<PAGE> 1
1998 Annual Report and Form 10-K
SOLUTIONS
SPEED
SPIRIT
Focus on profitable performance
[Hand in water]
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WATERLINK
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<PAGE> 2
SOLUTIONS
Waterlink is uniquely positioned to fulfill global demand for total water and
wastewater treatment solutions.
SPEED
OUR COMPANY is a leading global provider of water and wastewater treatment
equipment, systems, and services. From a single product to a fully engineered
and operated system, we offer single-source solutions to the water treatment
challenges faced by municipalities, industrial operations and other water users
throughout the world.
SPIRIT
OUR VISION is to be the most flexible and efficient leading global provider of
quality, single-source water purification and wastewater treatment solutions to
our customers while providing an above-average return to our shareholders and
promising opportunities to our employees and representatives.
OUR MARKET is vast and steadily growing. The global environmental market is
estimated to be $888 billion, with the water and wastewater equipment segment
alone representing $53 billion. The market for water and wastewater equipment
and services is projected to grow well into the next century as the world's
population increases, water becomes more scarce and expensive, health standards
improve, and industrial process water and wastewater treatment requirements
become more stringent. Because safe drinking water and effective wastewater
treatment are essential to human life, an increasing global need for solutions
is certain.
The market for water and wastewater equipment and services is projected to
grow well into the next century.
OUR COMPETITIVE ADVANTAGE
SOLUTIONS
Our comprehensive range of products and our applications engineering expertise
enable us to produce the high performing, single-source SOLUTIONS that water and
wastewater treatment customers are now demanding.
SPEED
Our new organizational structure is designed for flexibility and SPEED in
responding to customers, capitalizing on opportunities and solving problems.
SPIRIT
The expertise, innovation, efficiency and enthusiasm of Waterlink employees
engender a team SPIRIT unmatched in the industry. It is our people that will
make us a great company.
OUR 1999 FOCUS: PROFITABLE GROWTH
All of our resources are focused on a single objective -- to achieve
sustainable, profitable growth in 1999. We are committed to delivering
shareholder value.
<PAGE> 3
<TABLE>
<CAPTION>
FINANCIAL SUMMARY
WATERLINK, INC. AND SUBSIDIARIES
PRO-FORMA REVENUE SOURCES
- --------------------------------------------------------------------------------
Consumables United States Municipal
<S> <C> <C>
28% 51% 31%
Products & Systems International Industrial
72% 49% 69%
<CAPTION>
95 96 97 98 98PF
<S> <C> <C> <C> <C> <C>
Net Sales $ 2,684 $ 19,801 $64,699 $135,167 $ 183,521
in thousands
EBITDA* -336 1,674 6,104 12,451 17,925
in thousands
Backlog 3,224 10,967 30,547 38,082
in thousands
Total Assets 10,819 28,991 115,860 183,561
in thousands
Stockholder's Equity -11 2,407 70,873 54,878
in thousands
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
in thousands 1995 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 2,684 $ 19,801 $ 64,699 $135,167
- ---------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss)* (366) 1,232 4,875 9,125
- ---------------------------------------------------------------------------------------------------------------------------
EBITDA* (336) 1,674 6,104 12,451
- ---------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) (512) 306 372 (17,504)
===========================================================================================================================
===========================================================================================================================
AT SEPTEMBER 30,
----------------------------------------------------------------------------
1995 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------------------------
Working Capital $ 2,064 $ 3,438 $ 19,430 $ 30,737
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets 10,819 28,991 115,860 183,561
- ---------------------------------------------------------------------------------------------------------------------------
Total Debt 6,039 12,145 18,961 87,318
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Deficit) (11) 2,407 70,873 54,878
- ---------------------------------------------------------------------------------------------------------------------------
Order Backlog 3,224 10,967 30,547 38,082
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
* Operating income and EBITDA exclude a special charge to operations of
$2,630,000 in 1997 related to the Company's initial public offering and
$21,636,000 in 1998 primarily related to the Company's 1999 strategic
operating plan.
PF Pro-Forma assumes all acquisitions were completed as of October 1, 1997.
</TABLE>
waterlink annual report 1998
1
<PAGE> 4
TO OUR SHAREHOLDERS
By revenue, Waterlink is now one of the top five water/wastewater equipment
manufacturers headquartered in the United States.
Our first full year as a rapidly growing public company was one of both
achievements and challenges. We are proud to report to you that our spirited
people responded well to both conditions, enabling Waterlink to achieve
significant benchmarks toward becoming a global industry leader.
In fiscal 1998, our revenues increased 109% to $135 million, and Waterlink
became, by revenue, one of the top five water/wastewater equipment manufacturers
headquartered in the United States. On a pro-forma basis, our revenues
approached the $200 million mark.
Our revenue growth was primarily due to our successful acquisition program,
which added several more outstanding companies to our organization and greatly
expanded our product capability, geographical reach and customer base. Our
Carbon Group acquisition is particularly notable for its product base
composition, which raised our consumable product revenue to 28% of the total and
achieved a major 1998 objective to offset the revenue peaks and valleys of our
business. Also of note, this acquisition significantly broadened our
environmental scope by adding air pollution control equipment and systems to our
water and wastewater product mix.
In 1998, Waterlink grew to employ 750 people in 23 companies operating from
seven countries and serving the world. Among our 1998 achievements, we gained an
exclusive United States license for a promising biological wastewater treatment
technology, which we believe to have significant potential. In Germany, we
installed what we believe is the largest continuous sand filter application in
the world to date, upholding our industry-leading status in that technology. In
the United States, we supplied the reverse osmosis system for one of the largest
municipal drinking water plants on the East Coast to use membrane technology for
the treatment of brackish water.
In 1998, Waterlink became a leading world supplier of seawater desalination
systems designed specifically for the rugged demands of offshore energy
platforms and floating production facilities. At one of the largest industrial
wastewater facilities in Europe, we supplied what we believe to be the largest
jet aeration system in the world. Consumers throughout the world purchased our
activated carbon as part of home water and air filtration products manufactured
by our customers. The progress of our cross-selling initiatives was evidenced as
we supplied an increasing number of integrated systems comprised of multiple
Waterlink technologies. One example is a resort in the Middle East that selected
Waterlink to supply both the reverse osmosis system for converting water from
the Red Sea into drinking and utility water, and the biological system to treat
wastewater before its return to the environment.
All of Waterlink's considerable resources are focused on one objective -
achieving profitable growth.
Along with significant achievements, we faced many challenges in 1998. As we
made acquisitions at a rapid pace, we recognized the need to develop a more
efficient integration plan, and we experienced disappointing performance at
several of our operations, most notably our Bioclear subsidiary. We also
encountered softness in our European markets and a weakening global economy.
In June, T. Scott King joined Waterlink as President and CEO to help forge a new
operating strategy and guide Waterlink's successful evolution to a $500 million
company. The resulting 1999 Strategic Operating Plan calls for a major
restructuring of the 23 operating units into five divisions, with significant
cost reduction. The restructuring marks Waterlink's final move toward total
integration of its product offerings.
By the end of the fourth quarter in September, all major 1999 Strategic
Operating Plan initiatives were already in place and being implemented. We
believe that these actions will lead to steady sales growth and rising margins
and earnings. As part of the plan, we wrote off the intangible assets of
Bioclear in the fourth quarter. This immediately eliminated a goodwill charge of
$0.5 million annually and created a loss carry-forward in the United States,
which can be used to offset taxes generated from future profits. For the 1998
year, we recorded an EPS operating profit of $0.24 before special charges
compared with $0.31 last year, and after the charges and factors described
above, reported a loss.
waterlink annual report 1998
2
<PAGE> 5
As we look forward to 1999, all of Waterlink's considerable resources are
focused on one objective -- achieving profitable growth.
Our organization is now designed for profitable growth. Our five new divisions
are organized by markets and/or geography to concentrate applications
engineering, product, and management expertise. By design, these centers
increase our technical prowess for developing total solutions and increase the
speed of our cross-selling and integrated system sales effectiveness. We are
consolidating facilities as part of this reorganization, which will achieve
immediate cost reduction as well as provide long-term efficiencies and reduced
operating costs. The consolidation, along with other initiatives we have
implemented, will lower our production and distribution costs.
Our new organization is also designed to more efficiently integrate future
acquisitions. Acquisitions will continue to play a strategic role in our future
as they are used to increase competitiveness in product niches and markets, spur
revenue and profit growth, and enhance our total solutions capability. Important
and innovative technologies will also be incorporated onto Waterlink's product
offering through license and technology sharing agreements.
In 1999, we plan to achieve profitable growth by:
- - Increasing internal revenue growth.
- - Increasing external revenue growth through strategic acquisitions.
- - Improving gross and operating margins.
- - Eliminating $4.3 million in costs.
With our integrated structure, extensive product and applications engineering
capability, size and geographic footprint, we believe we are uniquely positioned
to fulfill global customer demand for total solutions. With an organization
designed for more speed and efficiency, we can better provide "one stop
shopping" for customers who are demanding the financial and technical assurance
of single-source accountability. The spirit of our talented employees is driving
our organization toward a strong future of industry leadership.
Waterlink was established to create value for all constituents. In 1998 we built
the foundation for sustainable, profitable, long-term growth. 1999 is the year
of execution, and our entire organization is optimistic about our success. We
sincerely thank our customers, employees, representatives, vendors, and partners
for their continuing contributions, which are essential for Waterlink's growth
and prosperity. We are particularly grateful for the support and patience of our
shareholders and other financial stakeholders during this pivotal year. We are
committed to justifying your confidence and support, and look forward to
reporting our progress in the years to come.
[PHOTO] [PHOTO]
/s/ T. Scott King /s/ Theodore F. Savastano
T. Scott King Theodore F. Savastano
President and Chief Chairman of the Board
Executive Officer
waterlink annual report 1998
3
<PAGE> 6
OUR DIVISIONAL STRUCTURE
The new Waterlink organization integrates our considerable product, technical
and applications engineering expertise across the full range of treatment
options and components. Waterlink also provides the flexibility desired by our
customers. Equipment can be provided either stand-alone or as part of a complete
system to treat municipal, commercial and residential drinking water, industrial
and other process water, or municipal, industrial, commercial and residential
wastewater. Our capabilities include design/build and turnkey projects, contract
operations, and access to project finance.
Integrated Systems using multiple Waterlink products or systems provide a
performance-based, total solution backed with technical and financial
accountability.
BIOLOGICAL WASTEWATER TREATMENT
DIVISION
BIOLOGICAL WASTEWATER TREATMENT AND AERATION SYSTEMS
Combining the capability of the companies formerly known as Aero-Mod, Bioclear,
Mass Transfer Systems, Purac Engineering and Sanborn Technologies
Cutting Fluid Recovery Systems
Decanting Centrifuges
Filter Presses
Jet Aeration and Jet Mixing Systems
Moving Bed Biofilm Reactors
Nutrient Removal Processes
Package Plants
Secondary and Tertiary Plants
Sequencing Batch Reactors
Sludge Bagging Systems
Surface and Submersible Aspirating Aerators
SEPARATIONS DIVISION
SEPARATIONS
TECHNOLOGY
AND SOLIDS MANAGEMENT
Combining the capability of the companies formerly known as Great Lakes
Environmental, Hycor, Lanco Environmental Products, Purac Engineering and the
NWP Division of Waterlink Technologies
Coarse and Fine Screens for Process Improvement
- Product Recovery
- Water Reuse
Dissolved Air Flotation Systems
Grit Classifiers and Washers
Groundwater Remediation
Inclined Plate Clarifiers
Oil/Water Separators
Physical/Chemical Pre-Treatment Systems
Plate and Frame Filter Presses
Prepackaged Headworks Systems
Recessed Chamber Filter Presses
Sand Filters
Screenings Washers
Septage Receiving Stations
Sludge Scrapers, Skimmers, Thickeners and Dryers
Solids Dewatering and Conveying
Stormwater Screens
Stormwater Tank Cleaning
PURE WATER DIVISION
MEMBRANE SYSTEMS FOR DRINKING AND PROCESS WATER
Combining the capability of the companies formerly known as C'treat and the WET
Division of Waterlink Technologies
Cooling Tower Treatment
Deionization Systems
Filter Housings and Cartridges
Membranes
Microfiltration Systems
Media Filters
Nanofiltration Systems
Residential Water Purification Systems
Reverse Osmosis Systems
Seawater Desalination Systems
SPECIALTY
PRODUCTS
DIVISION
ACTIVATED
CARBON AND CARBON SYSTEMS
Combining the capability of the companies Barnebey Sutcliffe (US), Sutcliffe
Carbons (UK) and Sutcliffe Croftshaw (UK)
Activated Carbon:
Coconut, Coal and Wood-Based;
Provided in Granular, Extruded, or Powdered Form; Impregnated
Carbon Systems:
Adsorption Systems
Air Stripping
Bioreactors
Bioscrubbers
Concentrators
Corrosive Gas Control Systems
Distillation
Indoor Air Quality Control Systems
Odor Control Systems
Portable Adsorbers
Soil/Vapor Extraction Systems
VOC/HAP Emission Control Systems
EUROPEAN
WATER AND WASTEWATER DIVISION
AXEL JOHNSON ENGINEERING
(Germany)
Design/Build Water and Wastewater Treatment Plants, Germany and Eastern Europe
All Waterlink Products
WATERLINK AB
(Sweden)
Combining the capability of the companies formerly known as Nordic Water
Products, MEVA, NOXON, and Zickert Products
Decanter Centrifuges
Flocculators
Fine Screens and Accessories
Inclined Plate Settlers
Oil/Water Separators
Sand Filters
Screw Wash Presses
Sludge Scrapers and Skimmers
Waterlink Oy (Waterlink Sales, Finland)
Zickert Miljo A/S (Waterlink Sales, Denmark)
WATERLINK UK
Complete Supply and Installation Services for Water and Wastewater Treatment
Plants and River Structures
All Waterlink Products
waterlink annual report 1998
4
<PAGE> 7
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended September 30, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period From to
Commission file number 1-13041
WATERLINK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 34-1788678
------------ --------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4100 HOLIDAY STREET N.W. SUITE 201
CANTON, OHIO 44718
- ------------------------------------------- -------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (330) 649-4000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.001 par value New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of October 31, 1998 the aggregate market value of the Company's voting Common
Stock held by non-affiliates of the Company was approximately $32.5 million.
As of November 30, 1998 there were 12,225,604 shares of the registrant's Common
Stock, $.001 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 21, 1999 are deemed to be incorporated by
reference in Part III of this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 8
PART I
ITEM 1. BUSINESS
GENERAL
Waterlink, Inc. (the "Company" or "Waterlink") is an international
provider of integrated water purification and wastewater treatment solutions,
treating process water and wastewater for its industrial customers, and drinking
water and wastewater for its municipal customers. The Company believes that its
comprehensive range of products and application engineering expertise enables it
to produce single source solutions demanded by its customers. 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 is executing this strategy through an
acquisition program which targets businesses in two principal markets
(wastewater and pure water) as well as in two geographic areas (United States
and Europe).
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")), which is
being operated by the Company's subsidiary, SanTech Equipment, Inc. Sanborn
Technologies is a designer and builder of industrial separation systems which
are used by customers for environmental compliance, resource conservation and
production processes. Later in fiscal 1995, the Company acquired Great Lakes
Environmental, Inc. ("Great Lakes"), which enabled the Company to enter the
industrial wastewater market. Great Lakes is a designer and builder of
industrial wastewater pretreatment systems and custom high quality oil/water
separation products.
In fiscal 1996, Waterlink completed three acquisitions, comprised of the
assets of Mass Transfer Systems, Inc. ("Mass Transfer"), the assets of Aero-Mod
Incorporated and its affiliates ("Aero-Mod") and the capital stock of Water
Equipment Technologies, Inc. (now known as Waterlink Technologies, Inc.
("Waterlink Technologies")). The acquisition of Mass Transfer provided access to
additional technologies used primarily in the industrial wastewater market and,
to a lesser extent, in the municipal wastewater market. Mass Transfer is a
designer of customized jet aeration and mixing systems used to accelerate the
biological digestion process through the introduction of oxygen in the treatment
of wastewater. The acquisition of Aero-Mod expanded the Company's presence in
the municipal wastewater market and presented cross-selling opportunities with
Mass Transfer. Additionally, Aero-Mod expanded the Company's geographic presence
and scope of operations through its customer base outside of the United States,
especially in Latin America, and its contract operations business. Aero-Mod
designs wastewater treatment plants, provides clarifiers, filters and dewatering
equipment for the biological treatment of wastewater and biosolids and provides
contract operation services. The acquisition of Waterlink Technologies enabled
the Company to enter the industrial process water and municipal drinking water
markets and increased the Company's presence in markets outside the United
States. Waterlink Technologies is a designer and builder of water treatment
filters and membrane separation systems, including reverse osmosis systems, and
related treatment equipment.
During fiscal 1997, Waterlink completed five acquisitions, comprised of
the capital stock of the Nordic Water Products Group subsidiaries (the "Nordic
Group"), Bioclear Technology, Inc. ("Bioclear"), Lanco Environmental Products,
Inc. ("Lanco"), Mellegard V.A. Maskiner AB ("MEVA") and Hycor Corporation
("Hycor"). The Nordic Group provides the Company with numerous benefits
including a distribution channel for its existing businesses into Europe;
internationally recognized and accepted technologies and equipment used in both
the municipal and industrial markets; and the Company's first substantial
design/build operations, focused primarily in Europe. The Nordic Group
manufactures continuous recirculating sand filters, inclined plate settlers and
systems for nutrient
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<PAGE> 9
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. The Bioclear acquisition was intended to provide sequential
batch reactor technology to the Company. Lanco expands the Company's product
offerings in the industrial wastewater treatment market and is complementary
with the products offered by Great Lakes. Lanco fabricates small plate and frame
filter presses for dewatering biosolids and inclined plate clarifiers for heavy
metal removal. MEVA specializes in the design and installation of fine screens
and related accessories for sewage treatment applications. Hycor designs and
manufactures screening, dewatering and related residuals management equipment
for liquid/solid separation in municipal wastewater and industrial wastewater
and process applications. MEVA and Hycor extend the Company's product offerings
and present various cross-selling opportunities with the Company's design/build
operations.
During fiscal 1998, the Company completed three acquisitions, comprised
of the capital stock of Chemitreat Services, Inc. ("C'treat"), Aquafine
Engineering Services Limited ("AES") and Purac Engineering Incorporated
("Purac") in a single transaction, and Barnebey & Sutcliffe Corporation,
Sutcliffe Speakman Carbons Limited and Sutcliffe Croftshaw Limited (the "Carbons
Group"). C'treat is a leading designer and manufacturer of pure watermakers for
use in the global offshore energy industry. C'treat provides the global offshore
energy industry with a reliable and economical supply of fresh water,
continuously generated from sea water using the reverse osmosis process. Nearly
half of C'treat's revenues are generated from parts, consumables and field
services. C'treat expands the Company's pure water business as well as its
consumable revenue base. AES designs and manufactures industrial and municipal
water and wastewater systems and solutions primarily for the United Kingdom
market. Purac designs water and wastewater systems principally for the United
States municipal market. AES and Purac bring additional product, engineering and
manufacturing capabilities to the Company which are complementary to the Nordic
Group, Hycor, and design/build product lines through cross-selling and
geographic expansion. The Carbons Group is engaged in the design, manufacture
and marketing of products and services utilizing activated carbon for the
separation, concentration or purification of water, liquids and gases. The
Carbons Group expands the Company's customer base and consumable revenue base.
The Carbons Group is the Company's largest acquisition to date and expanded the
Company's revenue base in fiscal 1998 to $183.5 million on a pro-forma basis.
In September 1998, the Company, under the direction of its recently
appointed President and Chief Executive Officer, announced its 1999 Strategic
Operating Plan (the "1999 Plan"). The 1999 Plan provides a divisional format for
efficient centers of product expertise and geographic experience to better serve
the Company's customers and independent marketing representatives. The 1999 Plan
calls for the reorganization of Waterlink from a holding company comprising 23
operating companies into five integrated divisions consisting of the Biological
Wastewater Division, the Separations Division, the European Water and Wastewater
Division, the Pure Water Division, and the Specialty Products Division. The 1999
Plan also sets cost savings and integration goals of $4.3 million in the first
year. This cost savings is expected to be realized as a result of the
consolidation of six facilities, and the resultant reduction of approximately 75
employees, or 10% of the Company's work force.
In conjunction with the 1999 Plan, the Company determined that it would
exit the acquired Bioclear business, which was purchased from four individual
shareholders in June 1997. At the time of the acquisition, Bioclear provided the
Company with sequential batch reactor technology, which was expected to expand
its biological wastewater solution capabilities. Bioclear was also expected to
provide the Company with cross-selling opportunities as well as design/build
capabilities. These benefits and expected orders never materialized, and will
not materialize, as this proprietary technology, while functional, proved to be
competitive in only narrow market niches that the Company believes are not
reliable for future order generation. In addition, the technology proved to be a
higher priced alternative when compared to other sequential batch reactor
product offerings or
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<PAGE> 10
alternative technologies advanced by competitors. This lack of orders prevented
the Company from exploiting any potential cross selling and design/build
opportunities it had anticipated at the time of the acquisition. The Company is
currently evaluating whether to invest in the reengineering effort necessary to
develop a more competitive non-proprietary sequential batch reactor technology
at its Biological Wastewater Division in Fall River, Massachusetts and at its
European Water and Wastewater Division. The Company no longer expects the
existing Bioclear technology to provide meaningful benefits, and therefore has
significantly reduced the expected future benefits of the Bioclear acquisition
and has written off the associated goodwill. As a result the Company is also
evaluating the most favorable means to divest the remaining assets of Bioclear,
primarily related to its manufacturing facility in Winnipeg, Canada. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Year Ended September 30, 1998 Compared to
Year Ended September 30, 1997", and "-- Liquidity and Capital Resources").
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.
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.
Replacement Parts, Repairs and Consumables. The Company manufactures and
sells replacement parts and consumables, such as activated carbon, membranes,
ion exchange resin and filter cartridges, manufactured both by the Company and
other suppliers. This equipment is required to support residential, industrial
and municipal water treatment systems. In addition, the Company performs
maintenance and repair services on equipment manufactured by both the Company
and others.
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
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<PAGE> 11
remote monitoring of water purification and wastewater treatment facilities for
both its industrial and municipal customers.
As illustrated below, the 1999 Plan provides a divisional format for
efficient centers of product expertise and geographic experience to better serve
the Company's customers and independent marketing representatives. The Company's
organization integrates product, technical and applications engineering
expertise across a full range of treatment options and components. Equipment can
be provided either stand-alone or as part of a complete system to treat
municipal, commercial and residential drinking water, industrial and other
process water or municipal, industrial, commercial and residential wastewater.
