<PAGE>
As filed with the Securities and Exchange Commission on December 19, 1997
Registration No. 33-______
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-1
UNDER THE SECURITIES ACT OF 1933
------------------
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3444 33-0391175
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification No.)
</TABLE>
3600 West Segerstrom Avenue, Santa Ana, California 92704 (714) 979-7300
(Address, including zip code, and telephone number, including area code, of
principal executive office)
--------------------------------
ROGER M. BARZUN, General Counsel
60 Hubbard Street
Concord, Massachusetts 01742
(978) 287-4275
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------------
Copy To:
Stephen B. Selbst, Esq.
Berlack, Israels & Liberman LLP
120 West 45th Street
New York, New York 10036
(212) 704-0100
--------------------
Approximate date of commencement of proposed distribution and sale
to the public: As soon as practicable after the effective date of the
Registration Statement.
--------------------
If any of the securities being registered on this Form are being
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [ ]
--------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================= ==================== ===================== ======================= ===================
Proposed Proposed Maximum
Title of Each Class of Amount To Be Maximum Offering Aggregate Offering Amount Of
Securities Being Registered Registered(1) Price Per Share(1) Price (1) Registration Fee
- --------------------------------------- -------------------- --------------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
Rights to purchase shares of Common
Stock, par value $.01 per - - -
share.................................. 27,112,000
- --------------------------------------- -------------------- --------------------- ----------------------- -------------------
Shares of Common Stock, par value
$.01 per share........................ 27,112,000 $.10 $2,711,200 $ 821.58
- --------------------------------------- -------------------- --------------------- ----------------------- -------------------
Total.................................. $ $
======================================= ==================== ===================== ======================= ===================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K
<TABLE>
<CAPTION>
Item Number and Heading Prospectus Heading
----------------------- ------------------
<S> <C>
1. Forepart of the Registration Statement and Outside Front Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus Cover Page of Prospectus/Proxy Statement
2. Inside Front and Outside Back Cover Page of Prospectus Inside Front and Outside Back Cover Pages of
Prospectus/Proxy Statement
3. Summary Information, Risk Factors and Ratio of Earnings Summary; Risk Factors
to Fixed Charges
4. Use of Proceeds Use of Proceeds; Plan of Financial Restructuring
5. Determination of Offering Price The Rights Offering
6. Dilution *
7. Selling Security Holders *
8. Plan of Distribution Outside Front Cover Page of Prospectus/Proxy Statement;
The Rights Offering -- Sale of Unsubscribed Shares
9. Description of Securities to be Registered Description of Capital Stock and Other Securities; The
Rights Offering; Price Range of Common Stock and
Dividends; Certain Income Tax Considerations
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information with Respect to the Registrant Summary; Plan of Financial Restructuring; The Company;
Business; The Rights Offering; Financial Statements; Pro
Forma Consolidated Financial Information; Selected
Financial Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations; Price
Range of Common Stock and Dividends; Capitalization;
Management; Executive Compensation; Certain Transactions
and Relationships; Security Ownership of Certain
Beneficial Owners and Management; Description of Capital
Stock and Other Securities; Legal Proceedings
12. Disclosure of Commission Position on Indemnification for *
Securities Act Liabilities
</TABLE>
- --------------------
* Omitted because inapplicable
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
3600 WEST SEGERSTROM AVENUE
SANTA ANA, CALIFORNIA 92704
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
_________________, 1998
To The Stockholders of Wahlco Environmental Systems, Inc.:
Notice is hereby given that the Special Meeting of
Stockholders of Wahlco Environmental Systems, Inc., a Delaware corporation (the
"Company"), will be held as follows:
Date: ______ __, 1998
Time: 10:00 a.m., local time
Place: [ ]
Purposes:
1. To consider the approval of the 1996 Stock Option Plan and
certain option grants thereunder.
2. To consider the adoption of two amendments to the Restated
Certificate of Incorporation of the Company: (i) to increase the shares of
Common Stock authorized for issuance by the Company from 50,000,000 shares to [
] shares in order to effect the rights offering described in the attached Proxy
Statement/Prospectus (the "Rights Offering"), and after the Rights Offering is
completed, (ii) to decrease the number of such shares authorized to 35,000,000.
3. To authorize the Company to issue and sell additional
shares of Common Stock of the Company in order to effect the Rights Offering and
the Wexford Debt Conversion.
4. To transact such other business as may properly come before
the Special Meeting or any adjournments or postponements thereof.
Because approval of both Items 2 and 3 are necessary to effect
the Rights Offering, they will be voted upon as a single item at the Special
Meeting.
The Board of Directors fixed the close of business on January
__, 1998 as the record date for the determination of stockholders who are
entitled to notice of, and to vote at, the Special Meeting or any adjournments
or postponements thereof. Each stockholder is cordially invited to attend and
vote in person.
YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY IN THE ENVELOPE PROVIDED. THE SIGNING AND SUBMISSION OF A PROXY WILL NOT
AFFECT A RECORD HOLDER'S RIGHT TO VOTE IN PERSON IF PRESENT AT THE MEETING.
By Order of the Board of Directors,
Roger M. Barzun, Secretary
Santa Ana, California
January [ ], 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information.....................................................................................
Summary...................................................................................................
Plan of Financial Restructuring...........................................................................
Rights Offering..................................................................................
Silicon Valley Bank Repayment....................................................................
WESAC Debt Conversion............................................................................
Reverse Stock Split..............................................................................
New Line of Credit...............................................................................
WESAC Merger.....................................................................................
Pro Forma Effect on Financial Condition..........................................................
Contingencies Affecting the Plan.................................................................
Pro Forma Effect of Plan on Stockholders.........................................................
Federal Income Tax Consequences of Restructuring Plan............................................
Wexford Fee......................................................................................
The Rights Offering.......................................................................................
Description of the Offering......................................................................
Method of Offering...............................................................................
Escrow of Subscription Proceeds..................................................................
Issuance of Shares of Common Stock...............................................................
Determination of the Subscription Price..........................................................
Subscription Privileges..........................................................................
Exercise of Rights...............................................................................
Subscription Agent...............................................................................
Information Agent................................................................................
No Revocation of Subscription....................................................................
Transfers and Sales of Rights....................................................................
Extension of Expiration Date.....................................................................
Shares Not Purchased in Rights Offering..........................................................
General..........................................................................................
No Board Recommendation Concerning Exercise of Rights............................................
State and Foreign Securities Laws................................................................
Federal Income Tax Consequences of the Rights Offering...........................................
Risk Factors..............................................................................................
Recent Losses....................................................................................
Liquidity; Availability of Future Financing......................................................
Control by Wexford, Wexford Funds................................................................
Potential Conflicts of Interest..................................................................
Dividend Policy..................................................................................
Limited Market for Common Stock; Possible Delisting..............................................
No Established Market for Rights.................................................................
Arbitrary Subscription Price.....................................................................
Dilution.........................................................................................
Effect of Reverse Stock Split on Small Stockholders..............................................
Shares Eligible for Future Sale..................................................................
Uncertainty of Market Acceptance.................................................................
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Sensitivity to Major Projects....................................................................
Fluctuations in Quarterly Operating Results......................................................
Proprietary Technology and Unpredictability of Patent Protection.................................
Competition......................................................................................
Dependence on Key Personnel......................................................................
Dependence on the Reliability and Performance of Subcontractors..................................
Possible Product Liability.......................................................................
Dependence on Customer Information...............................................................
Potential Environmental Liability................................................................
Special Meeting of Stockholders...........................................................................
General Information..............................................................................
Matters to be Considered at the Special Meeting..................................................
Outstanding Shares; Quorum.......................................................................
Voting Rights and Proceeds.......................................................................
Proposal 1- Adoption of the 1996 Stock Plan......................................................
Proposal 2 - Amendments to the Certificate of Incorporation......................................
Proposal 3 - Authorization to Issue Shares of Common Stock
in the Rights Offering and the Wexford Debt Conversion...........................................
Registration and Resale of Shares.........................................................................
The Company...............................................................................................
Use of Proceeds...........................................................................................
Capitalization............................................................................................
Price Range of Common Stock and Dividends.................................................................
Summary Financial Information.............................................................................
Pro Forma Consolidated Financial Information..............................................................
Pro Forma Consolidated Condensed Balance Sheet...................................................
Pro Forma Consolidated Statements of Operations...........................................................
Management's Discussion and Analysis of Financial Condition and Results of Operations.....................
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995........................
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994........................
Liquidity and Capital Resources..................................................................
Backlog and Bookings.............................................................................
Effects in Inflation; Other Cost Increases.......................................................
Foreign Currency Translation.....................................................................
Cautionary Statement.............................................................................
Certain Transactions
Components of the Conversion Debt................................................................
Origin of the Conversion Debt....................................................................
The New Line of Credit...........................................................................
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Warrants.........................................................................................
Wexford Fee......................................................................................
Business
The Company......................................................................................
Description of the Business......................................................................
Products and Services............................................................................
Dampers, Diverters, Expansion Joints, Piping Systems,
Hydraulic Equipment and Other Services ..........................................................
Patents and Trademarks...........................................................................
Research and Product Development.................................................................
Marketing........................................................................................
Customers........................................................................................
Raw Materials....................................................................................
Competition......................................................................................
Government Regulation............................................................................
Employees........................................................................................
Financial Information About Foreign and Domestic Sales...........................................
Employment.......................................................................................
Properties................................................................................................
Management................................................................................................
Executive Officers...............................................................................
Compensation of Executive Officers...............................................................
Option Grants Table..............................................................................
Aggregate Options Held at the End of 1996 Fiscal Year............................................
Employment, Severance and Other Agreements.......................................................
Compensation Committee Interlocks................................................................
Security Ownership of Principal Stockholders and Management...............................................
Compliance with Section 16(a) of Exchange Act....................................................
Compensation Committee's Report on Executive Compensation........................................
Chief Executive Officer's Compensation...........................................................
Compensation of Other Executives.................................................................
Components of Compensation.......................................................................
Performance Graph................................................................................
Description of Capital Stock and Other Securities.........................................................
Common Stock.....................................................................................
Transfer Agent...................................................................................
Preferred Stock..................................................................................
Warrants.........................................................................................
Shares Eligible for Future Sales
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Basis and Holding Period of Rights...............................................................
Sale of Rights...................................................................................
Lapse of Rights..................................................................................
Exercise of Rights; Basis and Holding Period of the Common Stock.................................
Legal Matters.............................................................................................
Experts .................................................................................................
Miscellaneous.............................................................................................
Additional Information....................................................................................
Financial Statements......................................................................................
</TABLE>
iv
<PAGE>
Information contained herein is subject to completion or
amendment. A registration statement relating to these
securities has been filed with the Securities and Exchange
Commission. These securities may not be sold nor may offers to
buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any
such state.
PROSPECTUS/PROXY STATEMENT
27,112,000 Shares of Common Stock
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
Transferable Rights Expiring ____________, 1998
to Purchase up to 27,112,000 Shares of Common Stock for $.10 per share
This Prospectus/Proxy Statement relates to an aggregate of
27,112,000 pre-split shares (the "Shares") of Common Stock, par value $.01 per
share (the "Common Stock"), of Wahlco Environmental Systems, Inc., a Delaware
corporation ("Wahlco" or the "Company"), which are to be offered by the Company
in connection with the Plan of Financial Restructuring (the "Restructuring Plan"
or the "Plan") referred to below and to 27,112,000 Rights (the "Rights"), each
to purchase one Share at a purchase price of $.10 per Share, which are to be
issued by the Company as part of the Rights Offering referred to below (the
"Rights Offering"). See "PLAN OF FINANCIAL RESTRUCTURING" and "THE RIGHTS
OFFERING." The Shares offered hereby will be subject to reduction, prior to
delivery, pursuant to a proposed 1-for-10 reverse stock split of the Common
Stock, upon consummation of the Restructuring Plan. See "PLAN OF FINANCIAL
RESTRUCTURING -- Reverse Stock Split."
If the Plan is approved by the stockholders of the Company at
the Special Meeting of Stockholders to be held on _____ __, 1998, the Company
will make the Rights Offering to its stockholders (the "Rights Offering") by
distributing to each stockholder of record other than WES Acquisition Corp.
("WESAC") of Common Stock at the close of business on December ____, 1997 (the
"Rights Record Date") eight transferable subscription rights (the "Rights") for
each share of Common Stock held on the Rights Record Date. Each Right entitles
the holder thereof to purchase one share of Common Stock (the "Basic
Subscription Privilege") at a price of $.10 per share (the "Subscription
Price"). No Rights will be issued to WESAC, which owns approximately 81% of the
outstanding Common Stock. The Rights entitle the holders thereof to subscribe
for and purchase a total of 27,112,000 pre-split shares of Common Stock. Holders
of Rights ("Rights Holders") may exercise Rights at any time until 5:00 p.m.,
New York City time, on _________, 1998 (such time and date of expiration, the
"Expiration Date"), after which the Rights will not be exercisable and will have
no value. The Rights will be evidenced by transferable rights certificates (the
"Rights Certificates"). If the Rights Offering is approved by stockholders at
the Special Meeting, the Rights Certificate will be mailed to stockholders of
record as of the Rights Record Date promptly after such date.
Each holder of Rights who exercises the Basic Subscription
Privilege may oversubscribe, at the Subscription Price, for up to one additional
share for each share of Common Stock purchased under the Basic Subscription
Privilege (the "Oversubscription Privilege"). Shares that are not subscribed for
under the Basic Subscription Privilege will be available for oversubscription.
If insufficient shares of Common Stock are available to satisfy fully all
oversubscriptions, the available shares will be prorated among and sold to those
who oversubscribe. See "THE RIGHTS OFFERING--Subscription
Privileges--Oversubscription Privilege".
THE RIGHTS OFFERING IS CONDITIONED UPON THE APPROVAL BY THE
STOCKHOLDERS OF THE COMPANY AND THE CONSUMMATION OF THE RESTRUCTURING PLAN, AND
WILL BE WITHDRAWN AND ANY SUBSCRIPTION FUNDS RETURNED IF THE PLAN IS NOT
CONSUMMATED FOR ANY REASON. IN THE EVENT OF ANY SUCH WITHDRAWAL, ALL PERSONS WHO
HAVE PURCHASED RIGHTS FROM STOCKHOLDERS OR SUBSEQUENT TRANSFEREES WILL LOSE ALL
CONSIDERATION PAID FOR RIGHTS UNLESS OTHER ARRANGEMENTS HAVE BEEN MADE WITH THE
SELLER OR SELLERS THEREOF. SEE "RISK FACTORS -- CONTINGENCIES AFFECTING THE
PLAN."
<PAGE>
The purchase price for the Shares issuable upon the exercise
of Rights bears no relationship to the net assets of the Company or to the
current market price of the Company's Common Stock. The purchase price of shares
of Common Stock issuable upon the exercise of Rights was determined by the
Company based on the funding requirements of the Plan and the anticipated
financial condition of the Company following consummation of the Plan. See "THE
RIGHTS OFFERING -- Determination of the Subscription Price."
The Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "WAL". On September 17, 1997, the last full trading
day before the public announcement of the Rights Offering, the last reported
sale price for the Common Stock on the NYSE was $13/16 or $.8125 per share. On
__________, 1998, the last reported sale price for the Common Stock on the NYSE
was $________ per share. There has been no prior market for the Rights.
Application has been made to list the Rights for trading on the NYSE; however, a
market for the Rights may not develop or, if it does develop, such market may
not be available throughout the Rights Offering. Application has also been made
to list on the NYSE the shares of Common Stock sold in the Rights Offering.
AN INVESTMENT IN THE SECURITIES OFFERED PURSUANT TO THIS
PROSPECTUS/ PROXY STATEMENT IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
============== ============================= ============================================ ==========================
UNDERWRITING DISCOUNTS PROCEEDS TO COMPANY(2)
SUBSCRIPTION PRICE AND COMMISSIONS(1)
- -------------- ----------------------------- -------------------------------------------- --------------------------
<S> <C> <C> <C>
Per Share $ .10 $200,000 $ .10
- -------------- ----------------------------- -------------------------------------------- --------------------------
Total $2,711,200.00 None $2,711,200.00
============== ============================= ============================================ ==========================
</TABLE>
(1) The shares issuable in the Rights Offering are being offered and sold
directly by the Company, and no commissions or other remuneration is
intended to be paid to any person for soliciting purchases of such shares.
See "THE RIGHTS OFFERING -- Method of Offering". Wexford Capital Partners
II, L.P., and Wexford Overseas Partners I, L.P., both Delaware limited
partnerships (the "Wexford 1995 Funds") and affiliates of Wexford
Management, LLC, a Connecticut limited liability company ("Wexford"), will
be paid a fee of $100,000 in the form of Common Stock in connection with
the Rights Offering. See "PLAN OF FINANCIAL RESTRUCTURING -- Rights
Offering" and "CERTAIN TRANSACTIONS -- Stand-by Purchase Commitment Fee."
Wexford will be paid a financial advisory fee of $100,000 in connection
with the Rights Offering and the related Restructuring Plan (as more fully
described below). See "CERTAIN TRANSACTIONS -- Wexford Fee."
(2) Before deducting total expenses payable by the Company estimated at
$400,000 in cash, plus $100,000 payable in the form of shares of the
Company's Common Stock.
January __, 1998
2
<PAGE>
The issuance of the securities to which this Prospectus/Proxy
Statement relates is conditioned upon the approval by the Company's stockholders
of the Restructuring Plan. The Plan will be submitted to the Company's
stockholders for approval at the Special Meeting of Stockholders to be held on
_____ __, 1998. See "SPECIAL MEETING OF STOCKHOLDERS." This Prospectus/Proxy
Statement is the principal means by which the Company is soliciting proxies from
its stockholders in respect of the Special Meeting.
The Company has filed a registration statement with the
Securities and Exchange Commission in respect of the shares of Common Stock and
the Rights to which this Prospectus/Proxy Statement relates. For information
concerning the circumstances in which this Prospectus/Proxy Statement may be
used, see "THE RIGHTS OFFERING -- Registration and Resales."
NO DEALER, SALESMAN OR ANY OTHER PERSON IS AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN OR INCORPORATED
BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY, OTHER THAN THE RIGHTS OR
THE COMMON STOCK OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION WHERE IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROXY STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
The Company's executive offices are located at 3600 West
Segerstrom Avenue, Santa Ana, California 92704 and its telephone number is (714)
979-7300.
------------
THIS PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE SHARES OR THE RIGHTS IN ANY STATE OR
OTHER JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides
a "safe harbor" for certain forward-looking statements. The factors discussed
under "Risk Factors", among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this Proxy
Statement/Prospectus, in filings by the Company with the Securities and Exchange
Commission (the "Commission"), in the Company's press releases and in oral
statements made by authorized officers of the Company. When used in this Proxy
Statement/Prospectus, the words "estimate", "project", "anticipate", "expect",
"intend", "believe", and similar expressions are intended to identify
forward-looking statements.
3
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Commission.
Such reports and other information can be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549-1004; and at the Commission's Regional Offices at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material can
also be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
also maintains a web site (http://www.sec.gov) that contains reports, proxy
statements and other information regarding the Company. Such reports and other
information concerning the Company can also be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005, on which the Company's Common
Stock is listed. Reference is hereby made to the Registration Statement of which
this Proxy Statement/Prospectus is a part (the "Registration Statement") and to
the exhibits thereto filed with the Commission for further information about the
Company, the Common Stock and the Rights. Statements contained herein concerning
provisions of documents are necessarily summaries of such documents, and each
statement is qualified in its entirety by reference to the complete document
filed with the Commission. As permitted by the rules and regulations of the
Commission, this Proxy Statement/Prospectus omits certain information contained
in the Registration Statement.
4
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, AND THE FINANCIAL STATEMENTS AND NOTES THERETO INCORPORATED BY
REFERENCE, IN THIS PROSPECTUS. EACH INVESTOR SHOULD READ THIS ENTIRE PROSPECTUS
BEFORE PURCHASING RIGHTS OR SUBSCRIBING FOR THE SHARES OF COMMON STOCK OFFERED
HEREBY.
The Company
The Company designs, manufactures, and sells air pollution
control equipment and related products and services, combined cycle gas turbine
products and metallic and fabric bellows to electric utilities, independent
power producers, cogeneration plants, and industrial manufacturers worldwide.
The Company also provides mechanical plant installation services and rents
associated equipment to users in the U.K. The Company operates through several
subsidiaries which focus on specific geographical regions or products. These
entities, located primarily in the United States and the U.K., are coordinated
through common corporate management.
The Company's principal executive offices are located at 3600
West Segerstrom Avenue, Santa Ana, California 92704, and its telephone number is
(714) 979-7300.
Adverse Financial Condition
The Company has experienced losses for each of the past five
years, and these losses have continued in 1997. For the 1996 fiscal year, losses
totaled approximately $10.8 million. The Company's independent public
accountants qualified their report on the Company's financial statements for the
1996 fiscal year, stating that there was substantial doubt about the Company's
ability to continue as a going concern. For the nine-month period ended
September 30, 1997, the Company reported a net loss of approximately $2.4
million. As of September 30, 1997, the consolidated stockholders' equity of the
Company was approximately negative $5.2 million.
The Company anticipates that the net loss for the fourth
quarter of 1997 will be larger than the net loss the Company reported for the
third quarter, due to increased provisions for warranty work and bad debts
related to a contract for the installation of multiple diverters in a foreign
location. The Company has not determined the precise magnitude of the expected
net loss for the fourth quarter of 1997 at this time. The systems, manufactured
under subcontract, went through initial start-up trials commencing in September
1997, and the additional costs were identified in November and December.
Commencing in 1993, the Company initiated a series of actions
intended to cope with its adverse financial condition. These actions included
layoffs and other steps designed to reduce overhead, including sales of various
Company assets. As a result, the Company's selling, general and administrative
expense has declined to an annual rate of approximately $12 million in 1997, as
compared to an annual rate of approximately $29.9 million for 1992. In 1995,
approximately $15 million of the Company's debt was canceled in connection with
WESAC's acquisition of its Common Stock of the Company. See "BUSINESS -- The
Company" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS." Despite these and other actions, the Board of Directors
believes that the Company's financial condition needs to be further
strengthened, which is why it has determined, subject to stockholder approval,
to implement the Restructuring Plan. See "PLAN OF FINANCIAL RESTRUCTURING."
Plan of Financial Restructuring
In order to improve its financial condition, the Company has
devised the Restructuring Plan. The Restructuring Plan contemplates the Rights
Offering to stockholders of the Company (except WESAC) as contemplated herein,
the Silicon Valley Bank Repayment, the WESAC Debt Conversion, the New Line of
Credit, the Reverse Stock Split and the WESAC Merger. The consummation of each
of these transactions is contingent upon one another and certain elements of the
Restructuring Plan will require stockholder approval at
5
<PAGE>
the Special Meeting to be held on ____ __, 1998. The Reverse Stock Split
requires the approval of the New York Stock Exchange (the "NYSE"). See "PLAN OF
FINANCIAL RESTRUCTURING -- Contingencies Affecting the Plan." The principal
elements of the Restructuring Plan are as follows:
Rights Offering. The Restructuring Plan contemplates raising
cash by means of the offering to existing stockholders of the Company (other
than WESAC) of rights to purchase an aggregate of 27,112,000 pre-split shares of
Common Stock at the exercise price of $.10 per share. Wexford Capital Partners
II, L.P., a Delaware limited partnership, and Wexford Overseas Partners I, L.P.,
a Delaware limited partnership, both of which are affiliates of Wexford
Management LLC ("Wexford"), and which are hereinafter referred to as the
"Stand-by Purchasers" or the "Wexford 1995 Funds" have agreed to purchase, at
the Subscription Price, all shares not subscribed for in the Rights Offering, if
any (the "Unsubscribed Shares"). The commitment of the Stand-by Purchasers to
purchase the Unsubscribed Shares is hereinafter referred to as the "Stand-by
Commitment." As compensation for providing the Stand-by Commitment, upon
consummation of the Restructuring Plan, the Company will pay the Stand-by
Purchasers a fee of $100,000, payable in shares of Common Stock. See "CERTAIN
TRANSACTIONS -- Stand-by Purchase Commitment Fee." The Company will receive cash
proceeds of approximately $2.7 million from the Rights Offering, before
deduction of cash expenses, which are estimated at $400,000 (or $500,000
including a $100,000 Stand-by Purchaser fee payable in shares of Common Stock).
For information regarding the use of proceeds of the Rights Offering, see "USE
OF PROCEEDS."
Silicon Valley Bank Repayment. In October 1995, the Company entered into a loan
and security agreement (the "SVB Loan") with Silicon Valley Bank ("SVB"), under
which SVB provided the Company with a $4,000,000 working capital loan through
September 1996. In May 1996, the Company revised the terms of the SVB Loan.
Under the renegotiated terms, SVB agreed to provide a $3,000,000 line of credit,
without covenants, to the Company through October 25, 1996. WESAC agreed to
collateralize its guarantee of the Company's outstanding loan and letter of
credit balance of $1,927,000 with cash, and to similarly collateralize any
additional principal and interest borrowings up to the maximum of $3,000,000. In
October 1996, the SVB Loan agreement was further modified, so that (i) the
maturity date was extended to May 1998, and (ii) the interest rate on funds
borrowed by the Company was reduced from about 11% to approximately 5.5%,
because WESAC had deposited with SVB cash in an amount equal to the Company's
outstanding borrowings under the SVB Loan and the face amount of all letters of
credit issued for the benefit of the Company. SVB has agreed to extend the
stated maturity of the SVB Loan until December 31, 2000. Outstandings under the
SVB Loan totaled $1,927,000 at September 30, 1997, which included $1,700,000 of
cash borrowings and $227,000 of cash collateral backing letters of credit.
Under the Restructuring Plan, the cash borrowings under the SVB Loan will be
paid off from the proceeds of the Rights Offering. See "USE OF PROCEEDS."
WESAC Debt Conversion. As of December 31, 1997, the Company
will owe to WESAC approximately $11,244,000 (including interest) for loans made
by WESAC at various times in 1995 and 1996. As used herein, the term "Conversion
Debt" means that sum, plus interest accruing at the rate of approximately
$121,000 per month. The Conversion Debt bears interest at various rates, and has
various maturity dates. No cash interest is being paid currently on the
Conversion Debt. Rather, pursuant to two agreements dated April 12, 1996 and
March 12, 1997, between WESAC and the Company, all such interest (except
interest on the Fee Note (as hereinafter defined)) is being added to principal
on a monthly or quarterly basis on the dates it would otherwise become due and
payable. See "CERTAIN TRANSACTIONS -- Components of the Conversion Debt." WESAC,
which currently owns 14,260,000 pre-split shares, representing approximately
81%, of the Company's outstanding Common Stock, will not receive any Rights.
Instead, assuming stockholder approval, after the Rights Offering is completed
and the Reverse Stock Split is effected, the Conversion Debt will be converted
into Common Stock of the Company at the rate of $1.00 (ten times the
Subscription Price) of Conversion Debt for each share of Common Stock. WESAC has
funded its loans to the Company by means of
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loans from the Wexford 1995 Funds, the Wexford 1996 Funds (as hereinafter
defined) and the stockholders of WESAC (such parties being hereinafter referred
to as the "WESAC Creditors").
WESAC will receive approximately 11,244,000 post-split shares
of Wahlco Common Stock (after giving effect to the Reverse Stock Split) upon the
conversion of the Conversion Debt. Although the conversion rate for the
Conversion Debt will be ten times the Subscription Price, because the WESAC Debt
Conversion will occur after the Reverse Stock Split, WESAC will be converting
its debt into shares of Common Stock on the same economic basis as Public
Stockholders who purchase shares of Common Stock in the Rights Offering. After
giving effect to the Restructuring Plan, the Wexford Entities (as hereinafter
defined) will own not less than 81% of the Common Stock of the Company. The
exact percentage that will be owned by the Wexford Entities will depend on the
extent to which Public Stockholders elect to purchase shares of Common Stock in
the Rights Offering. See "PLAN OF FINANCIAL RESTRUCTURING -- Pro Forma Effect of
Plan on Stockholders." For purposes hereof, the term "Wexford Entities" means
Wexford, the Wexford 1995 Funds, the Wexford 1996 Funds and any person or entity
who is or becomes a stockholder of the Company and who is an "affiliate" of
Wexford within the meaning of Rule 405 under the Securities Act of 1933, as
amended.
The Restructuring Plan is intended first, to strengthen the
Company's balance sheet, and second to offer the Public Stockholders the
opportunity to purchase Common Stock in the Rights Offering on the same economic
terms that the Conversion Debt will be converted into Common Stock. If the
Rights Offering is fully subscribed by stockholders of the Company and their
transferees (such stockholders and their transferees being hereinafter referred
to as the "Public Shareholders") other than WESAC or stockholders of WESAC, the
Public Stockholders' percentage ownership of the Company will remain at
approximately 19%. The Stand-by Purchasers will only increase the percentage of
the Common Stock owned by the Wexford Entities to the extent that the Public
Stockholders do not purchase shares of Common Stock in the Rights Offering.
Reverse Stock Split. After completion of the Rights Offering,
the Company intends, subject to the approval of the NYSE, to effect a 1-for-10
reverse stock split. After giving effect to the Rights Offering, the WESAC Debt
Conversion and the Reverse Stock Split, there will be 15,775,000 shares of
Common Stock of the Company issued and outstanding. See "SPECIAL MEETING OF
STOCKHOLDERS -- Proposal 2 -- Amendments to the Certificate of Incorporation."
It is a condition to the consummation of the Restructuring Plan that the NYSE
approve the Reverse Stock Split, but there can be no assurance that the Company
will be able to obtain such approval. See "PLAN OF FINANCIAL RESTRUCTURING --
Contingencies Affecting the Plan." As a result of the Reverse Stock Split, if a
stockholder's stock ownership is not evenly divisible by 10 shares, the
remainder will be paid in cash, in lieu of a fractional share. Only stockholders
who own 9 or fewer shares of Common Stock prior to the Reverse Stock Split will
receive no shares of Common Stock of the Company after the Reverse Stock Split.
See "SPECIAL MEETING -- Proposal 3 -- Amendments to Certificate of
Incorporation" and "PLAN OF FINANCIAL RESTRUCTURING -- Reverse Stock Split."
Cash will be paid on a per share basis at the greater of the Subscription Price
or the average closing market price for the Common Stock on the NYSE for the 20
trading days preceding the effectiveness of the Reverse Stock Split.
New Line of Credit. In connection with the Restructuring Plan,
the Wexford 1995 Funds and the Wexford 1996 Funds (as hereinafter defined, and
together with the Wexford 1996 Funds, the "Wexford Funds") have agreed, pursuant
to an Amended and Restated Credit Agreement dated ______, 1998 (the "New Line of
Credit") to make a line of credit of up to $3,000,000 of loans (the "Tranche A
Line") to the Company until the consummation of the Restructuring Plan. As used
herein, the term "Wexford 1996 Funds" means: Wexford Special Situations 1996,
L.P., a Delaware limited partnership, Wexford Special Situations 1996
Institutional, L.P., a Delaware limited partnership, Wexford Special Situations
1996 Limited, a Cayman Islands exempted company, and Wexford-Euris Special
Situations 1996, L.P., a Delaware limited partnership. Any loans under the
Tranche A Line (the "Tranche A Loans") will be due and payable upon consummation
of the Restructuring Plan and will be repaid from the net proceeds of the Rights
Offering after the prior repayment of cash borrowings under the SVB Loan and
payment of the fees and expenses incurred in connection with the Restructuring
Plan; provided, however that to the extent such net proceeds are insufficient to
repay the Tranche A Loans in full, the maturity of any unpaid Tranche A Loans
will be extended until December 31, 2000. See
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"USE OF PROCEEDS." Upon the consummation of the Restructuring Plan, the Wexford
Funds will make up to an additional line of credit of up to $2,500,000 (the
"Tranche B Line") available to the Company, to be due and payable on December
31, 2000. All loans pursuant to the New Line of Credit will bear interest at the
rate of 13% per annum and will be secured by a first priority perfected lien on
the assets of the Company. If and to the extent that the Company borrows under,
or has letters of credit issued on its behalf pursuant to, the Chase Facility
(as hereinafter defined), the Company's availability under the Tranche A Line or
the Tranche B Line will be reduced dollar for dollar by the amount of such
borrowings or letters of credit.
In February 1997, the Wexford 1995 Funds established and
guaranteed a credit facility at Chase Manhattan Bank (the "Chase Facility") to
provide short-term financing for companies owned by the Wexford 1995 Funds,
including the Company. The Chase Facility had a funding capacity of
approximately $3.8 million at September 30, 1997, against which the Company was
account party on letters of credit totaling approximately $2.3 million and had
drawn $750,000 for working capital. In October, the Chase Facility was increased
to a total of $5.0 million and the Company drew an additional $1.0 million as a
short-term loan and $500,000 as a letter of credit. In November 1997, the
Company drew $400,000 for working capital. Prior to completion of the Rights
Offering, the Company anticipates that an additional $500,000 will be required
to be drawn under the Chase Facility. Before making each loan or issuing of
each letter of credit, the Chase Manhattan Bank ("Chase") advises the Company of
the terms applicable to such loan or letter of credit. The current borrowings
bear interest at the average rate of 9.5%.
