<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 1998
REGISTRATION NO. 333-42805
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
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 AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(1) PRICE(1) FEE(3)
<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 Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus Front Cover Page of Prospectus/Proxy Statement
2. Inside Front and Outside Back Cover Page of Inside Front and Outside Back Cover Pages of
Prospectus Prospectus/Proxy Statement
3. Summary Information, Risk Factors and Ratio of Summary; Risk Factors
Earnings 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
MARCH 2, 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: March 2, 1998
Time: 9:00 a.m., local time
Place: Wexford Plaza
411 West Putnam Avenue
Greenwich, CT 06830
Purposes:
1. To consider the approval of the 1996 Stock Option Plan.
2. (A) To consider two amendments to the Company's Certificate of
Incorporation:
(i) to increase the number of shares of Common Stock authorized for
issuance by the Company from 50,000,000 shares to 58,000,000
shares and to reduce the number of shares of preferred stock
authorized for issuance by the Company from 10,000,000 shares to
2,000,000 shares;
(ii) effective upon the consummation of a 1 for 10 reverse stock
split, to reduce the number of shares authorized for issuance by
the Company to 28,000,000 shares of Common Stock of the
Company; and
(B) To consider the approval of such 1 for 10 reverse stock split of the
Common Stock of the Company.
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 February 2, 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
February 3, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................................................... 2
Summary.................................................................................................... 3
Plan of Financial Restructuring............................................................................ 11
Rights Offering.......................................................................................... 11
Silicon Valley Bank Repayment............................................................................ 11
Reverse Stock Split...................................................................................... 12
WESAC Debt Conversion.................................................................................... 12
1998 Credit Agreement.................................................................................... 12
WESAC Liquidation........................................................................................ 13
Pro Forma Effect on Financial Condition.................................................................. 13
Contingencies Affecting the Plan......................................................................... 14
Pro Forma Effect of Plan on Stockholders................................................................. 14
Federal Income Tax Consequences of Restructuring Plan.................................................... 15
Wexford Fee.............................................................................................. 15
The Rights Offering........................................................................................ 16
Description of the Offering.............................................................................. 16
Expiration Date.......................................................................................... 16
Method of Offering....................................................................................... 16
Escrow of Subscription Proceeds.......................................................................... 16
Issuance of Shares of Common Stock....................................................................... 16
Determination of the Subscription Price.................................................................. 17
Stand-by Commitment...................................................................................... 17
Subscription Privileges.................................................................................. 17
Exercise of Rights....................................................................................... 17
Subscription Agent....................................................................................... 19
Information Agent........................................................................................ 19
No Revocation of Subscription............................................................................ 20
Transfers and Sales of Rights............................................................................ 20
Extension of Expiration Date............................................................................. 20
General.................................................................................................. 20
No Board Recommendation Concerning Exercise of Rights.................................................... 21
State and Foreign Securities Laws........................................................................ 21
Federal Income Tax Consequences of the Rights Offering................................................... 21
Risk Factors............................................................................................... 22
Operating Losses......................................................................................... 22
Liquidity; Availability of Future Financing.............................................................. 22
Control by Wexford and Wexford Affiliates................................................................ 22
Potential Conflicts of Interest.......................................................................... 23
Dividend Policy.......................................................................................... 23
Limited Market for Common Stock; Possible Delisting...................................................... 23
No Established Market for Rights......................................................................... 23
Arbitrary Subscription Price............................................................................. 24
Dilution................................................................................................. 24
Effect of Reverse Stock Split on Small Stockholders...................................................... 24
Shares Eligible for Future Sale.......................................................................... 24
Sensitivity to Major Contracts........................................................................... 24
Fluctuations in Quarterly Operating Results.............................................................. 25
Proprietary Technology and Unpredictability of Patent Protection......................................... 25
Competition.............................................................................................. 25
Dependence on Key Personnel.............................................................................. 26
Dependence on the Reliability and Performance of Subcontractors.......................................... 26
Franchise Tax Liability..................................................................................
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Possible Product Liability............................................................................... 26
Dependence on Customer Information....................................................................... 27
Potential Environmental Liability........................................................................ 27
Warranties............................................................................................... 27
Risks Associated with Fixed Price Contracts.............................................................. 27
Risks Associated with International Operations and Sales................................................. 28
Special Meeting of Stockholders............................................................................ 28
General Information...................................................................................... 28
Matters to be Considered at the Special Meeting.......................................................... 28
Outstanding Shares; Quorum............................................................................... 29
Voting Rights and Procedures............................................................................. 29
Proposal 1--Adoption of the 1996 Stock Option Plan....................................................... 30
Proposal 2--Amendments to the Certificate of Incorporation and Approval of Reverse Stock Split........... 31
Proposal 3--Authorization to Issue Shares of Common Stock in the Rights Offering and the WESAC Debt
Conversion............................................................................................ 32
Registration and Resale of Common Stock.................................................................... 33
Use of Proceeds............................................................................................ 33
Capitalization............................................................................................. 34
Price Range of Common Stock and Dividends.................................................................. 35
Summary Financial Information.............................................................................. 36
Pro Forma Consolidated Financial Information............................................................... 37
Pro Forma Consolidated Condensed Balance Sheet........................................................... 37
Notes to Pro Forma Consolidated Balance Sheet.............................................................. 38
Pro Forma Consolidated Statements of Operations............................................................ 39
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 40
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995................................ 40
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994................................ 41
Liquidity and Capital Resources.......................................................................... 42
Backlog and Bookings..................................................................................... 43
Effects of Inflation; Other Cost Increases............................................................... 43
Foreign Currency Translation............................................................................. 43
Cautionary Statement..................................................................................... 43
Certain Transactions....................................................................................... 43
Components of the Conversion Debt........................................................................ 43
Origin of the Conversion Debt............................................................................ 44
1998 Credit Agreement.................................................................................... 44
Warrants................................................................................................. 44
Wexford Fee.............................................................................................. 45
Stand-by Commitment Fee.................................................................................. 45
Business................................................................................................... 46
The Company.............................................................................................. 46
Description of the Business.............................................................................. 46
Products and Services.................................................................................... 47
Dampers, Diverters, Expansion Joints, Piping Systems, Hydraulic Equipment and Other Services............. 47
Patents and Trademarks................................................................................... 48
Research and Product Development......................................................................... 49
Marketing................................................................................................ 49
Customers................................................................................................ 50
Raw Materials............................................................................................ 50
Competition.............................................................................................. 50
Governmental Regulation.................................................................................. 51
Employees................................................................................................ 52
Financial Information About Foreign and Domestic Operations.............................................. 52
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Properties................................................................................................. 52
Management................................................................................................. 53
Executive Officers....................................................................................... 53
Compensation of Executive Officers....................................................................... 53
Option Grants Table...................................................................................... 55
Aggregate Options Held at the End of 1996 Fiscal Year.................................................... 55
Employment, Severance and Other Agreements............................................................... 56
Compensation Committee Interlocks........................................................................ 57
Security Ownership of Principal Stockholders and Management................................................ 57
Compliance with Section 16(a) of Exchange Act............................................................ 59
Compensation Committee's Report on Executive Compensation................................................ 59
Chief Executive Officer's Compensation................................................................... 59
Compensation of Other Executives......................................................................... 59
Components of Compensation............................................................................... 59
Performance Graph........................................................................................ 60
Description of Common Stock and Other Securities........................................................... 61
Common Stock............................................................................................. 61
Transfer Agent........................................................................................... 61
Preferred Stock.......................................................................................... 61
Warrants................................................................................................. 61
Shares Eligible for Future Sale............................................................................ 62
Legal Matters.............................................................................................. 62
Experts.................................................................................................... 62
Additional Information..................................................................................... 62
Financial Statements....................................................................................... F-1
</TABLE>
iii
<PAGE>
PROSPECTUS/PROXY STATEMENT
27,112,000 SHARES OF COMMON STOCK
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
TRANSFERABLE RIGHTS EXPIRING APRIL 6, 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 March 2, 1998, the Company will make the
Rights Offering to its stockholders by distributing to each stockholder of
record of Common Stock other than WES Acquisition Corp. ('WESAC') at the close
of business on March 3, 1998 (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 April 6, 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 Certificates 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.'
The purchase price for the Shares issuable upon the exercise of Rights bears
no relationship to the value of 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 $13/16 ($.8125) per share. On February 3, 1998, the last
reported sale price for the Common Stock on the NYSE was $7/16 ($.4375) 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
SUBSCRIPTION PRICE AND COMMISSIONS(1) COMPANY(2)
------------------ ---------------------- -------------
<S> <C> <C> <C>
Per Share............................................. $ .10 None $ .10
Total................................................. $ 2,711,200.00 $200,000 $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.' For providing a stand-by
purchase commitment, 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
549,752 pre-split shares 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 $500,000
in cash, plus $100,000 payable in the form of shares of the Company's Common
Stock.
FEBRUARY 4, 1998
<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 March 2, 1998. See
'SPECIAL MEETING OF STOCKHOLDERS.' This Prospectus/Proxy Statement is the
principal means by which the Company is soliciting proxies from its stockholders
for 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 PROSPECTUS/PROXY STATEMENT, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS/PROXY STATEMENT 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
PROSPECTUS/PROXY STATEMENT 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 Prospectus/Proxy
Statement, 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 Prospectus/Proxy
Statement, the words 'estimate', 'project', 'anticipate', 'expect', 'intend',
'believe', and similar expressions are intended to identify forward-looking
statements.
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
Prospectus/Proxy Statement 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 Prospectus/Proxy Statement omits certain information contained
in the Registration Statement.
2
<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. At 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, and the sale of various Company assets.
As a result, the Company's selling, general and administrative expenses have
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.' The Board of Directors believes that the Company's financial
condition needs to be further strengthened, and therefore, it has determined,
subject to stockholder approval, to implement the Restructuring Plan. See 'PLAN
OF FINANCIAL RESTRUCTURING.'
PLAN OF FINANCIAL RESTRUCTURING
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 Liquidation. The consummation of each of these transactions
is contingent upon one another and certain elements of the Restructuring Plan
will require stockholder approval at the Special Meeting to be held on March 2,
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
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<PAGE>
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 549,752 shares of Common Stock before
giving effect to the Reverse Stock Split. 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 $500,000 excluding the $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 with Silicon Valley Bank ('SVB'), under which SVB
provided the Company with a $4,000,000 working capital loan through September
1996 (the 'SVB Loan'). 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 SVB loan and letter
of credit balance of $1,809,000 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. In December 1997, SVB agreed to
extend the stated maturity of the SVB Loan to December 31, 2000. Outstanding
borrowings 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. Outstanding borrowings under the SVB Loan at December 31,
1997, totaled $1,809,000, including $1,700,000 of cash borrowings and $109,000
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. In addition, the cash pledged by WESAC to collateralize letters
of credit will be repaid to WESAC and replaced by an equal amount of cash
provided by the Company. See 'USE OF PROCEEDS.'
WESAC Debt Conversion. As of March 31, 1998, the Company will owe to WESAC
approximately $11,606,000 (including interest) for loans made by WESAC at
various times in 1995 and 1996 (the 'Conversion Debt'). Interest on the
Conversion Debt which accrues from April 1, 1998 through the date of
consummation of the Restructuring Plan will be treated as a Tranche A Loan (as
hereinafter defined) under the 1998 Credit Agreement (as hereinafter defined).
See 'PLAN OF FINANCIAL RESTRUCTURING--1998 Credit Agreement.' 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 loans from the Wexford 1995 Funds, the Wexford 1996
Funds (as hereinafter defined) and the stockholders of WESAC (such parties being
hereinafter referred to collectively as the 'WESAC Creditors').
WESAC will receive approximately 11,606,000 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
percentage that will be owned by the Wexford Entities will depend on the extent
to which Public Stockholders (as hereinafter defined) 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 who is an 'affiliate' of Wexford within the meaning of Rule 405 under
the Securities Act of 1933, as amended.
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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 as 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
Stockholders') 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 stockholder approval and 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 16,137,000
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 issuing a fractional
share. Stockholders who own nine or fewer shares of Common Stock prior to the
Reverse Stock Split will have 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 effective date of the Reverse Stock Split.
1998 Credit Agreement. 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 as of January 30, 1998 (the
'1998 Credit Agreement') to make available to the Company a line of credit of up
to $3,000,000 (the 'Tranche A Line') until the consummation of the Restructuring
Plan (the 'Closing Date'). 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
on the Closing Date 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 'USE OF PROCEEDS.' On the Closing
Date, the Wexford Funds will make available to the Company an additional line of
credit of up to $2,500,000 (the 'Tranche B Line'), to be due and payable on
December 31, 2000. All loans pursuant to the 1998 Credit Agreement 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 the Chase Facility (as hereinafter defined) on or after
January 30, 1998, the Company's availability under the Tranche A Line (until the
Closing Date) or the Tranche B Line (from and after the Closing Date) will be
reduced dollar for dollar by the amount of such borrowings. The Company
anticipates that it will need to draw $2.5 million as Tranche A Loans prior to
the Closing Date.
In February 1997, the Wexford 1995 Funds established and guaranteed a
credit facility (the 'Chase Facility') at The Chase Manhattan Bank ('Chase') 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 December 1997, the Chase Facility was
increased to a total of $5.5 million. In November 1997, the Company drew
$400,000 for working capital and, in December, drew an additional $500,000,
bringing total cash borrowings under the Chase Facility to $2.65 million at
December 31, 1997. Under the Chase Facility, the Company may also request that
Chase issue letters of credit for the benefit of the Company, which Chase may
issue in its sole discretion. At December 31, 1997, Chase had issued
approximately $2.8 million of letters of credit for the benefit of the Company.
Letters of credit issued under the Chase Facility do not reduce availability
under the Tranche A Line or the Tranche B Line. Before making each loan or
issuing each letter of credit, the Chase Manhattan Bank ('Chase') advises the
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<PAGE>
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 1998
Credit Agreement, and that the combined facilities are at least as advantageous
to the Company as available alternatives absent credit support from the Wexford
Entities. See 'PLAN OF FINANCIAL RESTRUCTURING--1998 Credit Agreement.'
WESAC Liquidation. 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.' To reduce the complexity of the Company's ownership structure
and to reduce overall expenses, the stockholders and creditors of WESAC have
agreed to liquidate WESAC pursuant to a plan of liquidation (the 'WESAC
Liquidation Plan') after consummation of the Rights Offering, the Reverse Stock
Split and the WESAC Debt Conversion. Pursuant to the WESAC Liquidation Plan, on
the Closing Date, WESAC will distribute to its creditors (the 'WESAC
Creditors'), in complete satisfaction of their claims, the approximately
13,032,000 shares of Common Stock that will be owned by WESAC after giving
effect to the Rights Offering, the Reverse Stock Split and the WESAC Debt
Conversion. Payments to the WESAC Creditors under the WESAC Liquidation Plan
will be applied first to outstanding principal amounts and then to accrued but
unpaid interest. The outstanding loans to WESAC from the WESAC Creditors carry
contractual seniority rankings, which will be recognized under the WESAC
Liquidation Plan. For purposes of satisfying claims owed by WESAC to the WESAC
Creditors, the shares of Common Stock will be valued at $1.00 per share, which
is the equivalent of the Post-Split Exercise Price. Because the amounts owed to
the WESAC Creditors exceed $13,032,000, the most subordinate WESAC Creditors
will not be paid in full, and the stockholders of WESAC have agreed to cancel
their outstanding shares of common stock of WESAC.
The shares of Common Stock distributed pursuant to the WESAC Liquidation
Plan will not have been registered for resale under the Securities Act of 1933,
as amended (the 'Act') and will bear a legend restricting their transferability.
Further, pursuant to the Restructuring Agreement (as hereinafter defined), for
two years following the Closing Date, the resale of the Common Stock received by
the Creditors of WESAC in the WESAC Liquidation Plan shall be limited to a
maximum of 25,000 shares per month through regular-way brokers' sales by any one
holder; provided, however, that the Company has agreed, for the benefit of each
WESAC Creditor who consents to such limitation on sales of the shares of Common
Stock, to use its reasonable best efforts to register for resale such shares of
Common Stock on Form S-3 within 90 days following the Closing Date.
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 stockholders' equity would
have been approximately $7.9 million, and cash and cash-equivalents would have
been $0.7 million. In addition, the Company would have had an unused line of
credit of $2.5 million.
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 all stockholders the opportunity to maintain their percentage interest
in the Company, if all or a substantial portion of the Rights are not exercised
by the 'Public Stockholders,' who, for purposes hereof are defined as those
stockholders who are not affiliated with Wexford or other WESAC 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
6
<PAGE>
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 approval of the stockholders and 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 will 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
<TABLE>
<S> <C>
Rights.................................... Each record holder (each such holder and any transferee being a
'Rights Holder') of Common Stock at the close of business on March 3,
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
27,112,000 Rights will be distributed in the Rights Offering.
Rights Record Date........................ March 3, 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'), 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 549,752
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 of Offering............... April 6, 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.
Extension of Offering..................... 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........................... Proceeds of the Rights Offering will be used to effect the SVB loan
repayment, to repay borrowings under the Chase Facility or Tranche A
Loans, to pay expenses of the transactions, and 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
</TABLE>
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<TABLE>
<S> <C>
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 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, 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.'
</TABLE>
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<TABLE>
<S> <C>
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 'WAL
RT' 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. 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 Restructuring Plan has been consummated. See
'THE RIGHTS OFFERING--Issuance of Shares of Common Stock.'
Subscription Agent........................ ChaseMellon Shareholder Services L.L.C., P.O. Box 3301, South
Hackensack, NJ 07606 Attention: Reorganization Department. (by US
Postal Service); 120 Broadway, 13th Floor, New York, New York 10271
Attention: Reorganization Department (by hand) 85 Challenger
Road-Mail Drop-Reorg. Ridgefield Park, NJ 07660 Attention:
Reorganization Department (overnight courier).
Information Agent......................... Any questions regarding the Rights Offering, including the procedure
for exercising Rights and requests for additional copies of this
Prospectus/Proxy Statement or the notice of guaranteed delivery
should be directed to ChaseMellon Shareholder Services LLC (the
'Information Agent') at 450 West 33rd Street, 14th Floor, New York,
New York 10001, telephone number (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
16,137,000 (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 is completed, the Company will
pay to Wexford, or an affiliate designated by Wexford, a cash fee of
$100,000. 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 549,752 shares of
Common Stock before giving effect to the Reverse Stock Split.
</TABLE>
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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. Assuming such approval, the
44,761,000 shares of Common Stock to be outstanding after the Rights Offering is
completed will be reduced by the Reverse Stock Split 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 involves substantial risks. See 'RISK FACTORS.'
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.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-----------------------
ACTUAL PRO FORMA(1)
------- ------------
<S> <C> <C>
Summary Balance Sheet Data
Current Assets........................................................................ $21,286 $ 21,797
Working capital....................................................................... 4,120 4,631
Total assets.......................................................................... 27,095 27,606
Long-term debt........................................................................ 13,003 418
Total liabilities....................................................................... 32,255 19,670
Stockholders' equity (deficiency)....................................................... (5,160) 7,936
</TABLE>
- ------------------
(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 which
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. The exercise price and the number of warrants are subject to antidilution
adjustments, which will become effective as a result of the Restructuring Plan.
At the request of the Company, to reduce overall transaction expenses, the WESAC
Debt Conversion will occur after the Rights Offering and the Reverse Stock
Split. As a result, the Company and Wexford agreed to apply the anti-dilution
formula contained in the Warrants as if the WESAC Debt Conversion occurred as
part of the Rights Offering. The adjustments to the exercise price and the
number of such warrants are dependent on the market price for the Common Stock
for the 30 trading days prior to the Rights Offering. Because the market price
of the Common Stock at a future date cannot be known at this time, the Company
cannot now determine the adjustments to the exercise price and the number of
such warrants. After the Reverse Stock Split, the exercise price of such
warrants will be multiplied by ten (10) and the number of warrants will be
divided by ten (10).
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.'
10
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PLAN OF FINANCIAL RESTRUCTURING
As indicated herein, the Company has incurred six consecutive years of
operating losses, has experienced liquidity problems and, at September 30, 1997,
had 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 principal elements of which are set forth in a
Restructuring Agreement dated as of January 30, 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), the WESAC Debt Conversion, the 1998 Credit Agreement,
the Reverse Stock Split, the Funding Conversion and the WESAC Liquidation. The
consummation of these transactions is contingent upon one another and will
require stockholder approval at the Special Meeting to be held on March 2, 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 $500,000, and the $100,000 payable to the
Standby Purchasers 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 $1,809,000 with cash, and to similarly collateralize any
additional principal and interest borrowings or letters of credit up to the
maximum of $3,000,000. As of the date hereof, WESAC has pledged an aggregate of
$2,135,000 to collateralize the Company's borrowings and letters of credit under
the SVB Loan. In October 1996, the SVB Loan 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. In December 1997 SVB agreed to
extend the stated maturity of the SVB Loan until December 31, 2000. Outstanding
borrowings 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. Outstandings under the SVB Loan totaled $1,809,000 at
December 31, 1997, which included $1,700,000 of cash borrowings and $109,000 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 1998 Credit Agreement. See 'USE OF
PROCEEDS.' In addition, the cash pledged by WESAC to collateralize letters of
credit will be repaid to WESAC and replaced by an equal amount of cash provided
by the Company.
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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 (described below) and the
Reverse Stock Split, there will be approximately 16,137,000 (less any fractional
shares paid in cash) shares of Common Stock of the Company issued and
outstanding.
WESAC DEBT CONVERSION
As of March 31, 1998, the Company will owe to WESAC a total of
approximately $11,606,000 (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, 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 11,606,000 post-split shares and will own a
total of approximately 13,032,000 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.
Because the WESAC Debt Conversion will occur after the Reverse Stock Split, the
conversion rate for the Conversion Debt will be ten times the Subscription
Price, with the result that 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.'
1998 CREDIT AGREEMENT
In connection with the Restructuring Plan, the Wexford Funds have agreed,
pursuant to the 1998 Credit Agreement, directly or indirectly, to make available
to the Company a $3,000,000 line of credit (the 'Tranche A Line') until the
Closing Date. Any Tranche A Loans will be due and payable on the Closing Date
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.' On the Closing Date, the Wexford Funds
will make available to the Company an additional $2,500,000 of loans (the
'Tranche B Loans'), to be due and payable on December 31, 2000. All loans by the
Wexford Funds pursuant to the 1998 Credit Agreement 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
the Chase Facility on or after January 30, 1998, the Company's availability
under the Tranche A Line (until the Closing Date) or the Tranche B Line (from
and after the Closing Date). The Company anticipates that it will need to draw
$2.5 million as Tranche A Loans prior to the Closing Date.
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 December 1997, the Chase
Facility was increased to a total of $5.5 million. In November 1997, the Company
borrowed an additional $400,000 for working capital and, in December, drew an
additional $500,000, bringing total cash borrowings under the Chase Facility to
$2.65 million at December 31, 1997. Under the Chase Facility, the Company may
also request that Chase issue letters of credit for the benefit of the Company,
which Chase may issue in its sole discretion. At December 31, 1997, Chase had
issued approximately $2.8 million of
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letters of credit for the benefit of the Company. Letters of credit issued under
the Chase Facility do not reduce availability under the Tranche A Line or the
Tranche B Line. 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%.
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 1998
Credit Agreement, and that the combined facilities are at least as advantageous
to the Company as available alternatives absent credit support from the Wexford
Entities. See 'PLAN OF FINANCIAL RESTRUCTURING--1998 Credit Agreement.'
WESAC LIQUIDATION
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.' To
reduce the complexity of the Company's structure and to reduce overall expenses,
the stockholders and creditors of WESAC have agreed to liquidate WESAC pursuant
to the WESAC Liquidation Plan after consummation of the Rights Offering, the
Reverse Stock Split and the WESAC Debt Conversion. Pursuant to the WESAC
Liquidation Plan, on the Closing Date, WESAC will to distribute to the WESAC
Creditors, in complete satisfaction of their claims, the approximately
13,032,000 shares of Common Stock that will be owned by WESAC after giving
effect to the Rights Offering, the Reverse Stock Split and the WESAC Debt
Conversion. Payments to the WESAC Creditors under the WESAC Liquidation Plan
will be applied first to outstanding principal amounts and then to accrued but
unpaid interest. The outstanding loans to WESAC from the WESAC Creditors carry
contractual seniority rankings, which will be recognized under the WESAC
Liquidation Plan. For purposes of satisfying claims owed by WESAC to the WESAC
Creditors, the shares of Common Stock will be valued at $1.00 per share, which
is the equivalent of the Post-Split Exercise Price. Because the amounts owed to
the WESAC Creditors exceed $13,032,000, the most subordinate WESAC Creditors
will not be paid in full, and the stockholders of WESAC have agreed to cancel
their outstanding shares of common stock of WESAC.
The shares of Common Stock distributed pursuant to the WESAC Liquidation
Plan will not have been registered for resale under the Act and will bear a
legend restricting their transferability. Further, pursuant to the WESAC
Liquidation Plan, for two years following the Closing Date the resale of the
Common Stock received by the creditors of WESAC as a result of the WESAC
Liquidation Plan shall be limited to a maximum of 25,000 shares per month
through regular-way brokers' sales by any one holder provided, however, that the
Company has agreed, if requested by any creditor of WESAC who has consented to
such limitation to use its reasonable best efforts to register for resale such
shares of Common Stock on Form S-3 within 90 days following the Closing Date.
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 $7.9 million, total indebtedness would have been approximately
$670,000, working capital would have been approximately $4.6 million, and cash
would have been approximately $700,000. 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.'
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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 1998 Credit Agreement and the WESAC
Liquidation, (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 shares of Common
Stock, subject to adjustment prior to delivery for the Reverse Stock Split. The
Rights Offering is intended to offer all the Public Stockholders the opportunity
to maintain their approximate percentage interest in the Company, and
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. See 'RISK FACTORS--Dilution.'
The following table sets forth the percentage of the outstanding shares of
Common Stock projected to be held, as of April 15, 1998, (the projected Closing
Date), by the Public Stockholders of the Company as a group and WESAC, and the
percentage of the outstanding shares of Common Stock which would be held, upon
consummation of the Plan, but prior to the WESAC Liquidation, by the Public
Stockholders, WESAC, the Stand-by Purchasers, and all Wexford Entities, using
the following assumptions: (1) the WESAC Debt Conversion occurs, (2) that no
warrants are exercised, and (a) 25% of the Rights are exercised by Public
Stockholders, (b) 50% of the Rights are exercised by Public Stockholders, (c)
75% of the Rights are exercised by Public Stockholders and (d) all Rights are
exercised by Public Stockholders.
<TABLE>
<CAPTION>
(C)
(A) (B) 75% OF (D)
25% OF RIGHTS 50% RIGHTS RIGHTS ALL RIGHTS
EXERCISED BY EXERCISED BY EXERCISED BY EXERCISED BY
AT PUBLIC PUBLIC PUBLIC PUBLIC
12/31/97 STOCKHOLDERS STOCKHOLDERS STOCKHOLDERS STOCKHOLDERS
-------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Public Stockholders........................... 19.2% 6.3% 10.5% 14.7% 18.9%
WESAC......................................... 80.8% 80.8% 80.8% 80.8% 80.8%
Stand-By Purchasers........................... -- 12.9% 8.7% 4.5% 0.3%
All Wexford Entities.......................... 80.8% 93.7% 89.5% 85.3% 81.1%
</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.'