<TABLE>
<CAPTION>
BIOLOGICAL EUROPEAN WATER
WASTEWATER SEPARATIONS PURE WATER SPECIALTY PRODUCTS AND WASTEWATER
TREATMENT DIVISION DIVISION DIVISION DIVISION DIVISION
- --------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Biological Wastewater Separations Membrane Systems for Activated Carbon and Design, Supply &
and Aeration Systems Technology and Drinking and Process Carbon Systems Installation
Services Solids Management Water Services
for Water and
Wastewater
Treatment Plants
- --------------------- -------------------- -------------------- -------------------- --------------------
Combining the Combining the Combining the Combining the Combining the
capabilities of capabilities of capabilities of capabilities of the capabilities of the
Aero-Mod, Bioclear, Great C'treat Carbons Group Nordic Group, AES
Mass Transfer, Purac Lakes, Hycor, Lanco, and Waterlink and MEVA
and Sanborn Purac and the Nordic Technologies
Technologies Group
- --------------------- -------------------- -------------------- -------------------- --------------------
Cutting Fluid Coarse and Fine Cooling Tower Activated Carbon: All Waterlink
Recovery Systems Screens for Process Treatment Coconut, Coal and Products,
Decanting Centrifuges Improvement Deionization Systems Wood-Based; including
Filter Presses -- Product Recovery Filter Housings and Provided in
Jet Aeration and Jet --Water Reuse Cartridges Granular, Extruded, Decanter
Mixing Systems Dissolved Air Membranes or Powdered Form; Centrifuges
Moving Bed Flotation Systems Microfiltration Impregnated Flocculators
Biofilm Reactors Grit Classifiers and Systems Fine Screens and
Nutrient Removal Washers Media Filters Carbon Systems: Accessories
Processes Groundwater Nanofiltration Adsorption Systems Inclined Plate
Package Plants Remediation Systems Air Stripping Settlers
Secondary and Inclined Plate Residential Water Bioreactors Oil/Water Separators
Tertiary Plants Clarifiers Purification Bioscrubbers Sand Filters
Sequencing Batch Oil/Water Separators Systems Concentrators Screw Wash
Reactors Physical/Chemical Reverse Osmosis Corrosive Gas Presses
Sludge Bagging Pre-Treatment Systems Control Systems Sludge Scrapers and
Systems Systems Seawater Distillation Skimmers
Surface and Plate and Frame Desalination Indoor Air Quality
Submersible Filter Systems Control Systems
Aspirating Aerators Presses Odor Control
Prepackaged Systems
Headworks Systems Portable Adsorbers
Recessed Chamber Soil/Vapor
Filter Presses Extraction
Sand Filters Systems
Screenings VOC/HAP Emission
Washers Control Systems
Septage Receiving
Stations
Sludge Scrapers,
Skimmers,
Thickeners
and Dryers
Solids Dewatering
and Conveying
Stormwater Screens
Stormwater Tank
Cleaning
</TABLE>
- 5 -
<PAGE> 12
OPERATING STRATEGY
The Company has adopted a decentralized approach to the operational
management of its divisions. While functions such as strategic planning,
financial reporting, treasury, communications and risk management are
centralized in the Company's corporate headquarters, local management at each of
its five divisions is primarily responsible for the day-to-day operation of the
division's business. The Company also provides its divisions with financial
resources, management expertise, customer and market access which would be
unavailable to each division individually. With respect to acquisitions already
completed, the Company expects to realize improvements 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 divisions to offer complementary equipment
and services of other divisions increases the competitiveness of the Company.
For example, the Separations Division can team with the Pure Water Division and
the Biological Wastewater Treatment Division to offer both pure water and
wastewater solutions to a customer. 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 Specialty Products
Division. The Company also experiences cross-selling opportunities from a
geographic and customer standpoint. For example, the Company benefits from the
European Water and Wastewater Division given the ability to introduce the
Company's other Division's systems, equipment and services into the European
market and from the Company's ability to introduce the European Water and
Wastewater Division's systems, equipment and services into the Company's
domestic market.
A representative from each division, 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 companies within each division have been provided growth opportunities
far beyond those that exist for stand-alone companies concentrated in only one
area of the industry.
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.
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 subsidiar-
- 6 -
<PAGE> 13
ies have cross-selling opportunities which enable them to be considerably more
competitive, thereby increasing sales potential significantly.
The Company believes that there is a substantial number of attractive
acquisition candidates in the United States and abroad due to the highly
fragmented nature of the overall industry. These candidates include water
purification equipment and wastewater equipment manufacturers, design/build
companies, point-of-use/point-of-entry equipment providers, contract operations
companies, specialty chemical solution providers, small unit replacement part
companies, and regional service companies. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Forward-Looking
Statements -- Need for Additional Acquisition Financing")
As consideration for future acquisitions the Company intends to continue
to use various combinations of its common stock, par value $.001 per share
("Common Stock"), cash and notes. The consideration for each future acquisition
will vary on a case-by-case basis depending on the financial interests of the
Company and the historic operating results and future prospects of the business
to be acquired. The Company will finance future acquisitions through funds
provided by operations and by the Amended Credit Facilities (as defined herein)
and from the proceeds of future equity and debt financing. The Company intends
to have 5,000,000 shares of Common Stock registered under the Securities Act of
1933, as amended, ("Securities Act") for use in connection with future
acquisitions.
SALES AND DISTRIBUTION
The Company sells its systems, equipment and services primarily through
approximately 80 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 1998 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, printing, automotive and other heavy
manufacturing industries. In fiscal 1998 approximately 69% 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
1998 approximately 31% of the Company's pro forma net sales were derived from
municipal sales.
- 7 -
<PAGE> 14
BACKLOG
The Company had a backlog, consisting of written purchase orders received
by the Company, of $38.1 million as of September 30, 1998 as compared to $30.5
million as of September 30, 1997. At September 30, 1998, in addition to the
backlog of $38.1 million, the Company also had $6.4 million of firm commitments
to purchase recurring revenue products from its Specialty Products Division. The
Company expects that virtually all of the backlog at the beginning of a fiscal
year will be filled during that year. Backlog, and therefore sales, may vary
from quarter to quarter as a result of large projects being booked during any
quarter and varying project delivery schedules. In addition, the orders have
varying delivery schedules and the Company's backlog as of any particular date
may not be representative of actual net sales for any succeeding period.
PROCESS AND PRODUCT WARRANTY AND PERFORMANCE GUARANTEES
Consistent with market practices, the Company generally offers a warranty
on finished products for one year or in some cases 18 months from sale and 12
months from installation. The costs associated with warranty expense have not
been material. In connection with providing certain products and design/build
services to its customers, the Company is sometimes required to guarantee that
the products or services will attain specified levels of quality or performance,
based on a defined set of parameters. Should a product fail to perform according
to a warranty, or should a project fail to attain the guaranteed level of
quality, and should the Company be unable to effect a satisfactory replacement
or cure within the prescribed period of time, the Company could incur financial
penalties in the form of liquidated damages or could be required to remove and
replace the equipment or repeat the service in order to meet the specifications.
To date, the Company has not incurred any material payment or other obligations
pursuant to such performance guarantees.
RAW MATERIAL AND SUPPLIES
The Specialty Products Division is dependent on the importation of
coconut shell carbon from the Far East and the supply of coal based carbon from
domestic and Far East sources. 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 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 has generally been able to pass on
price increases for raw materials and components to its customers. The Company
is not a party to any material long-term fixed price supply contracts.
GOVERNMENT REGULATION
Federal, state, local and foreign environmental laws and regulations
necessitate substantial expenditures and compliance with water quality standards
by generators of wastewater and wastewater by-products and impose liabilities on
such entities for noncompliance. Environmental laws and regulations and their
enforcement are, and will continue to be, a significant factor affecting the
marketability of the solutions, systems and equipment provided by the Company.
Many of the countries in which the Company operates or in which its
customers are located, including the United States, Canada and countries in
western Europe, Latin America, and the Asia-Pacific region, have adopted
requirements that govern water quality, wastewater treatment, and wastewater
by-products and the solutions, systems and equipment provided by the Company.
These requirements and their enforcement vary by country, but in general
establish water quality use and disposal standards, set wastewater effluent
discharge limits, and prescribe standards for the protection
- 8 -
<PAGE> 15
of human health and safety and the environment. In each such country, the
Company monitors the status and impact of local environmental regulation and
enforcement as it relates to the marketability of the solutions, systems and
equipment provided by the Company.
Any changes in applicable environmental standards and requirements or
their enforcement may affect the operations of the Company by imposing
additional regulatory compliance costs on the Company's customers, requiring the
modification of and/or affecting the market for the Company's solutions, systems
and equipment. To the extent that demand for the Company's solutions, systems
and equipment is created by the need to comply with such enhanced standards and
requirements or their enforcement, any modification of the standards and
requirements or their enforcement may reduce demand, thereby adversely affecting
the Company's business prospects. Conversely, changes in applicable
environmental laws imposing additional regulatory compliance standards and
requirements or causing stricter enforcement of these laws or regulations could
increase the demand for the Company's systems, equipment and services.
COMPETITION
Despite an accelerating trend toward consolidation, the water
purification and wastewater treatment industry remains fragmented and highly
competitive due to the large number of competitors within each product area. The
Company has a significant number of competitors, including a number of
integrated suppliers and equipment manufacturers, some of which are larger and
have greater resources than the Company. The Company believes that success in
this market is based on the ability to offer appropriate technology, influence
specifications, have strong distribution, maintain respect within the consulting
and engineering community, finance and bond projects awarded, provide timely
delivery, and maintain a reputation for service and parts support after the
sale. Additionally, in the municipal arena, the ability to meet bid
specifications and pricing are often primary considerations. The Company
believes that its technologies and cost structures as well as its strong local
presence in international markets enable it to compete effectively against these
companies. The Company's primary competitors include United States Filter
Corporation, Calgon Carbon Corporation, Parkson Corporation, Ionics,
Incorporated, Alpha Laval and Humbolt KHD.
PATENTS, TRADEMARKS AND LICENSES
The Company currently owns a number of United States and foreign patents,
and registrations for United States service marks and trademarks. While each is
of value, the Company generally does not consider any of them to be material to
its business, although, as the Company has grown and its presence has been
extended, its Waterlink(SM) mark has become more widely known.
EMPLOYEES
At September 30, 1998, the Company and its subsidiaries had approximately
715 employees at its various locations. Approximately 55 people are covered
under collective bargaining agreements in the United States. The Company's
hourly employees in Europe are covered by collective bargaining agreements.
Management believes that the Company's relationship with its employees is good.
ITEM 2. PROPERTIES
The Company leases its corporate offices, consisting of approximately
7,000 square feet located in Canton, Ohio pursuant to a lease agreement dated
July 9, 1996 and amended October 1, 1997. In addition, its subsidiaries lease
facilities for office space and manufacturing in the United States in Carson,
California; Wilmington, Delaware; Clearwater, Sarasota, and West Palm Beach,
Florida; Addison and Lake Bluff, Illinois; Manhattan, Kansas; Medway and Fall
River, Massachusetts; Grand Rapids, Michigan; Sparks, Nevada; and The Woodlands,
Texas; and outside the United States in Holstebro, Denmark; Lancashire, England;
Vanda, Finland; Neuss-Grimlinghausen, Germany; and Mariestad,
- 9 -
<PAGE> 16
Frolunda, Kungsbacka, and Nynashamn, Sweden; and own facilities for office space
and manufacturing in Fall River, Massachusetts; Columbus, Ohio; Winnipeg,
Manitoba, Canada; and Fjaras, Sweden. The expiration dates for these leases
range from May 31, 1999 to March 31, 2011.
The Company believes that each of its facilities is in good condition and
will continue to remain suitable for its current purpose. The Company may add
improvements to the properties listed above. The Company anticipates using its
properties for purposes consistent with their present use. The Company
anticipates selling the facility in Winnipeg, Manitoba, Canada currently
utilized by its Bioclear business. 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
or property damage incurred in connection with its operations. The Company is
not a party to any material litigation. Management believes none of the
litigation will have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock has been listed on The New York Stock Exchange
("NYSE") under the symbol WLK since June 24, 1997. The following table sets
forth the high and low composite sales prices as reported by the NYSE for the
fiscal quarters indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year ended September 30, 1997
Third Quarter (from June 24, 1997) $13 $11
Fourth Quarter 20 3/16 13
Fiscal Year ended September 30, 1998
First Quarter $19 3/4 $16 5/1
Second Quarter 17 11/16 12 11/1
Third Quarter 14 5/8 8 5/
Fourth Quarter 8 5/8 2 7/1
</TABLE>
The current quoted price of the Common Stock is listed daily in the Wall
Street Journal in the NYSE section. The number of holders of record of the
Company's Common Stock as of November 30, 1998 was approximately 227. In
addition there were approximately 2,707 shareholders whose shares are held by
brokers/dealers.
- 10 -
<PAGE> 17
DIVIDENDS
The Company has not declared or paid any cash dividends on its Common
Stock. It is the Company's current intention to retain earnings to finance the
expansion of its business. Any future dividends will be at the discretion of the
Company's 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 Amended Credit Facilities and
any restrictions that may be imposed by the Company's future credit facilities
and other indebtedness. The Amended Credit Facilities prohibit the payment of
dividends by the Company without the consent of the lender.
RECENT SALES OF UNREGISTERED SECURITIES
During fiscal 1998, the Company made one sale of its securities that were
not registered under the Securities Act, in reliance on the exemption provided
therefrom by Section 4(2) of the Securities Act. On February 19, 1998, the
Company issued 928 shares of Common Stock to the former shareholders of
Waterlink Technologies in payment of an adjustment to the purchase price paid by
the Company for the issued and outstanding shares of Waterlink Technologies. The
total dollar value of the 928 shares of Common Stock issued to the former
shareholders of Waterlink Technologies as purchase price adjustment was $15,660
(or $16.88 per share). In such transaction, the Company did not engage any
underwriter, broker or placement agent. In connection with such transaction, the
Company obtained appropriate investment representations supporting its reliance
on such exemption from registration. In such transaction, appropriate disclosure
was provided to each investor to support the Company's reliance on the exemption
from registration provided by Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
the Company since its incorporation on December 7, 1994. The financial data
presented for and as of the end of fiscal 1995, fiscal 1996, fiscal 1997 and
fiscal 1998 were derived from the audited consolidated financial statements of
the Company. The financial data includes the operating results of each acquired
business from the date of acquisition in accordance with the purchase method of
accounting. The dates of each acquisition included in the operating results are
shown below:
<TABLE>
<S> <C>
- - Sanborn Technologies March 31, 1995
- - Great Lakes August 31, 1995
- - Mass Transfer January 31, 1996
- - Aero-Mod April 26, 1996
- - Waterlink Technologies September 30, 1996
- - Nordic Group March 5, 1997
- - Bioclear June 27, 1997
- - Lanco June 27, 1997
- - MEVA September 12, 1997
- - Hycor September 30, 1997
- - C'treat March 2, 1998
- - AES/Purac March 25, 1998
- - Carbons Group June 5, 1998
</TABLE>
- 11 -
<PAGE> 18
The data presented below should be read in conjunction with the financial
information appearing elsewhere herein.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL
1998 1997 1996 1995
--------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 135,167 $ 64,699 $ 19,801 $ 2,684
Cost of sales 85,532 40,390 11,233 1,857
--------- -------- -------- --------
Gross profit 49,635 24,309 8,568 827
Selling, general and administrative
expenses 38,639 18,683 7,029 1,178
Special charges(1) 21,636 2,630 -- --
Amortization 1,871 751 307 15
--------- -------- -------- --------
Operating income (loss) (12,511) 2,245 1,232 (366)
Other income (expense):
Interest expense (3,562) (1,281) (877) (144)
Interest income and other items-net 37 263 (44) 33
--------- -------- -------- --------
Income (loss) before income taxes (16,036) 1,227 311 (477)
Income taxes 1,468 470 5 35
--------- -------- -------- --------
Income (loss) before extraordinary item (17,504) 757 306 (512)
Extraordinary item, net of taxes(2) -- (385) -- --
--------- -------- -------- --------
Net income (loss) $ (17,504) $ 372 $ 306 $ (512)
========= ======== ======== ========
Earnings (loss) per common share:
Basic:
Income (loss) before extraordinary
item $ (1.46) $ 0.15 $ 0.21 $ (0.42)
Extraordinary item -- (0.08) -- --
--------- -------- -------- --------
$ (1.46) $ 0.07 $ 0.21 $ (0.42)
========= ======== ======== ========
Assuming dilution:
Income (loss) before extraordinary
item $ (1.46) $ 0.10 $ 0.06 $ (0.42)
Extraordinary item -- (0.05) -- --
--------- -------- -------- --------
$ (1.46) $ 0.05 $ 0.06 $ (0.42)
========= ======== ======== ========
Weighted average common and equivalent
shares:
Basic 12,007 4,924 1,469 1,225
========= ======== ======== ========
Assuming dilution 12,007 7,804 4,954 1,225
========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1998 1997 1996 1995
--------- -------- -------- --------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 30,737 $ 19,430 $ 3,438 $ 2,064
Total assets 183,561 115,860 28,991 10,819
Total debt 87,318 18,961 12,145 6,039
Redeemable preferred stock -- -- 8,500 3,900
Shareholders' equity (deficit) 54,878 70,873 2,407 (11)
</TABLE>
- ---------------
(1) During 1998 the Company recorded special charges totaling $21,636,000
comprised of the following three components: (i) $2,858,000 of termination
benefits and costs associated with the exiting of certain facilities in
connection with the 1999 Plan (ii) a non-cash charge of $17,284,000,
consisting of $15,967,000 related to the impairment of goodwill associated
with the June 1997 Bioclear acquisition and $1,317,000 to write off the
cumulative translation adjustment component of Bioclear's equity, and (iii)
$1,494,000 of costs primarily attributable to contractual obligations of the
- 12 -
<PAGE> 19
Company to its former president and chief executive officer, who resigned in
June 1998. These special charges of $21,636,000 on a per share
basis-assuming dilution were $1.70 for the fiscal year ended September 30,
1998.
In June 1997, the Company incurred a special charge to operations of
$2,630,000 resulting primarily from the issuance, concurrent with the
Company's initial public offering ("Initial Public Offering"), of a ten year
option to purchase 100,000 shares of Common Stock at a price of $0.10 per
share to an officer of the Company pursuant to terms of an employment
agreement. Of this amount, approximately $1,138,000 was non-cash and the
remainder represented cash obligations related principally to the
reimbursement of income taxes resulting from the stock option issuance. This
special charge after income taxes on a per share basis-assuming dilution was
$0.21 for the fiscal year ended September 30, 1997.
(2) The Company used a portion of the proceeds from its Initial Public Offering
to repay substantially all of its outstanding indebtedness. In addition,
concurrent with the offering the Company canceled a note purchase agreement.
In connection with the early retirement of certain indebtedness and the
cancellation of the note purchase agreement, the Company realized an
extraordinary charge of $385,000, net of taxes of $257,000, related to the
write-off of unamortized debt issuance costs and discounts associated with
this indebtedness. This extraordinary item on a per share basis-assuming
dilution was $0.05 for the fiscal year ended September 30, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is an international provider of integrated water purification
and wastewater treatment solutions, principally to industrial and municipal
customers. Waterlink was incorporated in Delaware on December 7, 1994 and has
grown externally by completing thirteen acquisitions and internally through
industry wide expansion as well as Company sponsored programs.
On June 27, 1997, the Company consummated its Initial Public Offering of
4,500,000 shares of its Common Stock at a price of $11 per share, before the
underwriters' discount, and received approximately $43.0 million of net
proceeds. On July 16, 1997, the Company sold 675,000 shares of its common stock
pursuant to the exercise of the underwriters' over-allotment option granted in
connection with the Initial Public Offering, and received approximately $6.9
million. These net proceeds from the Initial Public Offering were primarily used
to pay the cash portion of the purchase prices of Bioclear, Lanco and MEVA, to
repay indebtedness of the Company and for general working capital purposes.
The Company's acquisitions have enabled it to build its technical
capabilities and geographical presence. Through September 30, 1998, the Company
completed the following acquisitions at the following effective dates:
<TABLE>
<S> <C>
- - Sanborn Technologies March 31, 1995
- - Great Lakes August 31, 1995
- - Mass Transfer January 31, 1996
- - Aero-Mod April 26, 1996
- - Waterlink Technologies September 30, 1996
- - Nordic Group March 5, 1997
- - Bioclear June 27, 1997
- - Lanco June 27, 1997
- - MEVA September 12, 1997
- - Hycor September 30, 1997
- - C'treat March 2, 1998
- - AES/Purac March 25, 1998
- - Carbons Group June 5, 1998
</TABLE>
As part of its strategic plan, the Company intends to continue its
acquisition program. The Company's acquisition program targets businesses which
provide the Company with complementary systems, equipment and services, and
broadens its customer and geographic base. In addition, the
- 13 -
<PAGE> 20
Company seeks companies that provide the potential for synergies with existing
businesses. With respect to the acquisitions completed to date, the Company has
begun to identify and act upon opportunities to cross-sell systems, equipment
and services. As a result of the increased financial, managerial and other
resources provided by the Company to its acquired businesses, the Company
expects its internal growth rate to be a positive influence on its growth
strategy. The Company also expects that it will continue to benefit from such
synergies as it continues to more fully integrate the acquired businesses into
its operations.
All acquisitions have been accounted for under the purchase method of
accounting and are included in the results of operations for the period
subsequent to the effective date of acquisition. Due to the timing and magnitude
of these acquisitions, results of operations for the periods presented are not
necessarily comparable or indicative of operating results for current or future
periods.
The majority of the Company's systems and equipment are custom designed
and take a number of months to produce. Revenues from large contracts are
recognized using the percentage of completion method of accounting in the
proportion that costs bear to total estimated costs at completion. Revisions of
estimated costs or potential contract losses, if any, are recognized in the
period in which they are determined. Provisions are made currently for all known
or anticipated losses. Variations from estimated contract performance could
result in a material adjustment to operating results for any fiscal quarter or
year. Claims for extra work or changes in scope of work are included in revenues
when collection is probable. Revenues from remaining systems and equipment sales
are recognized when shipped.
In the past the Company has experienced quarterly fluctuations in
operating results due to the contractual nature of its business and the
consequent timing of these orders. As part of its strategic plan, the Company
expects that in the future it may receive contracts that are significantly
larger than those received by the Company historically. In addition, certain of
such contracts will be subject to the customer's ability to finance, or fund
from government sources, the actual costs of completing the project as well as
receiving any necessary permits to commence the project. Therefore, the Company
expects that its future operating results could fluctuate significantly,
especially on a quarterly basis, 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,
the Company anticipates that both the dollar volume and number of contracts in
its backlog will increase significantly. As of September 30, 1998, the Company's
backlog was approximately $38.1 million. In addition, the Company also had $6.4
million of firm commitments to purchase recurring revenue products from its
recently acquired Carbons Group at September 30, 1998. 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.