The Company plans to use the Chase Facility for letters of
credit and bank guarantees, as well as loans to the extent the terms offered are
advantageous to the Company. The Company believes that the Chase Facility
supplements the New Credit Line, and that the combined facilities are at least
as advantageous to the Company as available alternatives lacking credit support
from the Wexford Entities. See "PLAN OF FINANCIAL RESTRUCTURING -- New Line of
Credit."
WESAC Merger. WESAC was established in 1995 as the acquisition
and lending vehicle for the Wexford 1995 Funds and certain individuals. See "THE
COMPANY -- Business" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL STOCKHOLDERS
AND MANAGEMENT." Because the intercompany debt of the Company to WESAC is being
converted into shares of Common Stock as part of the Restructuring Plan, the
creditors of WESAC have agreed to convert their loans to WESAC into additional
shares of common stock of WESAC at the rate of one share of common stock of
WESAC for each $1.00 of debt so converted (the "Funding Conversion"). To reduce
the complexity of the ownership structure and to reduce overall expenses, the
Company and the stockholders of WESAC have agreed to merge WESAC with and into
Wahlco MergerSub, Inc., a newly-formed Delaware corporation that is a
subsidiary of the Company ("MergerSub"). In connection with the Restructuring
Plan, pursuant to an agreement of merger dated ______, 1998, between WESAC and
MergerSub (the "WESAC Merger Agreement"), after completion of the Rights
Offering, the Reverse Stock Split, the WESAC Debt Conversion and the Funding
Conversion, WESAC will be merged into MergerSub, with MergerSub being the
surviving corporation (the "WESAC Merger"). Pursuant to the WESAC Merger
Agreement, the outstanding common stock of WESAC will be canceled and the
stockholders of WESAC will receive their pro rata allocations of approximately
12,670,000 post-split shares of Common Stock. The resale of the Common Stock
received as a result of the WESAC Merger shall be limited to a maximum of 25,000
shares a month by any one holder by the terms of the WESAC Merger Agreement.
Pro Forma Effect on Financial Condition. Based on the
foregoing, if the Restructuring Plan had been consummated as of September 30,
1997, after giving effect to all of the pro forma assumptions described below
(see "PRO FORMA CONSOLIDATED FINANCIAL INFORMATION"), consolidated
8
<PAGE>
stockholders' equity would have been approximately $8.0 million, and cash and
cash-equivalents would have been $0.8 million. In addition, the Company would
have had an unused line of credit of $2.5 million.
Commitments and Contingencies Affecting the Plan. The
consummation of certain aspects of the Restructuring Plan is conditioned upon
approval by the Company's stockholders and approval of the Reverse Stock Split
by the NYSE. Although WESAC, which owns approximately 81% of the outstanding
shares of Common Stock, has advised the Company that it intends to vote its
shares in favor of the Restructuring Plan, there can be no assurance that the
Company will obtain the approval of the NYSE for the Reverse Stock Split. See
"PLAN OF FINANCIAL RESTRUCTURING -- Contingencies Affecting the Plan" and
"SPECIAL MEETING OF STOCKHOLDERS."
Pro Forma Effect of Plan on Stockholders. Assuming that the
Restructuring Plan is approved by the Company's Stockholders at the Special
Meeting, the Company anticipates that under the Restructuring Plan it will issue
27,112,000 additional shares of Common Stock, subject to adjustment prior to
delivery for the Reverse Stock Split described below. While the Rights Offering
is intended to offer continued participation to all stockholders on equivalent
terms, if all or a substantial portion of the Rights are not exercised by
stockholders not affiliated with Wexford or other WESAC stockholders (the
"Public Stockholders"), the issuance of such shares will result in dilution in
the percentage ownership of the Company by its existing Public Stockholders. See
"RISK FACTORS -- Dilution" and "PLAN OF FINANCIAL RESTRUCTURING -- Pro Forma
Effect of Plan on Stockholders."
Information regarding the Rights Offering and the use of
proceeds thereof is set forth elsewhere in this Summary and under the captions
"THE RIGHTS OFFERING" and "USE OF PROCEEDS." For information concerning the
terms of the Company's Common Stock, see "DESCRIPTION OF COMMON STOCK AND OTHER
SECURITIES."
Reverse Stock Split. In connection with the Restructuring
Plan, the Company intends, with the consent of the NYSE, to effect a 1-for-10
reverse stock split (the "Reverse Stock Split") such that every ten (10)
outstanding shares of Common Stock would be combined into one share of Common
Stock. Fractional share interests created as a result of the Reverse Stock Split
will be satisfied by the payment of cash in lieu of the issuance of fractional
shares or scrip therefor. All financial and other information in this
Prospectus/Proxy Statement excludes the effect of the Reverse Stock Split. The
Restructuring Plan and the Reverse Stock Split will result in adjustments to the
number of shares issuable upon exercise of certain outstanding warrants and
stock options issued by the Company. See "DESCRIPTION OF COMMON STOCK AND OTHER
SECURITIES."
The Rights Offering
Rights..............................Each record holder (each such holder and any
transferee being a "Rights Holder") of
Common Stock at the close of business on
January ___, 1998 (the "Rights Record
Date"), other than WESAC, will receive eight
transferable subscription rights ("Rights")
for each share of Common Stock held on the
Rights Record Date. Each Right will entitle
the Rights Holder to purchase from the
Company one share of Common Stock for a cash
price of $.10 per share (the "Subscription
Price") on the terms and subject to the
conditions of the offering. The distribution
of Rights and sale of shares of Common Stock
upon the exercise of Rights are referred to
as the "Rights Offering". A total of
approximately 27,112,000 Rights will be
distributed in the Rights Offering.
Rights Record Date..................____________, 1998 5:00 p.m., New York City
time.
Stand-By Commitment.................Wexford Capital Partners II, L.P., a
Delaware limited partnership, and Wexford
Overseas Partners I, L.P., a Delaware
limited partnership, both of which are
affiliates of Wexford (the "Wexford 1995
Funds"),
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<PAGE>
have agreed to purchase, at the Subscription
Price, all shares not subscribed for in the
Rights Offering, if any. As compensation for
the Stand-by Commitment, the Company has
agreed to pay the Wexford 1995 Funds a fee
of $100,000 in the form of shares of Common
Stock, upon consummation of the
Restructuring Plan. In this capacity, the
Wexford 1995 Funds are referred to as the
"Stand-by Purchasers." See "CERTAIN
TRANSACTIONS -- Stand-by Purchase Commitment
Fee."
Expiration Date;
Extension of Offering..............._____________, 1998 5:00 p.m., New York
City time (the "Expiration Date"), unless
extended by the Board of Directors of the
Company in its sole and absolute discretion.
The Rights Offering may be extended for up
to 30 additional days by the Board of
Directors of the Company in its sole and
absolute discretion.
Use of Proceeds.....................Cash proceeds of the Rights Offering will be
used to provide additional working capital
for the Company. See "PLAN OF FINANCIAL
RESTRUCTURING" and "USE OF PROCEEDS."
Contingencies;
Escrow Arrangements.................The Rights Offering is conditioned upon
certain approvals by the Company's
stockholders, the approval by the NYSE of
the Reverse Stock Split, and the
consummation of the Restructuring Plan. If
such approvals are not obtained, the Company
will not commence the Rights Offering. If
such approvals are obtained, but the Plan is
not consummated, the Rights Offering will be
withdrawn and all subscription funds
returned, without interest. See "THE RIGHTS
OFFERING -- Escrow of Subscription
Proceeds" and "PLAN OF FINANCIAL
RESTRUCTURING -- Contingencies Affecting the
Plan."
Listing.............................The Company has applied to the NYSE to list
the Rights and the Shares being offered
pursuant to this Prospectus/Proxy Statement.
The consummation of the Restructuring Plan
is contingent upon such securities being
accepted for listing, upon official notice
of issuance, on the NYSE. See "PRICE RANGE
OF COMMON STOCK AND DIVIDENDS" and "RISK
FACTORS -- No Established Market."
Certain Income Tax
Considerations......................For federal income tax purposes, the
distribution of Rights to shareholders will
not be a taxable event. On the sale of a
Right, a shareholder will recognize gain or
loss in an amount equal to the difference
between the amount realized upon such sale
and the tax basis of the Right, if any. See
"THE RIGHTS OFFERING -- Federal Income Tax
Consequences of the Rights Offering."
Basic Subscription Privilege........Rights Holders may purchase, at the
Subscription Price, one share of Common
Stock for each Right held (the "Basic
Subscription Privilege"). See "THE RIGHTS
OFFERING--Subscription Privileges--Basic
Subscription Privilege".
Oversubscription Privilege..........Each Rights Holder who exercises the Basic
Subscription Privilege may also subscribe,
at the Subscription Price, for up to one
additional share of Common Stock for each
share purchased by him under the Basic
Subscription Privilege (the
"Oversubscription Privilege"), to the extent
shares of Common Stock
10
<PAGE>
have not been purchased by others under the
Basic Subscription Privilege. If sufficient
shares to satisfy all oversubscriptions are
not available, the available shares will be
prorated among oversubscribing Rights
Holders, based upon the shares which they
purchase under the Basic Subscription
Privilege. See "THE RIGHTS
OFFERING -- Subscription
Privileges -- Oversubscription Privilege".
Procedure for
Exercising Rights The Basic Subscription Privilege and the
Oversubscription Privilege may be exercised
by properly completing the Rights
Certificate evidencing the Rights (a "Rights
Certificate") and forwarding such Rights
Certificate to the Subscription Agent (as
defined below) for receipt by the
Subscription Agent on or prior to the
Expiration Date. Payment of the Subscription
Price for each share of Common Stock
purchased under the Basic Subscription
Privilege and oversubscribed for must
accompany each subscription. If
subscriptions are mailed, it is recommended
that insured registered mail, with return
receipt requested, should be used. If time
does not permit a Rights Holder to deliver
his subscription to the Subscription Agent
on or before the Expiration Date, such
Holder should use the Guaranteed Delivery
Procedures described under "THE RIGHTS
OFFERING--Exercise of Rights".
Transferability of Rights...........The Rights are freely transferable and are
expected to be traded on the New York Stock
Exchange ("NYSE") under the trading symbol
"______" until the close of business on the
last trading day before the Expiration Date.
Any transfer of Rights will be deemed a
transfer of both the Basic Subscription
Privilege and the Oversubscription
Privilege. [The Subscription Agent will try
to sell Rights for Rights Holders who
deliver to the Subscription Agent by 5:00
p.m., New York City time, on or before
________, 1998 (three business days before
the Expiration Date), one or more Rights
Certificates, with the instruction for sale
included thereon properly signed. There can
be no assurance, however, that any market
for Rights will develop, or that the
Subscription Agent will be able to sell any
Rights. If less than all sales orders
received by the Subscription Agent can be
filled, sales proceeds will be prorated
among the Rights Holders based upon the
number of Rights each Rights Holder has
instructed the Subscription Agent to sell
during the term of the Rights Offering]. See
"THE RIGHTS OFFERING--Method of Transferring
Rights".
Persons Holding
Shares Through Others...............Persons holding shares of Common Stock, and
receiving the Rights with respect to such
shares, through a broker, dealer, commercial
bank, trust company or other nominee, as
well as persons holding certificates of
Common Stock personally who would prefer to
have such institutions exercise or sell
their Rights, should contact the appropriate
institution and request it to effect such
transactions for them. See "THE RIGHTS
OFFERING -- Exercise of Rights".
Issuance of
Common Stock........................Certificates representing shares of Common
Stock purchased in the Rights Offering will
be delivered to subscribers as soon as
practicable after the
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<PAGE>
Restructuring Plan has been consummated. See
"THE RIGHTS OFFERING-- Issuance of Shares of
Common Stock".
Subscription Agent..................ChaseMellon Shareholder Services LLC, P.O.
Box 798, Midtown Station, New York, New York
10018 Attention: Reorganization Department.
(by US Postal Service); 120 Broadway, 13th
Floor, New York, New York 10271 Attention:
Reorganization Department (by hand or
overnight courier).
Information Agent...................Any questions regarding the Rights Offering,
including the procedure for exercising
Rights, and requests for additional copies
of this Proxy Statement/Prospectus or the
notice of guaranteed delivery should be
directed to ChaseMellon Shareholder Services
LLC (the "Information Agent") at 450 West
33rd Street, 15th Floor, New York, New York
10001 or (800) 549-9249.
NYSE Symbol for
Common Stock........................WAL
Shares to be Outstanding
After the Rights Offering...........After the Rights Offering, and after giving
effect to the one-for-ten reverse stock
split (the "Reverse Stock Split") and the
WESAC Debt Conversion (as defined below) ,
the Company will have approximately
15,775,000 (less any fractional shares paid
in cash) outstanding.
Wexford Fee.........................As compensation for its assistance to the
Company in planning, formulating and
implementing the Rights Offering and other
related transactions described in this
Prospectus, including the WESAC Debt
Conversion, after the Rights Offering
completed, the Company will pay to Wexford,
or an affiliate designated by Wexford, a fee
of $100,000, payable in cash.
Reverse Stock Split
The stockholders of the Company are being asked to approve, at
the Special Meeting, two amendments of the Company's certificate of
incorporation, one of which gives effect to the Reverse Stock Split. As a result
of the Reverse Stock Split, assuming such approval, the 44,761,000 shares of
Common Stock to be outstanding after the Rights Offering is completed will be
reduced to 4,476,100 shares, before giving effect to the WESAC Debt Conversion
described below. See "SPECIAL MEETING OF STOCKHOLDERS -- Proposal 2 --
Amendments to Certificate of Incorporation."
Risk Factors
An investment in the securities offered pursuant to this
Prospectus/Proxy Statement is speculative and involve substantial risks. See
"RISK FACTORS."
12
<PAGE>
Summary Balance Sheet Data
The table that follows, entitled "Summary Balance Sheet Data"
sets forth balance sheet information relating to the Company for the nine-months
ended September 30, 1997, as adjusted to give effect to each of the constituent
elements of the Restructuring Plan.
At September 30, 1997
---------------------
Actual Pro Forma (1)
------ -------------
Balance Sheet Data
Current Assets $21,286 $21,897
Working capital 4,120 4,731
Total assets 27,095 27,706
Long-term debt 13,003 418
Total liabilities 32,255 19,670
Stockholders' equity (deficiency) (5,160) 8,036
(1) Based upon all of the pro forma assumptions, and after giving
effect to all of the pro forma transactions, described herein as of September
30, 1997. See "PRO FORMA CONSOLIDATED FINANCIAL INFORMATION."
Certain Transactions With WESAC And Its Affiliates
In connection with the 1996 Line of Credit arranged by WESAC
(see "CERTAIN TRANSACTIONS"), in 1996 the Company issued to the Wexford 1996
Funds that funded the Company's borrowings under that credit line five-year
warrants to purchase 3,404,255 shares of Common Stock of the Company at a price
of $.47 per share. As a consequence of the Rights Offering, the exercise price
of the outstanding warrants held by four partnerships managed by Wexford to
purchase 3,404,255 shares of the Company's Common Stock will be adjusted from
$.47 per share to $.14 per share, pursuant to the anti-dilution provisions of
such warrants. As a consequence of the Reverse Stock Split, such warrants will
entitle the holders to purchase 340,425 shares of the Company's post-split
Common Stock for $1.40 per share, pursuant to the anti-dilution provisions of
such warrants. See "CERTAIN TRANSACTIONS -- Warrants."
Other Matters
At the Special Meeting of Stockholders, in addition to
considering amendments to the Company's certificate of incorporation that give
effect to the Reverse Stock Split and authorize the issuance of shares to enable
the Company to make the Rights Offering and effect the WESAC Debt Conversion,
stockholders are also being asked to approve the 1996 Stock Option Plan and the
grant of options thereunder to officers, directors and employees of the Company.
See "SPECIAL MEETING -- Proposal 2 -- AMENDMENTS TO THE CERTIFICATE OF
INCORPORATION" and "-- Proposal 3 -- Authorization to Issue Shares of Common
Stock."
PLAN OF FINANCIAL RESTRUCTURING
As indicated herein, the Company has incurred six consecutive
years of operating losses, has experienced liquidity problems and currently has
a deficit in stockholders equity of approximately $5.2 million. In order to
improve its financial condition, the Company and WESAC have devised the
Restructuring Plan, the
13
<PAGE>
principal elements of which are set forth in a Restructuring Agreement dated
January __, 1998 (the "Restructuring Agreement") among the Company, WESAC and
certain other parties. The Restructuring Plan contemplates the Rights Offering
to stockholders of the Company (except WESAC) as contemplated herein, the WESAC
Debt Conversion, the New Line of Credit, the Reverse Stock Split and the WESAC
Merger. The consummation of these transactions is contingent upon one another
and will require stockholder approval at the Special Meeting to be held on
______ __, 1998. The principal elements of the Restructuring Plan are as
follows:
Rights Offering
The Restructuring Plan contemplates raising cash by means of
the offering to existing stockholders of the Company (other than WESAC) of
rights to purchase an aggregate of 27,112,000 pre-split shares of Common Stock
at the exercise price of $0.10 per share. The Wexford 1995 Funds, which are
hereinafter referred to as the "Stand-by Purchasers," have agreed to purchase,
at the Subscription Price, all shares not subscribed for in the Rights Offering,
if any (the "Unsubscribed Shares"). The commitment of the Stand-by Purchasers to
purchase the Unsubscribed Shares is hereinafter referred to as the "Stand-by
Commitment." As compensation for the Stand-by Commitment, the Company has agreed
to pay the Stand-by Purchasers a fee of $100,000 in the form of shares of Common
Stock upon consummation of the Restructuring Plan. See "CERTAIN TRANSACTIONS --
Stand-by Purchase Commitment Fee." The Company will receive cash proceeds of
approximately $2.7 million from the Rights Offering, before deduction of cash
expenses, which are estimated at $400,000, plus an additional $100,000 payable
in the form of shares of Common Stock. For information regarding the use of
proceeds of the Rights Offering, see "USE OF PROCEEDS."
Silicon Valley Bank Repayment
In October 1995, the Company entered into the SVB Loan with
SVB, under which SVB provided the Company with a $4,000,000 working capital loan
through September 1996. In May 1996, the Company revised the terms of the SVB
Loan. Under the renegotiated terms, SVB agreed to provide a $3,000,000 line of
credit, without covenants, to the Company through October 25, 1996. WESAC agreed
to collateralize its guarantee of the Company's outstanding loan and letter of
credit balance of $1,927,000 with cash, and to similarly collateralize any
additional principal and interest borrowings or letters of credit up to the
maximum of $3,000,000. In October 1996, the SVB Loan agreement was further
modified, so that (i) the maturity date was extended to May 1998, and (ii) the
interest rate on funds borrowed by the Company was reduced from about 11% to
approximately 5.5%, because WESAC had deposited with SVB cash in an amount equal
to the Company's outstanding borrowings under the SVB Loan and the face amount
of all letters of credit issued for the benefit of the Company. SVB has agreed
to extend the stated maturity of the SVB Loan until December 31, 2000.
Outstandings under the SVB Loan totaled $1,927,000 at September 30, 1997, which
included $1,700,000 of cash borrowings and $227,000 of letters of credit issued
under this loan arrangement. Under the Restructuring Plan, cash borrowings under
the SVB Loan will be paid off from the proceeds of the Rights Offering or
borrowings under the New Line of Credit. See "USE OF PROCEEDS."
WESAC Debt Conversion
As of December 31, 1997, the Company will owe to WESAC a total
of approximately $11,244,000 (the "Conversion Debt") for loans (and interest
which has been added to principal) made by WESAC at various times in 1995 and
1996. The Conversion Debt bears interest at various rates and has various
maturity dates. No interest is being paid currently on the Conversion Debt.
Rather, pursuant to two agreements dated April 12, 1996 and March 12, 1997,
between WESAC and the Company, all such interest (except for interest on the Fee
Note (as hereinafter defined)) is being added to principal on a monthly or
quarterly basis on the dates it would otherwise become due and payable. See
"CERTAIN TRANSACTIONS -- Components of the Conversion Debt" and --"Origins of
the Conversion Debt." WESAC, which currently owns 14,260,000 pre-split shares,
representing approximately 81% of the Company's outstanding Common Stock,
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<PAGE>
will not receive any Rights. Instead, assuming stockholder approval, after the
Rights Offering is completed and the Reverse Stock Split is effected, the
Conversion Debt will be converted into Common Stock of the Company at the rate
of $1.00 (ten times the Subscription Price) of Conversion Debt for each share of
Common Stock. As a result, after the Reverse Stock Split but before the WESAC
Merger, WESAC will receive approximately 11,244,000 post-split shares and will
own a total of approximately 12,670,000 shares, representing approximately 81%,
of the shares of the Company's Common Stock to be outstanding, if the Rights
Offering is fully subscribed for by stockholders other than the Stand-by
Purchasers. Although the conversion rate for the Conversion Debt will be ten
times the Subscription Price, because the WESAC Debt Conversion will occur after
the Reverse Stock Split, WESAC will be converting its debt into shares of Common
Stock of the Company on the same economic basis as persons who exercise Rights.
See "CERTAIN TRANSACTIONS -- Components of the Conversion Debt" and "-- Origins
of the Conversion Debt."
Reverse Stock Split
After completion of the Rights Offering, the Company intends,
subject to the approval of the NYSE, to effect the Reverse Stock Split. After
giving effect to the Rights Offering, the WESAC Debt Conversion and the Reverse
Stock Split, there will be approximately 15,775,000 (less any fractional shares
paid in cash) shares of Common Stock of the Company issued and outstanding.
New Line of Credit
In connection with the Restructuring Plan, the Wexford Funds have
agreed, pursuant to an Amended and Restated Credit Agreement dated ______, 1997
(the "New Line of Credit"), directly or indirectly, to make a $3,000,000 line of
credit (the "Tranche A Line") available to the Company until the consummation of
the Restructuring Plan. Any borrowings by the Company under the Tranche A Line
(the "Tranche A Loans") will be due and payable upon consummation of the
Restructuring Plan and will be repaid from the net proceeds of the Rights
Offering after the repayment of cash borrowings under the SVB Loan and payment
of the fees and expenses incurred in connection with the Restructuring Plan;
provided, however that to the extent such net proceeds are insufficient to repay
the Tranche A Loans in full, the maturity of any unpaid Tranche A Loans will be
extended until December 31, 2000. See "USE OF PROCEEDS." Upon the consummation
of the Restructuring Plan, the Wexford Funds will make an additional $2,500,000
of loans (the "Tranche B Loans") available to the Company, to be due and payable
on December 31, 2000. All loans by the Wexford Funds pursuant to the New Line of
Credit will bear interest at the rate of 13% per annum and will be secured by a
first priority perfected lien on the assets of the Company.
In February 1997, the Wexford 1995 Funds established and
guaranteed the Chase Facility to provide short-term financing for companies
owned by the Wexford 1995 Funds, including the Company. The Chase Facility had a
funding capacity of approximately $3.8 million at September 30, 1997, against
which the Company was account party on letters of credit totaling approximately
$2.3 million and had drawn $750,000 for working capital. In October 1997, the
Chase Facility was increased to a total of $5.0 million and the Company drew an
additional $1.0 million as a short-term loan and $500,000 as a letter of credit.
In November 1997, the Company borrowed an additional $400,000 for working
capital. Before making each loan or issuing each letter of credit, Chase advises
the Company of the terms applicable to such loan or letter of credit. The
current borrowings bear interest at an average rate of 9.5%. Prior to completion
of the Rights Offering, the Company anticipates that an additional $500,000 will
be required to be drawn under the Chase Facility.
The Company plans to use the Chase Facility for letters of
credit and bank guarantees, as well as loans to the extent the terms offered are
advantageous to the Company. The Company believes that the Chase Facility
supplements the New Credit Line, and that the combined facilities are at least
as advantageous to the Company as available alternatives lacking credit support
from the Wexford Entities. See "PLAN OF FINANCIAL RESTRUCTURING -- New Line of
Credit."
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<PAGE>
WESAC Merger
WESAC was established in 1995 as the acquisition and lending
vehicle for the Wexford 1995 Funds and certain individuals. See "THE COMPANY --
"Business" and 'SECURITY OWNERSHIP OF CERTAIN BENEFICIAL STOCKHOLDERS AND
MANAGEMENT." Because the intercompany debt of the Company to WESAC is being
converted as part of the Restructuring Plan, the creditors of WESAC have agreed
to convert their loans to WESAC into additional shares of common stock of WESAC
at the rate of one share of common stock of WESAC for each $1.00 of debt so
converted (the "Funding Conversion"). To reduce the complexity of the
Company's structure and to reduce overall expenses, the Company and the
stockholders of WESAC have agreed to merge WESAC with and into MergerSub. In
connection with the Restructuring Plan, pursuant to the WESAC Merger Agreement,
after completion of the Rights Offering, the Reverse Stock Split, the WESAC Debt
Conversion and the Funding Conversion, WESAC will be merged into MergerSub,
with MergerSub being the surviving corporation. Pursuant to the WESAC Merger
Agreement, the outstanding common stock of WESAC will be canceled and the
stockholders of WESAC will receive their pro rata allocations of approximately
12,670,000 post-split shares of Common Stock. The resale of the Common Stock
received as a result of the WESAC Merger shall be limited to a maximum of 25,000
shares per month by any one holder pursuant to the terms of the WESAC Merger
Agreement.
Pro Forma Effect on Financial Condition
Based on the foregoing, if the Restructuring Plan had been
consummated as of September 30, 1997, consolidated stockholders' equity would
have been approximately $8.0 million, total indebtedness would have been
approximately $670,000, working capital would have been approximately $4.7
million, and cash would have been approximately $0.8 million. In addition, the
Company would have had an unused line of credit of $2.5 million.
See "PRO FORMA CONSOLIDATED FINANCIAL INFORMATION."
The Company believes that the Restructuring Plan will improve
the Company's financial condition. After the consummation of the Restructuring
Plan, the Company's financial viability will depend, in part, on the adequacy of
the Company's cash reserves, the availability of lines of credit and the
Company's ability to service its debt obligations. These factors, in turn, will
depend primarily on the Company's operating performance subsequent to the
Restructuring Plan, business conditions in the industry in which the Company
competes, and other external financial and economic conditions at the time. The
Company is currently incurring operating losses and suffers from adverse
industry conditions. Accordingly, there can be no assurance that the Company
will be able to sustain its financial viability even if the Restructuring Plan
is consummated. See "RISK FACTORS."
Contingencies Affecting the Plan
The consummation of the Restructuring Plan is conditioned upon
(1) the performance by WESAC, Wexford and the Wexford Funds of their obligations
pursuant to the Restructuring Agreement, the New Line of Credit and the WESAC
Merger Agreement, (2) the approval of certain aspects of the Restructuring Plan
by the Company's stockholders, and (3) approval of the Reverse Stock Split by
the NYSE. Although WESAC, which owns approximately 81% of the outstanding shares
of Common Stock, has advised the Company that it intends to vote its shares in
favor of the Restructuring Plan, there can be no assurance that the Company will
obtain the approval of the NYSE for the Reverse Stock Split. If any of these
conditions are not satisfied, neither WESAC nor any Wexford Entity will have any
obligation to consummate the transactions contemplated by the Restructuring
Plan. See "SPECIAL MEETING OF STOCKHOLDERS."
Pro Forma Effect of Plan on Stockholders
Assuming that the Stockholders of the Company approve the
Restructuring Plan at the Special Meeting, the Company anticipates that under
the Restructuring Plan it will issue 27,112,000 million additional
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<PAGE>
shares of Common Stock, subject to adjustment prior to delivery for the Reverse
Stock Split. While The Rights Offering is intended to offer the Public
Stockholders the opportunity to participate in the Restructuring Plan on the
same economic terms as Wexford and its affiliates. However, if all or a
substantial portion of the Rights are not exercised by the Public Stockholders,
the issuance of such shares will result in dilution in the percentage ownership
of the Company by the Public Stockholders. While the Restructuring Plan may
cause a substantial decrease in the percentage holdings of the Company's Public
Stockholders, the Company believes that the Restructuring Plan represents the
best overall alternative for improving the Company's financial condition as well
as an opportunity for Public Stockholders to continue their participation on
terms equivalent to those afforded the Wexford Entities. See "RISK FACTORS --
Dilution".
The following table sets forth (i) the percentage of the
outstanding shares of Common Stock held, as of December 31, 1997, by the Public
Stockholders of the Company as a group and WESAC, and (ii) the percentage of the
outstanding shares of Common Stock which would be held, upon consummation of the
Plan, but prior to the WESAC Merger, by (A) the Public Stockholders, (B) WESAC;
(C) the Stand-by Purchasers, and (D) all Wexford Entities, assuming that (x) the
WESAC Debt Conversion occurs, (y) that no warrants are exercised, and (1) 25% of
the Rights are exercised by Public Stockholders, (2) 50% of the Rights are
exercised by Public Stockholders, (3) 75% of the Rights are exercised by Public
Stockholders and (4) all Rights are exercised by Public Stockholders.
<TABLE>
<CAPTION>
- --------------------- ------------------ ------------------ ------------------ ------------------- ------------------
(a) (b) (c) (d)
At 25% of Rights 50% Rights 75% of Rights All Rights
12/31//97 Exercised by Exercised by Exercised by Exercised by
Public Public Public Public
Stockholders Stockholders Stockholders Stockholders
- --------------------- ------------------ ------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Public Stockholders 19% 6% 11% 15% 19%
- --------------------- ------------------ ------------------ ------------------ ------------------- ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------- ------------------
WESAC 81% 80% 80% 80% 81%
- --------------------- ------------------ ------------------ ------------------ ------------------- ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Stand-By Purchasers zero 13% 9% 5% 0.3%
- --------------------- ------------------ ------------------ ------------------ ------------------- ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------- ------------------
All Wexford Entities 81% 94% 89% 85% 81%
- --------------------- ------------------ ------------------ ------------------ ------------------- ------------------
</TABLE>
The Stand-by Purchasers and WESAC are Wexford Entities. To the
extent that the Rights are not exercised by Public Stockholders, they will be
purchased by the Stand-by Purchasers, so the number and percentage of shares of
Common Stock held by the Wexford Entities will increase and the number and
percentage held by Public Stockholders will decrease. This table includes the
$100,000 fee payable in shares of Common Stock of the Company to the Stand-by
Purchasers. The Board of Directors determined that paying this fee in Common
Stock rather than in cash was advantageous to the Company. The foregoing
percentages will be generally unaffected by the Reverse Stock Split because all
shares of Common Stock outstanding at such time will be adjusted by the same
ratio. See "DESCRIPTION OF CAPITAL STOCK.".
Federal Income Tax Consequences of Restructuring Plan
The following is a summary of the Federal income tax consequences of the
various components of the Restructuring Plan.
Rights Offering. The Company will not recognize any taxable gain or loss
upon issuance of the rights pursuant to the terms of the Rights Offering or upon
exercise or lapse of the rights. For a discussion of the Federal income tax
consequences to stockholders of the Company resulting from the issuance,
exercise, disposition or lapse of the rights, see "THE RIGHTS OFFERING --
Federal Income Tax Consequences of Rights Offering."
Reverse Stock Split. Neither the Company nor its stockholders will
recognize any gain or loss as a result of the Reverse Stock Split. Stockholders
of the Company will be entitled to allocate their existing tax basis over their
reduced number of shares of Common Stock.
WESAC Merger. The merger of WESAC into MergerSub will qualify as a tax free
reorganization under Section 368(a)(2)(D) of the Internal Revenue Code of 1986
(the "Code"). Accordingly, neither WESAC, MergerSub nor the Company will
recognize any taxable gain or loss as a result of the WESAC Merger.
WESAC Debt Conversion. The WESAC Debt Conversion will not result in any
recognition of taxable income or loss to either WESAC or the Company. However,
to the extent that any portion of the Conversion Debt is attributable to accrued
but unpaid interest which was either not deducted by the Company or not reported
as taxable income by WESAC, such amount would be deductible or reportable as
taxable income as of the date of the WESAC Debt Conversion.
Funding Conversion. Except as noted below, the Funding Conversion will not
result in the recognition of any taxable income or loss to either WESAC or the
parties to the Funding Conversion. To the extent that any portion of the debt
converted in the Funding Conversion is attributable to accrued but unpaid
interest which was either not deducted by WESAC or not reported as taxable
income by the holders of such debt, such amount would be deductible or
reportable as taxable income as of the date of the Funding Conversion.