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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 Liquidation. The liquidation of WESAC will not result in its
recognition of any taxable income or loss under the Internal Revenue Code of
1986, as amended (the 'Code'). However, to the extent that the unpaid portion of
the interest on loans from the WESAC Creditors was previously deducted by WESAC,
such amount would be reportable by WESAC as taxable income as of the date of the
liquidation.
The WESAC Creditors will not recognize taxable gain or loss upon their
receipt of shares of Common Stock of the Company in exchange for the principal
portion of their loans pursuant to the WESAC Liquidation. However, to the extent
that any shares of Common Stock of the Company received by the WESAC Creditors
represent interest which was not previously reported as taxable income, such
amounts would be reportable as taxable income upon receipt.
Because it is anticipated that stockholders of WESAC will not receive any
distributions in respect of their shares of Common Stock in the liquidation,
they will recognize a capital loss in the liquidation, in an amount equal to
their basis in such shares.
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.
WEXFORD FEE
The Company has agreed to pay Wexford a fee of $100,000 upon the
consummation of the Restructuring Plan in consideration of its efforts and
assistance in formulating and implementing the Plan. 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 549,752 shares
of Common stock before giving effect to the Reverse Stock Split. 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 will distribute transferable subscription rights ('Rights') to the
record holders of its outstanding Common Stock as of the close of business on
March 3, 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
$11,606,000 of Conversion Debt will be converted into approximately 11,606,000
post-split shares of Common Stock, a rate which is equal to ten times the
Subscription Price of the Rights. Because the WESAC Debt Conversion will occur
after the Reverse Stock Split, the conversion rate will be ten times the
Subscription Price, with the result that 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 April 6, 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, Information Agent and proxy solicitation agent.
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
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<PAGE>
number in accordance with the proposed Reverse Stock Split. See 'PLAN OF
FINANCIAL RESTRUCTURING--Reverse Stock Split.'
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 transferable 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 Rights under the Basic Subscription Privilege will be
entitled to oversubscribe for shares.
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 by 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
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<PAGE>
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 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 NYSE trading days 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 NYSE trading days 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
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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 L.L.C. 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:
Address if by mail:
P.O. Box 3301
South Hackensack, NJ 07606
Attention: Reorganization Department
Address if by hand:
120 Broadway, 13th Floor
New York, New York 10271
Attention: Reorganization Department
Address if by overnight courier:
85 Challenger Road--Mail Drop Reorg.
Ridgefield Park, NJ 07660
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 Prospectus/Proxy Statement 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.
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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.
TRANSFERS AND SALES OF RIGHTS
It is anticipated that the Rights will be quoted on the NYSE under the
trading symbol WAL RT, 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.
All commissions, fees and other expenses (including brokerage commissions
and transfer taxes) incurred in connection with the purchase, sale or 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
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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
Prospectus/Proxy Statement 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
The Rights may not be exercised by any person, and neither this Prospectus/
Proxy Statement 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 receipt of Rights by 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.
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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, or issues of Federal estate and gift taxation, state and local
taxation or foreign taxaction. ACCORDINGLY, EACH RIGHTS HOLDER SHOULD CONSULT
WITH HIS OR HER OWN TAX AND FINANCIAL ADVISORS REGARDING 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. At 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 the Wexford
Entities (as hereinafter defined) to fund its cash flow requirements. The
Company's customers have required letters of credit or performance bonds
(totaling approximately $3.1 million 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 1998 Credit Agreement,
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
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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.
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. In
addition, 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 1998 Credit
Agreement. 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 Act or
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an exemption from the registration requirements of such statute. See
'REGISTRATION AND RESALE OF COMMON STOCK.'
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 Prospectus/Proxy Statement.
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 issuing fractional
shares. Stockholders who own nine 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 '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 effective date 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 16,137,000 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.
SENSITIVITY TO MAJOR CONTRACTS
The Company's results of operations are dependent on major contracts. Such
a reliance on major contracts is likely to lead to fluctuations in, and to
reduce the predictability of, quarterly results. Large 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
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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, in
addition to being large in scope, also often 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 makes financial
provisions 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. 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 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
25
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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 the efforts of
its 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 long-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 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.
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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.
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.'
27
<PAGE>
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 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.'
FRANCHISE TAX LIABILITY
The State of Delaware has advised the Company that the Company owes
approximately $300,000 for franchise tax liability for 1997. The Company
strongly disagrees with the basis on which the State of Delaware has computed
the Company's franchise tax liability and has taken the position that its
liability does not exceed $20,000. The Company is attempting to negotiate a
settlement of its franchise tax liability, and believes it will be able to
resolve this matter, but if it is unable to do so, it will take all steps
necessary to contest this tax by appropriate proceedings.
SPECIAL MEETING OF STOCKHOLDERS
This Prospectus/Proxy Statement 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 March 2, 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 Prospectus/Proxy
Statement 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 Prospectus/Proxy Statement is being mailed on or about February 6,
1998 to stockholders of record at the close of business on February 2, 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.
2. A. To consider two amendments to the Company's Certificate of
Incorporation:
(i) to increase the number of shares of Common Stock authorized
for issuance by the Company from 50,000,000 to 58,000,000
shares and to reduce the number of shares of preferred stock
authorized for issuance by the Company from 10,000,000 shares
to 2,000,000 shares;
(ii) effective upon the consummation of a 1 for 10 reverse stock
split, to reduce the number of shares of Common Stock of the
Company authorized for issuance by the Company to 28,000,000
shares; and
B. To consider the approval of such 1 for 10 reverse stock split of
the Common Stock of the Company.
28
<PAGE>
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.
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 1) 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 and approval of the Reverse Stock
Split (Proposal 2) 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 3)
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
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
29
<PAGE>
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
2,250,000 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 2 - 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 February 3, 1998, the
closing per share market price of the Common Stock was $7/16.
FEDERAL INCOME TAX INFORMATION
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.
30
<PAGE>
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 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 completion of the Rights Offering, the Compensation Committee of the
Board of Directors plans to issue options to certain current employees and
directors under the 1996 Plan. In addition, the Committee expects to grant
options to certain key employees and directors of the Company and its
subsidiaries. The terms of new option grants has not been determined at this
time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
THE 1996 PLAN AND THE OPTION GRANTS.
PROPOSAL 2--AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
AND APPROVAL OF REVERSE STOCK SPLIT
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 58,000,000
shares; and (ii) the second such amendment, by decreasing the number of
authorized shares to 28,000,000 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 Prospectus/Proxy Statement 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 3 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 tax expense. Authorization for the
additional shares of Common Stock will enable the Board of Directors of the
Company,
31
<PAGE>
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'), although the Board of
Directors has no current plans to do either.
THE REVERSE STOCK SPLIT
The Reverse Stock Split is intended to reduce the number of outstanding
shares so as to increase the stock price as well as to reduce the Company's
liability for Delaware franchise taxes and NYSE listing fees. Approval of the
Reverse Stock Split is not required as a matter of Delaware corporate law, but
is a condition to the consummation of the Restructuring Plan.
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, the Reverse Stock Split or the WESAC
Debt Conversion. WESAC has informed the Company it intends to vote in favor of
this Proposal 2 and Proposal 3. In addition, if this Proposal 2 is approved, but
Proposal 3 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, AND THE REVERSE STOCK SPLIT.
PROPOSAL 3--AUTHORIZATION TO ISSUE SHARES OF
COMMON STOCK IN THE RIGHTS OFFERING AND THE WESAC DEBT CONVERSION
Subject to the amendments to the Charter, which are described above in
Proposal 2, 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
Prospectus/Proxy Statement. In addition, subject to the approval of such
amendments, the Company intends to effect the Reverse Stock Split described in
Proposal 2 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 $11,606,000 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 2 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 Liquidation, WESAC
will own approximately 13,032,000 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 Prospectus/Proxy Statement. Approximately
27,112,000 pre-split 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 Liquidation, approximately
11,606,000 post-split shares of the Common Stock will be issued to WESAC upon
the conversion of the approximately $11,606,000 of indebtedness of the Company
that is owed to WESAC.
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<PAGE>
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 $11,606,000 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 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 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.
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. Except as otherwise described in this Prospectus/Proxy
Statement, the Company is not aware that 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 cash
expenses estimated at $500,000. The Company intends to use approximately
$1,700,000 of such proceeds to repay its SVB loan and $109,000 to replace
certain cash collateral posted by the Wexford 1995 Funds with SVB as collateral
security for outstanding letters of credit. The borrowings outstanding under the
Company's line of credit with SVB bear interest at approximately 5.5% per annum.
The Company intends to use the remainder of the net proceeds to repay advances
under the Chase Facility or Tranche A Loans under the 1998 Credit Agreement, if
any. To the extent not used for such purposes, proceeds will be used for working
capital purposes. Pending their 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 in the long term. However, 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 the proceeds prove 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.'
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<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, and 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........................................................................... 176 1,541
Capital in excess of par value.......................................................... 90,834 102,565
Retained earnings (deficit)............................................................. (94,129) (94,129)
Foreign currency translation adjustment................................................. (2,041) (2,041)
-------- -------------
Total stockholders' equity (deficit).................................................. (5,160) 7,936
-------- -------------
Total capitalization.................................................................... $ 7,843 $ 8,354
-------- -------------
-------- -------------
</TABLE>
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<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 7/8
Low Price............................................. 1/8 9/64 11/32 3/8
</TABLE>
<TABLE>
<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
</TABLE>
<TABLE>
<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
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
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. The existing credit agreements between WESAC and the
Company contain a covenant restricting the Company's ability to pay dividends on
its Common Stock, and the 1998 Credit Agreement contains a substantially similar
covenant.
35
<PAGE>
SUMMARY FINANCIAL INFORMATION
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996 1996(1) 1995(1) 1994(1) 1993(1) 1992(1)
------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
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 affects the
comparability of certain information. (See Note 3 to Consolidated Financial
Statements.)
36
<PAGE>
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.
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------------------------------
9/30/97
HISTORICAL RIGHTS WESAC DEBT PRO FORMA
STATEMENTS OFFERING(A) CONVERSION(B) RESULTS
---------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 438 $ 284 $ 722
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..................................... 21,286 511 21,797
Property, plant, and equipment, net........................... 4,601 4,601
Other assets.................................................. 1,208 1,208
---------- ----------- ---------
Total Current Assets..................................... $ 27,095 $ 511 $ 27,606
---------- ----------- ---------
---------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable............................................... 1,102 1,102
Accounts payable............................................ 7,442 7,442
Accrued payroll and payroll related liabilities............. 1,362 1,362
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 1,935 9,796 102,565
Accumulated deficit......................................... (94,129) (94,129 )
Foreign currency translation adjustment..................... (2,041) (2,041 )
---------- ----------- ------------- ---------
Total stockholders' equity (deficit)..................... (5,160) 2,211 10,885 7,936
---------- ----------- ------------- ---------
Total liabilities and stockholders' equity (deficit).......... $ 27,095 $ 511 $ 27,606
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
37
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(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....................................... (500)
-------
Net cash proceeds........................................................ $2,211
-------
-------
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........................................................ (500)
-------
Net increase in stockholders' equity..................................... $2,211
-------
-------
</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.
<TABLE>
<S> <C>
Net Cash Proceeds................................................................................... $2,211
Repayment of SVB borrowings......................................................................... (1,700)
Restricted Cash to replace letters of credit........................................................ (227)
-------
Cash and cash equivalents........................................................................... $ 284
-------
-------
</TABLE>
(b) Debt Restructuring
Represents the impact of the WESAC Debt Conversion, which is expected to be
consummated on or about April 15, 1998, assuming the Restructuring Plan is
approved.
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.
38
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN $ THOUSANDS 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 $36,346
Rental, service and other........... 4,818 4,818 6,705 6,705
---------- --------- ---------- ---------
37,548 37,548 43,051 43,051
COSTS AND EXPENSES:
Cost of revenues
Product sales.................... 26,313 26,313 32,685 32,685
Rental, service and other........ 3,359 3,359 6,412 6,412
Selling, general and
administrative................... 9,023 9,023 16,769 16,769
Restructuring and other
intangibles...................... -- -- 130 130
---------- --------- ---------- ---------
38,695 38,695 55,996 55,996
Operating profit/(loss)............... (1,147) (1,147) (12,945) (12,945)
OTHER INCOME (EXPENSE):
Interest income..................... 79 79 407 407
Interest expense (a)................ (1,366) 1,071 (295) (1,663) 1,218 (445)
Other income (expense).............. (11) 468 468
---------- ------------ --------- ---------- ------------ ---------
(11)
Loss before taxes..................... (2,445) 1,071 (1,374) (13,733) 1,218 (12,515)
Benefit for income taxes.............. (2,924) (2,924)
---------- ------------ --------- ---------- ------------ ---------
Net Loss.............................. ($ 2,445) $1,071 (1,374) ($10,809) $1,218 ($9,591)
---------- ------------ --------- ---------- ------------ ---------
---------- ------------ --------- ---------- ------------ ---------
Net loss per share.................... ($ 1.39) ($ 0.09) ($ 6.12) ($ 0.59)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Average common shares outstanding..... 1,765 16,137 1,765 16,137
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</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.
See accompanying notes to pro forma consolidated financial statements.
39
<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 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.
40
<PAGE>
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 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.
41
<PAGE>
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 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.
42
<PAGE>
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.
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 Clean Air Act 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 will be approximately $11,606,000 (including interest)
as of March 31, 1998 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. See 'PLAN OF FINANCIAL RESTRUCTURING--1998 Credit
Agreement.'
43
<PAGE>
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
foregoing obligations, together with accrued and unpaid interest thereon, are
currently outstanding and constitute the Conversion Debt. Pursuant to the
Restructuring Agreement, the Company's right to make further borrowings under
the 1996 Line of Credit will be terminated.
1998 CREDIT AGREEMENT
In connection with the Restructuring Plan, the Wexford Funds have agreed,
pursuant to the 1998 Credit Agreement, to make available to the Company a
$3,000,000 line of credit (the 'Tranche A Line') until the Closing Date. Any
borrowings by the Company under the Tranche A Line (the 'Tranche A Loans') will
be due and payable upon the Closing Date 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.'
On the Closing Date, 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 1998 Credit
Agreement 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 the Chase Facility on or after January 30,
1998, the Company's availability under the Tranche A Line (prior to the Closing
Date) or the Tranche B Line (after the Closing Date) will be reduced dollar for
dollar by the amount of such borrowings. The Company anticipates that it will
need to draw $2.5 million as Tranche A Loans prior to the Closing Date.
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 December 1997, the Chase
Facility was increased to a total of $5.5 million. In November 1997, the Company
borrowed an additional $400,000 for working capital and, in December, drew an
additional $500,000 bringing total cash borrowings under the Chase Facility to
$2.65 million at December 31, 1997. 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
annual 9.5%. Under the Chase Facility, the Company may also request that Chase
issue letters of credit for the benefit of the Company, which Chase may issue in
its sole discretion. At December 31, 1997, Chase had issued approximately $2.8
million of letters of credit for the benefit of the Company. Letters of credit
issued under the Chase Facility do not reduce availability under the Tranche A
Line or the Tranche B Line. 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 1998 Credit Agreement, 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--
1998 Credit Agreement.'
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, which will become effective as a result of the
Restructuring Plan. At the request of the Company, to reduce overall transaction
expenses, the WESAC Debt Conversion will occur after the Rights Offering and the
Reverse Stock Split. As a result, the Company and Wexford agreed to apply the
anti-dilution formula contained in the Warrants as if the WESAC Debt Conversion
occurred as part of the Rights Offering. The adjustments to the exercise price
and the number of such warrants are dependent on the average market price for
the Common Stock for the 30 trading days prior to the commencement of the Rights
Offering. Because
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the market price of the Common Stock at a future time cannot be known at this
time, the Company cannot now determine the adjustments to the exercise price and
number of such warrants. After the Reverse Stock Split, the exercise price of
such warrants will be multiplied by ten (10) and the number of warrants will be
divided by ten (10).
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/Proxy Statement, 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.'
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 pre-split shares, equal to 54,975 post-split shares,
for an implicit price per share of $0.1819 pre-split or $1.819 post-split
represented a fair and reasonable fee for providing the Stand-by Commitment. In
determining how to value the shares of Common Stock to be issued to the Stand-by
Purchasers, the Board used a weighted average formula, which assumed a Public
Stockholder fully exercised his or its 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). That formula produced the following result, eight
shares at $.80 plus one at $.8375, for nine shares for a total of $1.6375 or
$.1819 per share pre-split, which was the per-share valuation for the Common
Stock to be issued to the Stand-by Purchasers as their fee.
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.
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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.
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 Bachmann 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.
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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
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 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.
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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. The Company has a joint marketing agreement for SNRS with Nalco
Fueltech, a leading player in the supply of SNCR systems.
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
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
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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 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.
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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
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, Teddington and WEP Ltd. 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 450 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.
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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.
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.
Recent problems in Southeast Asian markets will have some negative effects on
sales of the Company's products to that region.
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.
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,
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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.
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 $360,000 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 $227,000.
The Company believes that its facilities are adequate for its current
operations.
52
<PAGE>
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, 61, has served as Senior Vice President, Sales and
Marketing, 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 each year at
the first meeting following the Annual 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.
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 $100,000 in 1996 and who were serving at the end of the
1996 fiscal year, for services rendered in all capacities to the Company and its
subsidiaries:
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION ----------------------------
------------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(2) (NO. OF SH.) ($)
- -------------------------------------- ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
C. Stephen Beal(1) 1996 212,497 -0- -0- -0- 307(3)
President and Chief 1995 186,117 -0- 145,282 529,470 348
Executive Officer 1994 147,220 -0- 46,808 -0- 731
James J. Ferrigan 1996 158,089 -0- -0- 15,008 1,663(4)
Senior Vice President of 1995 162,081 -0- -0- 175,000 3,703
NOx Technologies, Wahlco, Inc. 1994 206,347 -0- -0- -0- 2,687
(resigned December 1997)
Barry J. Southam 1996 181,553 -0- -0- 15,525 4,696(5)
Senior Vice President of 1995 154,248 -0- 39,813 200,000 4,995
Sales & Marketing (Wahlco, Inc.) 1994 150,136 -0- -0- -0- 3,930
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION ----------------------------
------------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(2) (NO. OF SH.) ($)
- -------------------------------------- ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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 Management LLC, an affiliate of WESAC. The
Agreement initially provided for payment to Wexford of 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.
54
<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>
INDIVIDUAL
-------------------------------------------------------------- POTENTIAL REALIZABLE VALUE
GRANTS AT ASSUMED ANNUAL RATES OF
NUMBER OF % OF OPTIONS GRANT STOCK PRICE-APPRECIATION FOR
SHARES GRANTED TO DATE OPTION TERM(3)
UNDERLYING EMPLOYEES EXERCISE MARKET EXPIRATION ----------------------------
NAME OPTIONS IN 1996 PRICE VALUE DATE 0% 5% 10%
- ------------------------- ---------- ------------ -------- ------ ---------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C. Stephen Beal.......... None
James J. Ferrigan........ 15,008(1) 5.92% $ 0.49 $1.00 06/01/06 $7,654 $16,888 $30,938
Barry J. Southam......... 15,525(1) 6.12% $ 0.49 $1.00 06/01/06 $7,918 $17,469 $32,004
A. Noel DeWinter......... 9,500(1) 3.75% $ 0.49 $1.00 06/01/06 $4,845 $10,689 $19,583
Mark L. Plaumann......... 50,000(2) 19.72% $ 0.49 $0.375 08/02/06 N/A $ 6,041 $24,133
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.
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.
55
<PAGE>
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 VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR 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 Prospectus/Proxy Statement, 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 to Mr. Beal's, 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.
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.
56
<PAGE>
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 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 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.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED (2) CLASS
- --------------------------------------------------------------------------- ---------------------- ----------
<S> <C> <C>
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%
</TABLE>
- ------------------
* 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.
(Footnotes continued on next page)
57
<PAGE>
(Footnotes continued from previous page)
(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 Mr.
Hemsley's two 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 December 31, 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 December 31, 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 December 31, 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 December 31, 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 December 31, 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 December
31, 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
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 December 31,
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:
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE OF OUTSTANDING
NAME OF SHAREHOLDER WESAC HELD WESAC SHARES
- ------------------------------------------------------------------------- ---------- -------------------------
<S> <C> <C>
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%
</TABLE>
58
<PAGE>
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 Act, or the Exchange Act, that might incorporate future
filings, including this Prospectus/Proxy Statement 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 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.
The Compensation Committee: Maarten D. Hemsley, Paul H. Hunn and David R.
A. Steadman.
59
<PAGE>
[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.
60
<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 Prospectus/Proxy Statement,
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 L.L.C., 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 Prospectus/Proxy Statement. 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 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, which
will become effective as a result of the Restructuring Plan. At the request of
the Company, to reduce overall transaction expenses, the WESAC Debt Conversion
will occur after the Rights Offering and the Reverse Stock Split. As a result,
the Company and Wexford agreed to apply the anti-dilution formula contained in
the Warrants as if the WESAC Debt Conversion occurred as part of the Rights
Offering. The adjustments to the exercise price and the number of warrants are
dependent on the market price for the Common Stock for the 30 trading days prior
to the commencement of the Rights Offering. Because the market price of the
Common Stock at a future time cannot be known at this time, the Company cannot
now determine the adjustments to the exercise price and the number of such
warrants. After the Reverse Stock Split, the exercise price of such warrants
will be multiplied by ten (10) and the number of warrants will be divided by ten
(10).
61
<PAGE>
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 anti-dilution provisions in these warrants that
come into effect in the event that the Company sells shares of Common Stock at a
price below the $2.29 warrant exercise price, both the Rights Offering and the
Debt Conversion will cause a reduction in the per-share warrant exercise price
and an increase in the shares subject to the warrants. Accordingly, after the
Rights Offering, Reverse Stock Split and Debt Conversion have been completed,
the warrants will entitle the holder to purchase 117,751 shares of Common Stock
at $3.39 per share.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Rights Offering, the Reverse Stock Split, and the
WESAC Debt Conversion, there will be 16,137,000 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.
Of the 16,137,000 shares of Common Stock to be outstanding upon the
completion of the Rights Offering, the Reverse Stock Split and the WESAC Debt
Conversion, 13,032,000 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 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
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.
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 of 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 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 Company and
the Securities and the Rights in the Common Stock, 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.
62
<PAGE>
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
F-1
<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
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
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.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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 intangible write-downs............................... 130 (590) 6,213
Goodwill amortization and write-downs........................................ -- 2,535 51,121
-------- -------- --------
$ 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.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN RETAINED EARNINGS FOREIGN CURRENCY TOTAL
------------------- EXCESS OF PAR (ACCUMULATED TRANSLATION STOCKHOLDERS'
(DEFICIT) SHARES AMOUNT VALUE DEFICIT) ADJUSTMENT EQUITY
---------- ------ ------------- ----------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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, 1996....... 17,649,000 $176 $90,735 $ (91,684) $ (2,047) $(2,820)
---------- ------ ------------- ----------------- ------- -------------
---------- ------ ------------- ----------------- ------- -------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
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.
F-6
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
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
Corp. ('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.
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.
F-7
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
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. A s 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 the 1998 Credit Agreement, 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.
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.
F-8
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
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.
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:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements.................................... 5 to 35 years
Machinery and equipment....................................... 3 to 15 years
</TABLE>
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
F-9
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
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.
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
F-10
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
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.
2. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
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
-------- --------
-------- --------
</TABLE>
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.
F-11
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. DISPOSALS OF SUBSIDIARIES--(CONTINUED)
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.
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
---- ------ -------
<S> <C> <C> <C>
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
</TABLE>
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.
F-12
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
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
<TABLE>
<CAPTION>
PRIOR TO AFTER
CONVERSION CONVERSION
---------- ----------
<S> <C> <C>
Long-term debt............................................................ $ 12,145 $7,145
Stockholders' equity...................................................... $ (2,820) $2,180
</TABLE>
F-13
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. LINES OF CREDIT AND CAPITAL RESTRUCTURING PLAN--(CONTINUED)
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, will be
adequate to fund the Company's operations during 1997. 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.
Selected data, with respect to the SVB facility and the former line of
credit, is shown below:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
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
------- ------
------- ------
</TABLE>
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.
F-14
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. LONG-TERM DEBT--(CONTINUED)
Principal payments due on long-term debt for the years subsequent to
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997....................................... $ 228
1998....................................... 11,812
1999....................................... 237
2000....................................... 96
-------
Total...................................... $12,373
-------
-------
</TABLE>
8. INCOME TAXES
The benefit from income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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)
------- ------- -------
------- ------- -------
</TABLE>
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>
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.
F-15
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. INCOME TAXES--(CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS 1996 1995
- ----------------------------------------------------------------------------------- ------- -------
<S> <C> <C>
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)
------- -------
------- -------
</TABLE>
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:
<TABLE>
<S> <C>
1997....................................................................... $1,145
1998....................................................................... 1,111
1999....................................................................... 1,124
2000....................................................................... 1,135
2001....................................................................... 774
------
Total...................................................................... $5,289
------
------
</TABLE>
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 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).
F-16
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
Information with respect to the Amended Plan follows:
<TABLE>
<CAPTION>
RIGHTS AND
OPTIONS NUMBER OF
AVAILABLE FOR NUMBER OF RIGHTS STOCK OPTION
ISSUANCE RIGHTS 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....................................... -- -- 2,069,920 0.49-2.50
Canceled...................................... (124,60 ) -- -- --
------------- --------- ----------- --------- ----------
Outstanding at December 31, 1995.............. 94,520 442,910 $4.50-13.00 2,109,920 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 2,234,356 $0.49-7.25
------------- --------- ----------- --------- ----------
------------- --------- ----------- --------- ----------
Exercisable................................... 297,400 $4.50-13.00 1,716,417 $0.49-7.25
------------- --------- ----------- --------- ----------
------------- --------- ----------- --------- ----------
</TABLE>
F-17
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. STOCK-BASED COMPENSATION PLAN--(CONTINUED)
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.
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
-------------------- -------------------- -----------------
WTD AVG WTD AVG WTD AVG
SHARES EX SHARES EX SHARES EX
(000) PRICE (000) PRICE (000) 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.
F-18
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. BUSINESS SEGMENT, GEOGRAPHIC AREA AND MAJOR CUSTOMER
INFORMATION--(CONTINUED)
The following table shows financial information by geographic area. 'Other'
consists principally of Canada and Australia:
<TABLE>
<CAPTION>
UNITED STATES EUROPE OTHER TOTALS
------------- ------- ------- --------
<S> <C> <C> <C> <C>
1996
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
</TABLE>
Export sales were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
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.
F-19
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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) $(0.03)
Second.................................................. 14,459 2,587 (2,810) (0.16)
Third................................................... 14,556 2,927 111 0.01
Fourth.................................................. 15,177 (645) (8,136) (0.46)
------- ------------ ----------------- ----------
Total................................................... $60,100 $8,580 $ (11,352) $(0.64)
------- ------------ ----------------- ----------
------- ------------ ----------------- ----------
</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).