- 14 -
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, statements of
operations data as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 63.3 62.4 56.7
----- ----- -----
Gross profit 36.7 37.6 43.3
Selling, general and administrative expenses 28.6 28.9 35.5
Special charges 16.0 4.1 --
Amortization 1.4 1.1 1.6
----- ----- -----
Operating income (loss) (9.3) 3.5 6.2
Other income (expense):
Interest expense (2.6) (2.0) (4.4)
Interest income and other items -- net 0.0 0.4 (0.2)
----- ----- -----
Income (loss) before income taxes (11.9) 1.9 1.6
Income taxes 1.1 0.7 0.1
----- ----- -----
Income (loss) before extraordinary item (13.0) 1.2 1.5
Extraordinary item, net of tax -- 0.6 --
----- ----- -----
Net income (loss) (13.0)% 0.6% 1.5%
===== ===== =====
</TABLE>
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Net Sales. Net sales for the year ended September 30, 1998 were
$135,167,000, an increase of $70,468,000 from the prior year. The increase was
due to the timing of the acquisitions previously described. The Company
experienced negative internal growth for the year of 10.8%, resulting
principally from the timing of orders, exchange rate fluctuations and stronger
performance for certain domestic companies during fiscal 1997 that was not
duplicated in fiscal 1998. The Company measures internal growth by comparing
each subsidiary's net sales from the months subsequent to their respective
acquisition dates during the prior year to those same months in the current
year.
Gross Profit. Gross profit for the year ended September 30, 1998 was
$49,635,000, an increase of $25,326,000 from the prior year. The increase was
primarily due to the aforementioned acquisitions. Gross margin was 36.7% for
1998 as compared to 37.6% for 1997. Gross margins have been impacted by the
March 1997 acquisition of the Nordic Group and the June 1998 acquisition of the
Carbons Group, both of which historically experience lower margins as compared
to other Waterlink companies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended September 30, 1998 were $38,639,000,
an increase of $19,956,000 from the prior year. The increase was primarily due
to the aforementioned acquisitions. Selling, general and administrative expenses
as a percentage of net sales was 28.6% for 1998 as compared to 28.9% for 1997.
This decrease primarily reflects the spreading of selling, general and
administrative expenses over a larger revenue base.
Special Charges. During the year ended September 30, 1998 the Company
incurred special charges of $21,636,000. These special charges are comprised of
the following three components:
- The Company recorded a charge of $2,858,000 primarily related to
termination benefits and costs associated with the exiting of certain
facilities in connection with the implementation of its 1999 Plan.
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- The Company recorded a non-cash charge of $17,284,000, consisting of
$15,967,000 related to the impairment of goodwill associated with the
June 1997 Bioclear acquisition and $1,317,000 to write off the
cumulative translation adjustment component of Bioclear's equity. With
regard to the $17,284,000 impairment charge, the 1999 Plan includes the
Company's decision to exit the acquired business of Bioclear. Several
factors lead to this decision including:
i. The lack of orders at Bioclear in fiscal 1998 led to a
comprehensive market review, which was completed in August 1998.
This analysis indicated that Bioclear's originally perceived niche
market was not reliable and possibly nonexistent.
ii. In order to compete in more traditional markets, Bioclear's
proprietary product would need to be reengineered, at great
expense, to significantly reduce the water treatment cost per
gallon. In addition, this reengineered proprietary product would
not guarantee success due to the extremely competitive traditional
marketplace.
iii. In July 1998, Bioclear's founder, a former owner and president,
resigned.
iv. In August 1998, Bioclear's chief engineer and a former owner
announced his desire to reduce his involvement to part time, making
the reengineering effort more difficult.
Having made the decision to exit the business, the remaining goodwill
associated with the Bioclear acquisition is not recoverable based on
Bioclear's lack of future undiscounted cash flows and is impaired. Once
the impairment was determined, the Company obtained an independent
appraisal of the fair value of the Bioclear business. This appraisal
indicated no value for the business above the identified tangible net
assets. As a result, the Company wrote off the unamortized balance of
goodwill of $15,967,000. Since this was deemed to be a substantially
complete liquidation of an investment in a foreign entity, the Company
also wrote off $1,317,000 of the cumulative translation adjustment
relating to Bioclear's equity.
- The Company incurred a special charge of $1,494,000 primarily
attributable to contractual obligations of the Company to its former
president and chief executive officer, who resigned in June 1998.
The Company incurred special charges of $2,630,000 for the year ended
September 30, 1997 resulting primarily from the issuance, concurrent with the
Initial Public Offering, of a ten year option to purchase 100,000 shares of
common stock at a price of $0.10 per share to an officer of the Company pursuant
to terms of an employment agreement. Of this amount, approximately $1,138,000
was non-cash and the remainder represented cash obligations related principally
to the reimbursement of income taxes resulting from the stock option issuance.
Amortization. Amortization expense for the year ended September 30, 1998
was $1,871,000, an increase of $1,120,000 from the prior year. The increase was
primarily due to the goodwill resulting from the aforementioned acquisitions.
Interest Expense. Interest expense for the year ended September 30, 1998
was $3,562,000, an increase of $2,281,000 from the prior year. This increase was
primarily due to increased borrowings related to the Company's ongoing
acquisition program.
Income Taxes. The Company recorded an income tax provision of $1,468,000
on a pre-tax loss of $16,036,000. The Company was required to record income tax
expense on its earnings outside the United States and was also required to
record income tax expense in certain states domestically. In addition, due to
the net operating loss carryforward in the United States, certain deferred tax
assets that had been recorded in the previous year had to be fully reserved for.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Net Sales. Net sales for the year ended September 30, 1997 were
$64,699,000, an increase of $44,898,000 from the prior year. The increase was
primarily due to its acquisitions. In addition,
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internal growth accounted for $6,830,000 of the increase, which represented an
internal growth rate of 34.5%, primarily due to expansion in overseas markets
and to the greater levels of resources provided by the Company to the businesses
subsequent to the acquisitions.
Gross Profit. Gross profit for the year ended September 30, 1997 was
$24,309,000, an increase of $15,741,000 from the prior year. The increase was
primarily due to its acquisitions and internal growth. Gross margin was 37.6%
for 1997 as compared to 43.3% for 1996. Gross margins have been impacted by the
March 1997 acquisition of the Nordic Group which historically experiences lower
margins as compared to other Waterlink companies, as well as by a large,
lower-margin, design-build project in Germany that is near completion at the end
of the fiscal year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended September 30, 1997 were $18,683,000,
an increase of $11,654,000 from the prior year. The increase was primarily due
to the aforementioned acquisitions. Selling, general and administrative expenses
as a percentage of net sales was 28.9% for 1997 as compared to 35.5% for 1996.
This decrease primarily reflects the spreading of selling, general and
administrative expenses over a larger revenue base.
Special Charges. Special management compensation of $2,630,000 for the
year ended September 30, 1997 resulted primarily from the issuance, concurrent
with the Initial Public Offering, of a ten year option to purchase 100,000
shares of Common Stock at a price of $0.10 per share to an officer of the
Company pursuant to terms of an employment agreement. Of this amount,
approximately $1,138,000 is non-cash and the remainder represents cash
obligations related principally to the reimbursement of income taxes resulting
from the stock option issuance.
Amortization. Amortization expense for the year ended September 30, 1997
was $751,000, an increase of $444,000 from the prior year. The increase was
primarily due to the goodwill resulting from the aforementioned acquisitions.
Interest Expense. Interest expense for the year ended September 30, 1997
was $1,281,000, an increase of $404,000 from the prior year. This increase was
primarily related to increased borrowings required to finance the aforementioned
acquisitions.
Extraordinary Item. During the year ended September 30, 1997, the
Company recorded an extraordinary charge of $385,000, net of taxes of $257,000,
related to the write-off of unamortized debt issuance costs associated with
certain indebtedness retired with the net proceeds from, and discounts
associated with a note purchase agreement terminated in connection with, its
Initial Public Offering.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's primary sources of liquidity have been
(i) borrowings available under credit facilities, (ii) net proceeds from the
sale of the Company's common and preferred stock, (iii) issuance of common stock
and seller financing incurred in connection with the Company's completed
acquisitions, and (iv) cash flow from certain profitable operations.
Historically, the Company's primary uses of capital have been the funding of its
acquisition program, working capital requirements including the funding for
growth at certain acquisitions and the funding required for certain
under-performing operations. The Company does not currently anticipate making
significant capital investments in plant and equipment due to its focus on
partnering with vendors who manufacture most of the components used in the
Company's systems and equipment.
For the year ended September 30, 1998, net cash used by operating
activities was $9,453,000, purchases of equipment totaled $2,261,000 and
purchases of businesses, net of cash acquired, totaled $53,430,000. These cash
outlays, financed primarily by long-term borrowings, reflect the cash purchase
price of acquisitions as well as additional payments made during the period
related to
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acquisitions, expansion of working capital requirements and purchases of
equipment for existing operations.
In the fourth quarter of fiscal 1998, the Company's Board of Directors
approved the 1999 Plan which calls for the reorganization of the Company from a
holding company comprised of twenty-three operating companies into five
integrated divisions that focus on specific market segments. This plan, which
will eliminate redundant costs and improve operating efficiencies, is
anticipated to be substantially completed by the end of fiscal 1999. The plan
includes costs associated with the exiting of certain facilities and employee
termination costs. Costs associated with this plan of approximately $2,858,000
were recognized during fiscal 1998, of which approximately $2,258,000 is
reserved for future payment at September 30, 1998. Other costs associated with
the 1999 Plan of approximately $1,000,000, which do not meet the criteria for
recognition at September 30, 1998, are expected to be recognized in fiscal 1999.
Additionally, in conjunction with its 1999 Plan, the Company recorded a
$17,284,000 non-cash charge, primarily related to the impairment of goodwill
associated with the June 1997 Bioclear acquisition. At September 30, 1998, the
Company had approximately $2,300,000 of long-lived assets recorded at its
Bioclear subsidiary, which represents the fair value utilizing an independent
appraisal, comprised primarily of property, plant and equipment. The Company is
evaluating the most favorable means to divest of the remaining assets of
Bioclear, primarily related to its manufacturing facility in Winnipeg, Canada.
At the present time the Company is attempting to sell the entire Bioclear
business, a purchaser of which has not yet been identified. If the Company is
unsuccessful in selling the entire Bioclear business in a reasonable time frame,
the Company will most likely close the facility, terminate the remaining eleven
employees, and sell the building and individual pieces of manufacturing and
office equipment in an orderly fashion.
The Company also incurred a special charge in during the third quarter of
fiscal 1998 of approximately $1,494,000, primarily attributable to contractual
obligations of the Company to its former president and chief executive officer,
who resigned in June 1998, and the costs necessary to recruit executives to the
Company. Approximately $822,000 of this charge is reserved for future payment at
September 30, 1998.
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. On June 5, 1998,
concurrent with the acquisition of the Carbons Group, the Company amended and
restated its then existing $40,000,000 domestic revolving credit with Bank of
America National Trust & Savings Association as agent by entering into a
$110,000,000 secured, domestic facility, comprised of a $75,000,000 revolving
facility and a $35,000,000 term loan ("New Domestic Facility"). On September 30,
1998, the New Domestic Facility was amended to allow for the implementation of
the 1999 Plan described above and the Company reduced the New Domestic Facility
to $87,000,000, comprised of a $52,000,000 revolving facility and a $35,000,000
term loan ("Amended Domestic Facility").
As a result of the Carbons Group acquisition and the implementation of
the 1999 Plan, the Company has caused its current and long-term debt to be in
excess of stockholder's equity and bears the risks associated with increased
leverage.
The Company believes that through the end of fiscal 1999, (i) future cash
flow from operations, (ii) borrowings under the credit facilities described
above or as amended, (iii) issuance of subordinated indebtedness, Common Stock
and seller financing incurred in connection with future acquisitions or
financings and (iv) the sale of certain underperforming assets will be
sufficient to fund its working capital needs, additional cash requirements of
the 1999 Plan, acquisitions and additional contingent consideration related to
acquisitions.
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Acquisitions. During the twelve months ended September 30, 1998, the
Company completed three acquisitions for an aggregate consideration of
$57,072,000, comprised of $54,822,000 of cash and $2,250,000 of seller financing
in the form of convertible debt. In addition, contingent consideration payments
totaling $1,776,000 were made in connection with acquisitions made prior to
1998.
Under the terms of certain of the purchase agreements, the Company may be
required to make additional purchase consideration payments of up to $2,468,000,
contingent upon the achievement of specified operating results through fiscal
2000. The payments that are expected to be required for meeting fiscal 1999 and
2000 targets are $1,468,000 and $1,000,000, respectively. Any such additional
purchase consideration payments will be treated as additional goodwill for
accounting purposes.
The Company, from time to time, has and expects to make in the future
strategic investments in industry related companies. During fiscal 1998 the
Company invested in Aquatec Water Systems, Incorporated ("Aquatec"), a designer
and manufacturer of specialized multi-chamber pumps for the pure water industry,
in the form of a $1,400,000 subordinated debt instrument. This investment is
convertible into approximately 30% of the equity of Aquatec. The Company also
has the option to purchase at anytime through March 2001 the remaining equity of
Aquatec at a pre-determined formula based on earnings. The Company will
determine during fiscal 1999 whether to retain its investment in Aquatec.
Credit Availability. The Company currently has a $87,000,000 Amended
Domestic Facility with Bank of America National Trust & Savings Association as
agent, which expires on May 19, 2003. In connection with this facility, the
Company also has separate facilities at three of its overseas subsidiaries
aggregating $7,000,000. The Amended Domestic Facility and the three overseas
facilities ("Amended Credit Facilities") will be utilized to fund operating
activities of the Company as well as future acquisitions.
Loans under the Amended Credit Facilities 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
Amended Credit Facilities bear interest based on a designated London interbank
offering rate ("LIBOR") plus spreads ranging from 100 to 225 basis points,
depending on the Company's aforementioned leverage ratio.
The Amended Credit Facilities restricts or prohibits the Company from
taking many actions, including paying dividends and incurring or assuming other
indebtedness or liens. The banks that participate in the Amended Credit
Facilities also must approve most acquisitions. The Company's obligations under
the Credit Facility are secured by liens on substantially all of the Company's
domestic assets, including equipment, inventory, accounts receivable and general
intangibles and the pledge of most of the stock of the Company's subsidiaries.
The Company has guaranteed the payment by its three overseas subsidiaries of
their obligations under the overseas facilities. The three overseas subsidiaries
have given a negative pledge of their assets in connection with the overseas
facilities.
Availability for future borrowings under the Credit Facility is based on
a multiple of the Company's pro forma earnings before interest, taxes,
depreciation and amortization. At September 30, 1998, approximately $4,100,000
was available for future borrowings under the Amended Credit Facilities.
Availability for future borrowings may increase or decrease based on the pro
forma operating performance of the Company.
The Company also has in place a $3,000,000 credit facility ("Canadian
Line of Credit") with Royal Bank of Canada to fund Canadian working capital
requirements including banker's acceptances and letters of credit. Interest
rates are negotiated on an individual borrowing basis and are related to the
Royal Bank of Canada's prime rate. Borrowings are payable upon demand and are
guaranteed by Bioclear. At September 30, 1998, the Canadian Line of Credit was
fully utilized.
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The Company's earnings are affected by changes in interest rates related
to its Amended Domestic Facility. During 1998, the Company entered into an
interest rate swap agreement with a major commercial bank to modify the interest
characteristics of its Amended Domestic Facility. The agreement involves the
exchange of amounts based on a fixed rate of interest for an amount based on a
LIBOR-based floating rate over the life of the agreement without an exchange of
the notional amount upon which the payments are based. The agreement, which
expires on December 30, 1999, fixes the Company's LIBOR-based rate at 5.25% on a
notional amount of $75,000,000. If LIBOR averaged 1% less in fiscal 1999 than
the fiscal 1998 year-end rate, the Company's interest expense, after considering
the effects of the interest rate swap, would not be materially impacted due to
the interest rate swap agreement. The impact was determined by considering the
hypothetical impact of interest rates on the Amended Domestic Facility and
interest rate swap agreement. The analysis does not consider the effects of the
overall economic environment associated with such a change nor does it assume
any change to the Company's current financial structure. See Note 14 of the
Company's 1998 audited financial statements for further discussion regarding the
Company's use of derivative financial instruments.
Year 2000. The Year 2000 issue, as widely reported, could cause
malfunctions in certain computer-related applications with respect to dates on
or after January 1, 2000. These malfunctions could relate to Information
Technology ("IT") or non-IT environments. Due to the Company's decentralized IT
environments, individual assessments, in accordance with the Company's Year 2000
program, have been conducted at the Company's operating companies. Collectively,
these assessments indicate that the Company's exposure to this segment of the
Year 2000 issue is not significant as the Company does not extensively rely on
IT systems which require modification. The Company's externally developed system
issues have been assessed Company-wide through inquiry of its major external
vendors and testing procedures where necessary. The appropriate upgrades, if
required, have been (or are scheduled to be) attained in order to make these
systems Year 2000 compliant. The Company has tested internally developed
software systems where applicable and have developed programs to make these
systems Year 2000 compliant. Testing of upgraded or modified systems has begun
at the Company's various operating units. Results of these testing procedures,
which are scheduled to be completed by the end of fiscal 1999, are incomplete.
The Year 2000 program also addresses issues related to non-IT
environments. Collectively, these assessments indicate that the Company's
exposure to this segment of the Year 2000 issue is not significant due to the
Company's limited manufacturing operations and related capital equipment needs.
The Company's operating equipment has been assessed through inquiry of its major
external manufacturers and internal testing procedures. Remediation efforts have
begun where necessary. Collectively, the Company intends to complete and test
remediated assets by the end of fiscal 1999.
The Company's primary system interface with an external party involves
its banking institutions. Based on inquiries of its banking institutions, the
Company is not aware of any unresolved Year 2000 issues. Further, due to the
Company's decentralized operations, individual assessments, in accordance with
the Company's Year 2000 program, have been conducted at the Company's operating
companies regarding significant suppliers and subcontractors. These assessments,
which are not complete, have been executed primarily through inquiry of its
various suppliers and subcontractors. To date, the Company is not aware of any
external party with an unresolved Year 2000 issue that would materially impact
the Company's operations and financial position. However, the Company has no
means of ensuring that external parties will be Year 2000 compliant. The
inability of external parties to resolve their Year 2000 issue in a timely
manner could impact the Company's operations and financial position. The effect
of non-compliance by external parties is not determinable.
The Company has utilized primarily internal resources to assess, test,
remediate and implement software and equipment related to the Year 2000. The
total cost of the Company's Year 2000 program, excluding employee salaries, is
estimated at $300,000, primarily attributable to software upgrades and
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modifications. The Company has incurred approximately $100,000 related to the
various phases of its Year 2000 program.
Management of the Company believes that it has a program established to
resolve the Year 2000 issue in a timely manner. Collectively, the Company's Year
2000 program has not been completed. In the event the Company does not complete
its remaining Year 2000 procedures, certain functions may be interrupted. The
Company does not have a formal contingency plan established if all phases of its
Year 2000 program are not completed. However, appropriate actions, such as
interim manual information systems, will be instituted to mitigate such
interruption. In addition, disruptions in the economy generally resulting from
unresolved Year 2000 issues could also materially adversely affect the Company.
The potential liability and loss of revenue from these issues is not
determinable.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income", which establishes standards for the reporting and display of
comprehensive income and its components. This Statement is intended to address
the concerns of financial statement users' for the increasing number of items
that bypass the income statement, such as foreign currency translation
adjustments. The Statement is effective for the Company in fiscal 1999. The
Company does not expect the adoption of this Statement to have a material effect
on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which changes the way public
companies report segment information in annual financial statements. The
Statement also requires public companies to report selected segment information
in interim financial reports to shareholders. The Statement is effective for the
Company in fiscal 1999 and restatement of comparative information for earlier
years is required in the initial year of adoption. The implementation of the
1999 Strategic Operating Plan will require the Company to present segmented
industry information upon adoption of SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The Statement will require, among other things, that all
derivatives be recorded on the balance sheet at fair value. The Statement is
effective for the Company in fiscal 2000. The Company has not yet determined
what the effect of adopting SFAS No. 133 will be on its operations or financial
position.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed
herein may include forward-looking statements that involve risks and
uncertainties. While forward-looking statements are sometimes presented with
numerical specificity, they are based on variety of assumptions made by
management regarding future circumstances over which the Company has little or
no control. A number of important factors, including those identified in this
section as well as factors discussed elsewhere herein, could cause the Company's
actual results to differ materially from those in forward-looking statements or
financial information. Actual results may differ from forward-looking results
for a number of reasons, including the following: (i) changes in economic
conditions (including, but not limited to, the potential instability of
governments and legal systems in countries in which the Company conducts
business, significant changes in currency valuations, recessionary environments
and Year 2000 compliance issues relating to the Company's program and external
parties, including suppliers and customers), (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, the impact of changes
in industrial business cycles, and legislative changes that affect the municipal
or industrial marketplace), (iii) competitive factors (including, but not
limited to, changes in market penetration and the introduction of new products
by existing and new competitors), (iv) changes in operating costs (including,
but not limited to, the effect of changes in the Company's manufacturing
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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
strategic plan (including, but not limited to, its ability to achieve the total
planned benefits of its 1999 Plan (including its ability to eliminate costs,
improve operating efficiencies, and successfully divest of its Bioclear
subsidiary), its ability to find and integrate acquisitions into Company
operations, and the ability of recently acquired companies to meet satisfactory
operating results), and (vi) unanticipated litigation, claims or assessments
(including, but not limited to, claims or problems related to product warranty
and environmental issues).
Potential Fluctuations in Quarterly Results of Operations. We have
experienced quarterly fluctuations in operating results due to the contractual
nature of our business and, to a lesser extent, weather conditions. We expect to
receive contracts that are significantly larger than those received by us in the
past. In addition, certain contracts will be subject to our customer's ability
to finance the project as well as to receive any necessary permits. Therefore,
we expect that our future operating results could fluctuate significantly,
especially on a quarterly basis. Our recognition of revenues and profits can
fluctuate due to the timing of the awarding of such contracts and the ability to
fund project costs. In addition, we have historically operated with a moderate
backlog. As a result, our 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 our operating results in any
particular period. Accordingly, we believe that period-to-period comparisons of
our operating results may not be necessarily indicative of future performance.
Also, our operating results and stock price could be volatile, particularly on a
quarterly basis.