Wexford Fee
In consideration of its efforts in formulating and assisting
in the implementation of the Restructuring Plan, Wexford is to receive from the
Company, upon consummation of the Restructuring Plan, a fee of $100,000, payable
in cash. The Company has also agreed to reimburse Wexford for all out-of-pocket
expenses incurred by Wexford or its affiliates with respect to the Restructuring
Plan. The Company has also agreed to pay the Stand-by Purchasers a fee of
$100,000 in the form of shares of Common stock. See "PLAN OF FINANCIAL
RESTRUCTURING -- Rights Offering" and "CERTAIN TRANSACTIONS -- Stand-by Purchase
Commitment Fee."
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<PAGE>
THE RIGHTS OFFERING
Description of the Offering
Subject to approval of Proposal 2 and Proposal 3 at the
Special Meeting, the Company is distributing transferable subscription rights
("Rights") to the record holders of its outstanding Common Stock as of the close
of business on January __, 1998 (the "Rights Record Date"), other than WESAC
(such recipients or their transferees being referred to as the "Rights
Holders"). The Company will distribute, at no cost to the Rights Holders, eight
Rights for each share of Common Stock held on the Rights Record Date. A total of
27,112,000 Rights will be distributed in the Rights Offering. Rights will be
evidenced by transferable Rights Certificates (the "Rights Certificates"), which
will be distributed to each Rights Holder promptly after the Special Meeting, if
the Rights Offering is approved by the stockholders.
No Rights Certificates may be divided in such a way as to
permit the holders of Common Stock to receive a greater number of Rights than
the number represented by such Right, except that a depository, bank, trust
company, securities broker or dealer holding shares of Common Stock on the
Rights Record Date for more than one beneficial owner may, upon proper showing
to the Subscription Agent (as defined below), exchange its Rights Certificates
for separate Rights Certificates representing the number of Rights to which each
beneficial owner would have been entitled had each been a record holder on the
Rights Record Date.
WESAC, which owns 14,260,000 pre-split shares, or
approximately 81%, of the outstanding Common Stock, will not receive any Rights;
instead following the Reverse Stock Split, and subject to stockholder approval,
the approximately $11,244,000 of Conversion Debt will be converted into
approximately 11,244,000 post-split shares of Common Stock, a rate which is
equal to ten times the Subscription Price of the Rights. Although the conversion
rate will be ten times the Subscription Price, because the WESAC Debt Conversion
will occur after the Reverse Stock Split, WESAC will be converting its debt into
shares of Common Stock on the same economic basis as persons who exercise
Rights.
Expiration Date
The Rights will expire at 5:00 p.m., New York City time, on
_____________, 1998 ("Expiration Date"), provided, however, that the Rights
Offering may be extended for up to 30 additional days by the Board of Directors
of the Company in its sole and absolute discretion. The Company will not be
obligated to honor any purported exercise of Rights received by the Subscription
Agent after the Expiration Date, regardless of when the documents relating to
such exercise were sent, except pursuant to the "Guaranteed Delivery Procedures"
described below. After the Expiration Date, unexercised Rights will be null and
void.
Method of Offering
The Rights Offering is being made directly by the Company. The
Company will pay no underwriting discounts or commissions, finders fees or other
remuneration in connection with any distribution of the Rights or sales of the
shares of Common Stock offered hereby, other than the fees paid to ChaseMellon
Shareholder Services, as Subscription Agent and the Information Agent.
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<PAGE>
Escrow of Subscription Proceeds
All funds received from the exercise of the Rights will be
held in escrow by the Subscription Agent until the earlier of (i) the date on
which the Restructuring Plan is consummated or (ii) the cancellation of the
Rights Offering. In the event the Restructuring Plan is not consummated or the
Rights Offering is canceled for any reason, the Subscription Agent will return
to each subscriber any funds held for his account, without interest, and all
persons who purchased Rights will lose all consideration paid for such Rights
unless other arrangements have been made with the seller or sellers thereof.
Issuance of Shares of Common Stock
Upon consummation of the Restructuring Plan and the Rights
Offering (including the Reverse Stock Split), persons who have exercised Rights
will receive fully paid and nonassessable shares of Common Stock. The Common
Stock will constitute the only voting securities of the Company then
outstanding. See "DESCRIPTION OF CAPITAL STOCK." The shares of Common Stock
issuable upon the exercise of Rights will be adjusted in number in accordance
with the proposed Reverse Stock Split. See "SPECIAL MEETING OF STOCKHOLDERS --
Proposal 3 -- Amendments to Certificate of Incorporation."
Determination of the Subscription Price
The Subscription Price bears no relationship to the current
net assets of the Company or the current market price of the Common Stock. See
"PRICE RANGE OF COMMON STOCK AND DIVIDENDS." In determining the Purchase Price,
the Company considered the funding requirements of the Restructuring Plan, the
financial condition of the Company and the anticipated financial condition of
the Company following consummation of the Restructuring Plan (including the
anticipated book value per share of Common Stock and the number of shares of
Common Stock anticipated to be outstanding upon consummation of the
Restructuring Plan). The Subscription Price is significantly less than the
recent market price of the Common Stock. See "PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION." There can be no assurance as to what the actual book value per
share of Common Stock will be upon consummation of the Restructuring Plan or as
to the price at which shares of Common Stock will be traded at any time.
Stand-by Commitment
In order to ensure the receipt by the Company of the cash
necessary to make the payments required under the Restructuring Plan and to
provide the Company with working capital, the Stand-by Purchasers have agreed to
purchase, at the Subscription Price, all of the Unsubscribed Shares.
Subscription Privileges
Basic Subscription Privilege. Stockholders of the Company will
receive eight Rights to purchase shares of Common Stock, at the Subscription
Price, for each share of Common Stock held on the Rights Record Date (the "Basic
Subscription Privilege"). Each Right entitles the holder to purchase at the
Subscription Price one share of Common Stock. Each Rights Holder is entitled to
subscribe for all, or any portion of, the shares of Common Stock subject to
Rights.
Oversubscription Privilege. Each Right also entitles any
Rights Holder exercising the Basic Subscription Privilege to oversubscribe for
shares not sold to Rights Holders under the Basic Subscription Privilege, not to
exceed one additional share of Common Stock for each share of Common Stock
purchased under the Basic Subscription Privilege (the "Oversubscription
Privilege"). Only Rights Holders who exercise the Rights under the Basic
Subscription Privilege will be entitled to oversubscribe for shares.
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<PAGE>
If the shares of Common Stock not subscribed for through the
Basic Subscription Privilege are not sufficient to satisfy all
oversubscriptions, available shares will be allocated pro rata (subject to the
elimination of fractional shares) among oversubscribing Rights Holders in
proportion to the number of shares of Common Stock each oversubscribing Rights
Holder has subscribed for under the Basic Subscription Privilege.
Banks, brokers and other nominee Rights Holders who exercise
the Basic Subscription Privilege and who oversubscribe on behalf of beneficial
owners of Rights will be required to certify to the Subscription Agent and the
Company, in connection with their exercise of the Oversubscription Privilege, as
to the number of Rights that have been exercised under the Basic Subscription
Privilege and the number of shares of Common Stock that are being oversubscribed
for on behalf of each beneficial owner of Rights for whom such nominee holder is
acting.
Exercise of Rights
Rights may be exercised by delivering to the Subscription
Agent at the addresses specified below, on or prior to the Expiration Date, the
properly completed and executed Rights Certificate evidencing such Rights,
together with payment in full of the Subscription Price for each share of Common
Stock subscribed and oversubscribed for. Payment may be made only by check or
bank draft drawn upon a U.S. bank or postal, telegraphic or express money order
payable to ChaseMellon Shareholder Services, as Subscription Agent. The
Subscription Price will be deemed to have been received by the Subscription
Agent only upon (i) clearance of any uncertified check or (ii) receipt by the
Subscription Agent of any certified check or bank draft drawn upon a U.S. bank
or of any postal, telegraphic or express money order. Because the funds paid by
personal uncertified checks may take at least five business days to clear,
Rights Holders who wish to pay the Subscription Price by means of uncertified
personal check should make payment sufficiently in advance of the Expiration
Date to ensure that such payment is received and clears by such date or to make
payment by means of a certified or cashier's check or money order. All funds
received in payment of the Subscription Price will be held by the Subscription
Agent and invested at the direction of the Company in short-term certificates of
deposit, short-term obligations of the United States or any state or any agency
of the United States or money market mutual funds investing in such instruments.
Rights Certificates and payment of the Subscription Price or,
if applicable, Notices of Guaranteed Delivery or Oversubscription Forms (each,
as defined below) should be delivered to the Subscription Agent at one of the
addresses for the Subscription Agent set forth below.
Guaranteed Delivery Procedures. If a Rights Holder wishes to
exercise Rights, but time will not permit such holder to cause the Rights
Certificates evidencing such Rights to reach the Subscription Agent on or before
the Expiration Date, such Rights may nevertheless be exercised if all of the
following conditions (the "Guaranteed Delivery Procedures") are met:
(i) such holder has caused payment in full of the
Subscription Price for each share of Common Stock being purchased under the
Basic Subscription Privilege and subscribed for pursuant to the Oversubscription
Privilege to be received (in the manner set forth above) by the Subscription
Agent on or prior to the Expiration Date;
(ii) the Subscription Agent receives, on or prior to
the Expiration Date, a guarantee notice (a "Notice of Guaranteed Delivery"),
which has been distributed with the Rights Certificates, from a member firm of a
registered national securities exchange or a member of the National Association
of Securities Dealers, Inc., from a commercial bank or trust company having an
office or correspondent in the United States, or from a financial institution
acceptable to the Subscription Agent (each, an "Acceptable Institution"),
stating the name of the exercising Rights Holder, the number of Rights
represented by the Rights
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<PAGE>
Certificates held by such Holder, the number of shares of Common Stock being
purchased under the Basic Subscription Privilege and the number of shares of
Common Stock, if any, being subscribed for under the Oversubscription Privilege,
and guaranteeing the delivery to the Subscription Agent of any Rights
Certificate evidencing such Rights within the five trading days on the NYSE next
following the Expiration Date; and
(iii) the properly completed Rights Certificates,
with any required signatures guaranteed, evidencing the Rights being exercised,
is received by the Subscription Agent within the five trading days on the NYSE
next following the date of the Notice of Guaranteed Delivery relating thereto.
The Notice of Guaranteed Delivery may be delivered to the Subscription Agent in
the same manner as Rights Certificates at the addresses set forth below, or may
be transmitted to the Subscription Agent by facsimile transmission at the
facsimile number set forth below. Additional copies of the form of Notice of
Guaranteed Delivery are available upon request from the Subscription Agent or
the Information Agent, whose address and telephone number are set forth below.
Discrepancies. If an exercising Rights Holder does not
indicate the number of Rights being exercised, or does not pay the aggregate
Subscription Price for the number of Rights that such holder indicates are being
exercised, the Rights Holder will be deemed to have exercised the Basic
Subscription Privilege to purchase the maximum number of shares that may be
purchased for the total Subscription Price paid by him. If the total
Subscription Price paid by the Rights Holder exceeds the product of (a) the
Subscription Price per share and (b) the number of Rights evidenced by the
Rights Certificates delivered by such holder, he will be deemed to have
oversubscribed to purchase, to the extent available, that number of whole shares
equal to (i) the excess payment divided by (ii) the Subscription Price per
share, but not more than one additional share for each share of Common Stock
such Rights Holder purchased under the Basic Subscription Privilege.
Refunds. Funds received in payment of the Subscription Price
for oversubscribed shares will be held in a segregated account pending issuance
of such shares, if any. If an oversubscribing Rights Holder is allocated fewer
shares than such holder oversubscribed for, the excess funds paid by such holder
in respect of the Subscription Price for shares not issued will be returned as
promptly as practical by mail after the Expiration Date, without any interest
earned on such funds.
Signature Guarantees. Unless a Rights Certificate (i) states
that the shares of Common Stock to be issued pursuant to the exercise of Rights
represented thereby are to be delivered to the registered holder of such Rights
or (ii) is submitted for the account of an Acceptable Institution, signatures on
such Rights Certificate must be guaranteed by a participant in the Securities
Transfer Agents Medallion Program, the Stock Exchange Medallion Program or the
New York Stock Exchange Inc. Medallion Signature Program.
Brokers; Nominees. Persons who hold shares of Common Stock for
the account of others, such as brokers, trustees or depositories for securities,
should notify the respective beneficial owners of such shares as soon as
possible to ascertain such beneficial owners' intentions and to obtain
instructions concerning the Rights. If the beneficial owner so instructs, the
record holder of such Rights should complete a Rights Certificate and submit it
to the Subscription Agent with the proper payment. In addition, beneficial
owners of Common Stock or Rights held through such a holder should contact the
holder and request it to effect transactions in accordance with the beneficial
owners' instructions.
Subscription Agent
The Company has appointed its transfer agent, ChaseMellon
Shareholder Services LLC as the Subscription Agent for the Rights Offering. The
Subscription Agent's addresses where the Rights Certificate and payment of the
Subscription Price should be delivered, as well as the address to which a Notice
of Guaranteed Delivery must be delivered, and facsimile number are:
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<PAGE>
Address if by mail:
P.O. Box 798
Midtown Station
New York, New York 10018
Attention: Reorganization Department
Address if by hand or overnight courier:
120 Broadway, 13th Floor
New York, New York 10271
Attention: Reorganization Department
Facsimile Number:
(201) 329-8936
(For Eligible Institutions Only)
Confirm by Telephone: (201) 296-4983
The Company will pay the fees and expenses of the Subscription
Agent and has agreed to indemnify the Subscription Agent from certain liability
which it may incur in connection with the Rights Offering.
Information Agent
The Company has appointed ChaseMellon Shareholder Services,
L.L.C. as Information Agent for the Rights Offering. Any questions or requests
for additional copies of this Proxy Statement/Prospectus or the Notice of
Guaranteed Delivery may be directed to the Information Agent at the address and
telephone number below:
ChaseMellon Shareholder Services, L.L.C.
450 West 33rd Street, 15th Floor
New York, New York 10001
Telephone: 800-549-2949
The Company will pay the fees and expenses of the Information
Agent and has agreed to indemnify the Information Agent from certain liabilities
which it may incur in connection with the Rights Offering.]
No Revocation of Subscription
ONCE A RIGHTS HOLDER HAS EXERCISED THE BASIC SUBSCRIPTION
PRIVILEGE AND/OR OVERSUBSCRIBED, SUCH EXERCISE OR SUBSCRIPTION MAY NOT BE
REVOKED.
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<PAGE>
Transfers and Sales of Rights
It is anticipated that the Rights will be quoted on the NYSE
under the trading symbol ____, and they may be purchased or sold through usual
investment channels, including banks and brokers. Trading in Rights will cease
on the close of business of the NYSE trading day preceding the Expiration Date.
Transfers. The Rights evidenced by a single Rights Certificate
may be transferred in whole by endorsing such Right for transfer in accordance
with the accompanying instructions. A portion of the Rights evidenced by a
single Rights Certificate (but not fractional Rights) may be transferred by
delivering to the Subscription Agent a Rights Certificate properly endorsed for
transfer, with instructions to register such portion of the Rights evidenced
thereby in the name of the transferee (and to issue a new Rights Certificate to
the transferee evidencing such transferred Rights). In such event, a new Rights
Certificate evidencing the balance of the Rights will be issued to the Rights
Holder or, if the Rights Holder so instructs, to an additional transferee.
Rights Holders wishing to transfer all or some of their Rights
should allow sufficient time before the Expiration Date for (i) the transfer
instructions to be received and processed by the Subscription Agent, (ii) a new
Rights Certificate to be issued and transmitted to the transferee or transferees
representing the transferred Rights, and to the transferor representing the
retained Rights, if any, and (iii) the Rights evidenced by such new Rights
Certificates to be exercised or sold by the recipients thereof. If time does not
permit a transferee who wishes to exercise its Rights to deliver its Rights
Certificate to the Subscription Agent on or before the Expiration Date, such
transferee should use the Guaranteed Delivery Procedures described under "The
Rights Offering--Exercise of Rights". Neither the Company nor the Subscription
Agent shall be liable to a transferee or transferor of Rights if Rights
Certificates are not received in time for exercise or sale before the Expiration
Date.
[Sales. The Rights represented by a Rights Certificate also
may be sold, in whole or in part, through the Subscription Agent by delivering
to the Subscription Agent such Warrant properly executed by the holder for sale
by the Subscription Agent. If only some of the Rights (but not fractional
Rights) evidenced by a single Rights Certificate are to be sold by the
Subscription Agent, such Rights Certificates must be accompanied by instructions
as to the action to be taken concerning the Rights that are not to be sold.
As promptly as practical after the Expiration Date, the
Subscription Agent will send the Rights Holder a check for the net proceeds from
the sale of such Rights. If the Rights can be sold, sales of such Rights will be
deemed to have been effected at the weighted average price received by the
Subscription Agent for all Rights sold by it at the request of Rights Holders,
less any applicable brokerage commissions, taxes and other direct expenses of
sale. The Company will pay the fees charged by the Subscription Agent for
effecting such sales. Orders to sell Rights must be received by the Subscription
Agent prior to 5:00 p.m., New York City time, on the third business day
preceding the Expiration Date. If less than all sales orders received by the
Subscription Agent can be filled, sales proceeds will be prorated among the
Rights Holders based upon the number of Rights each has instructed the
Subscription Agent to sell, irrespective of when the sale instructions are
received by the Subscription Agent. The Subscription Agent's obligation to
execute orders for the sale of Rights is subject to its ability to find
buyers.](1)
[Except for the fees charged by the Subscription Agent,] all
commissions, fees and other expenses (including brokerage commissions and
transfer taxes) incurred in connection with the purchase, sale or
- ------------------
(1) Will the Subscription Agent be willing to make such sales?
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exercise of Rights will be for the account of the transferor of the Rights, and
none of such commissions, fees or expenses will be paid by the Company or the
Subscription Agent.
Extension of Expiration Date
The Company reserves the right to extend the Expiration Date
in its sole and absolute discretion. There can be no assurance that any such
extension will occur.
General
The instructions that will accompany the Rights Certificates
should be read carefully and followed in detail. DO NOT SEND RIGHTS CERTIFICATES
TO THE COMPANY.
THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND PAYMENT OF
THE SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND
RISK OF THE RIGHTS HOLDERS. IF SENT BY MAIL, IT IS RECOMMENDED THAT SUCH RIGHTS
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00
P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL
CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO
PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY
ORDER.
All questions concerning the timeliness, validity, form and
eligibility of any exercise of Rights or subscriptions pursuant to the
Oversubscription Privilege will be determined by the Company, whose
determinations will be final and binding. The Company in its sole and absolute
discretion may waive any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as it may determine, or reject the
purported exercise of any Right or subscription pursuant to the Oversubscription
Privilege. Subscriptions will not be deemed to have been received or accepted
until all irregularities have been waived or cured within such time as the
Company determines in its sole and absolute discretion. Neither the Company nor
the Subscription Agent will be under any duty to give notification of any defect
or irregularity in connection with the submission of Rights Certificates or
incur any liability for failure to give such notification.
Any questions or requests for assistance concerning the method
of exercising Rights or over subscribing or requests for additional copies of
this Proxy Statement/Prospectus or the Notice of Guaranteed Delivery should be
directed to the Information Agent, ChaseMellon Shareholder Services, L.L.C., at
its addresses set forth under "Information Agent".
No Board Recommendation Concerning Exercise of Rights
Although the Board of Directors of the Company has recommended
that the stockholders approve the Rights Offering, any investment in the Common
Stock should be based on each Rights Holder's or prospective investor's
evaluation of his own best interests. Accordingly, the Board of Directors makes
no recommendation to any Rights Holder or prospective investor regarding the
exercise or sale of Rights. Without limiting the foregoing, there can be no
assurance that the Board of Directors will extend the stated Expiration Date, so
Rights Holders should either exercise or attempt to sell their Rights before the
Expiration Date.
State and Foreign Securities Laws
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The Rights may not be exercised by any person, and neither
this Proxy Statement/Prospectus nor any Rights Certificates shall constitute an
offer to sell or a solicitation of an offer to purchase any shares of Common
Stock, in any jurisdiction where such transactions would be unlawful. No action
has been taken in any jurisdiction outside the United States to permit offers
and sales of the Rights or the Common Stock. Consequently, the Company may
reject subscriptions by any holder of Rights outside the United States, and
subscriptions from holders in jurisdictions within the United States if it
determines that it may not lawfully issue shares to such holders, even if it
could do so by qualifying the shares for sale or by taking other actions in such
jurisdictions.
Federal Income Tax Consequences of the Rights Offering
The following is a brief summary of the United States Federal
income tax consequences to Rights holders resulting from issuance of the Rights
or upon their exercise disposition or lapse.
Issuance of Rights. No taxable gain or loss will be recognized
by Rights holders for Federal income tax purposes upon the issuance of Rights to
existing stockholders of the Company.
Under applicable provisions of the Code, Rights holders
generally will not be required to allocate any portion of their Common Stock tax
basis to the Rights. Accordingly, except as set forth below, Rights holders will
have no tax basis in the Rights. However, if either (i) the fair market value of
the Rights at the time of issuance equals or exceeds 15 percent of the value of
the Common Stock with respect to which the Rights were issued, or (ii) a Rights
holder otherwise so elects, a Rights holder will allocate the basis in his
Common Stock between the Common Stock and the Rights in proportion to the fair
market value of each on the date of issuance. However, no such allocation of
basis to the Rights is required or permitted if the Rights expire unexercised.
The holding period of a Rights holder for purposes of
measuring taxable gain or loss with respect to the Rights is identical to his
holding period in the Common Stock with respect to which the Rights were issued.
Exercise of Rights. Rights holders will not recognize any
taxable gain or loss upon the exercise of Rights. A Rights Holder's tax basis in
each share of Common Stock acquired upon exercise of the Rights will equal the
sum of (i) the Subscription Price, and (ii) his tax basis, if any, in the
underlying Right. The holding period in the Common Stock acquired upon exercise
of Rights will commence as of the date that the Rights are exercised.
Sale of Rights. A Rights holder generally recognizes capital
gain or loss upon the sale, exchange or other disposition (other than exercise)
of Rights. The amount of that gain or loss will be equal to the difference
between the amount realized by the Rights holder on the disposition of the
Rights and his tax basis in such Rights.
Lapse of Rights. A Rights holder will not recognize any
taxable gain or loss upon expiration of the Rights. Upon expiration of the
Rights, no portion of a Rights holder's basis in his Common Stock will be
allocable to the Rights.
The foregoing summary is intended only as a general statement
of certain U.S. Federal income tax considerations affecting Rights holders upon
the issuance of Rights or upon their exercise, disposition or lapse. This
summary does not purport to address all issues of Federal income taxation
affecting Rights holders, nor issues of Federal estate and gift taxation, state
and local taxation or foreign taxaction. ACCORDINGLY, EACH RIGHTS HOLDER SHOULD
CONSULT WITH HIS OWN TAX AND FINANCIAL ADVISORS REARDING THE U.S. FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE RIGHTS OFFERING.
RISK FACTORS
Prospective investors should consider carefully the following
factors, in addition to the other information contained in this Prospectus,
before purchasing the shares of Common Stock offered hereby.
Operating Losses
The Company has experienced losses for each of the past five
years, and losses have continued in 1997. For the 1996 fiscal year, losses
totaled approximately $10.8 million. The Company's independent public
accountants qualified their report on the Company's financial statements for the
1996 fiscal year, stating that there was substantial doubt about the Company's
ability to continue as a going concern. For the nine-month period ended
September 30, 1997, the Company reported a net loss of approximately $2.4
million. As of September 30, 1997, the consolidated stockholders' equity of the
Company was approximately negative $5.2 million.
The Company anticipates that the net loss for the fourth quarter of 1997
will be larger than the net loss the Company reported for the third quarter, due
to increased provisions for warranty work and bad debts related to a contract
for the installation of multiple diverters in a foreign location. The Company
has not determined the precise magnitude of the expected net loss for the fourth
quarter of 1997 at this time. The systems, manufactured under subcontract, went
through initial start-up trials commencing in September 1997, and the additional
costs were identified in November and December.
Liquidity; Availability of Future Financing
The Company has experienced operating losses for each of the
past five years (and 1997 to date), and has been dependent on advances from
Wexford Entities to fund its cash flow requirements. The Company's customers
have required letters of credit or performance bonds (totaling approximately
$3.1 million as at September 30, 1997), and this requirement may increase,
further increasing the Company's need for financial support. Although the
Wexford Funds agreed to provide the New Line of Credit, as supplemented by the
Chase Facility, to the Company pursuant to the Restructuring Plan, there can be
no assurance that this line of credit will be sufficient to fund the Company's
liquidity needs, nor can there be any assurance that the Company will be able to
raise additional debt or equity financing in the future on terms satisfactory to
it.
Control by Wexford and Wexford Affiliates
The Restructuring Plan is intended to strengthen the Company's
financial position while offering the Public Stockholders the opportunity to
particpate in the Restructuring Plan on the same economic terms as Wexford and
its affiliates. If the Rights Offering is fully subscribed by Public
Stockholders, their percentage ownership of the Company's Common Stock will
remain at approximately 19%. The percentage of the Company's Common Stock owned
by the Wexford Entities will increase only to the extent that Public
Stockholders do not exercise rights in the Rights Offering.
WESAC and the Wexford Funds are Wexford Entities, and WESAC is
currently the largest stockholder of the Company, owning approximately 81% of
the Company's outstanding Common Stock. After the Restructuring Plan is fully
implemented, the Wexford Entities will hold not less than 81% of the outstanding
shares of Common Stock, although the exact percentage is dependent upon the
extent to which Public Stockholders elect to purchase shares of Common Stock in
the Rights Offering. Accordingly, Wexford, directly or indirectly, has and will
continue to retain effective control over the election of directors of the
Company and most corporate actions, including matters submitted to a vote of the
Company's stockholders.
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Unless the approval of the Company's stockholders is obtained for
certain aspects of the Restructuring Plan. and the New York Stock Exchange
consents to the Reverse Stock Split, neither WESAC nor any Wexford Entity will
be obligated to consummate any of the transactions contemplated by the
Restructuring Plan. See "PLAN OF FINANCIAL RESTRUCTURING -- Contingencies
Affecting the Plan."
Potential Conflicts of Interest
The Company may be subject to various conflicts of interest
arising out of the relationships between it, on the one hand, and Wexford and
its affiliates (the "Wexford Entities") on the other hand. Although no specific
measures to resolve such conflicts of interest have been formulated, management
of the Company do not hold any other positions with any other affiliates of the
Wexford Entities and the Wexford Entities have a fiduciary obligation to deal
fairly and in good faith with the Company, and will exercise reasonable judgment
in resolving any specific conflict of interest which may occur.
Dividend Policy
The Company has never paid any dividends on the Common Stock
and does not anticipate paying dividends on the Common Stock in the foreseeable
future. The 1995 Term Loan Agreement (as hereinafter defined) contains a
covenant that restricts the Company's ability to pay dividends on its Common
Stock, and a substantially identical restriction is contained in the New Line of
Credit. See "PRICE RANGE OF COMMON STOCK AND DIVIDENDS--Dividend Policy."
Limited Market for Common Stock; Possible Delisting
The Company's Common Stock is listed on the NYSE. The Company
has been out of compliance with certain of the NYSE listing standards for some
time. In August, 1997, the Company met with the NYSE to discuss the continued
listing of the Company's Common Stock and to review the Restructuring Plan. The
NYSE subsequently advised the Company that it would not delist the Common Stock
at that time, but would review the Company's financial condition and compliance
with the listing criteria in approximately six months, after the anticipated
completion of the Restructuring Plan. While the Company has developed the
Restructuring Plan to address, in part, these compliance issues, there can be no
assurance that the shares of Common Stock will continue to be listed on the
NYSE. If the shares of Common Stock were delisted, there would likely be an
adverse impact on the marketability and liquidity of the Common Stock. The
Company anticipates that the Reverse Stock Split, which will reduce the number
of outstanding shares by 90%, will increase the market price of the shares, but
they may not trade after the Reverse Stock Split at ten times their pre-split
market price.
No Established Market for Rights
Because the Rights are new securities, the trading market for
the Rights may be volatile or non-existent. Moreover, there can be no assurance
that a market for the Rights will develop or as to the price, if any, at which
the Rights will trade.
All of the shares of Common Stock that will be outstanding
upon consummation of the Restructuring Plan will be freely transferable, except
for the shares held by affiliates or statutory underwriters of the Company,
which shares may be sold only pursuant to an effective registration statement
under the Securities Act of 1933 or an exemption from the registration
requirements of such statute. See "REGISTRATION AND RESALE OF COMMON STOCK."
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Arbitrary Subscription Price
The Subscription Price of the Rights has been arbitrarily
determined by the Board of Directors of the Company and represents a substantial
discount to the market price of the Common Stock at the date of this Proxy
Statement/Prospectus. There is a risk that the market price for the Common Stock
will decline during the subscription period and that, following the Expiration
Date, a subscribing Rights holder may not be able to sell shares purchased in
the Rights Offering at a price equal to or greater than the Subscription Price.
The election of a Rights holder to exercise Rights in the
Rights Offering is irrevocable. Moreover, until certificates are delivered,
subscribing Rights Holders may not be able to sell the Common Stock that they
have purchased in the Rights Offering. Certificates representing shares of
Common Stock purchased in the Rights Offering will not be delivered to
subscribers until after the Restructuring Plan has been effected. No interest
will be paid to Rights holders on funds delivered to the Subscription Agent to
pay the Subscription Price.
Dilution
The Rights entitle the holders to purchase shares at a price
substantially below the market price of the Common Stock before the commencement
of the Rights Offering. Stockholders who fully exercise their Rights will
preserve their proportionate interest in the equity and voting power of the
Company. Stockholders who do not fully exercise their Basic Subscription
Privilege will experience a decrease in their proportionate interest in the
equity and voting power of the Company. The sale of the Rights may not
compensate a holder for all or any part of the reduction in the market value of
such stockholder's shares of Common Stock, if any, resulting from the Rights
Offering. Stockholders who do not exercise or sell their Rights will relinquish
any value inherent in the Rights.
Effect of Reverse Stock Split on Small Stockholders
As a result of the Reverse Stock Split to be implemented as
part of the Restructuring Plan, if a stockholder's stock ownership is not evenly
divisible by 10 shares, the remainder will be paid in cash, in lieu of a
fractional share. Only stockholders who own 9 or fewer shares of Common Stock
prior to the Reverse Stock Split will receive no shares of Common Stock after
the Reverse Stock Split. See "SPECIAL MEETING -- Proposal 3 -- Amendments to
Certificate of Incorporation" and "PLAN OF FINANCIAL RESTRUCTURING -- Reverse
Stock Split." Cash will be paid on a per share basis at the greater of the
Subscription Price or the average closing market price for the Common Stock on
the NYSE for the 20 trading days preceding the effectiveness of the Reverse
Stock Split.
Shares Eligible For Future Sale
Upon completion of the Rights Offering, the Reverse Stock
Split, and the WESAC Debt Conversion, there will be 15,775,000 shares of Common
Stock outstanding. The 27,112,000 pre-split shares (which are equivalent to
2,711,200 shares, after giving effect to the Reverse Stock Split) being offered
by the Company pursuant to this Prospectus and the 3,389,000 shares (which are
equivalent to 338,900 shares, after giving effect to the Reverse Stock Split)
that are owned by the Company's current stockholders other than WESAC will be
available for sale in the public market. Sales of substantial amounts of Common
Stock in the public market following the completion of the Rights Offering could
adversely affect the market price of the Common Stock. A significant number of
shares of Common Stock could enter the public market in a number of ways.
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Sensitivity to Major Contracts
The Company's results of operations are dependent on major
contracts. Such a reliance on major orders is likely to lead to fluctuations in,
and to reduce the predictability of, quarterly results. Larger projects also
pose other challenges. The sales cycle for large contracts tends to be longer
than for smaller contracts, and, when orders are received, large contracts may
be delayed by factors outside the Company's control, including customer budget
decisions, design changes and delays in obtaining permits. The Company's
business, results of operations and financial condition could be materially
adversely affected if the Company were to fail to obtain major project orders,
if such orders were delayed, if installations of such systems were delayed, or
if such installations encountered operating, warranty or other problems. The
profitability of these contracts is contingent upon the Company's ability to
meet the obligations of the original contract cost estimates. The contracts
awarded in this market are often large in scope, require more than a year to
complete, and specify custom equipment. As a result, the Company has sometimes
experienced profit erosion due to design changes, cost increases, etc. not
anticipated at the outset of the contract. Although the Company provides for
such occurrences, there is no certainty that the Company will be able to
adequately reserve for such contingencies in the future. In addition, generally
accepted accounting principles require estimated costs and revenues while a
long-term contract is being performed, with such estimates reflecting these
uncertainties and requiring revision to reflect changing circumstances and
incomplete facts, etc. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
Fluctuations in Quarterly Operating Results
The Company's quarterly revenues and operating results have
varied significantly in the past and may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside the Company's
control. Such factors include general economic and industry conditions, the size
and timing of individual orders, the introduction of new products or services by
the Company or its competitors or the introduction of the Company's products to
new markets, changes in the levels of operating expenses. including development
costs. and the amount and timing of other costs relating to the expansion of the
Company's operations.
