<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1999
REGISTRATION NO. 333-84985
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WATERLINK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3590 34-1788678
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
4100 HOLIDAY STREET N.W., SUITE 201
CANTON, OHIO 44718
(330)649-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES)
------------------------
T. SCOTT KING, PRESIDENT AND CHIEF EXECUTIVE OFFICER
WATERLINK, INC.
4100 HOLIDAY STREET N.W., SUITE 201
CANTON, OHIO 44718
(330)649-4000
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPY TO:
DOUGLAS E. HAAS, ESQ.
BENESCH, FRIEDLANDER, COPLAN & ARONOFF LLP
2300 BP TOWER
200 PUBLIC SQUARE
CLEVELAND, OHIO 44114
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 23, 1999
PROSPECTUS
6,300,000 SHARES
WATERLINK, INC.
COMMON STOCK
This prospectus relates to an aggregate of 6,300,000 shares of Waterlink
common stock that we are selling to the State of Wisconsin Investment Board, T.
Rowe Price Associates, Inc., , and
pursuant to securities purchase agreements. As provided in each of the
securities purchase agreements, the purchase price per share of our common stock
is $ , which is the average of the closing sales price of our common
stock on the New York Stock Exchange for the twenty trading day period from
, 1999 to , 1999. Waterlink will receive $ in
net proceeds from this offering.
Our common stock is traded on the New York Stock Exchange under the symbol
"WLK." On , 1999, the last reported sales price of our common stock
on the NYSE was $ per share.
INVESTING IN THE SHARES INVOLVES A HIGH DEGREE OF RISK. RISK FACTORS BEGIN
ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Special Note Regarding Forward-Looking Statements........... 9
Use of Proceeds............................................. 10
Dividend Policy............................................. 10
Price Range of Common Stock................................. 11
Capitalization.............................................. 12
Dilution.................................................... 13
Selected Historical Consolidated Financial Data............. 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Our Business................................................ 31
Management.................................................. 39
Common Stock Ownership...................................... 50
Description of Capital Stock................................ 53
Plan of Distribution........................................ 60
Legal Matters............................................... 60
Experts..................................................... 60
Available Information....................................... 61
Index to Financial Statements............................... F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
This preliminary prospectus is subject to completion prior to this
offering.
i
<PAGE> 4
PROSPECTUS SUMMARY
This is only a summary and it does not contain all the information that may
be important to you. You should read the following summary together with the
more detailed information about Waterlink and the common stock being sold in
this offering and our historical financial statements including the notes to
those statements which appear elsewhere in this prospectus. When we refer to a
fiscal year, we mean the fiscal year ended September 30 of that year. When we
refer to fiscal 1995, we mean the period from December 7, 1994 (our date of
incorporation) to September 30, 1995.
OUR COMPANY
Waterlink, Inc. is an international provider of integrated water
purification and wastewater treatment solutions, treating process water and
wastewater for our industrial customers, and drinking water and wastewater for
our municipal customers. Waterlink designs, assembles and sells water and
wastewater treatment products and provides related services to companies and
municipalities to treat their water and wastewater. Our principal executive
offices are located at 4100 Holiday Street N.W., Suite 201, Canton, Ohio 44718
and our telephone number is (330) 649-4000.
RISK FACTORS
See the section of this prospectus entitled "Risk Factors", starting on
page 5, for a discussion of factors that you should consider before investing in
the common stock offered in this prospectus.
THE OFFERING
Common stock offered by Waterlink: 6,300,000 shares
Common stock outstanding after the
offering: 18,935,861 shares(1)
Use of Proceeds: We intend to use net proceeds of
approximately $18.0 million from this offering to repay a portion of the
outstanding debt under our bank credit
agreement. See "Use of Proceeds."
NYSE Symbol: WLK
- -------------------------
(1) Based on 12,635,861 shares outstanding as of July 31, 1999. Does not
include:
- 2,178,816 shares subject to outstanding options granted by Waterlink
- 127,500 shares issuable upon exercise of warrants issued in connection
with a note purchase agreement. See "Description of Capital Stock -- 1997
Warrants."
- 225,000 shares issuable upon exercise of warrants issued to Bank of
America Illinois. See "Description of Capital Stock -- Bank Warrants."
- 283,637 shares issuable upon exercise of warrants issued to one of our
significant stockholders and our three executive officers who are
assisting in the process of improving our capital structure by
guaranteeing our repayment of part of our bank debt. See "Description of
Capital Stock -- Guarantor Warrants."
1
<PAGE> 5
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth summary selected financial data of Waterlink
since its incorporation on December 7, 1994. The financial data presented for
the four fiscal years ended September 30, 1998 have been derived from
Waterlink's audited financial statements. The financial data presented for the
nine months ended June 30, 1998 and 1999 are derived from unaudited financial
statements which in our opinion include all adjustments, which were of a normal
recurring nature, necessary for a fair presentation of that information. The
financial data includes the operating results of each acquired business from the
date of acquisition in accordance with the purchase method of accounting. Our
results for the nine months ended June 30, 1999 are not necessarily indicative
of our future results.
You should read the summary selected financial data in conjunction with,
and they are qualified by, our historical consolidated financial statements and
the related notes, "Selected Historical Consolidated Financial Data," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
FISCAL FISCAL FISCAL FISCAL ------------------
1995 1996 1997 1998 1998 1999
------ ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $2,684 $19,801 $64,699 $135,167 $94,267 $128,858
Gross profit............... 827 8,568 24,309 49,635 35,670 40,151(1)
Selling, general and
administrative
expenses................. 1,178 7,029 18,683 38,639 27,458 32,829(2)
Special charges(3)......... -- -- 2,630 21,636 1,494 2,787
Amortization expense....... 15 307 751 1,871 1,412 1,569
Operating income (loss).... (366) 1,232 2,245 (12,511) 5,306 2,966
Income (loss) before
extraordinary item....... (512) 306 757 (17,504) 2,064 (3,158)
Net income (loss).......... (512) 306 372(4) (17,504) 2,064 (3,158)
Earnings (loss) per common
share:
Basic:
Income (loss) before
extraordinary
item................ $(0.42) $ 0.21 $ 0.15 $ (1.46) $ 0.17 $ (0.25)
Net income (loss)..... (0.42) 0.21 0.07 (1.46) 0.17 (0.25)
Assuming dilution:
Income (loss) before
extraordinary
item................ (0.42) 0.06 0.10 (1.46) 0.16 (0.25)
Net income (loss)..... (0.42) 0.06 0.05 (1.46) 0.16 (0.25)
Weighted average common
shares outstanding:
Basic.................... 1,225 1,469 4,924 12,007 11,964 12,529
Assuming dilution........ 1,225 4,954 7,804 12,007 12,641 12,529
</TABLE>
2
<PAGE> 6
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
--------------------------------------- -------------------
1995 1996 1997 1998 1998 1999
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............ $ 2,064 $ 3,438 $ 19,430 $ 30,737 $ 42,579 $ 30,927
Total assets............... 10,819 28,991 115,860 183,561 204,096 180,187
Total debt................. 6,039 12,145 18,961 87,318 87,990 87,138
Redeemable preferred
stock.................... 3,900 8,500 -- -- -- --
Shareholders' equity
(deficit)................ (11) 2,407 70,873 54,878 71,823 47,649
</TABLE>
- -------------------------
(1) In connection with our 1999 Strategic Operating Plan, Waterlink decided to
discontinue the manufacturing processes for our Great Lakes subsidiary
product line in favor of utilizing subcontractors. As a result of this
decision, during the nine months ended June 30, 1999, Waterlink recognized
$2,137,000 of costs, or $0.14 per share, assuming dilution, comprised of
$1,191,000 of cost overruns that took place on a contractual obligation and
$946,000 of inventory write downs and other costs, which reduced gross
profit.
(2) For the nine months ended June 30, 1999, selling, general and administrative
expenses included $255,000, or $0.02 per share, assuming dilution, relating
to the write off of costs associated with acquisition activity that ceased
during the quarter ended June 30, 1999.
(3) Waterlink incurred special charges as follows:
- During the fiscal year ended September 30, 1997 Waterlink incurred a
special charge to operations of $2,630,000, or $0.21 per share, assuming
dilution, resulting primarily from the issuance, concurrent with our
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 Waterlink
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.
- During the fiscal year ended September 30, 1998, Waterlink incurred
special charges of $21,636,000, or $1.70 per share, assuming dilution.
These special charges are comprised of the following three components:
- Waterlink recorded a charge of $2,858,000, or $0.23 per share,
assuming dilution, primarily related to termination benefits and costs
associated with the exiting of certain facilities to implement our
1999 plan.
- As a result of our decision to exit the Bioclear business, during the
fourth quarter of fiscal 1998, Waterlink recorded a non-cash charge of
$17,284,000, or $1.40 per share, assuming dilution, consisting of
$15,967,000 related to the impairment of goodwill associated with the
June 1997 acquisition of Bioclear Technology, Inc. and $1,317,000 to
write off the cumulative translation adjustment component of
Bioclear's equity.
- Waterlink incurred special charges of $1,494,000, or $0.07 per share,
assuming dilution, primarily attributable to contractual obligations
to our former chief executive officer, who resigned in June 1998, and
costs necessary to recruit executives to Waterlink.
3
<PAGE> 7
- During the nine months ended June 30, 1998, Waterlink incurred special
charges of $1,494,000, or $0.07 per share, assuming dilution, primarily
attributable to contractual obligations to our former chief executive
officer, who resigned in June 1998, and costs necessary to recruit
executives to Waterlink.
- During the nine months ended June 30, 1999, Waterlink incurred special
charges of $2,787,000, or $0.20 per share, assuming dilution, for the
following:
- Continuing costs of $1,487,000, or $0.11 per share, assuming dilution,
associated with implementing our 1999 plan, primarily related to
termination benefits and facility consolidation costs.
- In conjunction with our 1999 plan, we determined that we would exit
the acquired Bioclear business. During the fourth quarter of fiscal
1998, the assets of Bioclear, primarily related to Bioclear's
manufacturing facility located in Winnipeg, Canada, were reduced to
their estimated net realizable value. Based on the status of the sales
process and Waterlink's June 1999 decision regarding how to best
dispose of the facility, we further reduced the estimated net
realizable value of these remaining assets by $1,300,000, or $0.09 per
share, assuming dilution.
(4) Net income for fiscal 1997 reflects an extraordinary item. Waterlink used a
portion of the proceeds from our initial public offering to repay
substantially all of outstanding indebtedness. In addition, concurrent with
the initial public offering Waterlink canceled a note purchase agreement. In
connection with the early retirement of certain indebtedness and the
cancellation of the note purchase agreement, Waterlink realized an
extraordinary charge of $385,000, net of taxes of $257,000, or $0.05 per
share, assuming dilution, related to the write off of unamortized debt
issuance costs and discounts associated with this indebtedness.
4
<PAGE> 8
RISK FACTORS
Before you invest in our common stock, you should be aware of the various
risk factors described below. You should carefully consider these factors,
together with all the other information included in this prospectus, before you
decide whether to purchase our common stock.
OUR QUARTERLY RESULTS OF OPERATIONS COULD FLUCTUATE SIGNIFICANTLY WHICH COULD
RESULT IN DEFAULTS UNDER OUR BANK CREDIT AGREEMENT AND IN VOLATILITY IN THE
MARKET PRICE OF OUR COMMON STOCK
We need to finalize complicated contracts and orders with our customers
before we produce our revenues. Often, the timing of those contracts and orders
is also subject to our customers receiving financing, various permits and other
aspects outside our control. A delay in finalizing any of these contracts could
have a significant negative impact on our operating results in any fiscal
quarter. We believe that period-to-period comparisons of our operating results
are not necessarily meaningful and should not necessarily be relied upon as
indicators of our future performance. Since some of our financial covenants in
our bank credit agreement are based on quarterly results, these fluctuations
could result in our needing to negotiate amended terms or being in default of
our bank credit agreement. Also, these fluctuations in our quarterly results
could lead to our failure to meet expectations of securities analysts and
investors and could seriously harm the market price of our common stock.
Quarterly operating results have varied significantly in the past and will
likely vary significantly in the future.
OUR SUBSTANTIAL AMOUNT OF DEBT COULD LIMIT OUR GROWTH AND IMPOSES RESTRICTIONS
ON OUR BUSINESS
We have incurred substantial indebtedness. Our level of debt and our recent
operating performance, including the impact of special charges to our income,
limit our ability to:
- obtain additional financing to fund our strategy, capital expenditures
and other general corporate purposes;
- use operating cash flow in other areas of our business since we must
dedicate a substantial portion of these funds to pay interest and retire
debt; and
- react to changing market conditions and economic downturns.
Before giving effect to this offering, we had $87.1 million of indebtedness
as of June 30, 1999, and on an adjusted basis after giving effect to the use of
net proceeds in this offering, we would have had $69.2 million of indebtedness.
Our debt agreements contain numerous financial and operating covenants that
limit our discretion which respect to certain business matters. These covenants
place significant restrictions on, among other things, our ability to:
- incur additional indebtedness, both under the bank credit agreement and
other debt agreements;
- merge or consolidate with other entities;
- make acquisitions;
- repay our obligations; and
- pay dividends and other distributions.
5
<PAGE> 9
WE HAVE A LIMITED COMBINED OPERATING HISTORY AND ARE STILL IN THE PROCESS OF
INTEGRATING THOSE ACQUISITIONS THAT WE HAVE COMPLETED
We were formed in December, 1994 and have grown principally through the
acquisition of existing businesses. Our success depends, in part, on our ability
to integrate the operations of our various businesses, including centralizing
some functions to achieve cost savings and developing programs and processes
that will promote cooperation in the sharing of opportunities and resources
among our businesses. Our 1999 plan and our restructured organization are
intended to continue to promote our ongoing integration process. Our management
group has been assembled for only a relatively short time with several key
people joining us within the last two fiscal years.
THE DEMAND FOR OUR PRODUCTS IS CYCLICAL
Much of our water purification and wastewater equipment requires
significant capital expenditures by our customers. As such, the timing of
customer purchases from us is affected by various economic factors, including
interest rate and business cycle fluctuations, the timing and process of
government funding and the setting of rates by regulators, all of which are
beyond our control. The cyclical nature of capital equipment sales could have an
adverse affect on our revenues and profitability in general and on our revenues
and profitability in any particular quarterly financial reporting period.
OUR INDUSTRY IS HIGHLY COMPETITIVE
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 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 ARE DEPENDENT ON KEY PERSONNEL
Our business depends on our ability to hire and retain our executive
officers and senior management. Our business could be adversely affected if for
any reason any of our executive officers or senior managers cease to be employed
by us. In addition, we will be dependent on the senior managers of any
significant businesses we may acquire in the future and on our ability to
attract and retain qualified managers to support our internal expansion.
WE MAY LOSE OUR NEW YORK STOCK EXCHANGE LISTING
We have a market capitalization of $ , based on a stock price of
$ and outstanding shares of common stock
on , 1999 and stockholders' equity of $47,649,000 on June 30, 1999.
Currently, we fall below the New York Stock Exchange listing requirement for
market capitalization and stockholders' equity. We believe that we will satisfy
the continued listing requirements of the New York Stock Exchange following
successful completion of this offering. If our shares were not listed on the New
York Stock Exchange, then we would attempt to have the shares listed on another
stock market. We currently do not satisfy the original listing requirements for
trading on the NASDAQ National Market System.
6
<PAGE> 10
THE MEMBERS OF OUR BOARD OF DIRECTORS AND MANAGEMENT WILL OWN APPROXIMATELY
18.9% OF OUR COMMON STOCK AND CAN EXERCISE SIGNIFICANT INFLUENCE OVER OUR
AFFAIRS. ALSO, SEVERAL INSTITUTIONAL INVESTORS WILL OWN SUBSTANTIAL PERCENTAGES
OF OUR COMMON STOCK
After the closing of the offering our directors and management will own or
control, in the aggregate, approximately 18.9% of our common stock. In addition,
two institutional investors, the State of Wisconsin Investment Board and T. Rowe
Price Associates, Inc. will own or control approximately 16.8% and 9.9%,
respectively, of our common stock. Accordingly, these individuals and
institutional investors, if acting together or even alone, can exercise
significant influence over our affairs including the election of our directors,
appointment of our management and approval of actions requiring the approval of
our stockholders, which may include the adoption of amendments to our
certificate of incorporation, the approval of mergers or sales of all or
substantially all our assets, and similar items. The concentration of voting
power of these stockholders, if they act together, could, under certain
circumstances, have the effect of delaying or preventing a change in control of
Waterlink. See "Common Stock Ownership."
OUR FOREIGN OPERATIONS ARE SUBJECT TO POLITICAL AND ECONOMIC RISKS AND WE MAY BE
ADVERSELY AFFECTED BY FOREIGN CURRENCY FLUCTUATION
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. Our net sales
outside the United States were approximately 48.4% of our net sales for the nine
months ended June 30, 1999. 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
- the general hazards associated with the assertion of sovereignty over
certain areas in which operations are conducted
Because our reporting currency is the United States dollar, our operations
outside the United States sometimes face the additional risks of fluctuating
currency values and exchange rates, hard currency shortages and controls on
currency exchange. We are subject to the impact of foreign currency fluctuations
and exchange rate charges on our reporting for results from those operations in
our financial statements.
WE MAY BE SUBJECT TO LIABILITY UNDER ENVIRONMENTAL LAWS
In the United States, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, and comparable state laws,
impose liability without fault for the releases of hazardous substances into the
environment. Potentially responsible parties include (a) owners and operators of
a site, (b) parties which create the hazardous
7
<PAGE> 11
substances released at a site, and (c) parties which arrange for the
transportation or disposal of hazardous substances. 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 of the treatment process in
violation of law. We are also subject to 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.
CHANGES IN ENVIRONMENTAL LAWS COULD AFFECT OUR BUSINESS
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 our ability to sell our
solutions, systems and equipment. To the extent that demand for our solutions,
systems and equipment is created by the need to comply with environmental laws
and regulations, any modification of the standards imposed by these laws and
environmental laws and regulations may reduce demand for our products and
services, thereby adversely affecting our business and prospects.
OUR LONG-TERM GROWTH STRATEGY IS DEPENDENT ON COMPLETING ACQUISITIONS
While net proceeds from this offering are not expected to be utilized for
acquisition activity, over the long-term, we intend to significantly grow by
acquiring other businesses. Our current capital structure does not support an
acquisition program. We intend to use a combination of our common stock, cash
and debt obligations to make these future acquisitions. The extent to which we
are able to use our common stock for this purpose will depend on its market
value from time to time and the willingness of potential sellers 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 to funds from internally
generated cash flow over and above our other cash needs and our ability to incur
additional indebtedness. Our current capital structure may make it more
difficult for us to borrow money to use for acquisitions.
An acquisition strategy such as ours involves risks inherent in assessing
the values, strengths, weaknesses and profitability of acquisition candidates.
Historically, we have been successful in identifying potential acquisition
candidates. As consolidation continues in the industry, the prices for
attractive acquisition candidates may be higher than we have paid and may make
an acquisition strategy for growth less viable.
INVESTORS WILL EXPERIENCE IMMEDIATE DILUTION
The offering price per share will exceed the net tangible book value per
share of our common stock. Accordingly, investors purchasing shares in this
offering will incur immediate and substantial dilution of approximately $3.68 in
the book value per share of the common stock from an assumed $3.00 price per
share paid for the common stock. See "Dilution."
8
<PAGE> 12
OUR BUSINESS IS SUBJECT TO POTENTIAL WARRANTY AND PERFORMANCE GUARANTEE CLAIMS
Some of our customers require us to guarantee that our services and
products will be of a specified level of quality or performance. If a product or
service fails to attain that level of quality or performance, we could incur
significant financial penalties.
WE FACE MANY UNKNOWN RISKS ASSOCIATED WITH YEAR 2000 PROBLEMS
Many currently installed computer systems and software products are
dependant upon internal calendars coded to accept only two digit entries in the
date code field. These date code fields will need to accept four digit entries
to distinguish dates after the beginning of year 2000 from those before. While
we believe that we have a program established to resolve the year 2000 issue in
a timely manner in our computer systems, we may not have resolved all issues.
Also, we depend on third parties, including suppliers, subcontractors and
customers, for the operation of our day-to-day business. If they fail to correct
their year 2000 problems, failures or interruptions to our business may occur,
resulting in significant financial and other problems. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PROVISIONS OF OUR CORPORATE DOCUMENTS COULD DELAY OR PREVENT A CHANGE IN CONTROL
OF WATERLINK
Our certificate of incorporation and bylaws contain certain provisions
which may have anti-takeover effects and may discourage, delay, or prevent a
takeover attempt that a stockholder might consider in his best interest. These
documents allow our board of directors to authorize the issuance of preferred
stock, which could adversely affect the voting and other rights of the holders
of our common stock, provide that our directors are classified into three
classes with staggered terms, and contain a "fair price provision" which imposes
restrictions in the event of certain business combinations. See "Description of
Capital Stock."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. Except for statements
of historical facts, all statements may be forward-looking statements that
involve risks and uncertainties. These statements are only predictions. Actual
events or results may differ materially from forward-looking results for a
number of reasons, including:
- changes in world economic conditions, including:
- instability of governments and legal systems in countries in which
Waterlink conducts business
- significant changes in currency valuations
- recessionary environments
- year 2000 compliance issues relating to Waterlink's programs and
external parties, including suppliers and customers
- the effects of military conflicts
9
<PAGE> 13
- changes in customer demand and timing of orders as they affect sales and
product mix, including:
- the effect of delays in government approvals and funding
- the effect of strikes at customer's facilities
- variations in backlog
- the impact of changes in industry business cycles
- competitive factors, including:
- changes in market penetration
- introduction of new products, services or financing alternatives by
existing and new competitors
- changes in operating costs, including:
- changes in Waterlink's and its subcontractors' manufacturing processes
- changes in costs associated with varying levels of operations
- changes resulting from different levels of customers demands
- effects of unplanned work stoppages
- changes in cost of labor and benefits
- the cost and availability of raw materials and energy
- the success of Waterlink's strategic plan
- the ability to raise sufficient additional capital
- the ability to amend Waterlink's bank credit agreement
- unanticipated litigation, claims or assessments
USE OF PROCEEDS
The shares are being sold by Waterlink for an assumed aggregate net
proceeds of $18.0 million. We are using the net proceeds of this sale to repay a
portion of our outstanding debt under our bank credit agreement. The amounts
outstanding under our bank credit agreement currently bears interest at 7.93%
per year. All amounts outstanding under our bank credit agreement mature on May
19, 2003.
DIVIDEND POLICY
We have not paid or declared any dividends on our common stock since our
inception. We anticipate that, following the completion of the offering,
earnings will be retained to support the growth of our business and will not be
distributed to stockholders as dividends. The declaration and payment of any
future dividends and the amount of any dividend will be determined by our board
of directors and will depend upon our results of operations, financial
condition, cash requirements, future prospects, limitations imposed by bank
credit and debt agreements and other factors deemed relevant by our board of
directors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
10
<PAGE> 14
Pursuant to our bank credit agreement, we may not declare or make, or agree
to declare or make, directly or indirectly, any dividends, except that we may
declare and pay dividends with respect to our capital stock payable solely in
additional shares of our common stock or options, warrants or other rights to
purchase our common stock.
PRICE RANGE OF COMMON STOCK
Our common stock has been listed on the New York Stock Exchange under the
symbol "WLK" since our initial public offering on June 24, 1997. The following
table sets forth the high and low composite sales prices as reported on 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 5/16
Second quarter............................................ 17 11/16 12 11/16
Third quarter............................................. 14 5/8 8 5/8
Fourth quarter............................................ 8 5/8 2 7/16
Fiscal year ended September 30, 1999
First quarter............................................. 5 1/4 2 1/2
Second quarter............................................ 5 5/16 3 1/2
Third quarter............................................. 4 3/4 2 13/16
Fourth quarter (through September , 1999)...............
</TABLE>
The number of holders of record of our common stock as of September 3, 1999
was 219. On September , 1999, the last reported sales price of our common
stock was $ per share.
11
<PAGE> 15
CAPITALIZATION
The following table sets forth our consolidated capitalization as of June
30, 1999. Our capitalization is presented on an actual basis and on an as
adjusted basis. The as adjusted presentation gives effect to:
- our sale of 6,300,000 shares of common stock in the offering at a sale
price of $3.00 per share after deducting estimated offering expenses; and
- the anticipated application of the net proceeds from the offering to
repay a portion of our outstanding long-term debt.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................... $ 1,611 $ 1,611
======== ========
Total debt:
Current maturities of long-term debt.................. $ 8,444 $ 8,444
Long-term debt, less current portion.................. 75,444 57,489
Convertible subordinated notes-related parties........ 3,250 3,250
-------- --------
Total debt......................................... 87,138 69,183
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding....... -- --
Common stock, $.001 par value, 40,000,000 shares
authorized, 12,635,861 shares issued and
outstanding; as adjusted, 18,935,861 shares issued
and outstanding(1)................................. 13 19
Additional paid-in capital............................ 72,966 90,915
Accumulated other comprehensive loss.................. (4,834) (4,834)
Accumulated deficit................................... (20,496) (20,496)
-------- --------
Total stockholders' equity......................... 47,649 65,604
-------- --------
Total capitalization............................. $134,787 $134,787
======== ========
</TABLE>
- -------------------------
(1) Does not include:
- 2,178,816 shares subject to outstanding options granted by Waterlink
- 127,500 shares issuable upon exercise of warrants issued in connection
with a note purchase agreement. See "Description of Capital Stock -- 1997
Warrants."
- 225,000 shares issuable upon exercise of warrants issued to Bank of
America Illinois. See "Description of Capital Stock -- Bank Warrants."
- 283,637 shares issuable upon exercise of warrants issued to one of our
significant stockholders and our three executive officers who are
assisting in the process of improving our capital structure by
guaranteeing our repayment of part of our bank debt. See "Description of
Capital Stock -- Guarantor Warrants."
12
<PAGE> 16
DILUTION
Our deficit in consolidated net tangible book value as of June 30, 1999 was
$31.1 million or $2.46 per share of our common stock. After giving effect to the
sale of the shares of our common stock in this offering (at an assumed offering
price of $3.00 per share) and after deducting anticipated offering expenses, our
adjusted deficit in consolidated net tangible book value as of June 30, 1999
would have been $12.9 million or $0.68 per share, representing an immediate
$3.68 per share dilution to new investors purchasing shares at the offering
price. The following table illustrates such per share dilution.
<TABLE>
<S> <C> <C>
Offering price per share............................................ $ 3.00
Deficit in consolidated net tangible book value per share
as of June 30, 1999.................................... $(2.46)
Increase per share attributable to new investors.......... 1.78
------
Adjusted deficit in consolidated net tangible book value per share
after the offering................................................ (.68)
------
Dilution per share to new investors................................. $ 3.68
======
</TABLE>
The following table sets forth, on an adjusted basis as of June 30, 1999,
the number of shares of common stock purchased from Waterlink, the total
consideration paid and the average price per share paid by existing stockholders
and by new investors (after the sale by Waterlink of 6,300,000 shares in the
offering at an assumed offering price of $3.00 per share), before deduction of
offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 12,635,861 66.7% $78,323,253 80.6% $6.20
New investors.................. 6,300,000 33.3 18,900,000 19.4 3.00
---------- ----- ----------- -----
Total..................... 18,935,861 100.0% $97,223,253 100.0%
========== ===== =========== =====
</TABLE>
These tables assume no exercise of any outstanding stock options or
warrants. To the extent all outstanding options and warrants are exercised,
there will be no further dilution.