Limited Combined Operating History; Risks of Integration. We were formed
in December 1994 and have principally grown through acquisitions. Our success
depends, in part, on our ability to integrate the operations of our various
businesses and companies, 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 our businesses. Our new
1999 Plan and our restructured organization are designed to promote this
integration. While the breadth and diversity of our products and services permit
us to offer our customers single-source solutions to water and wastewater
treatment needs, this breadth and diversity also makes total integration more
difficult. We can not assure you that we will achieve our total integration
goals or that our operating results will match or exceed the combined individual
operating results achieved by our businesses prior to being acquired by us.
Our management group has been assembled only relatively recently, with
several key people joining us within the last twelve months. We cannot assure
you that management will be able to work together efficiently, implement our
strategies and the 1999 Plan effectively or direct us through a period of
significant growth.
While we believe that our customers and targeted customers benefit from
single-source solutions to water and wastewater treatment needs, we cannot
assure you that those customers will prefer the single-source approach or that
they will accept us as the provider of such solutions.
Significant Leverage. We have significant leverage. As of September 30,
1998, our total indebtedness was approximately $87,318,000 and our total
shareholders' equity was approximately $54,878,000. Our degree of leverage could
(i) increase our vulnerability to general adverse economic conditions, (ii)
limit our ability to obtain additional financing to fund working capital needs,
acquisitions and other general corporate requirements, (iii) require a greater
portion of our cash flow to go to interest and principal payments and reducing
cash flow for other general corporate purposes, and (iv) limit our ability to
react to changes in our business and industry. While we believe that cash flow
from operations will be sufficient to meet our anticipated needs, including debt
service, we can not assure you that general economic, financial, competitive or
other factors will not result in our
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being in default of our debt obligations. Such a default, if not waived, could
result in acceleration of our indebtedness and other adverse effects.
Dependence on Acquisitions for Growth. We intend to grow significantly
by acquiring existing businesses. This acquisition strategy involves risks
inherent in assessing the values, strengths, weaknesses, risks and profitability
of acquisition candidates. These risks include adverse short-term effects on our
operating results, diversion of our management's attention, dependence on
retaining, hiring and training key personnel, and risks associated with
unanticipated problems or latent liabilities. Although we generally have been
successful in acquiring companies we have pursued, we can not assurance you that
acquisition opportunities will continue to be available, that we will have
access to the capital required to finance potential acquisitions, that we will
continue to acquire businesses or that we will integrate successfully into our
operations any business we acquire. In addition, to the extent that
consolidation becomes more prevalent in our industry, the prices for attractive
acquisition candidates may be bid up to higher levels and we can not assure you
that businesses we acquire will achieve sales and profitability that justify our
investment in them.
Need for Additional Acquisition Financing. We currently intend to use a
combination of our Common Stock, cash, and debt obligations in making future
acquisitions. The extent to which we will be able or willing to use our 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 we are unable to use our Common Stock to make
acquisitions, our ability to grow may be limited by the extent to which we are
able to raise capital for this purpose, as well as to expand existing
operations, through debt or additional equity financing. At September 30, 1998,
we had approximately $4,100,000 available under the Amended Credit Facilities,
to be used for acquisitions (most of which would need to be approved by our
bank), working capital and other corporate purposes. We can not assure you that
we will be able to obtain the capital we need to finance a successful
acquisition program and our other cash needs.
Operations Outside the United States. We sell a substantial proportion
of our systems, equipment and services in western Europe, Latin America and
other regions outside the United States. Also, a number of our divisions operate
outside of the United States. On an annualized pro forma basis, our net sales
outside the United States were approximately 49% of our pro forma fiscal 1998
net sales. Political, economic, regulatory and social conditions in foreign
countries in which we operate may change. Risks associated with sales and
operations in foreign countries include risks of war, expropriation or
nationalization of assets, renegotiation or nullification of existing contracts,
changing political conditions, changing laws and policies affecting trade,
taxation 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. We can not assure you that changes in political,
economic, regulatory or social conditions will not have a substantial adverse
effect on our business.
Foreign Currency Risks. Because our functional currency is the United
States dollar, our 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. We have operations outside
the United States and are therefore hedged, to some extent, from foreign
exchange risks because of our ability to purchase, manufacture and sell in the
local currency of those jurisdictions. We also enter into foreign currency
contracts under certain circumstances to reduce our exposure to foreign exchange
risks. We can not assure you that our attempted matching of foreign currency
receipts with disbursements or hedging activity will adequately moderate the
risk of currency or exchange rate fluctuations. In addition, to the extent we
have operations outside the United States, we are subject to the impact of
foreign currency fluctuations and exchange rate charges on our reporting in our
financial statements of the results from such operations outside the United
States.
Dependence on Key Personnel. Our business depends on our ability to hire
and retain our executive officers and senior management. Our prospects could be
adversely affected if, for any reason, any of our executive officers or senior
management ceases active employment with us. We will
- 23 -
<PAGE> 30
depend on the senior management of any significant businesses we acquire in the
future to support our external growth and on our ability to attract qualified
management to support our internal expansion. Our business or prospects could be
affected adversely if any of these senior management of acquired businesses does
not continue in his or her management role after joining us and if we are unable
to attract and retain qualified replacements and additional members of
management.
Competition. Our industry, the water purification and wastewater
treatment industry, is fragmented and highly competitive due to the large number
of businesses within certain product areas. We compete 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 we believe we are well positioned to deliver
technology and services at a fair price, some of our competitors have developed
product and service integration capabilities beyond our current scope. We can
not assure you that we can compete successfully in our market.
Cyclicality of Demand for Water Purification and Wastewater
Equipment. Much of our water purification and wastewater equipment requires
significant capital expenditures by our customers. As such, the timing of
customer purchases from us may be affected by various economic factors,
including interest rate and business cycle fluctuations, which are beyond the
our control. The cyclical nature of capital equipment sales could have an
adverse effect on the our revenues and profitability in general, and on the our
revenues and profitability in any individual financial reporting period.
Potential Environmental Liabilities. In the United States, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended ("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. We are also subject to applicable
environmental laws in countries outside the United States where we operate or in
which our 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. We 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 our solutions, systems and
equipment. To the extent that demand for our 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 our business and prospects.
Process and Product Warranty and Performance Guarantees. In connection
with providing certain services and products to our customers, we sometimes
guarantee that the services and products will attain specified levels of quality
or performance. A product could fail to perform according to our performance
guarantee. A service could fail to accomplish treatment levels which we
guarantee. If that happens and if we are unable to remedy such failure within
any applicable cure period, we could incur financial penalties. We also could be
required to remove and/or replace the equipment or repeat the service in order
to meet the specifications. While we have fulfilled all of our guarantee
obligations, we can not assure you that we will continue to be able to fulfill
our guarantee obligations or that we will not incur significant costs in
fulfilling our obligations.
ITEM 7(a). QUALITATIVE AND QUANTITATIVE DISCLOSURES REGARDING MARKET RISK
The disclosures required under this item are included in Management's
Discussion and Analysis of Financial Condition and Results of Operations on page
20.
- 24 -
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WATERLINK, INC. AND SUBSIDIARIES
Report of Independent Auditors.............................. 26
Consolidated Balance Sheets at September 30, 1998 and
1997...................................................... 27
Consolidated Statements of Operations for the years ended
September 30, 1998, 1997 and 1996......................... 29
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1998, 1997 and 1996............. 30
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996......................... 31
Notes to Consolidated Financial Statements.................. 32
</TABLE>
- 25 -
<PAGE> 32
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Waterlink, Inc.
We have audited the accompanying consolidated balance sheets of
Waterlink, Inc. and subsidiaries as of September 30, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Canton, Ohio
November 6, 1998
- 26 -
<PAGE> 33
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1998 1997
-------- --------
(In thousands,
except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,925 $ 2,482
Trade accounts receivable,
less allowance of $1,266 in 1998
and $775 in 1997 29,906 24,625
Other receivables 2,757 1,320
Inventories 22,160 10,143
Costs in excess of billings 17,195 6,413
Refundable income taxes 840 635
Other current assets 3,111 1,177
-------- --------
Total current assets 79,894 46,795
Property, plant and equipment, at cost:
Land, building and improvements 4,095 2,366
Machinery and equipment 8,293 2,536
Office equipment 2,899 1,463
-------- --------
15,287 6,365
Less accumulated depreciation 1,557 554
-------- --------
13,730 5,811
Other assets:
Goodwill, net of amortization of $2,555
in 1998 and $929 in 1997 79,936 60,419
Patents, net of amortization of $217 in
1998 and $63 in 1997 1,408 1,484
Deferred income taxes -- 611
Other assets 8,593 740
-------- --------
89,937 63,254
-------- --------
Total assets $183,561 $115,860
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
- 27 -
<PAGE> 34
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1998 1997
-------- --------
(In thousands,
except share data)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade $ 15,133 $ 9,597
Accrued expenses 18,881 9,447
Additional purchase consideration payable 1,000 1,760
Billings in excess of costs 3,392 3,425
Accrued income taxes 1,158 490
Deferred income taxes 164 108
Current portion of long-term obligations 9,429 2,538
-------- --------
Total current liabilities 49,157 27,365
Long-term obligations:
Long-term debt 73,639 12,502
Convertible subordinated notes -- related parties 4,250 3,921
Other 1,637 1,199
-------- --------
79,526 17,622
Shareholders' equity:
Preferred Stock, $.001 par value, 10,000,000 shares
Authorized, none issued and outstanding -- --
Common Stock, voting, $.001 par value
Authorized -- 40,000,000 shares
Issued outstanding -- 12,225,604 shares in 1998 and
11,906,326 shares in 1997 12 12
Additional paid-in capital 71,973 70,739
Foreign currency translation adjustment 231 (44)
Retained earnings (deficit) (17,338) 166
-------- --------
Total shareholders' equity 54,878 70,873
-------- --------
Total liabilities and shareholders' equity $183,561 $115,860
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
- 28 -
<PAGE> 35
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1998 1997 1996
--------- -------- --------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net sales $135,167 $64,699 $19,801
Cost of sales 85,532 40,390 11,233
-------- ------- -------
Gross profit 49,635 24,309 8,568
Selling, general and administrative expenses 38,639 18,683 7,029
Special charges 21,636 2,630 --
Amortization 1,871 751 307
-------- ------- -------
Operating income (loss) (12,511) 2,245 1,232
Other income (expense):
Interest expense (3,562) (1,281) (877)
Interest income and other items -- net 37 263 (44)
-------- ------- -------
Income (loss) before income taxes (16,036) 1,227 311
Income taxes 1,468 470 5
-------- ------- -------
Income (loss) before extraordinary item (17,504) 757 306
Extraordinary item, net of income taxes of $257 -- (385) --
-------- ------- -------
Net income (loss) $(17,504) $ 372 $ 306
======== ======= =======
Earnings (loss) per common share:
Basic:
Income (loss) before extraordinary item $ (1.46) $ 0.15 $ 0.21
Extraordinary item -- (0.08) --
-------- ------- -------
$ (1.46) $ 0.07 $ 0.21
======== ======= =======
Assuming dilution:
Income (loss) before extraordinary item $ (1.46) $ 0.10 $ 0.06
Extraordinary item -- (0.05) --
-------- ------- -------
$ (1.46) $ 0.05 $ 0.06
======== ======= =======
Weighted average common shares outstanding:
Basic 12,007 4,924 1,469
Assuming dilution 12,007 7,804 4,954
</TABLE>
The accompanying notes are an integral part of these statements.
- 29 -
<PAGE> 36
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOREIGN TOTAL
ADDITIONAL CURRENCY RETAINED SHAREHOLDERS
COMMON PAID-IN TRANSLATION EARNINGS EQUITY
STOCK CAPITAL ADJUSTMENT (DEFICIT) (DEFICIT)
------ ---------- ----------- --------- -------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1996
Balance at October 1, 1995 $ 1 $ 500 $ (512) $ (11)
Exercise of 50,000 incentive stock
options 5 5
Issuance of 499,996 shares in
connection with acquisition of
subsidiary 1 2,124 2,125
Net income 306 306
Other (18) (18)
--- ------- ---- -------- --------
Balance at September 30, 1996 2 2,611 (206) 2,407
YEAR ENDED SEPTEMBER 30, 1997
Conversion of subordinated notes for
600,000 shares 1 2,516 2,517
Issuance of 481,830 shares in
connection with acquisition of
subsidiaries 1 4,843 4,844
Sale of 5,175,000 shares in connection
with the initial public offering and
the exercise of the underwriters
overallotment 5 49,935 49,940
Conversion of 3,250,000 shares of
Preferred Stock into Common Stock 3 8,497 8,500
Issuance of warrants in connection
with debt agreements 413 413
Exercise of 399,500 stock options 583 583
Net income 372 372
Other 1,341 $(44) 1,297
--- ------- ---- -------- --------
Balance at September 30, 1997 12 70,739 (44) 166 70,873
YEAR ENDED SEPTEMBER 30, 1998
Exercise of 275,966 stock options and
warrants -- 912 912
Issuance of 42,384 shares in
connection with the employee stock
purchase plan -- 396 396
Issuance of 928 shares in connection
with acquisitions -- 16 16
Net loss -- -- -- (17,504) (17,504)
Other -- (90) 275 185
--- ------- ---- -------- --------
$12 $71,973 $231 $(17,338) $ 54,878
=== ======= ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
- 30 -
<PAGE> 37
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1998 1997 1996
-------- ------- -------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(17,504) $ 372 $ 306
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Extraordinary item -- 385 --
Non-cash portion of special charges 17,378 1,138 --
Deferred income taxes (credit) 667 (503) --
Depreciation and amortization 3,326 1,229 442
Changes in working capital:
Accounts receivable 6,128 (8,951) (700)
Inventories (2,583) (827) 432
Costs in excess of billings (7,224) (13) (1,390)
Refundable income taxes (205) (123) --
Other assets (8,155) 462 (80)
Accounts payable 195 2,265 390
Accrued expenses 1,693 5 896
Billings in excess of costs (3,284) (2,725) (276)
Accrued income taxes 115 578 (34)
-------- ------- -------
Net cash used by operating activities (9,453) (6,708) (14)
INVESTING ACTIVITIES
Purchases of equipment (2,261) (1,072) (423)
Purchases of subsidiaries, net of cash acquired (53,430) (42,597) (5,557)
-------- ------- -------
Net cash used in investing activities (55,691) (43,669) (5,980)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 66,709 33,110 1,841
Payments on long-term borrowings (1,417) (30,866) (1,304)
Proceeds from sale of Common Stock 1,308 50,523 5
Proceeds from sale of Preferred Stock -- -- 4,576
-------- ------- -------
Net cash provided by financing activities 66,600 52,767 5,118
Effect of exchange rate changes on cash (13) (27) --
-------- ------- -------
Increase (decrease) in cash and cash equivalents 1,443 2,363 (876)
Cash and cash equivalents at beginning of year 2,482 119 995
-------- ------- -------
Cash and cash equivalents at end of year $ 3,925 $ 2,482 $ 119
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
- 31 -
<PAGE> 38
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Waterlink, Inc. and its wholly-owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated upon consolidation.
FISCAL YEAR END -- The Company's fiscal year ends on September 30th.
References in the notes to the financial statements to the years 1998, 1997 and
1996 refer to the fiscal years ended September 30, 1998, 1997 and 1996,
respectively.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
CONTRACTS AND 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 are recognized in the period in which they are determined.
Provisions are made currently for all known or anticipated losses. Variations
from estimated contract performance could result in a material adjustment to
operating results for any fiscal quarter or year. Claims for extra work or
changes in scope of work are included in revenues when collection is probable.
Contract costs include all direct engineering, material and labor costs,
as well as applicable overheads related to contract performance. General and
administrative expenses are charged to expense as incurred.
Revenues from the remaining equipment and product sales are recognized
when shipped.
INVENTORIES -- Inventories are valued at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
equivalents, trade receivables and notes receivable. The Company places its cash
equivalents with major 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. Notes receivable of approximately $2,800,000 from one
customer are classified in other long-term assets and are collateralized. Losses
from credit sales are provided for in the financial statements and have
historically been within management's expectations.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is valued
at cost. Expenditures for repairs and maintenance are charged to operations as
incurred, while expenditures for additions and improvements are capitalized.
Depreciation is computed principally using the straight-line method over the
estimated useful lives of assets. The useful lives range from 30 to 40 years for
building and improvements; 5 to 10 years for machinery and equipment and 3 to 7
years for office equipment.
- 32 -
<PAGE> 39
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
GOODWILL -- Goodwill represents costs in excess of net assets of acquired
businesses which are amortized using the straight-line method over a period of
40 years. The Company evaluates the realizability of goodwill based on the
undiscounted cash flows of the applicable businesses acquired over the remaining
amortization period. Should the review indicate that goodwill is not
recoverable, the Company's carrying value of goodwill would be reduced by the
estimated shortfall of the cash flows (See Note 7).
FOREIGN CURRENCY TRANSLATION -- Assets and liabilities of subsidiaries
are translated at the rate of exchange in effect on the balance sheet date;
income and expenses are translated at the average rates of exchange prevailing
during the year. The related translation adjustments are reflected as a separate
component of shareholders' equity. Foreign currency gains and losses resulting
from transactions are included in the results of operations and amounted to a
net gain of $91,000 in 1998 and $167,000 in 1997.
EARNINGS (LOSS) PER SHARE -- In 1997, the FASB issued SFAS No. 128,
Earnings Per Share, which replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share. In
addition, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 98, which became effective in February 1998. SAB 98 revises
the views of the staff contained in certain topics of the staff accounting
bulletin series, including SAB No. 83 -- Earnings Per Share Computations in an
Initial Public Offering, to be consistent with the provisions of SFAS No. 128.
All earnings per share amounts conform to the requirements of SFAS No. 128 and
SAB No. 98, where applicable (see Note 12).
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1997, the FASB
issued Statement No. 130, Reporting Comprehensive Income, which establishes
standards for the reporting and display of comprehensive income and its
components. This Statement is intended to address the concerns of financial
statement users' for the increasing number of items that bypass the income
statement, such as foreign currency translation adjustments. The Statement is
effective for the Company in fiscal 1999. The Company does not expect the
adoption of this Statement to have a material effect on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which changes the way public companies
report segment information in annual financial statements. The Statement also
requires public companies to report selected segment information in interim
financial reports to shareholders. The Statement is effective for the Company in
fiscal 1999 and restatement of comparative information for earlier years is
required in the initial year of adoption. The implementation of the 1999
Strategic Operating Plan will require the Company to present segmented industry
information upon adoption of SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The Statement will require, among other things, that all
derivatives be recorded on the balance sheet at fair value. The Statement is
effective for the
- 33 -
<PAGE> 40
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
Company in fiscal 2000. The Company has not yet determined what the effect of
adopting SFAS No. 133 will be on its operations or financial position.
RECLASSIFICATIONS
Certain amounts reported in the 1997 financial statements have been
reclassified to conform to the 1998 presentation.
2. ACQUISITIONS
On March 2, 1998, the Company acquired Chemitreat Services, Inc.
("C'treat") for approximately $4,500,000; consisting of $2,250,000 in cash and
$2,250,000 in convertible subordinated notes. C'treat designs and manufactures
pure watermakers for use in the global offshore energy industry. The purchase
price includes approximately $3,685,000 of goodwill, which is being amortized on
a straight-line basis over 40 years.
On March 25, 1998, the Company acquired Aquafine Engineering Services
Limited ("AES") and Purac Engineering Incorporated ("Purac") in a single
transaction for approximately $7,572,000 in cash. AES designs and manufactures
industrial and municipal water and wastewater systems and solutions principally
for the United Kingdom market. Purac designs water and wastewater systems
principally for the United States municipal market. The purchase price includes
approximately $3,174,000 of goodwill, which is being amortized on a
straight-line basis over 40 years.
On June 5, 1998, the Company acquired Barnebey & Sutcliffe Corporation
("Barnebey"), Sutcliffe Speakman Carbons Limited ("Carbons") and Sutcliffe
Croftshaw Limited ("Croftshaw") in a single transaction for approximately
$45,000,000 in cash. Barnebey is located in the United States and Carbons and
Croftshaw are located in the United Kingdom. These three companies ("Carbons
Group") design, manufacture and market products and services utilizing activated
carbon for separation, concentration and purification of water, liquid and
gases. The purchase price includes approximately $29,441,000 of goodwill, which
is being amortized on a straight-line basis over 40 years.
During fiscal 1997, the Company completed five acquisitions of companies
that design and produce water and wastewater treatment systems. The Nordic Water
Products Group ("Nordic Group") was purchased effective March 5, 1997 for
approximately $11,256,000, consisting of $10,721,000 in cash and $535,000 of
seller notes. Bioclear Technology, Inc. ("Bioclear") and Lanco Environmental
Products, Inc. ("Lanco") were purchased effective June 27, 1997. The purchase
price for Bioclear was approximately $20,391,000, which consisted of $14,488,000
in cash, $2,285,000 of assumed debt and 328,947 shares of Common Stock valued at
$11 per share. Lanco was purchased for $2,200,000 in cash. Mellegard V.A.
Maskiner AB ("Meva") was purchased effective September 12, 1997 for
approximately $7,730,000, consisting of $6,059,000 in cash and $1,671,000 of
seller notes. Hycor Corporation ("Hycor") was purchased effective September 30,
1997 for approximately $17,002,000, consisting of $13,500,000 in cash,
$2,250,000 in convertible subordinated notes, $502,000 of assumed debt and
41,095 shares of Common Stock at $18.25 per share. The aggregate purchase price
of the 1997 acquisitions included approximately $46,316,000 of goodwill (Nordic
Group -- $5,919,000; Bioclear -- $17,849,000; Lanco -- $1,833,000;
Meva -- $5,844,000 and Hycor -- $14,871,000), which is being amortized on a
straight-line basis over 40 years. During fiscal 1998, the Company made the
decision to exit the Bioclear business due to the lack of order inflow and
- 34 -
<PAGE> 41
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
proposal opportunities, the unreliability of Bioclear's niche market, and the
turnover in upper management of Bioclear. As a result of the Company's decision
to exit the business, the unamortized balance of Bioclear goodwill was written
off as part of the special charges to operations discussed in Note 7.
During fiscal 1996, the Company completed the acquisition of three
companies that design and produce water and wastewater treatment systems. Mass
Transfer Systems, Inc. was purchased effective January 31, 1996 for
approximately $8,000,000, consisting of $3,500,000 in cash, $4,100,000 in seller
notes and $400,000 of assumed debt. Aero-Mod, Inc. and Affiliates was purchased
effective April 26, 1996 for approximately $2,700,000, consisting of $1,300,000
in cash, $700,000 in seller notes and $700,000 in assumed debt. Water Equipment
Technologies, Inc. was purchased effective September 30, 1996 for approximately
$5,200,000, consisting of $2,600,000 in cash and 611,784 shares of Common Stock
valued at $4.25 per share. The aggregate purchase price of the 1996 acquisitions
included approximately $9,365,000 of goodwill (Mass Transfer
Systems -- $5,737,000; Aero-Mod -- $78,000 and Water Equipment
Technologies -- $3,550,000), which is being amortized on a straight-line basis
over 40 years.