Variations in the timing of recognition of specific revenues
due to changes in project scope and timing may adversely and disproportionately
affect the Company's operating results for a quarter because the Company
establishes its expenditure levels on the basis of expected future revenues, and
a significant portion of the Company's expenses do not vary with current
revenues. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
Proprietary Technology and Unpredictability of Patent Protection
The Company relies on patents, trade secrets and proprietary
know-how, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements with its strategic
partners, employees and consultants. There can be no assurance that the
proprietary information or confidentiality agreements will not be breached, that
the Company will have adequate remedies for any breach, or that the Company's
trade secrets and proprietary know-how will not otherwise become known to or be
independently developed by others. In addition, there can be no assurance that
competitors, many of which have substantial resources and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the United States or in international
markets. Furthermore, the laws of certain foreign countries do not protect the
Company's intellectual property rights to the same extent as do the laws of the
United States. Litigation or regulatory proceedings, which could result in
substantial cost and uncertainty to the Company, may also be necessary to
enforce patent or other intellectual property rights of the Company or to
determine the scope
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and validity of other parties' proprietary rights. There can be no assurance
that the Company will have the financial resources to defend its patents from
infringement or claims of invalidity. It is also possible that the Company may
need to acquire licenses to, or contest the validity of, issued or pending
patents of third parties relating to the Company's technology. There can be no
assurance that any of such licenses would be made available to the Company on
acceptable terms, if at all, or that if the Company were to contest the validity
of any issued or pending patents, it would prevail. In addition, the Company
could incur substantial costs in defending itself in suits brought against the
Company on its patents or in bringing suits against third parties. See "BUSINESS
- -- Patents And Trademarks."
Competition
The Company is engaged in a highly competitive industry.
Competition from suppliers of comparable goods in the United States and abroad
is intense and expected to increase. Many of these companies have substantially
greater capital resources, research and development staffs and facilities, and
greater experiences in obtaining regulatory approvals and in production,
marketing, and distribution of products, than does the Company. There can be no
assurance that the Company's competitors will not succeed in developing products
that are more effective or lower in cost than those that are being developed or
sold by the Company. Should the Company be unable, for technical or other
reasons, to develop products that are technologically competitive, responsive to
customer needs, and competitively priced, there would be a material adverse
effect upon the Company's business, financial condition, and results of
operation. In addition, because competition based on price is expected to become
increasingly important in the air pollution control equipment market, the
Company may be required to adjust its pricing policies in accordance with market
conditions and may otherwise be limited with respect to the prices it is able to
charge for its products. See "BUSINESS -- Competition."
Dependence on Key Personnel
The Company's success depends to a significant extent upon
executive officers, including its President and Chief Executive Officer, C.
Stephen Beal, and key engineering, sales, marketing, financial and technical
personnel. Employees may voluntarily terminate their employment with the Company
at any time, and none of the Company's employees is subject to any term
employment contract with the Company. The loss of the services of one or more of
the Company's key employees could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company also believes that its future success will depend
in large part upon its ability to attract and retain additional highly skilled
personnel, particularly design and process engineers. Because of the technical
sophistication of the Company's systems and the sophisticated engineering
software utilized by the Company, design and process engineers who join the
Company generally are required to have advanced technical knowledge and
significant training to perform efficiently and productively. The availability
of such personnel is limited, and the Company has at times experienced
difficulty in locating new employees with the requisite level of expertise and
experience. There can be no assurance that the Company will be successful in
retaining its existing key personnel or in attracting and retaining the
personnel it requires in the future. See "MANAGEMENT."
Dependence on the Reliability and Performance of Subcontractors
The Company relies on subcontractors to build system
components and to assemble and install systems. The Company's ability to deliver
high quality systems on time will depend upon the reliability and
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performance of its subcontractors. The failure of a subcontractor to meet
delivery schedules could cause the Company to default on its obligations to its
customers, which could materially adversely affect the Company's reputation,
business, results of operations and financial condition. In addition, the
Company's reliance on subcontractors for manufacturing, assembly and
installation places a significant part of the Company's quality control
responsibilities on these subcontractors. There can be no assurance that the
Company will be able to continue to contract for the level of quality control
required by the Company's customers. The failure to provide such quality control
could result in manufacturing and installation delays which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "BUSINESS."
Possible Product Liability
Certain of the Company's systems are designed to destroy VOCs,
which are highly toxic and flammable. If the Company's systems are improperly
designed or operated outside of design parameters and operating instructions
provided by the Company, there is a risk of system failure or release of VOCs,
which could require the Company to defend itself against a product liability or
personal injury claim. Although the Company has product liability and commercial
general liability insurance in scope and amount which it believes to be
sufficient for the conduct of its business, there can be no assurance that such
insurance will cover or be adequate to cover such claims. In addition, the
Company's general liability insurance is subject to coverage limits and excludes
coverage for losses or liabilities relating to environmental damage or
pollution. Accordingly, the Company's efforts to defend itself against such
claims could have a material adverse effect on the Company's business, results
of operations and financial condition.
Dependence on Customer Information
The Company is highly dependent upon information provided by
its customers concerning the type, volume and flow rate of particulate and
gaseous emissions to be treated by the Company's FGC and VOC systems. If the
customer's information is inaccurate, a malfunction in the Company's system
could occur, resulting in damage to the customer's facilities or personal
injury. In addition, incorrect information could cause delays in the design,
manufacture and installation of the customer's system. Through no fault of its
own, the Company could then be held liable for damages resulting from such
malfunction or delay. Any of these factors could have a material adverse effect
on the Company's business, results of operations and financial condition.
Potential Environmental Liability
Although the Company does not believe that its activities
would directly expose it to liabilities under local, state or federal
environmental laws and regulations, if the Company were to improperly design,
manufacture or test its systems or fail to properly train its customer's
employees in the operation of the systems, it could be exposed to possible
liability for investigation and clean-up costs under such environmental laws.
Although the Company does not currently lease its systems to customers or
operate the systems on behalf of its customers, if it were to do so in the
future, the Company could be liable under environmental laws for any releases of
hazardous substances.
The Company generally conducts performance tests on its
systems at its customers' facilities. However, in the future the Company may
perform prototype testing in its own facilities. If such testing were to involve
hazardous substances, it could subject the Company to liability under
environmental laws and regulations.
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The Company could also be exposed to possible liability under
environmental laws for violations of those requirements applicable to the
generation, storage, treatment and disposal of hazardous waste. Under some
environmental laws and various theories of tort and contract law, it is also
possible that the Company could be liable for damages to its customers and third
parties resulting from the actions of its customers or arising from the failure
or malfunction, or the design, construction or operation of, the Company's
systems or products, even if the Company were not at fault. The Company's
general liability insurance is subject to coverage limits and generally excludes
coverage for losses or liabilities relating to or arising out of environmental
damage or pollution. The Company's business, results of operations and financial
condition could be materially adversely affected by an uninsured or partially
insured claim. See BUSINESS-Government Regulation."
Warranties
The Company offers customers of its fabricated products
warranties should the Company's system fail to meet its performance criteria on
start-up. There can be no assurance that the Company will meet performance
specifications in the future or that customers will not make warranty claims.
While the Company maintains reserves for warranty claims (based upon the
Company's prior experience), if actual claims exceed the reserves reported
income would be reduced, and all claims under warranties could materially
adversely affect the Company's cash flow and reputation and thereby have a
material adverse effect on the Company's business, results of operations and
financial condition. See "BUSINESS-Warranties."
Risks Associated with Fixed Price Contracts
A majority of the Company's contracts are performed using
"fixed-price" rather than "cost-plus" terms. Under fixed-price terms, the
Company quotes firm prices to its customers and bears the full risk of cost
overruns caused by estimates that differ from actual costs incurred or
manufacturing delays during the course of the contract. Some costs, including
component costs, are beyond the Company's control and may be difficult to
predict. If manufacturing or installation costs for a particular project exceed
anticipated levels, gross margins would be materially adversely affected, and
the Company could experience losses. In addition, the manufacturing process may
be subject to significant change orders. However, the cost of these change
orders may not be negotiated until after the system is installed. The failure of
the Company to recover the full cost of these change orders could materially
adversely affect gross margins and also cause the Company to experience losses.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
Risks Associated with International Operations and Sales
In 1996, approximately 66% of the Company's total revenues
resulted from products and services sold to customers outside the United States.
International sales and operations may be limited or disrupted by the imposition
of government controls, export license requirements, trade restrictions, changes
in tariffs, difficulties in staffing, the transport of machinery, managing
international operations and other factors. Regulatory compliance requirements
differ among foreign countries and are also different from those established in
the United States. If the Company's customers are unable to obtain the necessary
foreign regulatory approvals on a timely basis, the Company's international
sales, and thereby its business, results of operations and financial condition,
could be materially adversely affected. Additionally, the Company's business,
results of operations and financial condition may be materially adversely
affected by fluctuations in currency exchange rates as well as increases in duty
rates, difficulties in obtaining export licenses, ability to maintain or
increase prices and competition. The Company denominates international sales
primarily in either United States dollars or British pounds Sterling. Since the
bulk of expenses in connection with international contracts are often incurred
in
31
<PAGE>
United States dollars, there can be a short-term exchange risk created.
Although the Company has not used hedging instruments in the past, the Company
may purchase hedging instruments to mitigate exchange risks on certain foreign
contracts, if the Company has significant sales in foreign currencies and such
instruments are available on advantageous terms. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
SPECIAL MEETING OF STOCKHOLDERS
This Proxy Statement/Prospectus is being furnished to holders
of Common Stock of the Company, in connection with the solicitation of proxies
by the Board of Directors of the Company for use at the Special Meeting of
Stockholders of the Company to be held on January ____, 1998, or any
adjournment or postponement thereof, and in connection with the Rights Offering
which will be undertaken by the Company if approved by stockholders at the
Special Meeting.
General Information
Proxies in the form of the Proxy enclosed with this Proxy
Statement/Prospectus will be voted at the Special Meeting if they are properly
executed, dated and returned to the Company prior to the meeting and are not
revoked prior to the voting. A stockholder of record who grants a proxy may
revoke it at any time before it is exercised (i) by delivering to the Secretary
of the Company an instrument revoking the proxy; (ii) by delivering to the
Company a duly executed proxy bearing a later date, or (iii) by attending the
Special Meeting and voting in person.
This Proxy Statement/Prospectus is being mailed on or about
January ___, 1998 to stockholders of record at the close of business on January
___, 1998 (the "Meeting Record Date"). Stockholders on the Meeting Record Date
are entitled to receive notice of, and to vote at, the Special Meeting in person
or by proxy.
Matters to be Considered at the Special Meeting
The Special Meeting has been called for the following
purposes:
1. To consider the approval of the 1996 Stock Option Plan and
certain option grants thereunder.
2. To consider the adoption of two amendments to the Restated
Certificate of Incorporation of the Company: (i) to increase the shares of
Common Stock authorized for issuance by the Company from 50,000,000 shares to
70,000,000 shares in order to effect the rights offering described in this Proxy
Statement/Prospectus (the "Rights Offering"), and after the Rights Offering is
completed, (ii) to decrease the number of such shares authorized to the sum of
(a) the shares resulting from a 1 for 10 reverse stock split (the "Reverse Stock
Split"), (b) the shares issuable upon the conversion of certain debt of the
Company owed to WESAC into Common Stock of the Company (the "WESAC Debt
Conversion") described in this Proxy Statement/Prospectus; (c) the shares
reserved for issuance pursuant to options, option plans, warrants and
convertible securities of the Company; and (d) 10 million shares.
3. To authorize the Company to issue and sell additional
shares of its Common Stock in order to effect the Rights Offering and the WESAC
Debt Conversion.
32
<PAGE>
4. To transact such other business as may properly come before
the Special Meeting or any adjournments or postponements thereof.
If a proxy in the accompanying form is duly executed and
returned, the shares represented thereby will be voted in accordance with the
instructions contained in it; if no instructions are given, the shares will be
voted FOR Proposals 1, 2, and 3. As to any other matter that may properly come
before the Special Meeting, the proxy holders will vote in accordance with their
best judgment, although the Company does not currently know of any such matters.
Outstanding Shares; Quorum
The Company has one class of common stock, par value $.01 per
share (the "Common Stock"), and on the Meeting Record Date, 17,649,000 shares
were issued and outstanding. Each share entitles the holder to one vote on all
matters submitted to stockholders at the Special Meeting. The presence at the
meeting, in person or represented by proxy, of the holders of a majority of the
outstanding Common Stock is necessary to constitute a quorum for the Special
Meeting. Abstentions are counted for purposes of determining whether the quorum
requirement is satisfied, but are not counted as voted for purposes of
determining the approval of any matter submitted to the stockholders for a vote.
Common Stock represented by "broker non-votes" will also be treated as present
for purposes of determining a quorum. A broker non-vote relates to shares of
Common Stock held in the name of a nominee as to which (i) the nominee has not
received instructions from the beneficial owner or person entitled to vote and
the nominee does not have discretionary voting power under applicable rules or
the instrument under which it serves as a nominee; or (ii) the record holder has
indicated on the proxy card or has executed a proxy and otherwise notified the
Company that the nominee does not have authority to vote such shares on a given
matter.
Voting Rights and Procedures
Because directors are elected by the affirmative vote of the
holders of a plurality of the shares of Common Stock present and entitled to
vote, in person or by proxy, abstentions and broker non-votes will not affect
their election. Approval of the 1996 Employee Stock Option Plan (Proposal 2)
requires the approval of the holders of a majority of the shares present and
entitled to vote, in person or by proxy at the meeting, so that abstentions will
have the effect of a no vote, but broker non-votes will have no effect on the
voting. The amendments to the Certificate of Incorporation (Proposal 3) require
the approval of the holders of a majority of the shares of Common Stock issued
and outstanding, so that abstentions and broker non-votes will have the effect
of no votes. Approval of the issuance of shares to effect the Rights Offering
and the WESAC Debt Conversion (Proposal 4) requires the approval of the holders
of a majority of the shares of Common Stock voted on the matter in person or by
proxy, provided a quorum is present so that abstentions and broker non-votes
will have no effect on the voting on those proposals.
WESAC, the holder of approximately 81% of the outstanding
shares of Common Stock, has advised the Company that it intends to be present,
in person or by proxy, at the Special Meeting and to vote its shares in favor of
all of the Board's Proposals and "FOR" the election of the Board of Director's
nominees for election as directors. Thus, approval of such matters and the
election of all such nominees is assured, regardless of the vote by any other
stockholder.
Holders of Common Stock are not entitled to appraisal or
dissenters' rights in connection with any of the Board's Proposals.
Proposal 1 - Adoption of the 1996 Stock Option Plan
33
<PAGE>
The 1996 Employee Stock Option Plan (the "1996 Plan") was
adopted by the Board of Directors on November 15, 1996 contemporaneously with
the termination of the Second Amended and Restated Incentive Stock Plan (the
"Incentive Stock Plan") and was amended in September 1997 to increase the shares
issuable under the plan in connection with the Rights Offering. The Incentive
Stock Plan was terminated (a) because it was to expire by its terms in April
1997; (b) because of recent major changes in the securities laws and rules
affecting stock plans; and (c) because the Incentive Stock Plan does not permit
the discretionary grant of options to non-employee directors. The 1996 Plan was
amended in September 1997 to increase the shares subject to issuance thereunder
in contemplation of the Rights Offering.
Purpose; Number of Shares
The purpose of the 1996 Plan is to provide directors,
officers, key employees and consultants with additional incentives by increasing
their ownership interest in the Company. The 1996 Plan provides for the issuance
of [2,000,000] shares of Common Stock pursuant to stock option grants, subject
to adjustment in the case of certain reorganizations, reclassifications and the
like of the Common Stock except that no such adjustment will occur as a result
of the Reverse Stock Split (see "Proposal 3 - Amendments to the Certificate of
Incorporation"). The 1996 Plan provides for the grant of incentive stock options
("ISOs") to employees and the grant of non-statutory stock options ("NSOs") to
employees, officers, directors and consultants of the Company and its
subsidiaries. Any employee of the Company or of any subsidiary who is considered
in the judgment of the committee that administers the 1996 Plan a key
contributor to the overall success of the consolidated enterprise is an eligible
participant in the 1996 Plan. The maximum number of shares with respect to which
options may be granted under the 1996 Plan to any one employee in any one year
is 300,000 shares.
Administration; General
The 1996 Plan is to be administered by a committee of the
Board of Directors made up of non-employee directors (the "Committee"). Subject
to the provisions of the 1996 Plan itself, the Committee has the authority to
select the optionees and determine the terms of the options granted, including:
(i) the number of shares; (ii) the term of the option (which may not exceed ten
years, or five years in the case of an ISO granted to a 10% stockholder of the
Company); (iii) the exercise or purchase price (which in the case of an ISO
cannot be less than the fair market value of the Common Stock on the date of
grant or 110% if the employee is a 10% stockholder of the Company); (iv) the
type and duration of any transfer or other restrictions; and (iv) the time and
form of payment for stock upon exercise of options. Options are not transferable
by the option holder except by will, by the laws of descent and distribution,
pursuant to a qualified domestic relations order or to immediate family members.
The Committee also determines the period, if any, during which the option may
continue beyond termination of employment, except that upon a grantee's
termination of employment for cause, all of his or her options terminate
immediately. Generally, no incentive stock option may be exercised as such more
than three months following termination of employment. However, in the event
that termination is due to death or disability, an incentive stock option is
exercisable as such for a maximum of one year after such termination. The 1996
Plan will remain in effect until terminated by the Board of Directors and may be
amended by the Board of Directors without the consent of the stockholders of the
Company, except that any amendment, although effective when made, will be
subject to stockholder approval if required by any federal or state law or
regulation or by the rules of any stock exchange or automated quotation system
on which the Common Stock may then be listed or quoted. On December 1, 1997, the
closing per share market price of the Common Stock was $5/8.
Federal Income Tax Information
34
<PAGE>
Set forth below is a general summary of the federal income tax
consequences to the Company and to recipients who receive options under the
Plan. The following summary is not intended to be exhaustive, does not address
certain special federal tax provisions, and does not address state, municipal or
foreign tax laws.
Tax Treatment of Non-Statutory Stock Options. Under Section 83
of the Code, optionees realize no taxable income when a non-statutory stock
option is granted. Instead, the difference between the fair market value of the
stock and the option price paid is taxed as ordinary compensation income. The
difference is measured and taxed as of the date of exercise if the stock is not
subject at that time to a "substantial risk of forfeiture," as defined in
Section 83.
The Company receives no tax deduction on the grant of an NSO,
but is entitled to a tax deduction when the optionee recognizes taxable income
on or after exercise of the option, in the same amount as the income recognized
by the optionee.
Tax Treatment of Incentive Stock Options. Under Section 422 of
the Code, an optionee incurs no federal income tax liability on either the grant
or exercise of an ISO. Provided that the stock is held for at least one year
after the date of exercise of the option and at least two years after its date
of grant, any gain realized on the subsequent sale of the stock will be taxed as
long-term capital gain. If the stock is disposed of within a shorter period, the
optionee will be taxed with respect to the gain realized as if he or she had
then received ordinary compensation income in an amount equal to the difference
between the fair market value of the stock on the date of exercise of the option
and its fair market value on the date on which the option was granted. The
balance of the gain realized will be taxed as capital gain, long-term or
short-term depending on the holding period since the date of exercise.
The Company receives no tax deduction on the grant of an ISO,
and is only entitled to a tax deduction upon the exercise of an ISO if the
optionee recognizes ordinary compensation income on account of a premature
disposition of ISO stock, in which case the deduction is equal to the amount and
occurs at the same time as the optionee's recognition of income.
Interest of Certain Persons
Because the directors and executive officers of the Company have
received and/or are eligible to receive stock option grants under the 1996 Plan,
they (and their respective associates) may be deemed to have an interest in the
approval of the 1996 Plan.
Plan and Option Grants
At the commencement of the Rights Offering, the Compensation
Committee of the Board of Directors plans to offer each then current employee
holding a stock option the opportunity to exchange his or her option or options
granted under the Incentive Stock Plan for a new option under the 1996 Plan.
Irrespective of the status of an option held under the Incentive Stock Plan, the
new option will be for a number of shares equal to [ %] of the number then
subject to all of the optionee's stock options, will have an exercise price
equal to the market value of the Common Stock on the date of grant, will have a
10-year duration, and will have the same vesting as the canceled option. In
addition the Committee expects to grant options to certain key employees of the
Company's subsidiaries who have not heretofore been granted stock options. The
number of shares subject to these new option grants will be based on the
recommendations of management.
The Board of Directors recommends a vote for the 1996 Plan and
the option grants.
Proposal 2 - Amendments to the Certificate of Incorporation
35
<PAGE>
The Amendments
In connection with the proposal to approve the Rights Offering
and the WESAC Debt Conversion, and in contemplation of the Reverse Stock Split,
on September 16, 1997, the Board of Directors of the Company adopted, subject to
stockholder approval, two amendments to the Company's Restated Certificate of
Incorporation (the "Charter") and pursuant to Delaware law declared such
amendments to be advisable. The amendments amend Article IV of the Charter, (i)
the first such amendment, by increasing the number of shares of Common Stock
that the Company is authorized to issue from 50,000,000 shares to ___00,000,000
shares; and (ii) the second such amendment, by decreasing the number of
authorized shares to the sum of (a) the shares resulting from the Reverse Stock
Split ("Reverse Stock Split"); (b) the shares issuable to effect the WESAC Debt
Conversion; (c) the shares reserved for issuance pursuant to the Company's stock
option plans and certain warrants and convertible securities heretofore issued
by the Company; and (d) 10,000,000 shares. If the amendments of the Charter are
approved by stockholders, they will become effective upon their filing with the
Secretary of State of the State of Delaware.
The increase in shares is required in order to implement the
Rights Offering. See the Prospectus portion of this Proxy Statement/Prospectus
for a detailed description of the Rights Offering. The decrease in shares is not
required but is deemed advisable by the Board of Directors because after the
completion of the Reverse Stock Split and the WESAC Debt Conversion, the Company
would have an unnecessarily large number of shares authorized for issuance in
relation to the number of shares then outstanding and reserved for issuance.
(See Proposal 4 for a description of the WESAC Debt Conversion.) Furthermore,
under Delaware franchise tax laws, the maintenance of an excessive number of
authorized shares would result in a needless expense. Authorization for 10
million additional shares will enable the Board of Directors of the Company,
without stockholder approval of a further amendment of the Charter, to sell
additional shares to raise equity capital or to make acquisitions, subject to
the rules of the New York Stock Exchange (the "NYSE"), except for the
Restructuring Plan, although the Board of Directors has no current plans to do
either.
The Additional Shares
The additional shares of Common Stock to be authorized for
issuance by the first amendment to the Charter will have rights identical to the
currently outstanding Common Stock. The approval of the amendments by
stockholders will not by themselves affect the rights of holders of currently
outstanding shares of Common Stock. However, the Rights Offering and the WESAC
Debt Conversion will have a substantial dilutive effect on existing stockholders
unless they exercise all of their Rights. See "PLAN OF FINANCIAL RESTRUCTURING
- -- Pro Forma Effect of Plan on Stockholders" and "RISK FACTORS -- Dilution."
Consequences of Non-Approval
If this proposal is not approved by stockholders, the Company
will be unable to implement the Rights Offering or the WESAC Debt Conversion.
WESAC has informed the Company it intends to vote in favor of this Proposal 2
and Proposals 3 and 4. In addition, if this Proposal 2 is approved, but Proposal
3 or Proposal 4 is not approved, under the rules of the NYSE, the Company would
be unable to implement the Rights Offering or the WESAC Debt Conversion as
described herein.
The board of directors recommends a vote to approve the amendments.
Proposal 3 - Authorization to Issue Shares of
Common Stock in the Rights Offering and the WESAC Debt Conversion
36
<PAGE>
Subject to the amendments to the Charter, which are described
above in Proposal 3, the Company intends to offer and sell to its existing
stockholders or their transferees a total of 27,112,000 pre-split shares of
Common Stock by means of the Rights Offering described in the Prospectus portion
of its Proxy Statement/Prospectus. In addition, subject to the approval of such
amendments, the Company intends to effect the Reverse Stock Split described in
Proposal 3 and thereafter to effect the WESAC Debt Conversion, namely, the
conversion of certain indebtedness owed by the Company to WESAC in the total
amount of approximately $11,244,000 for Common Stock of the Company by
converting such indebtedness at the rate of $1.00 (which is ten times the
proposed Subscription Price in the Rights Offering) of such debt for each share
of Common Stock. If Proposal 3 is approved by the stockholders and all
of the shares of Common Stock offered in the Rights Offering are fully
subscribed for and purchased by Public Stockholders, after giving effect to the
Reverse Stock Split and the WESAC Debt Conversion, but before the WESAC Merger,
WESAC will own approximately 12,670,000 shares, representing approximately 81%
of the Common Stock to be outstanding after the Reverse Stock Split.
Requirement for Stockholder Approval
NYSE Rule 312.03 requires the Company to obtain the approval
of its stockholders for the issuance of additional Common Stock if the number of
shares to be issued will exceed 20% of the shares outstanding immediately prior
to issuance. There will be 17,649,000 shares of Common Stock outstanding on the
commencement of the Rights Offering, which is also the number of shares that is
outstanding on the date of this Proxy Statement/Prospectus. Approximately
27,112,000 shares of Common Stock will be offered by the Company to its
stockholders (other than WESAC and its affiliates) in the Rights Offering. After
the Reverse Stock Split, but before the WESAC Merger, approximately 11,244,000
post-split shares of the Common Stock will be issued to WESAC upon the
conversion of the approximately $11,244,000 of indebtedness of the Company that
is owed to WESAC.
Consequences of Non-Approval; Interest of Certain Persons
If Proposal 3 is not approved, the Company will be unable to
effect the Rights Offering and the WESAC Debt Conversion. WESAC has informed the
Company it intends to vote in favor of this Proposal 3 and Proposal 2.
Because WESAC is the holder of the approximately $11,244,000
of debt to be converted into shares of Common Stock, it and its affiliates may
be deemed to have an interest in the approval of this Proposal.
THE BOARD OF DIRECTORS STRONGLY RECOMMENDS A VOTE FOR THIS
PROPOSAL.
REGISTRATION AND RESALE OF COMMON STOCK
Pursuant to the Registration Statement of which this
Prospectus/Proxy Statement is a part, the Company has registered under the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(the "Act"), the issuance, sale and transfer of 27,112,000 Rights and 27,112,000
pre-split shares of Common Stock which are to be issued on the consummation of
the Restructuring Plan subject to reduction, prior to delivery, by the reverse
stock split. Upon issuance, such Rights and Shares will be freely transferable.
Because the Rights Offering will be made on a continuous basis through the
Expiration Date, the Company will amend
37
<PAGE>
the Registration Statement from time during such period as may be necessary to
keep it effective. This Prospectus/Proxy Statement will be used in connection
with the following transactions:
(i) the issuance of the Rights to Stockholders of the
Company and resale of any such Rights by any person to whom
they are issued who may be deemed to be an underwriter thereof
within the meaning of the Act; and
(ii) the issuance by the Company of the shares of
Common Stock issuable upon exercise of Rights, the resale of
any such securities by any person who may be deemed to be an
underwriter thereof and which become Unsubscribed Shares; and
In connection with any such resales or transfers of the
Company's securities by any person who may be deemed to be an underwriter of
such securities, such person will be obligated to provide to the purchaser or
transferee a copy of this Prospectus/Proxy Statement containing current
information with respect to the Company and all of the matters described herein
and will be subject to all of the provisions of the Act which relate to
statutory underwriters. The Company is not aware that, except as otherwise
described in this Prospectus/Proxy Statement, any such person has, as of the
date hereof, a specific plan for the sale, transfer or distribution of any such
securities.
USE OF PROCEEDS
The net proceeds to be received by the Company from the Rights
Offering offered hereby are estimated to be $2,211,200, after payment of total
expenses estimated at $500,000 ($400,000 cash plus $100,000 payable in shares of
Common Stock). The Company intends to use approximately $1,700,000 of such
proceeds to repay its bank borrowings owed to SVB and $227,000 to replace
certain cash collateral posted by the Wexford 1995 Funds with SVB as collateral
security for outstanding letters of credit. Such borrowings are outstanding
under the Company's line of credit with SVB and bear interest at approximately
5.5%. The Company intends to use the remainder of the net proceeds to repay
advances under Tranche A Loans under the New Line of Credit, if any. To the
extent not used for such purposes, such proceeds will be used for working
capital purposes. Pending such application, the net proceeds of the Rights
Offering will be invested in
interest bearing, investment grade securities.
While the Company believes that the Restructuring Plan
represents the best opportunity for improving the Company's financial condition,
there can be no assurance that the proceeds from the Rights Offering and of the
other constituent elements of the Restructuring Plan will be sufficient to
satisfy the Company's operating needs. The Company anticipates that, unless
conditions in the business segments in which the Company competes significantly
worsen, the net proceeds from the Rights Offering and of the other constituent
elements of the Restructuring Plan will satisfy the Company's operating needs
through 1998. If such funding proves to be insufficient, the Company intends to
decide upon a course of action based on the facts and circumstances then
existing. The Company does not now know how it might raise additional funds in
such a situation. See "PLAN OF FINANCIAL RESTRUCTURING -- Pro Forma Effect on
Financial Condition" and "RISK FACTORS -- Availability of Future Financing."
38
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the
Company at September 30, 1997 and as adjusted to give effect to the
Restructuring Plan. This table should be read in conjunction with the
Consolidated Financial Statements of the Company, the Pro Forma Consolidated
Financial Statements and Notes thereto included in this Prospectus/Proxy
Statement.
<TABLE>
<CAPTION>
September 30, 1997
------------------
Pro Forma
Restructuring
Actual Plan
--------- ---------
($ in thousands)
<S> <C> <C>
Long-term debt
Silicon Valley Bank debt 1,700 --
WESAC Debt 10,885 --
Other long-term debt 670 670
--------- ---------
Total debt 13,255 670
Less current portion (252) (252)
--------- ---------
Total long-term debt 13,003 418
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 10,000,000 shares authorized, -- --
none issued
Common stock, $.01 par value; 50,000,000 shares authorized,
17,649,000 shares outstanding. $.01 par value 176 1,541
Capital in excess of par value 90,834 102,665
Retained earnings (deficit) (94,129) (94,129)
Foreign currency translation adjustment (2,041) (2,041)
--------- ---------
Total stockholders' equity (deficit) (5,160) 8,036
--------- ---------
Total capitalization $ 7,843 $ 8,454
========= =========
</TABLE>
39
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The table below shows the price ranges from the Company's
Common Stock for the periods indicated.
<TABLE>
<CAPTION>
From January 1, 1997 to December 31, 1997
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
High Price 15/32 15/32 1-26/32
Low Price 1/8 9/64 11/32
<CAPTION>
From January 1, 1996 to December 31, 1996
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
High Price 1-7/8 1-3/8 5/8 1/2
Low Price 1-1/4 5/8 3/8 9/32
<CAPTION>
From January 1, 1995 to December 31, 1995
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
High Price 2-3/8 2-1/4 3-1/4 2-7/8
Low Price 1-1/8 1 1-1/2 1-3/8
</TABLE>
The Company's Common Stock is listed on the NYSE and trades
under the symbol WAL. At September 30, 1997, there were approximately 279
stockholders of record of the Company's Common Stock. This number does not
include stockholders whose shares are held in the name of a nominee. The Company
has been out of compliance with certain of the NYSE listing standards for some
time. In August 1997, the Company met with the NYSE to discuss the continued
listing of the Company's Common Stock and to review the Restructuring Plan. The
NYSE subsequently advised the Company that it would not delist the Common Stock
at this time, but would review the Company's financial condition and compliance
with the listing criteria in approximately six months, after the anticipated
completion of the Restructuring Plan. While the Company has developed the
Restructuring Plan to address, in part, these compliance issues, there can be no
assurance that the shares of Common Stock will continue to be listed on the NYSE
after completion of the Restructuring Plan. If the shares of Common Stock were
delisted, there would likely be an adverse impact on the marketability and
liquidity of the Common Stock. See "RISK FACTORS -- Limited Market For Common
Stock; Possible Delisting."