13
<PAGE> 17
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of Waterlink since its incorporation on December 7, 1994. The financial
data presented for the four fiscal years ended September 30, 1998 have been
derived from Waterlink's audited financial statements. The financial data
presented for the nine months ended June 30, 1998 and 1999 are derived from
unaudited financial statements which in our opinion include all adjustments,
which were of a normal recurring nature, necessary for a fair presentation of
that information. The financial data includes the operating results of each
acquired business from the date of acquisition in accordance with the purchase
method of accounting. Our results for the nine months ended June 30, 1999 are
not necessarily indicative of future results.
You should read the selected historical consolidated financial data in
conjunction with, and they are qualified by, our historical consolidated
financial statements and the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contained elsewhere
in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
FISCAL FISCAL FISCAL FISCAL ------------------
1995 1996 1997 1998 1998 1999
------ ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $2,684 $19,801 $64,699 $135,167 $94,267 $128,858
Cost of sales....................... 1,857 11,233 40,390 85,532 58,597 88,707(1)
------ ------- ------- -------- ------- --------
Gross profit........................ 827 8,568 24,309 49,635 35,670 40,151
Selling, general and administrative
expenses.......................... 1,178 7,029 18,683 38,639 27,458 32,829(2)
Special charges(3).................. -- -- 2,630 21,636 1,494 2,787
Amortization expense................ 15 307 751 1,871 1,412 1,569
------ ------- ------- -------- ------- --------
Operating income (loss)............. (366) 1,232 2,245 (12,511) 5,306 2,966
Other income (expense):
Interest expense.................. (144) (877) (1,281) (3,562) (1,737) (5,092)
Interest income and other
items -- net................... 33 (44) 263 37 126 (163)
------ ------- ------- -------- ------- --------
Income (loss) before income taxes... (477) 311 1,227 (16,036) 3,695 (2,289)
Income taxes........................ 35 5 470 1,468 1,631 869
------ ------- ------- -------- ------- --------
Income (loss) before extraordinary
item.............................. (512) 306 757 (17,504) 2,064 (3,158)
Extraordinary item, net of
taxes(4).......................... -- -- (385) -- -- --
------ ------- ------- -------- ------- --------
Net income (loss)................... $ (512) $ 306 $ 372 $(17,504) $ 2,064 $ (3,158)
====== ======= ======= ======== ======= ========
</TABLE>
14
<PAGE> 18
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
FISCAL FISCAL FISCAL FISCAL ------------------
1995 1996 1997 1998 1998 1999
------ ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) per common share:
Basic:
Income (loss) before
extraordinary item........... $(0.42) $ 0.21 $ 0.15 $ (1.46) $ 0.17 $ (0.25)
Extraordinary item............. -- -- (0.08) -- -- --
------ ------- ------- -------- ------- --------
Net income (loss).............. $(0.42) $ 0.21 $ 0.07 $ (1.46) $ 0.17 $ (0.25)
====== ======= ======= ======== ======= ========
Assuming dilution:
Income (loss) before
extraordinary item........... $(0.42) $ 0.06 $ 0.10 $ (1.46) $ 0.16 $ (0.25)
Extraordinary item............. -- -- (0.05) -- -- --
------ ------- ------- -------- ------- --------
Net income (loss).............. $(0.42) $ 0.06 $ 0.05 $ (1.46) $ 0.16 $ (0.25)
====== ======= ======= ======== ======= ========
Weighted average common shares
outstanding:
Basic............................. 1,225 1,469 4,924 12,007 11,964 12,529
Assuming dilution................. 1,225 4,954 7,804 12,007 12,641 12,529
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
--------------------------------------- -------------------
1995 1996 1997 1998 1998 1999
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $ 2,064 $ 3,438 $ 19,430 $ 30,737 $ 42,579 $ 30,927
Total assets..................... 10,819 28,991 115,860 183,561 204,096 180,187
Total debt....................... 6,039 12,145 18,961 87,318 87,990 87,138
Redeemable preferred stock....... 3,900 8,500 -- -- -- --
Shareholders' equity (deficit)... (11) 2,407 70,873 54,878 71,823 47,649
</TABLE>
- -------------------------
(1) In connection with our 1999 plan, Waterlink decided to discontinue the
manufacturing processes for our Great Lakes subsidiary product line in favor
of utilizing subcontractors. As a result of this decision, during the nine
months ended June 30, 1999, Waterlink recognized $2,137,000 of costs, or
$0.14 per share, assuming dilution, comprised of $1,191,000 of cost overruns
that took place on a contractual obligation and $946,000 of inventory write
downs and other costs.
(2) For the nine months ended June 30, 1999, selling, general and administrative
expenses included $255,000, or $0.02 per share, assuming dilution, relating
to the write off of costs associated with acquisition activity that ceased
during the quarter ended June 30, 1999.
(3) Waterlink incurred special charges as follows:
- During the fiscal year ended September 30, 1997 Waterlink incurred a
special charge to operations of $2,630,000, or $0.21 per share, assuming
dilution, resulting primarily from the issuance, concurrent with our
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 Waterlink
pursuant to
15
<PAGE> 19
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.
- During the fiscal year ended September 30, 1998, Waterlink incurred
special charges of $21,636,000, or $1.70 per share, assuming dilution.
These special charges are comprised of the following three components:
- Waterlink recorded a charge of $2,858,000, or $0.23 per share,
assuming dilution, primarily related to termination benefits and costs
associated with the exiting of certain facilities to implement our
1999 plan.
- As a result of our decision to exit the Bioclear business, during the
fourth quarter of fiscal 1998, Waterlink recorded a non-cash charge of
$17,284,000, or $1.40 per share, assuming dilution, consisting of
$15,967,000 related to the impairment of goodwill associated with the
June 1997 acquisition of Bioclear Technology, Inc. and $1,317,000 to
write off the cumulative translation adjustment component of
Bioclear's equity.
- Waterlink incurred special charges of $1,494,000, or $0.07 per share,
assuming dilution, primarily attributable to contractual obligations
to our former chief executive officer, who resigned in June 1998, and
costs necessary to recruit executives to Waterlink.
- During the nine months ended June 30, 1998, Waterlink incurred special
charges of $1,494,000, or $0.07 per share, assuming dilution, primarily
attributable to contractual obligations to our former chief executive
officer, who resigned in June 1998, and costs necessary to recruit
executives to Waterlink.
- During the nine months ended June 30, 1999, Waterlink incurred special
charges of $2,787,000, or $0.20 per share, assuming dilution, for the
following:
- Continuing costs of $1,487,000, or $0.11 per share, assuming dilution,
associated with the implementation of Waterlink's 1999 plan, primarily
related to termination benefits and facility consolidation costs.
- In conjunction with our 1999 plan, we determined that we would exit
the acquired Bioclear business. During the fourth quarter of fiscal
1998, the assets of Bioclear, primarily related to Bioclear's
manufacturing facility located in Winnipeg, Canada, were reduced to
their estimated net realizable value. Based on the status of the sales
process and Waterlink's June 1999 decision regarding how to best
dispose of the facility, we further reduced the estimated net
realizable value of these remaining assets by $1,300,000, or $0.09 per
share, assuming dilution.
(4) Net income for fiscal 1997 reflects an extraordinary item. Waterlink 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 Waterlink canceled a note purchase
agreement. In connection with the early retirement of certain indebtedness
and the cancellation of the note purchase agreement, Waterlink realized an
extraordinary charge of $385,000, net of taxes of $257,000, or $0.05 per
share, assuming dilution, related to the write off of unamortized debt
issuance costs and discounts associated with this indebtedness.
16
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto included elsewhere in this
prospectus.
OVERVIEW
Waterlink 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.
The current focus of Waterlink is the implementation of its 1999 Strategic
Operating Plan. The 1999 plan is being implemented in three phases: the
restructuring phase, the cost reduction phase, and the growth phase.
The restructuring phase was completed prior to October 1, 1998, the
beginning of Waterlink's current fiscal year, and restructured Waterlink from a
holding company that completed 13 acquisitions consisting of 23 separate
operating companies into the following five fully integrated divisions that are
focused on their specific markets:
- the Biological Wastewater Treatment Division
- the Separations Division
- the Pure Water Division
- the Specialty Products Division
- the European Water and Wastewater Division
This divisional structure allows Waterlink to utilize the strengths of its
complementary product lines and brand name to work closer with customers.
The following table shows our 13 acquisitions to date, consisting of 23
operating companies, and where the acquired companies operate within our five
divisions.
<TABLE>
<CAPTION>
ACQUISITION DATE ACQUIRED CURRENT DIVISION
----------- ------------- ----------------
<C> <S> <C> <C>
(1) Sanborn Technologies March 1995 Biological Wastewater Treatment
(2) Great Lakes Environmental, Inc. August 1995 Separations
(3) Mass Transfer Systems, Inc. January 1996 Biological Wastewater Treatment
(4) Aero-Mod, Inc. April 1996 Biological Wastewater Treatment
Resi-Tech, Inc.
Blue Water Services, Inc.
(5) Waterlink Equipment Technologies, September 1996 Pure Water
Inc.
(6) Nordic Water Products AB March 1997 European Water and Wastewater
Zickert Products AB
Noxon AB
Axel Johnson Engineering GmbH
Zickert Miljo A/S
Nordic Water Products OY
(7) Bioclear Technology, Inc. June 1997 Biological Wastewater Treatment
(technology only)
(8) Lanco Environmental Products, Inc. June 1997 Separations
</TABLE>
17
<PAGE> 21
<TABLE>
<CAPTION>
ACQUISITION DATE ACQUIRED CURRENT DIVISION
----------- ------------- ----------------
<C> <S> <C> <C>
(9) Mellegard V.A. Maskiner AB (MEVA) September 1997 European Water and Wastewater
(10) Hycor Corporation September 1997 Separations
(11) Chemitreat Services, Inc. March 1998 Pure Water
(12) Aquafine Engineering Services March 1998 European Water and Wastewater,
Limited Biological Wastewater Treatment
Purac Engineering Incorporated and Separations
(13) Barnebey & Sutcliffe Corporation June 1998 Speciality Products
Sutcliffe Speakman Carbons Limited
Sutcliffe Croftshaw Limited
</TABLE>
The cost reduction phase established goals of reducing selling, general and
administrative expenses by $4.3 million in fiscal 1999, principally by reducing
the number of employees by 75, or approximately 10% of the work force, and by
closing seven facilities. Waterlink has decided to curtail its manufacturing
activities whenever possible, in favor of partnering with vendors who
manufacture components used in our systems and equipment. As of June 30, 1999,
the total number of employees has been reduced by 114 people, in excess of the
75 originally contemplated by the 1999 plan, and the annualized cost savings
goal of $4.3 million has been surpassed by approximately $1.1 million. With
regard to facilities, six have been closed and the remaining one is scheduled to
relocate before September 30, 1999, the end of Waterlink's fiscal year.
The cost reduction phase also includes an initiative to reduce production
costs by identifying common suppliers among divisions and consolidating
purchases to increase Waterlink's purchasing power. Supply contracts with these
common vendors are expected to provide cost savings to help Waterlink remain
competitive in the long term.
Waterlink is now focused on implementing the growth phase of the 1999 plan,
which provides for adding at least 25 sales and marketing professionals this
fiscal year, 15 of whom have already accepted positions, in order to improve
revenue performance over the long term. These additional costs will be funded,
in part, by the additional $1.1 million of annualized savings as a result of the
cost reduction phase of the 1999 plan.
The improved communications and specific identification of markets and
products resulting from the restructuring of Waterlink, together with the
reinvestment in sales and marketing professionals, are intended to allow
Waterlink to increase its sales efforts. Two specific areas of focus are the
implementation of a key account program with selected worldwide buyers of
Waterlink product offerings, and our integrated systems effort that is expected
to provide more interdivisional cross selling opportunities with certain key
customers. Waterlink is also developing sales strategies in regions where we do
not currently have a significant presence or wish to increase our opportunities,
like South America. The growth phase of the 1999 plan is expected to help build
Waterlink into a sales, marketing and engineering leader in the industry,
focused on profitable growth over the long term.
Waterlink's new organization is also designed to more efficiently integrate
future acquisitions. Waterlink's current capital structure does not support an
acquisition program. Waterlink's intends to improve its capital structure
through a combination of improved operating performance and access to capital
markets, which we expect will enable us to resume our acquisition program.
Acquisitions are expected to play a strategic role in Waterlink's future to
increase competitiveness, spur revenue and earnings growth, and enhance our
total solutions capability.
18
<PAGE> 22
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 systems and equipment produced by Waterlink 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 incurred 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 Waterlink 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, Waterlink expects that it may
receive contracts that are significantly larger than those received by Waterlink
historically. In addition, certain of the 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 the ability to receive any necessary
permits to commence the project. Therefore, Waterlink 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 Waterlink of revenues and profits. In
addition, Waterlink has historically operated with a moderate backlog. However,
as a result of its strategic plan, Waterlink anticipates that both the dollar
volume and number of contracts in its backlog will increase significantly. As of
June 30, 1999, Waterlink's total backlog was approximately $46.0 million,
consisting of $39.8 million of written purchase orders for capital goods
equipment and $6.2 million of firm commitments to purchase recurring revenue
products from our specialty products division. Quarterly sales and operating
results will 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
Waterlink's operating results in any particular period. Because of these
factors, Waterlink believes that period-to-period comparisons of its operating
results are not necessarily indicative of future performances.
19
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, statements of
operations data as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
FISCAL FISCAL FISCAL --------------- ---------------
1996 1997 1998 1998 1999 1998 1999
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............ 56.7 62.4 63.3 61.2 72.5 62.2 68.8
------ ------ ------ ------ ------ ------ ------
Gross profit............. 43.3 37.6 36.7 38.8 27.5 37.8 31.2
Selling, general and
administrative
expenses............... 35.5 28.9 28.6 30.6 26.9 29.1 25.5
Special charges.......... -- 4.1 16.0 4.3 4.8 1.6 2.2
Amortization............. 1.6 1.1 1.4 1.7 1.2 1.5 1.2
------ ------ ------ ------ ------ ------ ------
Operating income
(loss)................. 6.2 3.5 (9.3) 2.2 (5.4) 5.6 2.3
Other income (expense):
Interest expense....... (4.4) (2.0) (2.6) (2.9) (4.0) (1.8) (4.0)
Interest income and
other items-net..... (0.2) 0.4 0.0 0.4 (0.3) 0.1 (0.1)
------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... 1.6 1.9 (11.9) (0.3) (9.7) 3.9 (1.8)
Income taxes............. 0.1 0.7 1.1 0.2 0.9 1.7 0.7
------ ------ ------ ------ ------ ------ ------
Income (loss) before
extraordinary item..... 1.5 1.2 (13.0) (0.5) (10.6) 2.2 (2.5)
Extraordinary item, net
of taxes............... -- (0.6) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Net income (loss)........ 1.5% 0.6% (13.0)% (0.5)% (10.6)% 2.2% (2.5)%
====== ====== ====== ====== ====== ====== ======
</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. Waterlink
experienced negative internal growth for the year of 10.8%, resulting
principally from the timing of orders, exchange rate fluctuations and stronger
performance for specific domestic locations during fiscal 1997 that was not
duplicated in fiscal 1998. Waterlink 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 acquisitions previously described. 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 water products group and the June 1998
acquisition of the specialty products division, both of which historically
experience lower margins as compared to other Waterlink divisions.
20
<PAGE> 24
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 acquisitions previously described. 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, Waterlink
incurred special charges of $21,636,000. These special charges consisted of the
following three components:
- Waterlink recorded a charge of $2,858,000 primarily related to
termination benefits and costs associated with the exiting of facilities
in connection with the implementation of our 1999 plan.
- Waterlink 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 acquisition of Bioclear 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, our 1999 plan includes
Waterlink's decision to exit the acquired business of Bioclear. Several
factors lead to this decision including:
- 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.
- 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.
- In July 1998, Bioclear's founder, a former owner and president,
resigned.
- 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 was not recoverable based on
Bioclear's lack of future undiscounted cash flows and was impaired. Once
the impairment was determined, Waterlink 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, Waterlink 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, Waterlink also
wrote off $1,317,000 of the cumulative translation adjustment relating to
Bioclear's equity.
- Waterlink incurred special charges of $1,494,000 primarily attributable
to contractual obligations to our former president and chief executive
officer, who resigned in June 1998, and costs necessary to recruit
executives to Waterlink.
Waterlink incurred special charges of $2,630,000 for the year ended
September 30, 1997 resulting primarily from the issuance at the time of our
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
21
<PAGE> 25
an officer of Waterlink 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 acquisitions previously
described.
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 Waterlink's ongoing
acquisition program.
INCOME TAXES: Waterlink recorded an income tax provision of $1,468,000 on a
pre-tax loss of $16,036,000. Waterlink was required to record income tax expense
on its earnings outside the United States and was also required to record income
tax expense in several states domestically. In addition, due to the net
operating loss carryforward in the United States, we had to fully reserve for
deferred tax assets that had been recorded in the previous year.
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 our acquisitions. In addition, internal growth accounted for
$6,830,000 of the increase, which represented an internal growth rate of 34.5%.
The growth was primarily due to expansion in overseas markets and to the greater
levels of resources provided by Waterlink 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 our 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 water products group which historically
experiences lower margins as compared to other Waterlink divisions, 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 acquisitions previously described. 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 at the time of our
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 Waterlink 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 acquisitions previously
described.
22
<PAGE> 26
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 acquisitions
previously described.
EXTRAORDINARY ITEM: During the year ended September 30, 1997, Waterlink
recorded an extraordinary charge of $385,000, net of taxes of $257,000, related
to:
- the write-off of unamortized debt issuance costs from indebtedness we
repaid with the net proceeds from our initial public offering
- discounts associated with a note purchase agreement which was terminated
at the time of our initial public offering.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
NET SALES: Net sales for the three months ended June 30, 1999 were
$43,083,000, an increase of $8,146,000 from the comparable prior period. The
increase was due to the acquisition on June 5, 1998 of Barnebey & Sutcliffe
Corporation, Sutcliffe Speakman Carbons Limited and Sutcliffe Croftshaw Limited,
which we collectively refer to as our specialty products division. Waterlink
experienced negative internal growth for the quarter of 6.8%, resulting
primarily from the timing of orders at two specific domestic locations. If
currency rate fluctuations were excluded, negative internal growth for the
quarter would have been 4.5%. Waterlink 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 three months ended June 30, 1999 was
$11,854,000, a decrease of $1,696,000 from the comparable prior period. Gross
margin was 27.5% for the 1999 period as compared to 38.8% for the 1998 period.
We decided to discontinue the manufacturing processes for our Great Lakes
subsidiary product line in favor of utilizing subcontractors. As a result of
this decision, during the quarter ended June 30, 1999, Waterlink recognized
$2,137,000 of costs, comprised of $1,191,000 of cost overruns that took place on
a contractual obligation and $946,000 of inventory write downs and other costs.
Absent the $2,137,000 of costs associated with the exit of the Great Lakes
facility, the gross margin would have been 32.5% for the three months ended June
30, 1999. The adjusted gross margin of 32.5% is lower than the 38.8% realized in
the 1998 period primarily due to the timing of the acquisition of the specialty
products division, which is included in operations for one month in 1998 versus
three months in 1999. The specialty products division experiences lower margins
as compared to other Waterlink divisions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses for the three months ended June 30, 1999 were
$11,600,000, an increase of $894,000 from the comparable prior period. The
increase was primarily due to the acquisition of the specialty products
division. Selling, general and administrative expenses as a percentage of net
sales were 26.9% in 1999 as compared to 30.6% for the comparable prior period.
This decrease primarily reflects the costs savings realized from Waterlink's
1999 plan; as well as the impact of the June 1998 acquisition of the specialty
products division, which historically experiences a lower percentage of selling,
general and administrative expenses as a percentage of sales as compared to
other Waterlink divisions. Selling, general and administrative expenses for the
three months ended June 30, 1999 were increased by a charge of $255,000 from the
write off of costs associated with acquisition activity that ceased during the
quarter. Absent this write off, the increase from
23
<PAGE> 27
the 1998 period would have been $639,000 and selling, general and administrative
expenses as a percentage of sales would have been 26.3% for the three months
ended June 30, 1999.
SPECIAL CHARGES: Special charges of $2,084,000 during the three months
ended June 30, 1999 consisted of the following:
- Continuing costs of $784,000 associated with the implementation of
Waterlink's 1999 plan, primarily related to termination benefits and
facility consolidation costs.
- In conjunction with our 1999 plan, we determined that we would exit the
acquired Bioclear business. During the fourth quarter of fiscal 1998, the
assets of Bioclear, primarily related to Bioclear's manufacturing
facility located in Winnipeg, Canada, were reduced to their estimated net
realizable value. Based on the status of the sales process and
Waterlink's June 1999 decision regarding how to best dispose of the
facility, we further reduced the estimated net realizable value of these
remaining assets by $1,300,000.
We expect to recognize additional special charges associated with our 1999
plan of approximately $213,000 during the remainder of fiscal 1999. Waterlink
may incur additional charges in the fourth quarter of fiscal 1999 relating to
this offering, consisting of additional severance benefits of approximately
$550,000.
Waterlink incurred special charges of $1,494,000 during the three months
ended June 30, 1998 primarily attributable to contractual obligations to our
former chief executive officer, who resigned in June 1998, and costs necessary
to recruit executives to Waterlink.
AMORTIZATION: Amortization expense for the three months ended June 30,
1999 was $515,000, a decrease of $55,000 from the comparable prior period. This
net decrease has two components. First, amortization expense was reduced by
$107,000 from the exit of Waterlink's Bioclear business during the fourth
quarter of fiscal 1998. Second, this reduction was partially offset by $52,000
of additional amortization of goodwill associated with the June 1998 acquisition
of the specialty products division.
INTEREST EXPENSE: Interest expense for the three months ended June 30,
1999 was $1,702,000, an increase of $684,000 from the comparable prior period
primarily due to increased borrowings related to Waterlink's fiscal 1998
acquisitions. We expect interest expense to increase by approximately $100,000
per quarter as a result of an interest rate increase effected in the fifth
amendment to our bank credit agreement.
OTHER ITEM: Waterlink expects to incur a non cash charge of approximately
$900,000 in the fourth quarter of fiscal 1999 resulting from the amortization of
the deferred financing costs attributable to issuance of warrants to guarantors
of Waterlink's bank debt and the release of those guaranties upon the
application of the proceeds from this offering.
INCOME TAXES: Waterlink recorded income taxes of $367,000 on a pre-tax loss of
$4,194,000 for the three months ended June 30, 1999. This income tax expense was
recorded on our earnings outside the United States and in certain states
domestically. For the three months ended June 30, 1998, Waterlink recorded
income taxes of $75,000 on a pre-tax loss of $93,000 due to non-deductible
goodwill amortization in connection with certain of its acquisitions.
NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
NET SALES: Net sales for the nine months ended June 30, 1999 were
$128,858,000, an increase of $34,591,000 from the comparable prior period. The
increase was due to the acquisition of Chemitreat Services, Inc, on March 2,
1998; of Aquafine Engineering Services Limited and Purac Engineering
Incorporated in a single transaction on March 25,
24
<PAGE> 28
1998; and of the specialty products division on June 5, 1998. Waterlink
experienced negative internal growth for the nine months of 16.1%, resulting
primarily from significant revenues generated by German-based sales activity and
a Utah-based land development wastewater project in the comparable prior period.
Excluding these two factors, internal growth would have declined by 6.4% due to
the timing of orders at two specific domestic locations. Further, if currency
rate fluctuations were excluded, negative internal growth for the nine months
would have been 5.5%.
GROSS PROFIT: Gross profit for the nine months ended June 30, 1999 was
$40,151,000, an increase of $4,481,000 from the comparable prior period due to
the acquisitions. Gross margin was 31.2% for the 1999 period as compared to
37.8% for the 1998 period. We decided to discontinue the manufacturing processes
for our Great Lakes subsidiary product line in favor of utilizing
subcontractors. As a result of this decision, during the nine months ended June
30, 1999, Waterlink recognized $2,137,000 of costs, comprised of $1,191,000 of
cost overruns that took place on a contractual obligation and $946,000 of
inventory write downs and other costs. Absent the $2,137,000 of costs associated
with the exit of the Great Lakes facility, the gross margin would have been
32.8% for the nine months ended June 30, 1999. The adjusted gross margin of
32.8% is lower than the 37.8% realized in the 1998 period primarily due to the
June 1998 acquisition of the specialty products division, which historically
experiences lower margins as compared to other Waterlink divisions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses for the nine months ended June 30, 1999 were
$32,829,000, an increase of $5,371,000 from the comparable prior period. The
increase was primarily due to the acquisitions. Selling, general and
administrative expenses as a percentage of net sales were 25.5% in 1999 as
compared to 29.1% for the comparable prior period. This decrease primarily
reflects the costs savings realized from Waterlink's 1999 plan; as well as the
impact of the June 1998 acquisition of the specialty products division, which
historically experiences a lower percentage of selling, general and
administrative expenses as a percentage of sales as compared to other Waterlink
divisions. The selling, general and administrative expenses for the nine months
ended June 30, 1999 were increased by a charge of $255,000 from the write off of
costs associated with acquisition activity that ceased during the quarter ended
June 30, 1999.
SPECIAL CHARGES: Special charges of $2,787,000 during the nine months
ended June 30, 1999 related to the following:
- Continuing costs of $1,487,000 associated with the implementation of
Waterlink's 1999 plan, primarily related to termination benefits and
facility consolidation costs.
- In conjunction with our 1999 plan, we determined that we would exit the
acquired Bioclear business. During the fourth quarter of fiscal 1998, the
assets of Bioclear, primarily related to Bioclear's manufacturing
facility located in Winnipeg, Canada, were reduced to their estimated net
realizable value. Based on the status of the sales process and
Waterlink's June 1999 decision regarding how to best dispose of the
facility, we further reduced the estimated net realizable value of these
remaining assets by $1,300,000.
We expect to recognize additional special charges associated with our 1999
plan of approximately $213,000 during the remainder of fiscal 1999. Waterlink
may incur additional charges in the fourth quarter of fiscal 1999 relating to
this offering, consisting of additional severance benefits of approximately
$550,000.
Waterlink incurred special charges of $1,494,000 during the nine months
ended June 30, 1998 primarily attributable to contractual obligations to our
former chief
25
<PAGE> 29
executive officer, who resigned in June 1998, and costs necessary to recruit
executives to Waterlink.
AMORTIZATION: Amortization expense for the nine months ended June 30, 1999
was $1,569,000, an increase of $157,000 from the comparable prior period. The
increase was primarily due to the additional goodwill resulting from the fiscal
1998 acquisitions, offset by $322,000 reduction in amortization expense
resulting from the exit of Waterlink's Bioclear business during the fourth
quarter of fiscal 1998.
INTEREST EXPENSE: Interest expense for the nine months ended June 30, 1999
was $5,092,000, an increase of $3,355,000 from the comparable prior period
primarily due to increased borrowings related to Waterlink's fiscal 1998
acquisitions.
OTHER ITEM: Waterlink expects to incur a non cash charge of approximately
$900,000 in the fourth quarter of fiscal 1999 resulting from the amortization of
the deferred financing costs attributable to issuance of warrants to guarantors
of Waterlink's bank debt and the release of those guaranties upon the
application of the proceeds from this offering.
INCOME TAXES: Waterlink recorded income taxes of $869,000 on a pre-tax
loss of $2,289,000 for the nine months ended June 30, 1999. This income tax
expense was recorded on its earnings outside the United States and in certain
states domestically. The effective income tax rate of 44.1% for the nine months
ended June 30, 1998 exceeded the United States federal statutory rate of 34% due
primarily to non-deductible goodwill amortization related to certain
acquisitions made by Waterlink as well as state and local income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Waterlink's primary sources of liquidity have been:
- borrowings available under credit facilities
- net proceeds from the sale of Waterlink's common and preferred stock
- issuance of common stock and seller financing incurred in connection with
Waterlink's completed acquisitions
- cash flow from certain profitable acquisitions
Historically, Waterlink's primary uses of capital have been:
- the funding of its acquisition program
- working capital requirements including the funding for growth at certain
acquisitions
- the funding required for certain under-performing acquisitions
Waterlink does not currently anticipate making significant capital
investments in plant and equipment because of our efforts to partner with
vendors who manufacture most of the components used in our systems and
equipment.