F-20
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
WAHLCO ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
ADDITIONS
------------------------------
CHARGED TO CHARGED TO OTHER
BALANCE AT COSTS AND ACCOUNTS -- DEDUCTIONS -- BALANCE AT END
BEGINNING OF 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.
FINANCIAL STATEMENTS INCORPORATED BY REFERENCE
The Company hereby incorporates by reference the financial statements
contained in its reports on Forms 10-Q for the quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997.
F-21
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 1,000
NYSE fee...................................................... 105,000
Printing/Distribution......................................... 20,000
Accountants' fees and expenses................................ 40,000
Legal fees.................................................... 180,000
ChaseMellon - Transfer agent.................................. 40,000
Wexford fee (cash)............................................ 100,000
Stand-by Purchaser fee (stock)................................ 100,000
Morgan Walke (public relations)............................... 14,000
--------
Total.................................................... $600,000
--------
--------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Insofar as indemnification for liabilities arising under the Act 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 Act, 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.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 -- Restructuring Agreement, dated as of January 30, 1998, among the Company, WESAC, the other parties
named therein and Wexford Management LLC, as Agent
2.1 -- Restructuring Agreement (see item 1.1 above)
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 January 30, 1998, among the Company, as
Borrower, the Lenders and the Individual 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.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C>
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
10.193 -- WAHLCO Environmental Systems, Inc. 1996 Employee Stock Option Plan
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Ernst & Young LLP
</TABLE>
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:
(i) To include any prospectus required by Section 10(a)(3) of the
Act;
(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 Act, 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 Act
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 Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the 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 Act and will be governed by the
final adjudication of such issue.
(6) For determining any liability under the Act 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 Act as part of this registration statement as of the time the
Commission declared it effective.
(7) For determining any liability under the Act, 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 set forth on
the cover page of the prospectus, a post-effective amendment will be filed
to set forth the terms of such offering.
II-2
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA
ANA, STATE OF CALIFORNIA ON THIS THE 4TH DAY OF FEBRUARY, 1998.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------ --------------------------
<S> <C> <C>
/s/ C. STEPHEN BEAL President, Chief Executive Officer February 4, 1998
- ------------------------------------------ and Director
C. Stephen Beal
/s/ A. NOEL DEWINTER * Vice President and Chief Financial February 4, 1998
- ------------------------------------------ Officer
A. Noel DeWinter
/s/ MAARTEN D. HEMSLEY * Director February 4, 1998
- ------------------------------------------
Maarten D. Hemsley,
Director
- ------------------------------------------
Paul H. Hunn,
/s/ MARK L. PLAUMANN * Director February 4, 1998
- ------------------------------------------
Mark L. Plaumann,
/s/ DAVID R. A. STEADMAN * Director February 4, 1998
- ------------------------------------------
David R. A. Steadman,
</TABLE>
- ------------------
* Executed by C. Stephen Beal on behalf of signatory pursuant to a power of
attorney dated December 19, 1997.
II-3
<PAGE>
PROXY WAHLCO ENVIRONMENTAL SYSTEMS, INC.
SPECIAL MEETING OF STOCKHOLDERS ON
MARCH 2, 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 Prospectus/Proxy Statement dated February 2, 1998 in
connection with the Special Meeting of Stockholders of the Company to be held on
March 2, 1998 at 9:00 a.m. local time at Wexford Plaza, 411 West Putnam Avenue,
Greenwich, Connecticut 06830, 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 Prospectus/Proxy Statement.
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 1996 Stock Option Plan.
/ / FOR / / AGAINST / / ABSTAIN
PROPOSAL 2. Approval of (a) amendments to the Certificate of Incorporation
to increase and then to decrease the shares authorized for issuance by the
Company; and (b) Reverse Stock Split.
/ / FOR / / AGAINST / / ABSTAIN
PROPOSAL 3. Approval of the issuance of Common Stock to implement the
Rights Offering and the Wexford Debt Conversion.
/ / FOR / / AGAINST / / ABSTAIN
PROPOSAL 4. Approval of transactions with WESAC.
/ / FOR / / AGAINST / / ABSTAIN
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>
THIS RESTRUCTURING AGREEMENT, dated as of January 30, 1998 (this
"Restructuring Agreement"), is entered into by and among WAHLCO
ENVIRONMENTAL SYSTEMS, INC., a Delaware corporation (the "Company"), and
WES ACQUISITION CORP., a Delaware corporation ("WESAC"); WEXFORD MANAGEMENT
LLC, a Connecticut limited liability company ("Wexford Management");
WEXFORD CAPITAL PARTNERS II, L.P., a Delaware limited partnership ("Capital
Partners"); WEXFORD OVERSEAS PARTNERS I, L.P., a Delaware limited
partnership ("Overseas Partners"); WEXFORD SPECIAL SITUATIONS 1996, L.P., a
Delaware limited partnership ("Wexford Special Situations"); WEXFORD
SPECIAL SITUATIONS 1996 INSTITUTIONAL, L.P., a Delaware limited partnership
("Wexford Special Institutional"); WEXFORD SPECIAL SITUATIONS 1996 LIMITED,
a Cayman Islands exempted company partnership ("Wexford Special Limited",
and WEXFORD-EURIS SPECIAL SITUATIONS 1996, L.P., a Delaware limited
partnership ("Wexford Euris"); C. Stephen Beal, an individual, Henry N.
Huta, an individual, Maarten Hemsley, an individual, Deborah Louise
Hemsley-Schultz, an individual, and Rebecca Hemsley, an individual (each,
an "Individual Party," and collectively, the "Individual Parties").
RECITALS
A. The Company has experienced losses for each of the past six
years and as of September 30, 1997, the consolidated stockholders' equity
of the Company was approximately negative $5.2 million.
B. The Wexford Funds have been the principal sources of working
capital and loans to the Company since May 1995.
C. In order to improve the financial condition of the Company, the
Company has devised the Restructuring Plan, which contemplates the Rights
Offering, the Silicon Valley Bank Repayment, the WESAC Debt Conversion, the
New 1998 Credit Agreement, the Reverse Stock Split, the Funding Debt
Conversion and the WESAC Liquidation.
D. The parties acknowledge that the consummation of each
constituent transaction in the Restructuring Plan is contingent upon the
consummation of each other constituent transaction.
E. Approval of certain of the constituent transactions in the
Restructuring Plan requires the approval of the stockholders of the
Company, and the Reverse Stock Split requires the approval of the New York
Stock Exchange.
F. The Restructuring Plan has been approved by the board of
directors of the Company as being in the best interests of the Company and
its stockholders, and the board of directors has recommended approval by
the stockholders of the Company of each constituent transaction that
requires stockholder approval.
G. On the terms and subject to the conditions contained herein,
the parties desire to implement the Restructuring Plan.
1. Definitions.
1.1. "Agent" mean Wexford Management, in its capacity as agent for the
lenders pursuant to the 1998 Credit Agreement.
1.2. "Average Closing Price" means the average of the closing price for the
Company's Common Stock on the New York Stock Exchange for the 20 trading
days prior to the effective date of the Reverse Stock Split.
1.3. "Basic Subscription Privilege" has the meaning assigned to such term
in Section 2.1(c) hereof.
1.4. "Capital Partners" has the meaning assigned to such term in the
recitals to this Restructuring Agreement.
1.5. "Capital Stock" shall mean any class or series of capital stock of the
Company.
1.6. "Closing Date" is that date on which all of the transactions
contemplated by this Restructuring Agreement, other than the Rights
Offering, the Reverse Stock Split and the WESAC Liquidation are
simultaneously consummated, at a closing to be held on April 15, 1998 at
10:00 a.m. at a location to be designated by Wexford or at such other time
as the parties hereto shall agree.
1.7. "Company" means Wahlco Environmental Systems, Inc., a Delaware
corporation.
1.8. "Conversion Debt" means the aggregate sum of approximately $11,606,000
million, which the Company will owe to WESAC as of March 31, 1998, together
with interest accruing thereon after such date at the rate of approximately
$125,000 per month through the Closing Date.
1.9. "Cross-Receipt" means a cross-receipt in form and substance
satisfactory to the Agents, by which the Company certifies to the Agent
that the Restructuring Conditions have been duly met.
1.10. "Governmental Authority" means any national, state or local
government (whether domestic or foreign), any political subdivision thereof
or any other governmental, quasi-governmental, judicial, public or
statutory instrumentality, authority, body, agency, bureau or entity
(including any arbitrator with authority to bind a party at law).
1.11. [Intentionally omitted.]
1.12. "Liquidation Plan" means the Plan of Liquidation adopted by the board
of directors and approved by the stockholders and creditors of WESAC, in
substantially the form of Exhibit A attached hereto.
1.13. "1998 Credit Agreement" means that certain Amended and Restated
Credit Agreement dated as of January 30, 1998, in the form attached hereto
as Exhibit B among the Company, the parties named as Lenders therein, and
Wexford Management, as Agent.
1.14. "1998 Loan Documents" means each document or agreement required to be
executed and delivered in connection with the execution and delivery of the
1998 Credit Agreement.
1.15. "Overseas Partners" has the meaning assigned to such term in the
recitals to this Restructuring Agreement.
1.16. "Oversubscription Privilege" has the meaning assigned to such term in
Section 2.3 hereof.
1.17. "Permitted Investments" means (a) direct obligations of the United
States of America (including obligations issued or held in book-entry form
on the books of the Department of the Treasury of the United States of
America) or obligations the timely payment of the principal of, or interest
on, which are fully guaranteed by the United States of America; (b)
obligations, debentures, notes or other evidence of indebtedness issued or
guaranteed by any of the following: Export-Import Bank of the United
States, Federal Housing Administration or other agency or instrumentality
of the United States; (c) repurchase agreements with financial institutions
or savings and loan associations having a combined capital surplus of at
least $500,000,000 fully secured by collateral security described in
clauses (a) or (b) of this definition and continuously having a market
value of at least equal to the amount so invested; (d) interest-bearing
demand or time deposits (including certificates of deposit) which are
either (i) insured by the Federal Deposit Insurance Corporation, or (ii)
held in banks and savings and loan associations, having general obligations
rated at least "AA" or equivalent by S&P or Moody's, or if not so rated,
secured at all times, in the manner and to the extent provided by law, by
collateral security described in clauses (a) or (b) of this definition, of
a market value of no less than the amount of moneys so invested; (e)
commercial paper rated (on the date of acquisition thereof) at least A-1 or
P-1 or equivalent by S&P or Moody's, respectively (or an equivalent rating
by another nationally recognized credit rating agency of similar standing
if neither of such corporations is then in the business of rating
commercial paper), maturing not more than 90 days from the date of creation
thereof; and (f) any corporate evidence of indebtedness rated at least "A-"
or equivalent by S&P or Moody's, maturing not more than 90 days from the
date of creation thereof.
1.18. "Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association,
corporation, institution, public benefit corporation, entity or government
(whether federal, state, county, city, municipal or otherwise, including,
without limitation, any instrumentality, division, agency, body or
department thereof).
1.19. "Post-Split Common Stock" means the Common Stock of the Company after
giving effect to the Reverse Stock Split.
1.20. "Pre-Split Common Stock" means the Common Stock of the Company before
giving effect to the Reverse Stock Split.
1.21. "Proposal 2" means that proposal to the Stockholders of the Company
set forth in the Prospectus/Proxy Statement whereby the Stockholders
approve two amendments to the Company's Certificate of Incorporation, which
approval is a condition precedent to the Rights Offering and the Reverse
Stock Split.
1.22. "Proposal 3" means that proposal to the Stockholders of the Company
set forth in the Prospectus/Proxy Statement whereby the Stockholders
authorize the Company to issue and sell additional shares of Post-Split
Common Stock in order to effect the Rights Offering and the Funding Debt
Conversion.
1.23. "Prospectus/Proxy Statement" means the combined Registration
Statement on Form S-1 and Proxy Statement filed pursuant to Rule 14a-6, of
the Company as filed with the Securities and Exchange Commission ("SEC") on
December 19, 1997 and amended on February 4, 1998.
1.24. "Restructuring Plan" means the plan of financial restructuring
devised by the Company in order to improve its financial condition, and
which contemplates the Rights Offering, the Silicon Valley Bank Repayment,
the WESAC Debt Conversion, the 1998 Credit Agreement, the Reverse Stock
Split, and the WESAC Liquidation.
1.25. "Reverse Stock Split" means the 1-for-10 reverse stock split which
the Company intends to effect with respect to its Common Stock after
completion of the Rights Offering.
1.26. "Rights" has the meaning assigned to such term in Section 2.1(a)
hereof.
1.27. "Rights Certificates" has the meaning assigned to such term in
Section 2.1(a) hereof.
1.28. "Rights Holders" means has the meaning assigned to such term in
Section 2.1 hereof.
1.29. "Rights Offering" means the offer to existing stockholders of the
Company (other than WESAC) of rights to purchase an aggregate of 27,112,000
shares of the Pre-Split Common Stock at an exercise price of $.10 per
share.
1.30. "Rights Record Date" means March 3, 1998.
1.31. "SEC Documents" means the Prospectus/Proxy Statement in final form
and all exhibits filed together therewith.
1.32. "Silicon Valley Bank Repayment" means the repayment by the Company
from the proceeds of the Rights Offering of all cash borrowings for loans
under the SVB Facility and the deposit of cash collateral for all
outstanding letters of credit issued by SVB pursuant to the SVB Facility.
1.33. "Special Meeting" means the special meeting of stockholders of the
Company to be held on March 2, 1998, or such later date to which such
special meeting may be adjourned.
1.34. "Stand-By Commitment" has the meaning assigned to such term in
Section 2.1(d) hereof.
1.35. "Stand-By Commitment Fee" means a fee of $100,000, payable in 549,752
shares of Pre-Split Common Stock. -----------------------
1.36. "Stand-By Purchasers" means Capital Partners and Overseas Partners,
in their capacity as purchasers of unsubscribed shares of Pre-Split Common
Stock in the Rights Offering.
1.37. "Subscription Agent" means ChaseMellon Shareholder Services LLC as
the Company's transfer agent and as subscription agent for the Rights
Offering.
1.38. "Subscription Price" means $.10 per share of Pre-Split Common Stock.
1.39. "SVB" means Silicon Valley Bank.
1.40. "SVB Facility" means the Amendment and Forbearance Agreement, dated
as of May 9, 1996, between SVB and the Company, as amended to date, and the
"Loan Agreements" (as defined therein) as modified thereby.
1.41. "Tranche A Line" means the commitment by the Lenders under the 1998
Credit Agreement to lend the Company an aggregate principal amount of up to
$3,000,000 from time to time prior to the Closing Date under this
Restructuring Agreement. To the extent not prepaid from proceeds of the
Rights Offering, the unpaid principal balance of the Tranche A Line shall
have a scheduled maturity date of December 31, 2000, shall bear interest
and shall be governed by the terms and conditions of the 1998 Credit
Agreement.
1.42. "Tranche B Line" means the commitment by the Lenders under the 1998
Credit Agreement to lend the Company an aggregate principal amount of up to
$2,500,000 from time to time after the Closing Date under this
Restructuring Agreement to fund the Company's working capital needs.
1.43. "Transaction Documents" means all of the agreements among the several
parties hereto, which are intended to effect and consummate the
transactions contemplated by this Restructuring Agreement.
1.44. "Unsubscribed Shares" means any shares of Pre-Split Common Stock
offered in the Rights Offering and not purchased through exercise of the
Basic Subscription Privilege or the Oversubscription Privilege.
1.45. "WESAC" means WES Acquisition Corp., a Delaware corporation.
1.46. "WESAC Debt Liquidation" has the meaning assigned to such term in
Section 2.2 hereof.
1.47. "WESAC Lenders" means each of Capital Partners, Overseas Partners,
the Wexford 1996 Funds, C. Stephen Beal, Henry Huta and Maarten Hemsley, in
each case in such party's capacity as a lender to WESAC.
1.48. "WESAC Liquidation" means the liquidation of WESAC pursuant to the
Liquidation Plan, which will become effective on the Closing Date by the
execution, delivery and filing with the Secretary of State of Delaware of a
Certificate of Liquidation substantially in the form attached to the
Liquidation Plan as Annex 1.
1.49. "Wexford Funds" means the Wexford 1995 Funds and the Wexford 1996
Funds, collectively.
1.50. "Wexford Fee" shall have the meaning assigned to such term in Section
5.5(g) hereof.
1.51. "Wexford 1995 Funds" means Capital Partners and Overseas Partners,
collectively.
1.52. "Wexford 1996 Funds" means Wexford Special Situations, Wexford
Special Institutional, Wexford Special Limited and Wexford Euris,
collectively.
1.53. "Wexford Parties" means WESAC, the Wexford 1995 Funds, the Wexford
1996 Funds and Wexford Management, collectively.
2. THE RESTRUCTURING PLAN
2.1. Rights Offering. Set forth below are the principal terms and
conditions of the Rights Offering. In addition to the terms and conditions
set forth below, the Rights Offering will be conducted on the terms and
conditions contained in the Prospectus/Proxy Statement under the heading
"THE RIGHTS OFFERING," which additional terms and conditions are hereby
incorporated by reference as if set forth herein in full; provided,
however, that in the event of any inconsistency between the terms of this
Agreement and the provisions of the Prospectus/Proxy Statement, the terms
of this Agreement shall control.
(a) Distribution of Rights. After upon approval of Proposal 2 and Proposal
3 at the Special Meeting, the Company shall distribute to the stockholders
of record (other than WESAC) on the Rights Record Date (such recipients or
their transferees being hereinafter referred to as the "Rights Holders"),
eight (8) rights, each exercisable to purchase, on the terms and conditions
hereinafter set forth, one share of Pre-Split Common Stock (the "Rights")
at a price of $.10 per share (the "Subscription Price") for each share of
Pre-Split Common Stock held by such Rights Holder on the Rights Record
Date. The Rights shall be (i) evidenced by transferable rights certificates
(the "Rights Certificates"), and (ii) distributed at no cost to the Rights
Holders.
(b) Expiration of Rights. The Rights will expire on the 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.
(c) Subscription Privileges. Each Rights Holder is entitled to subscribe
for all or any portion of the shares of Pre-Split Common Stock that may be
purchased upon exercise of the Rights (the "Basic Subscription Privilege").
Each Right also entitles the Rights Holder to oversubscribe for any shares
not sold to Rights Holders exercising the Basic Subscription Privilege, not
to exceed one additional share of Pre-Split Common Stock for each share of
Pre-Split Common Stock purchased under the Basic Subscription Privilege
(the "Oversubscription Privilege"). Only Rights Holders who exercise Rights
under the Basic Subscription Privilege will be entitled to exercise the
Oversubscription Privilege. If the shares of Pre-Split Common Stock not
subscribed for by Rights Holders through exercise of 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 Pre-Split Common Stock each oversubscribing Rights Holder has
subscribed for under the Basic Subscription Privilege.
(d) Stand-By Commitment. On the terms and conditions of this Restructuring
Agreement and this Section 2.1(d), the Stand-By Purchasers agree, severally
and not jointly, to purchase all of the Unsubscribed Shares on the Closing
Date, at the Exercise Price (the "Stand-By Commitment"). Pursuant to the
Stand-By Commitment, Capital Partners shall purchase 70% of the
Unsubscribed Shares and Overseas Partners shall purchase 30% of the
Unsubscribed Shares. At least five days prior to the Closing Date, the
Company shall notify each Stand-By Purchaser of the number of shares to be
purchased by it hereunder and shall identify the bank account into which
the purchase price shall be paid. On the Closing Date, against payment of
the applicable purchase price by wire transfer of immediately available
funds to the bank account designated by the Company, the Company shall
deliver to each Stand-By Purchaser one or more stock certificates
representing the number of shares of Pre-Split Common Stock purchased by
such Stand-By Purchaser hereunder. As compensation for providing the
Stand-By Commitment, on the Closing Date, the Company shall pay the
Stand-By Purchasers the Stand-By Commitment Fee.
2.2. WESAC Debt Conversion. On the Closing Date, WESAC agrees to convert
the Conversion Debt into approximately 11,606,000 shares of Post-Split
Common Stock (the "WESAC Debt Conversion"). On the Closing Date, WESAC will
deliver to the Company the notes and instruments evidencing the Conversion
Debt identified in the definition of such term in this Restructuring
Agreement, and upon issuance of the shares of Post-Split Common Stock to be
delivered to WESAC hereunder, each such note or instrument evidencing the
Conversion Debt shall be marked "canceled;" provided, however, that in the
event any note or instrument evidencing any obligation constituting
Conversion Debt shall be lost or unable to be located, WESAC shall execute
and deliver an affidavit of loss and agree to indemnify the Company against
such loss, in which event the Company shall issue such shares of Post-Split
Common Stock to WESAC as if it had delivered the lost or unlocated note or
instrument.
2.3. Reverse Stock Split. Pursuant to the Restructuring Plan, the Company
intends, on the Closing Date, following the completion of the Rights
Offering, but prior to the WESAC Debt Conversion and the WESAC Liquidation,
to effect a one-for-ten reverse stock split, subject to (a) stockholder
approval, and (b) the prior approval of the New York Stock Exchange, which
approvals the Company agrees to seek promptly following the execution and
delivery of this Restructuring Agreement. The Company will not issue any
fractional shares of Post-Split Common Stock after the consummation of the
Reverse Stock Split, but will, in lieu thereof, pay to each stockholder
otherwise entitled to receive a fractional share of Post-Split Common
Stock, cash on a fractional per share basis equal to such fraction
multiplied by the greater of the Subscription Price or the Average Closing
Price.
2.4. 1998 Credit Agreement. Concurrently with the execution and delivery of
this Restructuring Agreement, the Company, and Capital Partners, Overseas
Partners, and each of the Wexford 1996 Funds, as lenders, and Wexford
Management, as agent, shall enter into the 1998 Credit Agreement and shall
execute and deliver each of the 1998 Loan Documents required to be executed
and delivered pursuant to the 1998 Credit Agreement.
2.5. WESAC Liquidation.
(a) On the Closing Date, but after the consummation of the Rights Offering,
the Reverse Stock Split and the WESAC Debt Conversion, WESAC Liquidation
shall be effected pursuant to the Liquidation Plan.
(b) By his or its execution and delivery of this Agreement, each
stockholder and each WESAC Lender hereby ratifies, confirms, adopts and
approves the terms and conditions of the Liquidation Plan. Pursuant to such
Liquidation Plan, WESAC will cease the active conduct of its business and
wind up its affairs and, within the meaning of Section 332 of the Internal
Revenue Code of 1986, as amended, will liquidate and distribute all of its
assets, if any, in complete liquidation, less any assets retained to meet
claims. The Liquidation Plan shall be consummated promptly, but in any
event, within one calendar month following the Closing Date.
(c) Subject to Section 2.5(d) hereof, each party who, pursuant to the
Liquidation Plan, will receive shares of the Common Stock, agrees that he
or it will not sell more than 25,000 shares of Post-Split Common Stock
received by such party pursuant to the Liquidation Plan in any thirty-day
period through regular-way brokers' sales. The execution and delivery of
this Agreement shall constitute the irrevocable consent of each WESAC
Lender to the limitations set forth in this Section 2.5(c).
(d) The shares of Common Stock of the Company distributed pursuant to the
Liquidation Plan shall not have been registered pursuant to the Securities
Act of 1933, as amended (the "Act"). Each stock certificate representing
shares of Common Stock of the Company distributed pursuant to the
Liquidation Plan shall bear a legend restricting its transferability under
the Act. The Company agrees for the benefit of each WESAC Lender who
consents to the limitations set forth in Section 2.5(c) hereof to use its
reasonable best efforts to register the resale of such shares of Common
Stock on Form S-3 within ninety (90) days following the Closing Date, and
to maintain the effectiveness of such registration statement for at least
90 days thereafter. Any WESAC Lender who fails to consent to the
limitations set forth in Section 2.5(c) hereof shall not be entitled to
have any shares of Common Stock owned by him or it registered for resale
hereunder.
2.6. Use of Proceeds. On the Closing Date, the Company shall use the net
proceeds of the Rights Offering as follows: (a) to pay the costs and
expenses of the Restructuring Plan, (b) to make the payments necessary to
effect the Silicon Valley Bank Repayment, (c) to the extent funds are
available therefor, to repay borrowings under the Chase Facility (as
defined in the 1998 Credit Agreement) or outstanding Tranche A Loans, and
(d) for working capital purposes. Pending the Closing Date, the Company
shall invest the proceeds of the Rights Offering in Permitted Investments.
3. REPRESENTATIONS AND WARRANTIES
3.1. Representations and Warranties and of the Company. The Company
represents and warrants to each other party hereto:
(a) Corporate Existence and Standing. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the
State of Delaware. Each subsidiary of the Company is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization. The Company and each subsidiary has all requisite corporate
authority to own its property and to conduct its business in each
jurisdiction in which the character of the properties owned or leased by it
therein or in which the transaction of its business makes such
qualification necessary or is subject to no material liability or
disability by reason of the failure to be so qualified.
(b) Capitalization.
(i) As of the date hereof, the total authorized capitalization of the
Company consists of 10,000,000 shares of preferred stock, none of which are
issued or outstanding, and 50,000,000 shares of common stock, of which
17,649,000 shares are issued and outstanding. All of the outstanding shares
of common stock have been duly and validly issued and are fully paid and
non-assessable.
(ii) Except as required to be disclosed in the SEC Documents, there are no
outstanding subscriptions, warrants, options, calls or commitments of any
character relating to or entitling any person to purchase or otherwise
acquire any of the Capital Stock of the Company or any subsidiary thereof
or any security that is convertible into or exchangeable for such Capital
Stock. Except as disclosed in the SEC Documents, there are no preemptive or
similar rights to subscribe for or to purchase any Capital Stock of the
Company, and, except as disclosed in the SEC Documents, the Company has not
entered into any presently outstanding agreement to register its Capital
Stock or debt securities under the Securities Act of 1933, as amended (the
"Securities Act").
(iii) The shares of Capital Stock to be issued pursuant to the
Restructuring Plan have been duly authorized and, when issued in accordance
with this Agreement and the Prospectus/Proxy Statement, will be validly
issued, fully paid and nonassessable, free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through the Company,
except as set forth in this Restructuring Agreement or by operation of law.
Except as set forth in the SEC Documents, the holders of outstanding
Capital Stock of the Company are not and shall not be entitled to
preemptive or other rights afforded by the Company to subscribe for or to
purchase the Capital Stock or other securities of the Company as a result
of the transactions to be consummated pursuant to the Restructuring Plan.
(c) Authorization and Validity. The Company has the power and authority and
legal right to execute and deliver the Transaction Documents to which it is
a party and to perform its obligations thereunder. The execution and
delivery by the Company of the Transaction Documents and the performance of
its obligations thereunder have been duly authorized by all necessary
corporate action on behalf of the Company and no further consent or
authorization of its board of directors or stockholders is required (other
than such stockholder approval of Proposals 1-3 to the extent set forth in
the Prospectus/Proxy Statement). The Transaction Documents to which it is a
party have been duly and validly executed and delivered by the Company and
constitute legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their respective terms.