Dividend Policy
The Company has never paid any dividends or made any
distribution on or with respect to the Common Stock, other than issuance of
Rights in the Rights Offering. The Company expects to retain its earnings if
any, to develop and expand its business and to repay indebtedness and does not
anticipate paying dividends on the Common Stock in the foreseeable future. Any
future dividend policy will be determined by the Company's Board of Directors,
and the payment of any dividend in the future will be based upon conditions then
existing, including the Company's earnings, financial condition and capital
requirements, as well as such economic and other factors as the Board of
Directors may deem relevant at the time. In addition, the New Line of Credit
contains a covenant restricting the Company's ability to pay dividends on its
Common Stock.
40
<PAGE>
SUMMARY FINANCIAL INFORMATION
(Dollar and share amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
SUMMARY OF OPERATIONS 1997 1996 1996(1) 1995(1) 1994(1) 1993(1) 1992(1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $37,548 $32,630 $43,051 $60,100 $69,897 $ 82,121 $81,877
Operating income (loss) (1,147) (7,738) (12,945) (12,536) (73,523) (16,353) (16,608)
Net income (loss) (2,445) (6,286) (10,809) (11,352) (66,149) (10,896) (12,788)
Net income (loss) per common share $ (0.14) $ (0.36) $ (0.61) $ (0.64) $ (3.75) $ (0.62) $ (0.72)
Average shares outstanding 17,649 17,649 17,649 17,649 17,649 17,649 17,649
Backlog at end of period $17,690 $21,048 $23,899 $20,613 $32,250 $33,500 $39,208
Number of employees at end of period 409 381 354 423 508 814 788
FINANCIAL POSITION AT YEAR END
- -------------------------------------------------------------------------------------------------------------------------------
Working capital (deficit) $4,120 $5,578 $5,163 $12,713 $(6,860) $ 5,695 $ 3,215
Property, plant and equipment, net 4,601 5,060 5,190 5,921 10,232 15,468 24,242
Goodwill, net - - - - 2,606 53,491 55,685
Total assets 27,095 34,290 29,820 46,519 58,930 129,780 136,378
Long-term debt 13,003 8,432 12,145 7,948 1,037 1,265 4,593
Other liabilities 2,086 3,168 2,435 3,689 4,128 3,300 3,847
Stockholders' equity (deficit) $(5,160) $1,434 $(2,820) $ 7,367 $ 6,678 $72,653 $83,932
FINANCIAL PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------------------
Current ratio 1.2 1.3 1.3 1.5 0.9 1.1 1.1
Long-term debt as a %
of total capitalization 165.8% 85.5% 130.2% 51.9% 13.4% 1.7% 5.2%
</TABLE>
(1) During the years 1990 - 1992, the Company made several business
acquisitions, and from 1993 to 1995 disposed of various businesses, which
may affect the comparability of the information. (See Note 3 to
Consolidated Financial Statements.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Pro Forma Consolidated Balance Sheet
The following Consolidated Balance Sheet sets forth actual
consolidated balance sheet information of the Company as of September 30, 1997,
and as adjusted to give effect to the Restructuring Plan. See "FINANCIAL
STATEMENTS." It should be understood that the Pro Forma Consolidated Balance
Sheet would not necessarily reflect the actual financial position had the
Restructuring Plan actually been consummated as of September 30, 1997, because,
among other factors, actual expenses may be higher or lower than amounts assumed
or estimated. Additionally, there can be no assurance that the Restructuring
Plan will be consummated. No adjustments have been made to reflect the Reverse
Stock Split.
41
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
Pro Forma Consolidated Balance Sheet
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------------------------------------------------
9/30/97 Rights WESAC Debt Pro
Historical Offering Conversion Forma
Statements (a) (b) Results
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 438 $ 384 $ 822
Restricted cash and cash equivalents 1,576 227 1,803
Accounts receivable 9,749 9,749
Costs and estimated earnings in excess of
billings on completed contracts 3,821 3,821
Inventories 4,731 4,731
Other current assets 971 971
------- -------- -------
Total Current Assets 21,286 611 21,897
Property, plant, and equipment, net 4,601 4,601
Other assets 1,208 1,208
------- -------- -------
Total Current Assets $27,095 $ 611 $27,706
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable 1,102 1,102
Accounts payable 7,442 7,442
Accrued payroll and payroll related 1,362 1,362
liabilities
Billings in excess of costs and estimated
earnings on uncompleted contracts 736 736
Current portion of long-term debt 252 252
Taxes payable 206 206
Other accrued liabilities 6,066 6,066
------- -------
Total Current Liabilities 17,166 17,166
Long term Debt 13,003 (1,700) (10,885) 418
Other liabilities 2,086 2,086
Stockholders' equity (deficit):
Common stock 176 276 1,089 1,541
Capital in excess of par value 90,834 2,035 9,796 102,665
Accumulated deficit (94,129) (94,129)
Foreign currency translation adjustment
(2,041) (2,041)
------- -------- -------- -------
Total stockholders' equity (deficit) (5,160) 2,311 10,885 8,036
------- -------- -------- -------
Total liabilities and stockholders' equity (deficit) $27,095 $ 611 $27,706
======= ======== =======
</TABLE>
Notes to Pro Forma Consolidated Balance Sheet
(Unaudited)
42
<PAGE>
(a) Rights Offering
The accounting for the proceeds from the stockholders' rights offering
is as follows:
<TABLE>
<CAPTION>
Amount
Shares (in thousands)
---------------- ------------------
<S> <C> <C>
Cash proceeds from exercise of 27,112,000 rights at $.10 per right 27,112,000 $ 2,711
Less: Costs of issuance paid in cash (400)
------
Net cash proceeds $2,311
------
Common stock, $.01 par:
Issued pursuant to rights offering 276
Capital in excess of par value applicable to 27,112,000 shares of $.01 per
share 2,435
Less costs of issuance:
Cash expenditures (400)
------
Net increase in stockholders' equity $2,311
------
</TABLE>
The total proceeds from the Rights Offering are currently shown in the
Common Stock account. No adjustment has been made for the Reverse Stock
Split.
(b) Debt Restructuring
Represents the impact of the following transactions which are expected
be consummated during the first quarter of 1998, assuming the
Restructuring Plan is approved: the WESAC Debt Conversion.
Pro Forma Consolidated Statement of Operations
The following Pro Forma Consolidated Statements of Operations
sets forth continuing operations of the Company for the year ended December 31,
1996 and for the nine-month period ending September 30, 1997, adjusted to give
effect to the Restructuring Plan, as if the restructuring had taken effect on
January 1, 1996.
This analysis has been adjusted to reflect the Reverse Stock Split.
For the periods reported, interest expense is adjusted to
eliminate interest on debt which is eliminated in the Restructuring Plan.
Net Cash Proceeds $ 2,311
Repayment of SVB borrowings (1,700)
Restricted Cash to replace letters
of credit (227)
-------
Cash and cash equivalents $ 384
43
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
Pro Forma Consolidated Statements of Operations
(Unaudited)
(In $ Thousand Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1997 December 31, 1996
-------------------------------------------------- -------------------------------------------------
Historical Pro Forma Pro Forma Historical Pro Forma Pro Forma
Statements Adjustments Results Statements Adjustments Results
------------------ ---------------- -------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Product sales $32,730 $32,730 $36,346 $36,346
Rental, service and
other 4,818 4,818 6,705 6,705
------- ------- ------- -------
37,548 37,548 43,051 43,051
COSTS AND EXPENSES:
Cost of revenues
Product sales 26,313 26,313 32,685 32,685
Rental, service and
other 3,359 3,359 6,412 6,412
Selling, general and
administrative 9,023 9,023 16,769 16,769
Restructuring and
other intangibles --- --- 130 130
------- ------- ------- -------
38,695 38,695 55,996 55,996
Operating profit/(loss) (1,147) (1,147) (12,945) (12.945)
OTHER INCOME (EXPENSE):
Interest income 79 79 407 407
Interest expense (a) (1,366) 1,071 (295) (1,663) 1,218 (445)
Other income (expense) (11) 468 468
------- ------- ------- ------- ------- -------
(11)
Loss before taxes (2,445) 1,071 (1,374) (13,733) 1,218 (12,515)
Benefit for income taxes (2,924) (2,924)
(b)
Net Loss ($2,445) $1,071 (1,374) ($10,809) $1,218 ($9,591)
-------- ------ ------- -------- ------ --------
Net loss per share ($1.440) ($0.09) ($6.12) ($0.62)
Average common shares
outstanding 1,765 15,416 1,765 15,416
</TABLE>
- ----------------
(a) Interest expense related to the Silicon Valley Bank debt and the WESAC debt
for the nine months ended September 30, 1997 and twelve months ended
December 31, 1996 which would have been eliminated upon assumed conversion
of debt on January 1, 1996.
(b) Benefit for income taxes reflects tax benefits available against losses from
domestic operations and the release of tax reserves deemed unnecessary.
See accompanying notes to pro forma consolidated financial statements.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared To The Year Ended December 31, 1995
Revenues in 1996 decreased $17.0 million, or 28%, to $43.1
million from $60.1 million in 1995. Revenues from businesses discontinued in
late 1995, primarily the operations in Australia, represented $2.9 million of
the revenue decrease. The decrease was primarily associated with reduced
revenues for gas flow diverters ($7.2 million), pipe work systems and hydraulics
equipment ($5.6 million), and flue gas conditioning (FGC) systems ($5.6
million). These lower revenues were partially offset by an increase in shipments
of damper products from the Company's facility in Maine. ($3.2 million).
International revenues accounted for 67% of total revenues in 1996 compared to
78% of total revenues in 1995.
FGC revenues have decreased in each of the last three years
due to the absence of large contracts from domestic utilities. Commencing in
1994, the U.S. electric utility industry has undergone major restructuring, as a
result of ongoing federal and state deregulation. Orders for all significant
capital expenditures, including air pollution control equipment, have been
minimal during this period.
The Company's 1996 cost of revenues totaled $39.1 million and
represented 91% of revenues. In 1995, the Company's cost of revenues totaled
$51.5 million and represented 86% of revenues. The increase in cost of revenues
as a percent of revenues in 1996, as compared to 1995, was due to contract
provisions of approximately $2.9 million taken in the second, third and fourth
quarters of 1996, primarily related to jobs subcontracted from Italy and the U.
K. in foreign locations. Cost of revenues for FGC systems increased to 91% of
revenues in 1996 from 74% of revenues in 1995, due to a large significant
profitable FGC contract in 1995 which did not recur in 1996. In addition, fixed
manufacturing and engineering cost became more significant against the lower
1996 revenues.
Selling, general and administrative (SG&A) expense, before
restructuring charges and intangible write-downs, totaled $16.8 million in 1996,
down from $19.1 million in 1995 and $21.4 million in 1994. SG&A expense, as a
percent of revenues, before restructuring charges and intangible write-downs,
was 39% in 1996, and 32% in 1995 and 31% in 1994. SG&A expense in 1996 included
one-time charges of approximately $2.8 million, including $2.4 million of
reserves for bad debts and $0.7 million for executive severance and option
costs, partially offset by the reversal of $0.3 million in reserves deemed
unnecessary. Approximately $0.8 million of the bad debt reserve related to
reserves required in the Company's Italian operation. SG&A expense in 1995
contained one-time charges totaling $2.3 million for legal and closing costs
related to the purchase by WESAC of an 81% interest in the Company and a
decision to close the Puerto Rico production facility. In 1996, SG&A expense
included approximately $0.9 million of expenses related to the marketing and
sale of VOC products and the Company's license agreement with Viking Water
Systems, Inc. SG&A expense related to these businesses was $0.3 million in 1995.
The number of employees in the Company totaled 354 at December 31, 1996, down
from 423 and 508 at the end of 1995 and 1994, respectively.
Prior to the acquisition by WESAC of 81% of the Company's
common stock, the Company's U.S. operations were consolidated into the tax
return of San Diego Gas & Electric Company, its former 81% parent, through a tax
sharing agreement dated April 1990. This agreement terminated on the closing of
the equity sale to WESAC.
With respect to WESAC's acquisition of PDC's shares on June 6,
1995, the buyer and seller agreed to jointly elect tax treatment for the
transaction as similar to an asset acquisition under section 338(h)(10) of the
Internal Revenue Code. Under this election, the allocation of the purchase price
to the assets deemed
45
<PAGE>
purchased resulted in the recording of deferred tax liabilities totaling $5.0
million, of which approximately $700 thousand was recorded in current
liabilities.
Subsequent to the closing of the WESAC transaction on June 6,
1995, and after the deferred tax liabilities were recorded, the Company provided
tax benefits of $3.0 million in 1995 and $2.0 million in 1996 against losses
from domestic operations. The tax benefit in 1996 also included $0.9 million
from the release of tax reserves deemed unnecessary.
Year Ended December 31, 1995 Compared To The Year Ended December 31, 1994
Revenues of $60.1 million in 1995 were $9.8 million, or 14%,
below 1994 revenues of $69.9 million. Revenues from businesses discontinued in
1995 and 1994 decreased to $3.5 million in 1995 from $10.3 million in 1994,
accounting for $6.8 million of the total revenue decrease. Revenues from
continuing operations decreased $3.0 million, to $56.6 million in 1995 from
$59.6 million in 1994, primarily due to a $3.1 million decrease in FGC and
De-NOx system revenues. International revenues accounted for 78% of total
revenues in 1995 compared to 60% of revenues in 1994.
The decrease in FGC and De-NOx systems revenues in 1995
resulted from the absence of large contracts from domestic utilities. Confronted
by increased competition developing from continuous Federal and state
deregulation, the U.S. electric utility industry is in the midst of major
restructuring with the result that order activity for domestic FGC systems has
been declining in this marketplace.
In addition, the air pollution control industry is in a period
of relatively low activity between two compliance deadlines. Demand for domestic
clean air products, including FGC and De-NOx systems, is principally driven by
compliance with emission limits established by the Federal Clean Air Act
Amendments in 1990. The Phase I Compliance deadline was January 1, 1995, and the
Phase II Compliance deadline is January 1, 2000. Having met the Phase I
requirements, many North American utilities will likely delay Phase II
compliance actions until later in the decade.
The Company's cost of revenues in 1995 totaled $51.5 million
and represented 86% of revenues, compared to cost of revenues of $64.7 million
at 93% of revenues in 1994. Approximately $11.3 million of 1994 cost of revenues
relates to operations which were closed or cut back over the last two years,
including Wahlco Power Products, Inc. ("WPPI"), Field Service Associates, Inc.
("FSA"), Exergetic Systems, Inc. ("ESI") and Wahlco Engineered Products, Pty.
Ltd. (Australia). When these operations are excluded, the percentage of cost of
revenues to total revenues is 86% and 89% in 1995 and 1994, respectively.
In 1995, cost of revenues as a percent of revenues decreased
primarily due to lower costs on De-NOx contracts and the absence of high costs
on a large domestic 1994 FGC contract. In addition, closing the Puerto Rican
manufacturing facility and transferring FGC production systems to California
reduced duplicate factory overhead costs and lowered unit production costs.
During 1995, the Company continued its cost reduction program
which commenced in 1992. As a result, selling, general and administrative
("SG&A") expense, before restructuring charges and intangible write-downs,
declined from $21.4 million in 1994 to $19.1 million in 1995. SG&A expense, as a
percent of revenues, before restructuring charges and intangible write-downs was
32%, in 1995, 31% in 1994 and 30% in 1993. As a result of the cost reduction
program, the number of employees declined to 423 at December 31, 1995, down from
508 and 814 at the end of 1994 and 1993, respectively.
During the third quarter of 1995, the Company released
restructuring accruals totaling approximately $590 thousand, primarily related
to strategic actions no longer under consideration by
46
<PAGE>
management. The reserves had been provided for 1993 and 1994 for the closing of
facilities used in international operations and associated severance. After
review, management deemed these reserves unnecessary.
During the fourth quarter of 1995, management evaluated the
value of goodwill remaining on the Company's books at Wahlco, Inc. and Pentney
in the U.K. As a result of this analysis, which involved a forecast for each
business and the discounting of future cash flows, the goodwill at Wahlco, Inc.
and Pentney, which totaled $1.8 million and $634 thousand, respectively was
written off.
Subsequent to the write-off of goodwill, the Company adopted
the provisions of FAS 121, effective December 31, 1995. No additional
write-downs of assets was required under FAS 121 in 1995. (See Note 1 to
Consolidated Financial Statements)
The Company was unable to book a tax benefit against 1995
losses prior to June 6, 1995, the date WESAC purchased SDG&E's 81 percent stock
interest in the Company, since the tax sharing agreement with SDG&E limited the
Company's reimbursements for tax credits and losses which the Company would be
entitled had it filed separate income tax returns.
Subsequent to the closing of the WESAC transaction on June 6,
1995, and after the deferred tax liabilities were recorded, the Company provided
tax benefits of $3.0 million against losses from domestic operations.
Liquidity And Capital Resources
The Company had a negative cash flow from operating activities
in 1996 of $4.1 million compared to a negative cash flow of $10.3 million in
1995. The negative cash flow in 1996 resulted from the net loss of $10.8
million, partially offset by reductions in working capital, principally accounts
receivable and inventories. The negative cash flow in 1995 resulted primarily
from the net loss of $11.4 million reported in that year. In 1996 and 1995, the
Company funded its operating cash flow deficit through borrowings from its 81%
stockholder, WESAC, and its primary bank, as described below.
The Company had a working capital position of $5.2 million at
December 31, 1996 compared to working capital of $12.7 million at December 31,
1995. The decrease in working capital reflects a $5.0 million reduction in
accounts receivable and a $4.6 million decline in inventories, due to the lower
level of production and revenues in 1996 compared to 1995, and contract
adjustments and operating losses in 1996. Working capital improved in 1995
principally due to the contribution to capital of approximately $20 million of
short-term debt owed by the Company to PDC as part of the WESAC transaction.
(See Note 1 to the Consolidated Financial Statements).
As a security for performance and advances on long-term
contracts, the Company is contingently liable in the amount of $1.3 million at
December 31, 1996 under standby letters of credit of which $1.1 million are
fully secured by restricted cash and marketable securities.
Capital expenditures in 1996 totaled $402 thousand compared to $648 thousand in
1995. Approximately $155 thousand was spent on additions to the rental equipment
inventory at Treste Plant Hire Ltd. Another $48 thousand was spent to expand the
Treste facility. The balance of the capital expenditures were for a variety of
production equipment and certain building improvements.
On October 25, 1996, the Company's loan and security agreement
with Silicon Valley Bank was modified, so that (i) the maturity date was
extended to May 1998, and (ii) the interest rate on funds
47
<PAGE>
borrowed by the Company was reduced from about 11% to about 5.5%, since WESAC
deposited cash collateral equivalent to the funds borrowed with Silicon Valley
Bank. As part of the loan and security agreement in October 1995 and the
renegotiation in October 1996, the Company issued warrants to SVB to purchase
175,000 shares of the Company's Common Stock at $2.29 per share, which warrants
expire on October 26, 2000.
On August 28, 1996, the Company reached an agreement with
WESAC, pursuant to which WESAC agreed to lend the Company up to $1.6 million.
The loan bears interest at an annual rate of 13%, and is secured by all of the
assets of the Company. Interest and a commitment fee of $32,000 have been paid
in kind and added to principal. In further consideration for making the loan,
the Company agreed to issue to WESAC or its designee five year warrants to
purchase the Company's common stock as the funds are drawn down. Each warrant
covers the number of shares of common stock equal to the quotient of (i) the
dollar amount of the draw down divided by (ii) $0.47, the approximate closing
price of the common stock on August 16, 1996. The warrants become exercisable on
issuance at $0.47 per share. The Company had drawn $1.5 million against this
loan as of December 31, 1996, and issued warrants covering 3,404,255 shares of
common stock to four WESAC partnerships which provided the funding.
The loan matured on January 1, 1997 but was extended as described below.
WESAC extended the maturity of the August 1996 $1.6 million
facility and the existing Silicon Valley Bank loan. Both facilities mature in
May 1998. WESAC also agreed to provide the Company with a new $2.4 million
standby line of credit.
As of March 31, 1997, the Company had not drawn the remaining
$100 thousand available under the August 1996 term loan or any funds on the $2.4
million line.
Backlog And Bookings
Backlog at December 31, 1996 was $23.9 million compared to
$20.6 million at December 31, 1995. FGC system backlog increased to $5.2 million
at December 31, 1996 from $3.1 million at the end of 1995. Backlog is unaudited
and is defined as work for which the Company has entered into a signed agreement
or has received a requisition or purchase order. Approximately $3.9 million of
the December 31, 1996 backlog is scheduled for delivery after December 31, 1997.
Historically, substantially all of the Company's backlog has resulted in
completed contracts.
Effects Of Inflation; Other Cost Increases
Management does not believe that inflation has had a material
effect on operations during the past several years. However, the Company
experienced significant stainless steel price increases on one large contract in
Southeast Asia in 1995 and 1996. Increases in labor, materials and other
operating costs could adversely affect the Company's operations, if the Company
is unable to raise its prices to cover the increases.
Foreign Currency Translation
A substantial portion of the Company's assets are outside of
the United States and are subject to fluctuation in exchange rates. The foreign
currency translation adjustment to the Balance Sheet at December 31, 1996 was
$2.0 million (net of tax) compared to $2.5 million as of December 31, 1995.
48
<PAGE>
Cautionary Statement
The foregoing discussion under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains various "forward looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and represent the Company's expectations or
beliefs concerning future events, including the following: Statements regarding
increasing competition from other manufacturers of FGC equipment; statements
regarding compliance methods other than FGC systems such as coal blending,
environmental credits, etc.; statements regarding the timing of demand for clean
air products under CAA Phase II deadlines; statements regarding the adequacy of
the Company's cash provided by internally generated funds and outside
borrowings. The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those projected by the Company, including, but not limited to, the following:
change in emphasis regarding compliance of existing clean air legislation under
a new administration; changing governmental regulations or legislation;
development of alternative compliance technologies; and emergence of new
competitors as Phase II of the CAA deadlines draw closer. Future results
actually achieved thus may differ materially from historical results and/or from
Company forecasts.
CERTAIN TRANSACTIONS
Components of the Conversion Debt
The Conversion Debt is expected to amount to approximately
$11,244,000 (including interest) as of December 31, 1997 and consists of the
principal amount of, and all accrued but unpaid interest on, (i) the Company's
$4,900,000 Note dated May 15, 1995 issued to WESAC, (ii) the $2,000,000 1995
Term Loan dated July 28, 1995, (iii) the Company's 15% Note in the amount of
$150,000 dated May 9, 1996 issued to WESAC (the "Fee Note"), and (iv)
$1,500,000, the amount drawn down under the 1996 line of credit provided by
WESAC on August 28, 1996 (the "1996 Line of Credit). The proceeds of the
Conversion Debt were used for working capital and other general corporate
purposes. Interest payable by the Company to Wexford (except on the Fee Note)
is accrued and added to principal monthly or quarterly, on interest payment
dates.
Origin of the Conversion Debt
In 1995, WESAC loaned to the Company $4,900,000, as evidenced
by the Company's 13% Note dated May 15, 1995, and $3,000,000 under the 1995 Term
Loan, of which $1,000,000 was repaid in 1995. In 1996, WESAC loaned to the
Company $1,500,000, which the Company drew down under the 1996 Line of Credit.
WESAC also received a note dated May 9, 1996 in the principal amount of $150,000
as a fee for pledging approximately $2,000,000 in cash to secure the SVB Loan.
(the Fee Note). The foregoing obligations, together with accrued and unpaid
interest thereon, are currently outstanding and constitute the Conversion Debt.
New Line of Credit
In 1997, WESAC, directly and through its affiliates, provided
to the Company an additional $2,400,000 line of credit (the "1997 Line of
Credit"). Pursuant to the Restructuring Agreements all amounts owed to WESAC in
excess of approximately $11,244,000 will be deemed to be borrowings outstanding
under the New Line of Credit, and the Company's ability to make further
borrowings under the 1996 Line of Credit and the 1997 Line of Credit will be
terminated.
In connection with the Restructuring Plan, the Wexford Funds
have agreed, pursuant to the New Line of Credit, to make a
49
<PAGE>
$3,000,000 line of credit (the "Tranche A Line") available to the Company until
the consummation of the Restructuring Plan. Any borrowings by the Company under
the Tranche A Line (the "Tranche A Loans") will be due and payable upon
consummation of the Restructuring Plan and will be repaid from the net proceeds
of the Rights Offering after the repayment of cash borrowings under the SVB Loan
and payment of the fees and expenses incurred in connection with the
Restructuring Plan; provided, however that to the extent such net proceeds are
insufficient to repay the Tranche A Loans in full, the maturity of any unpaid
Tranche A Loans will be extended until December 31, 2000. See "USE OF PROCEEDS."
Upon the consummation of the Restructuring Plan, the Wexford Funds will make an
additional $2,500,000 of loans (the "Tranche B Loans") available to the Company,
to be due and payable on December 31, 2000. All loans by the Wexford Funds
pursuant to the New Line of Credit will bear interest at the rate of 13% per
annum and will be secured by a first priority perfected lien on the assets of
the Company.
In February 1997, the Wexford 1995 Funds established and
guaranteed the Chase Facility to provide short-term financing for companies
owned by the Wexford 1995 Funds, including the Company. The Chase Facility had a
funding capacity of approximately $3.8 million at September 30, 1997, against
which the Company was account party on letters of credit totaling approximately
$2.3 million and had drawn $750,000 for working capital. In October 1997, the
Chase Facility was increased to a total of $5.0 million and the Company drew an
additional $1.0 million as a short-term loan and $500,000 as a letter of credit.
In November 1997, the Company borrowed an additional $400,000 for working
capital. Before making each loan or issuing each letter of credit, Chase
advises the Company of the terms applicable to such loan or letter of credit.
The current borrowings bear interest at an average rate of 9.5%. Prior to
completion of the Rights Offering, the Company anticipates that an additional
$500,000 will be required under the Chase Facility. The Company plans to use the
Chase Facility for letters of credit and bank guarantees, as well as loans to
the extent the terms offered are advantageous to the Company. The Company
believes that the Chase Facility supplements the New Credit Line, and that the
combined facilities are at least as advantageous to the Company as available
alternatives lacking credit support from the Wexford Entities. See "PLAN OF
FINANCIAL RESTRUCTURING -- New Line of Credit."
Warrants
As additional consideration for the 1996 Line of Credit
provided by WESAC to the Company, the Company has issued to WESAC'S designees,
namely, four limited partnerships managed by Wexford that funded the loans, five
year warrants to purchase, for $.47 per share (the approximate closing price per
share of Common Stock of the Company on the NYSE on August 16, 1996), 3,404,255
shares of Common Stock of the Company. The Warrants contain standard
anti-dilution provisions. Therefore, as a consequence of the Rights Offering and
the Reverse Stock Split, if the Rights are fully exercised, the exercise price
of the outstanding Warrants held by four partnerships managed by WESAC to
purchase 3,404,255 shares of the Company's Common Stock will be adjusted from
$.47 per share to approximately $1.40 per post-split share, and the number of
shares of Common Stock issuable upon exercise of such Warrants will be adjusted
to 340,425 post-split shares.
Wexford Fee
As compensation for its assistance to the Company in planning,
formulating and implementing the Rights Offering and other related transactions
described in this Proxy Statement/Prospectus, including the Wexford Debt
Conversion, after the Rights Offering is completed, the Company will pay to
Wexford Management LLC, or an affiliate designated by Wexford Management LLC, a
fee of $100,000. The Company will also pay the Stand-by Purchasers a fee of
$100,000 in the form of shares of Common Stock. See "PLAN OF FINANCIAL
RESTRUCTURING -- Rights Offering" and "CERTAIN TRANSACTIONS -- Stand-by Purchase
Commitment Fee."
50
<PAGE>
Stand-by Purchase Commitment Fee
The Wexford 1995 Funds, as the Stand-by Purchasers, have agreed to
purchase, at the Subscription Price, all Unsubscribed Shares under the Rights
Offering (the Stand-by Commitment). As compensation for the Stand-by Commitment,
the Company has agreed to pay the Stand-by Purchasers a fee of $100,000 in the
form of shares of Common Stock, upon consummation of the Restructuring Plan. See
"CERTAIN TRANSACTIONS -- Stand-by Purchase Commitment Fee."
The Board of Directors of the Company determined that a Stand-by
Purchasers' fee of 549, 752 shares, (pre-split or before giving effect to the
Reverese Stock Split), or 54,975 post-split shares, for an implicit price per
share of $0.1819 pre-split or $1.819 post-split. The Board used a weighted
average, assuming a Public Stockholder fully-exercised Rights, or eight Rights
per share at $0.10 per share averaged with one share at $.8375 (average of the
closing price per share of Common Stock on the New York Stock Exchange for the
twenty days ended October 10, 1997), or eight shares at $.80 plus one at $.8375
for nine shares for $1.6375 or $.1819 per share pre-split.
The Board believes that this weighted average reflects a single
economic opportunity for both Public Stockholders and Wexford Affiliates. The
Stand-by Purchasers may only purchase at the $.10 per share Subscription Price
to the extent that Public Stockholders elect not to exercise those Rights, and
that purchase will accomodate the Company's ineterst in reliably knowing in
advance the proceeds of the Rights Offering.
BUSINESS
The Company
The Company ("WES") is a Delaware corporation with its
principal executive offices located at 3600 West Segerstrom Avenue, Santa Ana,
California 92704 (telephone number (714) 979-7300). Unless otherwise indicated,
the term "Company" or "WES" refers to WES and its consolidated subsidiaries.
The Company designs, manufactures, and sells combined cycle
gas turbine products, metallic and fabric bellows, air pollution control
equipment, and related products and services to electric utilities, independent
power producers, cogeneration plants, and industrial manufacturers worldwide.
The Company also provides mechanical plant installation services and rents
associated equipment to users in the U.K. The Company operates through several
subsidiaries which focus on specific geographical regions or products. These
entities, located primarily in the United States and the U.K., are coordinated
through common corporate management.
The Company was formed in 1990 by Pacific Diversified Capital
Company ("PDC"), a wholly-owned subsidiary of San Diego Gas & Electric Company
("SDG&E"), for the purpose of acquiring and operating Wahlco, Inc. ("Wahlco"),
at that time a wholly-owned subsidiary of PDC. In May 1990, the Company issued
3,389,000 shares of common stock in its initial public offering. Upon the
completion of the public offering, PDC's ownership interest in the Company was
approximately 81%.
On June 6, 1995, PDC sold to WES Acquisition Corp., an
affiliate of Wexford Capital Corporation ("WESAC"), its 81% stock interest in
the Company.
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On March 30, 1990, the Company acquired all of the capital
stock of Bachmann Companies, Inc. ("Bachmann"), which designs, manufactures and
sells gas flow diverters, dampers, and expansion joints used by electric
utilities and other industrial companies.
On August 8, 1991, WES acquired all the outstanding shares of
stock of Teddington Bellows Ltd. ("Teddington"), which manufactures specialized
high performance metallic expansion joints. Teddington's customers include power
generation, petrochemical, automobile, construction, and steel companies.
On August 17, 1991, the Company acquired substantially all of
the Metro-Flex Group (now called Wahlco Engineered Products Ltd.), headquartered
in Baar, Switzerland, and Pentney Engineering Ltd. ("Pentney"), and Treste Plant
Hire Limited ("Treste") headquartered in Chesterfield, England. Wahlco
Engineered Products, Ltd. ("WEP Ltd."), now located at the Pentney facilities in
Chesterfield, England, designs and markets gas flow diverters and dampers for
electric utility and industrial power plant exhaust systems. Pentney
manufactures products for WEP Ltd. and also provides hydraulic equipment,
pipework, and general metal fabrication.
In June 1995, the Company formed a division of Wahlco to
identify and develop products designed for the destruction of volatile organic
compounds ("VOCs"). In November 1995, the division signed a license agreement
with LTG Lufttechnische GmbH ("LTG") to sell and manufacture a line of products
for the reduction and control of VOCs in the United States, Canada and Mexico.
LTG is located in Stuttgart, Germany and designs, manufactures and sells a broad
line of catalytic and thermal VOC and odorant oxidizers.
Description of the Business
The Company's business is operated through its subsidiaries:
Wahlco Engineered Products, Inc. (U. S.) (formerly Bashmann
Industries, Inc.) designs, manufactures and sells gas flow diverters, dampers
and fabric and metallic expansion joints used by electric utilities and other
industrial companies.
Wahlco Engineered Products, Ltd. (U.K.) (formerly Metro-Flex
UK, Ltd.) designs and sells gas flow diverters which control and direct the flow
of gases from a gas turbine exhaust to a waste heat recovery boiler in a
gas-turbine combined-cycle power-generation plant.