For the nine months ended June 30, 1999, net cash provided by operating
activities was $2,337,000. This positive cash flow, along with $519,000 of
proceeds from the sale of a building, were used to help fund purchases of
equipment totaling $1,470,000 and cash outlays related to the purchases of
businesses of $1,902,000.
In the fourth quarter of fiscal 1998, Waterlink's board of directors
approved the 1999 plan. The 1999 plan provides for costs associated with the
exiting of certain facilities and employee termination costs. Costs associated
with this plan totaled $2,858,000 during fiscal 1998 and $1,487,000 for the nine
months ended June 30, 1999, of which approximately $1,169,000 remains reserved
for future payment at June 30, 1999. We expect to recognize additional special
charges associated with the 1999 plan of approximately $213,000 during the
remainder of fiscal 1999. Waterlink may incur additional charges in the fourth
quarter
26
<PAGE> 30
of fiscal 1999 relating to this offering, consisting of additional severance
benefits of approximately $550,000.
Waterlink is in the process of selling and disposing of non-revenue
producing assets. A Waterlink-owned facility vacated during fiscal 1998 was sold
and the proceeds of $519,000 were received during January 1999. Waterlink is
also in the process of selling our land, building and equipment in Winnipeg,
Manitoba, Canada, the former site of our Bioclear manufacturing facility. Based
on the status of the sales process and Waterlink's June 1999 decision regarding
how to best dispose of the facility, Waterlink further reduced the estimated net
realizable value of these remaining assets held for sale by $1,300,000 to
approximately $1,000,000, and recorded this change in accounting estimate during
the quarter ended June 30, 1999. Waterlink expects to sell, at approximately
estimated net realizable value, the remaining assets of the Bioclear
manufacturing facility before December 31, 1999.
During fiscal 1998 Waterlink invested in Aquatec Water Systems,
Incorporated, a designer and manufacturer of specialized multi-chamber pumps for
the pure water industry, in the form of two $700,000 subordinated notes,
convertible into approximately 30% of the equity of Aquatec, together with other
stock purchase options. Waterlink reached an agreement to sell both notes at
their face value of $700,000 each plus interest to a group of investors.
Waterlink has received payment for one of the $700,000 notes and has received
$625,000 of the other note. Waterlink expects to collect the remaining balance
of $75,000 before December 31, 1999.
ACQUISITIONS
Waterlink's current capital structure does not support an acquisition
program. Waterlink's intends to improve its capital structure through a
combination of improved operating performance and access to capital markets,
which we expect will enable us to resume our acquisition program. Acquisitions
are expected to play a strategic role in Waterlink's future to increase
competitiveness, spur revenue and earnings growth, and enhance our total
solutions capability. The timing, size and success of any acquisition effort and
the associated potential capital commitments are unpredictable at this time. As
a result of the specialty products division acquisition and the implementation
of our 1999 plan, our debt is in excess of our stockholders' equity and we bear
the risks associated with increased leverage.
During the nine months ended June 30, 1999 Waterlink made additional
purchase consideration payments of $1,902,000 related to the achievement of
targeted operating results of two of our acquisitions. In addition, additional
purchase consideration of $500,000 in connection with one of Waterlink's
acquisitions had been earned and recorded as of June 30, 1999, and is expected
to be satisfied during this calendar year. These amounts have been recorded as
additional goodwill.
Under the terms of certain of the purchase agreements, Waterlink may be
required to make additional purchase consideration payments of up to $1,224,000,
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 $224,000 and $1,000,000, respectively. Any additional purchase
consideration payments will be treated as additional goodwill for accounting
purposes.
CREDIT AVAILABILITY
Waterlink's credit facilities are comprised of (1) a $76,000,000 domestic
facility with Bank of America National Trust & Savings Association as agent,
which expires on May 19, 2003 and (2) separate facilities aggregating
approximately $6,500,000 at three of
27
<PAGE> 31
its overseas subsidiaries. The credit facilities will be utilized to primarily
fund operating activities of Waterlink and, to a lesser extent, fund future
acquisitions.
Prior to the amendment mentioned below, $2,600,000 of borrowings was made
available to Waterlink as the result of third party guarantees. In connection
with assisting in the process of improving our capital structure, these third
party guarantees were provided by Brantley Venture Partners III, L.P. in the
amount of $2,300,000, and by the three executive officers of Waterlink totaling
$300,000.
Waterlink granted the guarantors warrants to purchase, in the aggregate, up
to 283,637 shares of Waterlink common stock at an exercise price of $.01 per
share. Of the 283,637 warrants, 125,000 were issued at the time the guarantees
were issued and the remaining 158,637 warrants were issued on September 28,
1999, the date of shareholder approval for the remaining warrants. The warrants
are immediately exercisable and expire if unexercised in five years. The number
of warrants granted to each guarantor was based on their proportionate share of
the $2,600,000 in guarantees.
Effective with the closing of this offering, Waterlink has entered into an
amendment of our domestic facility waiving certain financial covenants that were
not satisfied at June 30, 1999. The waiver remains effective until December 31,
1999, assuming Waterlink realizes not less than $750,000 of operating income for
each month of October, November and December 1999. Assuming an offering price of
$3.00 per share for this offering, availability for future borrowings upon
effectiveness of the amendment under the credit facilities is approximately
$9,618,000. Availability for future borrowings may increase or decrease based on
the pro forma operating performance of Waterlink.
Loans under the credit facilities bear interest at a designated variable
base rate plus spreads ranging from 0 to 75 basis points depending on a leverage
ratio of total consolidated indebtedness to Waterlink's earnings before
interest, taxes, depreciation and amortization. At Waterlink's option, the
credit facilities bear interest based on a designated London interbank offering
rate, or LIBOR, plus spreads ranging from 100 to 275 basis points, depending on
Waterlink's leverage ratio.
The credit facilities restrict or prohibit Waterlink from taking many
actions, including paying dividends and incurring or assuming other indebtedness
or liens. The banks that participate in the credit facilities also must approve
most acquisitions. Waterlink's obligations under the credit facilities are
secured by liens on substantially all of Waterlink's domestic assets, including
equipment, inventory, accounts receivable and general intangibles and the pledge
of most of the stock of Waterlink's subsidiaries. Waterlink has guaranteed the
payment by our three overseas subsidiaries of their obligations under the
overseas facilities. The three overseas subsidiaries have given the lenders an
assurance that the subsidiaries would not pledge their assets to any other
party.
Waterlink also has in place a $3,000,000 credit facility 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. At June 30, 1999 the Canadian credit facility was fully utilized.
Borrowings under the Canadian credit facility are payable upon demand and are
guaranteed by the real and personal property of Waterlink's Bioclear facility.
Waterlink believes that through the end of fiscal 2000, sufficient funds
for our working capital needs, additional cash requirements of the 1999 plan and
other special charges and additional contingent consideration payments related
to acquisitions will be provided by:
- future cash flow from operations
- borrowings under its credit facilities
28
<PAGE> 32
- issuance of subordinated indebtedness, common stock, preferred stock and
seller financing incurred in connection with future financings or
acquisitions
- the sale of certain non-revenue producing assets
MARKET RISK
Waterlink's earnings are affected by changes in interest rates charged on
our domestic facility. During 1998, Waterlink entered into an interest rate swap
agreement with a major commercial bank to modify the interest characteristics of
its 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
Waterlink's LIBOR-based rate at 5.25% on a notional amount of $75,000,000.
Waterlink also has exposure to currency rate fluctuations related primarily
to the purchases of inventory. Waterlink continues to utilize a limited number
of foreign exchange instruments, primarily forward contracts, to manage this
exposure.
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 Waterlink's decentralized IT environments,
individual assessments, in accordance with Waterlink's year 2000 program, have
been conducted at Waterlink's operating companies. Collectively, these
assessments indicate that Waterlink's exposure to this segment of the year 2000
issue is not significant as Waterlink does not extensively rely on IT systems
which require modification. Waterlink's externally developed system issues have
been assessed company-wide through inquiry of 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. Waterlink has tested internally developed software systems where
applicable and has developed programs to make these systems year 2000 compliant.
Testing of upgraded or modified systems has begun at Waterlink's various
operating units. Results of these testing procedures, which will be completed by
the end of 1999, are incomplete.
The year 2000 program also addresses issues related to non-IT environments.
Collectively, these assessments indicate that Waterlink's exposure to this
segment of the year 2000 issue is not significant due to Waterlink's limited
manufacturing operations and related capital equipment needs. Waterlink's
operating equipment has been assessed through inquiry of external manufacturers
and internal testing procedures. Remediation efforts have begun where necessary.
Collectively, Waterlink will complete and test remediated assets by the end of
1999.
Waterlink's primary system interface with an external party involves its
banking institutions. Based on inquiries of its banking institutions, Waterlink
is not aware of any unresolved year 2000 issues. Further, due to Waterlink's
decentralized operations, individual assessments, in accordance with Waterlink's
year 2000 program, have been conducted at Waterlink's operating companies
regarding significant suppliers and subcontractors. These assessments, which are
not complete, have been executed primarily through inquiry of our various
suppliers and subcontractors. To date, Waterlink is not aware of any external
party with an unresolved year 2000 issue that would materially impact
Waterlink's operations and financial position. However, Waterlink has no means
of ensuring that external parties will be year 2000 compliant. The inability of
external parties to resolve
29
<PAGE> 33
their year 2000 issue in a timely manner could impact Waterlink's operations and
financial position. The effect of non-compliance by external parties is not
determinable.
Waterlink has primarily utilized internal resources to assess, test,
remediate and implement software and equipment related to the year 2000. The
total cost of our year 2000 program, excluding employee salaries, is estimated
at $400,000, primarily attributable to software upgrades and modifications.
Waterlink has incurred approximately $325,000 related to the various phases of
its year 2000 program through June 30, 1999.
We believe that we have a program established to resolve the year 2000
issue in a timely manner. Waterlink's year 2000 program has not been completed.
In the event Waterlink does not complete its remaining year 2000 procedures, we
believe under a worst case scenario, certain functions may be interrupted.
Waterlink 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 Waterlink.
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 SFAS 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. Waterlink adopted this statement on October 1, 1998.
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 Waterlink's
annual reporting in fiscal 1999 and restatement of comparative information for
earlier years is required in the initial year of adoption. The implementation of
the 1999 plan will require Waterlink 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. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133", which
makes SFAS No. 133 effective for Waterlink beginning October 1, 2000. Waterlink
has not yet determined what the effect of adopting SFAS No. 133 will be on our
operations or financial position.
30
<PAGE> 34
OUR BUSINESS
GENERAL
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. Waterlink designs, assembles and sells water and wastewater treatment
products and provides related services to companies and municipalities to treat
their water and wastewater. Waterlink 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 to participate
in the consolidation of the highly fragmented water purification and wastewater
treatment industry. Waterlink grew rapidly through acquisitions from 1995
through 1998. To date Waterlink has made 13 acquisitions, targeting businesses
in two principal markets (wastewater and pure water treatment) and in two
geographic areas (United States and Europe).
DIVISIONAL FORMAT
In September 1998, Waterlink, under the direction of its recently appointed
president and chief executive officer, announced its 1999 Strategic Operating
Plan. The 1999 plan provides for a divisional format for efficient centers of
product expertise and geographic experience, to better serve Waterlink's
customers and independent marketing representatives. Under the 1999 plan,
Waterlink reorganized from a holding company that completed 13 acquisitions with
23 direct and indirect operating companies into five integrated divisions. The
divisions are:
- the Biological Wastewater Treatment Division
- the Separations Division
- the Pure Water Division
- the Specialty Products Division
- the European Water and Wastewater Division
BIOLOGICAL WASTEWATER TREATMENT DIVISION
The biological wastewater treatment division provides products and
processes treating municipal and industrial wastewater by various biological
based methods. This division furnishes products and processes that can be
incorporated into integrated systems or sold individually. Its products include
aeration systems, which treat wastewater with air and/or process water that is
pumped at high pressures through a series of jet nozzles, resulting in highly
efficient oxygen transfers and mixing activity to separate waste. These systems
are sold separately for use in industrial biological treatment plants and many
other uses, including for underdeveloped countries where land intensive, lagoon
treatment processes are widely accepted. In addition, these systems can be
integrated with other processes for more complete biological treatment
solutions. Waterlink's patented Aero-Mod Sequox(TM) nutrient removal process
uses aeration to increase biological activity for removing unwanted pollutants
from the water.
The biological wastewater treatment division also designs and manufactures
industrial separation systems using various technologies used to separate solids
from industrial
31
<PAGE> 35
coolants. The division markets its products and processes through both direct
sales offices and independent sales representatives located predominantly in
North and South America, the United Kingdom, Ireland and Asia. For the nine
months ended June 30, 1999, net sales for this division were approximately $14.1
million.
SEPARATIONS DIVISION
This division sells equipment and engineered systems employing physical and
chemical separation technology. Its markets are municipal water and wastewater
as well as industrial process water and wastewater. The division combines the
technology offerings of industry leading product lines. The separations
division's products include the following:
- Hycor(R) screening, conveying, dewatering and screenings/grit washing
equipment. Dewatering is the process of reducing or eliminating moisture
content. These products operate on the principle of liquid/solid gravity
separation and are used to improve water and wastewater processes,
minimize waste, reduce disposal volumes and provide for water recovery
and reuse.
- Lanco Environmental(TM) filter presses, clarifiers and sludge dryers.
Primarily serving the industrial market, this equipment is designed for
the efficient dewatering of effluent and sludges from specialized
industrial processes.
- Great Lake Environmental(R) oil/water separations, inclined plate
clarifiers and dissolved air flotation systems. With its broad industrial
customer base, this product line offers a wide range of equipment from
the basic separation and removal of oil droplets from water to systems
which remove suspended solids and emulsified oil from continuous flows.
- Nordic Water(TM) continuous sand filters, inclined plate clarifiers and
sludge removal equipment. These products offer a wide range of
capabilities including tertiary polishing filters, used to remove fine
particles, nitrates and phosphates in wastewater, solutions for high
turbidity, or cloudiness, in municipal water treatment, advanced settling
technology and sophisticated sludge removal equipment.
The separations division sells its products and systems primarily in North
America through a network of independent manufacturers representatives. For the
nine months ended June 30, 1999, net sales for the division were approximately
$25.6 million.
PURE WATER DIVISION
The pure water division sells products and solutions to the residential,
municipal and industrial water and process water markets through our Waterlink
Technologies, Inc. and C'treat Offshore, Inc. companies.
Waterlink Technologies is an international provider of membrane based
solutions focusing on:
- membrane technology with standard reverse osmosis system solutions which
can treat tap water to sea water for the production of high purity water
- nanofiltration systems, which can be used to decolor, soften and remove
harmful pathogenic organisms
- desalination systems for the purification of sea water to drinking water
for resorts, municipal and governmental installations
32
<PAGE> 36
- custom engineered microfiltration systems that can be used for the
clarification and removal of harmful organisms from surface water as well
as pre-treatment for other membrane technology in wastewater applications
- custom designed ultra pure water treatment systems for the power,
electronic and pharmaceutical industries
- the manufacture of pleated membrane sediment filtration cartridges which
are used for removal of suspended solids
- the distribution of other major lines of filter housings, filters and
components
C'treat is a provider of reverse osmosis desalination equipment and
services to the worldwide energy industry. C'treat equipment economically and
reliably provides fresh water for offshore drilling rigs and production
platforms. C'treat enjoys a significant market presence through a sales
organization that includes representatives and technical licensees in 12
countries. For the nine months ended June 30, 1999, net sales for this division
were approximately $11.5 million.
SPECIALTY PRODUCTS DIVISION
Waterlink's specialty products division and its predecessors have
specialized in the development and production of highly sophisticated activated
carbons for more than 80 years. Activated carbon is used to purify air, water
and gases by retaining impurities in carbon granules. The division is a
worldwide supplier of activated carbon for liquid, air and gas filtration
systems and is a leading manufacturer of specialty impregnated carbons used in
applications where the capacity of activated carbons can be significantly
increased. A full range of activated carbons manufactured from coconut shell,
coal, wood, along with other adsorbents such as modified clay media, bone char,
and anthracite are offered for use in:
- adsorption equipment, both standard and custom configurations, primarily
for separation of solvents from air
- bioreactors and bioscrubbers in which contaminants are destroyed using
biological microbes
- corrosive gas control systems to protect expensive electronic operated
controls
- distillation equipment for separation applications
- systems that control emissions from volatile organic compounds
- area filtration systems for the removal of both vapor phase and
particulate contaminants
- indoor air quality systems
- odor control systems
- soil vapor extraction systems
- solvent recovery systems engineered and installed on a turn-key basis, to
recover valuable solvents
This division's products and systems are sold worldwide using a combination
of direct sales and sales representatives. For the nine months ended June 30,
1999, net sales for this division were approximately $42.1 million.
33
<PAGE> 37
EUROPEAN WATER AND WASTEWATER DIVISION
The European water and wastewater division provides products and systems
similar to the separations division but focusing specifically on the European,
African and Asian municipal and industrial markets.
The European water and wastewater division, with principal locations in
Sweden, Germany and the United Kingdom, offers its products under various
proprietary names, including:
- Dynasand(TM) continuous sand filters
- Lamella(TM) separators
- Zickert(TM) bottom scrapers
- Noxon(TM) centrifuges
- MEVA(TM) fine screens
The products are sold separately or as an engineered turn-key solution. For the
nine months ended June 30, 1999, net sales for the division were approximately
$35.6 million.
OPERATING AND SALES STRATEGY
Waterlink has adopted a decentralized approach to the operational
management of our divisions. While functions such as strategic planning,
financial reporting, treasury, communications and risk management are
centralized in Waterlink's corporate headquarters, local management at each of
our five divisions is primarily responsible for the day-to-day operation of the
division's business. Waterlink also provides our divisions with financial
resources, management expertise, and customer and market access, which would be
unavailable to each division individually. Waterlink expects to realize
significant improvement in internal growth rates due to increased marketing
efforts and the opportunities to "cross-sell" products. As customers
increasingly seek to reduce their vendor base, outsource their non-core tasks
and find integrated solutions, the ability of each of our divisions to offer the
complementary equipment and services of other divisions increases the
competitiveness of Waterlink. For example, the separations division can team
with the pure water division and the biological division to offer both pure
water and wastewater solutions to a customer. Additionally, Waterlink's
design/build capabilities allow us to design systems that utilize a broad array
of Waterlink's products and provide opportunities for our specialty products
division. Waterlink also experiences cross-selling opportunities from a
geographic and customer standpoint. For example, our European water and
wastewater division has introduced our other divisions' systems, equipment and
services into the European market. Likewise, we have introduced the European
water and wastewater division's systems, equipment and services into our
domestic market.
We sell our systems, equipment and services primarily through approximately
80 direct sales personnel and approximately 250 independent sales organizations.
Waterlink also sells through licensees, principally in the Asia-Pacific region
as well as in Europe. To a lesser extent, Waterlink sells through water
treatment distributors, which take title to equipment for resale to the
end-user. Waterlink 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 Waterlink's direct sales force, which has greater
technical and product knowledge, to
34
<PAGE> 38
complete the sale and service the customer. Waterlink's direct sales force
generally plays a more primary role in sales of Waterlink's design/build
solutions.
While we have received contract awards in excess of $5 million, Waterlink
is focusing its marketing efforts on contract awards of up to approximately $4
million. We believe that competition is more fierce for larger contract awards
and the timing of these awards is more unpredictable.
To help facilitate revenue growth, and better serve our customer base,
Waterlink has formed a centralized marketing and sales team of three individuals
whose primary focus is to position Waterlink in the marketplace as an important
independent solution provider for municipal and industrial water and wastewater
requirements. This centralized sales and marketing approach will also utilize
technical divisional expertise and the market knowledge of our geographically
based independent representatives to focus on market opportunities. One of these
opportunities appears to be a national accounts program through which we intend
to provide water and wastewater solutions to major engineering and industrial
companies. Waterlink's centralized marketing and sales team is preparing to
focus initially on engineering and construction firms and key industrial
accounts in the food and beverage and pulp and paper industry.
A representative from each of our divisions, along with Waterlink's
executive officers and other key employees, form Waterlink's senior management
team, which meets on a frequent basis to facilitate the interchange of
information and enhance cross-selling opportunities.
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. Waterlink 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 Waterlink. We believe 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 to set pricing are
often primary considerations. Waterlink 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.
We believe that new entrants will play a significant role in the United
States municipal markets as privatization contracts for water and wastewater
concessions are expected to grow in size and importance. We believe that as an
independent supplier of water and wastewater solutions and equipment to these
service providers, we can provide a sound alternative to our competition.
Waterlink's primary competitors include operating subsidiaries of Vivendi
formally known as Compagnie Generale des Eaux and its recent acquisition of U.S.
Filter Corporation, Suez de Lyonaise des Eaux, Calgon Carbon Corporation;
Parkson Corporation; Ionics, Incorporated; Alpha Laval and Humbolt KHD.
35
<PAGE> 39
ACQUISITION STRATEGY
In order to achieve its objective of becoming a leading international
provider of integrated water purification and wastewater treatment solutions,
Waterlink has in the past pursued an aggressive acquisition-based growth
program.
Waterlink's acquisition strategy has been curtailed during fiscal 1999 due
to the effort required to complete the 1999 plan and as a result of Waterlink's
leverage. Proceeds from this offering are not expected to be utilized for
acquisition activity.
Waterlink intends to continue to use various combinations of its common
stock, cash and notes as consideration for future considerations. The
consideration for each future acquisition will vary on a case-by-case basis
depending on Waterlink's operating performance and the historic operating
results and future prospects of the business to be acquired. Waterlink intends
to finance future acquisitions through funds provided by operations and if
available, bank borrowings and proceeds of future equity and debt financing.
CUSTOMERS
Waterlink 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. Waterlink has a diverse customer base, with
no customer representing 10% or more of Waterlink's sales for the nine months
ended June 30, 1999.
Waterlink'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. For the nine months ended June 30, 1999 approximately
74.1% of Waterlink's 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. Waterlink utilizes specialized distribution channels
to service the municipal market and is skilled at participating in the municipal
bidding process. Waterlink focuses its efforts on smaller municipal projects
which Waterlink believes its product lines are best suited to serve. Waterlink
believes that the municipal business is important to its overall success because
of its large market size. For the nine months ended June 30, 1999 approximately
25.9% of Waterlink's net sales were derived from municipal sales.
BACKLOG
Total backlog as of June 30, 1999 was $46.0 million as compared to total
backlog of $44.5 million at September 30, 1998. Waterlink had a backlog,
consisting of written purchase orders for capital goods equipment of $39.8
million as of June 30, 1999 as compared to $38.1 million as of September 30,
1998. In addition, at June 30, 1999, Waterlink had $6.2 million of firm
commitments to purchase recurring revenue products from its specialty products
division as compared to $6.4 million as of September 30, 1998. Waterlink 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 Waterlink's backlog
36
<PAGE> 40
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 industry practices, we generally offer 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 our customers, Waterlink is sometimes required to guarantee that our
products or services will attain specified levels of quality or performance. If
a product fails to perform according to a warranty, or a project fails to attain
the guaranteed level of quality, and if we are unable to effect a satisfactory
replacement or cure within the prescribed period of time, Waterlink 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, Waterlink has not incurred any material payment or
other obligations pursuant to such performance guarantees.
RAW MATERIAL AND SUPPLIES
The raw materials and components used in Waterlink'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. Waterlink's systems are
fabricated from these materials and assembled together with products bought from
other companies to form an integrated system. In addition, the specialty
products division is dependent on the importation of coconut shell carbon from
the Asia and the supply of coal based carbon from domestic and Asian sources.
Waterlink is not dependent upon any single supplier, and if any supplier were to
become unable to perform, Waterlink believes a substitute source could readily
be found. Waterlink has generally been able to pass on price increases for raw
materials and components to its customers. Waterlink 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 Waterlink.
Many of the countries in which Waterlink operates or in which our 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 Waterlink. These requirements
and their enforcement vary by country, but in general establish water quality,
use and disposal standards, set wastewater effluent discharge limits, and
prescribe standards for the protection of human health and safety and the
environment. In each country, Waterlink 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 Waterlink.
37
<PAGE> 41
Any changes in applicable environmental standards and requirements or their
enforcement may affect the operations of Waterlink by imposing additional
regulatory compliance costs on Waterlink's customers, requiring the modification
of and/or affecting the market for Waterlink's solutions, systems and equipment.
To the extent that demand for Waterlink's solutions, systems and equipment is
created by the need to comply with these enhanced standards and requirements or
their enforcement, any modification of the standards and requirements or their
enforcement may reduce demand, thereby adversely affecting Waterlink'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
Waterlink's systems, equipment and services.
PATENTS, TRADEMARKS AND LICENSES
We currently own a number of United States and foreign patents, and
registrations for United States service marks and trademarks. While each is of
value, Waterlink generally does not consider any of them to be material to our
business, although, as Waterlink has grown and its presence has been extended,
our Waterlink(SM) mark has become more widely known and the goodwill associated
with it has increased.
EMPLOYEES
At June 30, 1999, Waterlink had approximately 638 employees at our various
locations. Approximately 51 people are covered under collective bargaining
agreements in the United States. All of Waterlink's hourly employees in Europe
are covered by collective bargaining agreements. We believe that our
relationship with our employees is good.
PROPERTIES
We lease our corporate offices, consisting of approximately 7,000 square
feet located in Canton. In addition, our subsidiaries lease facilities for
office space and manufacturing in the United States in Santa Fe Springs,
California; Clearwater and West Palm Beach, Florida; Lake Bluff and Addison,
Illinois; Manhattan, Kansas; 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, Frolunda, Kungsbacka, and Nynashamn, Sweden; and own
facilities for office space and manufacturing in Columbus, Ohio; Winnipeg,
Manitoba, Canada; and Fjaras, Sweden. The expiration dates for these leases
range from August 1999 to March 2011.
We believe that each of our facilities is in good condition and will
continue to remain suitable for its current purpose. We may add improvements to
the properties listed above. We anticipate using our properties for purposes
consistent with their present use. In the event any of the facilities becomes
unavailable upon termination of the existing lease, we believe we would be able
to find a suitable alternative facility without any significant adverse impact
to us or our operations. We believe our properties are adequately covered by
insurance.
LEGAL PROCEEDINGS
From time to time in the normal course of our business, we become a party
to litigation. Most of this litigation involves claims for personal or
employment related injury or property damage incurred in connection with our
operations. We are not a party to any material litigation and believe that none
of our litigation will have a material adverse effect on our business or
financial results.
38
<PAGE> 42
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their respective ages and
positions are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Theodore F.
Savastano............ 62 Director, Chairman of the Board
T. Scott King.......... 47 Director, President and Chief Executive Officer
John R. Miller......... 61 Director
Robert P. Pinkas....... 45 Director
Rollin S. Reiter....... 71 Director
Dr. Paul M. Sutton..... 51 Director
Michael J. Vantusko.... 42 Chief Financial Officer
</TABLE>
Set forth below is biographical information for our executive officers and
directors listed above.
THEODORE F. SAVASTANO is the founder of Waterlink and has been chairman of
the board since its inception in December 1994. He served as chief executive
officer of Hunter Environmental Services, Inc., a multi-disciplined
environmental company from August 1985 to January 1988 and as chief executive
officer and founder of Summit Environmental Group, Inc., a full-service
environmental consulting engineering company from August 1988 to May 1994.