(d) No Violation. Neither the execution and delivery by the Company of the
Transaction Documents to which it is a party nor the consummation of the
transactions therein contemplated, nor compliance with the provisions
thereof will (i) violate the Company's or any subsidiary's certificate of
incorporation or by-laws, (ii) violate any judgment, decree, order,
statute, law, regulation or rule of any court or governmental authority to
which the Company or any of its subsidiaries or any of their respective
properties may be subject or, (iii) (A) cause the acceleration of the
maturity of any debt or obligation of the Company or any of its
subsidiaries or (B) violate, or be in conflict with, or constitute a
default under, or permit the termination of, or result in the creation of,
any lien upon any property of the Company or any of its subsidiaries under
any agreement or instrument to which such Person is a party or by which
such Person (or its properties) may be bound. Neither the Company nor any
of its subsidiaries is (1) in violation of any term of its respective
certificates of incorporation or by-laws, or (2) in default of or
non-compliance with any material instrument, contract or agreement to which
it is a party or of any judgment, decree, order, statute, rule or
governmental regulation which is applicable to it or its business or
properties.
(e) No Consents. Neither the execution and delivery of the Transaction
Documents to which the Company is a party nor the consummation of the
transactions contemplated hereby, requires the consent, approval or
authorization of, or filing, registration or qualification with, any Person
or any governmental authority on the part of the Company or its
subsidiaries, except for (i) the approval of the Reverse Stock Split by the
New York Stock Exchange, and (ii) the approval of Proposals 1-3 by the
stockholders of the Company to the extent set forth in the Prospectus/Proxy
Statement.
(f) Litigation. There are no pending or, to the best of the Company's
knowledge, threatened actions or proceedings of any kind, including actions
or proceedings of or before any Governmental Authority, to which the
Company or any subsidiary is a party or is subject, or by which any of them
or any of their properties are bound seeking to challenge or restrain the
consummation of the Restructuring Plan, nor, to the best knowledge of the
Company, is there any basis for any such action or proceeding.
3.2. Representations and Warranties and of the Wexford Parties. The Wexford
Parties represent and warrant to each other party hereto:
(a) Existence and Standing. Each Wexford Party is duly formed, validly
existing and in good standing under the laws of its organization. Each
Wexford Party has all requisite authority to own its property and to
conduct its business in each jurisdiction in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary or is subject to no material
liability or disability by reason of the failure to be so qualified.
(b) Authorization and Validity. Each Wexford Party has the power and
authority and legal right to execute and deliver the Transaction Documents
and to perform its obligations hereunder and thereunder. The execution and
delivery by each Wexford Party of the Transaction Documents and the
performance of its obligations hereunder and thereunder have been duly
authorized by all necessary corporate, partnership or manager action on
behalf of such Wexford Party and no further consent or authorization of its
board of directors, general or limited partners or members is required. The
Transaction Documents to which each Wexford Party is a party have been duly
and validly executed and delivered by each Wexford Party and constitute the
legal, valid and binding obligations of such Wexford Party, enforceable
against such Wexford Party in accordance with their respective terms.
(c) No Violation. Neither the execution and delivery by any Wexford Party
of the Transaction Documents to which it is a party nor the consummation of
the transactions herein or therein contemplated, nor compliance with the
provisions hereof or thereof will (i) violate the Governing Documents of
any Wexford Party, (ii) violate any judgment, decree, order, statute, law,
regulation or rule of any court or governmental authority to which any
Wexford Party or any of their respective properties may be subject, or
(iii) violate, or be in conflict with, or constitute a default under, or
permit the termination of, or result in the creation of, any lien upon any
property of any of the Wexford Parties under any agreement or instrument to
which such Wexford Party is a party or by which such Wexford Party (or its
properties) may be bound. None of the Wexford Parties is (1) in violation
of any term of its Governing Documents, or (2) in default of or
non-compliance with any material instrument, contract or agreement to which
it is a party or of any judgment, decree, order, statute, rule or
governmental regulation which is applicable to it or its business or
properties.
(d) No Consents. Neither the execution and delivery of the Transaction
Documents to which any Wexford Party is a party nor the consummation of the
transactions contemplated thereby requires the consent, approval or
authorization of, or filing, registration or qualification with, any Person
or any Governmental Authority on the part of any of the Wexford Parties.
(e) Litigation. There are no pending or, to the best of knowledge of any
Wexford Party, threatened actions or proceedings of any kind, including
actions or proceedings of or before any Governmental Authority, to which
any Wexford Party is a party or is subject, or by which any of them or any
of their properties are bound seeking to challenge the validity of or
restrain the consummation of the transactions contemplated by, the
Restructuring Plan, nor to the knowledge of such Wexford Party, is there
any basis for any such action or proceeding.
3.3. Representations and Warranties of the Individual Parties. Each
Individual Party, severally and not jointly, represents and warrants to
each other party hereto as to only himself or herself:
(a) Authorization and Validity. Each Individual Party has the power and
authority and legal right to execute and deliver the Transaction Documents
to which such Individual Party is a party and to perform his or her
obligations hereunder and thereunder. The Transaction Documents to which
such Individual Party is a party have been duly and validly executed and
delivered by such Individual Party and constitute legal, valid and binding
obligations of such Individual Party, enforceable against such Individual
Party in accordance with their respective terms.
(b) No Violation. Neither the execution and delivery by each Individual
Party of the Transaction Documents to which such Individual Party is a
party nor the consummation of the transactions therein contemplated, nor
compliance with the provisions hereof or thereof will (i) violate any
judgment, decree, order, statute, law, regulation or rule of any court or
governmental authority to which such Individual Party or any of their
respective properties may be subject, or (ii) violate, or be in conflict
with, or constitute a default under, or permit the termination of, or
result in the creation of, any lien upon any property of such Individual
Party under any agreement or instrument to which such Individual Party is a
party or by which such Individual Party (or its properties) may be bound.
(c) No Consents. Neither the execution and delivery of the Transaction
Documents to which each Individual Party or a party, nor the consummation
of the transactions contemplated thereby requires the consent, approval or
authorization of, or filing, registration or qualification with, any Person
or any Governmental Authority on the part of any of the Individual Parties.
(d) Litigation. There are no pending or, to the best knowledge of any
Individual Party, threatened actions or proceedings of any kind, including
actions or proceedings of or before any Governmental Authority, to which
any Individual Party is a party or is subject, or by which any of them or
any of their properties are bound seeking to challenge the validity of or
restrain the consummation of the transactions contemplated by the
Restructuring Plan, nor, to the best knowledge of any Individual Party, is
there any basis for any such action or proceeding.
4. COVENANTS OF THE COMPANY.
4.1. The Company hereby covenants to each of the other parties hereto that
between the date hereof and the Closing Date, it shall employ its
reasonable best efforts to perform all of the following:
(a) SEC Documents. The Company shall cause a final draft of all of the SEC
Documents, including but not limited to, the Prospectus/Proxy Statement to
be prepared, properly filed with the SEC, and if declared effective,
thereafter mailed to all stockholders deemed to be stockholders of records
as of February 2, 1998 (the "Record Date").
(b) Special Meeting. The Company shall notify all stockholders of record of
the Special Meeting, and shall hold the Special Meeting at the time and
place as set forth in such notice.
(c) Approvals. The Company shall obtain all necessary approvals for each
constituent transaction of the Restructuring Plan as may be necessary,
including without limitation (i) the approval of a majority of stockholders
for Proposals 2 and 3 as set forth in the Prospectus/Proxy Statement; and
(ii) the approval of the New York Stock Exchange for the Reverse Stock
Split.
(d) Rights Offering. Upon approval of Proposals 2 and 3 at the Special
meeting, the Company shall proceed with the distribution of Rights, in
accordance with the terms of the Rights Offering, pursuant to Section 2.1
hereof.
(e) Reverse Stock Split. Following completion of the Rights Offering, but
prior to the WESAC Debt Conversion and the WESAC Liquidation, the Company
shall effect the Reverse Stock Split pursuant to Section 2.4 hereof.
(f) Actions Before Closing Date. Between the date hereof and the Closing
Date, the Company shall not take any action which shall cause it to be in
breach of any of its representations, warranties, covenants or agreements
contained in this Restructuring Agreement or any other Loan Document. The
Company shall use, at its sole cost and expense, all reasonable best
efforts to perform its obligations and satisfy all conditions to closing as
are hereinafter set forth as soon as practicable, but in no event later
than the Closing Date.
5. CONDITIONS PRECEDENT.
The obligations of each of the parties hereto to consummate the
transactions contemplated by this Restructuring Agreement are subject to
the fulfillment, at or before the Closing Date, of the following
conditions, any one or more of which may be waived by all of the other
parties hereto in their sole discretion.
5.1. Representations and Warranties. The representations and warranties of
each party as set forth in this Restructuring Agreement shall be true and
correct in all material respects on and as of the Closing Date as though
made on and as of the Closing Date, and each party shall have received from
every other party a certificate dated the Closing Date and signed by an
authorized representative of such party to that effect.
5.2. Performance of Obligations. Each party shall have performed in all
material respects all obligations required under this Restructuring
Agreement to be performed by such party on or before the Closing Date, and
each party shall have received from every other party a certificate dated
the Closing Date and signed by an authorized representative of such party
to that effect.
5.3. Consents and Approvals. All consents, waivers, authorizations and
approvals (including but not limited to, the consent, authorization and
approval of the stockholders of record of the Company to Proposals 2 and 3
as set forth in the Prospectus/Proxy Statement and the New York Stock
Exchange to the Reverse Stock Split) required or desired in connection with
the execution, delivery and performance of this Restructuring Agreement
shall have been duly obtained and shall be in full force and effect on the
Closing Date.
5.4. No Violation of Orders. No preliminary or permanent injunction or
other order issued by any court or other governmental or regulatory
authority, domestic or foreign, nor any statute, rule, regulation, decree
or executive order promulgated or enacted by any governmental or regulatory
authority, domestic or foreign, that declares this Restructuring Agreement
invalid or unenforceable in any respect or which prevents the consummation
of the transactions contemplated hereby shall be in effect, and no action
or proceeding before any court or regulatory authority, domestic or
foreign, shall have been instituted or threatened by any government or
governmental or regulatory authority, domestic or foreign, which seeks to
prevent or delay the consummation of the transactions contemplated by this
Restructuring Agreement or which challenges the validity or enforceability
of this Restructuring Agreement, and which in any such case has a
reasonable likelihood of success in the opinion of counsel to the Company
or to the Wexford Parties.
5.5. Restructuring Conditions. The following conditions (the "Restructuring
Conditions") shall be conditions precedent to the obligations of the
parties hereunder, and all of such Restructuring Conditions will be
effected as simultaneously as practical.
(a) Tranche A and Tranche B Loans. All conditions precedent to the funding
of the first Tranche A Loan shall have been satisfied, all conditions
precedent to the funding of the first Tranche B Loan shall have been duly
satisfied, and no Event of Default shall exist or be continuing under the
1998 Credit Agreement.
(b) SEC Documents. The final SEC Documents, in a form satisfactory to
WESAC, shall (i) have been filed by the Company with the SEC under the Act
and the Securities Exchange Act of 1934, as amended, and with all necessary
or appropriate state securities commissions, agencies and bureaus, and (ii)
such final SEC Documents shall have been declared effective by the SEC and
shall have been approved or authorized by all requisite state securities
commissions, agencies and bureaus.
(c) Rights Offering. The Rights Offering shall have been duly approved,
authorized and conducted, and all the Rights shall have been subscribed (by
non-Wexford Parties or under the Stand-by Commitment). The Rights, and the
shares of Pre-Split Common Stock deliverable upon subscription under the
Rights, shall have been accepted for listing, upon official notice of
issuance, on the New York Stock Exchange.
(d) Reverse Stock Split. The Reverse Stock Split shall have taken place:
(i) The Company's Certificate of Incorporation shall have been duly
amended, after all necessary or appropriate approvals or other actions by
the Company's stockholders and its board of directors.
(ii) The New York Stock Exchange, and all other appropriate self-regulatory
organizations, shall have duly approved the Reverse Stock Split as
described in the SEC Documents.
(e) SVB Repayment. All loans made under the SVB Facility shall have been
repaid in full using proceeds of the Rights Offering, and all letter of
credit obligations under the SVB Facility shall have been collateralized
with cash proceeds of the Rights Offering. SVB shall have transferred in
immediately available funds, to the Agent, or to the Agent's order, all
cash collateral previously posted by WESAC or any other Wexford Party under
the SVB Facility. SVB shall have released WESAC and all other Wexford
Parties from their guarantees, and released to the Agent all collateral
security owned by the Company or its subsidiaries posted in SVB's favor
securing the SVB Facility.
(f) WESAC Liquidation. The Liquidation Plan shall have been approved by the
holders of a majority of the outstanding shares of common stock of WESAC.
(g) Certain Fees. The Company shall have (i) paid $100,000 to Wexford
Management, in cash (the "Wexford Fee"), in consideration of its advice and
cooperation in arranging the Restructuring Plan, in immediately available
funds or by its good check to the order of Wexford Management, and (ii)
delivered $100,000 to the order of the Stand-by Purchasers (in the form of
certificates for 549,752 fully paid and non-assessable shares of Pre-Split
Common Stock).
When the Company believes that the conditions precedent to the
Restructuring Plan have been duly satisfied in all particulars, a duly
authorized officer of the Company shall execute and deliver to the Agent
the Company's certificate portion of the cross-receipt. When the Agent is
satisfied that all elements of the Agent's Certificate portion of the
cross-receipt are true, the Agent's duly authorized officer shall
countersign the cross-receipt and deliver a copy to the Company, all on
behalf of (and binding upon) all of the Wexford Parties party hereto.
5.6. Opinion of Counsel to the Company. The Wexford Parties shall have
received an opinion, dated as of the Closing Date, from Roger Barzun, Esq.,
counsel to the Company, substantially in form and substance satisfactory to
the Wexford Parties and their counsel.
6. Agency Provisions.
6.1. Appointment. Each undersigned Wexford Party hereby appoints Wexford
Management as its lawful agent and attorney-in-fact, with full power of
substitution, for all purposes under this Restructuring Agreement, the New
Credit Line and all of the other Loan Documents. This appointment is
coupled with an interest, and the Company as well as the Wexford Parties
will rely upon the irrevocable nature of such appointment.
6.2. Acceptance of Appointment. The Agent hereby accepts such appointment,
and agrees to exercise the powers granted hereunder and pursuant to the
Loan Documents with the same degree of care it would use if the entire
risks and rewards were for its own account.
6.3. Application of Funds. In the event any monies received from the
Company directly or pursuant to any Loan Document is in an amount
insufficient to pay all sums due to every Wexford Party, the Agent shall
first apply the sum received to its own out-of-pocket costs reasonably
reimbursable under the terms of the Loan Documents, and shall pay the
balance to the Wexford Parties pro rata in accordance with the amounts then
due and owing to each of them.
6.4. Agent's Liability. The Agent shall not be liable, except for its own
negligence or misconduct, and except with respect to claims based upon such
negligence or misconduct, that are successfully asserted against the Agent,
the Company and the Wexford Parties shall severally indemnify and hold
harmless the Agent, and any Person acting as the successor to the Agent,
from and against any and all losses, liabilities, claims, actions, damages
and expenses, including reasonable attorneys' fees and disbursements,
arising out of or in connection with the Agent's good faith acceptance of
or performance of its duties and obligations under this Restructuring
Agreement and/or the Loan Documents. The Agent shall be under no duty to
institute any suit, or to take any remedial procedures or to enter any
appearance or in any way defend any suit in which it may be made a
defendant hereunder until it shall be indemnified as provided herein. The
Agent may act pursuant to the advice of counsel with respect to any matter
relating to this Restructuring Agreement and/or the Loan Documents, and
shall not be liable for any action taken or omitted in accordance with such
advice.
6.5. Resignation of Agent. The Agent (or any successor Agent) may at any
time resign as such by delivering to the Company and the Wexford Parties at
least fifteen days' written notice of such resignation. Within fifteen days
after the giving of such notice, the Agent shall effect a transfer of all
funds still held in such Agent's possession to any successor Agent jointly
designated by the Company and the Wexford Parties in writing, or in the
event no such successor has been designated within such fifteen day period,
to any court of competent jurisdiction, whereupon the Agent shall be
discharged of and from any and all further obligations arising in
connection with this Restructuring Agreement and/or the Loan Documents. The
Agent's sole responsibility following the delivery of a notice of
resignation and prior to the delivery of the funds still under the Agent's
control to a successor Agent or to a court of competent jurisdiction shall
be to safeguard such funds until delivery thereof as aforesaid or pursuant
to a joint written disposition instruction by all the other parties hereto
or a final order of a court of competent jurisdiction.
7. INDEMNIFICATION
7.1. Indemnification by the Company. Notwithstanding the closing of the
transactions contemplated hereunder and regardless of any investigation at
any time made by or on behalf of the Wexford Parties or of any knowledge or
information that the Wexford Parties may have, the Company shall indemnify
and fully defend, save and hold the Wexford Parties and their respective
directors, general and limited partners, officers, employees, agents and
attorneys (the "Wexford Indemnitees"), harmless if any Wexford Indemnitee
shall at any time or from time to time suffer any damage, liability, loss,
cost, expense (including all reasonable attorneys', experts' and
consultants' fees), deficiency, interest, penalty, impositions, assessments
or fines (collectively, "Losses") arising out of or resulting from, or
shall pay or become obliged to pay any sum on account of, any Company Event
of Breach. As used herein, "Company Event of Breach" shall be and mean any
one or more of the following:
(a) any untruth or inaccuracy in any representation of the Company or the
breach of any warranty of the Company, including without limitation (i) any
misrepresentation in, or omission from, any statement, certificate,
schedule, exhibit, annex or other document furnished pursuant to the
Transaction Documents by the Company (or any of its representatives) to the
Wexford Parties (or any representative of the Wexford Parties) and any
misrepresentation in or omission from any document furnished to the Wexford
Parties in connection with the transactions contemplated by this
Restructuring Agreement;
(b) any failure of the Company duly to perform or observe any term,
provision, covenant, agreement or condition contained in the Transaction
Documents on the part of the Company to be performed or observed.
7.2. Indemnification by the Wexford Parties. Notwithstanding the closing of
the transactions contemplated hereunder, the Wexford Parties shall
indemnify and fully defend, save and hold the Company, and its respective
directors, officers, partners, employees, agents and attorneys (the
"Company Indemnitees"), harmless if any Company Indemnitee shall at any
time or from time to time suffer any Losses arising out of or resulting
from, or shall pay or become obligated to pay any sum on account of, any
Wexford Event of Breach. As used herein, "Wexford Event of Breach" shall be
and mean any one or more of the following: (a) any untruth or inaccuracy in
any representation of the Wexford Parties or the breach of any warranty of
the Wexford Parties contained in the Transaction Documents, (b) any failure
of the Wexford Parties duly to perform or observe any term, provision,
covenant, agreement or condition contained in the Transaction Documents on
the part of the Wexford Parties to be performed or observed.
7.3. Procedures for Indemnification. If a Company Event of Breach or a
Wexford Event of Breach (a "Party's Event of Breach") occurs or is alleged
and either the Company or the Wexford Indemnitees (a "Party Indemnitee")
asserts that the other party has become obligated to it pursuant to Section
7.1 or 7.2, or if any claim is begun, made or instituted as a result of
which the other party may become obligated to a Party Indemnitee hereunder,
such Party Indemnitee shall give prompt notice to the other party. The
Party Indemnitee shall permit the other party (at its expense) to assume
the defense of any claim; provided, however, that (a) the counsel for the
other party who shall conduct the defense shall be reasonably satisfactory
to the Party Indemnitee, (b) the Party Indemnitee may participate in such
defense at its expense, and (c) the omission by the Party Indemnitee to
give notice as provided herein shall not relieve the other party of its
indemnification obligation except to the extent that such omission results
in a failure of actual notice to the other party and the other party is
materially damaged as a result of such failure to give notice. Except with
the prior written consent of the Party Indemnitee, the other party shall
not, in the defense of any such claim, consent to entry of any judgment or
enter into any settlement that provides for injunctive or other nonmonetary
relief affecting the Party Indemnitee or that does not include as an
unconditional term thereof the giving by each claimant or plaintiff to such
Party Indemnitee of a release from all liability with respect to such claim
or litigation. In the event that the Party Indemnitee shall in good faith
determine that the conduct of the defense of any claim subject to
indemnification hereunder or any proposed settlement of any such claim by
the other party might be expected to affect adversely the ability of the
Party Indemnitee to conduct its business, or that the Party Indemnitee may
have available to it one or more defenses or counterclaims that are
inconsistent with one or more of those that may be available to the other
party in respect of such claim relating thereto, the Party Indemnitee shall
have the right at all times to take over and assume control over the
defense, settlement, negotiations or litigation relating to any such claim
at the sole cost of the other party (including without limitation
reasonable attorneys' fees and disbursements and other amounts paid as the
result of such claim); provided, however, that if the Party Indemnitee does
so take over and assume control, the Party Indemnitee shall not settle such
claim without the prior written consent of every other party, such consent
not to be unreasonably withheld. In the event that every other party does
not accept and continue the defense of any matter as provided above, the
Party Indemnitee shall have the full right to defend against any such claim
and shall be entitled to settle or agree to pay in full such claim.
8. TERMINATION
8.1. Conditions of Termination. Notwithstanding anything to the contrary
contained herein, this Restructuring Agreement may be terminated at any
time before the Closing Date: (a) by mutual consent of the parties hereto,
(b) by either the Company or the Wexford Parties if the other party or
parties shall have breached this Restructuring Agreement in any material
respect and such breach continues for a period of ten (10) days after the
receipt of a written notice of the breach from the non-breaching party, (c)
by the Company if, at June 30, 1998, any of the conditions set forth in
Section 5 shall not have been met, unless the Company's breach of this
Restructuring Agreement is the reason for the failure of such conditions to
be satisfied, or (d) by the Wexford Parties if, at June 30, 1998, any of
the conditions set forth in Section 5 shall not have been met, unless the
Wexford Parties' breach of this Restructuring Agreement is the reason for
the failure of such conditions to be satisfied.
8.2. Effect of Termination. In the event of termination pursuant to Section
8.1 this Restructuring Agreement shall become null and void and have no
effect, with no liability on the part of the parties, or their directors,
officers, agents or stockholders, with respect to this Restructuring
Agreement, except for the liability for breach of this Restructuring
Agreement, with respect to which, claims may be made pursuant to Sections
7.1 and 7.2 hereinabove.
9. MISCELLANEOUS
9.1. Survival of Provisions. The respective representations, warranties,
covenants and agreements of each of the parties to this Restructuring
Agreement made herein or in any certificate or other instrument delivered
by one of the parties to this Restructuring Agreement (except covenants and
agreements which are expressly required to be performed and are performed
in full on or before the Closing Date), shall be considered to have been
relied upon by the other party to this Restructuring Agreement, as the case
may be, and shall survive the Closing Date and the consummation of the
transactions contemplated by this Restructuring Agreement.
9.2. Successors and Assigns. Except as otherwise provided in this
Restructuring Agreement, no party hereto shall assign this Restructuring
Agreement or any rights or obligations hereunder without the prior written
consent of the other parties hereto and any such attempted assignment
without such prior written consent shall be void and of no force and
effect; provided, however, that a Wexford Party may assign its rights
hereunder, whether before or after the Closing Date, to one or more of its
affiliates and to any party providing financing in connection with the
transactions contemplated hereby; provided further, that no such assignment
shall reduce or otherwise vitiate any of the obligations of the Wexford
Parties hereunder. This Restructuring Agreement shall inure to the benefit
of and shall be binding upon the successors and permitted assigns of the
parties hereto.
9.3. Governing Law; Jurisdiction. This Restructuring Agreement shall be
construed, performed and enforced in accordance with, and governed by, the
laws of the State of New York, without giving effect to the principles of
conflicts of laws thereof. The parties hereto irrevocably elect as the sole
judicial forum for the adjudication of any matters arising under or in
connection with this Restructuring Agreement, and consent to the
jurisdiction of, the courts of the Southern District of New York.
9.4. Broker's and Finder's Fees. Other than the Stand-by Commitment Fee and
the Wexford Fee to be paid hereunder, each of the parties represents and
warrants that it has dealt with no broker or finder in connection with any
of the transactions contemplated by this Restructuring Agreement and
insofar as it knows, no other broker or other person is entitled to any
commission or finder's fee in connection with any of the transactions
contemplated hereby.
9.5. Severability. In the event that any part of this Restructuring
Agreement is declared by any court or other judicial or administrative body
to be null, void or unenforceable, said provision shall survive to the
extent it is not so declared, and all of the other provisions of this
Restructuring Agreement shall remain in full force and effect.
9.6. Notices. All notices, requests, demands and other communications under
this Restructuring Agreement shall be in writing and shall be deemed to
have been duly given (i) on the date of service if served personally on the
party to whom notice is to be given, (ii) on the day of transmission if
sent via facsimile transmission to the facsimile number given below, (iii)
on the day after delivery to an overnight courier service, or (iv) on the
fifth day after mailing, if mailed to the party to whom notice is to be
given, by first class mail, registered or certified, postage prepaid and
properly addressed, to the party as follows:
If to C. Stephen Beal of the Company:
Wahlco Environmental Systems, Inc.
3600 West Segerstrom Avenue
Santa Ana, CA 92704
Attn.: C. Stephen Beal, President and Chief
Executive Officer
Telephone: (714) 979-7300
Telecopier: (714) 979-0114
With a copy to:
Roger M. Barzun, Esq.
60 Hubbard Street
Concord, MA 01742
Telephone: (978) 287-4275
Telecopier: (978) 287-4276
If to the Wexford Parties:
Wexford Management LLC
411 West Putnam Avenue
Greenwich, Connecticut 06830
Attention: Mark L. Plaumann
Telephone: (203) 862-7000
Telecopier: (203) 862-7490
If to Huta:
Henry N. Huta
50 Princess Pine Court
East Greenwich, RI 02818
Telephone: (401) 727-1300
Telecopier: (401) 727-8459
If to any of Maarten Hemsley, Deborah Louise Hemsley-Schultz
and Rebecca Hemsley, to:
Maarten Hemsley
Bryanston Management, Ltd.
82 Powder Point Road
Duxbury, Massachusetts 02332
Telephone: (781) 934-2219
Telecopier: (781) 934-0843
With a copy to:
Berlack, Israels & Liberman LLP
120 West 45th Street
New York, New York 10036
Attention: Stephen B. Selbst, Esq.
Telephone: (212) 704-0100
Telecopier: (212) 704-0196
Any party may change its address for the purpose of this Section
by giving the other party written notice of its new address in the manner
set forth above.
9.7. Amendments; Waivers. This Restructuring Agreement may be amended or
modified, and any of the terms, covenants, representations, warranties or
conditions hereof may be waived, only by a written instrument executed by
the parties hereto, or in the case of a waiver, by the party waiving
compliance. Any waiver by any party of any condition, or of the breach of
any provision, term, covenant, representation or warranty contained in this
Restructuring Agreement, in any one or more instances, shall not be deemed
to be nor construed as a further or continuing waiver of any such
condition, or of the breach of any other provision, term, covenant,
representation or warranty of this Restructuring Agreement.