Pentney Engineering Ltd. (U.K.) provides mechanical pipework
and plant installation, hydraulic equipment manufacture, and general fabrication
to WEP Ltd., utilities and industrial companies.
Teddington Bellows Ltd. (U.K.) designs, manufactures and sells
specialized high performance metallic expansion joints for industrial and
utility applications.
Wahlco (U.S.) designs, manufactures, sells, leases and
services equipment used by electric utilities and others to reduce and control
air pollution. Wahlco's products and services include flue gas conditioning
systems, Nitrogen Oxide ("NOx") reduction systems, and industrial electric
heaters and thermocouples. In addition, through its license agreement with LTG,
Wahlco manufactures and sells catalytic and thermal oxidizers to control and
reduce VOCs.
Treste Plant Hire, Ltd., rents mechanical equipment to the
United Kingdom construction industry.
Products and Services
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The Company's products are sold in the coal-fired utility
after-boiler market, the gas-turbine power-generation market, the market for
elimination of volatile organic compounds and other industrial markets.
Dampers, Diverters, Expansion Joints, Piping Systems, Hydraulic Equipment and
Other Services
Gas flow diverters divert the flow of exhaust gases from gas
turbines either to the atmosphere via stack or to a boiler for steam production.
The steam produced is principally used for power generation by steam turbines
(combined cycle). In some cases, the steam is used as process steam in district
heating systems, water desalination, or operations such as liquefying oil to
assist in its extraction from the ground (co-generation). Gas flow diverters are
supplied to the power generation industry, industrial power plant systems, and
similar process industries of gas type isolation equipment. Diverters are sold
to customers in Europe, Southeast Asia, the Far East and the United States.
Dampers control the flow of air and gas by directing,
throttling and/or channeling air and gas through a single path. They are used by
power generating utilities, petrochemical plants, refineries, chemical plants,
cement plants, paper and steel mills, and other industrial companies.
Expansion joints are produced from various fabrics and metals,
in a variety of configurations, and are used with diverters and other ducting
systems. These products are provided to a wide range of industries.
Metallic expansion joints are installed in liquid and gas
piping, pressure systems and exhaust systems in the chemical, petrochemical,
utility power generation, aviation, nuclear, ship building, heating and other
general industries. Expansion joints are used primarily to counteract the
negative effect of the expansion and contraction of pipes and ducts caused by
extreme temperature changes from a production process such as electric power
production and petroleum refining.
In 1995 and 1996, only a small portion of these businesses was
driven by environmental regulation.
Warranties. Warranties for the Company's products generally
average from 12 to 24 months from the date of sale and provide for the repair or
replacement, without charge, of any parts found to be defective in material or
workmanship under normal and proper use (except wear and tear from abrasion or
corrosion). The Company believes that the useful life for this group of products
ranges from 3 to 20 years under normal and proper use.
FGC Systems, Heaters and Thermocouples, and Related Products and Services
(20% of 1996 Revenues; 22% of 1995 Revenues)
Flue Gas Conditioning ("FGC") Systems. The Company is the
leading provider of FGC systems worldwide. The FGC business is principally
driven by environmental regulations that require electric utilities to meet
certain emissions standards for particulate matter and sulfur oxides.
To comply with these regulations, many utilities previously
burning high sulfur coal have switched to low sulfur coal. While the conversion
from high sulfur to low sulfur coal enables utilities to meet existing sulfur
oxide emissions standards, the conversion generally results in an increase in
particulate emissions. FGC systems increase the collection efficiency of
electrostatic precipitators ("ESPs"), which abate particulate (fly ash)
emissions. The Company's FGC technologies include sulfur trioxide, ammonia and
dual
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conditioning (both sulfur trioxide and ammonia conditioning). FGC systems
may be installed on existing or new ESP's.
The ability of Wahlco's customers to purchase low sulfur coal
economically is an important factor in the continuing demand for Wahlco's FGC
business. Experts in the field of coal resources expect this trend to continue.
Originally, low sulfur coal was thought to be more difficult to obtain and
transport when planning for the Clean Air Act began in the early 1990's.
Rental Units. The Company rents FGC test systems to its
customers to demonstrate that the technology will reduce particulate emissions
sufficiently to comply with regulations.
Service Agreements. The Company has, from time to time,
entered into maintenance agreements of varying terms and conditions under which
it maintains systems purchased by its customers.
Nitrogen Oxide ("Nox") Reduction Systems. The Company's Staged
NOx Reduction System ("SNRS") relies on two NOx reduction technologies:
selective non-catalytic reduction ("SNCR") and selective catalytic reduction
(SCR). The system uses the customer's existing air heater to further reduce NOx
emissions. The air heater SCR process is covered by U.S. and foreign patents
owned by the Company. In 1995, the Company received contracts for four SNCR
systems in Russia. The contract is important because the global market for NOx
reduction systems on both oil and coal-fired boilers is significant.
Heaters And Thermocouples. Thermocouples are heat-sensing
devices used in conjunction with a temperature controller or indicator to
convert an electrical signal to a temperature readout. The Company's electrical
heaters include: (l) tubular heaters for plastic injection molding and
extrusion, pipe heating and die heating; (2) immersion heaters for heating
liquids in the chemical and process industries; (3) duct heaters for heating
large quantities of air or gas passing through ducts; (4) tubular elements for
specialty heating applications; and (5) silicone rubber heaters for drum and
tank heating used for food processing, medical equipment and other applications.
Volatile Organic Compound ("VOC") Control Systems. Under a
license agreement with LTG Lufttechnische GmbH covering the U.S., Canada and
Mexico, the Company manufactures a full line of thermal and catalytic oxidizers
to control and destroy VOCs. VOCs are an inherent by-product of many industrial
processes, but the emission of these hazardous compounds to the atmosphere is
limited under current state and federal regulations stemming from the 1990 Clean
Air Act Amendments Titles I, III and V.
Warranties. Warranties for FGC and VOC systems generally
provide for the repair or replacement, without charge, of any parts found to be
defective in material or workmanship under normal and proper use (excepting wear
and tear from abrasion or corrosion) within 18 months from the date of shipment
or 12 months from the date of initial operation, whichever occurs first. In
addition, under certain circumstances, the Company guarantees that proper
operation of its FGC and VOC systems will not exceed certain effluent opacity or
emission levels over an initial acceptance period.
Warranties for heaters and thermocouples generally provide
that the Company will repair or replace, without charge, any parts found to be
defective in material or workmanship under normal and proper use (excepting wear
and tear from abrasion or corrosion) within 12 months from the date of sale. The
Company believes the useful life of each of these products exceeds five years
under normal and proper use.
Patents and Trademarks
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The Company holds 24 U.S. patents and corresponding foreign
patents and/or applications. Existing patents expire between 1999 and 2015.
Although initially enhanced by its patent rights, the Company believes its
ability to compete effectively in the FGC market depends primarily upon its
engineering, scientific and technological expertise and its reputation for
successful installations. This includes a database of information relating to
coal and ash analysis and precipitator size and operating conditions. In
addition, the Company has competed successfully in the sale of its sulfur
dioxide-based and ammonia conditioning systems, which are not protected by
patents, and in the sale of its sulfur-burning FGC systems in foreign countries
in which it does not have significant patent protection.
During 1996, the Company was awarded four new U.S. patents
covering different approaches to environmentally beneficial "In-duct gas
conditioning" which the Company believes could become an important FGC
technology. Foreign patent applications for this technology are in progress.
In May 1992, the Company acquired from L&C Steinmuller GmbH
three U.S. and a number of corresponding foreign patents which broadly cover the
core component of Wahlco's entry into the market for the control of NOx
emissions.
The Company holds several U.S. and foreign patents, relating
to dampers, diverters and expansion joints, which expire between 1998 and 2015.
In addition, a number of applications are pending, for some of which patent
grants are imminent. As these patents and applications relate to a diverse range
of products, and because the Company's business is more dependent upon the
engineering quality of the Company's products, the Company does not view its
success as dependent upon any single patent.
Dampers, diverters, expansion joints and related services are
marketed under the trademarks or tradenames "WAHLCO," "METRO-FLEX," and
"TEDDINGTON."
Research and Product Development
Expenditures for research and product development were
approximately $277 thousand in 1996 and $460 thousand in 1995. The Company's
research and development activities are substantially augmented by the knowledge
gained through custom engineering provided for individual customers.
The Company has an ongoing program to improve its products. As
examples, its research efforts have resulted in the development of FGC process
improvements, development of high efficiency catalysts, improvements to heat
exchange surfaces, NOx reduction systems, a heat transfer testing facility, and
a sophisticated database containing information relating to coal and ash
analysis for sizing and improving the performance of electrostatic
precipitators, and precipitator size and operating conditions.
Marketing
The Company markets its products, technologies and services to
electric utilities and industrial customers worldwide. The principal export
markets for the Company's products are Asia, Europe and Canada. (See Note 13 to
Consolidated Financial Statements.)
The Company has a dedicated sales force for each subsidiary,
managed under common corporate control. Coordination among these groups has
aided the development of relationships and future business prospects for all
products.
Since January 1997, Wahlco's sales organization has been
headquartered in Santa Ana, California. A sales manager oversees approximately
40 independent sales representative organizations in North
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America that sell to utility customers and industrial customers, primarily in
the steel, cement, pulp and paper and related process industries. The
international sales function operates through a network of 42 representatives in
57 countries in Africa, Asia, the Pacific Rim, the Caribbean, Europe, the Middle
East, and Central and South America. In addition to this sales organization,
Wahlco markets its products through sales and/or service offices located in
California, and Illinois.
Wahlco's FGC marketing efforts are targeted primarily at
coal-fired power plants operated by electric utilities. Repeat business for FGC
systems is limited because individual customers typically have a small number of
electrostatic precipitators and because FGC systems operate for many years
without the need for replacement.
In recent years, Wahlco has increased its international
marketing efforts for FGC systems. While U.S. environmental regulations,
mandating lower emissions levels for power generating plants, have been in place
for several years, many other countries have not yet adopted or enforced strict
regulations aimed at reducing emissions from coal fired power plants. Wahlco
believes that Asia, Europe, and Africa, may enact stricter regulations to
control power plant emissions. It is impossible to predict with certainty,
however, whether such regulations will be enacted or, if enacted, enforced, or
the effect of such regulations upon the Company's business.
Wahlco has developed a proprietary staged NOx reduction system
("SNRS") that provides gas and coal-fired utilities with a modular, economic
solution to NOX removal. To increase market penetration, the Company is working
with Nalco Fueltech, a significant participant in NOx reduction, to jointly
market the staged reduction technique using the Company's patented heater basket
technology.
Wahlco's marketing activities for the VOC control product line
are similar to those for the FGC product line. A sales manager oversees a
network of independent sales representative organizations in the United States,
Mexico and Canada. VOC and FGC sales representatives do not generally overlap
because the VOC market addresses a different industrial base. During 1996, the
primary VOC control markets in the U.S. were wood products, semiconductor
manufacturing, printing/coating, surface finishing, metal decorating and
chemical processing.
Marketing and sales for Wahlco Engineered Products, Inc.
("WEP, Inc.") is based in Lewiston, Maine and focuses on customers in the power,
pulp & paper, cement, metals, and petro-chemical industries in North, Central
and South America through a network of approximately 28 independent sales
representative organizations.
WEP, Inc. also markets dampers and expansion joints to
customers in Europe and Asia through a network of 18 independent sales
representative organizations in Europe and Asia. In addition, WEP, Inc. sell
diverters to U.S. based customers for projects in Europe and Asia.
WEP Ltd.'s products are marketed internationally by 28 direct
and independent sales representatives in 34 countries. Sales, engineering and
technical support are performed from the Chesterfield, U.K. facility.
Teddington uses 10 of its own and several of the Company's
international sales and marketing representatives.
Customers
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No customer accounted for more than 10% of the Company's
revenues in 1996. (See Note 13 to Consolidated Financial Statements).
Raw Materials
The materials used in the production of the Company's product
lines are generally available through a number of sources, and the Company does
not anticipate difficulty in obtaining the materials and components used in its
operations. Most of the materials used by the Company are ordered to a number of
standards, including ASME, ASTM and DIN.
Certain materials and components must withstand extreme operating conditions and
because only relatively few component suppliers consistently meet necessary
specifications, the Company purchases from a limited number of suppliers.
Generally, the Company has not experienced difficulty in obtaining the necessary
materials and components and has several alternative sources of supply.
Pentney and Teddington have achieved ISO 9000 standards. The
remaining subsidiaries continue to work toward achieving ISO 9000 accreditation
or equivalent standards.
Competition
Wahlco, Inc. competes primarily on its engineering, scientific
and technological expertise. Wahlco believes that its past performance record of
approximately 400 installed systems is a benefit in dealing with its customers.
Wahlco bases its belief with respect to the performance record of its FGC
systems on its ongoing communications with customers for which it has installed
such systems.
Since 1990, Wahlco's domestic FGC business has experienced
increased price competition as domestic utilities attempted to reduce the
overall costs of compliance with state and federal regulations. Several smaller
domestic manufacturers including Chemithon, Inc. and Wilhelm Environmental
Technologies, Inc., have been successful in securing some FGC contracts.
As a result of price competition, Wahlco has experienced a
decline in market share and in overall FGC margins. During the period 1993-1996,
Wahlco confronted competitive pricing pressures by reducing certain engineering
and manufacturing costs and by reconfiguring various products to better meet
customer demand. Based upon internal market information, the Company believes
that Wahlco still continues to be the leading provider for FGC systems in the
United States and maintains a strong market position internationally.
Since there are several alternatives to FGC systems, Wahlco
faces substantial competition from companies providing devices which reduce
particulate emissions generally without the need for FGC systems. Examples of
such devices are scrubbers, certain ESPs, and baghouses. Numerous factors may be
considered by an electric utility in determining whether to install FGC systems
or an alternative technology to achieve compliance. These include the amount of
initial capital expenditures, issues and policies related to fuel sources,
related on-going operating and maintenance costs, availability and associated
costs of low and/or high sulfur coal, the particular emission standards
applicable to the public utility, and the value of any credits or allowances
which may be available.
One of the largest factors affecting the market and its
competitive nature has been the utilities' strategy to postpone adding FGC and
other compliance equipment by blending coals. Utilities have mixed high and low
sulfur coal or burned low sulfur coal containing enough sulfur content to reduce
sulfur emissions without impairing the effectiveness of the particulate control
devices.
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Wahlco faces substantial competition with respect to its
thermocouple and electrical heater products and serves a relatively small
portion of the total market. In addition to a few large companies which market
such products nationally, there are also several regional suppliers which
compete with Wahlco. In establishing a market niche, Wahlco targets customers
requiring specially engineered and customized products.
The Company's line of products to control VOC's compete with
products from numerous competitors. Products are customized for particular
applications, and companies compete based on design and engineering capabilities
as well as installation and on-site reliability.
WEP, Inc. faces significant competition in the sale of its
dampers, diverters, and expansion joints. Although these products are
differentiated by design, sophistication, reliability, and customer service,
many purchasing decisions are made on the basis of price and delivery.
WEP Ltd. continues to win a significant share of the
international market for gas flow diverters. Pentney, Treste and Teddington
complete in the U.K. construction market which has been somewhat depressed
during the last two years. The recent strength of the U.K. pound has adversely
affected the U.K. market.
WEP, Inc. and WEP, Ltd. believe that, as a group, they command
a significant share of the global market for gas flow diverters and dampers.
Significant competitors in this market include Rappold, Braden, Effox, and
Stober & Morlock. Domestically, WEP, Inc. faces competition in the damper market
from Effox, American Warming & Ventilating, ACDC, DDI, and others. In the
expansion joint market, WEP, Inc. competes with Pathways, EJS, Senior Flexonics,
Badger, and others.
Governmental Regulation
Although the Company's manufacturing operations are subject to
environmental regulations governing the discharge of pollutants, compliance by
the Company with these environmental regulations has not had, and is not
anticipated to have, a material effect on the capital expenditures, earnings or
competitive position of the Company.
Certain of the Company's business is dependent upon government
regulation of air pollution at the federal, state, local and foreign levels. In
the United States, the Federal Clean Air Act ("CAA") (which was amended in 1990
to impose stricter requirements for emissions), and the associated federal and
state regulations largely determine the size and timing of the investments the
Company's customers make in pollution control equipment. Clean air legislation
in the United States requires compliance with ambient air quality standards and
empowers the Environmental Protection Agency ("EPA") to establish and enforce
limits on the emission of various pollutants. The states have primary
responsibility for implementing these standards and, in some cases, have adopted
more stringent standards than those adopted by the EPA.
Several factors have negatively impacted the air pollution
control equipment marketplace since the passage of the CAA Amendments in 1990.
There was a general increase in competition and an associated decrease in unit
prices. These factors combined to erode gross margins. Weakness in general
business conditions and changes specific to utility industry customers, such as
the availability of emission credit trading, caused many air pollution control
equipment customers to reevaluate or postpone capital equipment decisions. As an
example, the market for FGC equipment plunged almost 70% in 1992. Many of the
Company's customers were able to meet January 1, 1995 (Phase I) compliance
requirements by blending coal, using environmental credits, derating plants, and
other methods rather than by purchasing FGC equipment.
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The Company's air pollution control businesses are driven, in
part, by environmental regulations in the United States and in other countries
that are broad in scope and extremely complex. Their impact on the company's
sales will depend variously upon the interaction of the stringency of the
regulations; application to the Company's specific technologies; implementation
and enforcement of the regulations; and the legal and political interplay among
states and between states and the federal government. New growth, new
facilities, and additions to existing facilities will be subject to existing
environmental regulatory standards, potentially increasing the available market
for the Company's products. In international markets, especially in developing
countries, additional economic factors and the stability of currencies play a
role in the evolution of market development for the Company's products.
In the United States, there are a number of regulatory
initiatives proposed or promulgated that may have considerable impact on the
Company's business. These include: new federal ozone and PM2.5 ("Particulate
Matter") ambient standards; the EPA's Fall 1997 SIP ("State Implementation
Plan") call for Nox compliance plans; the ACE ("Any Credible Evidence") Rule and
the CAM ("Compliance Assurance Monitoring") Rule designed to increase
enforcement and promote compliance; and numerous industry-based air toxics
rules. Nox regulations and ozone standards, certain air toxics standards, and
enforcement and compliance efforts are anticipated to impact air pollution
control equipment markets in the short to medium term.
The complexity of the rules and vigorous competition among
vendors means there can be no assurance that vigorous enforcement of existing or
proposed laws will increase demand for the company's products. There can be no
assurance that enforcement will be vigorous, or that stringent rules will
survive the interplay of legislation, rule-making and litigation challenging
rules or the enforcement of rules.
Employees
At December 31, 1996, the Company employed 354 persons, of
whom 250 were engaged in production and operations, 35 were engaged in
engineering and scientific research, 36 were engaged in accounting and
administration, 26 were engaged in sales, and 7 were in general management.
Financial Information About Foreign and Domestic Operations
Information about revenues, results of operations and
identifiable assets by geographic areas and the amount of export sales for the
periods indicated is set forth in Note 13 to Consolidated Financial Statements.
The Company's operations outside the United States are subject to the usual
risks and limitations attendant upon investments in foreign countries, such as
fluctuations in currency values, exchange control regulations, wage and price
controls, employment regulations, effects of foreign investment laws,
governmental instability (including expropriation or confiscation of assets) and
other potentially detrimental domestic and foreign governmental policies
affecting U.S. companies doing business abroad.
PROPERTIES
The building which houses the Company's and Wahlco's
headquarters located in Santa Ana, California, is occupied under a lease
expiring July 31, 2001 at a rental of $42,000 per month. The building consists
of approximately 28,000 square feet of office space and approximately 22,000
square feet of production space. Wahlco also owns a 5,000 square foot
service/installation office located in Thornton, Illinois.
Wahlco Engineered Products, Inc. is headquartered in Lewiston,
Maine, in a 49,300 square foot facility owned by the Company, consisting of
12,000 square feet of office space, and 37,300 square feet of manufacturing
area.
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Wahlco Engineered Products Ltd. operates from leased
facilities in Chesterfield, England aggregating to approximately 115,000 square
feet. The facilities consist of 95,000 square feet of manufacturing space and
20,000 square feet of office space. Approximately 24,000 square feet of
manufacturing space are subleased, which generates approximately $85 thousand
per year. Lease payments required on these facilities total $277 thousand per
year. These lease payments, which are part of the purchase agreement when the
Company purchased Pentney Engineering Ltd., are made to a company which is 50%
owned by an officer of the Company and a previous co-owner of Pentney
Engineering Ltd. Teddington owns and operates a 75,000 square foot facility in
Swansea, Wales. In March 1993, the Company purchased the facility for
approximately $227 thousand.
The Company believes that its facilities are adequate for its
current operations.
MANAGEMENT
Executive Officers
The names and ages of the executive officers of the Company
and the positions held by each during the last five years were as follows:
C. Stephen Beal, 49, is the President and Chief Executive
Officer of Wahlco Environmental Systems, Inc. Prior to joining Wahlco, as a
result of the acquisition by the Company of Pentney Engineering, Ltd. in 1991,
Mr. Beal served as Managing Director and joint owner of the Pentney Group since
1974. From 1991 to 1996, Mr. Beal served as President and CEO of the Company's
Engineered Products Group.
A. Noel DeWinter, 58, has been Vice President and Chief
Financial Officer since October 1996 after serving as Vice President, Controller
since March 1995. Mr. DeWinter served as Vice President, Finance from October
1991 to January 1992, and Chief Financial Officer from January 1990 to October
1991. From January 1992 to January 1994, he served at the Company's Lewiston,
Maine subsidiary as Vice President, Finance.
Barry J. Southam, 60, has served as Senior Vice President, FGC
Technologies, Wahlco, Inc., since March 1997. He served as Senior Vice
President, International Sales and Marketing for the Company since September
1991. Prior thereto, he was Vice President of International Operations for
Wahlco, Inc. for more than five years.
The officers are elected annually by the Board of Directors at
the first meeting following the Special Meeting of Stockholders. There is no
family relationship between any of the officers, directors or persons nominated
to become a director. There were no arrangements or understandings between any
officer and any other person pursuant to which he was elected as an officer.
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Compensation of Executive Officers
The following table sets forth all compensation for the fiscal
years ended December 31, 1996, 1995 and 1994, allocated or paid on or before
December 31, 1996 to those who served as the Company's Chief Executive Officer
during 1996 and to the other most highly compensated executive officers of the
Company whose compensation exceeded $100,000 in 1996 and who were serving at the
end of the 1996 fiscal year, for services rendered in all capacities to the
Company and its subsidiaries:
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Securities All
Other Annual Underlying Other
Name and Salary Bonus ($) Compensation Options/SARs Compensation
Principal Position Year ($) ($) (2) (No. of Sh.) ($)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
C. STEPHEN BEAL (1) 1996 212,497 -0- -0- -0- 307 (3)
President and Chief 1995 186,117 -0- 145,282 529,470 348
Executive Officer 1994 147,220 -0- 46,808 -0- 731
JAMES J. FERRIGAN 1996 158,089 -0- -0- 15,008 1,663 (4)
Senior Vice President of 1995 162,081 -0- -0- 175,000 3,703
North American Sales & 1994 206,347 -0- -0- -0- 2,687
Marketing (resigned
December 1997)
BARRY J. SOUTHAM 1996 181,553 -0- -0- 15,525 4,696(5)
Senior Vice President of 1995 154,248 -0- 39,813 200,000 4,995
International Sales & 1994 150,136 -0- -0- -0- 3,930
Marketing
A. NOEL DEWINTER 1996 101,276 -0- -0- 59,500 1,132 (6)
Vice President and Chief 1995 120,328 -0- -0- -0- 2,231
Financial Officer 1994 110,472 -0- -0- -0- 1,141
MARK L. PLAUMANN (7) 1996 * * * 50,000 --
Former President
HENRY N. HUTA (8) 1996 319,149 -0- -0- -0- 3,461 (9)
Former President and 1995 263,288 377,216 170,387 882,450 3,795
Chief Executive Officer 1994 247,122 -0- -0- -0- 731
</TABLE>
- ---------------
(1) Mr. Beal was elected President and Chief Executive Officer in October
1996.
(2) Excludes perquisites and other personal benefits if the aggregate amount
of such items of compensation was less than the lesser of either $50,000
or 10% of the total annual salary and bonus of the named executive
officer.
(3) This amount consists of premiums paid on excess life insurance.
(4) This amount consists of premiums paid on excess life insurance ($361)
and employer matching contributions under the Company's 401(k) Plan
($1,302).
(5) This amount consists of premiums paid on excess life insurance ($2,454)
and employer matching contributions under the Company's 401(k) Plan
($2,242).
(6) This amount consists of premiums paid on excess life insurance ($199)
and employer matching contributions under the Company's 401(k) Plan
($933).
(7) From May to October, 1996, Mr. Plaumann served as Chief Executive
Officer (and a director) of the Company under a management agreement
between the Company and his employer, Wexford, an affiliate of WESAC.
The Agreement initially provided that Wexford would be paid a management
fee of $20,000 per month, which was subsequently increased to $30,000
per month. The Company did not make any salary or other payments to Mr.
Plaumann for his services, but did grant him a stock option to purchase
50,000 shares of Common Stock in August 1996. See "Option/SAR Grants
Table," below.
(8) Mr. Huta resigned as President and Chief Executive Officer in May 1996.
(9) This amount consists of employer matching contributions under the
Company's 401(k) Plan.
(9) This amount consists of employer matching contributions under the
Company's 401(k) Plan.
61
<PAGE>
Option Grants Table
The following table sets forth certain information with
respect to stock options granted to the executive officers named in the Summary
Compensation Table, above, during 1996. All options have a term of ten years
from the grant date, subject in certain cases to earlier termination if the
optionee's employment terminates, except as noted. No SARs were granted during
1996.
<TABLE>
<CAPTION>
Potential Realizable Value At
Assumed Annual Rates of Stock
Individual Price-Appreciation for Option
Grants Term (3)
Number of % of Options Grant
Shares Granted to Date
Underlying Employees in Exercise Market Expiration
Name Options 1996 Price Value Date 0% 5% 10%
- ---------- ---------------- ---------------- ------------- ----------- --------------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C. Stephen None
Beal
James J. 15,008 (1) 5.92% $0.49 $1.00 06/01/06 $7,654 $16,888 $30,938
Ferrigan
Barry J. 15,525 (1) 6.12% $0.49 $1.00 06/01/06 $7,918 $17,469 $32,004
Southam
A. Noel 9,500 (1) 3.75% $0.49 $1.00 06/01/06 $4,845 $10,689 $19,583
DeWinter
50,000 (2) 19.72% $0.49 $0.437 10/17/06 N/A $11,172 $32,302
Mark L. 50,000 (2) 19.72% $0.49 $0.375 08/02/06 N/A $6,041 $24,133
Plaumann
Henry N. Huta None
</TABLE>
- --------------
(1) These options vest in 12 approximately equal installments commencing
April 1, 1996, but no vested shares may be exercised prior to April 1,
1997. The options expire on the earlier to occur of (i) April 1, 2006;
(ii) three years after termination of employment for other than cause;
and (iii) on the date of termination of employment if termination is for
cause.
(2) This option vests in four equal installments on the first four
anniversaries of the grant date and expires ten years from the grant
date.
(3) The "potential realizable value" is calculated based on the term of the
option (ten years) at its date of grant. It is calculated by assuming
that the stock price on the date of grant appreciates at the indicated
annual percentage rates, compounded annually, for the entire term of the
option. However, the optionee will not actually be able to realize any
benefit from the option unless the market value of the Common Stock is
in fact greater than the option price.
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<PAGE>
Aggregate Options Held At The End of 1996 Fiscal Year
The following table sets forth certain information based on
the fair market value per share ($0.375) of the Common Stock at December 31,
1996, the last day of the Company's 1996 fiscal year, with respect to stock
options held at that date by each of the individuals named in the Summary
Compensation Table, above. No SARs were held during 1996 and none is now held by
any of such persons. The "value" of unexercised in-the-money options is the
difference between the market value of the Common Stock subject to the options
at December 31, 1996 and the exercise price.
During 1996, no options were exercised by any of the executive
officers named in the Summary Compensation Table above.
<TABLE>
<CAPTION>
Number of Shares Underlying
Unexercised Options at Fiscal Year Value of Unexercised In-The-Money Options
End at Fiscal Year End
-------------------------------------- --------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ---------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
C. Stephen Beal 397,103 132,367 -0- -0-
James J. Ferrigan 54,255 135,752 -0- -0-
Barry J. Southam 60,867 154,657 -0- -0-
A. Noel DeWinter 6,650 52,850 -0- -0-
Mark L. Plaumann -0- 50,000 -0- -0-
Henry N. Huta 661,838 -0- -0- -0-
</TABLE>
Employment, Severance and Other Agreements
Employment Agreements. Effective as of May 5, 1995, Mr. Beal entered
into an employment agreement with the Company substantially on the terms agreed
to when WESAC acquired an 81% stock interest in the Company and certain Company
debt from Pacific Diversified Capital Company. See "SECURITY OWNERSHIP OF
PRINCIPAL STOCKHOLDERS AND MANAGEMENT," footnote (11). The initial term of the
agreement expired on May 5, 1997, but the agreement continues in effect
thereafter unless terminated by either party on 60 days' prior notice. The
agreement provides (i) that Mr. Beal is to be elected President of the Company's
Engineered Products Group at a salary of $16,700 per month (although he now
serves as President of the company at that salary); (ii) for payment by the
Company of the final installment of his relocation payments in the amount of
$124,596; and (iii) for conveyance to him of a Company membership in a local
country club. Mr. Beal is entitled to participate in the Company's benefit
programs made available to other executives generally and, in addition, to
receive reimbursement on a tax grossed-up basis for premiums paid to maintain $2
million of life insurance coverage (although no such coverage has yet been
obtained); reimbursement for country club membership; and reimbursement for
monthly auto lease payments not to exceed $750 per month when his Company
vehicle lease expires. The agreement provides that the Compensation Committee of
the Board of Directors will establish an appropriate bonus plan for Mr. Beal,
but as of the date of this Proxy Statement/Prospectus, no such plan has been
established. If Mr. Beal's employment is terminated without cause, whether
during the initial term or thereafter, the Company is obliged to continue to pay
him his salary for a period of 18 months following such termination and, at the
Company's expense, to continue to provide the benefits described above for the
same period. If termination is for cause, only accrued salary and unused
vacation is paid.
Mr. Huta, who resigned from the Company in May 1996, had a
similar agreement except that it provided for (i) his election as President and
Chief Executive Officer of the Company at a salary of $25,000 per month; (ii)
the forgiveness of debt owed to the Company of $147,268; and (iii) payment of a
one-time bonus of $377,316.
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<PAGE>
Severance Agreements. The Company has an agreement with each
of Messrs. Southam and DeWinter that provides for the continued
payment to each of them of his salary for a period of 12 months after his
employment terminates unless termination is for cause or by reason of his
resignation.
Indemnification Agreements. The Company has entered into
indemnification agreements with each of the executive officers named in the
Summary Compensation Table, above, that provide contractual indemnification
rights similar in scope to the applicable sections of the Company's Bylaws. Each
agreement applies retroactively as well as prospectively to any actions taken by
the indemnified officer while serving as an officer and/or director of the
Company. The indemnification agreements also provide that the Company will
indemnify such persons to the fullest extent permitted by law, notwithstanding
that the indemnification is not specifically authorized by the indemnification
agreement, the Company's Certificate of Incorporation, the Company's Bylaws or
by statute.
Compensation Committee Interlocks
None of the members of the Compensation Committee during 1996
(Messrs. Steadman, Hemsley and Hunn) is or was an employee of the Company or any
of its subsidiaries, and during 1996, no executive officer of the Company while
serving as such also served as a director or member of a compensation committee
of any entity with which any director of the Company had any relationship as a
director or officer.
In April 1996, the Company retained Atlantic Management
Associates, Inc., of which Mr. Steadman is President, to obtain Mr. Steadman's
services as a management consultant for a fee of $8,000 per month. In connection
with these consulting services, in June 1996, Mr. Steadman was granted an option
under the Second Amended and Restated Stock Incentive Plan to purchase 50,000
shares of Common Stock at an option price of $0.49 per share that vests in two
equal installments on the first and second anniversary of the grant date.