T. SCOTT KING was elected president and chief executive officer of
Waterlink effective June 8, 1998 and was elected to the board on September 3,
1998. Prior to joining Waterlink, Mr. King served as president and general
manager, consumer brands, a significant division of The Sherwin-Williams Company
since February 1992. Prior thereto, Mr. King served as vice president, director
of sales and marketing, consumer division since June 1987.
JOHN R. MILLER was elected to the board in March 1997. Since 1988, Mr.
Miller has been president, chief executive officer and a director of TBN
Holdings Inc., a resource recovery and recycling company. Mr. Miller has
previously served as a director and chairman of the board of the Federal Reserve
Bank of Cleveland and as president, chief operating officer and a director of
The Standard Oil Company. Mr. Miller serves on the board of directors of Eaton
Corporation, a global manufacturer of highly engineered products which serve
industrial, vehicle, construction, commercial and aerospace markets; and of
Cambrex Corporation, a leading supplier of specialty and fine chemicals.
ROBERT P. PINKAS, a director since the inception of Waterlink, is chairman
of the board, chief executive officer, treasurer and a director of Brantley
Capital Corporation, a business development corporation, and chairman of the
board, chief executive officer, treasurer and a manager of Brantley Capital
Management, L.L.C., an investment adviser. Mr. Pinkas also serves as managing
general partner of Brantley Venture Partners, a venture capital firm that makes
investments through its various partnership funds. Mr. Pinkas founded and has
been affiliated with the Brantley entities for more than the past five years.
Additionally, Mr. Pinkas is a director of Quad Systems Corporation, Gliatech,
Inc., Pediatric Services of America, Inc. and Medirisk, Inc.
39
<PAGE> 43
ROLLIN S. REITER was elected to the board in March 1997. Mr. Reiter was
vice president of sales and marketing, dairy, for Dean Foods Co., a grocery and
food service company in Franklin Park, Illinois from 1990 through 1993, when he
retired. Prior to that, Mr. Reiter was president of the Reiter Dairy Company in
Akron, Ohio from 1968 through 1990.
DR. PAUL M. SUTTON was elected to the board in January 1997. Since 1987,
Dr. Sutton has served as president of P.M. Sutton & Associates, Inc., an
environmental process engineering company providing services to private industry
and government organizations.
MICHAEL J. VANTUSKO, a certified public accountant, joined Waterlink on
January 1, 1997 as chief financial officer. From October 1995 to December 1996,
he served as chief financial officer of Waxman Industries, Inc., a packager and
distributor of plumbing, electrical and hardware products. From February 1994 to
September 1995, Mr. Vantusko served as president, chief operating officer, and
chief financial officer of Overdrive Systems, Inc., an emerging software
developer of electronic books. From 1979 to 1994, he was employed by The
Fairchild Corporation (formerly Banner Industries, Inc.) where he held several
positions, including chief financial officer of Fairchild's largest wholly-owned
operating division from 1990 to 1994 and vice president of Fairchild from 1986
to 1990.
COMPOSITION OF OUR BOARD OF DIRECTORS AND COMMITTEES
Our board of directors is divided into three classes. Each class consists,
as nearly as possible, of one-third of the whole number of the board of
directors. Directors for each class are elected at the annual meeting of
stockholders held in the year in which the term for such class expires. Upon
election, directors will serve thereafter for three years, and hold office until
their successors are elected and qualified. There are currently six members of
the board of directors. The term of Class I directors will expire in 2001, the
term of Class II directors in 2002 and the term of Class III directors in 2000.
Our board of directors has three standing committees: an audit committee, a
compensation committee and a nominating committee.
During the fiscal year ended September 30, 1998, the board held five
meetings. Messrs. John R. Miller, Rollin S. Reiter and Dr. Paul M. Sutton
(Chairman) serve on the audit committee, Messrs. John R. Miller, Robert P.
Pinkas, Rollin S. Reiter (Chairman) and Dr. Paul M. Sutton serve on the
compensation committee and Messrs. John R. Miller, Robert P. Pinkas and Dr. Paul
M. Sutton (Chairman) serve on the nominating committee. Each of the directors
attended 75% or more of all meetings of the board and of its committees of which
he was a member.
AUDIT COMMITTEE
The audit committee acts as a liaison between Waterlink's independent
auditors and the board of directors, reviews the scope of the annual audit and
the management letter associated therewith, reviews Waterlink's annual and
quarterly financial statements and reviews the sufficiency of Waterlink's
internal accounting controls. The audit committee held two meetings during
fiscal 1998.
COMPENSATION COMMITTEE
The general functions of the compensation committee include approval (or
recommendation to the board of directors) of the compensation arrangements for
senior management, directors and other key employees, review of benefit plans in
which officers
40
<PAGE> 44
and directors are eligible to participate and periodic review of the equity
compensation plans of Waterlink and the grants under such plans. The
compensation committee administers the 1997 omnibus incentive plan, the 1995
stock option plan, the 1997 non-employee director stock option plan and the
employee stock purchase plan. The compensation committee held two meetings
during fiscal 1998.
NOMINATING COMMITTEE
The nominating committee makes recommendations concerning the organization,
size and composition of the board of directors and its committees, proposes
nominees for election to the board of directors and its committees and considers
the qualifications, compensation and retirement of directors. The nominating
committee did not meet during fiscal 1998. The nominating committee will
consider nominations of persons for election as directors that are submitted by
stockholders in writing in accordance with requirements set forth in our
By-Laws.
DIRECTOR REMUNERATION
Directors who are employees of Waterlink receive no compensation, as such,
for service as members of the board of directors or any committees of the board
of directors.
Waterlink compensates only those directors who are not employees of
Waterlink for their participation as directors. They receive an annual retainer
of $10,000. In addition, they receive $750 for each meeting of the board of
directors (in excess of the four regularly scheduled meetings) or any committee
of the board attended by them (other than meetings of any committee on a day on
which the board also meets), and $250 for each additional telephonic meeting of
the board of directors or any committee of the board of directors. All directors
are reimbursed for out of pocket expenses incurred in attending meetings of the
board of directors or committees and for other expenses incurred in their
capacity as directors.
In addition, directors who are not Waterlink employees receive for each
year of service on the board of directors, options under our 1997 non-employee
director stock option plan. The per share exercise price of options granted
under the director plan is the fair market value of the common stock on the date
of grant. The exercise price for these options is payable in cash or in shares
of common stock valued at fair market value at the time of exercise, or a
combination of cash and shares. Waterlink may establish "cashless exercise"
procedures, to allow a director to exercise an option and arrange for a
simultaneous sale of the underlying common stock, with the exercise price being
paid from the proceeds of that sale. Options granted under the director plan
will expire ten years after the date of grant. Of the options, 25% may be
exercised after one year from the date of grant, 50% after two years, 75% after
three years and 100% after four years.
Messrs. Miller, Reiter and Sutton were each granted an option to purchase
3,000 shares of common stock in connection with his election to the board of
directors. In addition, on May 23 of each year, the anniversary of the date the
director plan became effective, each non-employee director who has served as a
director for at least six months is automatically granted an option to purchase
5,000 shares of common stock.
The director plan is administered by Waterlink's compensation committee.
Since the principal terms of the option grants are specified in the director
plan, the compensation committee has no discretion to select which directors
receive options, the number of shares of common stock subject to options or the
exercise price of options.
41
<PAGE> 45
During fiscal 1998 Waterlink paid $3,000 to Dr. Paul M. Sutton, a director,
for consulting services he performed.
EXECUTIVE COMPENSATION
The following table presents information regarding compensation we paid to
our chief executive officer and our other executive officers whose salary and
bonus together exceeded $100,000 in fiscal 1998. We refer to these individuals
collectively as the "Named Executive Officers." The compensation described in
the table does not include benefits which are generally available to all our
salaried employees and perquisites and other personal benefits which do not
exceed the lesser of $50,000 or 10% of the officer's salary and bonus shown in
the table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------- -----------------------
OTHER ANNUAL RESTRICTED SECURITIES
NAME AND COMPENSATION STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) AWARDS($) OPTIONS(#) COMPENSATION($)
- ------------------ ---- --------- -------- ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Theodore F. Savastano... 1998 $240,000 $ 45,000(3) -- -- -- --
Chairman of the 1997 $234,013 $125,000 $1,050,000(5) -- 100,000 $1,658,750(6)
Board of Directors 1996 $225,800 -- -- -- 100,000 --
T. Scott King(1)........ 1998 $108,750 $ 50,000(4) -- -- 400,000 $ 1,004(7)
Chief Executive 1997 -- -- -- -- -- --
Officer and 1996 -- -- -- -- -- --
President
Michael J. Vantusko..... 1998 $162,500 $ 40,000(3) -- -- 20,000 $ 1,425(7)
Chief Financial 1997 $123,500(8) $ 50,000 -- -- 225,000 $ 390(7)
Officer
1996 -- -- -- -- -- --
Chet S. Ross(2)......... 1998 $160,000 $ 45,000(3) -- -- -- $ 132,791(9)
Former Chief Executive 1997 $234,013 $125,000 -- -- 300,000 $ 620(7)
Officer and 1996 $225,800 -- -- -- 220,000 --
President
</TABLE>
- -------------------------
(1) The board elected Mr. King to be our president and chief executive officer
effective June 8, 1998. Salary and other compensation for 1998 represent
amounts from June 8, 1998 through September 30, 1998. For terms of Mr.
King's compensation, see "Employment Agreements," below.
(2) Effective June 5, 1998, Mr. Ross resigned as our president and chief
executive officer. The amounts shown as salary and bonus do not reflect
severance compensation paid to Mr. Ross during 1998 and described in
footnote 9 below.
(3) In January 1998 bonus payments were made which represent deferred payments
in connection with our initial public offering. No other bonus amounts were
earned or paid to these individuals during fiscal 1998.
(4) Mr. King's employment agreement provided for a bonus of $50,000 upon
signing. No other bonus amount was earned by or paid to Mr. King during
fiscal 1998.
(5) Represents $1,050,000 of gross-up payment for tax liabilities incurred by
Mr. Savastano upon exercise of the non-qualified stock options described in
footnote 6, below, which was paid to Mr. Savastano pursuant to his 1994
employment agreement with Waterlink.
(6) The amount shown represents compensation related to the exercise of 100,000
non-qualified stock options received by Mr. Savastano pursuant to the terms
of his 1994 employment agreement. The options were exercisable upon
consummation of our initial public offering. The compensatory amount was
determined by multiplying the
42
<PAGE> 46
number of options exercised by the difference between the market value at
the date of exercise ($16.6875) and the exercise price of $.10 per share.
(7) This represents Waterlink's "match" payment relating to our 401(k) Plan.
(8) This represents salary from January 1, 1997, the date Mr. Vantusko began
working for us.
(9) This represents payments of $130,000 made in accordance with Mr. Ross'
employment agreement of May 23, 1997 and with the agreement entered into in
June 1998 in connection with his resignation and $2,791 which represents
Waterlink's "match" payment relating to our 401(k) Plan.
STOCK OPTION GRANTS
The following table designates each grant of stock options made to the
Named Executive Officers during fiscal 1998. The per share exercise price of
options granted under our stock option plans is the fair market value of the
common stock on the date of grant. Waterlink has not yet granted stock
appreciation rights, or SARs. Amounts under the column heading "Potential
Realizable Value..." represent hypothetical gains that could be achieve for the
options if exercised at the end of the option term. The 5% and 10% assumed
annual rates of compounded stock price appreciation are mandated by the rules of
the SEC and do not represent our estimate or projection of future common stock
price growth. These amounts represent assumed rates of appreciation in the value
of our common stock from the fair market value on the date of grant. Actual
gains, if any, are dependent on the actual future performance of our common
stock which will benefit all stockholders.
OPTION GRANTS IN LAST
FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
NUMBER OF TOTAL OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO EXERCISE STOCKS PRICE APPRECIATION
UNDERLYING EMPLOYEES OF FOR OPTION TERM
OPTIONS FISCAL BASE PRICE EXPIRATION --------------------------
NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Theodore F. Savastano....... -- -- -- -- -- --
T. Scott King............... 400,000 50.0% $ 7.625 8/18/08 $1,918,129 $4,860,915
Michael J. Vantusko......... 20,000 2.5% $13.1875 4/3/08 $ 165,871 $ 420,350
Chet S. Ross................ -- -- -- -- -- --
</TABLE>
STOCK OPTION EXERCISES
The following table describes exercises of stock options during fiscal 1998
by each of the Named Executive Officers and their stock options outstanding as
of September 30, 1998. Waterlink has not granted stock appreciation rights. None
of the outstanding stock options are "in-the-money" since the exercise price of
all options are in excess of the market price for common stock on September 30,
1998.
43
<PAGE> 47
AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL AT FISCAL
SHARES YEAR-END(#) YEAR-END($)
ACQUIRED ON VALUE EXERCISABLE(E) EXERCISABLE(E)
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(U) UNEXERCISABLE(U)
- ---- ----------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Theodore F. Savastano.......... -- -- 100,000(E) --(E)
--(U) --(U)
T. Scott King.................. -- -- --(E) --(E)
400,000(U) --(U)
Michael J. Vantusko............ -- -- 100,000(E) --(E)
95,000(U) --(U)
Chet S. Ross................... 220,000 $756,563 300,000(E) --(E)
--(U) --(U)
</TABLE>
EMPLOYMENT AGREEMENTS
Mr. Savastano entered into an employment agreement with Waterlink in 1997
which provides for him to serve as chairman of the board for an initial term of
three years subject to automatic one-year extensions on each anniversary of the
agreement until mandatory retirement at age 65. He is paid an annual base salary
of $240,000. Mr. Savastano participates in Waterlink's annual incentive bonus
plan which entitles him to earn annually an amount ranging from zero to 150% of
his base salary if performance goals established by the board of directors are
achieved. If Mr. Savastano's employment is terminated without cause or if he
terminates his employment for good cause, he will receive an amount equal to the
present value of twice the sum of his base salary in effect when terminated and
the annual bonus paid to him for that fiscal year if calculable, and if not
calculable, then the bonus paid to him with respect to the prior fiscal year,
except during fiscal 1999, during which the annual bonus paid is deemed to be
equal to his base salary. If the payment is as a result of a change of control
and the termination occurs within one year of the change of control, the amount
payable to Mr. Savastano will be paid in a lump sum. In either event, if the
amounts payable to Mr. Savastano are "excess parachute payments" for federal tax
purposes, Mr. Savastano will be paid an additional amount to offset any taxes
payable with respect to the excess parachute payment and the additional payment.
He is also restricted from competing with Waterlink during the term of his
agreement and for 24 months following its termination. If a change of control of
Waterlink occurs during fiscal 1999 and Mr. Savastano had his employment
terminated without cause or he terminated his employment for good cause, he
would have been entitled to a payment of $1,025,000.
Mr. King entered into an employment agreement with Waterlink in 1998 which
provided for him to serve as president and chief executive officer for an
initial term of three years subject to automatic one-year extensions on each
anniversary of the agreement until mandatory retirement at age 65. He is paid an
initial annual base salary of $300,000. Mr. King participates in Waterlink's
annual incentive bonus plan which entitles him to earn annually an amount
ranging from zero to 150% of his base salary if performance goals established by
the board of directors are achieved. He was also paid a $50,000 signing bonus.
If Mr. King's employment is terminated without cause or if he terminates his
employment for good cause, he will receive an amount equal to the present value
of one
44
<PAGE> 48
and one-half times the sum of his base salary in effect when terminated and the
annual bonus paid to him with respect to that fiscal year if termination occurs
after the first four months of the fiscal year, and if termination occurs during
the first four months of a fiscal year, then the bonus, if any, paid to him with
respect to the fiscal year immediately preceding the year in which his
employment was terminated, except during fiscal 1999, during which the annual
bonus paid is deemed to be equal to his base salary. If any of the payments
payable to Mr. King under these circumstances are "excess parachute payments"
for federal tax purposes, Mr. King is to be paid an additional amount to offset
any tax payable with respect to the excess parachute payment and the additional
payment. He is also restricted from competing with Waterlink during the term of
his agreement and for 18 months following its termination. If a change of
control of Waterlink occurs during fiscal 1999 and Mr. King had his employment
terminated without cause or he terminated his employment for good cause, he
would have been entitled to a payment of $950,000. Mr. King was granted options
to purchase 400,000 shares of common stock at $7.625, which was then the fair
value. Those options vest in four equal installments beginning on May 21, 1999
subject to acceleration.
Mr. Vantusko entered into an agreement with Waterlink in 1997 which
provides for him to serve as chief financial officer for initial terms of three
years subject to automatic one-year extensions on each anniversary of the
agreement. He was paid an annual base salary of $150,000. Mr. Vantusko
participates in Waterlink's annual incentive plan which entitles him to earn
annually an amount ranging from zero to 150% of his base salary if performance
goals established by the board of directors are achieved. If Mr. Vantusko's
employment is terminated without cause or if he terminates his employment for
good cause, he will receive an amount equal to the sum of his base salary in
effect when terminated and the annual bonus paid to him for that fiscal year if
calculable, and if not calculable, then the bonus paid to him with respect to
the prior fiscal year, except during fiscal 1999, during which the annual bonus
paid is deemed to be equal to his base salary. He is also restricted from
competing with Waterlink during the term of his agreement and for 12 months
following its termination. If a change of control of Waterlink occurs during
fiscal 1999 and Mr. Vantusko had his employment terminated without cause or he
terminated his employment for good cause, he would have been entitled to a
payment of $425,000. In 1997, Mr. Vantusko was granted options to purchase
100,000 shares of common stock at $11.00 per share, the initial offering price
of the common stock sold in our initial public offering. This option vests in
four equal annual installments beginning on May 23, 1998, subject to
acceleration. Effective April 1, 1999, Mr. Vantusko's annual base salary was
increased to $200,000.
Chet Ross entered into an agreement with Waterlink to resign his employment
in June, 1998. Mr. Ross had served as president and chief executive officer
since 1995. Pursuant to the agreement, Mr. Ross's employment terminated on June
5, 1998 at which time he also resigned as a director. Mr. Ross will receive
$780,000 payable in 48 equal semi-annual installments. He also retained for up
to two years standard executive employee medical and similar benefits. Stock
options to purchase 300,000 shares of common stock granted to him in May 1997
with an exercise price of $11.00 per share, which options are exercisable until
January 10, 2000, subject to agreed-upon volume limitations, became vested. Mr.
Ross agreed to maintain as confidential information he had access to while
employed by Waterlink. Mr. Ross is restricted from competing with Waterlink
until June 4, 2000.
45
<PAGE> 49
BENEFIT PLANS
Waterlink currently has several stock option plans including our omnibus
incentive plan, 1995 stock option plan, employee stock purchase plan and 1997
non-employee director stock option plan. Our omnibus incentive plan, 1995 stock
option plan, stock purchase plan and director plan are intended to encourage
ownership of common stock by directors, officers and other key employees and
advisors of Waterlink, to encourage their continued employment with us and to
provide them with additional incentives to promote our success. Each of the
plans are administered by the compensation committee of the board of directors.
The compensation committee has the full power and authority, subject to the
provisions of each plan, to designate participants, grant awards and determine
the terms of all awards. Generally, all awards granted are subject to adjustment
upon a recapitalization, stock split, stock dividend, merger, reorganization or
other similar event affecting the common stock, subject to the terms of each
plan. Awards are not transferable, other than by will or the laws of descent and
distribution or, in certain circumstances, pursuant to a qualified domestic
relations order. An award may be exercised only by the holder or the holder's
representative in the event of death or disability. The board of directors may
amend each of the plans, but no amendment without the approval of the
stockholders may be made if stockholder approval is required under applicable
law. Additionally, no amendment may impair any rights of any holder of an award
previously granted under any plan without the holder's consent.
Upon the completion of this offering, by an amendment to Waterlink's
By-laws, no stock options can be granted to an officer with an exercise price
lower than the market price on the date of grant nor can the exercise price be
reduced, without the approval of the holders of a majority of Waterlink's voting
shares.
THE OMNIBUS INCENTIVE PLAN
GENERAL INFORMATION. Our omnibus incentive plan provides for compensatory
equity based awards. There are reserved for issuance an aggregate of up to
5,000,000 shares of common stock, or a lesser number calculated based upon a
formula using the number of awards granted under other benefit plans. Awards may
be granted for no consideration and consist of stock options, stock awards,
SARs, dividend equivalents, other stock based awards (such as phantom stock) and
performance awards consisting of any combination of the foregoing. The omnibus
plan was approved by our board of directors and stockholders in May 1997, and
again by our stockholders in January 1998 and will terminate on the tenth
anniversary of the date of approval by our board of directors.
STOCK AWARDS. Our compensation committee has the right to grant awards of
shares of common stock which are subject to such restrictions, including
restrictions on transferability and limitations on the right to vote or receive
dividends with respect to the restricted shares, and such terms regarding the
lapse of restrictions as the compensation committee deems appropriate.
Generally, upon termination of employment for any reason during the restriction
period, restricted shares will be forfeited to Waterlink.
SARS. Upon exercising an SAR, the holder will be paid the difference
between the fair market value of the common stock on the date of exercise and
the fair market value of the common stock on the date of the grant of the SAR,
less applicable withholding of Federal and state taxes. We may, at our election,
pay such difference in cash or in shares of common stock valued at the fair
market value of the common stock on the day preceding the date of payment. In no
event may (a) an aggregate payment by us during any fiscal year upon the
exercise of SARs exceed $100,000, or (b) a holder of an SAR,
46
<PAGE> 50
who is also an employee of Waterlink or our subsidiaries, exercise an SAR if the
aggregate amount to be received as a result of his or her exercise of SARs in
the preceding 12 month period exceeds such employee's current base salary, in
each case except as may otherwise be permitted by the compensation committee.
STOCK OPTIONS. The terms of specific options are determined by the
compensation committee. Generally, options will be granted at an exercise price
equal to at least 100% of fair market value of the common stock on the date of
grant. Each option will be exercisable after the period or periods specified in
the option agreement, which will generally not exceed 10 years from the date of
grant. Options may be issued in tandem with SARs as a performance award. Upon
the exercise of a tandem option, the related SAR will terminate, the value being
limited to the credit which can be applied only toward the purchase price of
common stock. Upon the exercise of an option, the option holder will pay to us
the exercise price plus the amount of the required Federal and state withholding
taxes, if any.
THE 1995 STOCK OPTION PLAN
GENERAL INFORMATION. Our 1995 stock option plan authorizes the grant to
officers, key employees, and directors of awards consisting of incentive stock
options and non-qualified stock options. There are 1,600,000 shares of common
stock reserved for issuance under the 1995 stock option plan. As of July 31,
1999, options for 1,008,075 shares were outstanding, options for 465,000 shares
had been granted and exercised, and options for 126,925 shares were unissued.
Our 1995 stock option plan terminates on February 1, 2005, although the
terms of any award may be amended in accordance with the 1995 stock option plan
at any date prior to the end of the term of such award. Any awards outstanding
at the time of termination of the 1995 stock option plan continue in full force
and effect according to the terms and conditions of the award and the 1995 stock
option plan.
STOCK OPTIONS. Our compensation committee may grant incentive stock
options, non-qualified stock options, or a combination of the two. The exercise
price of each incentive stock option may not be less than the fair market value
of the common stock at the date of grant. The exercise price of each incentive
stock option granted to any stockholder possessing more than 10% of the combined
voting power of all classes of capital stock of Waterlink or our subsidiaries on
the date of grant must not be less than 110% of the fair market value on that
date, and no such option may be exercisable more than five years after the date
of grant. The option price per share of any non-qualified stock option is
determined by the compensation committee on the date the option is granted.
Options granted are exercisable for a term of not more than ten years from the
date of grant.
THE EMPLOYEE STOCK PURCHASE PLAN
GENERAL INFORMATION. Except as discussed below, employees are eligible to
participate in the stock purchase plan if they are employed by Waterlink or any
of our subsidiaries and customarily work more than 20 hours per week and five
months per calendar year. There are reserved for issuance upon the exercise of
options to be granted under the stock purchase plan an aggregate of 500,000
shares of common stock, subject to adjustment upon the occurrence of certain
specific capitalization events. The stock purchase plan will terminate ten years
from the date of adoption, and an option shall not be granted under the stock
purchase plan after such date. Any options outstanding at the time of
termination of the stock purchase plan will continue in full force and effect
according to
47
<PAGE> 51
the terms and conditions of the stock purchase plan. As of July 31, 1999, 42,384
shares of common stock were purchased pursuant to the stock purchase plan. Our
stock purchase plan was approved by the board of directors and stockholders in
May 1997 and again by the stockholders in January 1998.
The compensation committee administers the stock purchase plan and has sole
discretion to determine when offerings will be made under the stock purchase
plan, the employees to whom offerings will be made, the number of shares of
common stock to be made available in any such offering, the length of the period
pursuant to which employees can elect to participate in any offering and the
period pursuant to which installment obligations of the option price must be
paid.
TERMS OF OFFERINGS. On the first day of the purchase period, eligible
employees who elect to participate in an offering will receive, subject to
certain limitations set forth in the stock purchase plan, an option to purchase
the number of shares for which such employee has subscribed, at a price
determined by the compensation committee. These options will be automatically
exercised as of the last business day of the purchase period. Unless the
compensation committee determines otherwise, the option price will equal 85% of
the fair market value of the common stock on the first day of the purchase
period. No option may be granted to an employee who, immediately after the
option is granted, owns 5% or more of the value or voting power of all classes
of stock of Waterlink or our subsidiaries, after taking into account certain
attribution rules. The subscription period and purchase period of any offering
made under the stock purchase plan may not together exceed 27 months.
Subject to limitations set forth in the stock purchase plan, an employee is
permitted, at any time prior to the end of the purchase period, to terminate or
reduce his or her payroll deductions, to reduce his or her options to purchase
or to withdraw all or part of the amount in his or her account, without
interest. Upon the termination of the employee's employment with us prior to the
last day of the purchase period for any reason other than death or retirement,
the employee's only right will be to receive the amount of cash then in such
employee's account, without interest.
In the case of an unusual corporate event such as liquidation, merger,
reorganization, or other business combination, acquisition or change in control
of Waterlink through a tender offer or otherwise, the board of directors may, in
its sole discretion, determine to terminate the purchase period of any offering
made under the stock purchase plan as of the last day of the month during which
such unusual corporate event occurs, but in the event of any such termination,
an option holder will have the right, commencing at least five days prior to the
unusual corporate event, to either make a lump sum payment equal to the
remaining portion of the purchase price payable under his or her option or to
cancel his or her election to purchase shares pursuant to such option.
1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
GENERAL INFORMATION. Our 1997 non-employee director stock option plan is
intended to encourage our non-employee directors to acquire or increase their
ownership of common stock on reasonable terms and to foster a strong incentive
for non-employee directors to put forth maximum effort for our continued success
and growth. An aggregate of 150,000 shares of common stock have been reserved
for issuance under the director plan, subject to adjustment upon the occurrence
of certain specified capitalization events. The director plan became effective
as of June 27, 1997 and will terminate ten years from that date. Our director
plan was approved by the board of directors and stockholders in May 1997.
48
<PAGE> 52
The director plan is administered by the compensation committee. The
principal terms of the option grants are set forth in the director plan,
therefore, the compensation committee will have no discretion to select which
directors receive options, the number of shares of common stock subject to
options or the exercise price of options.
TERMS OF OPTIONS. Each non-employee director who becomes a member of the
board of directors shall automatically be granted an option to purchase 3,000
shares of common stock. In addition, on each anniversary of the date the
director plan became effective, each of our then non-employee directors who has
served as a director for at least six months shall automatically be granted an
option to purchase 5,000 shares of common stock. The per share exercise price of
options granted under the director plan will be the fair market value of the
common stock on the date of grant. Options granted under the director plan will
expire ten years after the date of grant, subject to earlier termination, and
vest equally over a period of four years.