All of the acquisitions were accounted for as purchases. The purchase
price allocations for certain of the Company's 1998 acquisitions have been based
on preliminary estimates, which may be revised at a later date, due primarily to
obtaining property appraisals and actuarial valuations. The Company does not
believe that these revisions will result in a significant change to the purchase
allocations. The consolidated statements of operations of the Company includes
the results of operations of the acquired businesses for the period subsequent
to the effective date of these acquisitions.
Under the terms of certain of the purchase agreements, the Company may be
required to make additional purchase consideration payments of up to $2,468,000,
contingent upon the achievement of specified operating results through fiscal
2000. The payments that are expected to be required for meeting fiscal 1999 and
2000 targets are $1,468,000 and $1,000,000, respectively. Any such additional
purchase consideration payments will be treated as additional goodwill for
accounting purposes.
The following unaudited pro forma information presents the consolidated
results of operations of the Company assuming the acquisitions discussed above
were completed on October 1, 1996:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Net sales $183,521 $183,843
Operating income (loss) (8,443) 12,613
Income (loss) before taxes and extraordinary item (14,617) 4,605
Income (loss) before extraordinary item (16,360) 2,763
Net income (loss) (16,360) 2,378
Per common share-basic:
Income (loss) before extraordinary item $(1.36) $0.53
Net income (loss) (1.36) 0.46
Per common share-assuming dilution:
Income (loss) before extraordinary item $(1.36) $0.34
Net income (loss) (1.36) 0.29
</TABLE>
- 35 -
<PAGE> 42
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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. Pro forma
operating results for the year ended September 30, 1998 reflect $21,636,000 of
special charges incurred in connection with the Company's fiscal 1999 Strategic
Operating Plan as described in Note 7. Pro forma operating results for the year
ended September 30, 1997 reflect the $2,630,000 special charge incurred in
connection with the Initial Public Offering, as described in Note 7. The 1997
pro forma operating results do not reflect the use of proceeds of the Initial
Public Offering in June 1997 and the related reduction of indebtedness.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Raw materials and supplies $11,843 $ 4,821
Work in process 3,500 1,842
Finished goods 6,817 3,480
------- -------
$22,160 $10,143
======= =======
</TABLE>
4. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Contract costs incurred to date $57,435 $17,033
Estimated profits 24,497 7,793
------- -------
Contract revenue earned to date 81,932 24,826
Less billings to date 68,129 21,838
------- -------
Cost and estimated earnings in excess of billings, net $13,803 $ 2,988
======= =======
</TABLE>
The above amounts are included in the accompanying consolidated balance
sheet as:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Costs in excess of billings $17,195 $ 6,413
Billings in excess of costs 3,392 3,425
------- -------
$13,803 $ 2,988
======= =======
</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
- 36 -
<PAGE> 43
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
customer. This retainage aggregated $1,411,000 at September 30, 1998, and
$1,294,000 at September 30, 1997. Substantially all retained balances are
collectible within one year.
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1997
-------- -------
(In thousands)
<S> <C> <C>
LONG-TERM DEBT
Revolving credit agreements with a bank, due May 19,
2003. Interest is payable monthly at designated
variable rates (average rate of 7.93% at September
30, 1998) $ 43,000 $12,000
Term note payable to a bank, quarterly payments ranging
from $1,000,000 in March 1999 to $2,500,000 in March
2003, with the balance due upon maturity. Interest is
payable quarterly at variable rates (7.88% at
September 30, 1998) 35,000 --
Notes payable to a bank, due January 14, 1999. Interest
is payable at maturity (average rate of 6.03% at
September 30, 1998) 2,535 2,003
Other notes payable to various parties 862 1,037
CONVERTIBLE SUBORDINATED NOTES -- RELATED PARTIES
Note payable to former shareholders of Meva, due
September 12, 1999. Interest accrues at 3% per annum
and is payable on a quarterly basis 1,671 1,671
Note payable to a former shareholder of Hycor, due
September 30, 1999. Interest accrues at 5.81% per
annum and is payable on a quarterly basis 2,000 2,250
Note payable to former shareholders of C'treat, due
March 2, 2001. Interest accrues at 5.54% per annum
and is payable on a quarterly basis 2,250 --
-------- -------
87,318 18,961
Less current maturities 9,429 2,538
-------- -------
$ 77,889 $16,423
======== =======
</TABLE>
Future maturities of long-term obligations for the five years subsequent
to September 30, 1998 are as follows: 1999 -- $9,429,000; 2000 -- $4,177,000;
2001 -- $10,315,000; 2002 -- $10,071,000 and 2003 -- $53,074,000.
Interest paid approximated $2,758,000 in 1998, $1,605,000 in 1997 and
$631,000 in 1996.
On February 19, 1997, the Company entered into a credit facility with
Bank of America National Trust & Savings Association ("Pre IPO Credit
Facility"). Proceeds from the Pre IPO Credit Facility were used to acquire the
Nordic Group and to refinance certain indebtedness in connection with the
acquisition. As additional consideration for the Pre IPO Credit Facility, the
Company granted the Bank, pursuant to an agreement dated February 19, 1997, a
warrant, expiring in 2002, to purchase
- 37 -
<PAGE> 44
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
225,000 shares of Common Stock at a purchase price of $4.50 per share. The
aggregate fair value of the 225,000 warrants issued of $265,500 ($1.18 per
share) was treated as an original issue discount and was subsequently written
off in connection with the extraordinary charge discussed in Note 8. The
warrants under this agreement have not been exercised as of September 30, 1998.
On June 27, 1997, concurrent with the closing of its Initial Public
Offering, the Company terminated its Pre IPO Credit Facility and entered into
its $40,000,000 three year, secured, domestic revolving credit facility with
Bank of America National Trust & Savings Association as agent (the "Post IPO
Credit Facility"). The Post IPO Credit Facility also permits the Company's
overseas subsidiaries to incur up to $10,000,000 of additional unsecured
indebtedness.
On June 5, 1998, concurrent with the acquisition of the Carbons Group,
the Company amended and restated its Post IPO Credit Facility by entering into a
$110,000,000 secured, domestic facility, comprised of a $75,000,000 revolving
facility and a $35,000,000 term loan (the "New Domestic Facility"). On September
30, 1998, the New Domestic Facility was amended to allow for the implementation
of the 1999 Strategic Operating Plan described in Note 7 and the Company reduced
the New Domestic Facility to $87,000,000, comprised of a $52,000,000 revolving
facility and a $35,000,000 term loan (the "Amended Credit Facilities"). The
Company's Amended Credit Facilities expire on May 19, 2003, and combined with
the three oversees facilities will be utilized to fund operating activities of
the Company, as well as future acquisitions.
Availability for future borrowings under the Amended Credit Facilities is
based on a multiple of the Company's pro forma earnings before interest, taxes,
depreciation and amortization. At September 30, 1998, approximately $4,100,000
was available for future borrowings under the Amended Credit Facilities.
Loans under the Amended Credit Facilities 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
credit facilities bear interest based on a designated London interbank offering
rate ("LIBOR") or prime plus spreads ranging from 100 to 225 basis points,
depending on the Company's aforementioned leverage ratio. Certain borrowings
under the Amended Credit Facilities are subject to an interest rate swap
agreement (see Note 14).
The Amended Credit Facilities restrict or prohibit the Company from
taking many actions, including paying dividends and incurring or assuming other
indebtedness or liens. The banks that participate in the Amended Credit
Facilities also must approve most acquisitions. The Company's obligations under
the Amended Credit Facility are secured by liens on substantially all of the
Company's domestic assets, including equipment, inventory, accounts receivable
and general intangibles and the pledge of most of the stock of the Company's
subsidiaries. The Company has guaranteed the payment by its three overseas
subsidiaries of their obligations under the overseas facilities. The three
overseas subsidiaries have given a negative pledge of their assets in connection
with their facilities.
The conversion rate on convertible subordinated notes payable to former
shareholders of acquired companies range from $15.63 to $22.25.
In March 1997, the Company entered into a note purchase agreement (the
"Note Purchase Agreement") pursuant to which the Company could issue, and
several purchasers had committed to
- 38 -
<PAGE> 45
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
purchase, five year subordinated notes (the "1997 Notes"). The 1997 Notes were
not drawn on by the Company and upon the consummation of the Initial Public
Offering the Note Purchase Agreement terminated in accordance with its terms. 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 at a purchase price of $4.50 per share. The aggregate fair value of
the 125,000 warrants issued of $148,000 ($1.18 per share) was initially
capitalized as deferred financing costs and was subsequently written off in
connection with the extraordinary item discussed in Note 8. At September 30,
1998, warrants to purchase 62,500 shares of Common Stock were outstanding.
6. LEASES
The Company leases certain facilities and equipment under operating
leases, some of which are with entities controlled by former shareholders of
certain acquired businesses. Rent expense totaled $2,072,000 in 1998, $959,000
in 1997 and $241,000 in 1996. Related party rent expense included in these
totals amounted to $758,000 in 1998, $438,000 in 1997 and $116,000 in 1996.
Aggregate future minimum lease payments under noncancelable operating leases at
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
RELATED
PARTY OTHER
LEASES LEASES TOTAL
------- ------ -------
(In thousands)
<S> <C> <C> <C>
1999 $ 876 $1,558 $ 2,434
2000 886 1,206 2,092
2001 766 1,167 1,933
2002 389 1,101 1,490
2003 415 670 1,085
Thereafter 3,600 2,015 5,615
------ ------ -------
$6,932 $7,717 $14,649
====== ====== =======
</TABLE>
7. SPECIAL CHARGES
During the fourth quarter of fiscal 1998, the Company's Board of
Directors approved the 1999 Strategic Operating Plan (the "1999 Plan") which is
designed to reorganize the Company from a holding company with 23 operating
companies into five integrated divisions that focus on specific market segments.
The 1999 Plan, which will eliminate redundant costs and improve operating
efficiencies, is expected to be substantially completed by the end of fiscal
1999. The plan includes costs associated with the exiting and consolidation of
certain facilities and employee termination costs. Costs associated with this
plan of approximately $2,858,000 were recognized during 1998. The 1999 Plan will
reduce the Company's domestic and foreign workforce by approximately 75 people
and eliminate certain production-related functions no longer required. At
September 30, 1998, 41 employees have been terminated in conjunction with the
1999 Plan. Due to the timing of certain termination benefits and facility
consolidation costs, the reserve is expected to be utilized throughout 1999 and
2000. Other costs associated with the 1999 Plan of approximately $1,000,000,
which do not meet the criteria for recognition at September 30, 1998, will be
recognized in future periods as
- 39 -
<PAGE> 46
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
incurred. The following table summarizes the provisions, payments and remaining
reserves associated with the 1999 Plan:
<TABLE>
<CAPTION>
OTHER
TERMINATION EXIT
BENEFITS COSTS TOTAL
----------- ---------- ------
(In thousands)
<S> <C> <C> <C>
Provision in 1998 $1,076 $1,782 $2,858
Payments in 1998 (120) (480) (600)
------ ------ ------
Reserve at September 30, 1998 $ 956 $1,302 $2,258
====== ====== ======
</TABLE>
The Company also recorded a $17,284,000 non-cash charge during the fourth
quarter of 1998, consisting of $15,967,000 related to the impairment of goodwill
associated with the June 1997 Bioclear acquisition and $1,317,000 to write off
the cumulative translation adjustment component of Bioclear's equity. In
conjunction with the 1999 Plan, the Company determined that it would exit the
acquired Bioclear business and the associated goodwill was therefore, not
recoverable. The impairment charge was determined by reducing the carrying value
of Bioclear's assets to fair value utilizing a certified independent third party
valuation.
The Company also incurred a special charge during the third quarter of
fiscal 1998 of approximately $1,494,000 primarily attributable to contractual
obligations of the Company to its former chief executive officer, who resigned
in June 1998, and costs necessary to recruit executives to the Company.
The special charges of $2,630,000 for the year ended September 30, 1997
resulted primarily from the issuance, concurrent with the Initial Public
Offering, of a ten year option to purchase 100,000 shares of common stock at a
price of $0.10 per share to an officer of the Company pursuant to terms of an
employment agreement. Of this amount, approximately $1,138,000 was non-cash and
the remainder represented cash obligations related principally to the
reimbursement of income taxes resulting from the stock option issuance.
8. EXTRAORDINARY ITEM
The Company used a portion of the proceeds from its Initial Public
Offering to repay substantially all of its outstanding indebtedness. In
addition, concurrent with the Initial Public Offering the Company canceled the
Note Purchase Agreement discussed in Note 5. In connection with the early
retirement of certain indebtedness and the cancellation of the Note Purchase
Agreement, the Company realized an extraordinary charge of $385,000, net of
taxes of $257,000, related to the write-off of unamortized debt issuance costs
and discounts associated with this indebtedness. This extraordinary item on a
per share basis - assuming dilution was $0.05 for the year ended September 30,
1997.
- 40 -
<PAGE> 47
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------ ---- ----
(In thousands)
<S> <C> <C> <C>
Current:
U.S. federal $ -- $807 $--
State and local 111 (48) 5
Foreign 690 214 --
------ ---- ---
801 973 5
Deferred (credit):
U.S. federal 620 (620) --
Foreign 47 117 --
------ ---- ---
667 (503) --
------ ---- ---
$1,468 $470 $ 5
====== ==== ===
</TABLE>
The Company made income tax payments of approximately $979,000 in 1998,
$220,000 in 1997 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>
1998 1997 1996
------- ---- ----
(In thousands)
<S> <C> <C> <C>
Provision (credit) for income taxes at the statutory
federal rate $(5,452) $417 $106
Adjustments:
State and local income taxes 111 (32) 5
Non-deductible goodwill amortization 247 71 --
Difference in rates on foreign subsidiaries 45 (46) --
Change in valuation allowance 6,141 46 (99)
Other 376 14 (7)
------- ---- ----
Provision for income taxes $ 1,468 $470 $ 5
======= ==== ====
Effective income tax rate (9)% 38% 2%
======= ==== ====
</TABLE>
- 41 -
<PAGE> 48
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- 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>
1998 1997 1996
------- ------ ----
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward $15,100 $ 771 $152
Other 3,010 645 133
Valuation allowance (16,124) (110) (64)
------- ------ ----
1,986 1,306 221
Deferred tax liabilities:
Amortization of goodwill (553) (261) (164)
Revenue recognition (1,164) (485) --
Other (433) (57) (57)
------- ------ ----
(2,150) (803) (221)
------- ------ ----
Net deferred tax asset (liability) $ (164) $ 503 $ -
======= ====== ====
</TABLE>
In connection with acquisitions made in 1998, the Company recorded
deferred tax asset valuation reserves as part of purchase price allocations
totaling $7,417,000 in the United Kingdom, $1,497,000 in Germany and $509,000 in
the United States due primarily to net operating loss carryforwards existing in
these tax jurisdictions. The benefit of these net operating loss carryforwards
realized in the future will be recorded as a reduction of goodwill rather than
as a credit to income tax expense during that period. During 1998, an income tax
benefit of $350,000 was recorded which resulted in a corresponding decrease in
goodwill.
For tax purposes, the Company has U.S. federal loss carryforwards of
$17,629,000 which expire in the year 2018 and foreign net operating loss
carryforwards of $25,389,000, $2,211,000 of which expire in 2005 and $23,178,000
that have no expiration date. A valuation allowance has been established for the
entire amount of these net operating loss carryforwards since the realization is
uncertain.
The Company plans to continue to finance expansion of its operations
outside of the United States by reinvesting undistributed earnings of its
non-U.S. subsidiaries. The amount of undistributed earnings considered to be
indefinitely reinvested for this purpose was approximately $4,600,000 at
September 30, 1998. Accordingly, no provisions have been made for U.S. income
tax purposes on such undistributed earnings. While the amount of any U.S. income
taxes on these undistributed earnings, if distributed in the future, is not
determinable, it is expected that they would be reduced by the utilization of
tax credits or deductions. A distribution of these earnings would be subject to
withholding taxes.
10. STOCK OPTION PLANS
During 1998, the shareholders approved the Omnibus Incentive Plan (the
"Omnibus Plan"), which provides for compensatory equity based awards to officers
and certain other key employees of
- 42 -
<PAGE> 49
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
the Company. Awards may be granted for no consideration and consist of stock
options, stock awards, SARs, dividend equivalents, other stock based awards
(such as phantom stock) and performance awards consisting of any combination of
the foregoing.
The Company's 1995 Stock Option Plan (the "Stock Option Plan") provides
grants to officers, certain other key employees and directors of awards
consisting of "incentive stock options" as defined under the provisions of
Section 422 of the Internal Revenue Code and non-qualified stock options. All
options granted under the Stock Option Plan expire ten years after the date of
grant (see Note 11).
The Company's 1997 Non-Employee Director Stock Option Plan (the "Director
Plan") is authorized to issue up to 150,000 shares of Common Stock. Each
non-employee director is automatically granted an option to purchase 3,000
shares of Common Stock. In addition, on each anniversary date of the Director
Plan, each of the Company's then non-employee directors who have served at least
six-months shall automatically be granted an option to purchase 5,000 shares of
Common Stock. The per share exercise price of options granted under the Director
Plan will be the fair market value of the Common Stock on the date of grant.
Options granted under the Director Plan expire ten years after the date of grant
(see Note 11).
Collectively, 2,750,000 shares of Common Stock are available for granting
of awards under the above plans at September 30, 1998.
Under the Company's Employee Stock Purchase Plan (the "Stock Purchase
Plan"), the Company is authorized to issue up to 500,000 shares of Common Stock.
Under the terms of the Stock Purchase Plan, employees can choose to have up to
20% of their annual compensation withheld to purchase Common Stock. The exercise
price for shares subject to purchase under options granted shall be 85% of the
fair market value of the Common Stock on the first day of the purchase period,
unless otherwise determined by the compensation committee. On the last day of
the purchase period of any offering of shares made under the Stock Purchase
Plan, each outstanding option shall automatically be exercised. At any time
prior to the end of the purchase period applicable to each offering, an employee
is permitted to terminate or reduce his or her payroll deductions, to reduce his
or her options to purchase or to withdraw all or part of the amount in his or
her account. The employee has the right to receive in cash the amount
accumulated in such account. The Stock Purchase Plan will terminate in 2007.
11. STOCK BASED COMPENSATION
It is the Company's policy to generally grant stock options for a fixed
number of shares to employees with the exercise price approximating fair value.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations and accordingly,
recognizes no compensation expense for stock options granted at fair value.
Management believes that the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting For Stock Based Compensation" ("SFAS
123"), requires use of option valuation methods that were not developed for use
in valuing employee stock options. Under APB 25, compensation expense has been
recognized for all options granted at less than the fair market value of the
Company's common shares on the date of grant (see Note 7).
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value of these options and the options granted as part of the
- 43 -
<PAGE> 50
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
Plan were estimated at the date of grant using a Black-Scholes option pricing
model. The Company utilized the following weighted-average assumptions for 1998,
1997 and 1996; risk-free interest rate of 6.0%, dividend yield rate of 0% and a
weighted-average expected life of the options of 5 years. Further, the
volatility factor of the expected market price of the Company's stock was 26% in
1998 and 30% in 1997 and 1996. Using the Black-Scholes model, the
weighted-average grant-date fair value of options granted during 1998, 1997 and
1996 in the Stock Option Plan follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
FAIR EXERCISE FAIR EXERCISE FAIR EXERCISE
VALUE PRICE VALUE PRICE VALUE PRICE
----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Stock price:
Equals exercise price $3.14 $8.98 $4.28 $11.20 $1.53 $3.92
Greater than exercise price -- -- -- -- 4.18 .10
Less than exercise price -- -- -- -- 1.54 4.40
</TABLE>
The weighted-average grant-date fair values of the shares granted during
1998 and 1997 under the Stock Purchase Plan were $2.14 and $4.86, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated value of the options
is amortized to expense over the options' vesting period. The pro forma results
are not necessarily indicative of what would have occurred had the Company
adopted SFAS 123. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------- -------
(In thousands, except per share data)
<S> <C> <C> <C>
Pro forma net income (loss) $(18,249) $(331) $268
Pro forma earnings (loss) per share -- basic (1.52) (.07) .18
Pro forma earnings (loss) per share -- assuming dilution (1.52) (.07) .05
</TABLE>
- 44 -
<PAGE> 51
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,290,800 $8.48 666,500 $2.96 215,000 $ .10
Granted 825,000 8.98 808,800 9.98 501,500 3.88
Exercised (230,500) 3.96 (184,500) .33 (50,000) .10
Canceled (1,000) 12.09
--------- ----- --------- ----- ------- -----
Outstanding at end of year 1,884,300 $9.25 1,290,800 $8.48 666,500 $2.96
========= ===== ========= ===== ======= =====
Exercisable at end of year 754,325 $8.00 583,000 $3.98 3,750 --
========= ===== ========= ===== ======= =====
Available for future Options 400,700 74,700 83,500
========= ========= =======
</TABLE>
The Company has reserved 2,572,500 shares of Common Stock for possible
exercise of outstanding stock options and warrants.
- 45 -
<PAGE> 52
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item $(17,504) $ 757 $ 306
Extraordinary item, net of tax -- (385) --
-------- ------ ------
Income (loss) available to common stockholders for
basic and diluted earnings per share $(17,504) $ 372 $ 306
======== ====== ======
Denominator:
Average shares outstanding -- basic 12,007 4,924 1,469
Effect of dilutive securities:
Conversion of preferred stock into common stock -- 2,395 3,250
Stock options and warrants -- 485 235
-------- ------ ------
Dilutive potential common shares -- 2,880 3,485
-------- ------ ------
Denominator for diluted earnings per share --
Adjusted weighted-average shares and assumed
conversions 12,007 7,804 4,954
======== ====== ======
Earnings (loss) per common share:
Basic:
Income (loss) before extraordinary item $ (1.46) $ 0.15 $ 0.21
Extraordinary item, net of tax -- (0.08) --
-------- ------ ------
$ (1.46) $ 0.07 $ 0.21
======== ====== ======
Assuming dilution:
Income (loss) before extraordinary item $ (1.46) $ 0.10 $ 0.06
Extraordinary item, net of tax -- (0.05) --
-------- ------ ------
$ (1.46) $ 0.05 $ 0.06
======== ====== ======
</TABLE>
For the fiscal year ended September 30, 1998, certain issuances of
potential common stock were excluded from the computation of diluted earnings
per share since their inclusion in the computation would have an anti-dilutive
effect. Further, certain outstanding convertible subordinated notes in 1997 and
1996 have been excluded from the computation of diluted earnings per share,
since they would have an anti-dilutive effect on earnings per share.