From May to October, 1996, Mr. Plaumann served as Chief
Executive Officer and a director of the Company under a management agreement
between the Company and his employer, Wexford Management LLC, an affiliate of
WESAC. The Company paid WESAC a monthly management fee of $20,000 and did not
make any salary or other payments to Mr. Plaumann for his services. In August
1996, the Company granted Mr. Plaumann a stock option to purchase 50,000 shares
of Common Stock. See "Option Grants Table," above
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS
AND MANAGEMENT
The following table contains certain information as of October
1, 1997, regarding the beneficial ownership of the Company's Common Stock (i) by
each person known by the Company to own beneficially more than 5% of the
outstanding Common Stock; (ii) by each of the directors and nominees for
election as directors of the Company; (iii) by the executive officers named in
the Summary Compensation Table, below; and (iv) by all directors and executive
officers as a group. The numbers and percentages are based on 17,649,000 shares
of Common Stock outstanding on October 1, 1997 and assume for each person or
group listed, the exercise of all warrants and stock options held by such person
or group that are exercisable within 60 days of October 1, 1997, in accordance
with Rule 13d-3(d)(1) of the Securities Exchange Act of 1934 (the "Exchange
Act"), but not the exercise of such warrants or stock options owned by any other
person. Except as otherwise noted, beneficial ownership includes both sole
voting and dispositive powers with respect to the shares shown.
64
<PAGE>
Number of Shares Percent of
Name Beneficially Owned (2) Class
Wexford Management LLC (1) 17,664,255 (3) 83.9%
C. Stephen Beal 529,470 (4) 2.9%
Maarten D. Hemsley 8,000 (5) *
Paul H. Hunn 8,000 (5) *
Mark L. Plaumann 17,676,755 (3)(6) *84.0%
David R. A. Steadman 33,000 (5) *
James J. Ferrigan 104,508 (7) *
Barry J. Southam 115,525 (8) *
A. Noel DeWinter 22,000 (8) *
Henry N. Huta 666,838 (9) 3.6%
All directors and executive officers
as a group (9 persons) 19,164,096 (10)(11) 85.0%
- ------------------
* Less than 1%.
(1) The address of Wexford Management LLC ("Wexford") is 411 West Putnam
Avenue, Greenwich, Connecticut 06830.
(2) Based upon information furnished by the stockholders.
(3) Pursuant to a Stock Purchase Agreement dated as of May 15, 1995, WESAC
purchased all of the shares of the Company's Common Stock (14,260,000
pre-split shares) held by Pacific Diversified Capital Company ("PDC"),
which represent approximately 81% of the outstanding Common Stock,
together with $4.9 million out of approximately $20 million of debt owed
by the Company to PDC for a total purchase price of $5 million. PDC
contributed the remainder of the debt to the capital of the Company. The
annual interest rate on the note evidencing the $4.9 million debt is
13%.
The purchase by WESAC was funded through the sale of 94% of its shares
to two private investment funds and the balance to Messrs. Huta, Beal
and two of Mr. Hemsley's children. See footnote (10), below. Through
investment management agreements with those two funds, Wexford has
shared voting and dispositive power as to these shares. Mr. Plaumann is
a director of WESAC as well as a senior vice president of Wexford and
therefore also has shared voting and dispositive powers as to these
shares. Mr. Plaumann disclaims beneficial ownership of 17,664,255
shares.
Of the 17,664,255 shares attributed to Mr. Plaumann, 3,304,255 represent
shares that are subject to purchase under currently exercisable warrants
with an exercise price per share of $0.47 that are held by four limited
partnerships managed by Wexford. These warrants were granted by the
Company to these partnerships in partial consideration of their granting
a loan to the Company through WESAC See "Compensation Committee
Interlocks and Insider Participation," below. Mr. Plaumann disclaims
beneficial ownership of these shares.
(4) These shares are purchasable within 60 days of October 1, 1997 under an
outstanding stock option at an option price of $0.49 per share. Mr. Beal
is also a minority shareholder in WESAC. See footnote (10), below.
(5) These shares are purchasable within 60 days of October 1, 1997 under
outstanding stock options at option prices ranging from $0.49 to $1.875
per share.
(6) Of the total attributable to Mr. Plaumann, 12,500 shares are purchasable
within 60 days of October 1, 1997 under an outstanding stock option at
an option price of $0.49 per share.
(7) Of these shares, 56,506 are purchasable within 60 days of October 1,
1997 under outstanding stock options at option prices ranging from $0.49
to $0.99 per share. Mr. Ferrigan resigned in December 1997.
(8) These shares are purchasable within 60 days of October 1, 1997 under
outstanding stock options at option prices ranging from $0.49 to $0.99
per share.
(9) Of these shares, 661,838 shares are purchasable within 60 days of
October 1, 1997 under an outstanding stock option at an option price of
$0.49 per share. The remaining 5,000 shares are held in trust by Mr.
Huta and Sharon
65
<PAGE>
L. Huta, co-trustees under a declaration of trust dated November 20,
1989, who share both voting and investment power with respect to such
shares. Mr. Huta is also a minority shareholder in WESAC. See footnote
(10), below. Mr. Huta resigned from the Company in May 1996.
(10) This number includes 4,897,096 shares that are purchasable under
currently exercisable warrants at $0.47 per share and, within 60 days of
October 1, 1997, under outstanding stock options at option prices
ranging from $0.49 to $1.875 per share.
(11) The ownership of WESAC is as follows:
<PAGE>
Shares of Percentage of Outstanding
Name of Shareholder WESAC Held WESAC Shares
Wexford Capital Partners II, L.P. 9,411,600 66%
Wexford Overseas Partners I, L.P. 4,033,543 28%
Henry N. Huta 356,500 2.5%
C. Stephen Beal 356,500 2.5%
Rebecca Hemsley 50,928 0.3%
Deborah Hemsley-Schultz 50,929 0.3%
Compliance with Section 16(a) of Exchange Act
Section 16(a) of the Exchange Act requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities ("Insiders") to file reports of ownership and
certain changes in ownership with the Securities and Exchange Commission and to
furnish the Company with copies of those reports.
Based solely on a review of those reports and amendments
thereto furnished to the Company during its most recent fiscal year or written
representations by Insiders that no Forms 5 were required to be filed, the
Company believes that during the fiscal year ended December 31, 1996, all
Section 16(a) filing requirements applicable to the Company's Insiders were
satisfied
Notwithstanding anything to the contrary set forth in any of the Company's
filings under the Securities Act of 1933, as amended, or the Exchange Act, that
might incorporate future filings, including this Proxy Statement/Prospectus in
whole or in part, the following report of the Compensation Committee, and the
Performance Graph shall not be deemed to be incorporated by reference into any
such filings.
Compensation Committee Report on Executive Compensation
This report has been prepared by the members of the
Compensation Committee of the Board and addresses the Company's compensation
policies with respect to the Chief Executive Officer and other executive
officers of the Company for the 1996 fiscal year.
Chief Executive Officer's Compensation
Mr. Beal's compensation in 1996 was determined according to an
employment agreement between him and the Company dated as of May 5, 1995. See
"Employment, Severance and Other Agreements," above. Mr. Huta, who was Chief
Executive Officer of the Company for a portion of 1996, was also
66
<PAGE>
compensated pursuant to an employment agreement entered into in 1995. See
"Employment, Severance and Other Agreements," above.
Compensation of Other Executives
The executive compensation philosophy of the Company with
respect to its executive officers is to provide a total compensation package, in
which base salary, bonus, incentives and benefits are structured and
administered in a manner designed to align compensation with the Company's
business strategy and performance, to be reasonable in comparison to competitive
practice, and to motivate and reward executives on the basis of Company and
individual performance. In view of the poor financial performance of the Company
during 1996, each of the executive officers of the Company agreed to a 10% pay
cut effective in the second quarter of 1996.
Components of Compensation
The Company's executive compensation is, in general, composed
of base salary, incentive compensation and stock incentive awards.
Base Salaries. The base salaries of executive officers are
reviewed periodically and are designed to be competitive within the industries
in which the Company competes, subject however, to the Company's financial
resources, which in 1996 were severely limited. In addition, the Committee
considers a number of subjective criteria, including individual performance,
levels of responsibility and prior experience. The Committee does not make
individual base salary decisions according to specific criteria and does not
ascribe specific weights to the factors it considers.
Incentive Compensation. The Company had no incentive program
in effect during 1996.
Stock Incentive Awards. In 1996, stock incentive awards in the
form of stock options were made to executive officers under the Company's Second
Amended and Restated Stock Incentive Plan in connection with the 10% salary cut
instituted by the Company and in one case, in connection with a promotion in
title and responsibilities.
67
<PAGE>
The Compensation Committee. The committee consists of Maarten
D. Hemsley, Paul H. Hunn and David R. A. Steadman
[Performance Graph]
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Wahlco Environmental Systems, 100 53.64 31.82 14.55 10 2.73
Peer Group (NYSE Stocks - SIC4950- 100 98.32 72.34 73.55 84.45 90.3
(US Companies - Sanitary Services)
Broad Market Index (S&P 100 107.64 118.5 120.0 165.18 203.11
</TABLE>
Performance Graph
The foregoing graph compares the percentage change in the
Company's cumulative total stockholder return on Common Stock for the last five
years with the performances of the Standard & Poor's 500 Index (a broad market
index) and NYSE stocks in Sanitary Services, SIC 4950-4959, (a peer group
index), over the same period. Because there are a limited number of air
pollution control companies that may be included in an index, the industry group
index includes companies engaged in hazardous waste, water treatment and air
pollution control.
The returns are calculated assuming the value of the
investment in the Company's stock and each index was $100 on December 31, 1991,
and that all dividends were reinvested; however, the Company paid no dividends
during the periods shown. The graph lines merely connect the beginning and end
of the measuring periods and do not reflect fluctuations between those dates.
The historical stock performance shown on the graph is not intended to, and may
not be indicative of, future stock performance.
68
<PAGE>
DESCRIPTION OF COMMON STOCK AND OTHER SECURITIES
Common Stock
The Company is authorized to issue up to 50,000,000 shares of
Common Stock, par value $.01 per share. As of the date of this Proxy
Statement/Prospectus, there are 17,649,000 shares of Common Stock issued and
outstanding.
Holders of the Common Stock are entitled to dividends from
funds legally available therefor when, as and if declared by the Board of
Directors of the Company, and to a pro rata share of all assets available for
distribution upon a liquidation of the Company. Holders of the Common Stock are
entitled to one vote for each share of Common Stock held of record on matters
submitted to a vote of stockholders. Holders of the Common Stock do not have
cumulative voting rights. The dividend, liquidation and voting rights of the
holders of the Common Stock are subject to and qualified by such rights, if any,
of the holders of any outstanding class or series of debt or preferred stock.
Holders of the Common Stock do not have preemptive,
subscription or conversion rights. There are no redemption or sinking fund
provisions applicable to the Common Stock in the Company's Certificate of
Incorporation. All shares of Common Stock to be sold by the Company in the
Rights Offering will be fully paid and nonassessable.
Transfer Agent
The stock transfer agent for the Common Stock, and the
Subscription Agent for the Rights is ChaseMellon Shareholder Services LLC, 707
Wilshire Boulevard, Los Angeles, California 90017, telephone number
800-549-9249.
Preferred Stock
The Company's certificate of incorporation authorizes to issue
up to 10,000,000 shares of preferred stock, $.01 par value per share. None of
the preferred stock is issued or outstanding or is reserved for issuance at the
date of this proxy Statement/Prospectus. Such shares may be issued by resolution
of the Board of Directors of the Company (without shareholder approval) in one
or more series, and the Board may establish and designate the powers,
preferences and rights and the qualifications, limitations or restrictions
thereof. The issuance of preferred stock may have the effect of delaying,
deferring, or preventing a change in control of the Company without further
action by the stockholders. The availability of preferred stock may be used to
thwart an outsider from acquiring control of the Company through the issuance to
existing shareholders of rights to receive preferred stock with voting and
conversion rights that would be onerous to an outsider if its acquisition of
shares exceeded a stated threshold. Accordingly, the issuance of preferred stock
with voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others, and the
prospect of receiving dividends. The Company has no present plans to issue any
of the preferred stock
Delaware law also contains provisions which have the effect of
preventing or at least delaying hostile takeovers of Delaware corporations, such
as the Company.
Warrants
In connection with the 1996 Line of Credit arranged by WESAC
(see "CERTAIN TRANSACTIONS"), in 1996 the Company issued to four partnerships
managed by Wexford that funded the
69
<PAGE>
Company's borrowings under that credit line five-year warrants to purchase
3,404,255 shares of Common Stock of the Company at a price of $.47 per share.
The warrants contain standard anti-dilution provisions. Therefore, as a
consequence of the Rights Offering and the Reverse Stock Split, the exercise
price of the outstanding warrants held by four partnerships managed by Wexford
to purchase 3,404,255 shares of the Company's Common Stock will be adjusted from
$.47 per share to $1.40 per share, and the number of shares of Common Stock
issuable upon exercise of such warrants will be adjusted to 340,425.
In connection with the SVB Loan, the Company issued to SVB
[five-year] warrants to purchase 175,000 shares of Common Stock at a price of
$2.29 per share. As a consequence of the Rights Offering, if the Rights are
fully exercised, the exercise price of the outstanding warrants held by SVB will
be changed from $2.29 per share to $22.90 per share, pursuant to the
anti-dilution provisions of such warrants. As a consequence of the Rights
Offering and the Reverse Stock Split, such warrants will be adjusted to permit
the holders to purchase 152,860 shares of the Company's post-split Common Stock
for $22.90 per share, pursuant to the anti-dilution provisions of such warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Rights Offering, the Reverse Stock
Split, and the WESAC Debt Conversion, there will be 15,676,100 shares of Common
Stock outstanding. The 27,112,000 shares (which are equivalent to 2,711,200
shares, after giving effect to the Reverse Stock Split) being offered by the
Company pursuant to this Prospectus and the 3,389,000 shares (which are
equivalent to 338,900 shares, after giving effect to the Reverse Stock Split)
that are owned by the Company's current stockholders other than WESAC will be
available for sale in the public market.
Sales of substantial amounts of Common Stock in the public
market following the completion of the Rights Offering could adversely affect
the market price of the Common Stock. A significant number of shares of Common
Stock could enter the public market in a number of ways.
Of the 15,676,100 shares of Common Stock to be outstanding
upon the completion of the Rights Offering, the Reverse Stock Split and the
WESAC Debt Conversion, 12,626,000 shares will be owned by WESAC and will be
subject to certain restrictions on resale under the federal securities laws.
Such shares may be sold if they are registered by means of a Registration
Statement which is filed and declared effective by the Securities and Exchange
Commission (the "Commission" under the Securities Act of 1933, a amended (the
"Securities Act"), and if such shares are qualified, or deemed to be exempt,
under the securities laws of the various states. In addition, such shares may be
sold subject to the volume limitations discussed below.
In general, under the Commission's Rule 144 as currently in
effect, a person (or persons whose shares are aggregated), including persons who
may be deemed to be "affiliates" of the Company, as that term is defined under
the Securities Act, is entitled to sell, within any three-month period, a number
of shares beneficially owned for at least one year that does not exceed the
greater of (i) one percent of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and the availability of
current public information about the Company.
70
<PAGE>
LEGAL MATTERS
The validity of the Rights and the Common Stock offered by the
Company will be passed upon for the Company by Roger M. Barzun, Esq., Concord,
Massachusetts, General Counsel for the Company.
EXPERTS
The financial statements included in this Prospectus and in
the Registration Statement of which this Prospectus forms a part have been
audited by Arthur Andersen LLP, and Ernst & Young LLP, independent certified
public accountants, to the extent and for the periods set forth in their
respective reports appearing elsewhere herein and in the Registration Statement,
of which this Prospectus is a part, and are included herein in reliance upon
such report given upon the authority of such firms as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration
Statement on Form S-1 under the Securities Act with respect to the Rights and
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
with respect to the
72
<PAGE>
Company and the Securities, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of any contract or
other documents referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Public Accountants
To The Board Of Directors And Stockholders Of
Wahlco Environmental Systems, Inc.:
We have audited the accompanying consolidated balance sheets
of Wahlco Environmental Systems, Inc. as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years then ended. These consolidated financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Wahlco
Environmental Systems, Inc. as of December 31, 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that Wahlco Environmental Systems, Inc. will continue as a
going concern. As more fully described in Note 1, the Company has incurred
recurring operating losses, and has been dependent on advances from its parent
as well as proceeds from the sale of fixed assets to fund its cash flow
requirements. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets, or the amount and classification of
liabilities that may result from the possible inability of Wahlco Environmental
Systems, Inc. to continue as a going concern.
Our audit was made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. The schedule
listed in the index of the consolidated financial statements is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Orange County, California
April 7, 1997 Arthur Andersen LLP
Report of Independent Public Accountants
73
<PAGE>
The Board Of Directors And Stockholders Of Wahlco Environmental Systems, Inc.
We have audited the accompanying consolidated statements of
operations, stockholders' equity, and cash flows of Wahlco Environmental
Systems, Inc. for the year ended December 31, 1994. Our audit also included the
financial statement schedule listed in the Index at Item 14(a) for the year
ended December 31, 1994. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Wahlco Environmental Systems, Inc. for the year ended December
31, 1994, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein for the year ended
December 31, 1994.
The accompanying consolidated financial statements have been
prepared assuming that Wahlco Environmental Systems, Inc. will continue as a
going concern. As more fully described in Note 1, the Company has incurred
recurring operating losses, had a working capital deficiency and has been
dependent on advances from its parent as well as proceeds from the sale of
marketable securities and fixed assets to fund its cash flow requirements. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classifications
of assets, including goodwill and intangibles, or the amounts and classification
of liabilities that may result from the possible inability of Wahlco
Environmental Systems, Inc. to continue as a going concern.
Ernst & Young LLP
February 24, 1995
Orange County, California
74
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
--------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,853 $ 3,840
Restricted cash and cash equivalents 1,050 1,307
Accounts receivable 12,069 15,935
Cost and estimated earnings in excess of
billings on uncompleted contracts 2,148 6,839
Inventories 4,738 8,711
Other current assets 1,365 1,580
--------------------------------------------------------------------------------------------------------------
Total current assets 23,223 38,212
Property, plant and equipment, net 5,190 5,921
Other assets 1,407 2,386
--------------------------------------------------------------------------------------------------------------
$ 29,820 $ 46,519
--------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 373 $ 2,744
Accounts payable 9,622 8,932
Accrued payroll and payroll related liabilities 1,589 1,944
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,356 2,376
Current portion of long-term debt 228 204
Taxes payable 317 391
Other accrued liabilities 4,575 8,908
--------------------------------------------------------------------------------------------------------------
Total current liabilities 18,060 25,499
Long-term debt 12,145 7,948
Other liabilities 2,435 3,689
Deferred income taxes - 2,016
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 10,000,000 shares authorized,
None issued or outstanding - -
Common stock, $.01 par value; 50,000,000 shares authorized,
17,649,000 shares issued and outstanding 176 176
Capital in excess of par value 90,735 90,534
Retained deficit (91,684) (80,875)
Foreign currency translation adjustment (2,047) (2,468)
--------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (2,820) 7,367
--------------------------------------------------------------------------------------------------------------
$ 29,820 $ 46,519
--------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
75
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years ended December 31, 1996 1995 1994
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Product sales $ 36,346 $ 49,558 $ 51,750
Rental, service and other 6,705 10,542 18,147
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
43,051 60,100 69,897
----------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of revenues:
Product sales 32,685 43,421 49,640
Rental, service and other 6,412 8,099 15,015
Selling, general and administrative 16,769 19,171 21,431
Restructuring and other intangibles 130 (590) 6,213
write-downs - 2,535 51,121
Goodwill amortization and write-downs
----------------------------------------------------------------------------------------------------
55,996 72,636 143,420
----------------------------------------------------------------------------------------------------
Operating loss (12,945) (12,536) (73,523)
----------------------------------------------------------------------------------------------------
Other income (expense):
Interest and other income 875 359 1,069
Interest and other expense (1,663) (2,125) (2,394)
----------------------------------------------------------------------------------------------------
(788) (1,766) (1,325)
----------------------------------------------------------------------------------------------------
Loss before income taxes (13,733) (14,302) (74,848)
Benefit from income taxes (2,924) (2,950) (8,699)
----------------------------------------------------------------------------------------------------
Net loss $ (10,809) $ (11,352) $ (66,149)
-------------------------------------------------------------------------------------------------
Net loss per share $ (0.61) $ (0.64) $ (3.75)
-------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 17,649 17,649 17,649
-------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
76
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
RETAINED EARNINGS FOREIGN CURRENCY
COMMON STOCK STOCKHOLDERS CAPITAL IN (ACCUMULATED TRANSLATION
EXCESS OF PAR TOTAL
- ------------------------- ---------------------------- ----------------- --------------------- ------------------ ------------
SHARES AMOUNT VALUE DEFICIT) ADJUSTMENT EQUITY
- ------------------------- --------------- ------------ ----------------- --------------------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(DEFICIT)
Balance, December 31,
1993 17,649,000 $ 176 $ 78,188 $ (3,374) $ (2,337) $
72,653
Net loss - - - (66,149) - (66,149)
Change in foreign
currency translation
adjustment (net of
deferred taxes of $96) 174 174
- ------------------------- --------------- ------------ ----------------- --------------------- ------------------ ------------
Balance, December 31,
1994 17,649,000 176 78,188 (69,523) (2,163) 6,678
Net loss - - - (11,352) - (11,352)
Contribution to
capital, net of
deferred taxes 11,750 11,750
Stock option programs 596 596
Change in foreign
currency translation
adjustment (net of
deferred taxes of $164) (305) (305)
- ------------------------- --------------- ------------ ----------------- --------------------- ------------------ ------------
Balance, December 31,
1995 17,649,000 176 90,534 (80,875) (2,468) 7,367
Net loss - - - (10,809) - (10,809)
Stock option programs - - 201 - - 201
Change in foreign - - - - -
currency translation
adjustment (net of
deferred taxes of $227)
421 421
Balance, December 31, 17,649,000 $ 176 $ 90,735 $ (91,684) $ (2,047) $ (2,820)
1996
- ------------------------- --------------- ------------ ----------------- --------------------- ------------------ ------------
</TABLE>
See notes to consolidated financial statements
77
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------- ------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,809) $(11,352) $(66,149)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,406 1,692 3,008
Non-current asset write-downs - 2,405 54,106
Deferred income taxes (2,924) (3,422) (4,635)
Loss (gain) on sale of fixed assets (83) 625 (406)
Deferred compensation 311 596 -
Changes in current assets and
liabilities net of effects from acquisitions:
Accounts receivable 4,982 1,124 (644)
Refundable income taxes - 883 8,640
Costs and estimated earnings in excess of
billings on uncompleted contracts 5,254 2,016 (695)
Inventories 4,596 (4,168) 4,447
Other current assets 317 17 (459)
Accounts payable 24 (1,799) 2,025
Accrued payroll and payroll related liabilities (425) 615 (554)
Billings in excess of costs and estimated earnings on uncompleted
contracts (1,134) 314 492
Income taxes payable (87) (252) -
Other accrued liabilities (5,520) 368 3,242
- ---------------------------------------------------------------------------------- ------------- -------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,092) (10,338) 2,418
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of marketable securities - - 7,182
Purchase of property, plant and equipment (402) (648) (1,679)
Proceeds from dispositions of property, plant
and equipment 46 2,799 3,645
Change in other assets 774 1,375 (776)
- ---------------------------------------------------------------------------------- ------------- -------------- ---------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 418 3,526 8,372
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from WESAC 2,738 3,248 -
Payments to WESAC - (1,000) -
Borrowing on notes payable 11 3,206 -
Payments on notes payable (714) (922) (14,000)
Borrowings on long-term debt 53 65 -
Payments on long-term debt (280) (336) (1,949)
Payments to Pacific Diversified Capital Company - (372) -
Advances from Pacific Diversified Capital Company - 1,267 7,997
- ---------------------------------------------------------------------------------- ------------- -------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,808 5,156 (7,952)
Effect of exchange rate changes on cash (378) (318) (506)
- ---------------------------------------------------------------------------------- ------------- -------------- ---------------
Increase (decrease) in cash and cash equivalents (2,244) (1,974) 2,332
Cash and cash equivalents, beginning of year 5,147 7,121 4,789
- ---------------------------------------------------------------------------------- ------------- -------------- ---------------
Cash and cash equivalents, end of year $2,903 $5,147 $7,121
- ---------------------------------------------------------------------------------- ------------- -------------- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash (paid for) received from income taxes $(107) $1,221 $12,247
- ---------------------------------------------------------------------------------- ------------- -------------- ---------------
Cash (paid for) interest $(541) $(1,088) $(608)
</TABLE>
See notes to consolidated financial statements.
78
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(Dollars in thousands, except share and per share data)
1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Wahlco Environmental Systems, Inc. ("the Company") was
incorporated on February 6, 1990 as a Delaware corporation and issued ten shares
of common stock to Pacific Diversified Capital Company ("PDC"), a wholly-owned
subsidiary of San Diego Gas & Electric Company ("SDG&E"). On April 25, 1990, the
Company issued an additional 14,259,990 shares of common stock to PDC in
exchange for all of the outstanding stock of Wahlco, Inc. ("Wahlco"), at that
time a wholly-owned subsidiary of PDC. For financial reporting purposes, the
exchange was accounted for as a reorganization of companies under common control
and the historical cost basis of Wahlco carried over to the Company.
Wahlco's predecessor, known as Wahlco, Inc. ("the Predecessor
Company"), was acquired by PDC in October 1987 for a purchase price of $40,000
and contingent consideration based on certain Wahlco earnings levels. On March
1, 1990, Wahlco, PDC and the shareholders of the Predecessor Company entered
into an Earnout Payment Agreement which fixed the amount of the contingent
consideration provided for in the October 1987 merger agreement at $10,750 plus
accrued interest of $171 through the settlement date of May 1990. The payment of
this obligation was accounted for as additional purchase price, increasing
goodwill.
In May 1990, the Company issued 3,389,000 shares of common
stock in its initial public offering. Total proceeds to the Company, net of
underwriters' discount and expenses related to the offering, were approximately
$37,881. As a result of the offering, PDC's ownership interest in the Company
was reduced to approximately 81%.
On May 15, 1995, PDC entered into a purchase agreement with
WES Acquisition Corporation ("WESAC"), an affiliate of Wexford Capital
Corporation, under which WESAC purchased $4,900 of the Company's outstanding
debt to PDC, and PDC contributed to the capital of the Company the remaining
approximately $20,000 the Company owed to PDC. Pursuant to the same agreement,
WESAC agreed to purchase PDC's 81 percent stock interest in the Company. The
share transfer was approved under the Hart-Scott-Rodino Antitrust Act on June 2,
1995, and the purchase of the stock interest was completed on June 6, 1995.
OPERATIONS
The Company designs, manufactures, and sells air pollution
control and power plant efficiency equipment, combined cycle gas turbine
products, metallic and fabric bellows, and related services to electric
utilities, independent power producers, cogeneration plants, and industrial
manufacturers worldwide. Under separate licensing agreements, the Company
manufactures and installs products for the control of volatile organic
compounds. The Company also provides mechanical plant installation services and
rents mechanical equipment to users in the U. K. The Company operates through
several distinct subsidiaries, which focus on specific geographical regions or
products. These entities, located throughout the United States and other
geographical locations, are coordinated through common corporate management.
The Company's business is affected by world, national and
local economic conditions and events, legislation, government negotiations,
competition, exchange and interest rates and changing technology.
79
<PAGE>
The Company sells its products primarily to large utility and
other industrial customers worldwide. Credit is extended based on an evaluation
of the customer's financial condition, and collateral generally is not required.
The Company incurred net losses of $10,809 in 1996, and
$11,352 in 1995, and $66,149 in 1994, and a net cash inflow (outflow) from
operations of $(4,092) in 1996, and $(10,338) in 1995, and $2,418 in 1994. The
cash flow deficits in 1996 and 1995 were funded through borrowings from WESAC
and Silicon Valley Bank as described below and more fully in Note 6. The 1994
cash inflow was primarily associated with a decrease in refundable taxes of
$8,640 resulting from the receipt of tax benefits of $12,500 from PDC.
In October 1995, the Company entered into a loan and security
agreement with Silicon Valley Bank ("SVB") under which SVB provided the Company
with a $4,000 working capital loan through September 1996. In May 1996, the
Company revised the terms of the credit line with SVB. Under the renegotiated
terms, SVB agreed to provide a $3,000 line of credit, without covenants, to the
Company through October 25, 1996. WESAC agreed to collateralize its guarantee of
the Company's outstanding loan balance of $1,900 with cash, and to similarly
collateralize any additional principal and interest borrowings up to the maximum
of $3,000.
In October 1996, the Silicon Valley Bank agreement was further
modified, so that (i) the maturity date was extended to May 1998, and (ii) the
interest rate on funds borrowed by the Company was reduced from about 11% to
about 5.5%, since WESAC had deposited cash collateral equivalent to the funds
borrowed with Silicon Valley Bank. Borrowings under the loan totaled $1,927 at
December 31, 1996, which included $1,700 of cash borrowings and $227 cash
collateral for letters of credit issued under this loan arrangement.
In August 1996, the Company reached an agreement with WESAC,
pursuant to which WESAC agreed to lend the Company up to $1,600. The loan bears
interest at an annual rate of 13%; matures on January 1, 1997; and is secured by
all of the assets of the Company. The Company had drawn $1,500 against this loan
as of December 31, 1996. The maturity of this loan has been extended as
described below.
In October 1996, the Company announced a capital restructuring
plan that will reduce the Company's debt and provide additional working capital.
The capital restructure plan, subject to final documentation and stockholder
approval, involves converting $5,000 of WESAC debt into 12% preferred stock. The
preferred stock will be convertible into 10,958,904 common shares, representing
a per share conversion price of $0.45625, the average closing price of the
common stock for the thirty trading days prior to October 18, 1996. Quarterly
dividends on the preferred stock can be paid in additional preferred stock in
lieu of cash, at the option of the Company.
As part of the restructuring plan, WESAC extended the maturity
of the August 1996 $1,600 facility and the Silicon Valley Bank loan. Both
facilities mature in May 1998. WESAC also agreed to provide the Company with a
new $2,400 standby line of credit.
As of March 31, 1997, the Company had not drawn the remaining
$100 thousand available under the August 1996 term loan or any funds on the $2.4
million line.
The Company believes that the extension of the existing
facilities with WESAC and Silicon Valley Bank, along with New Line of Credit, as
supplemented by the Chase Facility, will be adequate to fund the Company's
operations during 1998. However, significant changes in the Company's
anticipated level of business and other events could substantially increase the
Company's cash requirements above those now anticipated, and thereby materially
and adversely affect the Company's results of operations and financial
condition. Therefore, the Company is continuing to seek additional sources of
financing and to evaluate various strategies, including seeking new capital to
meet its working capital requirements. There can be no assurance, however, that
the Company will be successful in these efforts.
80
<PAGE>
All of the above conditions raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amount and
classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues from most of the Company's large contracts are
recognized using the percentage-of-completion method. Under this method,
revenues are recognized in the same proportion as the percentage of costs
incurred during the period to estimated total costs for each contract. Changes
in job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to revenue recognition and are recognized in
the period in which the revisions are determined. It is reasonably possible that
the revenues and estimated costs on certain contracts may change in the near
term.
Revenues from other products are recognized on a completed
contract basis, where revenues and their associated costs are recognized when
the contract is complete or when the product is shipped.
Revenues from rental and service contracts are recognized over
the respective lease or service period.
Cost of revenues includes all direct materials, labor costs
and indirect costs related to contract performance such as indirect labor,
warranty, supplies, tools, repairs and depreciation.
Selling, general and administrative costs are charged to
expense as incurred.
81
<PAGE>
CASH EQUIVALENTS
The Company considers all highly liquid investments with
maturities, at the date of purchase, of three months or less to be cash
equivalents.
RESTRICTED CASH
At December 31, 1996, $1,050 of cash was pledged to the
Company's various banks as collateral for the letters of credit and other bank
guarantees.
INVENTORIES
Inventories are stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and
depreciated over the following estimated useful lives, predominantly using the
straight-line method:
Buildings and improvements 5 to 35 years
Machinery and equipment 3 to 15 years
GOODWILL AND OTHER INTANGIBLE ASSETS
Management routinely evaluates events or conditions that might
indicate impairment of value or require a reduction in the amortization period
of the Company's goodwill and other intangible assets. As discussed above, the
Company's financial performance has been below expectations during the last
three years. It continues to experience intensifying competition and margin
pressure in its major markets, and has restructured its operations in response
to these factors. As a result, management took substantial write-downs against
goodwill and other intangibles during the quarter ended June 30, 1994, reduced
the amortization period from 40 to 20 years effective June 1, 1994 and wrote-off
the remaining goodwill during the fourth quarter of 1995. (See note 5).