In the event that a director ceases to be a member of the board of
directors, other than by reason of death or disability, an option may be
exercised by the director, to the extent the director was entitled to do so at
the time he or she ceased to be a member of the board of directors, at any time
within three months after he or she ceases to be a member of the board of
directors, but not beyond the term of the option. If the director dies or
becomes disabled while he or she is a member of the board of directors, or
within three months after he or she ceases to be a member of the board of
directors, the option may be exercised, to the extent the director was entitled
to do so at the time of his or her death, in full by his or her personal
representative or distributees at any time within one year after his or her
death or disability, but not beyond the term of the option. In the event of the
occurrence of a change in control, a director would be entitled to exercise the
option in full, but such option would terminate 90 days after the change in
control.
49
<PAGE> 53
COMMON STOCK OWNERSHIP
The following table sets forth the beneficial ownership of our common stock
as of August 31, 1999 by our executive officers of Waterlink, each of our
directors of Waterlink and all of our executive officers and directors of
Waterlink as a group, as well as by each person known by Waterlink to be the
beneficial owner of more than 5% of common stock. Beneficial ownership includes
shares of common stock subject to options, warrants, rights, or similar
obligations exercisable within 60 days of the date of determination for purposes
of computing the percentage of the person or group holding such options or
warrants. Except as noted, each stockholder has sole voting power and sole
investment power with respect to all shares beneficially owned by that
stockholder. The columns under the heading "Ownership After This Offering"
reflect the beneficial ownership of common stock as of August 31, 1999, modified
to include the additional beneficial ownership anticipated from this offering.
The percentage computations are based on 12,635,861 shares currently outstanding
and 18,935,861 outstanding as modified to include the shares anticipated to be
issued in this offering. An asterisk means ownership of less than one percent.
<TABLE>
<CAPTION>
CURRENT OWNERSHIP OWNERSHIP AFTER THIS OFFERING
-------------------------------------- --------------------------------------
SHARES OF PERCENT SHARES OF PERCENT
NAME AND ADDRESS COMMON STOCK OF SHARES COMMON STOCK OF SHARES
OF BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING BENEFICIALLY OWNED OUTSTANDING
- ------------------- ------------------ ----------- ------------------ -----------
<S> <C> <C> <C> <C>
Brantley Venture Partners III, L.P. 2,304,459(3) 17.81% 2,304,459(3) 11.98%
20600 Chagrin Blvd
Suite 1150
Cleveland, Ohio 44122
T. Rowe Price Associates, Inc. 1,208,300(4) 9.56% 1,874,650(4) 9.90%
100 East Pratt Street
Baltimore, MD 21202
Dimensional Fund Advisors Inc. 815,000(5) 6.45% 815,000(5) 4.30%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
State of Wisconsin Investment Board 749,500(6) 5.93% 3,179,500(6) 16.79%
P.O. Box 7842
Madison, WI 53707
Environmental Opportunities Management 676,000(7) 5.33% 676,000(7) 3.56%
Co., LLC
3100 Texas Commerce Tower
Houston, TX 77002
River Cities Capital Fund Limited 647,950(8) 5.12% 647,950(8) 3.42%
Partnership
221 East 4th Street
Suite 2250
Cincinnati, OH 45202
Theodore F. Savastano 1,009,164(9)(10)(11) 7.91% 1,009,164(9)(10)(11) 5.30%
T. Scott King(1) 125,909(9)(10) * 125,909(9)(10) *
Michael J. Vantusko 185,455(9)(10) 1.45% 185,455(9)(10) *
Robert P. Pinkas 2,407,709(9)(12) 18.46% 2,407,709(9)(12) 12.45%
Dr. Paul M. Sutton 15,050(9)(13) * 15,050(9)(13) *
Rollin S. Reiter 29,250(9) * 29,250(9) *
John R. Miller 9,250(9) * 9,250(9) *
Chet S. Ross(2) 603,362(9) 4.66% 603,362(9) 3.14%
All directors and executive officers
as a group (8 persons) 4,385,149(14) 31.97% 4,385,149(15) 21.91%
</TABLE>
- -------------------------
(1) The board of directors elected Mr. King to the position of president and
chief executive officer of Waterlink effective June 8, 1998.
50
<PAGE> 54
(2) Effective June 5, 1998, Mr. Ross resigned as president and chief executive
officer of Waterlink.
(3) Includes warrants to purchase 304,459 shares of common stock held by
Brantley Capital Corporation, an affiliate of Brantley Venture Partners III,
L.P. Robert P. Pinkas, a director of Waterlink, is managing general partner
of Brantley Venture Partners III, L.P. and has sole voting and investment
power with respect to these shares.
(4) Based on its filing on Form 13 G/A dated February 12, 1999. T. Rowe Price
Associates, Inc. has sole voting power with respect to 187,900 shares and
sole dispositive power with respect to 1,208,300 shares.
(5) Based on its filing on Form 13 G dated February 11, 1999. Dimensional Fund
Advisors Inc. is a registered investment advisor and an investment manager
for investment companies and other investment vehicles. All of the indicated
shares are owned by those investment companies and investment vehicles.
Dimensional has disclaimed beneficial ownership of those securities.
(6) Based on its filing on Form 13 G dated February 2, 1999.
(7) Includes warrants issued to entities to purchase an aggregate of 51,000
shares of common stock, as to which entities Environmental Opportunities
Management Co., LLC is the general partner and has sole voting and
investment power with respect to these shares. Waterlink has been advised
that Sanders Morris Mundy Inc., one of the underwriters of Waterlink's
initial public offering, in 1997, owns a 75% interest in, and thereby
controls, Environmental Opportunities Management Co. In this offering,
Sanders Morris Mundy Inc. is purchasing 1,070,000 shares for certain of its
discretionary accounts, which accounts do not include Environmental
Opportunities Management Co., LLC or its related entities, which would
result in Sanders Morris Mundy Inc. being deemed to control 1,746,000 shares
or 9.22% after the transactions.
(8) Includes warrants to purchase 22,950 shares of common stock. Waterlink has
been advised that Mayson, Inc., an Ohio corporation, is the general partner
of the partnership which is the general partner of River Cities Capital Fund
Limited Partnership and that Mr. Edwin T. Robinson and Mr. R. Glen Mayfield
(both of 221 East 4th Street, Suite 2250, Cincinnati, OH 45202) are the sole
officers, directors and shareholders of Mayson, and each has shared voting
and investment power with respect to these shares.
(9) Includes options for the indicated optionholder to purchase the indicated
shares of common stock, which options are fully vested:
<TABLE>
<S> <C>
Theodore F. Savastano....................................... 100,000
T. Scott King............................................... 100,000
Michael J. Vantusko......................................... 130,000
Robert P. Pinkas............................................ 101,250
Dr. Paul M. Sutton.......................................... 4,250
Rollin S. Reiter............................................ 4,250
John R. Miller.............................................. 4,250
Chet S. Ross................................................ 300,000
</TABLE>
(10) Includes warrants to purchase the indicated shares of common stock:
<TABLE>
<S> <C>
Theodore F. Savastano....................................... 16,364
T. Scott King............................................... 10,909
Michael J. Vantusko......................................... 5,455
</TABLE>
(11) Mr. Savastano's business address is 4100 Holiday Street, N.W., Canton, OH,
44718.
(12) Includes shares, including the 304,459 warrants referred to in footnote 3
above, which are held by Brantley Venture Partners III, L.P., of which Mr.
Pinkas is managing general partner. Mr. Pinkas's business address is 20600
Chagrin Blvd., Suite 1150, Cleveland, OH 44122.
(13) Dr. Sutton disclaims beneficial ownership of 100 shares of common stock
held by a member of his family.
51
<PAGE> 55
(14) Includes options to purchase 744,000 shares of common stock, which are
fully vested, and 337,187 warrants (as indicated above). Includes the
former president and chief executive officer as part of the group. If he
was excluded, the group would consist of seven persons and would
beneficially own 3,781,787 shares of common stock or 27.57%.
(15) Includes options to purchase 744,000 shares of common stock, which are
fully vested, and 337,187 warrants (as indicated above). Includes the
former president and chief executive officer as part of the group. If he
was excluded, the group would consist of seven persons and would
beneficially own 3,781,187 shares of common stock or 18.89%.
52
<PAGE> 56
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 40,000,000 shares of common stock,
par value $.001 per share, and 10,000,000 shares of preferred stock, par value
$.001 per share. We believe that the following summary reflects all of the
material terms and provisions of our capital stock. Nevertheless, we encourage
you to read our fifth amended and restated certificate of incorporation and
amended and restated bylaws, each of which is an exhibit to the registration
statement of which this prospectus is a part.
COMMON STOCK
VOTING RIGHTS. The holders of common stock are entitled to one vote for
each share held by them upon all matters to be voted on by stockholders. The
holders of common stock are not entitled to cumulative votes in the election of
directors.
DIVIDEND RIGHTS. The holders of common stock are entitled to receive
dividends out of assets legally available therefor, at such times and in such
amounts as the board of directors from time to time may determine, subject to
any preferences or rights of any outstanding preferred stock.
OTHER RIGHTS. In the event of liquidation, dissolution or winding up of
the affairs of Waterlink, the holders of common stock would be entitled to share
ratably in all assets of Waterlink remaining available for distribution to them
after payment of all of our liabilities and the payment of any liquidation
preference to any outstanding preferred stock. The holders of common stock have
no preemptive rights, redemption rights, or conversion rights, and are not
entitled to the benefits of any sinking fund provisions. Each outstanding share
of common stock is, and all shares of common stock outstanding upon the
completion of this offering will be upon payment therefor, duly and validly
issued, fully paid and nonassessable.
PREFERRED STOCK
Our board of directors has the authority, without any further vote or
action by the stockholders, to issue up to 10,000,000 shares of preferred stock
from time to time in one or more series and to fix the number of shares,
designations, rights, voting powers, preferences and limitations of that
preferred stock, including series 1 preferred stock authorized in connection
with the stockholders rights plan described below.
Although it is not possible to state the effect that any issuance of
preferred stock might have on the rights of holders of common stock, the
issuance of preferred stock may have one or more of the following effects:
- restrict common stock dividends if preferred stock dividends have not
been paid;
- dilute the voting power and equity interests of holders of common stock
to the extent that any preferred stock series has voting rights or is
convertible into common stock; or
- prevent current holders of common stock from participating in the
distribution of Waterlink's assets upon liquidation until any liquidation
preferences granted to holders of preferred stock are satisfied.
53
<PAGE> 57
In addition, the issuance of preferred stock may discourage bids for the
common stock at a premium over the market price and could have a material
adverse effect on the market value of the common stock. Our board of directors
does not presently intend to issue any shares of preferred stock, other than in
connection with the stockholders rights plan, referred to below.
REGISTRATION RIGHTS AGREEMENTS
Pursuant to the terms of a registration rights agreement among us and some
of our stockholders, holders of approximately 4,637,573 shares of common stock
or securities exercisable for common stock may require us to register their
shares of common stock under the Securities Act. These stockholders included
Theodore F. Savastano, our chairman of the board, and Brantley Venture Partners
III, L.P., River Cities Capital Fund Limited Partnership and Environmental
Opportunities Management Co., LLC, some of our significant stockholders. In
addition, if we propose to register any shares of common stock under the
Securities Act, either for our own account or for the account of other security
holders, these stockholders are entitled to receive notice of that registration
and may include their shares in that registration. These registration rights are
subject to customary conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares of common stock to be
included in the registration, as well as to limit the number held by security
holders with registration rights to be included in that registration. We are
generally required to pay all registration expenses relating to any
registration.
STOCKHOLDER RIGHTS PLAN
Our board of directors has adopted a stockholder rights plan. The rights
plan is designed to help insure that all stockholders of Waterlink receive fair
value for their shares of common stock in the event of any proposed takeover of
Waterlink and to guard against the use of partial tender offers or other
coercive tactics to gain control of Waterlink without offering fair value to
Waterlink's stockholders. The rights will cause substantial dilution to any
acquiring person that attempts to acquire Waterlink on terms not approved by the
board of directors. The rights should not interfere with any merger or other
business combination approved by the board of directors since, subject to
limitations, we may redeem the rights prior to the time that any person or group
has become an acquiring person.
Each outstanding share of common stock, including those offered hereby,
includes one right. The right entitles its holder to purchase from Waterlink one
one-hundredth of a share of the series 1 preferred stock at a purchase price of
$65.00, subject to adjustment. The description and terms of the series 1
preferred stock are in the rights agreement between us and American Stock
Transfer & Trust Company, as rights agent, which is filed as an exhibit to the
registration statement of which this prospectus is a part and is incorporated
herein by reference. The rights are not now exercisable, and may never be
exercisable. The rights will expire on the earlier of (a) May 23, 2007, unless
extended, or (b) their redemption or exchange as described below. Until a right
is exercised, it confers no rights to a stockholder.
In general, until the rights are exercisable, redeemed or exchanged, each
right will trade together with and cannot be separated from the underlying share
of common stock
54
<PAGE> 58
on which the right was declared. The rights will separate from the common stock
if there is a "distribution date." A distribution date would occur on the
earlier of:
- the first public announcement that a person or group, including any
affiliate of such person or group, (such person or group, subject to
certain exemptions, being an "acquiring person") acquired or has obtained
the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of common stock; or
- 10 days (or such later date specified by the board of directors prior to
the existence of an acquiring person) after the commencement of or the
first public announcement of an intent to commence a tender offer or
exchange offer that would result in a person or group becoming an
acquiring person.
The plan excludes people or entities who acquire shares directly from
Waterlink, and other specified exceptions, from being an "acquiring person."
After this offering, the State of Wisconsin Investment Board will also be
excluded from being an "acquiring person" until it acquires 20% or more of the
outstanding shares of common stock.
If a distribution date occurs, the rights would become exercisable and
separately tradable, and Waterlink would issue certificates for the rights as
soon as possible. Any rights which belong to an acquiring person are null and
void.
When there is an acquiring person, proper provision will be made so that
each holder of a right, other than such acquiring person, will have the right to
receive upon the exercise thereof, at the then current exercise price of the
right, and in lieu of series 1 preferred stock, that number of shares of common
stock which at that time would have a market value of two times the exercise
price of the right.
When there is an acquiring person and Waterlink is acquired in a merger or
other business combination transaction or 50% or more of its consolidated assets
or earning power are sold, proper provision will be made so that each holder of
a right will have the right to receive, upon the exercise at the then-current
exercise price of the right, that number of shares of common stock of the
acquiring company which at the time of the transaction will have a market value
of two times the exercise price of the right.
The amount of series 1 preferred stock that the holder of a right is
entitled to receive upon exercise of the right and the purchase price payable
upon exercise of the right are both subject to adjustment. With certain
exceptions, no adjustment in the exercise price will be required until
cumulative adjustments require an adjustment of at least 1% in such exercise
price.
Any rights that are at any time beneficially owned by an acquiring person,
or any affiliate or associate of an acquiring person, will be null and void and
nontransferable.
The board of directors may redeem the rights in whole, but not in part, at
a redemption price of $.01 per right, at any time before a distribution date.
Immediately upon the order of redemption of the rights by our board of
directors, and without any further action or notice, the right to exercise the
rights will terminate and the only right of holders of rights will be to receive
the redemption price. At any time after the time that any person or group
becomes an acquiring person and prior to the acquisition by the acquiring person
or group of 50% or more of the outstanding common stock, our board of directors
may exchange the rights, in whole or in part, at an exchange ratio of one share
of common stock per right.
55
<PAGE> 59
Before the distribution date, the rights agreement may be amended by
Waterlink without the approval of any holders of rights. After the distribution
date, the rights agreement may be amended by Waterlink without the approval of
any holders of rights in any manner which does not, in the good faith
determination of the board of directors, adversely affect the holders of the
rights, including amendments which add other events requiring adjustment to the
purchase price payable and the number of shares of series 1 preferred stock or
other securities issuable upon the exercise of the rights or which modify
procedures relating to the redemption of the rights. Under no circumstances may
the rights agreement be amended to decrease the stated redemption price or the
period of time remaining until the expiration date or to modify a time period
relating to when the rights may be redeemed at such time as the rights are not
then redeemable.
1997 WARRANTS
In March 1997, in connection with the execution of a note purchase
agreement, we entered into a warrant agreement where we agreed to issue warrants
to persons agreeing to purchase the notes. Each warrant entitles the holder to
purchase one share of common stock at an exercise price per share of $4.50. None
of the notes were issued but 125,000 warrants were issued, of which 62,500
warrants were outstanding on July 31, 1999. The current holders are Brantley
Capital Corporation, River Cities Capital Fund Limited Partnership and the
entities of which Environmental Opportunities Management Co., LLC is the general
partner. See "Common Stock Ownership". The warrants expire on March 6, 2002. The
exercise price of the warrants is subject to adjustment upon the occurrence of
certain events such as the issuance of securities at prices less than the
exercise price then in effect, or upon stock splits, stock dividends,
reorganizations, mergers or consolidations. As a result of an exchange of
$1,000,000 of convertible subordinated notes for 410,257 shares of common stock,
Waterlink and the holders of the outstanding warrants agreed that in lieu of any
adjustment of the purchase price, additional warrants to purchase an aggregate
of 65,000 warrants with an exercise price of $3.75 were issued to the holders,
pro rata. All other terms of these warrants were governed by the original
warrant agreement.
BANK WARRANTS
In February 1997, as additional consideration for Bank of America Illinois
entering into our credit agreement, we entered into a warrant agreement where we
issued 225,000 warrants to the bank. Each warrant entitles the holder to
purchase one share of common stock at an exercise price per share of $4.50. All
of the warrants were outstanding on July 31, 1999. The warrants expire on
February 19, 2002. The exercise price of the warrants is subject to adjustment
upon the occurrence of certain events such as the issuance of securities at
prices less than the market price, or upon stock splits, stock dividends,
reorganizations, mergers or consolidations.
GUARANTOR WARRANTS
In 1997, Brantley Venture Partners III, L.P., a significant stockholder of
Waterlink, had entered into a guaranty of Waterlink debt, along with other
significant shareholders, and had negotiated documentation satisfactory with our
senior lenders. In June 1999, in connection with the execution of the fifth
amendment of Waterlink's credit agreement, the bank insisted that we obtain
guarantees of the repayment of any additional borrowings. Upon the closing of
this offering and the application of an agreed amount of net proceeds to
permanently reduce outstanding bank debt, the guarantees will be released. We
had a very limited period of time to negotiate an amendment with our senior
lenders to enable us to borrow under the credit agreement and to avoid being in
default. The senior lenders advised us that a guaranty was required and that a
new guaranty from Brantley would be
56
<PAGE> 60
acceptable. Brantley agreed to assist us in this process of improving our
capital structure and providing a guarantee of $2.3 million of availability for
us from our senior lenders, but insisted that each of our executive officers
execute a guaranty and assist in this process. Theodore F. Savastano, T. Scott
King and Michael J. Vantusko, who are the chairman of the board, chief executive
officer and chief financial officer, respectively, of Waterlink, agreed to
guarantee, in the aggregate, up to an additional $.3 million. Robert P. Pinkas,
a director of Waterlink, is managing general partner of Brantley. We agreed to
grant these guarantors warrants to purchase, in the aggregate, up to 283,637
shares of common stock at an exercise price of $0.01 per share. The warrants are
immediately exercisable, expire if unexercised in five years, and contain
substantially the same terms as the 1997 warrants referred to above. The
guarantors, the amount of Waterlink senior indebtedness guaranteed and the
number of shares to be issuable to each upon exercise of warrants granted to
them as follows:
<TABLE>
<CAPTION>
INDEBTEDNESS NUMBER OF
GUARANTOR GUARANTEED SHARES
- --------- ------------ ---------
<S> <C> <C>
Brantley Venture Partners III, L.P............. $2,300,000 250,909
Theodore F. Savastano.......................... 150,000 16,364
T. Scott King.................................. 100,000 10,909
Michael J. Vantusko............................ 50,000 5,455
</TABLE>
CERTAIN ANTI-TAKEOVER CONSIDERATIONS
Our certificate of incorporation and amended and restated bylaws, contain
certain provisions which operate only with respect to an extraordinary corporate
transaction involving Waterlink or any of our subsidiaries and which are
designed to encourage any person who desires to take control of and/or acquire
Waterlink to enter into negotiations with the board of directors, thereby making
more difficult the acquisition of Waterlink by means of a tender offer, a proxy
contest or other non-negotiated means. In addition to encouraging any person
intending to attempt a takeover of Waterlink to negotiate with the board of
directors, these provisions also curtail that person's use of a dominant equity
interest to control any negotiations with the board of directors. Under those
circumstances, the board of directors may be better able to make and implement
reasoned business decisions and protect the interests of all of the
stockholders. A copy of our certificate of incorporation and bylaws are filed as
exhibits to the registration statement of which this prospectus is a part.
CLASSIFIED BOARD OF DIRECTORS. Our certificate of incorporation provides
for a classified board of directors in which directors are divided into three
classes. Each class is elected for a term of three years expiring at successive
yearly intervals. Additionally, subject to any rights of holders of preferred
stock, only a majority of the board of directors then in office has the
authority to fill any vacancies on the board of directors, including vacancies
created by an increase in the number of directors. Moreover, because our
certificate of incorporation provides for a classified board of directors,
Delaware law provides that the stockholders may remove a member of the board of
directors only for cause. The affirmative vote of the holders of at least 80% of
the voting power of stock entitled to vote generally in the election of
directors is required to remove a director for cause.
57
<PAGE> 61
AMENDMENT OF THE CERTIFICATE OF INCORPORATION AND BYLAWS. The certificate
of incorporation contains provisions requiring the affirmative vote of the
holders of at least 80% of the voting power of the stock entitled to vote
generally in the election of directors to amend certain provisions of our
certificate of incorporation and bylaws, including certain of the provisions
discussed above.
LIMITATIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL
MEETINGS. Stockholder action can be taken only at an annual or special meeting
of stockholders. Our certificate of incorporation prohibits stockholder action
by written consent in lieu of a meeting. Additionally, special meetings of
stockholders can be called only by a majority of the entire board of directors
or by the president or chairman of the board, subject to any rights of holders
of preferred stock. Stockholders are not permitted to call a special meeting or
to require that the board of directors call a special meeting of stockholders.
Moreover, the business permitted to be conducted at any special meeting of
stockholders is limited to the business brought before the meeting by or at the
direction of the board of directors.
NOMINATIONS OF DIRECTORS AND STOCKHOLDER PROPOSALS. Our bylaws establish
an advance notice procedure with regard to the nomination other than by, or at
the direction of, the board of directors of candidates for election as directors
and with regard to stockholder proposals to be brought before an annual meeting
of stockholders. The nomination procedure provides that only persons who are
nominated by, or at the direction of, the board of directors, or by a
stockholder who has given timely written notice to the secretary prior to the
meeting at which directors are to be elected, are eligible for election as
directors. The business procedure provides that to be properly brought before an
annual meeting, business must be specified in the notice of the annual meeting
given by or at the direction of the board of directors or brought before the
meeting by, or at the direction of, the board of directors or by a stockholder
who has given timely written notice to the secretary of that stockholder's
intention to bring that matter before the meeting. The notice from the
stockholder must also meet information requirements, as further set forth in our
bylaws.
If the officer presiding at the meeting determines that a person was not
nominated in accordance with the nomination procedure, or that other business
was not brought before the meeting in accordance with the business procedure,
that person is not eligible for election as a director, or such business is not
to be conducted at that meeting, as the case may be.
FAIR PRICE PROVISION. The certificate of incorporation, in the "fair price
provision," requires the approval by the holders of 80% of the voting power of
the outstanding capital stock of Waterlink entitled to vote on all matters
submitted to the stockholders, generally as a condition for mergers and certain
other business combinations involving Waterlink and any holder of more than 10%
of such voting power, or an "interested stockholder." The fair price provision
does not apply if the transaction is either (a) approved by a majority of the
members of the board of directors who are not affiliated with the interested
stockholder and who were directors before the interested stockholder became an
interested stockholder or (b) certain minimum price and procedural requirements
are met. If the transaction satisfies either of these criteria, the usual
requirement of applicable law, regulations and other provisions of our
certificate of incorporation would apply.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. We are a Delaware
corporation subject to section 203 of the Delaware General Corporation Law.
Section 203
58
<PAGE> 62
provides in general that an interested stockholder acquiring more than 15% of
the outstanding voting stock of a corporation subject to Section 203 but less
than 85% of such stock may not engage in certain business combinations (as
defined in Section 203) with the corporation for a period of three years after
the date on which the stockholder became an interested stockholder unless:
- prior to that date the corporation's board of directors approves either
the business combination or the transaction in which the stockholder
became an interested stockholder; or
- the business combination is approved by the corporation's board of
directors and authorized by a vote of at least 66 2/3% of the outstanding
voting stock of the corporation not owned by the interested stockholder.
A business combination includes mergers, asset sales and other transactions
resulting in financial benefit to a stockholder. Section 203 could prohibit or
delay mergers or other takeover or change of control attempts with respect to
Waterlink and, accordingly, may discourage attempts that might result in a
premium over the market price for the shares held by stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
59
<PAGE> 63
PLAN OF DISTRIBUTION
All of the shares being offered by this prospectus are being sold by
Waterlink to the following purchasers under securities purchase agreements dated
, 1999 at the price set forth on the cover of this prospectus:
<TABLE>
<CAPTION>
NAME OF PURCHASER NUMBER OF SHARES
----------------- ----------------
<S> <C>
State of Wisconsin Investment Board............ [](1)
T. Rowe Price Associates, Inc. ................ [](2)
Sanders Morris Mundy Inc....................... []
[others-to come]
Total................................ 6,300,000
</TABLE>
Waterlink has agreed to pay a fee of $ and $ to Sanders
Morris Mundy Inc. and , respectively, in connection with the
offering. Sanders Morris Mundy Inc. owns a 75% interest in, and thereby
controls, a significant stockholder of Waterlink and has also purchased shares
in this offering for certain discretionary accounts. Elben LLC acted as a
financial advisor to Waterlink in connection with this offering. Elben LLC has a
consulting arrangement with Sanders Morris Mundy Inc. Other than as disclosed
above, none of Waterlink or its officers, directors or principal stockholders
has any material relationship with the entities receiving payments in connection
with the offering.
- -------------------------
(1) The State of Wisconsin Investment Board has agreed to purchase that number
of shares of common stock equal to 2,000,000 shares plus ten percent of all
shares sold in this offering in excess of 2,000,000 shares.
(2) T. Rowe Price Associates, Inc. has agreed to purchase that number of shares
of common stock that, when added to the 1,208,300 shares owned prior to this
offering, will result in T. Rowe Price Associates, Inc. owning 9.9% of the
share outstanding after this offering. If 6,300,000 shares are sold in this
offering, T. Rowe Price Associates, Inc. will purchase 666,350 shares in the
offering.
The shares have been registered on Waterlink's registration statement on
Form S-1 (No. 333-84985) of which this prospectus forms a part. Pursuant to the
securities purchase agreement, Waterlink will pay all expenses incident to the
offering and sale of the shares to the purchasers. In some cases, Waterlink has
agreed to indemnify the purchasers against certain liabilities, including
liabilities under the Securities Act of 1933.
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Benesch, Friedlander, Coplan & Aronoff LLP, Cleveland,
Ohio.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at September 30, 1998 and 1997, and for each of the three
years in the period ended September 30, 1998, as set forth in their report.
We've included our financial
60
<PAGE> 64
statements in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
We file annual, quarterly and current reports and other information with
the SEC. You may access and read our SEC filings, including the complete
registration statement and all of the exhibits to it, through the SEC's Internet
site at www.sec.gov. This site contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. You may also read and copy any document we file at the SEC's public
reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room. Our filings will also be available after the offering at the offices of
the New York Stock Exchange, 20 Broad Street, New York, NY 10005.
