 4,298,000
<SECURITIES> 0
<RECEIVABLES> 18,683,000
<ALLOWANCES> 112,000
<INVENTORY> 8,818,000
<CURRENT-ASSETS> 37,193,000
<PP&E> 3,330,000
<DEPRECIATION> 219,000
<TOTAL-ASSETS> 62,687,000
<CURRENT-LIABILITIES> 21,230,000
<BONDS> 26,010,000
<COMMON> 3,000
8,500,000
0
<OTHER-SE> 6,944,000
<TOTAL-LIABILITY-AND-EQUITY> 62,687,000
<SALES> 24,727,000
<TOTAL-REVENUES> 24,727,000
<CGS> 14,800,000
<TOTAL-COSTS> 14,800,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (612,000)
<INCOME-PRETAX> 1,632,000
<INCOME-TAX> 647,000
<INCOME-CONTINUING> 985,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 985,000
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