13. RETIREMENT PLANS
In conjunction with the acquisition of the Carbons Group on June 5, 1998,
the Company acquired two defined benefit pension plans. The Company acquired a
U.K. plan, which covers substantially all of the employees of Carbons and
Croftshaw, and a U.S. plan, which covers
- 46 -
<PAGE> 53
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
substantially all of the employees of Barnebey. Information pertaining to the
Company's defined benefit pension plans follows (in thousands):
<TABLE>
<S> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at October 1, 1997 $ --
Benefit obligations assumed in connection with acquisitions 8,449
------
8,449
Service cost 171
Interest cost 195
Plan participants' contributions 41
Actuarial gains (53)
Benefits paid (53)
Foreign currency exchange rate changes 251
------
Benefit obligation at September 30, 1998 $9,001
======
CHANGE IN PLAN ASSETS
Plan assets at October 1, 1997 $ --
Plan assets acquired 9,756
------
9,756
Actual return on plan assets (241)
Company contributions 55
Plan participants' contributions 41
Benefits paid (53)
Foreign currency exchange rate changes 322
------
Plan assets at September 30, 1998 $9,880
======
FUNDED STATUS
Plan assets in excess of benefit obligations $ 879
Unrecognized actuarial loss 496
------
Prepaid benefit cost, net $1,375
======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF SEPTEMBER 30, 1998
Discount rate 7.00%
Expected return on plan assets 9.00%
Rate of compensation increase 3.50
to 4.50%
COMPONENTS OF NET PERIODIC PENSION COST
Service cost $ 171
Interest cost 195
Expected return on plan assets (291)
------
Net periodic pension cost $ 75
======
</TABLE>
- 47 -
<PAGE> 54
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
Amounts applicable to the Company's pension plan with accumulated benefit
obligations in excess of plan assets are (in thousands):
<TABLE>
<S> <C>
Projected benefit obligation $3,346
Accumulated benefit obligation 3,010
Fair value of plan assets 2,775
</TABLE>
In addition to the defined benefit plans acquired in the Carbons Group
acquisition, the Company has certain other employees, all located in the United
Kingdom, which currently participate in a defined benefit pension plan operated
and funded by their former parent company. In accordance with the terms of the
sale and purchase agreement, the Company is required to make contributions to
the plan for a period not to exceed twelve months from the acquisition date, or
March 1999. Upon expiration of the twelve-month period, the participants (and
related plan assets and benefit obligation) will be transferred into a defined
benefit pension plan funded and administered by the Company's U.K. operations.
The net asset or obligation associated with this plan is not determinable at
September 30, 1998.
The Company also sponsors a defined contribution plan which covers
substantially all domestic employees. Company contributions to the Plan totaled
$94,000 in 1998 and $13,000 in 1997. No Company contributions were made in 1996.
14. FINANCIAL INSTRUMENTS
The carrying values 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. Substantially all of the Company's
long-term debt obligations, except for the convertible subordinated notes --
related parties, have variable rates and cost approximates fair value at
September 30, 1998. The convertible subordinated notes -- related parties do not
have a ready market and cost is assumed to approximate fair value. The aggregate
carrying value of these notes is $5,921,000 at September 30, 1998, with interest
rates ranging from 3.00% to 5.81% and maturity dates ranging from September 1999
to March 2001.
During 1998, the Company entered into an interest rate swap agreement
with a major commercial bank to modify the interest characteristics of its
Amended Domestic Facility. The agreement involves the exchange of amounts based
on a fixed rate of interest for an amount based on a LIBOR-based floating rate
over the life of the agreement without an exchange of the notional amount upon
which the payments are based. The agreement, which expires on December 30, 1999,
fixes the Company's LIBOR-based rate at 5.25% on a notional amount of
$75,000,000. The differential to be paid or received as the interest rates
change is accrued and recognized as an adjustment of interest expense related to
the debt. The amount payable to or receivable from its counterparty is included
in other liabilities or assets. The fair value of the swap agreement and changes
in the fair value as a result of changes in market interest rates are not
recognized in the financial statements. The fair value of the swap agreement at
September 30, 1998 was a loss of $388,000. The counterparty to the agreement is
a major commercial bank. Management believes that any loss related to credit
risk is remote.
The Company uses a limited number of foreign exchange instruments,
primarily forward contracts, to manage exposure to currency rate fluctuations
primarily related to the purchases of inventory. Gains and losses incurred on
foreign exchange instruments identified as hedges are deferred
- 48 -
<PAGE> 55
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
and recognized in income in the same period as the hedged transaction. The
deferred gains or losses from hedging anticipated transactions were not material
to the Company's financial condition at September 30, 1998 and 1997.
15. GEOGRAPHIC AREA DATA
The Company operates in a single industry, providing integrated water and
wastewater treatment solutions to industry and municipalities worldwide. The
Company has a strategy of acquisition and internal growth to provide integrated
products, technologies and services to water users globally. Export sales
represented approximately one-fifth of U.S. sales in 1998 and one-third in 1997
and 1996.
Revenue transfers between geographic areas and other intergeographic
eliminations are not material. The Company does not derive more than 10% of its
total revenue from any individual customer.
Prior to 1997, the Company's operations were all domestic. Information by
geographic area for the years ended September 30, 1998 and 1997 follows:
<TABLE>
<CAPTION>
UNITED
STATES EUROPE CANADA CONSOLIDATED
------- ------- -------- ------------
(In thousands)
<S> <C> <C> <C> <C>
1998
Net sales $74,719 $57,676 $ 2,772 $135,167
Operating income (loss) (1) 332 3,847 (16,690) (12,511)
Income (loss) before income
taxes (1) 1,379 1,765 (19,180) (16,036)
Assets employed at year end 112,200 66,940 4,421 183,561
1997
Net sales $43,015 $20,556 $ 1,128 $ 64,699
Operating income (2) 787 1,323 135 2,245
Income (loss) before income
taxes (2) 431 1,162 (366) 1,227
Assets employed at year end 62,489 32,317 21,054 115,860
</TABLE>
- ---------------
(1) The special charges of $21,636,000 were recorded as follows: United
States -- $3,335,000; Europe -- $1,017,000; Canada -- $17,284,000.
(2) The special charge of $2,630,000 is included under the United States.
- 49 -
<PAGE> 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item is located on pages 3 through 7 of the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of the Company's fiscal year
ended September 30, 1998 and is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this item is located on pages 8 through 15 of the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of the Company's fiscal year
ended September 30, 1998 and is incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is located on pages 2 and 3 of the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of the Company's fiscal year
ended September 30, 1998 and is incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
- 50 -
<PAGE> 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following report and consolidated financial statements of Waterlink,
Inc. and Subsidiaries are included in Item 8, Part II of this report:
Report of Independent Auditors
Consolidated Balance Sheets at September 30, 1998 and 1997
Consolidated Statements of Operations for the years ended September 30,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended September 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
Financial Statements or notes thereto.
(b) REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
DATE ITEM FINANCIAL STATEMENTS
---- ---- --------------------
<S> <C> <C>
August 14, 1998 #7 Historical Combined Financial Statements of
Barnebey & Sutcliffe Corporation and Combined
Affiliates.
Unaudited Pro Forma Condensed Consolidated
Financial Data of Waterlink, Inc. and
Subsidiaries.
</TABLE>
(c) EXHIBITS
The exhibits are set forth on the attached Exhibit Index which is
incorporated by reference. Exhibits are included only in the copies of
this Form 10-K filed with the Securities and Exchange Commission and
NYSE.
- 51 -
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Waterlink, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WATERLINK, INC.
By: /s/ T.Scott King
---------------------------------
Its President and Chief Executive
Officer
Date: December 1, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
<TABLE>
<S> <C>
/s/ John R. Miller /s/ Robert P. Pinkas
- ------------------------------------------- -------------------------------------------
John R. Miller, Robert P. Pinkas,
Director Director
Date: December 1, 1998 Date: December 1, 1998
/s/ Rollin S. Reiter /s/ Dr. Paul M. Sutton
- ------------------------------------------- -------------------------------------------
Rollin S. Reiter, Dr. Paul M. Sutton,
Director Director
Date: December 1, 1998 Date: December 1, 1998
/s/ Theodore F. Savastano /s/ T. Scott King
- ------------------------------------------- -------------------------------------------
Theodore F. Savastano, T. Scott King,
Director and Chairman of the Board Director, President and Chief Executive
Date: December 1, 1998 Officer
Date: December 1, 1998
/s/ Michael J. Vantusko
- -------------------------------------------
Michael J. Vantusko,
Chief Financial Officer
(and principal accounting officer)
Date: December 1, 1998
</TABLE>
- 52 -
<PAGE> 59
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<C> <S>
*3.1 Form of Fifth Amended and Restated Certificate of
Incorporation of the Company (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, File No. 1-13041)
*3.2 Form of Amended and Restated By-Laws of the Company (filed
as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, File No.
1-13041)
*4.1 Form of Rights Agreement, dated as of May 23, 1997, between
the Company and American Stock Transfer & Trust Company
(filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1997, File
No. 1-13041)
*4.2 Amended and Restated Registration Rights Agreement, dated as
of March 6, 1997, by and among the Company, Brantley Venture
Partners III, L.P., Theodore F. Savastano, River Cities
Capital Fund limited Partnership, IPP95, L.P., Environmental
Opportunities Fund, L.P., Environmental Opportunities Fund
(Cayman), L.P., Brantley Capital Corporation and National
City Capital Corporation (filed as an exhibit to the
Company's Registration Statement on Form S-1, filed
April 16, 1997, Registration No. 333-25249).
*4.3 Registration Rights Agreement, dated as of January 31, 1996,
between the Company and Mass Transfer Systems, Inc (filed as
an exhibit to the Company's Registration Statement on
Form S-1, filed April 16, 1997, Registration No. 333-25249)
*4.4 Registration Rights Agreement, dated as of April 26, 1996,
between the Company and Lawrence A. Schmid (filed as an
exhibit to the Company's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249)
*4.5 Registration Rights Agreement dated as of September 30,
1996, between the Company, Lawrence Stenger, Theresa
Stenger, Ronald Jaworski, Christine Jaworski, John Stenger,
Dawn P. Stenger, Scott Stenger, Kristie D. Stenger, Jorg
Menningman, Michael Mudrick, Robert Young and Gary Prae
(filed as an exhibit to the Company's Registration Statement
on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.1 Employment Agreement, dated May 23, 1997, between the
Company and Chet S. Ross (filed as an exhibit to the
Company's Amendment No. 1 to Registration Statement on
Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.2 Employment Agreement, dated May 23, 1997, between the
Company and Theodore F. Savastano (filed as an exhibit to
the Company's Amendment No. 1 to Registration Statement on
Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.3 Employment Agreement, dated May 23, 1997, between the
Company and Michael J. Vantusko (filed as an exhibit to the
Company's Amendment No. 1 to Registration Statement on Form
S-1, filed May 23, 1997, Registration No. 333-25249).
*10.4 Employment Agreement, dated May 23, 1997, between the
Company and L. Dean Hertert, Jr. (filed as an exhibit to the
Company's Amendment No. 1 to Registration Statement on
Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.5 Employment Agreement, dated July 1, 1987, between Nordic
Water Products AB and Dr. Hans F. Larsson (filed as an
exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
</TABLE>
- 53 -
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<C> <S>
*10.6 Credit Agreement, dated as of February 19, 1997 among the
Company, Bank of America Illinois, as agent, and the other
financial institutions party thereto (filed as an exhibit to
the Company's Registration Statement on Form S-1, filed
April 16, 1997, Registration No. 333-25249)
*10.7 Brantley Guaranty, dated as of February 19, 1997, by
Brantley Venture Partners, III, L.P. in favor of Bank of
America Illinois, as agent, on behalf of the other financial
institutions party to the Credit Agreement, dated as of
February 19, 1997 (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.8 Credit Agreement, dated as of June 27, 1997, among the
Company, Bank of America National Trust & Savings
Association (successor by merger to Bank of America
Illinois), as agent, and for other financial institutions
party thereto (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, File No. 1-13041)
*10.9 Credit Agreement, dated as of March 4, 1997, among
Gigantissimo 2061 AB (to be known as Waterlink (Sweden) AB),
the Company, as guarantor, and Bank of America National
Trust & Savings Association, London Branch (filed as an
exhibit to the Company's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249).
*10.10 First Amendment, dated as of June 27, 1997, to Credit
Agreement, dated March 4, 1997, among Waterlink (Sweden) AB,
the Company, as guarantor, and Bank of America National
Trust & Savings Association, London Branch (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1997, File No. 1-13041)
*10.11 Credit Agreement, dated as of March 4, 1997, among Provista
Einhundertsechsundfunfzigste Verwaltungsgesellschaft mbH (to
be known as Waterlink (Germany) GmbH), Waterlink, Inc., as
guarantor, and Bank of America National Trust & Savings
Association, Frankfurt Branch (filed as an exhibit to the
Company's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249).
*10.12 First Amendment, dated as of June 27, 1997, to Credit
Agreement, dated March 4, 1997, among Waterlink (Germany)
GmbH, the Company, as guarantor, and Bank of America
National Trust & Savings Association, Frankfurt Branch
(filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1997, File
No. 1-13041)
*10.13 Common Stock Warrant Agreement, dated as of February 19,
1997, between the Company and Bank of America Illinois
(filed as an exhibit to the Company's Registration Statement
on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.14 The Company's 1995 Stock Option Plan (filed as an exhibit to
the Company's Registration Statement on Form S-1, filed
April 16, 1997, Registration No. 333-25249).
*10.15 Subordinated Note Purchase Agreement and Credit Facility,
dated as of March 6, 1997, among the Company, Brantley
Venture Partners III, L.P. and the purchasers named therein,
along with the Form of Subordinated Note due 2002 attached
thereto as Exhibit A (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
</TABLE>
- 54 -
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<C> <S>
*10.16 Warrant Agreement, dated as of March 6, 1997, among the
Company and each of the purchasers named therein, along with
the Form of Warrant to Purchase Common Stock, attached
thereto as Exhibit A (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.17 The Company's 1997 Omnibus Incentive Plan (filed as an
exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
*10.18 Asset Purchase Agreement, dated January 31, 1996, among the
Company, Waterlink Acquisition Corporation, Mass Transfer
Systems, Inc., Mark E. Neville and Frederick J. Siino (filed
as an exhibit to the Company's Registration Statement on
Form S-1, filed April 16, 1997, Registration No. 333-25249).
*10.19 Asset Purchase Agreement, dated April 26, 1996, among the
Company, A-M Acquisitions Corp., Aero-Mod Incorporated,
Resi-Tech, Inc. and Lawrence A. Schmid (filed as an exhibit
to the Company's Registration Statement on Form S-1, filed
April 16, 1997, Registration No. 333-25249).
*10.20 Asset Purchase Agreement, dated April 26, 1996, among the
Company, B-W Acquisition Corp., Blue Water Services, Inc.
and Lawrence A. Schmid (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.21 Agreement and Plan of Merger, dated September 27, 1996, by
and among the Company, Wet Acquisition Corp. and Water
Equipment Technologies, Inc. and the shareholders of Water
Equipment Technologies, Inc (filed as an exhibit to the
Company's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249).
*10.22 Share Purchase Agreement, dated March 4, 1997, among
Waterlink (Sweden) AB, Waterlink (Germany) GmbH, Awpe
Svenska AB and Anglian Water Holding GmbH (filed as an
exhibit to the Company's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249).
*10.23 Purchase and Sale Agreement, dated March 14, 1995, among
Santech, Inc. (as assignee from the Company pursuant to an
Assignment of Purchase and Sale Agreement dated March 28,
1995) and Sanborn, Inc (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.24 Asset Purchase Agreement, dated August 28, 1995, among Great
Lakes Environmental, Inc., a Delaware corporation (as
assignee from the Company pursuant to an Assignment dated
August 31, 1995), Great Lakes Environmental, Inc., an
Illinois corporation, Lawrence Field and David Field (filed
as an exhibit to the Company's Registration Statement on
Form S-1, filed April 16, 1997, Registration No. 333-25249).
*10.25 The Company's Employee Stock Purchase Plan (filed as an
exhibit to the Company's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249)
*10.26 First Amendment, dated as of June 23, 1997, to the Company's
Employee Stock Purchase Plan (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, File No. 1-13041)
*10.27 The Company's 1997 Non-Employee Director Stock Option Plan.
*10.28 Stock Purchase Agreement among Waterlink (Sweden) AB,
Waterlink, Inc. and the shareholders of Mellegard V.A.
Maskiner AB dated September 12, 1997 (filed as an exhibit to
the Company's Current Report on Form 8-K, filed September
26, 1997, File No. 1-13041).
</TABLE>
- 55 -
<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
<C> <S>
*10.29 Stock Purchase Agreement dated September 30, 1997 among
Waterlink, Inc., Philip A. Thompson and the Hycor
Corporation Employee Stock Ownership Trust (filed as an
exhibit to the Company's Current Report on Form 8-K, filed
October 14, 1997, File No. 1-13041).
*10.30 Stock Purchase Agreement between Waterlink, Inc., and David
Romanow, Joe Romanow, Brian Topnik and Robert Jenkyns dated
as of April 15, 1997 (filed as an exhibit to the Company's
Current Report on Form 8-K, filed July 9, 1997, File No. 1-
13041).
*10.31 Stock Purchase Agreement between Great Lakes Environmental,
Inc. and David M. Rice dated as of April 14, 1997 (filed as
an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
*10.32 Letter Agreement among Waterlink, Inc., Bioclear Technology,
Inc. and Royal Bank of Canada dated September 24, 1997
(filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997, File No.
1-13041)
*10.33 Stock Purchase Agreement between Waterlink, Inc., and
Anglian Water Services Limited dated as of March 25, 1998
(filed as an exhibit to the Company's Current Report on Form
8-K, filed April 9, 1998, File No. 1-13041).
*10.34 Stock Purchase Agreement between Waterlink, Inc., and
Sutcliffe Speakman PLC dated as of June 5, 1998 (filed as an
exhibit to the Company's Current Report on Form 8-K, filed
June 19, 1998, File No. 1-13041).
*10.35 Amended as Restated Credit Agreement, dated as of June 27,
1997 and amended and restated as of May 19, 1998, among
Waterlink, Inc. and Bank of America National Trust and
Savings Association, as agent, Letter of Credit Issuing
Bank, and Swing Line Bank, and the other financial
institutions party hereto (filed as an exhibit to the
Company's Current Report on Form 8-K, filed June 19, 1998,
File No. 1-13041).
10.36 Agreement, dated June 5, 1998, between the Company and Chet
S. Ross.
10.37 Executive Employment Agreement, dated June 8, 1998, between
the Company and T. Scott King.
10.38 Third Amendment, dated as of September 29, 1998, to Amended
and Restated Credit Agreement, dated as of May 19, 1998,
among Waterlink, Inc. and Bank of America National Trust and
Savings Association, as agent, and the other financial
institutions party hereto.
11.1 Computation of earnings per share.
21.1 List of Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule as of and for the year ended
September 30, 1998.
</TABLE>
- ---------------
* Incorporated herein by reference as indicated.
- 56 -
<PAGE> 63
CORPORATE DIRECTORY
DIRECTORS
Theodore F. Savastano
Chairman of the Board
T. Scott King
President and Chief Executive Officer
John R. Miller*o
Director
Robert P. Pinkas o
Director
Rollin S. Reiter*o
Director
Dr. Paul M. Sutton*o
Director
* Audit Committee
o Compensation Committee
CORPORATE OFFICERS AND
SENIOR MANAGEMENT
T. Scott King
President and Chief Executive Officer
Michael J. Vantusko
Chief Financial Officer
L. Dean Hertert, Jr.
Vice President, Marketing and Business Development
Dr. Hans F. Larsson
Vice President, Technology
William A. McSwain
Vice President, Operations Integration
Donald A. Weidig
Controller and Secretary
Henrik Kallen
President, European Water and Wastewater Division
Frederick J. Siino
President, Biological Wastewater Systems Division
Philip A. Thompson
President, Separations Division
William W. Vogelhuber
President, Specialty Products Division
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
700 William R. Day Building
121 Cleveland Avenue South
Canton, Ohio
44702-1920
INDEPENDENT COUNSEL
Benesch, Friedlander, Coplan and Aronoff LLP
2300 BP Tower
200 Public Square
Cleveland, Ohio
44114-2378
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
SHAREHOLDER INFORMATION
The Company's common stock trades on the New York Stock Exchange under the
symbol "WLK".
ANNUAL MEETING
The Annual Shareholders Meeting will be held on January 21, 1999 at the Sheraton
Inn Belden Village, 4375 Metro Circle, North Canton, Ohio at 10:00 a.m.
CORPORATE OFFICE
Waterlink, Inc.
4100 Holiday Street NW
Canton, Ohio
44718-2532
Phone: 330-649-4000
Fax: 330-649-4008
E-mail:
[email protected]
Web: www.waterlink.com
WORLDWIDE OPERATING LOCATIONS
BIOLOGICAL WASTEWATER SYSTEMS DIVISION
MTS and Kaldnes Systems
Fall River, Massachusetts
+1 508-679-6770
Aero-Mod Systems
Manhattan, Kansas
+1 785-537-4995
Sanborn Technologies
Medway, Massachusetts
+1 508-533-8800
SEPARATIONS DIVISION
Hycor, NWP, Purac Products
Lake Bluff, Illinois
+1 847-473-3700
Great Lakes Environmental Products and Systems
Addison, Illinois
+1 630-543-9444
Lanco Products
Grand Rapids, Michigan
+1 616-791-9100
SPECIALTY PRODUCTS DIVISION
Waterlink/Barnebey Sutcliffe
Columbus, Ohio
+1 614-258-9501
Waterlink/Sutcliffe Carbons and Sutcliffe Croftshaw
Lancashire, UK
+ 44 1942 275 400
PURE WATER DIVISION
C'treat Offshore Watermakers
The Woodlands, Texas
+1 281-367-2800
WET Products and Systems
West Palm Beach, Florida
+1 561-684-6300
EUROPEAN WATER AND WASTEWATER DIVISION
WATERLINK AB
MEVA, NOXON, and Zickert Products
Gothenburg, Sweden
+46 31 68 49 96
Filtration Products
Nynashamn, Sweden
+46 8 520 651 00
NOXON and Zickert Products Manufacturing
Kungsbacka, Sweden
+46 300 710 65
MEVA Products
Design/Engineering
Mariestad, Sweden
+46 501 787 00
Waterlink Oy
Vantaa, Finland
+358 9 5305 6500
Zickert Miljo A/S
Holstebro, Denmark
+45 9741 0222
WATERLINK UK
Cambridgeshire, UK
+44 1353 602 700
AXEL JOHNSON ENGINEERING GMBH
Neuss-Grimlinghausen
Germany
+49 2131 3106 0
SOLUTIONS
SPEED
SPIRIT
<PAGE> 64
- ---------
WATERLINK
- ---------
4100 Holiday Street N.W.
Canton, Ohio 44718-2532
www.waterlink.com
<PAGE> 1
Exhibit 10.36
AGREEMENT
---------
THIS AGREEMENT (the "Agreement") is made and entered into as
of this 5th day of June 1998, by and between Waterlink, Inc., a Delaware
corporation (the "Company"), and Chet S. Ross ("Ross").