We have filed with the SEC a registration statement under the Securities
Act with respect to the shares of common stock offered hereby. This prospectus,
which constitutes part of the registration statement, does not contain all of
the information set forth in the registration statement and the exhibits and
schedules thereto. Our descriptions in this prospectus of the provisions of
documents filed as exhibits to the registration statement or otherwise filed
with the SEC are only summaries of the documents' material terms. If you want a
complete description of the content of the documents, you should obtain the
documents yourself by following the procedures described above.
61
<PAGE> 65
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Waterlink, Inc. and Subsidiaries
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at September 30, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
September 30, 1998, 1997 and 1996......................... F-5
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1998, 1997 and 1996............. F-6
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996......................... F-7
Notes to Consolidated Financial Statements.................. F-8
Consolidated Balance Sheets at September 30, 1998 and June
30, 1999 (Unaudited)...................................... F-28
Consolidated Statements of Operations for the three months
ended June 30, 1998 and 1999 and for the nine months ended
June 30, 1998 and 1999 (Unaudited)........................ F-30
Consolidated Statements of Cash Flows for the nine months
ended June 30, 1998 and 1999 (Unaudited).................. F-31
Notes to Consolidated Financial Statements (Unaudited)...... F-32
</TABLE>
F-1
<PAGE> 66
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
F-2
<PAGE> 67
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.
F-3
<PAGE> 68
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- CONTINUED
- --------------------------------------------------------------------------------
<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.
F-4
<PAGE> 69
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.
F-5
<PAGE> 70
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.
F-6
<PAGE> 71
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.
F-7
<PAGE> 72
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.
F-8
<PAGE> 73
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is valued at
cost. Expenditures for repairs and maintenance are charged to operations as
incurred, while expenditures for additions and improvements are capitalized.
Depreciation is computed principally using the straight-line method over the
estimated useful lives of assets. The useful lives range from 30 to 40 years for
building and improvements; 5 to 10 years for machinery and equipment and 3 to 7
years for office equipment.
GOODWILL -- Goodwill represents costs in excess of net assets of acquired
businesses which are amortized using the straight-line method over a period of
40 years. The Company evaluates the realizability of goodwill based on the
undiscounted cash flows of the applicable businesses acquired over the remaining
amortization period. Should the review indicate that goodwill is not
recoverable, the Company's carrying value of goodwill would be reduced by the
estimated shortfall of the cash flows (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.
F-9
<PAGE> 74
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which changes the way public companies
report segment information in annual financial statements. The Statement also
requires public companies to report selected segment information in interim
financial reports to shareholders. The Statement is effective for the Company in
fiscal 1999 and restatement of comparative information for earlier years is
required in the initial year of adoption. 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.
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.
F-10
<PAGE> 75
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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
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
F-11
<PAGE> 76
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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>
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>
F-12
<PAGE> 77
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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 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.
F-13
<PAGE> 78
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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
F-14
<PAGE> 79
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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 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
F-15
<PAGE> 80
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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 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
F-16
<PAGE> 81
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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 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.
F-17
<PAGE> 82
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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.
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>
F-18
<PAGE> 83
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.
F-19
<PAGE> 84
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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 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
F-20
<PAGE> 85
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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 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
F-21
<PAGE> 86
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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>
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.
F-22
<PAGE> 87
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.
F-23
<PAGE> 88
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
plan, which covers 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%
</TABLE>
F-24
<PAGE> 89
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
COMPONENTS OF NET PERIODIC PENSION COST
Service cost $ 171
Interest cost 195
Expected return on plan assets (291)
------
Net periodic pension cost $ 75
======
</TABLE>
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
F-25
<PAGE> 90
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
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 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.
F-26
<PAGE> 91
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
Prior to 1997, the Company's operations were all domestic. Information by
geographic area for the 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.
F-27
<PAGE> 92
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, 1999
1998 (UNAUDITED)
------------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 3,925 $ 1,611
Accounts receivable:
Trade, net....................................... 29,906 30,806
Other............................................ 2,757 1,800
Inventories......................................... 22,160 20,793
Costs in excess of billings......................... 17,195 25,466
Refundable income taxes............................. 840 --
Other current assets................................ 3,111 3,192
-------- --------
Total Current Assets........................ 79,894 83,668
Property, plant and equipment, at cost:
Land, buildings and improvements.................... 4,095 2,852
Machinery and equipment............................. 8,293 7,423
Office equipment.................................... 2,899 3,312
-------- --------
15,287 13,587
Less accumulated depreciation....................... 1,557 2,490
-------- --------
13,730 11,097
Other assets:
Goodwill, net....................................... 79,936 77,373
Patents, net........................................ 1,408 1,335
Other assets........................................ 8,593 6,714
-------- --------
89,937 85,422
-------- --------
Total Assets................................ $183,561 $180,187
======== ========
</TABLE>
See notes to consolidated financial statements
F-28
<PAGE> 93
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- CONTINUED
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, 1999
1998 (UNAUDITED)
------------- -----------
(IN THOUSANDS EXCEPT SHARE
DATA)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade............................. $ 15,133 $ 19,166
Accrued expenses................................... 18,881 20,663
Additional purchase price payable.................. 1,000 500
Billings in excess of cost......................... 3,392 2,865
Accrued income taxes............................... 1,158 983
Deferred income taxes.............................. 164 120
Current portion of long-term debt.................. 9,429 8,444
-------- --------
Total Current Liabilities.................. 49,157 52,741
Long-term obligations:
Long-term debt..................................... 73,639 75,444
Convertible subordinated notes-related parties..... 4,250 3,250
Other long-term obligations........................ 1,637 1,103
-------- --------
79,526 79,797
Shareholders' equity:
Preferred Stock, $.001 par value, 10,000,000 shares
authorized, none issued and outstanding......... -- --
Common Stock, voting, $.001 par value,
authorized -- 40,000,000 shares, issued and
outstanding -- 12,225,604 shares at September
30, 1998 and 12,635,861 at June 30, 1999........ 12 13
Additional paid-in capital......................... 71,973 72,966
Accumulated other comprehensive income (loss)...... 231 (4,834)
Accumulated deficit................................ (17,338) (20,496)
-------- --------
Total Shareholders' Equity................. 54,878 47,649
-------- --------
Total Liabilities and Shareholders'
Equity.................................. $183,561 $180,187
======== ========
</TABLE>
See notes to consolidated financial statements
F-29
<PAGE> 94
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS-UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1998 1999 1998 1999
------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales............................ $34,937 $43,083 $94,267 $128,858
Cost of sales........................ 21,387 31,229 58,597 88,707
------- ------- ------- --------
Gross Profit......................... 13,550 11,854 35,670 40,151
Selling, general and administrative
expenses........................... 10,706 11,600 27,458 32,829
Special charges...................... 1,494 2,084 1,494 2,787
Amortization......................... 570 515 1,412 1,569
------- ------- ------- --------
Operating Income (Loss).............. 780 (2,345) 5,306 2,966
Other income (expense):
Interest expense................... (1,018) (1,702) (1,737) (5,092)
Interest income and other
items -- net.................... 145 (147) 126 (163)
------- ------- ------- --------
Income (Loss) Before Income Taxes.... (93) (4,194) 3,695 (2,289)
Income taxes......................... 75 367 1,631 869
------- ------- ------- --------
Net Income (Loss).................... $ (168) $(4,561) $ 2,064 $ (3,158)
======= ======= ======= ========
Earnings (Loss) per Common Share:
Basic.............................. $ (0.01) $ (0.36) $ 0.17 $ (0.25)
Assuming dilution.................. $ (0.01) $ (0.36) $ 0.16 $ (0.25)
Weighted Average Common Shares
Outstanding:
Basic.............................. 12,006 12,636 11,964 12,529
Assuming dilution.................. 12,006 12,636 12,641 12,529
</TABLE>
See notes to consolidated financial statements.
F-30
<PAGE> 95
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-------------------
1998 1999
-------- -------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 2,064 $(3,158)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Special charges........................................... 1,494 2,183
Depreciation and amortization............................. 2,400 2,962
Deferred income taxes..................................... 501 379
Changes in working capital:
Accounts receivable.................................... 6,103 (991)
Inventories............................................ (1,357) 40
Costs in excess of billings............................ (10,351) (9,128)
Refundable income taxes................................ 303 840
Other assets........................................... (6,355) 3,073
Accounts payable....................................... (973) 4,568
Accrued expenses....................................... 1,545 2,764
Billings in excess of cost............................. (1,125) (465)
Accrued income taxes................................... 1,427 (730)
-------- -------
Net cash provided (used) by operating activities............ (4,324) 2,337
INVESTING ACTIVITIES
Purchases of equipment...................................... (1,671) (1,470)
Proceeds from sale of building.............................. -- 519
Purchases of subsidiaries, net of cash acquired............. (52,667) (1,902)
-------- -------
Net cash used in investing activities....................... (54,338) (2,853)
FINANCING ACTIVITIES
Proceeds from long-term borrowings.......................... 67,176 3,106
Payments on long-term borrowings............................ (1,213) (2,341)
Proceeds from sale of common stock.......................... 456 --
-------- -------
Net cash provided by financing activities................... 66,419 765
Effect of exchange rate changes on cash..................... (1,091) (2,563)
-------- -------
Increase (decrease) in cash and cash equivalents............ 6,666 (2,314)
Cash and cash equivalents at beginning of period............ 2,482 3,925
-------- -------
Cash and cash equivalents at end of period.................. $ 9,148 $ 1,611
======== =======
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE> 96
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE THREE AND NINE-MONTH PERIODS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine-month periods ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ending September 30, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1998.
2. INVENTORIES
Inventories consisted of the following (thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1999
------------- --------
<S> <C> <C>
Raw materials and supplies............. $11,843 $12,793
Work in process........................ 3,500 3,131
Finished goods......................... 6,817 4,869
------- -------
$22,160 $20,793
======= =======
</TABLE>
3. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is
as follows (thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1999
------------- --------
<S> <C> <C>
Contract costs incurred to date........ $57,435 $63,218
Estimated profits...................... 24,497 25,691
------- -------
Contract revenue earned to date........ 81,932 88,909
Less billings to date.................. 68,129 66,308
------- -------
Cost and estimated earnings in excess
of billings, net..................... $13,803 $22,601
======= =======
</TABLE>
F-32
<PAGE> 97
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above amounts are included in the accompanying consolidated balance
sheets as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1999
------------- --------
<S> <C> <C>
Costs in excess of billings............ $17,195 $25,466
Billings in excess of cost............. 3,392 2,865
------- -------
$13,803 $22,601
======= =======
</TABLE>
4. CAPITALIZATION
During December 1998 the Company entered into an agreement with one of its
existing holders of convertible subordinated notes to reduce the note principal
amount from $2,000,000 to $1,000,000 in exchange for 410,257 shares of Common
Stock. In addition, the maturity date of the $1,000,000 principal amount of the
convertible subordinated note was extended from September 30, 1999 to October 1,
2000; the interest rate on the remaining note balance was increased from 5.81%
to 6.06%; and the conversion rate was decreased from $22.25 per share to $6.75
per share.
A progression of shareholders' equity follows (thousands of dollars):
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE TOTAL
COMMON PAID-IN INCOME ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL (LOSS) DEFICIT EQUITY
------ ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at September 30,
1998.................. $12 $71,973 $ 231 $(17,338) $54,878
Net loss................ (3,158) (3,158)
Foreign currency
translation
adjustments........... (5,065) (5,065)
-------
Comprehensive
loss............. (8,223)
Issuance of 410,257
shares of common stock
in connection with the
conversion of
convertible
subordinated notes.... 1 999 1,000
Other................... (6) (6)
--- ------- ------- -------- -------
Balance at June 30,
1999.................. $13 $72,966 $(4,834) $(20,496) $47,649
=== ======= ======= ======== =======
</TABLE>
The comprehensive loss for the three months ended June 30, 1999 and 1998
was $6,654,000 and $673,000, respectively. Comprehensive income for the nine
months ended June 30, 1998 was $552,000.
F-33
<PAGE> 98
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. 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 restructure the Company from a holding company with 23 operating companies
into five integrated divisions that focus on specific market segments. The 1999
Plan, has eliminated redundant costs and is intended to 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. In conjunction with the 1999
Plan, the Company expected to reduce its domestic and foreign workforce by
approximately 75 people and eliminate certain administrative and
production-related functions no longer required. Through June 30, 1999, 114
employees have been terminated in conjunction with the 1999 Plan. Of the 114
employees terminated, 90 people have received, or are currently receiving,
termination benefits in accordance with Company guidelines or local laws.
Further, six facilities have been closed or relocated as of June 30, 1999, with
one additional facility scheduled to relocate prior to September 30, 1999. Other
costs associated with the 1999 Plan of approximately $1,700,000, which did not
meet the criteria for recognition at September 30, 1998, are expected to be
incurred during fiscal 1999, of which, the Company incurred $784,000 and
$1,487,000 during the quarter and nine months ended June 30, 1999, respectively.
The following table summarizes the provisions, payments and the unpaid
balances associated with the 1999 Plan. The unpaid balances, or reserve, are
expected to be utilized through fiscal 1999 and 2000:
<TABLE>
<CAPTION>
TERMINATION OTHER EXIT
BENEFITS COSTS TOTAL
----------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision in fiscal 1998..................... $ 1,076 $ 1,782 $ 2,858
Payments in fiscal 1998...................... (120) (480) (600)
------- ------- -------
Reserve at September 30, 1998.............. 956 1,302 2,258
Provision in fiscal 1999..................... 596 891 1,487
Payments in fiscal 1999...................... (1,150) (1,426) (2,576)
------- ------- -------
Reserve at June 30, 1999................... $ 402 $ 767 $ 1,169
======= ======= =======
</TABLE>
In conjunction with its 1999 Plan, the Company determined that it would
exit the acquired Bioclear business. During the fourth quarter of fiscal 1998,
the assets of Bioclear, primarily related to its manufacturing facility located
in Winnipeg, Canada, were reduced to their estimated net realizable value. Based
on the status of the sales process and Waterlink's June 1999 decision regarding
how to best dispose of the facility, the Company further reduced the estimated
net realizable value of these remaining assets by $1,300,000 and recorded this
change in accounting estimate during the quarter ended June 30, 1999.
As a result of the reduction in estimated net realizable value of the
remaining Bioclear assets, together with the termination and facility
consolidation costs previously discussed, the Company has recorded special
charges totaling $2,084,000 and $2,787,000 during the quarter and nine months
ended June 30, 1999, respectively.
F-34
<PAGE> 99
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company incurred special charges of $1,494,000 during the three and
nine months ended June 30, 1998 primarily attributable to contractual
obligations to its former chief executive officer, who resigned in June 1998,
and costs necessary to recruit executives to Waterlink.
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and assuming
dilution earnings (loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1998 1999 1998 1999
------- ------- ------ -------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
earnings (loss) per share-net
income (loss)................ $ (168) $(4,561) $2,064 $(3,158)
======= ======= ====== =======
Denominator:
Average shares outstanding --
basic........................... 12,006 12,636 11,964 12,529
Effect of dilutive securities:
Stock options and warrants... -- -- 677 --
------- ------- ------ -------
Denominator for diluted earnings
(loss) per share -- weighted
average shares and assumed
conversions....................... 12,006 12,636 12,641 12,529
======= ======= ====== =======
Earnings (loss) per common share:
Basic........................ $ (0.01) $ (0.36) $ 0.17 $ (0.25)
Assuming dilution............ $ (0.01) $ (0.36) $ 0.16 $ (0.25)
</TABLE>
For all periods presented, certain issuances of potential common stock and
certain outstanding convertible subordinated notes were excluded from the
computation of earnings per share, assuming dilution, since their inclusion in
the computation would have an anti-dilutive effect.
7. SUBSEQUENT EVENTS
On July 9, 1999, Waterlink entered into an amendment of its $87 million
domestic credit facility. This amendment was effective on June 29, 1999 and
waives until October 8, 1999 certain financial covenants that were not otherwise
satisfied at June 30, 1999, assuming Waterlink realizes not less than $700,000
of operating income on a monthly basis for the remainder of fiscal 1999. As part
of this amendment, $2.6 million of borrowings were made available to Waterlink
as the result of third party guarantees.
In connection with assisting in the process of improving our capital
structure by providing the $2.6 million of guarantees, Waterlink granted the
guarantors warrants to purchase, in the aggregate, up to 283,637 shares of
Waterlink common stock at an exercise price of $.01 per share. The warrants are
immediately exercisable and expire if unexercised
F-35
<PAGE> 100
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in five years. Of the 283,637 warrants, 125,000 were issued at the time the
guarantees were issued and the remaining 158,637 warrants will be issued upon
shareholder approval. The 125,000 warrants were valued at $2.74 per warrant and
the remaining 158,637 will not be valued until shareholder approval is obtained.
F-36
<PAGE> 101
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,300,000 SHARES
WATERLINK, INC.
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 102
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $4,926
NYSE Listing Fee............................................ 25,050
Printing Expenses........................................... 50,000
Accounting Fees and Expenses................................ 50,000
Legal Fees and Expenses..................................... 175,000
Financial Advisory and Related Fees and Expenses............ 575,000
Miscellaneous............................................... 65,024
--------
Total.................................................. $945,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") permits
the indemnification of the directors and officers of Waterlink. Our Bylaws
provide that it will indemnify the officers, directors, employees and agents of
Waterlink to the extent permitted by the DGCL.
The certificate of incorporation provides for the indemnification of
directors and officers of Waterlink, and persons who serve or served at the
request of Waterlink as a director, officer, employee or agent of another
corporation, including service with respect to employee benefit plans, against
all expense, liability and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties in amounts paid or to be paid in settlement)
reasonably incurred with respect to any action, suit or proceeding, whether
civil, criminal, administrative, or investigative, provided, however, Waterlink
shall indemnify any such person seeking indemnification in connection with a
proceeding initiated by such person only if such proceeding was authorized by
Waterlink's board. In the event a claim for indemnification by any person has
not been paid in full by Waterlink after written request has been received by
Waterlink, the claimant may at any time thereafter bring suit against Waterlink
to recover the unpaid amount of the claim and, if successful in whole or in
part, the claimant shall be entitled to be paid also the expense of prosecuting
such claim. The right to indemnification conferred in the certificate of
incorporation is a contract right and shall include the right to be paid by
Waterlink the expenses incurred in defending any such proceeding in advance of
its final disposition. Waterlink maintains insurance, at its expense, to protect
itself and any director, officer, employee or agent of Waterlink against any
such expense, liability or loss, whether or not Waterlink would have the power
to indemnify such person against such expense, liability or loss under state
law.
II-1
<PAGE> 103
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years Waterlink issued and sold shares of its capital
stock without registration under the Securities Act of 1933, as amended, in
reliance on the exemption provided therefrom by Section 4(2) of the Secondary
Act, in the transactions described below. In each transaction, Waterlink did not
engage any underwriter, broker or placement agent. In connection with each such
transaction, Waterlink obtained appropriate investment representations
supporting its reliance on such exemption from registration. In such
transactions (other than in connection with the Water Equipment Technologies,
Inc. acquisition), Waterlink obtained representations from the investors that
each was an "accredited investor," as defined in Regulation D under the Act. In
such transactions, appropriate disclosure was provided to each investor to
support Waterlink's reliance on the exemption from registration provided by
Section 4(2) of the Act.
On September 30, 1996, Waterlink issued 499,996 shares of common stock in
connection with its acquisition of all of the issued and outstanding capital
stock of Water Equipment Technologies, Inc. The shares of common stock were
issued to 11 shareholders of Water Equipment upon the merger of Water Equipment
with and into a wholly-owned subsidiary of Waterlink. The total dollar value of
the 499,996 shares of common stock issued to the shareholders of Water Equipment
in the merger was $2,124,983. On February 28, 1997, the Company issued 111,788
additional shares of common stock to the shareholders of Water Equipment in
payment of an adjustment to the purchase price paid by Waterlink for the issued
and outstanding shares of Water Equipment. The total dollar value of the 111,788
shares of common stock issued to the shareholders of Water Equipment as purchase
price adjustment was $475,099 (or $4.25 per share).
On October 15, 1996, Waterlink issued 100,000 shares of common stock to
Lawrence M. Schmid on his conversion of a convertible subordinated promissory
note in the principal amount of $400,000 at a conversion price of $4.00 per
share of common stock. The note was issued to Schmid as part of the purchase
price for Waterlink's acquisition of certain patents and related know-how owned
by Schmid and acquired by Waterlink as part of its acquisition of all of the
business, assets and goodwill of Aero-Mod Incorporated and Resi-Tech Inc.
On January 6, 1997, Waterlink issued 500,000 shares of common stock to Mark
E. Neville (350,000 shares) and Frederick J. Siino (150,000 shares) on their
conversion of a convertible subordinated promissory note in the principal amount
of $2,000,000 at a conversion price of $4.00 per share of common stock. The note
was issued to Mass Transfer Systems, Inc. as part of the purchase price for
Waterlink's acquisition of all of the business assets and goodwill of Mass
Transfer. The note was distributed to Messrs. Neville and Siino, the sole
shareholders of Mass Transfer, following completion of the acquisition.
On February 19, 1997, Waterlink issued 25,000 shares of common stock to
Wheat First Securities, Inc., a Custodian for L. Dean Hertert, IRA. Mr. Hertert
was a vice president of Waterlink. Mr. Hertert paid $106,250 for these shares.
On February 19, 1997, Waterlink granted Bank of America a warrant to
purchase 225,000 shares of common stock at a purchase price of $4.50 per share.
The warrant was issued as additional consideration for the provision of
Waterlink's credit facility with Bank of America. The warrant expires on
February 19, 2002.
II-2
<PAGE> 104
On March 12, 1997, in connection with its potential issuance of
subordinated notes in the principal amount of up to $10,000,000, Waterlink
issued to the potential purchasers (Brantley Capital Corporation, IPP95, L.P.,
River Cities Capital Fund Limited Partnership, National City Capital Corporation
and Environmental Opportunities Management Co., LLC) of the notes warrants to
purchase 125,000 shares of common stock. Each warrant entitles the holder to
purchase one share of common stock at an initial purchase price per share of
$4.50, as adjusted on the occurrence of certain events. On January 9, 1998,
IPP95, L.P. purchased 18,233 shares of common stock pursuant to its exercise of
its warrants, for which it delivered 6,767 warrants valued at $82,048.50 (or
$12.125 per share, representing the excess of $16.625 per share (the closing
price of common stock on the New York Stock Exchange on January 8, 1998) over
$4.50 per share (the initial purchase price for the warrants). On February 24,
1998, National City Capital Corporation purchased 27,233 shares of common stock
pursuant to its exercise of its warrants, for which it delivered 10,267 warrants
valued at $122,548.50 (or $11.9375 per share, representing the excess of
$16.4375 per share (the closing price of common stock on the New York Stock
Exchange on February 23, 1998) over $4.50 per share (the initial purchase price
for the warrants). As of April 15, 1999, as a result of an exchange of
$1,000,000 of convertible subordinated notes for 410,257 shares of common stock,
Waterlink and the holders of the outstanding warrants agreed that in lieu of any
adjustment of the purchase price, additional warrants to purchase an aggregate
of 65,000 warrants with an exercise price of $3.75 were issued to the holders,
pro rata. All other terms of these warrants were governed by the original
warrant agreement.
On March 14, 1997, Waterlink issued 50,000 shares of common stock to
Michael J. Vantusko. Mr. Vantusko is chief financial officer of Waterlink. Mr.
Vantusko paid $212,500 (or $4.25 per share) for these shares.
On April 3, 1997, Waterlink issued 25,000 shares of common stock to Rollin
S. Reiter. Mr. Reiter is a director of Waterlink. Mr. Reiter paid $106,250 (or
$4.25 per share) for these shares.
On April 11, 1997, Waterlink issued 10,000 shares of common stock to Dr.
Paul N. Sutton. Dr. Sutton is a director of Waterlink. Dr. Sutton paid $42,500
(or $4.25 per share) for these shares.
On April 14, 1997, Waterlink issued 5,000 shares of common stock to Mr.
John R. Miller. Mr. Miller is a director of Waterlink. Mr. Miller paid $21,250
(or $4.25 per share) for these shares.
On June 27, 1997, Waterlink issued 328,947 shares of common stock to the
four shareholders of Bioclear (David Romanow, Joe Romanow, Brian Topnik and
Robert Jenkyns) as part of the purchase price for Waterlink's acquisition of all
of the capital stock of Bioclear. The shares represented $5,000,000 (Canadian),
valued at the initial public offering price of Waterlink's common stock is
$11.00 per share.
On September 12, 1997, Waterlink issued convertible promissory notes in the
aggregate original principal amount of SEK 12,980,000 Swedish Kronor
(approximately US $1,671,000) to the shareholders of MEVA (Krister Lundberg,
Soren Andersson and Per Mellegard) as part of the purchase price for the
Company's acquisition of all the capital stock of MEVA. The principal amount of
the promissory notes is payable on September 12, 1999, with interest accruing at
the rate of three percent per annum, payable
II-3
<PAGE> 105
quarterly. The promissory notes are convertible by their holders, at any time,
into shares of common stock at an conversion price of $21.38 per share.
On September 30, 1997, Waterlink issued 41,095 shares of common stock to a
shareholder of Hycor (Philip A. Thompson) as part of the purchase price for
Waterlink's acquisition of all of the capital stock of Hycor. The shares
represented $750,000, valued at $18.25, the closing price of the common stock on
the New York Stock Exchange on September 29, 1997, the day immediately preceding
the acquisition. Waterlink also issued a promissory note in the aggregate
original principal amount of $2,250,000 to Philip A. Thompson as part of the
purchase price for such acquisition. The principal amount of the promissory note
is payable on September 30, 1999, with interest accruing at the rate of 5.81%
per annum, payable quarterly. The promissory note is convertible by its holder,
at any time, into shares of common stock at an conversion price of $22.25 per
share.
On February 19, 1998, Waterlink issued 928 shares of common stock to the
former shareholders of Waterlink Technologies in payment of an adjustment to the
purchase price paid by Waterlink 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).
On March 2, 1998, Waterlink issued promissory notes in the aggregate
principal amount of $2,250,000 to the six former shareholders of Chemitreat
Services, Inc., d.b.a. C'treat Offshore Watermakers, as part of the purchase
price for Waterlink's acquisition of all of the capital stock of Chemitreat
Services. The principal amount of the promissory notes are payable on March 2,
2001, with interest payable on a quarterly basis at 5.54% per annum. The
promissory notes are convertible by the holders, at any time, into shares of
common stock. The conversion price initially was $19.5328 per share and was
adjusted to $15.6263 on June 17, 1998 in accordance with the terms of the notes
that required an adjustment to the conversion price since the fair value of
Waterlink common stock decreased by more than 20% from March 2, 1998 to June 1,
1998.
On November 23, 1998, Waterlink issued 410,257 shares of common stock to
Philip A. Thompson as payment of $1,000,000 principal amount of the promissory
note issued on September 30, 1997. In addition, the original promissory note was
amended for the remaining principal amount of $1,000,000, which is payable on
October 1, 2000. Interest will accrue at the rate of 6.06% per annum, payable
quarterly. The promissory note is convertible by its holder, at any time, into
shares of common stock at a conversion price of $6.75 per share.
On July 9, 1999, Waterlink granted Brantley Venture Partners III, L.P.,
Theodore F. Savastano, T. Scott King and Michael J. Vantusko warrants to
purchase 250,909, 16,364, 10,909 and 5,455, respectively, shares of common stock
at a purchase price of $0.01 per share. The warrants were issued in connection
with assisting in the process of improving our capital structure by guaranteeing
up to $2.6 million of indebtedness under the bank credit agreement. The warrant
expires on July 9, 2004.