9.8. Entire Agreement. This Restructuring Agreement and the other
Transaction Documents contain the entire understanding between the parties
hereto with respect to the transactions contemplated hereby and supersedes
and replaces all prior and contemporaneous agreements and understandings,
oral or written, with regard to such transactions.
9.9. Section and Paragraph Headings. The section and paragraph headings in
this Restructuring Agreement are for reference purposes only and shall not
affect the meaning or interpretation of this Restructuring Agreement.
9.10. No Third Party Beneficiaries. This Restructuring Agreement does not
create and shall not be construed as creating any rights enforceable by any
Person who or which is not a party to this Restructuring Agreement.
9.11. Gender; Number. As used in this Restructuring Agreement, the
masculine shall include the feminine and the neuter, the singular shall
include the plural and the plural shall include the singular as the context
may require.
9.12. Counterparts. This Restructuring Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, this Restructuring Agreement has been duly
executed and delivered as of the date first above written.
WAHLCO ENVIRONMENTAL
SYSTEMS, INC.
By:_____________________________
Name:
Title:
WES ACQUISITION CORP.
By:_____________________________
Name:
Title:
WEXFORD SPECIAL SITUATIONS
1996, L.P.
By:_____________________________
Its General Partner
WEXFORD SPECIAL SITUATIONS
1996 LIMITED
By:_____________________________
WEXFORD-EURIS SPECIAL
SITUATIONS 1996, L.P.
By:_____________________________
Its General Partner
<PAGE>
WEXFORD MANAGEMENT LLC,
individually and as Agent
By:_____________________________
Name:
Title:
WEXFORD CAPITAL
PARTNERS II, L.P.
By: Wexford Capital Partners, L.P.,
It's General Partner
By: Wexford Capital Corporation,
Its General Partner
By:_____________________________
Name:
Title:
WEXFORD OVERSEAS
PARTNERS I L.P.
By: Wexford Capital Overseas, L.P.
Its General Partner
By: Wexford Capital Limited
Its General Partner
By:_____________________________
Name:
Title:
-----------------------------
C. Stephen Beal
-----------------------------
Henry N. Huta
----------------------------
Maarten D. Hemsley
----------------------------
Rebecca Hemsley
----------------------------
Deborah Louise Hemsley-Schultz
WES ACQUISITION CORP.
PLAN OF LIQUIDATION
-------------------
1. Restructuring Agreement. This plan of liquidation (the
"Liquidation Plan") of WES Acquisition Corp., a Delaware corporation ("WESAC"),
is being adopted pursuant to Section 2.5 of that certain Restructuring Agreement
dated as of January 30, 1998 (the "Restructuring Agreement"), by and among the
Company, WESAC, Wexford Management, as Agent, Capital Partners, Overseas
Partners, the Wexford 1996 Funds and the Individual Parties. Capitalized terms
used herein, if not separately defined, shall have the meanings assigned to such
terms in the Restructuring Agreement.
2. Approval and Ratification. This Liquidation Plan shall be
deemed adopted by the WESAC Lenders and the stockholders of WESAC upon the
execution and delivery of the Restructuring Agreement by (a) stockholders of
WESAC (the "WESAC Stockholders") holding at least two thirds of the issued and
outstanding shares of common stock of WESAC, and (b) WESAC Lenders holding
two-thirds in amount and at least 50% in number of the outstanding claims
against WESAC.
3. Plan of Liquidation. WESAC will cease the active conduct of
its business and wind up its affairs and, within the meaning of Section 332 of
the Internal Revenue Code of 1986, as amended, will liquidate and distribute all
of its assets, if any, in complete liquidation, less any assets retained to meet
claims. The liquidation of WESAC will occur promptly, but in any event within
one calendar month following the Closing Date.
4. Assets and Liabilities. On the Closing Date, after
consummation of the Rights Offering, the Reverse Stock Split and the WESAC Debt
Conversion, the assets of WESAC will consist principally of shares of Company
Common Stock. The liabilities of WESAC will consist of the amounts owed to the
WESAC Lenders listed on Schedule I attached hereto, which carry the contractual
rights of seniority listed thereon, and miscellaneous tax liabilities.
5. Distribution of Assets.
5.1. WESAC Lenders. Promptly following the Closing
under the Restructuring Agreement, WESAC shall distribute to the WESAC Lenders,
in order of contractual seniority in accordance with Schedule I attached hereto,
all of the shares of Company Common Stock owned by WESAC on the Closing Date.
For purposes of such distribution, shares of Company Common Stock shall be
valued at $1.00 per share. To the extent that any class of WESAC Lenders are not
paid in full, payments by WESAC shall be applied first to principal and then to
interest.
<PAGE>
5.2. WESAC Stockholders. If, as of the Closing Date,
the liabilities of WESAC exceed its liabilities, the WESAC Stockholders agree
that they shall receive no distribution in respect of their common stock of
WESAC, and that on the Closing Date, such stock shall be canceled.
6. Cancellation of Stock Certificates and Notes. The
distributions in complete liquidation provided for in Section 5 hereof shall be
in exchange and solely for the complete satisfaction of the rights of the WESAC
Lenders and the WESAC Stockholders. On the Closing Date, each WESAC Creditor and
each WESAC Stockholder shall surrender any notes or evidences of indebtedness
(in the case of the WESAC Lenders) or stock certificates (in the case of the
WESAC Stockholders) representing common stock of WESAC.
7. Effective Date; Cessation of Business. The effective date
of this Liquidation Plan shall be the Closing Date under the Restructuring
Agreement. WESAC shall cease doing business immediately upon such Closing Date,
except to the extent required to wind up its affairs. As soon thereafter as
practicable, but within one calendar month following the Closing Date, WESAC
shall make one or more substantial distributions of its assets and liabilities,
so that all of such assets and liabilities are distributed to or for the account
of the WESAC Lenders and the WESAC Stockholders, as the case may be, within such
calendar month. Notwithstanding the foregoing, if the Closing Date under the
Restructuring Agreement does not occur on or before June 30, 1998, this
Liquidation Plan shall be deemed rescinded nunc pro tunc without necessity of
any act or deed on the part of WESAC or any officer, director or WESAC
Stockholder.
8. Dissolution. The officers and directors of WESAC shall
proceed with the voluntary dissolution of WESAC under the laws of the State of
Delaware at such time as they may deem appropriate, and may withdraw WESAC from
qualification in any other state where it may have qualified to do business as a
foreign corporation.
9. Authorization to Execute and File Documents. The officers
and directors of WESAC are authorized, empowered, and directed to execute and
file all documents which they deem necessary or advisable to carry out the
purposes and intentions of this Liquidation Plan, including a certificate of
dissolution under the laws of the State of Delaware, and information returns on
the appropriate Treasury Department forms, together with income tax returns and
the information required by applicable income tax regulations.
10. Further Assurances; Indemnity. The officers and directors
of WESAC are authorized, directed and empowered to do any and all other things
in its name and behalf which they may deem necessary or advisable in order to
carry out the purposes and intentions of this Plan. Such officers and directors
shall be held harmless by WESAC for any action under this Liquidation Plan taken
in good faith.
-2-
<PAGE>
IN WITNESS WHEREOF, WESAC has caused this Liquidation Plan to be
adopted as of this 30th day of January 1998.
WES Acquisition Corp.
By:
-------------------------
<PAGE>
SCHEDULE I
1. Definitions. As used herein, the following definitions shall apply:
"Administrative Reserve" means an amount of cash sufficient to pay all
reasonably estimated expenses of the WESAC Liquidation.
"Class I Claims" means (i) loans from the Wexford 1995 Funds to WESAC
in the aggregate principal amount of $2,000,000, the proceeds of which were
pledged by the Company to secure the Company's borrowings under the SVB
Facility, plus interest on the loans to the Wexford 1995 Funds at the rate of
fifteen (15%) percent per annum from the date of such loans to the Closing Date,
and (ii) the principal amount of $150,000 evidenced by a note dated May 13,
1996, together with interest at the rate provided therein through the Closing
Date. The Class I Claims are held 70% by Wexford Capital Partners II, L.P. and
30% by Wexford Overseas Partners I, L.P.
"Class II Claims" means (i) the principal amount of $1,500,000 funded
by the Wexford 1996 Funds to enable WESAC to loan funds to the Company pursuant
to the 1996 Line of Credit, together with interest from the date of each such
advance at the rate provided therein to the Closing Date, (ii) $32,000 as a
commitment fee for providing the 1996 Line of Credit and (iii) $2,080 to be
reimbursed for expenses advanced on behalf of WESAC. As of April 15, 1998, the
Class II Claims will be as follows:
Wexford Special Situations 1996, L.P. $1,252,528.19
Wexford Special Situations Institutional, L.P. $ 232,684.58
Wexford Special Situations 1996 Limited $ 63,459.63
Wexford-Euris-Special Situations 1996, L.P. $ 323,287.43
"Class III Claims" means (i) the aggregate principal amount of
$4,900,000, together with interest from the date of such advances at rate of
thirteen percent (13%) per annum, together with interest through the Closing
Date, (ii) the aggregate principal amount of $2,000,000, together with interest
at the rate of thirteen percent (13%) through the Closing Date. As of April 15,
1998, the Class III Claims will be as follows:
C. Stephen Beal $ 240,121.94
Maarten Hemsley $ 58,617.55
Henry Huta $ 240,121.94
Wexford Capital Partners II, L.P. $6,344,136.19
Wexford Overseas Partners I, L.P. $2,719,871.09
"1996 Line of Credit" means that certain Agreement dated August 28,
1996 between WESAC and the Company.
<PAGE>
2. Payments. The payments to be made by or on behalf of WESAC to the WESAC
Lenders and the WESAC Lenders shall be distributed in the following order of
priority:
2.1 Administrative Reserve. On the Closing Date, the Administrative
Reserve shall be funded.
2.2 Class I Claims. In respect of the Class I Claims, the Wexford 1995
Funds shall be paid an amount of cash equal to the amount of cash repaid to
WESAC by SVB in connection with the Silicon Valley Bank Repayment, less the
amount of cash deposited into the Administrative Reserve (the "Cash Payment").
To the extent that the Cash Payment is insufficient to repay the Class I Claims
in full, the holders of Class I Claims shall receive a number of shares of
Company Common Stock, valued at $1.00 per share, equal to the difference between
the amount of Class I Claims on the Closing Date and the Cash Payment. Any
payments in respect of Class I Claims shall be applied first to principal
amounts due and then to accrued but unpaid interest.
2.3 Class II Claims. After the holders of Class I Claims have been paid
in full, the holders of Class II Claims shall receive a number of shares of
Company Common Stock, valued as $1.00 per share, equal to the amount of the
Class II Claims on the Closing Date. Any payment in respect of Claim II Claims
shall be applied first to principal amounts due and then to accrued but unpaid
interest.
2.4 Class III Claims. After the holders of Class II Claims have been
paid in full, the holders of Class III Claims shall receive all remaining shares
of Company Common Stock owned by WESAC, valued as $1.00 per share, pro rata in
accordance with their interests. Any payments in respect of Class III Claims
shall be applied first to principal amounts due and then accrued but unpaid
interest.
2.5 WESAC Stockholders. The WESAC Stockholders agree that on the
Closing Date, their shares of common stock of WESAC shall be canceled, and such
WESAC Stockholders shall receive no consideration in exchange therefor.
-2-
<PAGE>
Exhibit 4.1
[FRONT SIDE (Stockholder Certificate)]
CERTIFICATE NO. ___________ __________________________________
Number of Rights Represented
by this Certificate
ALL RIGHTS WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON APRIL 6, 1998
SUBSCRIPTION RIGHTS CERTIFICATE FOR SHARES
OF WAHLCO ENVIRONMENTAL SYSTEMS, INC.
(a Delaware corporation)
The person named herein, or assigns, is entitled to subscribe for shares of
Common Stock, which, upon issuance, will have a par value of $.01 per share (the
"Shares"), of Wahlco Environmental Systems, Inc. (a Delaware corporation) (the
"Company"), by the ratio of one Share for one Right at the subscription price
of $.10, upon the terms and conditions set forth in the Company's
Prospectus/Proxy Statement, dated February 4, 1998.
ONE RIGHT AND THE SUBSCRIPTION PRICE SHOWN ABOVE ARE NEEDED TO
SUBSCRIBE FOR ONE SHARE.
In order to exercise or transfer Rights, the appropriate form on the
reverse side must be completed and signed. Please read the accompanying
instruction sheet before completing any form.
---------------------------
Registered Owner
<PAGE>
[BACK SIDE (Shareholder Certificate)]
RETURN TO SUBSCRIPTION AGENT
By Mail
FORM 1 - TO SUBSCRIBE FOR SHARES:
I hereby irrevocably exercise Rights to subscribe for the number of shares of
Common Stock indicated below, on the terms specified in the Company's
Prospectus/Proxy Statement, dated February 4, 1998 (the receipt of which is
hereby acknowledged).
(a) Number of rights owned (stated on reverse
side of this Rights Certificate)
----------
Rights
------------------
(b) Number of shares of Common Stock subscribed
for Shares
---------------------------
(c) Cost (Number of Shares listed in (b) above
times $.10)
--------------------------------------------
--------------------------------------------
Subscriber's Signature(s)
--------------------------------------------
--------------------------------------------
Address
--------------------------------------------
Telephone Number
By Hand
FORM 2 - TO TRANSFER RIGHTS OR TO SELL
RIGHTS: For money received, the number of Rights
indicated below are herein irrevocably assigned to the
person(s) indicated below.
(a) Number of Rights to be Transferred:
Rights
----------------------------------
(b)
--------------------------------------------
Name of Transferee
--------------------------------------------
Address
--------------------------------------------
Telephone Number
--------------------------------------------
Signature(s) of Registered Owner(s)
--------------------------------------------
--------------------------------------------
Address
--------------------------------------------
Telephone Number
Signatures guaranteed by
--------------------------------------------
FORM 3 - EXERCISING BROKER-DEALER:
The Rights exercised hereby have been so exercised
through the efforts or facilities of the following
broker-dealer:
Firm:
--------------------------------------------
Authorized
Signature:
--------------------------------------
<PAGE>
EXHIBIT 5.1
ROGER M. BARZUN
ATTORNEY AT LAW
60 HUBBARD STREET
CONCORD, MASSACHUSETTS 01742
TELEPHONE: (978) 287-4275
FACSIMILE: (978) 287-4276
February 4, 1998
Wahlco Environmental Systems, Inc.
3600 West Segerstrom Avenue
Santa Ana, California 92704-6495
Gentlemen:
I am General Counsel of Wahlco Environmental Systems, Inc. and in that capacity,
this opinion is delivered to you in connection with the registration statement
on Form S-1 filed with the Securities and Exchange Commission on behalf of
Wahlco Environmental Systems, Inc. (the "Company"), under the Securities Act of
1933 on December 19, 1997 (File No. 333-42805) (the "Registration Statement")
relating to 27,112,000 shares of the common stock, $0.01 par value per share
(the "Common Stock") of the Company to be sold in connection with a rights
offering of the Company (the "Rights Offering").
I am familiar with the Company's Restated Certificate of Incorporation, By-Laws
and its corporate minute book as well as the Registration Statement. I have also
examined such other documents, records and certificates and made such further
investigation as I have deemed necessary for the purposes of this opinion.
Based upon and subject to the foregoing, I am of the opinion that the shares of
Common Stock when issued against receipt of the purchase price therefor and in
conformity with the terms and conditions of the Rights Offering will be duly
authorized, validly issued, fully paid and non-assessable.
I understand that this opinion is to be used in connection with the Registration
Statement and accordingly I consent to the filing of this opinion as an exhibit
to the Registration Statement. I further consent to the reference to me under
the heading "Legal Matters" in the Registration Statement
Very truly yours,
/s/ Roger M. Barzun
<PAGE>
EXECUTION COPY
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of January 30, 1998
among
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
as Borrower,
WES ACQUISITION CORP.
and
WEXFORD CAPITAL PARTNERS II, L.P.
WEXFORD OVERSEAS PARTNERS I, L.P.
as the Tranche A Lenders
and
WEXFORD SPECIAL SITUATIONS 1996, L.P.
WEXFORD SPECIAL SITUATIONS 1996 INSTITUTIONAL, L.P.
WEXFORD SPECIAL SITUATIONS 1996 LIMITED
WEXFORD-EURIS SPECIAL SITUATIONS 1996, L.P.
and
WEXFORD MANAGEMENT LLC
as Agent for the Lenders
<PAGE>
INDEX OF EXHIBITS AND SCHEDULES
Exhibit A-1 - Tranche A Note
Exhibit A-2 - Tranche B Note
Exhibit B - First Amendment to Guaranty
Exhibit C-1 - First Amendment to Patent Assignment
of Wahlco Environmental Systems, Inc.
Exhibit C-2 First Amendment to Patents Assignment of Wahlco, Inc.
Exhibit C-3 First Amendment to Patent Assignment of Wahlco
International, Inc.
Exhibit D - First Amendment to Security Agreement
Exhibit E - First Amendment to Stock Pledge Agreement
Schedule 3.6 Defaults
Schedule 3.10 Taxes
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<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT, dated as of January 30, 1998
(the "1998 Credit Agreement"), among (a) WAHLCO ENVIRONMENTAL SYSTEMS, INC., a
Delaware corporation ("Borrower"); (b) WES ACQUISITION CORP., a Delaware
corporation ("WESAC") and (c) WEXFORD CAPITAL PARTNERS II, L.P., a Delaware
limited partnership ("WCP"), WEXFORD OVERSEAS PARTNERS I, L.P., a Delaware
limited partnership ("WOSP") (WCP and WOSP collectively, the "Tranche A
Lenders"), 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 (collectively together with the Tranche A Lenders, the
"Lenders"); and WEXFORD MANAGEMENT LLC, a Connecticut limited liability
company, as administrative and collateral agent for the Lenders (the "Agent").
RECITALS
A. Borrower and WESAC have entered into a series of related credit
and collateral security agreements, starting with the Term Loan Agreement,
dated as of July 28, 1995, related collateral security instruments, the Side
Letter dated May 9, 1996 from the Borrower to WESAC, and the 1996 Financing
Letter dated August 28, 1996 from the Borrower to WESAC; such series, taken as
a whole and, as amended, supplemented or otherwise modified to date (the
"Existing Credit Lines").
B. Pursuant to a Restructuring Agreement of even date herewith (the
"Restructuring Agreement"), on the Closing Date, the Lenders have agreed, among
other things, to convert the Wexford Conversion Debt now outstanding under the
Existing Credit Lines into shares of the Borrower's Common Stock, par value
$.10 per share, at the rate of one share of Common Stock for each $1.00 of such
indebtedness.
C. The Lenders are now prepared to make Tranche A Loans and Tranche B
Loans to Borrower on the terms and conditions specified herein.
D. The Lenders require, among other conditions precedent, that
certain Collateral Documents by Borrower in favor of WESAC be amended and
restated to clarify and expressly state that (i) new advances hereunder shall
be fully secured under those Collateral Documents and (ii) all collateral
security interests previously granted to WESAC shall be assigned by WESAC to
the Agent for the benefit of WESAC and the Lenders.
E. It is one of several conditions precedent to such restructuring
that this 1998 Credit Agreement be executed and delivered, to novate the
Existing Credit Lines to replace WESAC as a Lender, and to substitute the Agent
for WESAC as named secured party for the benefit of the Lenders, all as more
fully set forth below.
<PAGE>
1. DEFINITIONS
In addition to the defined terms appearing above, capitalized terms
used in this 1998 Credit Agreement shall have (unless otherwise provided
elsewhere in this 1998 Credit Agreement) the following respective meanings when
used herein:
1.1. "Account Debtor" shall mean any Person who is or who may become
obligated to Borrower or any of its Subsidiaries under, with respect to, or on
account of, an Account.
1.2. "Accounts" shall mean all accounts, accounts receivable, other
receivables, contract rights, chattel paper, instruments, documents, and notes,
whether now owned or hereinafter acquired by Borrower or any of its
Subsidiaries.
1.3. "Affiliate" shall mean, with respect to any Person, (i) each
Person that, directly or indirectly, owns or controls, whether beneficially, or
as a trustee, guardian or other fiduciary, 5% or more of the Stock having
ordinary voting power in the election of directors of such Person, (ii) each
Person that controls, is controlled by or is under common control with such
Person or any Affiliate of such Person or (iii) each of such Person's officers,
directors, joint venturers and partners. For the purpose of this definition,
"control" of a Person shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of its management or policies, whether
through the ownership of voting securities, by contract or otherwise.
1.4. "Ancillary Agreements" shall mean all those agreements as to
which Borrower, the Lenders or the Agent is a party or a beneficiary on the
Closing Date with respect to any of the transactions contemplated by the Loan
Documents or the Restructuring Agreement.
1.5. "Borrower" shall mean Wahlco Environmental Systems, Inc., a
Delaware corporation having an office at 3600 West Segerstrom Avenue, Santa
Ana, California 92704-6495.
1.6. "Business Day" shall mean any day that is not a Saturday, a
Sunday or a day on which banks are required or permitted to be closed in the
State of New York.
1.7. "Capital Expenditures" shall mean all payments for any fixed
assets or improvements or for replacements, substitutions or additions thereto,
that have a useful life of more than one year and which are required to be
capitalized under GAAP.
1.8. "Capital Lease" shall mean, with respect to any Person, any lease
of any property (whether real, personal or mixed) by such Person as lessee
that, in accordance with GAAP, either would be required to be classified and
accounted for as a capital lease on a balance sheet of such Person or otherwise
be disclosed as such in a note to such balance sheet, other than, in the case
of Borrower or a Subsidiary of Borrower, any such lease under which Borrower or
such Subsidiary is the lessor.
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<PAGE>
1.9. "Capital Lease Obligation" shall mean, with respect to any
Capital Lease, the amount of the obligation of the lessee thereunder that, in
accordance with GAAP, would appear on a balance sheet of such lessee in respect
of such Capital Lease or otherwise be disclosed in a note to such balance
sheet.
1.10. "Cash Equivalents" shall have the meaning assigned to it in
Section 7.2 hereof.
1.11. "Charges" shall mean all federal, state, county, city,
municipal, local, foreign or other governmental (including, without limitation,
PBGC) taxes at the time due and payable, levies, assessments, charges, liens,
claims or encumbrances upon or relating to (i) the Collateral, (ii) the
Obligations, (iii) Borrower's or any of its Subsidiaries' employees, payroll,
income or gross receipts, (iv) Borrower's or any of its Subsidiaries' ownership
or use of any of its assets, or (v) any other aspect of Borrower's or any of
the Subsidiaries' business.
1.12. "Chase" means The Chase Manhattan Bank.
1.13. "Chase Facility" means a non-committed line of credit, arranged
and guaranteed by the Lenders. As at the date hereof, Borrower had borrowings
outstanding aggregating $2.65 million (the "Chase Facility Baseline Amount").
1.14. "Chase Facility Tranche A Commitment Reduction Amount" means the
excess, if any, of (x) Borrower's aggregate borrowings under the Chase Facility
prior to the Restructuring Date, over (y) the Chase Facility Baseline Amount.
1.15. "Chase Facility Tranche B Commitment Reduction Amount" means the
excess, if any, of (x) Borrower's aggregate borrowings under the Chase Facility
from and after the Restructuring Date over (y) the amount of Borrower's
borrowings under the Chase Facility on the Restructuring Date.
1.16. "Closing Date" shall mean the date the Lenders make the initial
Tranche A Loan.
1.17. "Code" shall mean the Uniform Commercial Code of the
jurisdiction with respect to which such term is used, as in effect from time to
time.
1.18. "Collateral" shall mean the collateral covered by the Security
Agreement, the Patent Assignments, and the Pledged Collateral covered by the
Stock Pledge Agreement (as such term is defined therein).
1.19. "Collateral Documents" shall mean the Security Agreement, the
Patent Assignments and the Stock Pledge Agreement.
1.20. "Commission" means the Securities and Exchange Commission or any
successor thereto.
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<PAGE>
1.21. "Commitment Termination Date" shall mean June 30, 1998.
1.22. "Compensation" shall mean, with respect to any Person, all
payments and accruals commonly considered to be compensation, including,
without limitation, all wages, salary, deferred payment arrangements, bonus
payments and accruals, profit sharing arrangements, payments in respect of
stock option or phantom stock option or similar arrangements, stock
appreciation rights or similar rights, incentive payments, pension or
employment benefit contributions or similar payments, made by Borrower to or
accrued for the account of such Person or otherwise for the direct or indirect
benefit of such Person.
1.23. "Default" shall mean any event which, with the passage of time
or notice or both, would, unless cured or waived, become an Event of Default.
1.24. "Due Date" shall mean the date on which payment is due with
respect to an Account, as indicated on the invoice or statement of Account
rendered to the Account Debtor.
1.25. "ERISA" shall mean the Employee Retirement Income Security Act
of 1974 (or any successor legislation thereto), as amended from time to time
and any regulations promulgated thereunder.
1.26. "Event of Default" shall have the meaning assigned to it in
Section 9.1 hereof.
1.27. "Financials" shall mean the financial statements referred to in
Section 4.6(a) hereof.
1.28. "Fiscal Year" shall mean the calendar year. Subsequent changes
of the fiscal year of Borrower shall not change the term "Fiscal Year," unless
the Lenders shall consent in writing to such changes.
1.29. "GAAP" shall mean generally accepted accounting principles in
the United States of America as in effect from time to time.
1.30. "Governmental Authority" shall mean any nation or government,
any state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
1.31. "Guaranteed Indebtedness" shall mean, as to any Person, any
obligation of such Person guaranteeing any indebtedness, lease, dividend, or
other obligation ("primary obligations") of any other Person (the "primary
obligor") in any manner including, without limitation, any obligation or
arrangement of such Person (a) to purchase or repurchase any such primary
obligation, (b) to advance or supply funds (i) for the purchase or payment of
any such primary obligation or (ii) to maintain working capital or equity
capital of the primary obligor or
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<PAGE>
otherwise to maintain the net worth or solvency or any balance sheet condition
of the primary obligor, (c) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor to make payment of such primary
obligation, or (d) to indemnify the owner of such primary obligation against
loss in respect thereof.
1.32. "Guarantor" shall mean each Subsidiary of Borrower, each of
which is executing and delivering to the Agent on behalf of the Lenders the
Guaranty.
1.33. "Guaranty" shall mean the existing Guaranty dated as of July 25,
1995, between Borrower and WESAC, as amended by the First Amendment thereto,
and as may be amended from time to time hereafter.
1.34. "Indebtedness" of any Person shall mean (i) all indebtedness of
such Person for borrowed money or for the deferred purchase price of property
or services (including, without limitation, reimbursement and all other
obligations with respect to surety bonds, letters of credit and bankers'
acceptances, whether or not matured, but not including obligations to trade
creditors incurred in the ordinary course of business), (ii) all obligations
evidenced by notes, bonds, debentures or similar instruments, (iii) all
indebtedness created or arising under any conditional sale or other title
retention agreements with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property),
(iv) all Capital Lease Obligations, (v) all Guaranteed Indebtedness, (vi) all
Indebtedness referred to in clause (i), (ii), (iii), (iv) or (v) above secured
by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien upon or in property
(including, without limitation, accounts and contract rights) owned by such
Person, even though such Person has not assumed or become liable for the
payment of such Indebtedness, (vii) the Obligations, and (viii) all liabilities
under Title IV of ERISA.