W I T N E S S E T H :
---------------------
WHEREAS, Ross is employed by the Company as President and
Chief Executive Officer pursuant to that certain Employment Agreement (the
"Employment Agreement") dated May 23, 1997 by and between Ross and the
Company;
WHEREAS, the Company and Ross have determined that it would be
in their respective interests to amicably resolve all disputes between them
pursuant to this Agreement;
WHEREAS, Ross acknowledges that, as a result of his positions
with the Company and related authority, he has had access to trade secrets,
confidential information and other sensitive matters regarding the Company and
its business and operations;
WHEREAS, Ross and the Company have agreed to certain
provisions restricting Ross from disclosing confidential information and
competing with the Company and its affiliates; and
WHEREAS, it is the mutual desire of Ross and the Company to
settle all disputes among them and to release each other from certain
liabilities and to set forth their mutual understandings and agreements with
respect to the termination of Ross' employment with the Company;
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. TERMINATION OF EMPLOYMENT. The Company and Ross hereby
agree that (i) effective at the close of business on June 5, 1998 (the
"Termination Date"), (x) Ross' employment with the Company will, without further
action on the part of either party hereto, terminate, including his positions as
President and Chief Executive Officer of the Company and all positions he holds
as of such date with any subsidiaries of the Company and (y) Ross will resign as
a director of the Company and as a director of each subsidiary of the Company of
which he is a director as of the Termination Date, and (ii) the Employment
Agreement will be terminated effective as of the Termination Date, and as of and
subsequent to such date will be of no further force or effect.
<PAGE> 2
2. COMPENSATION.
2.1 TERMINATION PAYMENT. As consideration for the termination
of the Employment Agreement, the Company shall pay to Ross an amount equal to
$780,000, such amount to be payable to Ross in forty-eight (48) equal bi-monthly
installments of $16,250 commencing on the Termination Date. The payments
described in this Section 2.1 are collectively referred to as the "Termination
Payment."
2.2 BENEFITS. The Company agrees to maintain in full force and
effect, for the continued benefit of Ross, until the earlier to occur of (i) the
second anniversary of the Termination Date (such two year period being referred
to herein as the "Payment Period") and (ii) the date upon which Ross commences
full-time employment (the earlier of such periods being referred to herein as
the "Benefits Period"), all benefits and perquisites provided to him prior to
the Termination Date, including all medical, dental, hospitalization, health,
disability and accident insurance benefits, plans or programs in which Ross was
entitled to participate immediately prior to the Termination Date (collectively,
the "Medical Programs"); provided, however, that if, upon Ross' commencement of
full-time employment during the Payment Period, he shall not be eligible to
immediately participate in such new employer's medical, dental, hospitalization,
health and accident insurance benefits or if such programs shall exclude, or
limit benefits with respect to pre-existing conditions, then Ross shall continue
to be covered by the Medical Programs until the earlier of (i) the conclusion of
the Payment Period and (ii) the date upon which Ross may participate in such new
employer's programs without any such limitations or restrictions. Neither the
Payment Period nor the Benefits Period extends any "COBRA" coverage period. In
the event that Ross' participation in any of the Company's benefits, plans or
programs is barred, the Company shall arrange to provide Ross with benefits
substantially similar to those which Ross would otherwise have been entitled to
receive under such plans and programs. In furtherance and not in limitation of
the foregoing, the Company agrees to continue to (x) provide Ross, during the
Benefits Period, with long-term disability insurance coverage in the same manner
and providing for benefits substantially commensurate with the level of benefits
provided to Ross as of the date hereof and (y) pay to the lessor of the
automobile presently leased by the Company for Ross' use, during the Benefits
Period, aggregate payments of $1,000 per month, payable on the first day of each
month during the Benefits Period with respect to such automobile. The Company
shall also maintain for Ross, for a period of five (5) years after the
Termination Date, 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.
2.3 STOCK OPTIONS. In connection with the execution of the
Employment Agreement, Ross was granted stock options to purchase 300,000 shares
of the common stock of the Company (the "Option Shares") at an exercise price of
$11.00 per share (the "Stock Options") under the Company's 1995 Stock Option
Plan (the "Plan") and pursuant to a Stock Option Agreement between Ross and the
Company, dated May 23, 1997 (the "Stock Option Agreement"). The Company hereby
agrees that irrespective of any term or condition of the Plan or the Stock
Option Agreement to the contrary, effective as of the date hereof, the Stock
Options that are not vested and exercisable as of such date shall be vested and
exercisable and Ross shall be entitled to exercise all
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<PAGE> 3
of the Stock Options until the close of business on January 10, 2000 (the "Sale
Period") without regard to the vesting criteria otherwise contained therein;
provided, however, that Ross shall not sell the Option Shares purchased upon
exercise of the Stock Options in an amount exceeding 25,000 shares per week (the
"Weekly Limit") and 50,000 shares per month (the "Monthly Limit," and together
with the Weekly Limit, the "Limits"); provided further, however, that (x) the
Monthly Limit shall terminate and be of no further force or effect upon the
earlier to occur of October 1, 1999 and the occurrence of a Change of Control
and (y) the Limits shall terminate and be of no further force or effect upon the
occurrence of a Change of Control. The Company agrees that at all times during
the Sale Period, the acquisition by Ross of the Option Shares shall be
registered under a registration statement on Form S-8 or other appropriate form
(a "Registration Statement") filed with and declared effective by the Securities
and Exchange Commission (the "SEC") and the Company shall take all action that
may be necessary to (i) cause the Registration Statement to comply with all
applicable laws and regulations and (ii) permit the sale by Ross, without any
limitation as to volume (other than as set forth in this Section 2.3 or which
may be applicable to "affiliates" pursuant to Rule 144 promulgated under the
Securities Act of 1933), of the Option Shares. To the extent that a Registration
Statement is not effective or does not contain all information required to be
disclosed therein at any time during the Sale Period, the Sale Period shall be
extended by the number of days during such period that such Registration
Statement was not effective or did not contain all information required to be
disclosed therein.
2.4 CHANGE OF CONTROL. Upon the occurrence of a Change of
Control (as hereinafter defined), the sum of (x) all payments to be made to Ross
pursuant to Section 2.1 hereof and (y) the cost of providing, or, as applicable,
having Ross obtain, the benefits to be provided to him pursuant to Section 2.2
hereof, shall immediately become due and payable. 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 Ross or an entity directly or indirectly controlled by
Ross, 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 Ross 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.
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<PAGE> 4
3. CONFIDENTIAL INFORMATION.
3.1 Ross hereby acknowledges that, in the course of his
employment by the Company, he has had 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, Ross agrees that he
will not, for a period commencing on the Termination Date and concluding upon
the earlier to occur of (a) two (2) years after such Termination Date and (b)
the date subsequent to such Termination Date upon which the Company is in
material breach of any material provision of this Agreement (provided that Ross
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 Ross),
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 the Employment Agreement or this
Section 3 by Ross, (ii) prior to the date of commencement of Ross' employment by
the Company was known to Ross, (iii) is, after the Termination Date, lawfully
acquired by Ross from a third party who, to Ross' s knowledge, is not prohibited
from disclosing such data or information to Ross or (iv) is required to be
disclosed by court order or other legal process. In the event that Ross 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, Ross 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 Ross' 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.
3.2 Ross 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 Ross or by others
("Confidential Materials"), which are in Ross' possession or under his control,
are the sole property of the Company. Accordingly, Ross hereby represents that
as of the date hereof, Ross has returned to the Company all Confidential
Materials and all copies thereof in his possession or under his control and has
not retained any copies of Confidential Materials.
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<PAGE> 5
4. NON-COMPETITION.
4.1 Ross agrees that for a period commencing on the
Termination Date and concluding upon the earlier to occur of (a) twenty four
(24) months after such Termination Date and (b) the date subsequent to such
Termination Date upon which the Company is in material breach of any material
provision of this Agreement (provided that Ross 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 Ross), Ross 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
Termination Date.
4.2 Anything to the contrary herein notwithstanding, the
provisions of this Section 4.1 shall not be deemed violated by the purchase
and/or ownership by Ross 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 Ross shall not be otherwise connected with or active in
the business (including serving as a member of the board of directors) of the
issuers described in this Section 4.1 or (z) of any entity which is then
employing Ross, provided that such employment does not violate the provisions of
Section 4.1.
5. REMEDY FOR BREACH. Ross hereby acknowledges that in the
event of any breach or threatened breach by him of any of the provisions of
Sections 3 or 4 of this Agreement, the Company would have no adequate remedy at
law and could suffer substantial and irreparable damage. Accordingly, Ross
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.
6. REPRESENTATIONS AND WARRANTIES.
6.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants that:
(a) It has the full power and authority to consummate all
transactions required of it by this Agreement. It has duly authorized the
execution, delivery and performance of this Agreement, has duly executed and
delivered this Agreement and this Agreement, when duly
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<PAGE> 6
authorized, executed and delivered by Ross will constitute a legal, valid and
binding obligation, enforceable against it in accordance with its terms, subject
to applicable bankruptcy, insolvency, reorganization, moratorium and other laws
now or hereafter in effect relating to creditors' rights generally and by
equitable principles of general application (regardless of whether considered in
a proceeding in equity or at law) and the discretion of the court before which
any such proceeding may be brought;
(b) Neither the execution and delivery of this Agreement, the
consummation of the transactions required of it herein, nor the fulfillment of,
or compliance with, the terms and conditions of this Agreement will conflict
with, or result in, a breach of any of the terms, conditions or provisions of
its charter or by-laws or any material agreement or instrument to which it is
now a party or by which it is bound or constitute a material default or result
in an acceleration under any of the foregoing, or result in the violation of any
law, rule, regulation, order, judgment or decree to which it or its property is
subject;
(c) There is no litigation pending or, to its knowledge,
threatened, which if determined adversely to it, would adversely affect the
execution, delivery or enforceability of this Agreement, or its ability to
perform its obligations in accordance with the terms hereof, or which would have
a material adverse effect on its financial condition; and
(d) No consent, approval, authorization or order of any court
or governmental agency or body is required for the execution, delivery and
performance by it of, or compliance by it with, this Agreement.
6.2 REPRESENTATIONS AND WARRANTIES OF ROSS. Ross hereby
represents and warrants that:
(a) He has the full power and authority to consummate all
transactions required of him by this Agreement. He has duly authorized the
execution, delivery and performance of this Agreement, has duly executed and
delivered this Agreement and this Agreement, when duly authorized, executed and
delivered by the Company will constitute a legal, valid and binding obligation,
enforceable against him in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and other laws now or
hereafter in effect relating to creditors' rights generally and by equitable
principles of general application (regardless of whether considered in a
proceeding in equity or at law) and the discretion of the court before which any
such proceeding may be brought;
(b) Neither the execution and delivery of this Agreement, the
consummation of the transactions required of him herein, nor the fulfillment of,
or compliance with, the terms and conditions of this Agreement will conflict
with, or result in, a breach of any of the terms, conditions or provisions of
any material agreement or instrument to which he is now a party or by which he
is bound or constitute a material default or result in an acceleration under any
of the foregoing, or result
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<PAGE> 7
in the violation of any law, rule, regulation, order, judgment or decree to
which he or his property is subject;
(c) There is no litigation pending or, to his knowledge,
threatened, which if determined adversely to him, would adversely affect the
execution, delivery or enforceability of this Agreement, or its ability to
perform his obligations in accordance with the terms hereof, or which would have
a material adverse effect on his financial condition; and
(d) No consent, approval, authorization or order of any court
or governmental agency or body is required for the execution, delivery and
performance by him of, or compliance by him with, this Agreement.
7. RELEASE.
7.1 Ross, for himself and his heirs, personal representatives
and members of his immediate family, voluntarily releases and forever discharges
the Company, its affiliates, and its and their respective officers, directors,
employees, agents, advisors, stockholders, successors and assigns, both
individually and in their official capacities with the Company and/or its
affiliates, of and from any and all actions or causes of action, suits, debts,
dues, sums of money, accounts, reckonings, bonds, bills, covenants, claims,
charges, complaints, contracts, agreements, trespasses, damages, judgments,
commissions, executions, demands and promises whatsoever, in law or equity,
which Ross, his heirs, executors, administrators, successors and assigns may now
have or hereafter can, shall or may have for, upon, or by reason of any and all
matters arising out of his relationship with the Company and/or its affiliates,
and including, but not limited to, any claims regarding any alleged violation of
Title VII of the Civil Rights Act of 1964, the Employee Retirement Income
Security Act of 1974, the Age Discrimination in Employment Act of 1967 as
amended, 42 U.S.C. Section 1981, Ohio Revised Code Section 4112.02(A) and (N),
the Vocational Rehabilitation Act, the Equal Pay Act of 1963, the National Labor
Relations Act and any other alleged violation of any local, state or federal
statutory or common law, regulation or ordinance, and/or public policy, contract
or tort law, having any bearing whatsoever on his relationship with the Company
and/or its affiliates, including, without limitation, the terms and conditions
and/or cessation of his employment or the termination of the Employment
Agreement; provided however, that notwithstanding the foregoing provisions of
this release, this release shall not apply to and Ross reserves the following
(i) any rights, claims and causes of action he may have arising out of or
resulting from the non-performance or breach of the terms and conditions of this
Agreement and the Stock Option Agreement between the Company and Ross and (ii)
any right, claims and causes of action that Ross may acquire solely as a
stockholder or optionholder of the Company and only with respect to matters
arising after the Termination Date; provided, however, that Ross may only join
in, but may not initiate, any stockholder class action or stockholder derivative
lawsuit against, or in the name of, as the case may be, the Company. This
release is for any relief, no matter how denominated, including but not limited
to wages, back pay, front pay, compensatory damages or punitive damages. Ross
understands, acknowledges and agrees that by signing this Agreement, he is
waiving the right to recover in any proceeding he may bring before the U.S.
Equal Employment Opportunity Commission or in any proceeding brought by the
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<PAGE> 8
U.S. Equal Employment Opportunity Commission on his behalf. Ross further agrees
that he will not file or permit to be filed on his behalf any such claim.
7.2 The Company voluntarily releases and forever discharges
Ross of and from any and all actions or causes of action, suits, debts, dues,
sums of money, accounts, reckonings, bonds, bills, covenants, claims, charges,
complaints, contracts, agreements, trespasses, damages, judgments, commissions,
executions, demands and promises whatsoever, in law or equity, which the Company
may now have or hereafter can, shall or may have for, upon, or by reason of any
and all matters arising out of Ross' relationship with the Company and/or its
affiliates, and including as an officer, employee and stockholder of the Company
and/or its affiliates, and including, but not limited to, all claims for officer
loans and advances made to Ross; provided, however, that notwithstanding the
foregoing provisions of this release, the Company hereby reserves any rights,
claims and courses of action it may have arising out of or resulting from breach
of the terms and conditions of this Agreement. The Company further agrees to
defend, indemnify and hold Ross absolutely harmless from any and all claims
asserted in the future by any person arising out of, or in any way connected to,
Ross' employment relationship with the Company, excluding claims by Ross or the
Company against the other with respect to this Agreement or the Employment
Agreement.
8. RIGHT TO CONSIDER AND REVOKE.
8.1 The Company agrees that Ross may consider whether to agree
to the terms and conditions contained herein for a period of twenty-one (21)
days after the date the Company executes this Agreement. Accordingly, Ross may
execute and return a countersigned copy of this Agreement to the Company on or
prior to June 26, 1998 to acknowledge his understanding of and agreement with
the foregoing.
8.2 This Agreement will become effective, enforceable and
irrevocable seven (7) days after the date on which Ross executes it (the
"Effective Date"). During the seven-day period ending on the Effective Date,
Ross may revoke his agreement to accept the terms hereof by so indicating in
writing to the Company hereunder, whereupon this Agreement will terminate and be
of no force and effect.
9. NON-DISCLOSURE OF AGREEMENT. Ross and the Company mutually
agree not to disclose, either directly or indirectly, any information whatsoever
regarding the existence or substance of this Agreement to any person or
organization, except as may be required by law. The provisions of this Section 9
specifically exclude members of Ross' immediate family, his and the Company's
respective legal counsel and accountants (each of which will be advised of the
confidential nature, and the prohibition on the disclosure of, terms and
provisions of this Agreement) and include, but are not limited to, members of
the media, members of the financial community, present and former employees
(excluding current executive officers and directors of the Company), customers
and suppliers of, and lenders to, the Company, its affiliates and other members
of the public.
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<PAGE> 9
10. NON-DISPARAGEMENT. Ross and the Company mutually agree
not to make any statements, in writing or otherwise, that may disparage the
reputation or character of the other party hereto (and, with respect to the
Company and its affiliates, its and their respective officers, directors,
employees and agents), at any time from and after the date hereof for any reason
whatsoever, except in connection with any litigation or administrative
proceedings by or between Ross and the Company. Ross and the Company each
acknowledge that, to the date hereof, he or it, as appropriate, has not made
disparaging remarks regarding the other.
11. KNOWLEDGE AND CONSENT OF PARTIES. The parties hereto
mutually warrant and represent that they have read and understand this Agreement
and that this Agreement is executed voluntarily and without duress or undue
influence on the part of or on behalf of either party hereto. The parties hereby
acknowledge that they have been represented in negotiations and for the
preparation of this Agreement by counsel of their own choice; that they have
read this Agreement; and that they are fully aware of the contents of this
Agreement and of the legal effect of each and every provision hereof. It is
acknowledged and agreed by each of the parties to this Agreement that each of
the parties has participated in the drafting of this Agreement and that any
claimed ambiguity should not be construed for or against any such party on
account of such drafting.
12. 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
With copies to: Ira Kaplan, Esq.
Benesch, Friedlander, Coplan & Aronoff LLP
2300 BP America Building
200 Public Square
Cleveland, OH 44114-2378
Telephone: (216) 363-4500
Telecopy: (216) 363-4588
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<PAGE> 10
To Ross: 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.
13. ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties hereto with respect to the matters contemplated
herein and supersedes all prior agreements or understandings among the parties
related to such matters. Ross and the Company mutually agree to deliver all such
other documents and to do and perform all such other acts as may be reasonably
be required from time to time in connection with this Agreement.
14. 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 Ross. "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 Ross, 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. As used in this
Agreement, "Company" shall mean Waterlink, Inc. and any successor to its
business and/or assets.
15. NO ASSIGNMENT. This Agreement may not be assigned by Ross,
but may be assigned by the Company to any affiliate thereof and to any successor
to its business or the purchaser of all or substantially all of its assets.
16. AMENDMENT OR MODIFICATION; WAIVER. This Agreement may be
amended, superseded, canceled, renewed or extended, and the terms hereof may be
waived, only by a written instrument signed by all parties hereto. Except as
otherwise specifically provided in this Agreement,
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<PAGE> 11
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.
17. ADMISSION; EVIDENCE. The execution of this Agreement
shall not be deemed an admission of any wrongdoing, liability or unlawful
conduct on the part of Ross and/or the Company, its affiliates, divisions,
officers, employees, agents, successors or assigns. Neither this Agreement nor
any portion hereof shall be admissible evidence in any proceeding whatsoever
involving any party other than Ross, the Company or their representatives or
successors hereto.
18. FEES AND EXPENSES. The Company will reimburse Ross 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.
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.
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 counterparts, 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.
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<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first set forth above.
WATERLINK, INC.
By: /s/ MICHAEL J. VANTUSKO
-----------------------------------------
Name: Michael J. Vantusko
Title: Chief Financial Officer
/s/ CHET S. ROSS
--------------------------------------------
Chet S. Ross
<PAGE> 1
Exhibit 10.37
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of this
21st day of May, 1998, by and between Waterlink, Inc., a Delaware corporation
(the "Company"), and T. Scott King ("Executive").
W I T N E S S E T H :
WHEREAS, the Company desires to employ Executive as of the date hereof
and, effective June 8, 1998, as its President and Chief Executive Officer and
Executive desires to be so employed;
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 employ Executive and Executive
hereby agrees 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, unless otherwise terminated in accordance with
the provisions hereof, 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.
3. POSITION, DUTIES AND RESPONSIBILITIES.
3.1 POSITION, DUTIES AND RESPONSIBILITIES. During
the Term, as of June 8, 1998, 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
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, 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
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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 (which Executive acknowledges is not required in connection
with his entering into this Agreement), 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 (and retain any
director's fees received therefrom), 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 three hundred thousand dollars ($300,000) 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 program 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, the Company will grant to the Executive
options to purchase Four Hundred Thousand (400,000) shares of the Company's
Common stock (the "Stock Option") at the fair market value of such shares on the
date of grant under and in accordance with the Company's 1997 Omnibus Incentive
Plan (the Plan"). Such grant will be made upon approval of the stockholders of
the Company of an amendment to the Plan adopted by the Board on May 20, 1998 to
increase the number of shares reserved under the Plan. Stockholder approval will
be sought as soon as practicable at a special meeting of stockholders called
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for such purpose. 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.
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 BONUS UPON EXECUTION. Upon execution of this Agreement, the
Company shall pay to Executive a one-time signing bonus of Fifty Thousand
Dollars ($50,000).
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. During the Term, the Company will provide Executive
with a monthly automobile allowance in an amount not to exceed One Thousand
Dollars ($1000), and the Company shall be responsible for costs associated with
repairing, maintaining and insuring such automobile.
5.3 INSURANCE. As soon as practicable after the date hereof, the
Company, at its sole expense, shall purchase and maintain during the Term (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, if available, equal to 66 2/3% of
Base Salary per month or such lesser amount as is maintained generally for the
senior executive of the Company, from time to time.
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 of the Company for its senior Executives and do not materially
interfere with the operations of the Company.
5.5 KEY MAN 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
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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 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,
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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 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 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 Section 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
Executive attains age 65, (iii) if Executive's employment is terminated date
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 Section 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.