As of the date of this registration statement, Waterlink has granted
options to acquire an aggregate 1,525,300 shares of the Common Stock pursuant to
its 1995 Stock Option Plan. In addition, Waterlink issued 465,000 shares of the
common stock to 17 employees of Waterlink upon the exercise of stock options
granted to them under the 1995 Stock Option Plan: (i) On March 1, 1996, Nancy A.
Hamerly, the former chief financial officer of Waterlink, purchased 5,000 shares
of the common stock for an aggregate purchase price
II-4
<PAGE> 106
of $500 (or $.10 per share), (ii) on June 1, 1996 Chet S. Ross purchased 45,000
shares of the common stock for an aggregate purchase price of $4,500 (or $.10
per share), (iii) on January 3, 1997, Nancy A. Hamerly purchased 15,000 shares
of the common stock for an aggregate purchase price of $1,500 (or $.10 per
share), (iv) on March 10, 1997 Donald A. Weidig purchased 2,500 shares of common
stock for an aggregate purchase price of $250 (or $.10 per share), (v) on March
31, 1997, Nancy A. Hamerly purchased 10,000 shares of the common stock for an
aggregate purchase price of $40,000 ($4.00 per share), (vi) on June 1, 1997,
Chet S. Ross purchased 45,000 shares of common stock for an aggregate purchase
price of $4,500 (or $.10 per share), (vii) on July 8, 1997, Chet S. Ross
purchased 90,000 shares of common stock for an aggregate purchase price of
$9,000 (or $.10 per share), (viii) during fiscal 1997, several non-officer
employees purchased in the aggregate 22,000 shares of common stock for an
aggregate purchase price of $28,500 (or $1.30 per share), (ix) during fiscal
1998, several non-officer employees purchased, in the aggregate, 10,500 shares
of common stock for an aggregate purchase price of $32,000 (or $3.05 per share)
and (x) during fiscal 1998, Chet S. Ross purchased, in the aggregate, 220,000
shares of common stock for an aggregate purchase price of $880,000 (or $4.00 per
share).
<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)
3.2A Form of Amendment to Amended and Restated By-Laws of
Waterlink, to become effective upon the closing of this
offering.
*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)
4.1A Form of Amendment to Rights Agreement, to become effective
upon the closing of this offering.
*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)
</TABLE>
II-5
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- -------- -------------------
<C> <S>
*4.5 Registration Rights Agreement dated as of September 30,
1996, between the Company, Lawrence Stenger, Theresa
Stenger, Ronald Jaworski, Christine Jaworski, John Stenger,
Dawn P. Stenger, Scott Stenger, Kristie D. Stenger, Jorg
Menningman, Michael Mudrick, Robert Young and Gary Prae
(filed as an exhibit to the Company's Registration Statement
on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.1 Employment Agreement, dated May 23, 1997, between the
Company and Chet S. Ross (filed as an exhibit to the
Company's Amendment No. 1 to Registration Statement on Form
S-1, filed May 23, 1997, Registration No. 333-25249).
*10.2 Employment Agreement, dated May 23, 1997, between the
Company and Theodore F. Savastano (filed as an exhibit to
the Company's Amendment No. 1 to Registration Statement on
Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.3 Employment Agreement, dated May 23, 1997, between the
Company and Michael J. Vantusko (filed as an exhibit to the
Company's Amendment No. 1 to Registration Statement on Form
S-1, filed May 23, 1997, Registration No. 333-25249).
*10.4 Employment Agreement, dated May 23, 1997, between the
Company and L. Dean Hertert, Jr. (filed as an exhibit to the
Company's Amendment No. 1 to Registration Statement on Form
S-1, filed May 23, 1997, Registration No. 333-25249).
*10.5 Employment Agreement, dated July 1, 1987, between Nordic
Water Products AB and Dr. Hans F. Larsson (filed as an
exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
*10.6 Credit Agreement, dated as of February 19, 1997 among the
Company, Bank of America Illinois, as agent, and the other
financial institutions party thereto (filed as an exhibit to
the Company's Registration Statement on Form S-1, filed
April 16, 1997, Registration No. 333-25249)
*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).
</TABLE>
II-6
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- -------- -------------------
<C> <S>
*10.10 First Amendment, dated as of June 27, 1997, to Credit
Agreement, dated March 4, 1997, among Waterlink (Sweden) AB,
the Company, as guarantor, and Bank of America National
Trust & Savings Association, London Branch (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1997, File No. 1-13041)
*10.11 Credit Agreement, dated as of March 4, 1997, among Provista
Einhundertsechsundfunfzigste Verwaltungsgesellschaft mbH (to
be known as Waterlink (Germany) GmbH), Waterlink, Inc., as
guarantor, and Bank of America National Trust & Savings
Association, Frankfurt Branch (filed as an exhibit to the
Company's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249).
*10.12 First Amendment, dated as of June 27, 1997, to Credit
Agreement, dated March 4, 1997, among Waterlink (Germany)
GmbH, the Company, as guarantor, and Bank of America
National Trust & Savings Association, Frankfurt Branch
(filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1997, File
No. 1-13041)
*10.13 Common Stock Warrant Agreement, dated as of February 19,
1997, between the Company and Bank of America Illinois
(filed as an exhibit to the Company's Registration Statement
on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.14 The Company's 1995 Stock Option Plan (filed as an exhibit to
the Company's Registration Statement on Form S-1, filed
April 16, 1997, Registration No. 333-25249).
*10.15 Subordinated Note Purchase Agreement and Credit Facility,
dated as of March 6, 1997, among the Company, Brantley
Venture Partners III, L.P. and the purchasers named therein,
along with the Form of Subordinated Note due 2002 attached
thereto as Exhibit A (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.16 Warrant Agreement, dated as of March 6, 1997, among the
Company and each of the purchasers named therein, along with
the Form of Warrant to Purchase Common Stock, attached
thereto as Exhibit A (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.17 The Company's 1997 Omnibus Incentive Plan (filed as an
exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
*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).
</TABLE>
II-7
<PAGE> 109
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- -------- -------------------
<C> <S>
*10.21 Agreement and Plan of Merger, dated September 27, 1996, by
and among the Company, Wet Acquisition Corp. and Water
Equipment Technologies, Inc. and the shareholders of Water
Equipment Technologies, Inc (filed as an exhibit to the
Company's Registration Statement on Form S-1, filed April
16, 1997, Registration No. 333-25249).
*10.22 Share Purchase Agreement, dated March 4, 1997, among
Waterlink (Sweden) AB, Waterlink (Germany) GmbH, Awpe
Svenska AB and Anglian Water Holding GmbH (filed as an
exhibit to the Company's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249).
*10.23 Purchase and Sale Agreement, dated March 14, 1995, among
Santech, Inc. (as assignee from the Company pursuant to an
Assignment of Purchase and Sale Agreement dated March 28,
1995) and Sanborn, Inc (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.24 Asset Purchase Agreement, dated August 28, 1995, among Great
Lakes Environmental, Inc., a Delaware corporation (as
assignee from the Company pursuant to an Assignment dated
August 31, 1995), Great Lakes Environmental, Inc., an
Illinois corporation, Lawrence Field and David Field (filed
as an exhibit to the Company's Registration Statement on
Form S-1, filed April 16, 1997, Registration No. 333-25249).
*10.25 The Company's Employee Stock Purchase Plan (filed as an
exhibit to the Company's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249)
*10.26 First Amendment, dated as of June 23, 1997, to the Company's
Employee Stock Purchase Plan (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, File No. 1-13041)
*10.27 The Company's 1997 Non-Employee Director Stock Option Plan.
*10.28 Stock Purchase Agreement among Waterlink (Sweden) AB,
Waterlink, Inc. and the shareholders of Mellegard V.A.
Maskiner AB dated September 12, 1997 (filed as an exhibit to
the Company's Current Report on Form 8-K, filed September
26, 1997, File No. 1-13041).
*10.29 Stock Purchase Agreement dated September 30, 1997 among
Waterlink, Inc., Philip A. Thompson and the Hycor
Corporation Employee Stock Ownership Trust (filed as an
exhibit to the Company's Current Report on Form 8-K, filed
October 14, 1997, File No. 1-13041).
*10.30 Stock Purchase Agreement between Waterlink, Inc., and David
Romanow, Joe Romanow, Brian Topnik and Robert Jenkyns dated
as of April 15, 1997 (filed as an exhibit to the Company's
Current Report on Form 8-K, filed July 9, 1997, File No.
1-13041).
*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).
</TABLE>
II-8
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- -------- -------------------
<C> <S>
*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 and 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 (filed as an exhibit to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1998,
File No. 1-13041).
*10.37 Executive Employment Agreement, dated June 8, 1998, between
the Company and T. Scott King (filed as an exhibit to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998, File No. 1-13041).
*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 thereto (filed as an exhibit to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998, File No. 1-13041).
**10.39 Fourth Amendment, dated as of February 25, 1999, 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 thereto.
**10.40 Fifth Amendment, dated as of June 29, 1999, 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 thereto.
**10.41 Agreement dated as of April 15, 1999, among Waterlink, Inc.
and each of the current holders of warrants issued pursuant
to that certain Warrant Agreement dated as of March 6, 1997.
10.42 Warrant Agreement dated as of July 9, 1999 among Waterlink
and each of the Warrantholders party thereto.
**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 nine months ended
June 30, 1999 (filed as an exhibit to Waterlink's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1999, filed August 11, 1999, File No. 1-13041).
</TABLE>
- -------------------------
* Incorporated herein by reference as indicated.
** Filed previously.
II-9
<PAGE> 111
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
by a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-10
<PAGE> 112
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CANTON,
STATE OF OHIO, ON THE 23RD DAY OF SEPTEMBER, 1999.
WATERLINK, INC.
By: /s/ MICHAEL J. VANTUSKO
------------------------------------
Name: Michael J. Vantusko
Title: Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ THEODORE F. SAVASTANO* Director and Chairman of the September 23, 1999
- --------------------------------------------------- Board
Theodore F. Savastano
/s/ T. SCOTT KING* Director, President and September 23, 1999
- --------------------------------------------------- Chief Executive Officer
T. Scott King
/s/ MICHAEL J. VANTUSKO Chief Financial Officer (and September 23, 1999
- --------------------------------------------------- principal accounting
Michael J. Vantusko officer)
/s/ JOHN R. MILLER* Director September 23, 1999
- ---------------------------------------------------
John R. Miller
/s/ ROBERT P. PINKAS* Director September 23, 1999
- ---------------------------------------------------
Robert P. Pinkas
/s/ ROLLIN S. REITER* Director September 23, 1999
- ---------------------------------------------------
Rollin S. Reiter
/s/ DR. PAUL M. SUTTON* Director September 23, 1999
- ---------------------------------------------------
Dr. Paul M. Sutton
*By /s/ MICHAEL J. VANTUSKO September 23, 1999
---------------------------------------------
Michael J. Vantusko, Attorney-in-fact pursuant to
the power of attorney previously provided as part
of this registration statement
</TABLE>
II-11
<PAGE> 1
EXHIBIT 3.2A
AMENDMENT TO THE AMENDED AND RESTATED BY-LAWS
OF
WATERLINK, INC.
ARTICLE VII
MISCELLANEOUS
Section 7. STOCK OPTIONS. Without the approval of the holders of not
less than fifty percent (50%) of the votes entitled to be cast by the holders of
all of the then outstanding shares of Voting Stock (as defined in Article Sixth
of the Corporation's Restated Certificate of Incorporaiton), the Corporation
shall not grant to any officer of the Corporation any stock options at less than
the closing market price on the date of grant or reduce the price of any options
which either (i) were granted as a non-qualified stock option grant to an
incoming employee or vendor or (ii) were granted under any of the Corporation's
existing or future stock option plans, PROVIDED, HOWEVER, that the foregoing
shall not preclude the Corporation from issuing new, lower priced options issued
from a stock option plan to persons holding higher priced options from such
plan, PROVIDED FURTHER, HOWEVER, that if such new lower priced options are
granted in exchange for such higher priced options, the shares covered by such
higher priced options shall be canceled or surrendered and not available for
re-grant under such stock option plan.
Section 8. AMENDMENTS. These By-Laws may be made, altered, amended or
repealed, in whole or in part, only in accordance with the provisions of Article
Ninth of the Restated Certificate of Incorporation. Notwithstanding the
foregoing sentence or any provision of the Restated Certificate of
Incorporation, Article VII, Section 7 of these Bylaws may only be amended by the
affirmative vote of the holders of not less than fifty percent (50%) of the
votes entitled to be cast by the holders of all of the then outstanding shares
of Voting Stock (as defined in Article Sixth of the Restated Certificate of
Incorporation), voting together as a single class.
<PAGE> 1
EXHIBIT 4.1A
FIRST AMENDMENT TO RIGHTS AGREEMENT
WATERLINK, INC., a Delaware corporation (the "Corporation"), and the
AMERICAN STOCK TRANSFER & TRUST COMPANY (the "Rights Agent") hereby enter into
this amendment (the "Amendment") effective as of September ___, 1999.
R E C I T A L S:
The Corporation and the Rights Agent entered into a Rights Agreement
dated as of May 27, 1997 (the "Rights Agreement"). The Board of Directors of the
Corporation has determined that it is in the best interests of the Corporation
to amend the Rights Agreement. Capitalized terms used in the Amendment not
otherwise defined herein shall have the meanings given such terms in the Rights
Agreement.
1. SUPPLEMENT TO DEFINITIONS. The definitions contained in Section 1 of
the Rights Agreement shall be supplemented by adding the following:
"SWIB" shall mean the State of Wisconsin Investment Board.
2. AMENDMENT TO DEFINITIONS. The definition of "Acquiring Person"
contained in Section 1(a) of the Rights Agreement shall be amended and restated
in its entirety to read as follows:
(a) "Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, shall be
the Beneficial Owner of 15% or more of the then outstanding Common
Shares (other than as a result of a Permitted Offer) or was such a
Beneficial Owner at any time after the date hereof, whether or not such
person continues to be the Beneficial Owner of 15% or more of the then
outstanding Common Shares. Notwithstanding the foregoing, (A) the term
"Acquiring Person" shall not include (i) the Corporation, (ii) any
Subsidiary of the Corporation, (iii) any employee benefit plan of the
Corporation or of any Subsidiary of the Corporation, (iv) any Person or
entity organized, appointed or established by the Corporation for or
pursuant to the terms of any such plan, (v) any Person, who or which
together with all Affiliates and Associates of such Person becomes the
Beneficial Owner of 15% or more of the then outstanding Common Shares
as a result of the acquisition of Common Shares directly from the
Corporation, (vi) an Exempt Person or (vii) SWIB unless and until SWIB
shall have become the Beneficial Owner of 20% or more of the then
outstanding Common Shares at which time SWIB shall be an "Acquiring
Person" and (B) no Person shall be deemed to be an "Acquiring Person"
either (X) as a result of the acquisition of Common Shares by the
Corporation which, by reducing the number of Common Shares outstanding,
increases the proportional number of shares beneficially owned by such
person together with all Affiliates and Associates of such Person to
15% or more (or in the case of SWIB to 20% or more) of the Common
Shares of the Corporation then outstanding; except that if (i) a Person
would become an Acquiring Person (but for the operation of this
subclause (X)) as a result of the acquisition of Common Shares by the
Corporation and (ii) after such share acquisition by the Corporation,
such Person, or an Affiliate or Associate of such Person, becomes the
Beneficial Owner of any additional Common Shares, then such Person
shall be deemed an Acquiring Person, or (Y) if (i) within 8 days after
such Person would otherwise have become an Acquiring Person (but for
the operation of this subclause (Y)), such Person notifies the Board of
Directors that such Person did so inadvertently and (ii) within 2 days
after such notification, such Person is the
1
<PAGE> 2
Beneficial Owner of less than 15% (or in the case of SWIB, less than
20%) of the outstanding Common Shares.
The phrase "then outstanding," when used with reference to a Person's
Beneficial Ownership of securities of the Corporation, shall mean the
number of such securities then issued and outstanding together with the
number of such securities not then actually issued and outstanding
which such Person would be deemed to own beneficially hereunder.
3. AMENDMENT TO SECTION 3. Section 3(a) shall be amended and restated in
its entirety to read as follows:
Section 3. ISSUANCE OF RIGHT CERTIFICATES. (a) Until the earlier of (i)
the Shares Acquisition Date or (ii) the Close of Business on the tenth
day (or such later date as may be determined by action of the
Disinterested Directors) after the date any Person (other than the
Corporation, any Subsidiary of the Corporation, SWIB unless and until
SWIB shall have become the Beneficial Owner of 20% or more of the
Common Shares then outstanding, any employee benefit plan of the
Corporation or of any Subsidiary of the Corporation or any Person or
entity organized, appointed or established by the Corporation for or
pursuant to the terms of any such plan) commences, or first publicly
announces its intention to commence (which intention to commence
remains in effect for five Business Days after such announcement), a
tender or exchange offer the consummation of which would result in any
Person becoming an Acquiring Person (including, in the case of both (i)
and (ii), any such date which is after the date of this Agreement and
prior to the issuance of the Rights), the earlier of such dates being
herein referred to as the "Distribution Date," (x) the Rights will be
evidenced (subject to the provisions of Section 3(b) hereof) by the
certificates for Common Shares registered in the names of the holders
thereof (which certificates shall also be deemed to be Right
Certificates) and not by separate Right Certificates, and (y) the
Rights will be transferable only in connection with the transfer of the
underlying Common Shares (including a transfer to the Corporation);
provided, however, that if a tender offer is abandoned prior to the
occurrence of a Distribution Date, then no Distribution Date shall
occur as a result of such tender offer. As soon as practicable after
the Distribution Date, the Corporation will prepare and execute, the
Rights Agent will countersign, and the Corporation will send or cause
to be sent by first-class, postage-prepaid mail, to each record holder
of Common Shares as of the Close of business on the Distribution Date,
at the address of such holder shown on the records of the Corporation,
a Right Certificate, substantially in the form of Exhibit B hereto (a
"Right Certificate"), evidencing one Right for each Common Share so
held. As of and after the Distribution Date, the Rights will be
evidenced solely by such Right Certificates.
4. Except as expressly modified herein, the Rights Agreement is and
remains in full force and effect. All references to the Rights Agreement in the
Rights Agreement shall refer to the Rights Agreement as amended by the
Amendment.
5. The Amendment will be binding upon and inure to the sole and exclusive
benefit of the Corporation, the Rights Agent, and the registered holders of the
Rights Certificates (and, prior to the Distribution Date, the Common Shares).
2
<PAGE> 3
6. The Amendment may be executed in any number of counterparts, and
each of such counterparts shall for all purposes be deemed an original, and all
of which shall together constitute but one and the same instrument.
7. The Amendment shall be deemed to be a contract made under the laws of
the State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State.
8. The Amendment shall become effective as of the date first above
written but such effectiveness is contingent upon (a) the execution of the
Amendment by the Corporation and by the Rights Agent, (b) delivery of a
certificate from an appropriate officer of the Corporation stating that the
Amendment is in compliance with Section 26 of the Rights Agreement, and (c)
closing the sale of Common Shares to SWIB pursuant to that certain securities
purchase agreement between the Corporation and SWIB, the closing of which shall
be evidenced to the Rights Agent by a certificate from an appropriate officer
of the Corporation so stating.
IN WITNESS WHEREOF, the parties hereto have caused the Amendment to be
duly executed as of the day and year first above written.
WATERLINK, INC.
By: _________________________________
Name: ___________________________
Title:___________________________
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: _________________________________
Name: ___________________________
Title:___________________________
3
<PAGE> 1
EXHIBIT 10.42
WARRANT AGREEMENT
THIS WARRANT AGREEMENT ("Agreement") dated as of July 9, 1999, among
WATERLINK, INC., a Delaware corporation (the "Company"), and each of the
Warrantholders named on the execution page hereof (the "Warrantholders").
R E C I T A L S:
----------------
This Agreement is entered into in connection with assistance provided
by the Warrantholders to the Company in improving its capital structure,
including that certain Fifth Amendment to the Credit Agreement dated as of June
27, 1997, and as amended and restated as of May 19, 1998, among the Company, the
financial institutions from time to time party thereto, and Bank of America
National Trust and Savings Association, as Agent, as from time to time restated,
amended or modified (the "Fifth Amendment"). At the time the Company is entering
into the Fifth Amendment, each of the Warrantholders has agreed to provide a
guaranty of the Company's repayment of part of the Company's bank debt. In order
to induce the Warrantholders to make their commitments, the Warrantholders have
required the Company, and the Company has agreed, to issue certain warrants to
purchase shares of the Company's common stock, $.01 par value per share ("Common
Stock").
NOW, THEREFORE, for good and valuable consideration the receipt of
which is hereby acknowledged and the promises and the mutual agreements set
forth herein, the parties hereto agree as follows:
1. ISSUANCE OF WARRANTS; FORM OF WARRANTS.
1.1 GENERAL. The Company hereby agrees to issue (pro rata in
proportion to the amount of the Warrantholder's guaranty of the
Company's obligations under the Credit Agreement) to the
Warrantholders, at the times and upon the conditions specified below,
(i) warrants (the "Base Warrants") to purchase, in the aggregate, up to
125,000 shares of the Common Stock, $.01 par value per share (the
"Common Stock"), and (ii) warrants (the "Additional Warrants") to
purchase, in the aggregate, up to 158,637 shares of Common Stock, in
the case of (i) and (ii) above, subject to the terms and on the
conditions set forth in this Agreement. The Base Warrants and the
Additional Warrants are referred to herein together as the "Warrants".
Each Warrant, once issued, will initially entitle the holder thereof to
purchase one share of Common Stock for the purchase price set forth in
Section 5 below, as adjusted from time to time pursuant to the
provisions of Section 9 below.
1.2 ISSUANCE OF BASE WARRANTS. Base Warrants shall be issued
on the terms and upon the satisfaction of the following conditions, in
all cases in the amounts set forth on Schedule 1 hereto:
(a) All of the Base Warrants shall be issued to the
Warrantholders on the date hereof.
1
<PAGE> 2
(b) The Brantley Guaranty (as defined in the Fifth
Amendment) and each of the three management guaranties to be
executed in connection with the Fifth Amendment shall have been
executed and delivered by the parties thereto.
(c) The Fifth Amendment shall have become effective.
1.3 ISSUANCE OF ADDITIONAL WARRANTS. Additional Warrants shall
be issued on the terms and upon satisfaction of the following
conditions, in all cases in the amounts set forth on Schedule 1 hereto:
(a) Each of the conditions set forth in Section 1.2 shall
have been satisfied.
(b) All requisite consents and approvals to the issuance
of the Additional Warrants shall have been obtained, including,
without limitation, any required shareholder approval, in
accordance with the requirements established by the New York
Stock Exchange. The Company hereby agrees to use all reasonable
efforts, from time to time, to obtain the approval of the
Company's shareholders necessary to issue the Additional Warrants
as soon as reasonably practicable. Each of the Warrantholders
agrees to provide all necessary information and assistance to the
Company in its efforts to obtain such shareholder approval and to
vote all share of Common Stock held it or him in favor of such
approval.
2. FORM OF WARRANTS. The text of the Warrants and of the form of
election to purchase Common Stock underlying the Warrants (the "Warrant Stock")
to be set forth on the reverse thereof shall be substantially as set forth in
the Warrant Certificate ("Warrant Certificate"), attached as Exhibit A to this
Agreement. Each Warrant Certificate shall be executed on behalf of the Company
by the President or Vice President of the Company and attested by the Secretary
or an Assistant Secretary of the Company. Warrant Certificates shall be dated as
of the date of the execution thereof by the Company either upon initial issuance
or upon division, exchange, substitution or transfer as may be permitted
hereunder, provided that all such issuances of Warrants shall be deemed
effective upon the date that the conditions to their issuance are satisfied.
3. REGISTRATION. The Warrant Certificates shall be numbered and shall
be registered on the books of the Company (the "Warrant Register") as they are
issued. The Company shall be entitled to treat the registered holder of any
Warrant Certificate on the Warrant Register (the "Holder") as the owner in fact
thereof for all purposes and shall not be bound to recognize any equitable or
other claim to or interest in such Warrant Certificate, or the Warrants'
represented thereby, on the part of any other person, and shall not be liable
for any registration or transfer of Warrant Certificates which are registered or
to be registered in the name of a fiduciary or the nominee of a fiduciary unless
made with the actual knowledge that a fiduciary or nominee is committing a
breach of trust in requesting such registration or transfer, or with knowledge
of such facts that the Company's participation therein amounts to bad faith.
2
<PAGE> 3
4. TRANSFER OF WARRANT CERTIFICATE. The Warrant Certificate shall be
transferable only on the Warrant Register upon delivery of the Warrant
Certificate duly endorsed by the Holder or by its duly authorized attorney or
representative (with evidence reasonably satisfactory to the Company of such
authorization), or accompanied by evidence reasonably satisfactory to the
Company of succession, assignment or authority to transfer. Notwithstanding the
foregoing, the Company shall have no obligation to cause Warrant Certificates to
be transferred on the Warrant Register to any person, unless the Holder of such
Warrants shall furnish to the Company evidence satisfactory to the Company of
(i) compliance with the registration provisions of Section 5 of the Securities
Act of 1933, as amended (the "Act"), or (ii) the availability of an exemption
from compliance with the registration provisions of Section 5 of the Act.
5. TERM OF WARRANTS; EXERCISE OF WARRANTS.
5.1 TERM AND EXERCISE PRICE. Each outstanding Base Warrant and
each Additional Warrant entitles the registered owner thereof to
purchase one (1) share of Warrant Stock at any time prior to the close
of business on the fifth (5th) anniversary of the date hereof (the
"Expiration Date") at an initial purchase price per share of Warrant
Stock of $0.01, subject to adjustment pursuant to the provisions of
Section 9 of this Agreement (the "Warrant Price").
5.2 GENERAL.
(a) Subject to the provisions of this Agreement, each
Holder shall have the right to purchase from the Company (and
the Company shall issue and sell to such Holder) the number of
fully paid and nonassessable shares of Warrant Stock specified
in such Holder's Warrant Certificate(s) (as adjusted from time
to time in accordance with the provisions of Section 9 of this
Agreement), upon surrender of such Warrant Certificate(s) to
the Company or its duly authorized agent, and upon payment to
the Company of the Warrant Price, or, at the option of the
Holder, by conversion of unpaid principal and accrued interest
on the Notes, if then outstanding, in an amount equal to the
Warrant Price, as adjusted in accordance with the provisions
of Section 9 of this Agreement, for the number of shares of
Warrant Stock in respect of which such Warrants are then
exercised. The date of exercise (the "Exercise Date") of any
Warrant shall be deemed to be the date of receipt by the
Company of the Warrant Certificate duly filled in and signed
and accompanied by proper payment as hereinafter provided.
Payment of the Warrant Price shall be made as set forth in the
Warrant Certificate.
(b) Subject to Section 6 of this Agreement, upon such
exercise of Warrants, and payment of the Warrant Price as
aforesaid, the Company shall issue and cause to be delivered
with all reasonable dispatch (but in any event within twenty
(20) business days) to or (subject to the provisions of
Section 4 of this Agreement) upon the written order of the
Holder, a certificate for the number of full shares of Warrant
Stock so purchased upon the exercise of such Warrants,
together with cash, as provided in Section 9 of this
Agreement, in respect of any fraction of a share of such
3
<PAGE> 4
stock otherwise issuable upon such exercise. Except under
circumstances described in the following sentence, the shares
of Warrant Stock purchased pursuant to the immediately
preceding sentence shall be deemed to be issued to the Holder
as the record owner of such shares as of the close of business
on the Exercise Date. Notwithstanding the foregoing, if the
Company determines, on or after the date of exercise of any
Warrant, that issuance of the Warrant Stock represented
thereby would violate an applicable order, law, rule, or
regulation, including federal or state securities laws, the
Company shall so notify immediately the exercising Holder and
shall in good faith, and as expeditiously as possible,
endeavor to issue the Warrant Stock without such violation.