1.35. "Inventory" shall mean any and all now owned or hereafter
acquired inventory, goods, merchandise, and other tangible personal property
intended for sale or lease, in the custody or possession, actual or
constructive, of Borrower or any of its Subsidiaries, or in transit to Borrower
or any of its Subsidiaries, including such inventory as is on consignment to
third parties, leased to customers of Borrower or any of its Subsidiaries, or
otherwise temporarily out of the custody or possession of Borrower or any of
its Subsidiaries.
1.36. "IRC" shall mean the Internal Revenue Code of 1986, as amended,
and any successor thereto.
1.37. "IRS" shall mean the Internal Revenue Service, or any successor
thereto.
1.38. "Leases" shall mean all of those leasehold estates in real
property now owned or hereafter acquired by Borrower or any Subsidiary of
Borrower, as lessee.
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<PAGE>
1.39. "Lenders" shall mean the initial Lenders defined in the
Preamble, but excluding WESAC (and the Borrower as successor by merger) from
and after the date the WESAC Merger is effected, and adding or substituting any
assignees or alternate Lender or Lenders the lenders may from time to time
nominate by written notice to the Borrower.
1.40. "Lien" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, any lease or title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, and the filing of, or agreement to give, any financing statement
perfecting a security interest under the Code or comparable law of any
jurisdiction).
1.41. "Loan" or "Loans" shall mean the Tranche A and the Tranche B
Loans.
1.42. "Loan Documents" shall mean this 1998 Credit Agreement, the
Tranche A and Tranche B Notes, the Collateral Documents, the Guaranty, those
other Ancillary Agreements as to which the Lenders or the Agent is a party or a
beneficiary on the Closing Date, and all other agreements, instruments,
documents and certificates, including, without limitation, pledges, powers of
attorney, consents, assignments, contracts, notices, and all other written
matter whether heretofore, now or hereafter executed by or on behalf of
Borrower or any of its Affiliates, or any employee of Borrower or any of its
Affiliates, and delivered to the Agent or any Lender in connection with this
1998 Credit Agreement or the transactions contemplated hereby, and all
amendments or supplements to any of the foregoing.
1.43. "Loan Party" shall mean Borrower and each Subsidiary of
Borrower.
1.44. "Material Adverse Effect" shall mean material adverse effect on
(i) the business, assets, operations, prospects or financial or other condition
of Borrower and its Subsidiaries taken as a whole, (ii) Borrower's and its
Subsidiaries' collective ability to pay the Obligations in accordance with the
terms thereof, or (iii) the Collateral or Lenders' Liens on the Collateral or
the priority of any such Lien.
1.45. "1998 Credit Agreement" shall mean this Agreement, and all
amendments, modifications and supplements hereto and any appendices, exhibits
or schedules to any of the foregoing, and shall refer to this 1998 Credit
Agreement as the same may be in effect at the time such reference becomes
operative.
1.46. "Obligations" shall mean all loans, advances, debts,
liabilities, and obligations for monetary amounts (whether or not such amounts
are liquidated or determinable) owing by Borrower or any of its Subsidiaries or
all of them to any Lenders, or any Subsidiary or Affiliate of a Lender, and all
covenants and duties regarding such amounts, of any kind or nature, present or
future, whether or not evidenced by any note, agreement or other instrument,
arising under any of the Loan Documents. This term includes, without
limitation, the Wexford Conversion Debt (prior to the Restructuring Date), any
surviving obligations of Borrower under
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<PAGE>
the Existing Credit Lines, the Tranche A and Tranche B Loans, and any amounts
payable to Chase or its affiliates on account of the Company's obligations under
the Chase Facility and any and all other, future advances, as well as all
interest, Commitment Fees, charges, expenses, attorneys' fees and any other sum
chargeable to Borrower or any or all of its Subsidiaries under any of the Loan
Documents.
1.47. "Patent Assignments" shall mean the existing Patent Assignments,
each dated as of July 25, 1995 between Borrower and WESAC, Wahlco, Inc. and
WESAC, and Wahlco International, Inc. and WESAC, in each case as amended by the
First Amendment thereto, substantially in the form of Exhibits C-1, C-2 and C-3
attached hereto and as may be amended from time to time hereafter.
1.48. "Permitted Encumbrances" shall mean the following encumbrances:
(i) Liens for taxes or assessments or other governmental charges or levies,
either not yet due and payable or to the extent that nonpayment thereof is
permitted by the terms of this 1998 Credit Agreement; (ii) pledges or deposits
securing obligations under workmen's compensation, unemployment insurance,
social security or public liability laws or similar legislation; (iii) pledges
or deposits securing bids, tenders, contracts (other than contracts for the
payment of money) or leases to which Borrower or any of its Subsidiaries is a
party as lessee made in the ordinary course of business; (iv) deposits securing
public or statutory obligations of Borrower or any of its Subsidiaries; (v)
workers', mechanics', suppliers', carriers', warehousemen's or other similar
liens arising in the ordinary course of business and securing indebtedness
aggregating not in excess of $100,000 at any time outstanding, not yet due and
payable; (vi) deposits securing or in lieu of surety, appeal or customs bonds
in proceedings to which Borrower or any of its Subsidiaries is a party; (vii)
any attachment or judgment lien, unless the judgment it secures shall not,
within 60 days after the entry thereof, have been discharged or execution
thereof stayed pending appeal, or shall not have been discharged within 60 days
after the expiration of any such stay; (viii) zoning restrictions, easements,
licenses, or other restrictions on the use of real property or other minor
irregularities in title (including leasehold title) thereto, so long as the
same do not materially impair the use, value, or marketability of such real
property, leases or leasehold estates; and (ix) Liens on cash and Cash
Equivalents to secure Letter of Credit Obligations, and (x) prior to the
Restructuring Date, Liens in favor of Silicon Valley Bank.
1.49. "Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, institution, public benefit corporation, entity or government
(whether federal, state, county, city, municipal or otherwise, including,
without limitation, any instrumentality, division, agency, body or department
thereof).
1.50. "Plan" shall mean, with respect to Borrower or any ERISA
Affiliate, at any time, an employee benefit plan, as defined in Section 3(3) of
ERISA, which Borrower or any of its Subsidiaries maintains, contributes to or
has an obligation to contribute to on behalf of participants who are or were
employed by any of them.
1.51. "Required Lenders" shall mean, as of any date, the holders of
Notes evidencing at least a majority of the aggregate unpaid principal amount
of the Loans; provided,
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<PAGE>
however, that any amendment to, modification of or supplement to this 1998
Credit Agreement or waiver of a Default or an Event of Default hereunder that
would have the effect of reinstating the obligations to make Loans from and
after the date such obligations have been terminated or changing the terms of,
amount of or obligation to make Loans shall require the affirmative consent
thereto of each Lender whose obligations would be so increased.
1.52. "Reserves" shall mean such reserves for doubtful accounts,
returns, allowances and the like as may be established by Borrower or any
Subsidiary or as may otherwise be required in accordance with GAAP.
1.53. "Restricted Lease" shall mean, as at any date, any lease of
property (whether real, personal or mixed) other than Capital Leases.
1.54. "Restricted Payment" shall mean (i) the declaration of any
dividend or the incurrence of any liability to make any other payment or
distribution of cash or other property or assets in respect of Borrower's Stock
or (ii) any payment on account of the purchase, redemption or other retirement
of Borrower's Stock or any other payment or distribution made in respect
thereof, either directly or indirectly.
1.55. "Restructuring Date" means the closing date under the
Restructuring Agreement.
1.56. "SEC Documents" means each report or filing made by Borrower
with the Commission.
1.57. "Security Agreement" shall mean the Security Agreement dated as
of July 25, 1995, between Borrower and WESAC, as amended by the First Amendment
thereto, and as may be amended from time to time hereafter.
1.58. "Stock" shall mean all shares, options, warrants, general or
limited partnership interests, participations or other equivalents (regardless
of how designated) of or in a corporation, partnership or equivalent entity
whether voting or nonvoting, including, without limitation, common stock,
preferred stock, or any other "equity security" (as such term is defined in
Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended).
1.59. "Stock Pledge Agreement" shall mean the Stock Pledge Agreement
dated as of July 25, 1995, between Borrower and WESAC, as amended by the First
Amendment thereto, and as may be amended from time to time hereafter.
1.60. "Subsidiary" shall mean, with respect to any Person, (a) any
corporation of which an aggregate of more than 50% of the outstanding Stock
having ordinary voting power to elect a majority of the board of directors of
such corporation (irrespective of whether, at the time, Stock of any other
class or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time, directly or
indirectly, owned legally or
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<PAGE>
beneficially by such Person and/or one or more Subsidiaries of such Person, and
(b) any partnership in which such Person and/or one or more Subsidiaries of
such Person shall have an interest (whether in the form of voting or
participation in profits or capital contribution) of more than 50%.
1.61. "Termination Date" shall mean the date on which all Existing
Credit Lines and any other Obligations hereunder have been completely
discharged and Borrower shall have no further right to borrow any monies
hereunder.
1.62. "Tranche A Commitment" shall mean the Lenders' commitment to
make the Tranche A Loans under Section 2.2.
1.63. "Tranche A Commitment Termination Date" shall mean the earliest
of (a) the Restructuring Closing Date, (b) June 30, 1998, or (c) the date
Tranche A Commitment terminates pursuant to Section 8.2.
1.64. "Tranche A Loan" shall have the meaning assigned in Section
2.2(a).
1.65. "Tranche A Note" shall have the meaning assigned in Section
2.2(b).
1.66. "Tranche B Commitment" shall mean the Lenders' commitment to
make the Tranche B Loans under Section 2.2.
1.67. "Tranche B Commitment Termination Date" shall mean the earlier
of (a) December 31, 2000, or (b) the date the Tranche B Commitment is
terminated pursuant to Section 8.2.
1.68. "Tranche B Loan" shall have the meaning assigned in Section
2.2(a).
1.69. "Tranche B Note" shall have the meaning assigned in Section
2.2(b).
1.70. "Wexford Conversion Debt" shall mean all Obligations owed or
accrued as of the Closing Date under the Existing Credit Lines.
1.71. "Welfare Plans" shall mean any welfare plan, as defined in
Section 3(1) of ERISA, which is maintained or contributed to by Borrower, any
of its Subsidiaries or any ERISA Affiliate.
1.72. "Withdrawal Liability" means, at any time, the aggregate amount
of the liabilities, if any, pursuant to Section 4201 of ERISA, and any increase
in contributions pursuant to Section 4243 of ERISA with respect to all
Multiemployer Plans.
1.73. Accounting Terms. Any accounting term used in this 1998 Credit
Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given such term in accordance with GAAP, and all financial
computations hereunder shall be
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computed, unless otherwise specifically provided herein, in accordance with
GAAP consistently applied. That certain terms or computations are explicitly
modified by the phrase "in accordance with GAAP" shall in no way be construed
to limit the foregoing. All other undefined terms contained in this 1998 Credit
Agreement shall, unless the context indicates otherwise, have the meanings
provided for by the Code as in effect in the State of New York to the extent
the same are used or defined therein. The words "herein," "hereof" and
"hereunder" and other words of similar import refer to this 1998 Credit
Agreement as a whole, including the Exhibits and Schedules hereto, as the same
may from time to time be amended, modified or supplemented, and not to any
particular section, subsection or clause contained in this 1998 Credit
Agreement.
1.74. Gender. Wherever from the context it appears appropriate, each
term stated in either the singular or plural shall include the singular and the
plural, and pronouns stated in the masculine, feminine or neuter gender shall
include the masculine, the feminine and the neuter.
2. AMOUNT AND TERMS OF CREDIT
2.1. Wexford Conversion Debt. The Existing Credit Lines and all the
obligations of Borrower and each Loan Party with respect thereto shall continue
in full force and effect as regards the Wexford Conversion Debt, and shall
govern the amount and terms of the Wexford Conversion Debt, unless and until
the conversion thereof into Common Stock of Borrower is consummated pursuant to
Section 2.2 of the Restructuring Agreement, whereupon the Wexford Conversion
Debt shall be paid and discharged in accordance with the terms thereof, subject
to the survival of all existing indemnities of Borrower, which shall henceforth
run in favor of Agent on behalf of all the Lenders.
2.2. Trance A Line. (a) Upon and subject to the terms and conditions
hereof, the Tranche A Lenders agree to make available until the Tranche A
Commitment Termination Date, for Borrower's use one or more loans (each a
"Tranche A Loan") in an aggregate amount not to exceed (x) $3,000,000, minus
(y) the Chase Facility Tranche A Commitment Reduction Amount from time to time
in effect (the "Tranche A Line").
(b) Each Tranche A Loan made by the Tranche A Lenders shall be
evidenced by a promissory note to be executed and delivered by Borrower at the
time of the first Tranche A Loan, the form of which is attached hereto and made
a part hereof as Exhibit A-1 (the "Tranche A Note"). The stated maturity of the
Tranche A Note shall be the Restructuring Closing Date, provided that if the
Tranche A Loans are not prepaid in full from the proceeds of the Rights
Offering as set forth in Section 2.1 of the Restructuring Agreement, the unpaid
principal balance of the Tranche A Note shall have a stated maturity of
December 31, 2000.
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2.3 Trance B Line. (a) Upon and subject to the terms and conditions
hereof, the Lenders agree to make available, from the Restructuring Closing
Date to and including the Tranche B Commitment Termination Date, for Borrower's
use one or more advances (each a "Tranche B Loan") in an aggregate amount not
to exceed (x) $2,500,000, minus (y) the Chase Facility Tranche B Commitment
Reduction Amount from time to time in effect (the "Tranche B Line").
(b) Each Tranche B Loan made by the Lenders shall be evidenced by
a promissory note to be executed and delivered by Borrower at the time of the
first Tranche B Advance, the form of which is attached hereto and made a part
hereof as Exhibit A-2 (the "Tranche B Note"). The Tranche B Note shall have a
stated maturity of December 31, 2000.
2.4 Optional Prepayment. Borrower shall have the right at any time,
on ten days' prior written notice to Lenders, to prepay first the Tranche A
Loans, and then the Tranche B Loans, in minimum amounts of $50,000 and integral
multiples thereof, without premium or penalty. Amounts prepaid may not be
reborrowed. Each prepayment shall be accompanied by accrued but unpaid interest
on the amount prepaid.
2.5. Notice of Borrowing; Use of Proceeds. Each Tranche A Loan or
Tranche B Loan shall be made on not less than three Business Days' Notice to
the Agent, and shall be accompanied by a proposed use of proceeds, which use of
proceeds shall be reasonably acceptable to the Agent. Borrower shall use the
proceeds of the Tranche A and Tranche B Loans made hereunder for purposes
specified in the applicable notice of borrowing.
2.6. Interest. The unpaid principal balance of the Tranche A Loans and
the Tranche B Loans shall bear interest at the rate of 13% per annum until
maturity, and any amount not paid when due shall bear interest at the rate of
15% per annum, in either case based upon a year of 365 or 366, as the case may
be, days for actual days elapsed. Interest shall be payable semi-annually in
arrears on the last day of each June and January, commencing on June 30, 1998.
2.7. Assignment of Security Interest. Effective upon the execution and
delivery of this Agreement, WESAC hereby assigns to the Agent, for the benefit
of all the Lenders, all Liens and security interests held by WESAC as of the
date hereof. Borrower consents to such assignment and agrees that such Liens
and security interests shall secure all Obligations under the Existing Credit
Liens and under this 1998 Credit Agreement.
2.8. Receipt of Payments. Borrower shall make each payment under this
1998 Credit Agreement not later than 3:00 P.M. (New York City time) on the day
when due in lawful money of the United States of America in immediately
available funds to Lenders' depository bank as designated by the Agent on
behalf of the Lenders from time to time for deposit in Lenders' depository
account. For purposes only of computing interest hereunder, all payments shall
be applied by Lenders on the day payment has been credited by Lenders'
depository bank to Lenders' account in immediately available funds.
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2.9. Indemnity. Borrower shall indemnify and hold Lenders and the
Agent harmless from and against any and all suits, actions, proceedings,
claims, damages, losses, liabilities and expenses (including, without
limitation, reasonable attorneys' fees and disbursements, including those
incurred upon any appeal) which may be instituted or asserted against or
incurred by any of them as the result of its having entered into any of the
Loan Documents or extended credit hereunder; provided, however, that Borrower
shall not be liable for such indemnification to any Lender or the Agent to the
extent that any such suit, action, proceeding, claim, damage, loss, liability
or expense results from such Lender's or the Agent's gross negligence or
willful misconduct.
2.10. Access. The Agent, the Lenders and any of their officers,
employees and/or agents shall have the right, exercisable as frequently as the
Agent or the Lenders reasonably determine to be appropriate, during normal
business hours (or at such other times as may reasonably be requested by the
Agent and the Lenders, to inspect the properties and facilities of Borrower and
the Subsidiaries and to inspect, audit and make extracts from all of Borrower's
and such Subsidiaries' records, files and books of account. Borrower shall
deliver any document or instrument reasonably necessary for the Agent and the
Lenders, as any of them may reasonably request, to obtain records from any
service bureau maintaining records for Borrower or its Subsidiaries, and shall
maintain duplicate records or supporting documentation on paper or other media,
including, without limitation, computer tapes and discs owned by Borrower and
its Subsidiaries. Borrower shall instruct its and its Subsidiaries' banking and
other financial institutions to make available to the Agent and the Lenders
such information and records as the Agent and Lenders may reasonably request.
3. REPRESENTATIONS AND WARRANTIES
To induce each Lender to make the Tranche A and Tranche B
Loans, as herein provided for, Borrower makes the following representations and
warranties to Lenders, each and all of which shall be true and correct as of
the date hereof, and shall survive the execution and delivery of this 1998
Credit Agreement:
3.1. Corporate Existence; Compliance with Law. Borrower and each
Subsidiary of Borrower (i) is a corporation duly organized, validly existing
and in good standing under the laws of the state of its incorporation; (ii) is
duly qualified as a foreign corporation and in good standing under the laws of
each jurisdiction where its ownership or lease of property or the conduct of
its business requires such qualification (except for jurisdictions in which
such failure to so qualify or to be in good standing would not have a Material
Adverse Effect); (iii) has the requisite corporate power and authority and the
legal right to own, pledge, mortgage or otherwise encumber and operate its
properties, to lease the property it operates under lease, and to conduct its
business as now, heretofore and proposed to be conducted; (iv) has all material
licenses, permits, consents or approvals from or by, and has made all material
filings with, and has given all material notices to, all Governmental
Authorities having jurisdiction, to the extent required for such ownership,
operation and conduct; (v) is in compliance with its certificate or articles of
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incorporation and by-laws; and (vi) is in compliance with all applicable
provisions of law where the failure to comply would have a Material Adverse
Effect.
3.2. Subsidiaries. The Borrower's Subsidiaries have been disclosed in
its SEC Documents.
3.3. Corporate Power; Authorization; Enforceable Obligation. The
execution, delivery and performance by Borrower and its Subsidiaries of the
Loan Documents, Ancillary Documents and all instruments and documents to be
delivered by Borrower and its Subsidiaries, to the extent they are parties
thereto, hereunder and thereunder and the creation of all Liens provided for
herein and therein: (i) are within Borrower's and its Subsidiaries' corporate
power; (ii) have been, or by the Closing Date will be, duly authorized by all
necessary or proper corporate action; (iii) are not in contravention of any
provision of Borrower's or its Subsidiaries' respective certificates or
articles of incorporation or by-laws; (iv) will not violate any law or
regulation, or any order or decree of any court or governmental
instrumentality; (v) will not conflict with or result in the breach or
termination of, constitute a default under or accelerate any performance
required by, any indenture, mortgage, deed of trust, lease, agreement or other
instrument to which Borrower or any of its Subsidiaries is a party or by which
Borrower or any of its Subsidiaries or any of their property is bound; (vi)
will not result in the creation or imposition of any Lien upon any of the
property of Borrower or any of its Subsidiaries other than those in favor of
the Agent and the Lenders, all pursuant to the Loan Documents; and (vii) do not
require the consent or approval of any Governmental Authority or any other
Person. At or prior to the Closing Date, each of the Loan Documents shall have
been duly executed and delivered for the benefit of or on behalf of Borrower or
its Subsidiaries, as the case may be, and each shall then constitute a legal,
valid and binding obligation of Borrower or its Subsidiaries, to the extent
they are parties thereto, enforceable against them in accordance with its
terms.
3.4. Financial Statements.
(a) All of the following balance sheets and statements of income,
retained earnings and cash flows of Borrower, copies of which have been
furnished to Lenders prior to the date of this 1998 Credit Agreement, have
been, except as noted therein, prepared in conformity with GAAP consistently
applied throughout the periods involved and present fairly the consolidated
financial position of Borrower in each case at the dates thereof, and the
results of operations and cash flows for the periods then ended (as to the
unaudited interim financial statements, subject to normal year-end audit
adjustments):
(i) the unaudited consolidated balance sheet of Borrower at
September 30, 1997, and the related consolidated statements of income,
retained earnings and cash flows for the three months ending on such date;
and
(ii) the audited consolidated balance sheet of Borrower as at
December 31, 1996, and the related consolidated statements of income,
retained earnings and cash flows for the year then ended, with the opinion
thereon of Arthur Andersen & Co., LLP.
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(b) Borrower, as of September 30, 1997, had no obligations, contingent
liabilities or liabilities for Charges, long-term leases or unusual forward or
long-term commitments which are not reflected in the consolidated financial
statements of Borrower and its Subsidiaries and which would have a Material
Adverse Effect.
(c) There has been no material adverse change in the business, assets,
operations, prospects or financial or other condition of Borrower and its
Subsidiaries taken as a whole since September 30, 1997 (it being understood
that, subsequent to the Closing Date, this representation and warranty shall be
subject to the fact that Borrower shall have incurred the Obligations
hereunder). No dividends or other distributions have been declared, paid or
made upon any shares of capital Stock of Borrower or any of the Subsidiaries,
nor have any shares of capital Stock of Borrower or any of the Subsidiaries
been redeemed, retired, purchased or otherwise acquired for value by Borrower
or Subsidiaries since September 30, 1997.
3.5. Ownership of Property; Liens. Borrower or its Subsidiaries owns
good and marketable fee simple title to all of the Real Estate owned by it or
such Subsidiaries and Borrower or such Subsidiaries have good, valid and
marketable leasehold interests in the Leases to which the Borrower or any
Subsidiary is a party, and good and marketable title to, or valid leasehold
interests in, all of its other properties and assets, and none of the
properties and assets of Borrower and its Subsidiaries, including, without
limitation, the Real Estate and Leases, is subject to any Liens, except (i)
Permitted Encumbrances and (ii) from and after the Closing Date, the Lien in
favor of the Agent and the Lenders pursuant to the Collateral Documents; and
Borrower and its Subsidiaries have duly effected all recordings, filings and
other actions necessary to establish, protect and perfect Borrower's and its
Subsidiaries' right, title and interest in and to all such property except
where the failure to have received such documents or effected such actions will
not, in the aggregate, have a Material Adverse Effect.
3.6. No Default. Except as set forth on Schedule 3.6, neither Borrower
nor any of its Subsidiaries is in default, nor to Borrower's knowledge, is any
third party in default, under or with respect to any contract, agreement, lease
or other instrument to which it is a party, except for any default which
(either individually or collectively with other defaults arising out of the
same event or events) would not have a Material Adverse Effect. No Default or
Event of Default has occurred and is continuing.
3.7. Burdensome Restrictions. No contract, lease, agreement or other
instrument to which Borrower or any of its Subsidiaries is a party or is bound
and no provision of applicable law or governmental regulation has a Material
Adverse Effect, or insofar as Borrower can reasonably foresee may have a
Material Adverse Effect.
3.8. Labor Matters. There are no strikes or other labor disputes
against Borrower or any of its Subsidiaries pending or, to Borrower's
knowledge, threatened which, if adversely determined, would have a Material
Adverse Effect. All payments due from Borrower or any of its Subsidiaries on
account of employee health and welfare insurance which would have a Material
Adverse Effect if not paid have been paid or accrued as a liability on the
books of Borrower or
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such Subsidiary. Neither Borrower nor any of its Subsidiaries has any
obligation under any collective bargaining agreement or any employment
agreement. There are no complaints or charges against Borrower or any of its
Subsidiaries pending or threatened to be filed with any federal, state, local
or foreign court, governmental agency or arbitrator based on, arising out of,
in connection with, or otherwise relating to the employment or termination of
employment by Borrower or any Subsfidiary of any individual.
3.9. Other Ventures. Except for the Borrower's 34% interest in
Bachmann India, Ltd., neither Borrower nor any Subsidiary has any equity
interest in, or is engaged in, any partnership with any other Person.
3.10. Taxes. Except as set forth on Schedule 3.10, all federal, state,
local and foreign tax returns, reports and statements required to be filed by
Borrower and its Subsidiaries have been filed with the appropriate Governmental
Authority and all Charges and other impositions shown thereon to be due and
payable have been paid prior to the date on which any fine, penalty, interest
or late charge may be added thereto for nonpayment thereof, or any such fine,
penalty, interest, late charge or loss has been paid. Each of Borrower and its
Subsidiaries has paid when due and payable all Charges required to be paid by
it. Proper and accurate amounts have been withheld by Borrower and its
Subsidiaries from their respective employees for all periods in full and
complete compliance with the tax, social security and unemployment withholding
provisions of applicable federal, state, local and foreign law and such
withholdings have been timely paid to the respective governmental agencies.
Neither Borrower nor any of its Subsidiaries are currently being audited by the
IRS or any other applicable Governmental Authority. Neither Borrower nor any of
its Subsidiaries has executed or filed with the IRS or any other Governmental
Authority any agreement or other document extending, or having the effect of
extending, the period for assessment or collection of any Charges. Neither
Borrower nor any of its Subsidiaries has filed a consent pursuant to IRC
Section 341(f) or agreed to have IRC Section 341(f)(2) apply to any
dispositions of subsection (f) assets (as such term is defined in IRC Section
341(f)(4)). None of the property owned by Borrower or any of its Subsidiaries
is property which such company is required to treat as being owned by any other
Person pursuant to the provisions of IRC Section 168(f)(8) of the Internal
Revenue Code of 1954, as amended, and in effect immediately prior to the
enactment of the Tax Reform Act of 1986 or is "tax-exempt use property" within
the meaning of IRC Section 168(h). Neither Borrower nor any of its Subsidiaries
has agreed or has been requested to make any adjustment under IRC Section
481(a) by reason of a change in accounting method or otherwise. Neither
Borrower nor any of its Subsidiaries has any obligation under any written tax
sharing agreement.
3.11. ERISA. Neither the Company nor any Subsidiary has any Plan
subject to regulation under ERISA except for its 401(k) plan.