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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 an amount equal to the sum
of (x) Executive's unpaid Base Salary through the month in which Executive's
death occurred (which shall be paid within thirty (30) days of Executive's
death), plus (y) an amount equal to the product of (1) the "Bonus Payment" (as
defined in Section 8.2), if any, with respect to the fiscal year in which
Executive's employment is terminated pursuant to Section 7.1, 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 so terminated and the denominator of which is
365; such amounts related to the Bonus Payment to be payable to Executive in
twelve (12) equal semi-monthly 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, other than any Bonus Payment that is
not then determined, which shall be paid when such Bonus Payment under Section
4.2 would otherwise have been due. 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 Payment" (as defined below), if
any, with respect to the fiscal year in which Executive's employment is
terminated pursuant to Section 7.2, 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 semi-monthly 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, other than any Bonus
Payment that is not then determined, which shall be paid when such Bonus Payment
under Section 4.2 would otherwise have been due. 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. The "Bonus Payment" shall mean
(a) if a termination of employment occurs within the first four (4) months of a
fiscal year the bonus, if any, paid to Executive with respect to the immediately
preceding fiscal year pursuant to Section 4.2 hereof (which for a termination in
fiscal 1998 or during the first four (4) months of fiscal 1999 shall be deemed
to be $300,000) or (b) if a termination of employment occurs after the first
four months of a fiscal year), the bonus to be paid to Executive pursuant to
Section 4.2 hereof calculated after the end of the fiscal year in which such
termination occurs with respect to such year.
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
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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;
plus
(ii) In lieu of all other 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 Bonus Payment, and (B) one
and one half (1 1/2), such amounts to be payable to Executive
in thirty-six (36) equal semi-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 other than any Bonus Payment that
is not then determined, which shall be paid in equal
installments over the balance of such thirty-six (36)
installments commencing no later than ninety (90) days after
the end of the fiscal year in which Executive's employment is
terminated. 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 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;
plus
(ii) In lieu of all other salary and incentive
compensation payments which Executive would have earned under
this Agreement but for his termination, the
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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 Bonus Payment, and (B) one and
one-half (1 1/2) (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 other than any Bonus Payment that is not then
determined, which shall be paid within five (5) days after
calculated and in no event later than ninety (90) days after
the end of the fiscal year in which Executive's employment is
terminated. 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)(l)
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
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respect of which payments have been made under this Section
8.4(b)), 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 Executive's 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 Executive terminates his employment under this
Agreement for Good Reason, 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
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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, profit sharing and other
deferred compensation 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 for other than
Good Reason, the Company shall maintain in full force and effect, for the
continued benefit of Executive for one and one-half (1 1/2) 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 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 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
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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 Date of
Termination and concluding upon the earlier to occur of (a) eighteen (18) 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
operate, control or participate in the ownership, management, manage operation
or control, or be employed by or connected in any manner in the "Territory" (as
defined below) with, any business, firm or corporation which is engaged in or
competes with the business of the Company, its subsidiaries, affiliates or
division as such business is constituted on the Date of Termination. The
Territory shall mean any country in the world in which the Company or any of its
subsidiaries maintains offices or manufacturing facilities or has employees at
the Date of
11
<PAGE> 12
Termination, it being acknowledged that the Company's business is and is
intended to continue to be international in nature.
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
With copies to: Ira C. Kaplan, Esq.
Benesch, Friedlander,
Coplan & Aronoff LLP
2300 BP America Bldg.
200 Public Square
Cleveland, OH 44114
12
<PAGE> 13
Telephone: (216) 363-4567
Telecopy: (216) 363-4588
To Executive: T. Scott King
4571 Windstream Lane
Brecksville, OH 44141
Telephone: 440-526-5914
Telecopy: 440-526-0971
With a copy to: Ronald L. Kahn
Ulmer & Berne LLP
1300 East 9th Street, Suite 900
Cleveland, OH 44114
Telephone: 216-902-8818
Telecopy: 216-621-7488
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
13
<PAGE> 14
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
[Remainder of page intentionally left blank]
14
<PAGE> 15
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 binding arbitration in accordance with the rules of the
American Arbitration Association, and judgment upon such award rendered by the
arbitrators 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 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/T. Scott King
-----------------------------------
T. Scott King
15
<PAGE> 1
Exhibit 10.38
THIRD AMENDMENT
---------------
This Third Amendment (this "Amendment") is entered into as of
this 29th day of September, 1998 among Waterlink, Inc. (the "Company"), Bank of
America National Trust and Savings Association, as Agent (the "Agent"), and the
financial institutions from time to time party thereto (the "Banks"). Unless
otherwise specified herein, capitalized terms used in this Amendment shall have
the meanings ascribed to them by the Agreement (as defined below).
RECITALS
--------
WHEREAS, the Company, the Agent and the Banks are party to
that certain Amended and Restated Credit Agreement, dated as of May 19, 1998 (as
amended, supplemented, restated or otherwise modified from time to time, the
"Agreement");
WHEREAS, the Company, the Agent and the Banks wish to enter
into certain amendments to the Agreement, each as more fully set forth herein;
NOW THEREFORE, in consideration of the mutual execution hereof
and other good and valuable consideration, the parties hereto agree as follows:
SECTION 1. AMENDMENTS.
(a) The definition of "EBITDA" appearing in SECTION 1.01 of
the Agreement is hereby amended by deleting it in its entirety and
inserting the following in lieu thereof:
"EBITDA" means, for any period, for the Company and
its Subsidiaries on a consolidated basis, determined in
accordance with GAAP, the sum of (a) the net income (or net
loss) for such period PLUS (b) all amounts treated as expenses
for depreciation and interest and the amortization of
intangibles of any kind to the extent included in the
determination of such net income (or loss), PLUS (c) all
accrued taxes on or measured by income to the extent included
in the determination of such net income (or loss); PROVIDED,
HOWEVER, that net income (or loss) shall be computed for these
purposes without giving effect to extraordinary losses or
extraordinary gains plus (d) with respect to any business
acquired during the period of determination, an amount equal
to the sum of (x) the total compensation paid to each
management equity holder of such acquired business during the
twelve month period immediately preceding the date such
business was acquired LESS the base compensation paid to each
such Person during such twelve month period PLUS (y) the
aggregate amount of management fees paid to management equity
holders or Affiliates thereof during such twelve month period
<PAGE> 2
to the extent that such management fee is no longer required
to be paid after the date of such acquisition PLUS (z) the net
income of such acquired business during such period (plus, to
the extent deducted in determining such net income, interest
expense, income tax expense, depreciation and amortization of
such acquired business) in accordance with Article 11 of
Regulation S-X of the SEC; and PROVIDED FURTHER, that for the
purpose of computations under SECTIONS 8.16, 8.17 and 8.18 for
any business acquired during the period of determination
(including the Sutcliffe Acquisition), EBITDA for such period
shall be determined on a pro forma basis as if such
acquisition had occurred as of the beginning of such period;
AND PROVIDED FURTHER, that:
(A) for all purposes, for any period which includes
the third fiscal quarter of the Company's 1998 fiscal
year, there shall be excluded in determining EBITDA
any restructuring expense recorded in the third
fiscal quarter of the Company's 1998 fiscal year
which serves to reduce net income of the Company
and/or its Subsidiaries in such fiscal quarter,
PROVIDED, HOWEVER, that such restructuring expense
shall not be in excess of $1,493,750 ($1,400,000 of
which is hereinafter defined as the "Special Charge")
and for all purposes commencing with the fiscal
quarter ended June 30, 1998, for any period which
includes a fiscal quarter ending on or prior to June
30, 2000, EBITDA shall be reduced by an amount, if
any, equal to the amount by which (I) cumulative
EBITDA reductions with respect to the Special Charge
as described on ANNEX A to the Second Amendment
hereto exceeds (II) actual cumulative net cash flow
attributable to the Special Charge, it being
understood and agreed that the Company shall add a
line item to the Compliance Certificate for the
purpose of determining the calculations required by
this sentence;
(B) for all purposes for any period which includes
the fourth fiscal quarter of the Company's 1998
fiscal year, there shall be excluded in determining
EBITDA any restructuring expense recorded in the
fourth fiscal quarter of the Company's 1998 fiscal
year (I) relating to Bioclear Technologies, Inc., a
Canadian corporation, which serves to reduce net
income of the Company and/or its Subsidiaries in such
fiscal quarter, PROVIDED, HOWEVER, that such
restructuring expense shall not be in excess of
$17,300,000 and (II) relating to the realignment of
the Company, PROVIDED, HOWEVER, that such realignment
expense shall not be in excess of $2,700,000; and
(C) for all purposes for any period which includes a
fiscal quarter of the Company's 1999 fiscal year,
there shall be excluded in determining EBITDA any
realignment expense recorded in such fiscal quarter,
which serves to reduce net income of the Company
and/or its Subsidiaries in such fiscal quarter,
PROVIDED, HOWEVER, that the aggregate amount of such
2
<PAGE> 3
realignment expenses during such 1999 fiscal year
shall not exceed $1,300,000.
(b) SECTION 1.01 of the Agreement is hereby further
amended by inserting the following new definition in appropriate
alphabetical order:
"THIRD AMENDMENT" shall mean the Third Amendment to
this Agreement, dated as of September 29, 1998.
(c) Section 7.01 of the Agreement is hereby amended
by adding the following clause thereto:
"(c) as soon as available but no later than 30 days
after the end of each calendar month, a copy of the monthly
financial information package in the form attached as Exhibit
A to the Third Amendment.".
(d) Sub-section (d) of Section 8.04 of the Agreement
is hereby amended by deleting it in its entirety and inserting the
following in lieu thereof:
"(d) Investments, subject to SECTION 8.09, incurred
in order to consummate Acquisitions (other than the Sutcliffe
Acquisition) otherwise permitted herein, PROVIDED that (i) any
such Acquisition the aggregate consideration of which exceeds
$7,500,000 shall not be permitted without the prior written
approval of the Majority Banks, PROVIDED, HOWEVER that at any
time during which the Leverage Ratio of the Company is greater
than 4.0:1.0 for the immediately preceding 12 calendar months
(taken as one accounting period), no Acquisition shall be
permitted without prior written approval of 100% of the Banks,
(ii) no Default or Event of Default is in existence both
before and after giving effect to such Acquisition, (iii) such
Acquisition is undertaken in accordance with all applicable
Requirements of Law, and (iv) the prior, effective written
consent or approval to such Acquisition of the board of
directors or equivalent governing body of the acquiree is
obtained;".
(e) Sections 8.15, 8.16, 8.17, 8.18 and 8.20 of the
Agreement are each hereby amended by deleting each said Section in its
entirety and inserting the following new Sections 8.15, 8.16, 8.17,
8.18 and 8.20 in lieu thereof:
"8.15 MINIMUM NET WORTH. The Company shall not permit
its consolidated Net Worth at any time to be less than an
amount equal to the sum of (a) $51,100,000 PLUS (b)75% of the
Company's positive Net Income, if any, for each fiscal quarter
ending after the date of the Third Amendment and prior to the
date of determination, PLUS (c) an amount equal to 100% of the
cash and non-cash
3
<PAGE> 4
proceeds of any equity securities issued by the Company after
the date of the Third Amendment and prior to the date of
determination.
8.16 LEVERAGE RATIO. The Company shall not permit, at
any time during a period listed below, its Leverage Ratio at
such time for the twelve month period (taken as one accounting
period) last ended prior to the date of determination, to be
greater than the ratio set forth below opposite the respective
period in which the determination is being made:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From and including the last day 5.10:1.0
of the fiscal quarter ended in September, 1998
to but excluding the last day of the fiscal quarter
ended in December, 1998
Thereafter, from and including the last day 5.97:1.0
of the fiscal quarter ended in December, 1998
to but excluding the last day of the fiscal quarter
ended in March, 1999
Thereafter, from and including the last day 5.80:1.0
of the fiscal quarter ended in March, 1999
to but excluding the last day of the fiscal quarter
ended in June, 1999
Thereafter, from and including the last day 5.05:1.0
of the fiscal quarter ended in June, 1999
to but excluding the last day of the fiscal quarter
ended in September, 1999
Thereafter, from and including the last day 4.10:1.0
of the fiscal quarter ended in September, 1999
to but excluding the last day of the fiscal quarter
ended in December, 1999
Thereafter, from and including the last day 4.00:1.0
of the fiscal quarter ended in December, 1999
to but excluding the last day of the fiscal quarter
ended in March, 2000
Thereafter, from and including the last day 3.75:1.0
of the fiscal quarter ended in March, 2000
</TABLE>
4
<PAGE> 5
<TABLE>
<S> <C>
to but excluding the last day of the fiscal quarter
ended in December, 2000
Thereafter, from and including the last day 3.5:1.0
of the fiscal quarter ended in December, 2000
to but excluding the last day of the fiscal quarter
ended in December, 2001
Thereafter 3.25:1.0
</TABLE>
8.17 SENIOR LEVERAGE RATIO. The Company shall not permit,
at any time during a period listed below, its Senior Leverage
Ratio at such time for the twelve month period (taken as one
accounting period) last ended prior to the date of
determination, to be greater than the ratio set forth below
opposite the respective period in which the determination is
being made:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From and including the last day 4.55:1.0
of the fiscal quarter ended in September, 1998
to but excluding the last day of the fiscal quarter
ended in December, 1998
Thereafter, from and including the last day 5.37:1.0
of the fiscal quarter ended in December, 1998
to but excluding the last day of the fiscal quarter
ended in March, 1999
Thereafter, from and including the last day 5.20:1.0
of the fiscal quarter ended in March, 1999
to but excluding the last day of the fiscal quarter
ended in June, 1999
Thereafter, from and including the last day 4.55:1.0
of the fiscal quarter ended in June, 1999
to but excluding the last day of the fiscal quarter
ended in September, 1999
Thereafter, from and including the last day 4.0:1.0
of the fiscal quarter ended in September, 1999
to but excluding the last day of the fiscal quarter
ended in December, 1999
</TABLE>
5
<PAGE> 6
<TABLE>
<S> <C>
Thereafter, from and including the last day 3.50:1.0
of the fiscal quarter ended in December, 1999
to but excluding the last day of the fiscal quarter
ended in March, 2000
Thereafter 3.25:1.0
</TABLE>
8.18 INTEREST COVERAGE RATIO. The Company shall not
permit, at any time during a period listed below, its Interest
Coverage Ratio at such time for the twelve month period (taken
as one accounting period) last ended prior to the date of
determination, to be less than the ratio set forth below
opposite the respective period in which the determination is
being made:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From and including the last day of the fiscal 2.0:1.0
quarter ended in September, 1998 but
excluding the last day of the fiscal quarter
ended March, 1999
From and including the last day of the fiscal 1.75:1.0
quarter ended in March, 1999 but
excluding the last day of the fiscal quarter
ended June, 1999
From and including the last day of the fiscal 2.0:1.0
quarter ended in June, 1999 but
excluding the last day of the fiscal quarter
ended December, 1999
From and including the last day of the fiscal 2.25:1.0
quarter ended in December, 1999 but
excluding the last day of the fiscal quarter
ended September, 2001
Thereafter 2.50:1.0
</TABLE>
* * *
8.20 CAPITAL EXPENDITURES. The Company shall not, and
shall not permit any of its Subsidiaries to, incur Capital
Expenditures; PROVIDED, that the Company and its Subsidiaries
may make Capital Expenditures during: (i) its 1998 fiscal year
in an aggregate amount not in excess of $6,000,000; (ii) its
1999 fiscal year in an
6
<PAGE> 7
aggregate amount not in excess of $3,000,000; and (iii) each
fiscal year thereafter, $6,000,000.".
(f) Section 9.01 of the Agreement is hereby amended by (i)
deleting the "or" contained at the end of 9.01(m), and (ii) deleting
the period at the end of clause 9.01(n) and adding the following:
"; or
(o) SUBORDINATED DEBT. The Company shall make any payment
of principal on any Subordinated Debt where after giving
effect to such payment the Leverage Ratio for the twelve month
period (taken as one accounting period) then last ended would
be greater than 4.25:1.0 and/or the Senior Leverage Ratio for
the twelve month period (taken as one accounting period) then
last ended would be greater than 3.75:1.0.".
(g) Schedule 8.01 of the Agreement is hereby amended by
deleting the text contained therein in its entirety and inserting in
lieu thereof the word "None".
SECTION 2. CONSENT
(a) The Banks hereby consent to the formation of Bioclear
Technology, ULC, a Nova Scotia unlimited liability company (the "New Foreign
Subsidiary"), for the purpose of effecting an amalgamation between Bioclear
Technology, Inc., a Canadian corporation, and New Foreign Subsidiary with New
Foreign Subsidiary being the surviving corporation of such amalgamation;
PROVIDED, HOWEVER that the Company shall cause New Foreign Subsidiary to take
the actions required pursuant to Section 8.03 (c) of the Agreement.
(b) Notwithstanding Section 8.02 (c) of the Agreement, the
Company shall be permitted to sell all of the assets of Bioclear Technology,
Inc., a Canadian corporation (the "Bioclear Disposition"); PROVIDED, HOWEVER,
that in the event that the Majority Banks determine that the distribution of the
Net Proceeds from such Bioclear Dispositions requires an application other than
as provided in Section 2.09 (b) of the Agreement, then the Majority Banks will
inform the Company of such alternative application on the earlier of (i) the
date of the first Bioclear Disposition and (ii) January 8, 1999.
SECTION 3. REFERENCE TO AND EFFECT UPON THE AGREEMENT.
(a) Except as specifically amended above, the Agreement shall
remain in full force and effect and are hereby ratified and confirmed.
(b) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy of the
Bank under the Agreement, nor constitute a
7
<PAGE> 8
waiver of any provision of the Agreement, except as specifically set forth
herein. Upon the effectiveness of this Amendment, each reference in the
Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of
similar import shall mean and be a reference to the Agreement as amended hereby.
SECTION 4. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS.
SECTION 5. HEADINGS. Section headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purposes.
SECTION 6. COUNTERPARTS. This Amendment may be executed in any
number of counterparts, each of which when so executed shall be deemed an
original but all such counterparts shall constitute one and the same instrument.
SECTION 7. EFFECTIVENESS. This Amendment shall become
effective as of the date first written above upon (i) the delivery of executed
signature pages for this Amendment signed by the Company and the Majority Banks
and (ii) the payment by the Company to the Agent, for the pro rata distribution
to those Banks executing this Amendment, of an amendment fee in an aggregate
amount equal to .075% of the Revolving Loan Commitments, such fee to be due and
payable upon the satisfaction of Section 7(i) hereof.
[signature pages follow]
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Amendment by
its duly authorized officer as of the date first written above.
WATERLINK, INC.
By: /s/ Michael J. Vartusko
---------------------------------------
Title: Chief Financial Officer
-------------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Agent
By: /s/ Jay McKeown
---------------------------------------
Title: Assistant Vice President
-------------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, Individually as a Bank
By: /s/ Timothy J. Pepowski
---------------------------------------
Title: Senior Vice President
-------------------------------------
COMERICA BANK
By: /s/ Preeti Sarnaik
---------------------------------------
Title: Account Representative
-------------------------------------
S-1
[TO THIRD AMENDMENT]
<PAGE> 10
THE FIFTH THIRD BANK OF COLUMBUS
By: /s/ Stephen S. Brooks
---------------------------------------
Title: Vice President
-------------------------------------
HARRIS TRUST AND SAVINGS BANK
By: /s/ William A. McDonnell
---------------------------------------
Title: Vice President
-------------------------------------
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Joseph G. Moran
---------------------------------------
Title: Vice President
-------------------------------------
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Karyssa M. Britton
---------------------------------------
Title: Vice President
-------------------------------------
S-2
[TO THIRD AMENDMENT]
<PAGE> 1
EXHIBIT 11.1 - COMPUTATION OF EARNINGS PER SHARE
WATERLINK, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1998 1997 1996
------------------ ----------------- -----------------
(In thousands, except per share data)
<S> <C> <C> <C>
Basic
Average common shares outstanding 12,007 4,924 1,469
================== ================= =================
Net Income (Loss) $ (17,504) $ 372 $ 306
================== ================= =================
Basic Earnings (Loss) per Share $ (1.46) $ 0.07 $ 0.21
================== ================= =================
Assuming Dilution
Average shares outstanding-basic 12,007 4,924 1,469
Effect of dilutive securities:
Conversion of preferred stock into common 2,395 3,250
stock -
Impact of outstanding stock options
and warrants - 485 235
------------------ ----------------- -----------------
12,007 7,804 4,954
================== ================= =================
Net income (loss) $ (17,504) $ 372 $ 306
================== ================= =================
Earnings (Loss) per Share-Assuming Dilution $ (1.46) $ 0.05 $ 0.06
================== ================= =================
</TABLE>
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
--------------------
Aero-Mod Incorporated, a Delaware corporation
Great Lakes Environmental, Inc., a Delaware corporation
Lanco Environmental Products, Inc., a Michigan corporation
Mass Transfer Systems, Inc., a Delaware corporation
San Tech Equipment, Inc., an Ohio corporation
Waterlink Technologies, Inc., a Delaware corporation
Waterlink Operational Services, Inc., a Delaware corporation
Waterlink Management, Inc., an Ohio corporation
Barnebey Sutcliffe Corporation, an Ohio corporation
C'Treat Offshore, Inc. (fka Chemitreat Services, Inc.), a Texas corporation
Hycor Corporation, a Delaware corporation
Hycor Thickener, Inc., an Illinois corporation
Purac Engineering, Inc., a Delaware corporation
Waterlink Wastewater Systems, Inc., a Delaware corporation
Waterlink N.S., Inc., a Delaware corporation
Axel Johnson Engineering GmbH, a German corporation
Bioclear Technology ULC, a Nova Scotia corporation
Nordic Water Products AB, a Swedish corporation
Nordic Water Products Spain S.L., a Spanish corporation
Noxon AB, a Swedish corporation
Nordic Water Products OY, a Finnish corporation
Waterlink (Germany) GmbH, a German Corporation
Waterlink (Sweden) AB, a Swedish Corporation
Waterlink (UK) Holdings Limited, a UK corporation
Zickert Miljo A/S, a Danish corporation
Zickert Products AB, a Swedish corporation
Waterlink (UK) Limited, a UK corporation
Mellegard V.A. Maskiner AB, a Swedish corporation
Sutcliffe Speakman Carbons Limited, a UK corporation
Sutcliffe Croftshaw Limited, a UK corporation
Lakeland Processing Limited, a UK corporation
Sutcliffe Speakmanco 5 Limited, a UK corporation
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-4 No. 333-43939) and related Prospectus of Waterlink, Inc., and the
Registration Statement (Form S-8 No. 333-29911) pertaining to the Employee Stock
Purchase Plan of Waterlink, Inc.; 1997 Non-Employee Director Stock Option Plan
of Waterlink, Inc.; Waterlink, Inc. Amended and Restated 1995 Stock Option Plan,
and the Waterlink, Inc. 1997 Omnibus Incentive Plan of our report dated November
6, 1998 with respect to the consolidated financial statements of Waterlink, Inc.
included in this Annual Report (Form 10-K) for the year ended September 30,
1998.
ERNST & YOUNG LLP
Canton, Ohio
November 30, 1998
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