In March, 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121 ("FAS 121") which
changed the method of accounting for long-lived assets, whereby long-lived
assets that are expected to be held and used in operations should be carried at
the lower of cost or the fair value of the asset and long-lived assets to be
disposed of should be reported at the lower of carrying amount or fair value
less cost to sell. In evaluating long-lived assets held for use, an impairment
loss is recognized if the sum of the expected future cash flows (undiscounted
and without interest charge) is less than the carrying amount of the asset. Once
a determination has been made that an impairment loss should be recognized for
long-term assets expected to be held and used, various assumptions and estimates
are used to determine fair value. Subsequent to the write-off of goodwill in the
fourth quarter of 1995, the Company adopted the provisions of FAS 121, effective
December 31, 1995. No additional write downs of assets were required under FAS
121 in 1996 or 1995. It is reasonably possible that the estimates used to
determine the fair value of certain long-lived assets will change in the near
term.
INCOME TAXES
The Company prepares a consolidated Federal income tax return.
The effective tax rate is different than the Federal statutory rate principally
due to losses from the Company's operations which cannot be utilized and from
certain state taxes. The Company files separate state, Puerto Rican and foreign
income tax returns.
82
<PAGE>
The Company accounts for income taxes under the method
prescribed by FAS No. 109. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Prior to the acquisition by WESAC, the Company's U.S.
operations were consolidated into the tax return of its 81% parent, PDC. A tax
sharing agreement with PDC dated April 2, 1990, enabled the Company to receive
tax benefits from its taxable losses. This tax sharing agreement between the
Company and PDC terminated on the closing of the equity sale to Wexford,
retroactive to January 1, 1995. The Company has not and is not expected to enter
into a similar tax sharing arrangement with WESAC.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average
number of common shares outstanding. Common stock equivalents were antidilutive
in each of the years 1996, 1995, and 1994.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries,
which are principally located in the United Kingdom and Italy, are translated at
year-end rates of exchange, and revenues and expenses are translated at average
monthly rates of exchange. Gains and losses resulting from foreign currency
transactions (transactions denominated in other than the subsidiary's functional
currency) are included in operations and are not significant. The change in the
Foreign Currency Translation Adjustment, which is included in stockholders'
deficit, was primarily due to a strengthening of the foreign currencies against
the U.S. dollar.
PRODUCT WARRANTY COSTS
Provision for estimated warranty expense is recorded at the
time of sale and periodically adjusted to reflect actual experience. The Company
reported warranty expense provisions of $1,794, $1,137 and $981 in 1994, 1995,
and 1996, respectively. Costs charged against the warranty reserve at WEP, Inc.
have been reduced significantly over the past three years, from $1,410 in 1994,
to $700 in 1995, and to $335 in 1996. Significant warranty costs have been
incurred since 1992 to re-design and correct toggle type diverters, acquired at
the time of the purchase of Bachmann.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to conform with the 1996 presentation.
83
<PAGE>
2. BALANCE SHEET COMPONENTS
1996 1995
---- ----
Inventories:
Raw materials $1,375 $1,910
Work in process 3,152 6,579
Finished goods 211 222
$4,738 $8,711
------ ------
Other accrued liabilities:
Commissions $944 $1,030
Warranty 1,279 826
Restructuring 249 375
Accrued contract costs 646 5,032
Other 1,457 1,645
$4,575 $8,908
------ ------
Property, plant and equipment, at cost:
Land $ 270 $ 270
Buildings and improvements 4,290 4,308
Machinery and equipment 11,301 11,629
Construction in progress 0 26
15,861 16,233
Less accumulated depreciation and amortization (10,671) (10,312)
$5,190 $5,921
------ ------
3. DISPOSALS OF SUBSIDIARIES
In May 1995, the Company initiated the closure of the
manufacturing plant in Puerto Rico, where it assembled flue gas conditioning
("FGC") systems, and transferred the manufacture of these systems to Santa Ana,
California. On October 20, 1995, Wahlco, Inc. sold the manufacturing facility in
Puerto Rico for $1,550. The facility was operated by a subsidiary, Wahlco
International, Inc.
On January 19, 1994, Wahlco Power Products, Inc. ("WPPI") sold
substantially all of the assets associated with the manufacture of its tube
shield products for $600 and a 6 percent royalty payable quarterly, with a
minimum royalty payment per year of $100 for four years. Subsequent to receipt
of the first $100 payment, the remaining royalty obligation was set aside for a
cash settlement of $240 in May 1995.
The WPPI air preheater line and other equipment used in the
manufacture of heater baskets was sold on October 7, 1994 to ABB Air Preheater,
Inc. ("ABB"), in conjunction with the settlement of a lawsuit. The amount paid
to the Company by ABB to settle the lawsuit and sell the manufacturing line and
associated equipment was $1,500 in cash and a commitment to provide $1,000 in
heater basket product to fill future orders. The Company sold the WPPI plant and
remaining equipment in May 1995 for $1,270.
The Company sold the machinery, equipment and stock inventory
at Wahlco Engineered Products, Pty. Ltd., its Australian subsidiary, for
approximately $300 in August 1995. In May 1995, the Company closed the
operations of Exergetic Systems, Inc., its performance monitoring subsidiary
located in California, and sold nominal assets to the previous owner.
84
<PAGE>
4. REORGANIZATION
As part of a restructuring plan in 1994, the Company took
charges totaling $2,906 for the closure of several facilities, and reserves
totaling $1,469 for the termination of 169 employees were established. During
1996 and 1995, $534 and $578, respectively, were paid in benefits against
reserves.
The following data reflect the combined results of the
subsidiaries identified for closure during 1994:
Years ended December 31, 1996 1995 1994
- ------------------------ ---- ---- ----
Revenues:
Product Sales $605 $3,428 $ 7,040
Service - 30 3,256
$605 $3,458 $10,296
Cost of Revenues:
Product Sales $669 $2,954 $ 7,874
Service - 34 3,472
$669 $2,988 $11,346
Operating loss before restructuring
charges $431 $ 745 $ 5,747
5. GOODWILL AND OTHER INTANGIBLE WRITE-DOWNS
During 1995 and 1994, the Company evaluated the value of
goodwill and intangibles, given intensifying competition and declining margins.
As a result of this analysis, the Company wrote-off goodwill totaling $2,406
during the fourth quarter of 1995, which represented the remaining goodwill at
Wahlco, Inc. and Pentney of $1,772 and $634, respectively.
In 1994, the Company recorded write-downs of $50,403 and
$1,826 of goodwill and other intangibles, respectively, during the quarter ended
June 30, 1994. The write-down of goodwill consisted of $35,999 associated with
its FGC and staged nitrogen oxide removal system businesses and $14,404
associated with its engineered products business.
The other intangible write-downs in 1994 consisted primarily
of $1,570 in gas flow diverter patents, which were no longer significant since
the product had been redesigned. Other intangible write-downs were $165 and $91
associated with noncompete agreements with the previous owners of ESI and FSA,
respectively.
As of December 31, 1995, the Company had no goodwill remaining
on the balance sheet.
6. LINES OF CREDIT AND CAPITAL RESTRUCTURING PLAN
On October 25, 1995, the Company entered into a loan and
security agreement with Silicon Valley Bank ("SVB") under which SVB provided the
Company with a $4,000 working capital loan through September 1996. Working
capital draws by the Company under this facility were guaranteed by WESAC, up to
the limit of the line. Borrowings under the loan totaled $1,927 at December 31,
1996, which included $1,700 of cash borrowings and $227 of cash collateral for
letters of credit issued under this loan arrangement.
On May 9, 1996, the Company revised the terms of the credit
line with SVB. Under the renegotiated terms, SVB agreed to provide a $3,000 line
of credit, without covenants, to the Company through October 25, 1996. WESAC
agreed to collateralize its guarantee of the Company's outstanding loan balance
of $1,900 with cash, and to similarly collateralize any additional principal and
interest borrowings up to the maximum of $3,000. As consideration for posting
the collateral, the Company agreed to pay WESAC a fee in the form of a note for
$150 payable in two years at 15% interest.
85
<PAGE>
On October 25, 1996, the Silicon Valley Bank agreement was
further modified, so that (i) the maturity date was extended to May 1998, and
(ii) the interest rate on funds borrowed by the Company was reduced from about
11% to about 5.5%, since WESAC deposited cash collateral equivalent to the funds
borrowed with Silicon Valley Bank. As part of the loan and security agreement in
October 1995 and the renegotiation in October 1996, the Company issued warrants
to SVB to purchase 175,000 shares of the Company's Common Stock at $2.29 per
share, which warrants expire on October 26, 2000.
On August 28, 1996, the Company reached an agreement with
WESAC, pursuant to which WESAC agreed to lend the Company up to $1,600. The loan
bears interest at an annual rate of 13%, and is secured by all of the assets of
the Company. Interest and a commitment fee of $32 payable to WESAC are
capitalized. In further consideration for making the loan, the Company agreed to
issue to WESAC or its designee five year warrants to purchase the Company's
common stock as the funds are drawn down. Each warrant covers the number of
shares of common stock equal to the quotient of (i) the dollar amount of the
draw down divided by (ii) $0.47, the approximate closing price of the common
stock on August 16, 1996. The warrants become exercisable on issuance at $0.47
per share. The Company had drawn $1,500 against this loan as of December 31,
1996, and issued warrants covering 3,404,255 shares of common stock to four
WESAC partnerships which provided the funds. The loan matured on January 1, 1997
but was extended as described below.
The warrants described above have been determined to have
nominal value and have not been separately recorded in
equity.
On October 18, 1996, the Company announced a capital
restructuring plan that will reduce the Company's debt and provide additional
working capital. The capital restructure plan, subject to final documentation
and stockholder approval, involves converting $5,000 of WESAC debt into 12%
preferred stock. The preferred stock will be convertible into 10,958,904 common
shares, representing a per share conversion price of $0.45625, the average
closing price of the common stock for the thirty trading days prior to October
18, 1996. Quarterly dividends on the preferred stock can be paid in additional
preferred stock in lieu of cash, at the option of the Company.
The impact on the Company's capital structure of the
conversion of WESAC debt into preferred stock, as described above, is as
follows:
Pro forma Impact of Converting Debt into Preferred Stock
Consolidated Balance Sheet at December 31, 1996
PRIOR TO AFTER
CONVERSION CONVERSION
Long-term debt $12,145 $7,145
Stockholders' equity $(2,820) $2,180
As part of the restructuring plan, WESAC extended the maturity
of the August 1996 $1,600 facility and the Silicon Valley Bank loan. Both
facilities mature in May 1998. WESAC also agreed to provide the Company with a
new $2,400 standby line of credit.
The Company believes that the extension of the existing
facilities with WESAC and Silicon Valley Bank, along with the New Line of
Credit, as supplemented by the Chase Facility, will be adequate to fund the
Company's operations during 1997 [and 1998]. However, significant changes in the
Company's anticipated level of business and other events could substantially
increase the Company's cash requirements above those now anticipated, and
thereby materially and adversely affect the Company's results of operations and
financial condition. Therefore, the Company is continuing to seek additional
sources of financing and to evaluate various strategies, including seeking new
capital to meet its working capital requirements. There can be no assurance,
however, that the Company will be successful in these efforts.
86
<PAGE>
Selected data, with respect to the SVB facility and the former
line of credit, is shown below:
1996 1995 1994
---- ---- ----
Balance at December 31 $1,700 $1,700 $ -
Interest rate at December 31 5.5% 10.5% -
Maximum amount outstanding $1,700 $1,700 $14,000
Average amount outstanding $1,700 $ 312 $ 3,583
Weighted average interest rate 9.54% 8.97% 5.91%
The average amounts outstanding and weighted average interest rates during each
year are based on daily balances outstanding.
Equipment and facility notes in Italy and the Corporate office of $305 and $68,
respectively, total to the caption, notes payable.
7. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
1996 1995
---- ----
7.9525% note payable, due in monthly
installments of $19 (principal and interest) through
June 2000, secured by related lease payments (Note 10) $702 $874
Secured term loan from WESAC, bearing interest at
13.0% and due May, 1998. 5,763 5,061
Secured term loan from WESAC, bearing interest at
13.0% and due May, 1998. 2,372 2,087
Secured loan from Silicon Valley Bank, bearing interest at
5.5% and due May 1998. 1,700 -
Secured term loan from WESAC, bearing interest at
13.0% and due May, 1998. 1,585 -
Other credit agreements 251 130
12,373 8,152
Less current portion (228) (204)
$12,145 $7,948
The fair value of each of the long-term debt instruments discussed above, as
well as the notes payable discussed in Note 6, approximate the carrying amounts
within an insignificant difference based on current market interest rates for
similar instruments.
Under an agreement reached between the Company and WESAC on March 22, 1996,
interest due and payable from WESAC is compounded. This agreement commenced with
interest due and payable for the fourth quarter of 1995 and extends through the
maturity date. The above secured loan balances with WESAC include compounded
interest of $1,304 and $248, as of December 31, 1996 and 1995, respectively,
under this agreement.
Principal payments due on long-term debt for the years subsequent to December
31, 1996 are as follows:
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<PAGE>
1997 $ 228
1998 11,812
1999 237
2000 96
Total $ 12,373
8. INCOME TAXES
The benefit from income taxes consists of the following:
Years ended December 31, 1996 1995 1994
- ------------------------ ---- ---- ----
Federal
Current $- $ - $(4,446)
Deferred (2,266) (2,286) (4,039)
State
Current - - 420
Deferred (658) (664) (653)
Puerto Rico
Current - - 18
Deferred - - 1
Foreign
Current - - -
Deferred - - -
Benefit from income taxes $ (2,924) $(2,950) $(8,699)
The benefit from income taxes differs from the amount obtained by applying the
statutory tax rate as follows:
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Federal benefit at statutory rate $(4,669) $(4,863) $(25,828)
Federal benefit not allowable (pre-acquisition) - 1,326 -
Goodwill amortization - 735 14,812
State taxes, net of Federal impact (498) (703) (232)
Limitation on benefit from current year net operating losses 1,327 - -
Puerto Rican earnings (benefited) taxed at lower rates - 44 (249)
Foreign losses without current benefit 1,816 1,032 5,046
Reduction in Federal and state tax liabilities no longer required (900) (106) (1,443)
Investment loss in foreign affiliates and other - (415) (805)
Benefit from income taxes $(2,924) $(2,950) $(8,699)
</TABLE>
88
<PAGE>
The Company had a tax sharing agreement with PDC which terminated on the closing
of the equity sale to WESAC. The Company will not enter into a similar tax
sharing agreement with WESAC. The tax effect of the WESAC purchase transaction
resulted in a net deferred tax liability for the Company, which was offset
against paid in capital.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1996 and 1995 are as follows:
Deferred tax assets 1996 1995
- ------------------- ---- ----
Accruals $1,681 $496
Organization and start up costs - -
Net operating loss carry forwards 4,904 2,748
Other - 284
Total deferred tax assets 6,585 3,528
Valuation allowance (2,423) -
Net deferred tax assets 4,162 3,528
Deferred tax liabilities
Depreciation 1,088 165
Basis adjustments on purchased assets 3,074 5,379
Total deferred tax liabilities 4,162 5,544
Net deferred tax assets (liabilities) $ 0 $(2,016)
The Company has provided residual Puerto Rico tollgate tax on approximately
$11,000 of undistributed earnings as of December 31, 1995 and will be obligated
to pay tollgate taxes estimated at approximately $1,000 over the next several
years, which has been included in other liabilities in the accompanying balance
sheet.
9. RELATED PARTY TRANSACTIONS
Included in other assets at December 31, 1996 and 1995 are
$110 and $432, respectively, of non-interest bearing relocation loans to
officers, employees and certain former employees, which become due in 1998 and
are secured by second trust deeds on each individual's primary residence. The
amount of discount and imputed interest income related to these notes is not
material.
10. LEASING ACTIVITIES
The Company leases buildings, certain office space, vehicles,
equipment and manufacturing facilities under non-cancelable operating leases
which require annual aggregate rental payments as follows:
1997 $ 1,145
1998 1,111
1999 1,124
2000 1,135
2001 774
Total $ 5,289
Total rental expense for the years ended December 31, 1996, 1995 and 1994 was
$1,296, $1,251 and $1,341, respectively.
During 1993, the Company sold a customer equipment lease
contract to its equipment lease lender. The transaction resulted in revenue of
approximately $800, the elimination of the Company's net investment in equipment
leases and a reduction of the related long-term debt of approximately $3,200.
The lease lender has the right to have the Company buy back the
89
<PAGE>
equipment at a definitive amount under certain circumstances, as defined. As of
December 31, 1996, the total amount due, had one of these events occurred, would
have been $2,699, of which $702 is included in long-term debt (see note 7).
A security interest in service contract payments has been
provided to a lender as collateral for a loan (see note
7).
11. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan established under
Internal Revenue Code Section 401(k) covering substantially all eligible
domestic employees. In addition, as a result of certain acquisitions, the
Company has adopted several foreign defined contribution plans covering
substantially all eligible foreign employees. Employer contributions to the
plans are made to an individual account for each participant based on a
prescribed percentage of the employee's voluntary contribution, in accordance
with the plans. Retirement benefits to the employees are based solely on the
amount available in each participant's account at the time of retirement or
termination of employment. The Company's contributions to the plans for the
years ended December 31, 1996, 1995, and 1994 were $324, $419, and $437,
respectively.
12. STOCK-BASED COMPENSATION PLAN
The Company has one stock option plan, the 1990 Stock
Appreciation Rights Plan, now known as the Second Amended and Restated 1990
Stock Incentive Plan (the "Amended Plan"). The Company accounts for the Amended
Plan under APB No. 25, under which the Company recognized compensation cost of
$201 and $596 in 1996 and 1995, respectively.
During 1994, the stockholders approved an amendment to the
Amended Plan, which increased the number of Stock Appreciation Rights ("SARs")
available to 1,764,900 from 882,450 and extended the plan to April 23, 1997.
During 1995, the stockholders approved a further amendment to
the Amended Plan which increased the number of shares available for grant to
2,647,350 from 1,764,900, eliminated the minimum purchase price for
non-qualified stock options which had been established at 100% of the fair
market value of the Company's Common Stock on the grant date and increased the
maximum number of shares that may be subject to options granted to any one
person in any one-year period from 50,000 to 1,000,000.
90
<PAGE>
Information with respect to the Amended Plan follows:
<TABLE>
<CAPTION>
Rights and
Options Number of Number of
Available for Rights Rights Stock Option
Issuance Prices Options Price
- ------------------------------------------ --------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1993 178,290 664,160 4.50-13.00 40,000 7.25
Granted - - - -
Canceled (96,650) 4.50-13.00 - 7.25
- ------------------------------------------ --------------- ------------ --------------- ------------ --------------
Outstanding at December 31, 1994 1,157,390 567,510 4.50-13.00 40,000 7.25
Granted - - 2,069,92 0.49-2.50
Canceled (124,60) - - -
- ------------------------------------------ --------------- ------------ --------------- ------------ --------------
Outstanding at December 31, 1995 94,520 442,910 $4.50-13.00 2,109,92 0.49-7.25
Granted - 345,048
Canceled (145,51) (220,612)
- ------------------------------------------ --------------- ------------ --------------- ------------ --------------
Outstanding at December 31, 1996 115,594 297,400 $4.50-13.00 2,234,35 0.49-7.25
- ------------------------------------------ --------------- ------------ --------------- ------------ --------------
Exercisable 297,400 $ 4.50-3.00 1,716,41 $0.49-7.25
- ------------------------------------------ --------------- ------------ --------------- ------------ --------------
</TABLE>
Had compensation cost for these plans been determined consistent with FASB
Statement No. 123, the Company's net loss and earnings per share would have been
the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net Loss: As Reported $(10,809) $(11,352)
Pro Forma (11,554) (12,084)
Primary EPS: As Reported $(0.61) $(0.64)
Pro Forma (0.65) (0.68)
</TABLE>
Because the Statement 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
91
<PAGE>
A summary of the status of the Company's option plan at December 31, 1994, 1995
and 1996, and changes during the years then ended is presented in the table and
narrative below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- ------------------------- -------------------------
Shares Wtd Avg Shares Wtd Avg Shares Wtd Avg
(000) Ex Price (000) Ex Price (000) Ex Price
----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beg. of year 2,109,920 $.807 40,000 $7.25 40,000 $7.25
Granted 345,048 - 2,069,920 - 0 0
Exercised 0 0 0 0 0 0
Forfeited (220,612) 0.490 0 0 0 0
Expired 0 0 0 0 0 0
--------------- --- ------------ ------------
Outstanding at end of year 2,234,356 $.764 2,109,920 $.807 40,000 $7.25
--------------- --- ------------ ------------
Exercisable at end of year 1,716,417 510,593 40,000
Weighted average fair value
of options granted $0.53 $0.94 -
</TABLE>
The options granted vest through 2000 and expire from 2000 to 2006.
A total of 1,624,356 options outstanding at December 31, 1996
have an exercise price of $0.49 per share, 580,000 shares have an exercise price
of $.992 per share and 30,000 shares have an exercise price of $1.875 per share.
A total of 2,079,920 options were granted in 1995 which have a weighted average
remaining contractual life of 8.2 years; 335,048 options were granted in 1996
which have a weighted average remaining contractual life of 9.6 years.
The fair value of each grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions. Risk-free interest rates ranged from 5.7 to 6.3 percent for options
granted in 1995, and ranged from 5.9 to 6.6 percent for options granted in 1996.
Expected dividend yields of 0 percent were assumed for all options. Expected
option lives of 8.2 and 9.6 years were assumed for the 1995 and 1996 options,
respectively, and expected volatility was 62% and 76% for options granted in
1995 and 1996, respectively.
13. BUSINESS SEGMENT, GEOGRAPHIC AREA AND MAJOR CUSTOMER INFORMATION
The Company operates in several industries: the after-boiler
market, the gas-turbine power-generation market, and the market for elimination
of volatile organic compounds. The Company markets and sells most of its
products through a coordinated worldwide sales force which interacts with both
electric utilities and industrial customers in connection with the reduction and
control of air pollution, gas flow control, energy efficiency, and the control
of volatile organic compounds.
92
<PAGE>
The following table shows financial information by geographic area. "Other"
consists principally of Canada and Australia:
<TABLE>
<CAPTION>
1996 United States Europe Other Totals
<S> <C> <C> <C> <C>
Revenues $20,404 $22,042 $605 $43,051
Operating loss (7,160) (5,555) (230) (12,945)
Loss before income taxes (8,392) (5,495) 154 (13,733)
Identifiable assets 16,049 13,675 96 29,820
1995
Revenues $21,550 $35,122 $3,428 $60,100
Operating loss (9,826) (2,341) (369) (12,536)
Loss before income taxes (11,267) (2,864) (171) (14,302)
Identifiable assets 22,638 22,999 882 46,519
1994
Revenues $34,246 $31,296 $4,355 $69,897
Operating loss (57,064) (12,623) (3,836) (73,523)
Loss before income taxes (58,748) (12,290) (3,810) (74,848)
Identifiable assets 37,911 19,202 1,817 58,930
Export sales were as follows:
Years ended December 31, 1996 1995 1994
Canada $ 413 $ 685 $ 680
Europe 997 3,228 973
Asia 2,869 3,451 3,479
Africa and Other 1,932 1,331 1,511
$6,211 $8,695 $6,643
</TABLE>
There were no sales to individual customers constituting 10% or more of total
revenues in 1996, 1995 or 1994.
14. COMMITMENTS AND CONTINGENCIES
As security for performance and advances on long-term
contracts, the Company at December 31, 1996 is contingently liable in the amount
of approximately $1,277 under standby letters of credit and bank guarantees.
The Company and certain of its subsidiaries are parties to
claims and litigation proceedings arising in the normal course of business.
Although the legal responsibility and financial impact with respect to such
claims and litigation cannot presently be ascertained, the Company does not
believe that these matters will result in the payment by the Company of monetary
damages that in the aggregate, would be material in relation to the consolidated
financial position of the Company. It is reasonably possible that the reserves
provided for by the Company with respect to such claims and litigation could
change in the near term.
93
<PAGE>
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Net Income
(Loss)
Revenue Gross Margin Net Income (Loss) Per Share
- --------------------- ------------------------ ------------------------ ----------------------- ---------------
<S> <C> <C> <C> <C>
1996
Quarters:
First $13,388 $2,812 $(810) $(0.05)
Second 10,119 11 (4,058) (0.23)
Third 9,123 1,243 (1,417) (0.08)
Fourth 10,421 (112) (4,524) (0.25)
Total $43,051 $3,954 $(10,809) $(0.61)
1995
Quarters:
First $15,908 $3,711 $(517) $(.03)
Second 14,459 2,587 (2,810) (.16)
Third 14,556 2,927 111 .01
Fourth 15,177 (645) (8,136) (.46)
Total $60,100 $8,580 $(11,352) $(.64)
</TABLE>
During the second and fourth quarters of 1996, and the fourth quarter of 1995,
the Company's gross margin, net loss and net loss per share were affected by
write-downs and restructuring charges (see note 4).
94
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Wahlco Environmental Systems, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Additions
Charged to Charged to Other
Balance at Beginning of Costs and Accounts - Deductions- Balance at End
Period Expenses Describe Describe(1) of Year
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts $1,277 $2,350 $421 $3,206
Inventory valuation reserve 286 120 237 169
Restructuring reserve 375 0 126 249
Warranty reserve 826 981 528 1,279
--- --- --- -----
Total $2,764 $3,451 $1,312 $4,903
====== ====== ====== ======
Year ended December 31, 1995:
Allowance for doubtful accounts $923 $870 $516 $1,277
Inventory valuation reserve 1,110 141 965 286
Restructuring reserve 1,819 (590) 854 375
Warranty reserve 1,662 1,137 1,973 826
----- ----- ----- ---
Total $5,514 $1,558 $4,308 $2,764
====== ====== ====== ======
Year ended December 31, 1994:
Allowance for doubtful accounts $507 $865 $449 $923
Inventory valuation reserve 470 849 209 1,110
Restructuring reserve 1,611 4,386 4,178 1,819
Warranty reserve 1,184 1,794 1,316 1,662
----- ----- ----- -----
Total $3,772 $7,894 $6,152 $5,514
====== ====== ====== ======
</TABLE>
(1) Amounts charged off during the year.
95
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
SPECIAL MEETING OF STOCKHOLDERS ON
___________ [ ], 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby (i) revokes previous proxies given with
respect to the shares of the common stock of Wahlco Environmental Systems, Inc.
(the "Company") noted on the reverse side hereof and registered in the name of
the undersigned (the "Shares"), if any; (ii) acknowledges receipt of the Notice
of Special Meeting and Proxy Statement/Prospectus dated December [ ], 1997 in
connection with the Special Meeting of Stockholders of the Company to be held on
____ [ ], 1998 at 10:00 a.m. local time at [ ] or any adjournment thereof; and
(iii) appoints David R. A. Steadman, C. Stephen Beal and Roger M. Barzun, or any
one of them, each with full power to act alone, the attorneys and proxies of the
undersigned with power of substitution to each, to vote all of the Shares that
the undersigned is entitled to vote at the Special Meeting of Stockholders of
the Company, and at any adjournment thereof, with all the powers the undersigned
would have had if personally present at said meeting. Without limiting the
generality of the authorization hereby given, said proxies are, and each of them
is instructed to vote or act as follows on the matters to be voted upon set
forth in said Proxy Statement/Prospectus.
If you wish to vote in accordance with the recommendations of
the Board of Directors, you need only sign and date this proxy on the reverse
side -- you need not mark any boxes.
CONTINUED AND TO BE SIGNED AND DATED ON THE REVERSE SIDE
[SEE REVERSE SIDE]
<PAGE>
[Reverse Side]
Please mark your votes as in this example [x]
PROPOSAL 1. Approval of the FOR AGAINST ABSTAIN
1996 Stock Option Plan and
certain option grants. [ ] [ ] [ ]
PROPOSAL 2. Approval of FOR AGAINST ABSTAIN
amendments to the Certificate of
Incorporation to increase and [ ] [ ] [ ]
then to decrease the shares
authorized for issuance by the
Company.
PROPOSAL 3. Approval of the FOR AGAINST ABSTAIN
issuance of Common Stock to
implement the Rights Offering [ ] [ ] [ ]
and the Wexford Debt
Conversion.
PROPOSAL 4. Approval of FOR AGAINST ABSTAIN
transactions with WESAC. [ ] [ ] [ ]
PROPOSAL 5. Approval of FOR AGAINST ABSTAIN
merger of the Company with
WESAC. [ ] [ ] [ ]
Signature(s)___________________________________________________________________
Date:____________________, 1998
NOTE: Please sign as name(s) appear(s) hereon. Joint owners should each sign.
When signing in a representative capacity, please give full title. Corporations
should sign in the corporate name by an authorized officer; partnerships in the
partnership name by an authorized person.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC registration fee.....................$1,000
NYSE fee................................105,000
Printing/Distribution...................$20,000
Accountants' fees and expenses...........20,000
Legal fees..............................100,000
ChaseMellon - Transfer agent.............40,000
Wexford fee (cash)......................100,000
Stand-by Purchaser fee (stock)..........100,000
Morgan Walke (public relations)..........14,000
Total..................................$500,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers or 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 Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the 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 hereunder, 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 Securities Act of 1933, as amended, and will be governed by the
final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the past three years, the Company has not sold any of its securities
without registration.
ITEM 16 EXHIBITS INDEX
Exhibit
Number Description
1.1 Restructuring Agreement, dated as of January __, 1998, among the
Company, WESAC, the Wexford Entities named therein and Wexford
Management LLC, as Agent*
2.1 Restructuring Agreement (see item 1.1 above)
2.2 Form of Agreement of Merger, dated as of _______ __, 1998, between WES
Acquisition Corp. and Wahlco MergerSub, Inc.*
3.3 Form of Amendment to Certificate of Incorporation of the Company re:
Reverse Stock Split*
4.1 Form of Rights Certificate*
5.1 Opinion re: legality of Roger Barzun, Esquire*
10.187 Amended and Restated Credit Agreement, dated as of _______ __, 1998,
among the Company, as Borrower, the Lenders parties thereto and
Wexford Management LLC as Agent.*
10.188 Agreement between the Company and ChaseMellon re: Subscription
Agency*
10.189 $750,000 Promissory Note, dated as of July 2, 1997, between the
Company and The Chase Manhattan Bank*
10.190 $1,000,000 Promissory Note, dated as of October 13, 1997 between the
Company and The Chase Manhattan Bank.*
10.191 $400,000 Promissory Note, dated as of November 17, 1997 between the
Company and The Chase Manhattan Bank.*
10.192 Waiver letter of SVB dated as of December 19, 1997 re: extension
of maturity and waiver of covenants*
23.1 Consent of Arthur Anderson LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Roger M. Barzun, Esquire*
*To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
<PAGE>
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) For determining liability under the Securities Act of 1933, as
amended, to treat each post-effective amendment as a new registration statement
of the securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) To remove from the registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriters to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers or
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 Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the 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 hereunder, 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 Securities Act of 1933, as amended,
and will be governed by the final adjudication of such issue.
(6) For determining any liability under the Securities Act of 1933, as
amended, to treat the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the issuer under Rule 424(b)(1), or (4) or 497(h)
under the Securities Act of 1933, as amended, as part of this registration
statement as of the time the Commission declared it effective.
(7) For determining any liability under the Securities Act of 1933, as
amended, to treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
(8) To supplement the prospectus, after the expiration of the
subscription period, to set forth the results of the subscription offer, the
transactions by the underwriters during the subscription period, the amount of
unsubscribed securities to be purchased by the underwriters, and the terms of
any subsequent reoffering thereof. If any public offering by the underwriters is
to be made on terms differing from those
<PAGE>
set forth on the cover page of the prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
<PAGE>
SIGNATURES
In accordance with 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 Los
Angeles, State of California on this the 19th day of December, 1997.
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
By: /s/ C. Stephen Beal
------------------------------------------------
C. Stephen Beal, President and Chief Executive
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated. Each person
whose signature appears below hereby authorizes C. Stephen Beal as his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this registration statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission.
/s/ C. Stephen Beal December 19, 1997
- ------------------------------------------------
C. Stephen Beal
President, Chief Executive Officer and Director
/s/ A. Noel DeWinter December 19, 1997
- ------------------------------------------------
A. Noel DeWinter
Vice President and Chief Financial Officer
/s/ Maarten D. Hemsley December 19, 1997
- ------------------------------------------------
Maarten D. Hemsley, Director
December 19, 1997
- ------------------------------------------------
Paul H. Hunn, Director
/s/ Mark L. Plaumann December 19, 1997
- ------------------------------------------------
Mark L. Plaumann, Director
/s/ David R. A. Steadman December 19, 1997
- ------------------------------------------------
David R. A. Steadman, Director
<PAGE>
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 February 24, 1995 in the Registration Statement (Form
S-1 No. 33- ) and related Prospectus of Wahlco Environmental Systems, Inc.
for the registration of 27,112,000 shares of its common stock.
/s/ Ernst & Young LLP
December 19, 1997
Orange County, California
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of
this Registration Statement.
/s/ Arthur Andersen LLP
Orange County, California
December 19, 1997