3.12. No Litigation. No action, claim or proceeding is now pending or,
to the knowledge of Borrower, threatened against Borrower or any of its
Subsidiaries, at law, in equity or otherwise, before any court, board,
commission, agency or instrumentality of any federal, state, or local
government or of any agency or subdivision thereof, or before any arbitrator or
panel of arbitrators, which, if determined adversely, could have a Material
Adverse Effect, nor to the
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knowledge of Borrower does a state of facts exist which is reasonably likely to
give rise to such proceedings. None of the matters set forth therein questions
the validity of any of the Loan Documents or any action taken or to be taken
pursuant thereto, or would have either individually or in the aggregate a
Material Adverse Effect.
3.13. Patents, Trademarks, Copyrights and Licenses. Borrower and its
Subsidiaries own all material licenses, patents, patent applications,
copyrights, service marks, trademarks, trademark applications, and trade names
necessary to continue to conduct their business as heretofore conducted by
them, now conducted by them and proposed to be conducted by them. To the best
of their knowledge, Borrower and its Subsidiaries conduct their respective
businesses without infringement or claim of infringement of any license,
patent, copyright, service mark, trademark, trade name, trade secret or other
intellectual property right of others, except where such infringement or claim
of infringement would not have a Material Adverse Effect. To Borrower's
knowledge, there is no infringement or claim of infringement by others of any
material license, patent, copyright, service mark, trademark, trade name, trade
secret or other intellectual property right of Borrower or any of its
Subsidiaries.
3.14. Liens. Except for Permitted Encumbrances, the Liens granted to
the Agent for the benefit of the Lenders pursuant to the Collateral Documents
will at the Closing Date be fully perfected first priority Liens in and to the
Collateral described therein.
3.15. Full Disclosure. No information contained in this 1998 Credit
Agreement, the other Loan Documents, the Financial Statements or any written
statement furnished by or on behalf of Borrower or its Subsidiaries pursuant to
the terms of this 1998 Credit Agreement contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements contained herein or therein not misleading in light of the
circumstances under which made.
4. CONDITIONS PRECEDENT
4.1. Conditions to Initial Tranche A Loan. Notwithstanding any other
provision of this Agreement and without affecting in any manner the rights of
the Agent or any Lender hereunder, Borrower shall have no rights under this
Agreement (but shall have all applicable obligations hereunder), and no lender
shall be obligated to make any Loan hereunder, unless and until Borrower shall
have delivered to the Agent, in form and substance satisfactory to the Agent
and each Lender and (unless otherwise indicated, each dated the Closing Date):
(a) The Tranche A Loan Note payable to the order of the Agent, duly
executed by Borrower.
(b) A favorable opinion of Roger M. Barzun, Esq., counsel to the
Borrower and its Subsidiaries (each a "Loan Party," and collectively, the "Loan
Parties"), in form and substance satisfactory to the Agent and its counsel;
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(c) Resolutions of the board of directors of each Loan Party,
certified by the Secretary or Assistant Secretary of such Loan Party, as of the
Closing Date, to be duly adopted and in full force and effect on such date,
authorizing (i) the consummation of each of the transactions contemplated by
the Loan Documents and (ii) specific officers to execute and deliver this
Agreement and the other Loan Documents.
(d) Governmental certificates, dated the most recent practicable date
prior to the Closing Date, showing that each Loan Party is organized and in
good standing in the jurisdiction of its organization and is qualified as a
foreign corporation and in good standing in all other jurisdictions in which it
is qualified to transact business.
(e) The Security Agreement, duly executed and delivered by borrower;
the Stock Pledge Agreement, duly executed and delivered by Borrower and each
Subsidiary owning Stock of other Subsidiaries or Borrower; the Patent
Assignments duly executed by Borrower and its Subsidiaries; and the Guaranty,
duly executed and delivered by each Guarantor; together with:
(i) acknowledgment copies of proper Financing Statements
(Form UCC-1) or Amendment to/Assignment of Financing Statements (Form UCC-3),
duly filed under the Uniform Commercial Code of each jurisdiction as may be
necessary or, in the opinion of the Agent, desirable to perfect the security
interests created by the Security Agreement;
(ii) certified copies of requests for Information or Copies (Form
UCC-11), or equivalent reports, listing the Financing Statements and
Amendment/Assignment thereof referred to in paragraph (i) above and all other
effective financing statement which name Borrower or any of its Subsidiaries
(under this present name and any previous name) as debtor and which are filed
in the jurisdictions referred to in said paragraph (i), together with copies of
such other financing statements (none of which shall cover the Collateral
purported to be covered by the Security Agreement);
(iii) evidence of the completion of all recordings and filing of the
Security Agreement and Patent Assignments as may be necessary or, in the
opinion of the Agent, desirable to perfect the security interests and liens
created by the Security Agreement and Patent Assignments;
(iv) evidence that all other actions necessary or, in the opinion
of the Agent, desirable to perfect and protect the security interests created
by the Security Agreement and Patent Assignments have been taken.
(f) A certificate of the chief executive officer and chief financial
officer of Borrower, satisfactory in form and substance to the Agent, stating
that all of the representations and warranties of the Loan Parties contained
herein or in any of the Loan Documents are correct on and as of the Closing
Date as though made on and as of such date, and no event has occurred and is
continuing, or would result from a Tranche A Loan, which constitutes or would
constitute a Default or an Event of Default.
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(g) Certificates of the Secretary or an Assistant Secretary of each
Loan Party, dated the Closing Date, as to the incumbency and signatures of the
officers of such Loan Party executing this Agreement, the Tranche A Note, any
of the Loan Documents and any other certificate or other document to be
delivered pursuant hereto or thereto, together with evidence of the incumbency
of such Secretary or Assistant Secretary.
(h) Such additional information and materials as the Agent may
reasonably request, including, without limitation, copies of any debt
agreement, security agreements and other material contracts.
4.2. Conditions Precedent to Tranche B Loans. Notwithstanding any
other provision of this 1998 Credit Agreement and without affecting in any
manner the rights of the Agent or any Lender, unless and until:
(a) the Restructuring Conditions, as defined in the Restructuring
Agreement, shall all have been fulfilled (or with the consent of the Agent)
duly waived, and the Agent shall have so confirmed by delivering to the
Borrower the Agent's Certificate in the form attached to the form of
Cross-Receipt attached to the Restructuring Agreement.
(b) The Borrower shall have delivered to the Agent, duly executed by
Borrower's Tranche B Note, payable to the order of the Agent; and
(c) If requested by the Agent, a favorable opinion of Roger M. Barzun,
Esquire, counsel to the Loan Parties, in form and substance satisfactory to the
Agent and its counsel.
4.3. Conditions Precedent to All Tranche A and Tranche B Loans.
(a) No default or Event of Default shall have occurred and be
continuing.
(b) All of Borrower's representations and warranties set forth in
Section 3 of this 1998 Credit Agreement, or those of any Loan Party elsewhere
in the Loan Documents, shall be true and correct in all material respects on
and as of the proposed disbursement date.
Each request for a Tranche A or Tranche B Loan shall be deemed an express
representation that each of the aforesaid conditions is met.
5. FINANCIAL STATEMENTS AND INFORMATION
5.1 Reports and Notices. Borrower covenants and agrees that it shall
deliver to the Agent, within thirty (30) days following the end of each month,
the financial statements and reports referred to as the "Monthly Reporting
Package," consistent with past practice. Borrower also agrees to provide Lender
with such other financial information concerning Borrower's results of
operations and financial condition as Lender may reasonably request from time
to time.
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5.2 Communication with Accountants. Borrower authorizes the Agent and
the Lenders to communicate directly with its independent certified public
accountants and tax advisors and authorizes those accountants to disclose to
the Agent or any Lender any and all financial statements and other supporting
financial documents and schedules including copies of any management letter
with respect to the business, financial condition and other affairs of Borrower
and any of its Subsidiaries.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, unless the Lenders shall
otherwise consent in writing, from and after the date hereof and until the
Termination Date:
6.1. Maintenance of Existence and Conduct of Business. Borrower shall,
and shall cause each of its Subsidiaries to: (a) do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, and its rights and franchises; (b) continue to conduct its business
substantially as now conducted or as otherwise permitted hereunder; (c) at all
times maintain, preserve and protect all of its material trademarks and trade
names, and preserve all the remainder of its property, in use or useful in the
conduct of its business and keep the same in good repair, working order and
condition (taking into consideration ordinary wear and tear) and from time to
time make, or cause to be made, all needful and proper repairs, renewals and
replacements, betterments and improvements thereto consistent with applicable
industry practices, so that the business carried on in connection therewith may
be properly and advantageously conducted at all times; and (d) transact
business only in such names used as of the date hereof, or such other names as
Borrower or any Subsidiary of Borrower shall specify to Lender in writing not
less than thirty (30) days prior to the first date such name is used by
Borrower or any Subsidiary of Borrower.
6.2. Payment of Obligations. (a) Borrower shall, and shall cause each
of its Subsidiaries to: (i) pay and discharge or cause to be paid and
discharged all its Indebtedness, including, without limitation, all the
Obligations, as and when due and payable, and (ii) pay and discharge or cause
to be paid and discharged promptly all (A) Charges imposed upon it, its income
and profits, or any of its property (real, personal or mixed), and (B) lawful
claims for labor, materials, supplies and services or otherwise before any
thereof shall become in default.
(b) Borrower and its Subsidiaries may in good faith contest, by proper
legal actions or proceedings, the validity or amount of any Charges or claims
arising under Section 6.2(a)(ii), provided that at the time of commencement of
any such action or proceeding, and during the pendency thereof (i) no Default
or Event of Default shall have occurred; (ii) adequate Reserves with respect
thereto are maintained on the books of Borrower or such Subsidiary, in
accordance with GAAP; (iii) such contest operates to suspend collection of the
contested Charges or claims and is maintained and prosecuted continuously with
diligence; (iv) none of the Collateral would be subject to forfeiture or loss
or any Lien by reason of the institution or prosecution of such contest; (v) no
Lien shall exist for such Charges or claims during such action or proceeding;
(vi) Borrower or such Subsidiary shall promptly pay or discharge such contested
Charges and all
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additional charges, interest, penalties and expenses, if any, and shall deliver
to Lender evidence acceptable to Lender of such compliance, payment or
discharge, if such contest is terminated or discontinued adversely to Borrower
or such Subsidiary; and (vii) Lender has not advised Borrower in writing that
Lender reasonably believes that nonpayment or nondischarge thereof would have
a Material Adverse Effect.
6.3. Lenders' Fees. Borrower shall pay to the Agent and the Lenders,
on demand, any and all fees, costs or expenses that the Agent or either Lender
shall pay to a bank or other similar institution arising out of or in
connection with the forwarding to Borrower or any other Person on behalf of
Borrower by any Lender of proceeds of the Tranche A or Tranche B Loans.
6.4. Books and Records. Borrower shall, and shall cause each of its
Subsidiaries to, keep adequate records and books of account with respect to its
business activities, in which proper entries, reflecting all of their financial
transactions, are made in accordance with GAAP and on a basis consistent with
the Financials referred to in Section 3.4(b) hereof.
6.5. Litigation. Borrower shall notify the Agent in writing, promptly
upon learning thereof, of any litigation commenced against Borrower and/or any
of the Subsidiaries, and of the institution against any of them of any suit or
administrative proceeding that may have a Material Adverse Effect.
6.6. Insurance. Borrower shall and shall cause each Subsidiary of
Borrower to maintain insurance covering, without limitation, fire, theft,
burglary, public liability, property damage, product liability, workers'
compensation, and insurance on all property and assets, all in amounts
customary for its industry and under policies issued by insurers and pursuant
to policies satisfactory to the Agent and in any event in compliance with any
insurance requirements under any Loan Documents and with a lender's loss
payable clause for the benefit of the Agent and the Lenders. Borrower shall,
and shall cause each of its Subsidiaries to, pay all insurance premiums payable
by them.
6.7. Compliance with Law. Borrower shall and shall cause each of its
Subsidiaries to comply with all federal, state and local laws and regulations
applicable to it, including, without limitation, ERISA, those regarding the
collection, payment and deposit of employees' income, unemployment and social
security taxes and those relating to environmental matters where the failure to
comply may have a Material Adverse Effect.
6.8. Agreements. Borrower shall and shall cause each of its
Subsidiaries to perform, within all required time periods (after giving effect
to any applicable grace periods), all of its obligations and enforce all of its
rights under each agreement to which it is a party, including, without
limitation, any leases to which any such company is a party, where the failure
to so perform and enforce would have a Material Adverse Effect. Borrower shall
not and shall cause each of its Subsidiaries not to terminate or modify in any
manner adverse to any such company any provision of any agreement to which it
is a party which termination or modification could have a Material Adverse
Effect.
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6.9. SEC Filings; Certain Other Notices. Borrower shall furnish to the
Agent (i) promptly after the filing thereof with the Securities and Exchange
Commission, a copy of each report, notice or other filing, if any, by Borrower
with the Securities and Exchange Commission and (ii) a copy of each written
communication received by Borrower from or delivered by Borrower to the
Securities and Exchange Commission.
6.10. Additional Security. If requested by the Agent, Borrower shall
cause any Subsidiary designated by the Agent to enter into a security agreement
and/or one or more mortgages for the benefit of the Agent, pursuant to which
security agreement and mortgages such Subsidiary shall grant the Agent a first
priority security interest in substantially all of such Subsidiary's real and
personal property assets. In connection therewith, if the Agent shall so
request, such Subsidiary shall execute and deliver security agreements,
mortgages and such further documents and instruments and make such filings as
the Agent shall request to enable the Agent to perfect its security interest
and Liens in such Subsidiary's assets.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, without the Agent's prior
written consent, from and after the date hereof and until the Termination Date:
7.1. Mergers, Etc. Neither Borrower nor any Subsidiary of Borrower
shall directly or indirectly, by operation of law or otherwise, merge with,
consolidate with, acquire all or substantially all of the assets or capital
stock of, or otherwise combine with, any Person, or form any Subsidiary.
7.2. Investments; Loans and Advances. Except as otherwise permitted by
Section 7.3 or 7.4 hereof, Borrower shall not and shall not permit any
Subsidiary of Borrower to make any investment in, or make or accrue loans or
advances of money to any Person, through the direct or indirect holding of
securities or otherwise; provided, however, that Borrower shall be permitted
hereunder and may permit hereunder its Subsidiaries to make one or more
investments in, or make or accrue loans or advances of money to, Borrower or
any other Subsidiary and provided, further, that Borrower and its Subsidiaries
may make and own investments in (i) direct obligations of the United States of
America (including obligations issued or held in book-entry form on the books
of the Department of the Treasury of the United States of America) or
obligations the timely payment of the principal of, or interest on, which are
fully guaranteed by the United States of America; (ii) obligations, debentures,
notes or other evidence of indebtedness issued or guaranteed by any of the
following: Export-Import Bank of the United States, Federal Housing
Administration or other agency or instrumentality of the United States; (iii)
repurchase agreements with financial institutions or savings and loan
associations having a combined capital surplus of at least $500,000,000 fully
secured by collateral security described in clauses (i) or (ii) of this
definition and continuously having a market value of at least equal to the
amount so invested; (iv) interest-bearing demand or time deposits (including
certificates of deposit) which are either (i) insured by the Federal Deposit
Insurance Corporation, or (ii) held in banks and savings and loan associations,
having general obligations rated at least "AA" or equivalent by
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S&P or Moody's, or if not so rated, secured at all times, in the manner and to
the extent provided by law, by collateral security described in clauses (i) or
(ii) of this definition, of a market value of no less than the amount of moneys
so invested; (v) commercial paper rated (on the date of acquisition thereof) at
least A-1 or P-1 or equivalent by S&P or Moody's, respectively (or an
equivalent rating by another nationally recognized credit rating agency of
similar standing if neither of such corporations is then in the business of
rating commercial paper), maturing not more than 90 days from the date of
creation thereof; and (f) any corporate evidence of indebtedness rated at least
"A-" or equivalent by S&P or Moody's, maturing not more than 90 days from the
date of creation thereof. (the investments described in the preceding clauses
(i)-(v) being hereinafter referred to as "Cash Equivalents"). Notwithstanding
the foregoing, Wahlco, Engineer Products, Ltd. has pledged cash in the amount
of $700,000 U.K. pounds with London & International Mercantile, Ltd., which
pledge shall not be deemed a breach of this Section 7.2; provided, however,
that no further pledges may be made without the consent of the Agent.
7.3. Indebtedness. (a) Except as otherwise expressly permitted by this
Section 7.3 or by any other section of this 1998 Credit Agreement, Borrower
shall not, nor shall it permit any of its Subsidiaries to, create, incur,
assume or permit to exist any Indebtedness, except (i) Indebtedness secured by
Liens permitted under Section 7.7 hereof, (ii) the Obligations, (iii) all
deferred taxes, (iv) all unfunded pension fund and other employee benefit plan
obligations and liabilities but only to the extent they are permitted to remain
unfunded under applicable law, (v) intercompany debt to any Guarantor or to
Borrower, and (vi) Indebtedness of Subsidiaries of Borrower created under the
Guaranty.
(a) Except as otherwise expressly permitted by Section 7.8 hereof,
Borrower shall not and shall not permit any Subsidiary of Borrower to sell or
transfer, either with or without recourse, any assets, of any nature
whatsoever, in respect of which a Lien is granted or to be granted pursuant to
any Loan Document or engage in any sale-leaseback or similar transaction
involving any of such assets.
7.4. Employee Loans. Borrower shall not, and shall not permit any
Subsidiary of Borrower to, make or accrue any loans or other advances of money
to any employee of Borrower or any Subsidiary in excess at any one time of
$50,000 in the aggregate for all such loans, provided that any such loans are
made only in the ordinary course of Borrower's or such Subsidiary's business.
7.5. Maintenance of Business. Borrower shall not and shall not permit
any Subsidiary of Borrower to engage in any business other than the business
currently engaged in by Borrower or such Subsidiary on the Closing Date.
7.6. Guaranteed Indebtedness. Borrower shall not and shall not permit
any Subsidiary of Borrower to incur any Guaranteed Indebtedness (excluding the
Guaranteed Indebtedness pursuant to the Guaranty) except (i) by endorsement of
instruments or items of payment for deposit to the general account of Borrower
or such Subsidiary, and (ii) for Guaranteed Indebtedness incurred for the
benefit of Borrower or any Subsidiary of Borrower if the primary obligation is
permitted by this 1998 Credit Agreement.
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(a) Liens. Borrower shall not and shall not permit any Subsidiary of
Borrower to create or permit any Lien on any of its properties or assets
except: (a) presently existing or hereafter created Liens in favor of the Agent
or any Lender; and (b) Permitted Encumbrances.
7.7. Sales of Assets. Borrower shall not and shall not permit any
Subsidiary of Borrower to sell, transfer, convey or otherwise dispose of any
assets or properties; provided, however, that the foregoing shall not prohibit
(i) the sale of Inventory in the ordinary course of business, (ii) the sale of
surplus or obsolete equipment and fixtures, and (iii) transfers resulting from
any casualty or condemnation of assets or properties.
7.8. Cancellation of Indebtedness. Borrower shall not and shall not
permit any Subsidiary of Borrower to cancel any claim or debt owing to it,
except for reasonable consideration and in the ordinary course of business,
except that obligations of Wahlco Engineered Products Italiana SRC owed to
Wahlco Engineered Products Group Ltd. may be cancelled.
7.9. Events of Default. Borrower shall not and shall not permit any
Subsidiary of Borrower to take or omit to take any action, which act or
omission would constitute (i) a default or an event of default pursuant to, or
noncompliance with any of, the terms of any of the Loan Documents or the
Ancillary Agreements or (ii) a material default or an event of default pursuant
to, or noncompliance with any other contract, lease, mortgage, deed of trust or
instrument to which it is a party or by which it or any of its property is
bound, or any document creating a Lien, unless such default, event of default
or non-compliance would not have a Material Adverse Effect.
7.10. Hedging Transactions. Borrower shall not and shall not permit
any of its Subsidiaries to engage in any speculative interest rate hedging
swaps, caps or similar derivatives transaction other than currency hedging in
the ordinary course of business.
7.11. Restricted Payments. Borrower shall not and shall not permit any
Subsidiary of Borrower to make any Restricted Payments nor shall Borrower
permit any Subsidiary to make such payments with respect to Borrower's Stock.
7.12. Compensation. Except with the approval of the Board of Directors
of the Borrower, Borrower shall not and shall not permit any Subsidiary of
Borrower to, increase the salary and bonus in any year of the ten highest paid
employees of Borrower and its Subsidiaries, if as a result of such increase,
any such employee's total cash Compensation would increase by more than five
percent (5%) of his total cash Compensation for the prior year.
7.13. ERISA. Neither Borrower nor any of its Subsidiaries shall
establish or become obligated to any new Plan.
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8. TERM
8.1. Termination. Subject to the provisions of Section 2 hereof, the
financing arrangement contemplated hereby in respect of the Tranche A and
Tranche B Loans shall be in effect until the Commitment Termination Date.
8.2. Survival of Obligations Upon Termination of Financing
Arrangements. Except as otherwise expressly provided for in the Loan Documents,
no termination or cancellation (regardless of cause or procedure) of any
financing arrangement under this 1998 Credit Agreement shall in any way affect
or impair the powers, obligations, duties, rights and liabilities of Borrower
or the rights of the Agent or any Lender relating to any transaction or event
occurring prior to such termination. Except as otherwise expressly provided
herein or in any other Loan Document, all undertakings, agreements, covenants,
warranties and representations contained in the Loan Documents shall survive
such termination or cancellation and shall continue in full force and effect
until such time as all of the Obligations have been paid in full in accordance
with the terms of the agreements creating such Obligations, at which time the
same shall terminate.
8.3. Termination Prior to Closing Date. Borrower hereby covenants and
agrees with the Agent and each Lender that Borrower will: (a) use its best
efforts to satisfy, and to cause to be satisfied, fully and promptly each of
the conditions set forth in Sections 4.1, 4.2 and 4.3 hereof and to consummate
each of the transactions contemplated by this 1998 Credit Agreement; and (b)
refrain from taking, or permitting to be taken, any action, of any nature
whatsoever, which shall impede, preclude or otherwise interfere with the
satisfaction of any such condition,
9. EVENTS OF DEFAULT; RIGHTS AND REMEDIES
9.1. Events of Default. The occurrence of any one or more of the
following events (regardless of the reason therefor) shall constitute an "Event
of Default" hereunder:
(a) Borrower shall fail to make any payment of principal of, or
interest on or any other amount owing in respect of, the Loans or any of the
other Obligations when due and payable or declared due and payable, except that
with respect to expenses payable under this 1998 Credit Agreement, or other
Obligations owing under any Loan Document other than this 1998 Credit
Agreement, such failure shall have remained unremedied for a period of ten (10)
days after Borrower has received notice of such failure from the Agent or any
Lender.
(b) Borrower shall fail or neglect to perform, keep or observe any of
the provisions of Section 6 or 7 of this 1998 Credit Agreement.
(c) Borrower shall fail or neglect to perform, keep or observe any
other provision of this 1998 Credit Agreement or of any of the other Loan
Documents, or any other Loan Party shall fail or neglect to perform, keep or
observe any of the provisions of any other
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Loan Document and the same shall remain unremedied for a period ending on the
first to occur of ten (10) days after Borrower shall receive written notice of
any such failure from the Agent or any Lender or thirty (30) days after
Borrower shall become aware thereof.
(d) A default shall occur under any other agreement, document or
instrument to which any Loan Party is a party or by which any Loan Party or any
Loan Party's property is bound, and such default (i) involves the failure to
make any payment (whether of principal, interest or otherwise) due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise) in
respect of any Indebtedness of any Loan Party in an aggregate amount exceeding
$25,000, or (ii) causes (or permits any holder of such Indebtedness or a
trustee to cause) such Indebtedness or a portion thereof in an aggregate amount
exceeding $25,000, to become due prior to its stated maturity or prior to its
regularly scheduled dates of payment.
(e) Any representation or warranty herein or in any Loan Document or
in any written statement pursuant thereto or hereto, report, financial
statement or certificate made or delivered to the Agent or any Lender by any
Loan Party shall be untrue or incorrect in any material respect, as of the date
when made or deemed made (including those made or deemed made.
(f) Any of the assets of any Loan Party shall be attached, seized,
levied upon or subjected to a writ or distress warrant, or come within the
possession of any receiver, trustee, custodian or assignee for the benefit of
creditors of any Loan Party and shall remain unstayed or undismissed for thirty
(30) consecutive days; or any Person other than any Loan Party shall apply for
the appointment of a receiver, trustee or custodian for any of the assets of
any Loan Party and shall remain unstayed or undismissed for thirty (30)
consecutive days; or any Loan Party shall have concealed, removed or permitted
to be concealed or removed, any part of its property, with intent to hinder,
delay or defraud its creditors or any of them or made or suffered a transfer of
any of its property or the incurring of an obligation which may be fraudulent
under any bankruptcy, fraudulent conveyance or other similar law.
(g) A case or proceeding shall have been commenced against any Loan
Party in a court having competent jurisdiction seeking a decree or order in
respect of such Loan Party (i) under title 11 of the United States Code, as now
constituted or hereafter amended, or any other applicable federal, state or
foreign bankruptcy or other similar law, (ii) appointing a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or similar official) of such
Loan Party or of any substantial part of its or their properties, or (iii)
ordering the winding-up or liquidation of the affairs of such Loan Party and
such case or proceeding shall remain undismissed or unstayed for thirty (30)
consecutive days or such court shall enter a decree or order granting the
relief sought in such case or proceeding.
(h) Any Loan Party shall (i) file a petition seeking relief under
title 11 of the United States Code, as now constituted or hereafter amended, or
any other applicable federal, state or foreign bankruptcy or other similar law,
(ii) consent to the institution of proceedings thereunder or to the filing of
any such petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee or sequestrator (or similar official)
of Borrower
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or such Loan Party or of any substantial part of its properties, (iii)
fail generally to pay its debts as such debts become due, or (iv) take any
corporate action in furtherance of any such action.
(i) Final judgment or judgments (after the expiration of all times to
appeal therefrom) for the payment of money in excess of $25,000 in the
aggregate shall be rendered against Borrower or any of its Subsidiaries and the
same shall not be (i) fully covered by insurance in accordance with Section 6.6
hereof, or (ii) vacated, stayed, bonded, paid or discharged for a period of
fifteen (15) days.
(j) Any other event shall have occurred which would have a Material
Adverse Effect and the Agent or any Lender shall have given Borrower at least
ten (10) days notice thereof.
(k) Any provision of any Security Agreement or Pledge Agreement
(collectively, the "Collateral Documents") Collateral Document or the Guaranty
shall for any reason cease to be valid or enforceable in accordance with its
terms, or any security interest created under any Collateral Document shall
cease to be a valid and perfected first priority security interest or Lien
(except as otherwise stated therein) in any of the Collateral purported to be
covered thereby.