The right of purchase represented by the Warrants shall be
exercisable, at the election of the Holder thereof, either in
full or from time to time in part and, in the event that any
Warrant is exercised in respect of less than all of the shares
of Warrant Stock purchasable on such exercise at any time
prior to the Expiration Date, a new Warrant Certificate
evidencing the remaining Warrants shall be issued.
6. PAYMENT OF TAXES. The Company shall pay all documentary stamp taxes,
if any, attributable to the initial issuance of Warrant Stock upon the exercise
of Warrants PROVIDED, HOWEVER, that the Company shall not be required to pay any
tax or taxes which may be payable in respect of any permitted transfer involved
in the issue or delivery of any Warrant Certificates or Warrant Stock in a name
other than that of the registered Holder of such Warrants.
7. MUTILATED OR MISSING WARRANTS. Upon (i) receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of a Warrant Certificate, (ii) if requested by the Company, the
posting of a bond in an amount equal to the value of the lost, stolen or
destroyed Warrant Certificate, (iii) reimbursement to the Company of all
reasonable expenses incident thereto, and (iv) surrender and cancellation of
such Warrant Certificate, if mutilated, the Company will make and deliver in
lieu of such Warrant Certificate a new Warrant Certificate of like tenor and
representing an equivalent right or interest. The term "outstanding" when used
herein with reference to the Warrant Certificate as of any particular time shall
not include any Warrant Certificate in lieu of which a new Warrant Certificate
has been made and delivered by the Company in accordance with the provisions
hereof.
8. RESERVATION OF WARRANT STOCK.
(a) The Company represents that there has been
reserved out of the authorized and unissued shares of Common
Stock, a number of shares sufficient to provide for the
exercise of the right of purchase represented by the Warrant
Certificates as initially issued, and the Company, which
currently acts as the transfer agent for its Common Stock
("Transfer Agent") and every subsequent Transfer Agent for any
shares of the Company's capital stock issuable upon the
exercise of any of the Warrants are hereby irrevocably
authorized and directed at all times until the Expiration Date
or earlier termination of this Agreement to reserve such
number of authorized and unissued shares of Common Stock as
shall be required for such purpose. The Company will keep a
copy of this Agreement on file with every
4
<PAGE> 5
subsequent Transfer Agent for any shares of the Company's
capital stock issuable upon the exercise of the Warrants. The
Company will supply any such subsequent Transfer Agent with
duly executed stock certificates for issuance on exercise of
Warrants and will itself provide or make available any cash
which may be required by Section 10 of this Agreement. The
Company will furnish to any such subsequent Transfer Agent a
copy of all notices of adjustments, and certificates related
thereto, transmitted to each Holder pursuant to Section 9.3 of
this Agreement. All Warrant Certificates surrendered in the
exercise of the rights thereby evidenced shall be canceled.
(b) The Company covenants that it shall endeavor to
comply with all securities laws regulating the offer and
delivery of shares of Common Stock upon exercise of the
Warrants; and that if any shares of Common Stock required to
be reserved for purposes of exercising the Warrants hereunder
require registration with or approval of any governmental
authority under any Federal or state law before such shares
may be validly issued or delivered upon exercise of the
Warrants, the Company shall, in good faith and as
expeditiously as possible, endeavor to secure such
registration or approval, as the case may be. The Company
covenants that all shares of Common Stock which shall be
issued upon exercise of the Warrants shall upon issue and
payment therefor be validly issued, fully paid and
nonassessable.
9. ADJUSTMENTS OF WARRANT PRICE, PREPAYMENT EVENT PRICE AND NUMBER OF
SHARES OF WARRANT STOCK. The number and kind of securities purchasable upon the
exercise of each Warrant and the Warrant Price related thereto shall be subject
to adjustment from time to time upon the happening of certain events, as
hereinafter defined, but (with respect to Warrants) only as to Warrants
outstanding at the time of such adjustment. Upon each adjustment of the Warrant
Price pursuant to the provisions of Section 9.1(b), the Holder of such Warrant
shall thereafter, prior to the Expiration Date thereof, be entitled to purchase
at the Warrant Price resulting from such adjustment, the number of shares of
Warrant Stock obtained by multiplying the Warrant Price in effect immediately
prior to such adjustment by the number of shares of Warrant Stock issuable upon
exercise of such Warrant immediately prior to such adjustment and dividing the
product thereof by the Warrant Price resulting from such adjustment.
9.1 ADJUSTMENT OF THE NUMBER OF SHARES OF WARRANT STOCK AND
THE WARRANT PRICE. The number of shares of Warrant Stock and the
Warrant Price shall be subject to adjustment as follows:
(a) In case the Company shall at any time after the
date of issuance of a Warrant (A) pay a dividend or make a
distribution on its Common Stock in shares of its capital
stock (whether in shares of Common Stock or of capital stock
of any other class), (B) subdivide its outstanding shares of
Common Stock into a greater number of shares, (C) combine its
outstanding shares of Common Stock into a smaller number of
shares, or (D) reclassify, reorganize or effect any similar
transaction with respect to any of its shares of Common Stock,
or in substitution or exchange therefor (other than a change
in par value, or from par value to no par value, or from no
par value to
5
<PAGE> 6
par value), then the number and, if applicable, kind of shares
of Warrant Stock to be received by any Holder shall be
adjusted so that the Holder will be entitled to receive on
exercise the number and kind of shares of capital stock which
it would have owned immediately following such action had its
Warrants been exercised immediately prior thereto. An
adjustment made pursuant to this subsection (a) shall become
effective immediately after the payment date in the case of a
dividend or distribution and shall become effective
immediately after the effective date in the case of a
subdivision, combination, reclassification, reorganization or
similar transaction. If, as a result of an adjustment made
pursuant to this subsection (a), a Holder shall become
entitled to receive shares of two or more classes of capital
stock of the Company, the Board of Directors or a duly
authorized committee thereof shall in good faith determine
(which determination shall be conclusive and binding) the
allocation of the Warrant Price between or among shares of
such classes of capital stock. After such allocation, the
Warrant Price and number of shares of each class of capital
stock that is part of the Warrant Stock shall thereafter be
subject to adjustment in a manner and on terms determined by
the Board of Directors (which determination shall be
conclusive and binding) to be as nearly equivalent as
practicable to those applicable to Common Stock under this
Section 9.
(b) If the Company shall issue any shares of Common
Stock other than Excluded Shares (as hereinafter defined) for
consideration per share less than the Warrant Price per share
in effect immediately prior to such issuance, the Warrant
Price in effect immediately prior to such issuance shall be
reduced (but shall not be increased) to the price (calculated
to the nearest cent) determined: by dividing (A) an amount
equal to the sum of (1) the number of shares of Common Stock
outstanding on a fully diluted basis immediately prior to such
issuance multiplied by the Warrant Price per share in effect
immediately prior to such issuance and (2) the consideration,
if any, received by the Company upon such issuance by (B) the
number of shares of Common Stock outstanding on a fully
diluted basis immediately after such issuance.
(c) CERTAIN ADJUSTMENT FACTORS. For the purposes of
any adjustment of the Warrant Price pursuant to paragraph (b)
above, the following provisions shall be applicable:
(x) CASH. In the case of the issuance of
shares of Common Stock for cash, the amount of the
consideration received by the Company shall be deemed
to be the amount of the cash proceeds received by the
Company for such shares of Common Stock before
deducting therefrom any discounts, commissions, taxes
or other expenses allowed, paid or incurred by the
Company for any underwriting or otherwise in
connection with the issuance and sale thereof; and
(y) CONSIDERATION OTHER THAN CASH. In the
case of the issuance of shares of Common Stock
(other than upon the conversion of shares of capital
6
<PAGE> 7
stock or other securities of the Company) for
consideration in whole or in part other than cash,
including securities acquired in exchange therefor
(other than securities by their terms so
exchangeable), the consideration other than cash
shall be deemed to be the fair value thereof (as
determined by the Board of Directors of the Company
based on an opinion of an outside financial advisor
of recognized regional or national standing, which
may, but need not, be the independent public
accountants who serve as the regular auditors of the
Company (the "Financial Advisor"), whose
determination shall be conclusive and binding),
irrespective of any accounting treatment; and
(z) OPTIONS AND CONVERTIBLE SECURITIES. In
the case of the issuance of (i) options, warrants or
other rights to purchase or acquire shares of Common
Stock (whether or not exercisable immediately
following such issuance), (ii) securities by their
terms convertible into or exchangeable for shares
Common Stock (whether or not so convertible or
exchangeable immediately following such issuance), or
(iii) options, warrants or rights to purchase such
convertible or exchangeable securities (whether or
not exercisable immediately following such issuance):
(1) the aggregate maximum number of
shares of Common Stock deliverable upon
exercise of such options, warrants or other
rights to purchase or acquire shares of
Common Stock shall be deemed to have been
issued at the time such options, warrants or
other rights are first issued and for a
consideration equal to the consideration
(determined in the manner provided in
clauses (x) and (y) above), if any, received
by the Company upon the issuance of such
options, warrants or other rights plus the
purchase price provided in such options,
warrants or other rights for the shares of
Common Stock covered thereby (if the
purchase price per share of Common Stock is
expressed as a range, the purchase price per
share for purposes of this subparagraph
(z)(1) shall be the average of such range of
prices);
(2) the aggregate maximum number of
shares of Common Stock deliverable upon
conversion of or in exchange for any such
convertible or exchangeable securities, or
upon the exercise of options, warrants or
other rights to purchase or acquire such
convertible or exchangeable securities and
the subsequent conversion or exchange
thereto shall be deemed to have been issued
at the time such convertible or exchangeable
securities or such options, warrants or
other rights are first issued and for a
consideration equal to the consideration, if
any, received by the Company for any such
convertible or exchangeable securities or
options, warrants or other rights (excluding
any cash received on account of accrued
interest or accumulated dividends), plus the
additional consideration, if any, to be
7
<PAGE> 8
received by the Company upon the conversion
or exchange of such securities and the
exercise of any options, warrants or other
rights (the consideration in each case to be
determined in the manner provided in clauses
(x) and (y) above);
(3) on any change in the number of
shares of Common Stock deliverable upon
exercise of any such options, warrants or
other rights which have become exercisable
or conversion of or exchange of such
convertible or exchangeable securities which
have become convertible or exchangeable, or
any change in the consideration to be
received by the Company upon such exercise,
conversion or exchange, the Warrant Price as
then in effect shall forthwith be readjusted
to such Warrant Price as would have been
obtained had such adjustment been made upon
the original issuance of such options,
warrants or other rights; provided, however,
no adjustment shall be made with respect to
such options, warrants or other rights
exercised prior to such change, or
securities converted or exchanged prior to
such change;
(4) on the expiration or
cancellation of any such options, warrants
or other rights, or the termination of the
right to convert or exchange such
convertible or exchangeable securities, if
the Warrant Price shall have been adjusted
upon such securities being issued or
becoming exercisable, convertible or
exchangeable, such Warrant Price shall
forthwith be readjusted to such Warrant
Price as would have been obtained had an
adjustment been made on the basis of the
issuance of only the number of shares of
Common Stock actually issued upon the
exercise of such options, warrants or other
rights, or upon the conversion or exchange
of such securities; and
(5) if the Warrant Price shall have
been adjusted when such options, warrants or
other rights were first issued or such
convertible or exchangeable securities were
first issued, no further adjustment of the
Warrant Price shall be made for the actual
issuance of shares of Common Stock upon the
exercise, conversion or exchange thereof.
(d) EXCLUDED SHARES. "Excluded Shares" shall mean (i)
any shares of Common Stock issued in a transaction described
in Section 9.1(a) of this Agreement; and (ii) issuances of
shares of Common Stock from time to time pursuant to stock
option or bonus plans authorized by the Board of Directors of
the Company as of the date hereof; (iii) issuances of Common
Stock, or warrants, options or rights to acquire shares of
Common Stock, or securities convertible into or exchangeable
for Common Stock pursuant to the terms of any acquisition by
the Company of all or substantially all of the operating
assets, or more than fifty percent (50%) of the voting
8
<PAGE> 9
capital stock or other management interest of any business
entity in a transaction negotiated on an arms'-length basis
and expressly approved in advance by the Board of Directors of
the Company; (iv) issuances of shares of Common Stock from
time to time upon the exercise, exchange or conversion of
warrants, options, convertible securities, the Notes (whether
or not outstanding as of the date hereof) or other securities
outstanding as of the date hereof; and (v) issuances of shares
of Common Stock from time to time pursuant to the
anti-dilution provisions of other securities.
(e) No adjustment in the Warrant Price shall be
required unless such adjustment would require an increase or
decrease of at least 2.2% in such price; PROVIDED, HOWEVER,
that any adjustments which by reason of this subsection (f)
are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations
under this Section 9.1 shall be made to the nearest tenth of a
cent or to the nearest one-hundredth of a share, as the case
may be.
(f) The number of shares of Common Stock outstanding
at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any
such shares shall be considered an issuance of Common Stock
for the purposes of this Section 9.
9.2 RIGHTS TO PURCHASE OTHER SECURITIES. If any of the
following shall occur:
(a) any consolidation or merger to which the Company
is a party, other than a consolidation or a merger in which
the Company is the continuing or surviving Company and which
does not result in any reclassification of, or change (other
than as a result of a subdivision or combination) in,
outstanding shares of the Common Stock, or
(b) any sale or transfer to another corporation or
entity of all or substantially all of the assets of the
Company;
then, and in either such case, the Holder of each Warrant then
outstanding shall have the right to purchase the kind and amount of
shares of stock and/or other securities and property receivable upon
such consolidation, merger, sale or transfer by a holder of the number
of shares of Common Stock issuable upon exercise of such Warrant
immediately prior to such consolidation, merger, sale, or transfer. The
provisions of this Section 9.2 shall similarly apply to successive
consolidations, mergers, sales or transfers.
9.3 NOTICE OF ADJUSTMENT. Whenever the number of shares of
Warrant Stock purchasable upon the exercise of each Warrant or the
Warrant Price of such Warrant Stock is adjusted or reduced, as herein
provided, the Company shall mail by first class, postage prepaid, to
each Holder (a) notice of any reduction on or before the day the
reduction takes effect, which shall state the reduced Warrant Price and
the period during which it will be in effect and/or (b) a certificate
setting forth the number of shares of Warrant Stock purchasable upon
the exercise of each Warrant and the Warrant Price on such Warrant
Stock after
9
<PAGE> 10
adjustment setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment
was made.
9.4 NO ADJUSTMENT FOR DIVIDENDS. No adjustment in respect of
any cash dividends shall be made during the term of a Warrant or upon
the exercise or conversion of a Warrant.
9.5 CERTAIN EVENTS. If any event occurs as to which in the
reasonable judgment of the Board of Directors of the Company, in good
faith, the other provisions of this Section 9 are not strictly
applicable but the lack of any adjustment would not in the opinion of
the Board of Directors of the Company fairly reflect the purchase
rights of the Holders of the Warrants in accordance with the basic
intent and principles of the provisions of this Agreement then the
Board of Directors of the Company shall appoint a Financial Advisor
which shall give its opinion upon the adjustment, if any, on a basis
consistent with the basic intent and principles established and the
other provisions of this Section 9, necessary to preserve, without
dilution, the exercise rights of the Holders. Upon receipt of such
opinion, the Company shall forthwith make the adjustments described
therein which adjustments shall be conclusive and binding.
10. ELIMINATION OF FRACTIONS. The Company shall not be required to
issue certificates representing fractional shares of Common Stock upon any
exercise of Warrants, but will make a payment in cash, in lieu of issuing such
fractional shares, based on the Current Market Price per share at the time.
11. CERTIFICATES TO BEAR LEGENDS. The Warrant Certificates and
certificates representing shares of Warrant Stock shall be subject to a
stop-transfer order and each such certificate shall bear the following legends
by which each Holder shall be found:
THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 ("ACT"). THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE ACT OR
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED. THESE SECURITIES HAVE BEEN
ISSUED UNDER AND ARE GOVERNED BY AND ARE SUBJECT TO THAT
CERTAIN WARRANT AGREEMENT DATED AS OF JULY 9, 1999 (THE
WARRANT AGREEMENT). A COPY OF THE WARRANT AGREEMENT CAN BE
OBTAINED FROM THE SECRETARY OF THE COMPANY.
12. NO RIGHTS AS STOCKHOLDERS; NOTICES TO HOLDERS; UNISSUED WARRANTS.
Nothing contained in this Agreement or in any of the Warrant Certificates shall
be construed conferring upon the Holders or their transferees the right to vote
or to receive dividends or to consent to or receive notice as stockholders in
respect of any meeting of stockholders for the election of directors of the
Company or on any other matter, or any rights whatsoever as stockholders of the
Company.
10
<PAGE> 11
Warrants as to which the conditions precedent to issuance are not satisfied
shall be void and of no effect, and no Purchaser or other party shall have any
rights with respect thereto.
13. INVESTMENT INTENT. The Warrants to be purchased pursuant to this
Agreement are being purchased for each Purchaser's own account and with no
intention of distributing or reselling the Warrants. The Holder understands that
neither the Warrants nor the Common Stock have been registered under the Act or
any applicable state securities laws and that neither the Warrants nor the
Common Stock can be sold, transferred or otherwise disposed of without
registration under the Act and applicable state securities laws, unless it has
been established to the satisfaction of the Company that they may be sold,
transferred or otherwise disposed of without such registration.
14. NOTICES. Any notice pursuant to this Agreement to be given or made
by the Holder of any Warrant Certificate to or on the Company shall be
sufficiently given or made if delivered personally or sent by telecopier or by
certified mail, addressed to the Chief Financial Officer of the Company at the
Company's principal executive offices at 4100 Holiday Street, N.W., Suite 201,
Canton, Ohio 44718 (unless notice has been given of a change of such address),
and shall be effective three (3) days after having been mailed or upon receipt
if delivered personally or sent by telecopier, with receipt confirmed by the
office of the President. Notices or demands authorized by this Agreement to be
given or made to the Holder of any Warrant Certificate shall be sufficiently
given or made if delivered personally or sent by certified mail or by
telecopier, addressed to such Holder at the address of such Holder as shown on
the Warrant Register, and shall be effective three (3) days after having been
mailed or upon receipt if delivered personally or sent by telecopier, with
receipt confirmed.
15. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio.
16. SUPPLEMENTS, AMENDMENTS AND WAIVERS. Any supplement or amendment
to, or any waiver of any provision of, this Agreement shall be effective when
consented to in writing by the Holders of a majority of the Warrants then
outstanding (determined as though there were one Warrant for each share of
Common Stock issuable on the exercise of the then outstanding Warrants) and by
the Company.
17. SUCCESSORS. All the covenants and provisions of this Agreement by
or for the benefit of the Company or the Holders shall bind and inure to the
benefit of their respective successors and assigns hereunder.
18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the day, month and year first above written.
11
<PAGE> 12
WATERLINK, INC.
By:/s/ Michael J. Vantusko
-------------------------
Its: Chief Financial Officer
-------------------------
12
<PAGE> 13
WARRANT AGREEMENT SIGNATURE PAGE
Accepted and agreed as of the date first above written:
BRANTLEY VENTURE PARTNERS III, L.P.
By: BRANTLEY VENTURE MANAGEMENT III, L.P.,
as General Partner
By: PINKAS FAMILY PARTNERS, L.P.,
a General Partner
By:/s/Robert P. Pinkas
------------------------------------------
[Please Sign Above This Line]
Name: Robert P. Pinkas
Title: General Partner
Address: 20600 Chagrin Blvd.
Suite 1150
Cleveland, Ohio 44122
Telephone No.: (216) 283-4800
Taxpayer Identification No.: 34-1757020
13
<PAGE> 14
WARRANT AGREEMENT SIGNATURE PAGE
Accepted and agreed as of the date first above written:
THEODORE F. SAVASTANO
/s/Theodore F. Savastano
----------------------------------
[Please Sign Above This Line]
Address: 2436 Brentwood Road, N.W.
Canton, Ohio 44708
Telephone No.: (330) 477-2186
Taxpayer Identification No.: ###-##-####
14
<PAGE> 15
WARRANT AGREEMENT SIGNATURE PAGE
Accepted and agreed as of the date first above written:
T. SCOTT KING
/s/T. Scott King
-----------------------------------
[Please Sign Above This Line]
Address: 5408 Valley Parkway
Brecksville, Ohio 44141
Telephone No.: 440-526-5914
Taxpayer Identification No.: ###-##-####
15
<PAGE> 16
WARRANT AGREEMENT SIGNATURE PAGE
Accepted and agreed as of the date first above written:
MICHAEL J. VANTUSKO
/s/Michael J. Vantusko
----------------------------------
[Please Sign Above This Line]
Address: 8594 Somerset Drive
Broadview Heights, Ohio 44147
Telephone No.: (440) 582-3916
Taxpayer Identification No.: ###-##-####
16
<PAGE> 17
<TABLE>
<CAPTION>
T
SCHEDULE 1
Number of Number of
Warrantholder Base Warrants Additional Warrants
- ------------- ------------- -------------------
<S> <C> <C>
Brantley Venture Partners III, L.P. 110,577 140,332
Theodore F. Savastano 7,211 9,153
T. Scott King 4,808 6,101
Michael J. Vantusko 2,404 3,051
</TABLE>
1
<PAGE> 18
EXHIBIT A
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
("ACT"). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED.
THESE SECURITIES HAVE BEEN ISSUED UNDER AND ARE GOVERNED BY AND ARE SUBJECT TO
THAT CERTAIN WARRANT AGREEMENT DATED AS OF JULY 9, 1999 (THE "WARRANT
AGREEMENT"). A COPY OF THE WARRANT AGREEMENT CAN BE OBTAINED FROM THE SECRETARY
OF THE COMPANY.
WARRANT TO PURCHASE COMMON STOCK OF
WATERLINK, INC.
WARRANT NO. G-_______________
This certifies that, for value received, ____________________, or its
permitted assigns, is entitled, subject to the terms set forth below, to
purchase from WATERLINK, INC., a Delaware corporation (the "Company"),
______________ shares (the "Shares") (subject to adjustment as provided in
Section 9 of the Warrant Agreement) of fully paid and nonassessable common
stock, $.01 par value per share, of the Company (the "Common Stock"), at the
purchase price of $0.01 per share (the "Purchase Price"), at any time or from
time to time up until 5:00 P.M. Cleveland, Ohio time on July 9, 2004.
1. EXERCISE PROVISIONS.
(a) MANNER OF EXERCISE. This Warrant may be exercised by the
holder of this Warrant surrendering to the Company at its principal
office at 4100 Holiday Street, N.W., Suite 201, Canton, Ohio 44718, or
such other address as to which the Company may hereafter give notice to
the holder, this Warrant, together with the exercise form attached to
this Warrant duly executed by the holder together with payment to the
Company in the amount obtained by multiplying the Purchase Price by the
number of shares of Common Stock designated in the exercise form.
Payment may be in cash or by cashier's or certified bank check payable
to the order of the Company, or by conversion of the unpaid principal
and accrued interest under the Notes in the manner set forth in the
Notes and the Warrant Agreement.
(b) PARTIAL EXERCISE. On any partial exercise, the Company
shall promptly issue and deliver to the holder of this Warrant a new
Warrant or Warrants of like tenor in the name of that holder providing
for the right to purchase that number of shares of Common Stock as to
which this Warrant has not been exercised.
1
<PAGE> 19
2. DELIVERY OF STOCK CERTIFICATES. Within a reasonable time after full
or partial exercise of this Warrant, the Company at its expense will cause to be
issued in the name of and delivered to the holder of this Warrant in accordance
with the requirements of the Warrant Agreement, a certificate or certificates
for the number of fully paid and nonassessable shares of Common Stock to which
that holder shall be entitled upon such exercise.
3. COMPLIANCE WITH SECURITIES ACT; DISPOSITION OF WARRANT OR SHARES OF
COMMON STOCK. The holder of this Warrant, by acceptance hereof, agrees that this
Warrant and the Shares of Common Stock to be issued upon exercise hereof are
being acquired for investment and that the holder will not offer, sell or
otherwise dispose of this Warrant or any Shares of Common Stock to be issued
upon exercise hereof, except under circumstances which will not result in a
violation of the Securities Act of 1933, as amended (the "Act") nor violate the
terms of the Warrant Agreement. In addition, any permitted Warrant transferee
will be required to agree to the provisions of this Section 3. The provisions of
this Section 3 shall not apply to any shares of Common Stock, the issuance or
resale of which is registered under the Act.
4. MISCELLANEOUS PROVISIONS.
(a) RESERVATION OF STOCK. The Company covenants that it will
at all times reserve and keep available, solely for issuance upon
exercise of this Warrant, all shares of Common Stock or other
securities from time to time issuable upon exercise of this Warrant.
(b) MODIFICATION. This Warrant and any of its terms may be
changed, waived, or terminated only by a written instrument signed by
the party against whom enforcement of that change, waiver or
termination is sought.
(c) REPLACEMENT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Warrant and subject to the requirements of the
Warrant Agreement, the Company will execute and deliver, in lieu of
this Warrant, a new Warrant of like tenor.
(d) WARRANT AGENT. The Company may, on written notice to the
holder of this Warrant, appoint an agent having an office in Cleveland,
Ohio, for the purposes of issuing Common Stock upon the exercise of
this Warrant and of replacing or exchanging this Warrant, and after
that appointment any such issuance, replacement, or exchange shall be
made at that office by that agent.
(e) NO RIGHTS AS STOCKHOLDER. No holder of this Warrant, as
such, shall, solely by holding this Warrant, be entitled to vote or
receive dividends or be considered a stockholder of the Company for any
purpose, nor shall anything in this Warrant be construed to confer on
any holder of this Warrant as such, any rights of a stockholder of the
Company or any right to vote, to give or withhold consent to any
corporate action, to receive notice of meeting of stockholders, to
receive dividends or subscription rights or otherwise.
2
<PAGE> 20
(f) ANTI-DILUTION RIGHTS. The holder hereof shall have certain
anti-dilution protection as to the Shares of Common Stock to be issued
upon exercise as specifically set forth in the Warrant Agreement which
may result in the adjustment from time to time of the Purchase Price
and/or the number of shares of Common Stock issuable upon the exercise
hereof.
(g) NOTICES. Notices hereunder to the holder of this Warrant
shall be sent as provided in the Warrant Agreement.
Dated: _______________, ______ WATERLINK, INC.
By:____________________________
3
<PAGE> 21
FORM OF EXERCISE
----------------
(To be signed only upon exercise of Warrant)
To: WATERLINK, INC.
The undersigned holder of the attached Warrant hereby irrevocably
elects to exercise the right to purchase _______________ shares of Common Stock
of WATERLINK, INC., and herewith makes payment of $___________________ for those
shares, and requests that the certificate for those shares be issued in the name
of the undersigned and delivered to the address below the signature of the
undersigned. The undersigned hereby affirms the statements and covenants all as
set forth in Section 3 of the Warrant.
Dated:_______________, _____
(Signature must conform in all respects to
name of holder as specified on the face
of the attached Warrant)
__________________________________________
Signature
__________________________________________
Address
__________________________________________
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated November 6, 1998, in Amendment No. 1 to the Registration
Statement (Form S-1 No. 333-84985) and related Prospectus of Waterlink, Inc. for
the registration of 6,300,000 shares of its common stock.
ERNST & YOUNG LLP
Canton, Ohio
September 23, 1999