9.2. Remedies. If any Event of Default shall have occurred and be
continuing, the Agent shall at the request, or may with the consent, of the
Required Lenders, without notice, (i) terminate this facility with respect to
further Loans, whereupon no Loan may be made hereunder, and/or (ii) declare all
Obligations to be forthwith due and payable, whereupon all Obligations shall
become and be due and payable, without presentment, demand, protest or further
notice of any kind, all of which are expressly waived by Borrower; provided,
however, that upon the occurrence of an Event of Default specified in Section
9.1(f), (g) or (h) hereof, the Obligations shall become due and payable without
declaration, notice or demand by Lender. Lender shall take such action with
respect to any Default or Event of Default as shall be directed by the Required
Lenders; provided that, unless and until Lender shall have received such
directions, Lender may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable in the best interests of the Lenders taken
as a whole, including any action (or the failure to act) pursuant to the Loan
Documents.
9.3. Waivers by Borrower. Except as otherwise provided for in this
1998 Credit Agreement and applicable law, Borrower waives (i) presentment,
demand and protest and notice of presentment, dishonor, notice of intent to
accelerate, notice of acceleration, protest, default, nonpayment, maturity,
release, compromise, settlement, extension or renewal of any or all commercial
paper, accounts, contract rights, documents, instruments, chattel paper and
guaranties at any time held by the Agent or any Lender on which Borrower may in
any way be liable and hereby ratifies and confirms whatever the Agent or such
Lender may do in this regard, (ii) all rights to notice and a hearing prior to
the Agent or such Lender's taking possession or control of, or to the Agent or
such Lender's replevy, attachment or levy upon, the Collateral or any bond or
security which might be required by any court prior to allowing Lender to
exercise any of its
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remedies, and (iii) the benefit of all valuation, appraisal and exemption laws.
Borrower acknowledges that it has been advised by counsel of its choice with
respect to this 1998 Credit Agreement, the other Loan Documents and the
transactions evidenced by this 1998 Credit Agreement and the other Loan
Documents.
10. MISCELLANEOUS
10.1. Complete Agreement; Modification of Agreement. (a) The Loan
Documents constitute the complete agreement between the parties with respect to
the subject matter hereof and may not be modified, altered or amended except by
an agreement in writing signed by Borrower, the Agent and each Lender in
accordance with Section 10.1(d) hereof. Borrower may not sell, assign or
transfer any of the Loan Documents or any portion thereof, including, without
limitation, Borrower's rights, title, interests, remedies, powers and duties
hereunder or thereunder.
(a) In the event any Lender assigns or otherwise transfers all or any
part of any Note, Borrower shall, upon the request of such Lender, issue new
Notes to effectuate such assignment or transfer.
(b) Each Lender may sell, assign, transfer or negotiate to one or more
other lenders, commercial banks insurance companies, other financial
institutions or any other Person all or a portion of its rights and obligations
under any Note held by Lender and this 1998 Credit Agreement. From and after
the effective date of such an assignment, the assignees thereunder shall, in
addition to the rights and obligations hereunder held by it immediately prior
to such effective date, have the rights and obligations hereunder that have
been assigned to it pursuant to such assignment, relinquish its rights and be
released from its obligations under the Agreement (and, in the case of an
assignment and acceptance covering all or the remaining portion of an assigning
Lender's rights and obligations under this 1998 Credit Agreement, such Lender
shall cease to be a party hereto).
(c) No amendment or waiver of any provision of this 1998 Credit
Agreement or any Notes or any other Loan Document, nor consent to any departure
by Borrower therefrom, shall in any event be effective unless the same shall be
in writing and signed by the Required Lenders, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given; provided, however, that no amendment, waiver or consent shall,
unless in writing and signed by each Lender affected thereby do any of the
following: (i) increase the amount of Lender's commitment to make Loans
hereunder or subject such Lender to any additional obligations, (ii) reduce the
principal of, or interest on, any Note or other amounts payable hereunder,
(iii) postpone any date fixed for any payment of principal of, or interest on,
any Note or other amounts payable hereunder, (iv) change the aggregate unpaid
principal amount of any Note, or the number of Lenders which shall be required
for the Lenders or any of them to take any action hereunder, (v) release or
discharge any Person liable for the performance of any obligations of any Loan
Party hereunder or under any of the Loan Documents, or (vi) amend this Section
10.1(c); and provided, further, however, that no amendment, waiver or consent
shall, unless in writing and signed by all Lenders holding Notes,
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increase the amount of the commitment to make Loan. hereunder; and provided,
further, however, that no amendment, waiver or consent shall unless in writing
and signed by any such Lender in addition to the Required Lenders required
above to take such action, affect the rights or duties of any such Lender under
this 1998 Credit Agreement, any Term Note or any Loan Document.
10.2. Fees and Expenses. Borrower shall pay all reasonable
out-of-pocket expenses of the Agent and the Lender in connection with the
preparation of the Loan Documents (including the reasonable fees and expenses
of all of its counsel and advisors retained in connection with the Loan
Documents and the transactions contemplated thereby and advice in connection
therewith). If, at any time or times, regardless of the existence of an Event
of Default (except with respect to paragraphs (iii) and (iv), which shall be
subject to an Event of Default having occurred and be continuing), the Agent or
any Lender shall employ counsel or other advisors for advice or other
representation or shall incur reasonable legal or other costs and expenses in
connection with:
(i) any amendment, modification or waiver, or consent with
respect to, any of the Loan Documents or advice in connection with the
administration of the loans made pursuant hereto or its rights hereunder
or thereunder;
(ii) any litigation, contest, dispute, suit, proceeding or action
(whether instituted by the Agent, a Lender, Borrower, any Subsidiary of
Borrower or any other Person) in any way relating to the Collateral, any
of the Loan Documents or any other agreements to be executed or delivered
in connection herewith;
(iii) any attempt to enforce any rights of any Lender against
Borrower, any Subsidiary of Borrower or any other Person, that may be
obligated to any Lender by virtue of any of the Loan Documents;
(iv) any attempt to verify, protect, collect, sell, liquidate or
otherwise dispose of the Collateral;
then, and in any such event, the attorneys' and other parties' fees arising from
such services, including those of any appellate proceedings, and all expenses,
costs, charges and other fees incurred by such counsel and others in any way or
respect arising in connection with or relating to any of the events or actions
described in this Section 10.2 shall be payable, on demand, by Borrower to the
Agent or the relevant Lender and shall be additional Obligations secured under
this 1998 Credit Agreement and the other Loan Documents. Without limiting the
generality of the foregoing, such expenses, costs, charges and fees may include:
paralegal fees, costs and expenses; accountants' and investment bankers' fees,
costs and expenses; court costs and expenses; photocopying and duplicating
expenses; court reporter fees, costs and expenses; long distance telephone
charges; air express charges; telegram charges; secretarial overtime charges;
and expenses for travel, lodging and food paid or incurred in connection with
the performance of such legal services.
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10.3. No Waiver by Lender. No failure of the Agent or any Lender, at
any time or times, to require strict performance by any Loan Party of any
provision of this 1998 Credit Agreement and any of the other Loan Documents
shall not waive, affect or diminish any right of the Agent or any Lender
thereafter to demand strict compliance and performance therewith. Any
suspension or waiver by the Agent or any Lender of an Event of Default by any
Loan Party under the Loan Documents shall not suspend, waive or affect any
other Event of Default by any Loan Party under this 1998 Credit Agreement and
any of the other Loan Documents whether the same is prior or subsequent thereto
and whether of the same or of a different type. None of the undertakings,
agreements, warranties, covenants and representations of any Loan Party
contained in this 1998 Credit Agreement or any of the other Loan Documents and
no Event of Default by Borrower under this 1998 Credit Agreement and no
defaults by any Loan Party under any of the other Loan Documents shall be
deemed to have been suspended or waived by the Agent or any Lender, unless such
suspension or waiver is by an instrument in writing signed by an officer of the
Agent and directed to such Loan Party specifying such suspension or waiver.
10.4. Agency Provisions. Wexford Management is appointed as the
lawful agent and attorney-in-fact by each Lender, as more fully set forth in
Section 6 of the Restructuring Agreement of even date herewith, which
provisions are incorporated herein as though fully set forth in this 1998
Credit Agreement.
10.5. Remedies. The rights and remedies of the Agent and each Lender
under this 1998 Credit Agreement shall be cumulative and nonexclusive of any
other rights and remedies which the Agent or any Lender may have under any
other agreement, including without limitation, the Loan Documents, by operation
of law or otherwise. Recourse to the Collateral shall not be required.
10.6. WAIVER OF JURY TRIAL. THE PARTIES HERETO WAIVE ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER
THE LOAN DOCUMENTS.
10.7. Severability. Wherever possible, each provision of this 1998
Credit Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this 1998 Credit Agreement
shall be prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this 1998 Credit Agreement.
10.8. Parties. This 1998 Credit Agreement and the other Loan Documents
shall be binding upon, and inure to the benefit of, the successors of Borrower,
the Agent and the Lender and the assigns, transferees and endorsees of each
Lender.
10.9. Conflict of Terms. Except as otherwise provided in this 1998
Credit Agreement or any of the other Loan Documents by specific reference to
the applicable provisions of this 1998 Credit Agreement, if any provision
contained in this 1998 Credit Agreement is in
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conflict with, or inconsistent with, any provision in any of the other Loan
Documents, the provision contained in this 1998 Credit Agreement shall govern
and control.
10.10. Authorized Signature. Until Lender shall be notified by
Borrower to the contrary, the signature upon any document or instrument
delivered pursuant hereto of an officer of Borrower listed in Schedule 10.10
hereto shall bind Borrower and be deemed to be the act of Borrower affixed
pursuant to and in accordance with resolutions duly adopted by Borrower's Board
of Directors.
10.11. Governing Law. Except as otherwise expressly provided in any of
the Loan Documents, in all respects, including all matters of construction,
validity and performance, this 1998 Credit Agreement and the Obligations
arising hereunder shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York applicable to contracts made
and performed in such state, without regard to the principles thereof regarding
conflict of laws, and any applicable laws of the United States of America. The
Agent, each Lender and Borrower agree to submit to personal jurisdiction and to
waive any objection as to venue in the County of New York, State of New York.
Service of process on Borrower, the Agent and each Lender in any action arising
out of or relating to any of the Loan Documents shall be effective if mailed to
such party at the address listed in Section 10.12 hereof. Nothing herein shall
preclude the Agent, any Lender or Borrower from bringing suit or taking other
legal action in any other jurisdiction.
10.12. Notices. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties by another, or whenever any of the parties desires to give or
serve upon another any communication with respect to this 1998 Credit
Agreement, each such notice, demand, request, consent, approval, declaration or
other communication shall be in writing and either shall be delivered in person
with receipt acknowledged or by registered or certified mail, return receipt
requested, postage prepaid, or telecopied and confirmed by telecopy answerback
addressed as follows:
(a) If to the Lenders or to the Agent, at:
Wexford Management LLC, as Agent
411 West Putnam Avenue
Greenwich, Connecticut 06830
Attention: Mark L. Plaumann
Telephone: (203) 862-7000
Telecopier: (203) 862-7328
-30-
<PAGE>
With a copy to:
Berlack, Israels & Liberman LLP
120 West 45th Street
New York, New York 10036
Attention: Stephen B. Selbst
Telephone: (212) 704-0100
Telecopier: (212) 704-0196
(b) If to Borrower, at:
Wahlco Environmental Systems, Inc.
3600 West Segerstrom Avenue
Santa Ana, California 92704
Attention: C. Stephen Beal
Telephone: (714) 979-7300
Telecopier: (714) 979-0114
With a copy to:
Roger M. Barzun, Esq.
60 Hubbard Street
Concord, Massachusetts 01742
Telephone: (978) 287-4275
Telecopier: (978) 287-4276
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, telecopied and confirmed by telecopy answerback or
three (3) Business Days after the same shall have been deposited in the United
States mail. Failure or delay in delivering copies of any notice, demand,
request, consent, approval, declaration or other communication to the persons
designated above to receive copies shall in no way adversely affect the
effectiveness of such notice, demand, request, consent, approval, declaration or
other communication.
10.13. Survival. The representations and warranties of Borrower in
this 1998 Credit Agreement shall survive the execution, delivery and acceptance
hereof by the parties hereto and the closing of the transactions described
herein or related hereto.
-31-
<PAGE>
10.14. Section Titles. The Section titles and Table of Contents
contained in this 1998 Credit Agreement are and shall be without substantive
meaning or content of any kind whatsoever and are not a part of the agreement
between the parties hereto.
10.15. Counterparts. This 1998 Credit Agreement may be executed in any
number of separate counterparts, each of which shall, collectively and
separately, constitute one agreement.
IN WITNESS WHEREOF, this 1998 Credit Agreement has been duly
executed as of the date first written above.
WAHLCO ENVIRONMENTAL STYSTEMS, INC.
By: /s/ A. Noel DeWinter
---------------------------------------
Name:
Title:
WES ACQUISITION CORP.
By:
---------------------------------------
Name:
Title:
WEXFORD CAPITAL PARTNERS II, L.P.
By:
---------------------------------------
Wexford Capital II, L.P.
Its General Partner
By:
---------------------------------------
Wexford Capital II, L.P.
Its General Partner
By:
---------------------------------------
Name:
Title:
-32-
<PAGE>
WEXFORD OVERSEAS PARTNERS I, L.P.
By:
---------------------------------------
Wexford Capital Overseas II, L.P.
The General Partner
By:
---------------------------------------
Wexford Capital Limited
Its General Partner
By:
---------------------------------------
Name:
Title:
WEXFORD SPECIAL SITUATIONS 1996, L.P.
By:
---------------------------------------
Name:
Title:
WEXFORD SPECIAL SITUATIONS 1996
INSTITUTIONAL, L.P.
By:
---------------------------------------
Name:
Title:
WEXFORD SPECIAL SITUATIONS 1996
LIMITED
By:
---------------------------------------
Name:
Title:
-33-
<PAGE>
WEXFORD-EURIS SPECIAL SITUATIONS
1996, L.P.
By:
---------------------------------------
Name:
Title:
WEXFORD MANAGEMENT LLC, As Agent
By:
---------------------------------------
Name:
Title:
-34-
<PAGE>
Exhibit A-1
to 1998 Credit Agreement
TRANCHE A NOTE
$3,000,000 Santa Ana, California
_______ __, 1998
FOR VALUE RECEIVED, WAHLCO ENVIRONMENTAL SYSTEMS, INC., a Delaware
corporation (hereinafter referred to as "Borrower"), hereby unconditionally
PROMISES TO PAY to the order of WEXFORD MANAGEMENT LLC, a Connecticut limited
liability company, as agent (the "Agent"), at 411 West Putnam Avenue, Greenwich,
Connecticut 06830 or at such other place as the holder of this Note may
designate from time to time in writing, in lawful money of the United States of
America and in immediately available funds, the principal amount of THREE
MILLION DOLLARS ($3,000,000) or such lesser amount as may be outstanding
hereunder, together with interest on the unpaid principal amount of this Note
outstanding from time to time at the rate provided in the 1998 Credit Agreement
(as hereinafter defined).
This Note is issued pursuant to that certain Amended and Restated Credit
Agreement dated as of January 30, 1998 among Borrower, the Lenders named therein
and the Agent, as agent (the "1998 Credit Agreement"), and is entitled to the
benefit and security of the Loan Documents provided for therein, to which
reference is hereby made for a statement of all of the terms and conditions
under which the loan evidenced hereby is made. All capitalized terms, unless
otherwise defined herein, shall have the meanings ascribed to them in the 1998
Credit Agreement or in the Loan Documents.
The principal amount of the indebtedness evidenced hereby shall be payable
in the amounts and on the dates specified in the 1998 Credit Agreement and, if
not sooner paid in full, on December 31, 2000. Interest thereon shall be paid
until such principal amount is paid in full at such interest rates and at such
times as are specified in the Agreement.
If any payment on this Note becomes due and payable on a day other than a
Business Day, the maturity thereof shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest thereon shall
be payable at the then applicable rate during such extension.
Upon and after the occurrence of an Event of Default, this Note may, as
provided in the Loan Agreement, and without demand, notice or legal process of
any kind, be declared, and immediately shall become, due and payable.
Demand, presentment, protest and notice of nonpayment and protest are
hereby waived by Borrower.
<PAGE>
This Note has been executed, delivered and accepted at Santa Ana,
California and shall be interpreted, governed by, and construed in accordance
with, the laws of the State of New York.
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
By: ______________________________
Name:
Title:
-2-
<PAGE>
Exhibit A-2
to 1998 Credit Agreement
TRANCHE B NOTE
$2,500,000 Santa Ana, California
__________ __, 1998
FOR VALUE RECEIVED, WAHLCO ENVIRONMENTAL SYSTEMS, INC., a Delaware
corporation (hereinafter referred to as "Borrower"), hereby unconditionally
PROMISES TO PAY to the order of WEXFORD MANAGEMENT LLC, a Connecticut limited
liability company, as agent (the "Agent"), at 411 West Putnam Avenue, Greenwich,
Connecticut 06830 or at such other place as the holder of this Note may
designate from time to time in writing, in lawful money of the United States of
America and in immediately available funds, the principal amount of TWO MILLION
FIVE HUNDRED THOUSAND DOLLARS ($2,500,000) or such lesser amount as may be
outstanding hereunder, together with interest on the unpaid principal amount of
this Note outstanding from time to time at the rate provided in the 1998 Credit
Agreement (as hereinafter defined).
This Note is issued pursuant to that certain Amended and Restated Credit
Agreement dated as of January 30, 1998 among Borrower, the Lenders named therein
and the Agent, as agent (the "1998 Credit Agreement"), and is entitled to the
benefit and security of the Loan Documents provided for therein, to which
reference is hereby made for a statement of all of the terms and conditions
under which the loan evidenced hereby is made. All capitalized terms, unless
otherwise defined herein, shall have the meanings ascribed to them in the 1998
Credit Agreement or in the Loan Documents.
The principal amount of the indebtedness evidenced hereby shall be payable
in the amounts and on the dates specified in the 1998 Credit Agreement and, if
not sooner paid in full, on December 31, 2000. Interest thereon shall be paid
until such principal amount is paid in full at such interest rates and at such
times as are specified in the Agreement.
If any payment on this Note becomes due and payable on a day other than a
Business Day, the maturity thereof shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest thereon shall
be payable at the then applicable rate during such extension.
Upon and after the occurrence of an Event of Default, this Note may, as
provided in the Loan Agreement, and without demand, notice or legal process of
any kind, be declared, and immediately shall become, due and payable.
Demand, presentment, protest and notice of nonpayment and protest are
hereby waived by Borrower.
<PAGE>
This Note has been executed, delivered and accepted at Santa Ana,
California and shall be interpreted, governed by, and construed in accordance
with, the laws of the State of New York.
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
By: ______________________________
Name:
Title:
-2-
<PAGE>
Exhibit B
to 1998 Credit Agreement
FIRST AMENDMENT TO GUARANTY
FIRST AMENDMENT TO GUARANTY, dated as of January 30, 1998 among the
Guarantors identified as such on the signature page hereof (individually a
"Guarantor" and collectively, the "Guarantors"), WES Acquisition Corp., a
Delaware corporation ("WESAC"); the 1998 Lenders (as hereinafter defined;
together with WESAC, collectively, the "Lenders"); and Wexford Management LLC, a
Connecticut limited liability company, as administrative and collateral agent
for the Lenders (the "Agent").
W I T N E S S E T H :
WHEREAS, WAHLCO ENVIRONMENTAL SYSTEMS, INC., a Delaware Corporation
("Borrower") and WESAC entered into that certain Term Loan Agreement dated as of
July 28, 1995 (the "1995 Loan Agreement"); and
WHEREAS, Guarantors and Borrower are members of the same consolidated group
of companies and are engaged in related business; and
WHEREAS, to induce WESAC to make the Loans (as such term is defined in the
1995 Loan Agreement), Guarantors entered into that certain Guaranty dated as of
July 25, 1995 (the "Guaranty"); and
WHEREAS, to amend and supplement the 1995 Loan Agreement, and to provide
for additional credit facilities to Borrower, each of the Lenders and the Agent,
as agent, have entered into that certain Amended and Restated Loan Agreement
dated as of January 30, 1998 (the "1998 Credit Agreement"), pursuant to which
the Lenders have agreed to make loans to Borrower for the benefit of Borrower
and the Guarantors; and
WHEREAS, Lenders have determined to appoint the Agent as their agent for
admimnistrative and collateral purposes, including exercising all rights under
the Guaranty, as amended hereby;
WHEREAS, in connection with the execution and delivery of the 1998 Credit
Agreement and as a condition precedent thereto, the Lenders are requiring that
each Guarantor shall have executed and delivered this Guaranty;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained and to induce the Lenders and the Agent to enter into the
1998 Credit Agreement, and to make the loans provided for therein, it is agreed
as follows:
1. Definitions. Unless otherwise defined herein, terms defined in the 1998
Credit Agreement are used as therein defined, and as following shall have
(unless otherwise provided
<PAGE>
elsewhere in this Agreement or the Security Agreement) the following respective
meanings (such meanings being equally applicable to both the singular and plural
form of the terms defined):
"Agreement" shall mean this First Amendment to the Security Agreement,
including all amendments, modifications and supplements and any exhibits or
schedules to any of the foregoing, and shall refer to the Agreement as the same
may be in effect at the time such reference becomes operative.
"Existing Obligations" shall mean any Obligations now existing or
hereafter arising under the 1995 Loan Agreement or any Loan Document.
"1995 Lender" shall mean WESAC.
"1998 Lenders" shall mean all of the parties named as Lenders in the
1998 Credit Agreement.
2. Assignment to Agent; Guaranty of Obligations of Borrower. WESAC hereby
assigns to the Agent, for the benefit of all the Lenders, the unconditional
Guaranty of payment and performance and not collection, held by WESAC as of the
date hereof. Guarantors hereby consent to such assignment. Each Guarantor
acknowledges, confirms and agrees that this Agreement unconditionally guarantees
to the Lenders, and their successors, endorsees, transferees and assigns, the
prompt payment (whether at stated maturity, by acceleration or otherwise) and
performance, in full, of the Obligations.
3. Effect of Amendment. Each Guarantor hereby confirms and agrees that,
Texcept as specifically amended hereby, the Guaranty continues in full force and
effect.
4. Waiver. No delay on the part of the Agent to enforce this Agreement or
any other Loan Document or the waiver of consent by any Lender with respect to
any of the provisions thereof shall constitute a waiver thereof or impair the
Agent's rights to such Lender with respect to any of the provisions thereof
shall constitute a waiver thereof or impair the Agent's rights to seek
satisfaction from the Guarantors, jointly and severally, prior or subsequent to,
or simultaneously with, the enforcement of the Lenders' rights hereunder, to
exercise any right or remedy which either may have against any property, real or
personal, as a result of any lien it may have as security for all or any portion
of the Obligations.
5. Assignment. Each Lender may assign, endorse or transfer this Agreement
as provided in, and in accordance with, the 1998 Credit Agreement, and the
assignee of this Agreement shall be entitled to all the benefits hereof.
6. Further Assurances. Each Guarantor agrees, upon the written request of
the Agent, to execute and deliver to the Agent, any additional instruments or
any documents reasonably considered necessary by any Lender to cause this
Agreement to be, become or remain valid and effective in accordance with its
terms.
-2-
<PAGE>
7. Miscellaneous.
(a) The Agent may execute any of its duties hereunder by or through
agents or employees and shall be entitled to advice of counsel concerning all
matters pertaining to its duties hereunder.
(b) Each Guarantor jointly and severally agrees to promptly reimburse
the Agent for actual out-of-pocket expenses, including, without limitation,
reasonable counsel fees, incurred in connection with the administrator and
enforcement of this Agreement.
(c) Neither the Agent nor any of its respective officers, directors,
employees, agents or counsel shall be liable for any action lawfully taken or
omitted to be taken by it of them hereunder or in connection herewith, except
for its or their own gross negligence or willful misconduct.
(d) The Agreement shall be binding upon the Guarantors and their
successors and assigns, and shall inure to the benefit of, and be enforceable
by, the Agent, and its successors and assigns, and shall be governed by and
construed and enforced in accordance with, the internal laws in effect in the
State of New York without giving effect to principles of conflict of laws, and
none of the terms or provisions of this Agreement may be waived, altered,
modified or amended except in writing duly signed for on behalf of the Agent and
the Guarantors.
8. Severability. If for any reason any provision or provisions hereof are
determined to be invalid and contrary to any existing or future law, such
inability shall not impair the operation of or effect those portions of this
Agreement which are valid.
9. Notice. Whenever it is provided herein that any notice, demand, request,
consent, approval or other communication shall or may be given to or served upon
any of the parties by any other party, or whenever any of the parties desires to
give or serve upon any other a communication with respect to this Agreement,
each such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and shall be given as provided in Section
10.11 of the 1998 Credit Agreement.
10. Section Titles. The section titles contained in this Agreement are and
shall be without substantive meaning or content of any kind whatsoever and are
not a part of this Agreement.
11. Counterparts. This Agreement may be executed in any number of
counterparts, which shall, collectively and separately, constitute one document.
-3-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this First
Amendment to the Security Agreement to be executed and delivered by its duly
authorized officer on the date first set forth above.
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
By:_________________________
Name:
Title:
BACHMANN COMPANIES, INC.
By:_________________________
Name:
Title:
WAHLCO ENGINEERED PRODUCTS GROUP, LTD.
By:_________________________
Name:
Title:
WAHLCO, INC.
By:_________________________
Name:
Title:
FIELD SERVICE ASSOCIATES, INC.
By:_________________________
Name:
Title:
-4-
<PAGE>
WAHLCO POWER PRODUCTS, INC.
By:_________________________
Name:
Title:
WES TECHNOLOGY, INC.
By:_________________________
Name:
Title:
WAHLCO ENGINEERED PRODUCTS, INC.
By:_________________________
Name:
Title:
LAGUNA SERVICE CORPORATION
By:_________________________
Name:
Title:
WAHLCO GAS FLOW TECHNOLOGIES, INC.
By:_________________________
Name:
Title:
WAHLCO SERVICE CORPORATION
By:_________________________
Name:
Title:
-5-
<PAGE>
WAHLCO ENGINEERED PRODUCTS PTY., LTD.
By:_________________________
Name:
Title:
WAHLCO ENGINEERED PRODUCTS CANADA, INC.
By:_________________________
Name:
Title:
FLOWRITE DAMPERS, LTD.
By:_________________________
Name:
Title:
WAHLCO ENGINEERED PRODUCTS, LTD.
By:_________________________
Name:
Title:
WAHLCO ENGINEERED INTERNATIONAL, LTD.
By:_________________________
Name:
Title:
PENTNEY ENGINEERING, LTD.
By:_________________________
Name:
Title:
-6-
<PAGE>
TEDDINGTON BELLOWS (HOLDINGS), LTD.
By:_________________________
Name:
Title:
TRESTE PLAN HIRE, LTD.
By:_________________________
Name:
Title:
WAHLCO INTERNATIONAL, INC.
By:_________________________
Name:
Title:
WAHLCO ENGINEERED PRODUCTS ITALIANA SRL.
By:_________________________
Name:
Title:
TEDDINGTON BELLOWS, LTD.
By:_________________________
Name:
Title:
BACHMANN H&T, GmbH
By:_________________________
Name:
Title:
-7-
<PAGE>
EXERGETIC SYSTEMS, INC.
By:_________________________
Name:
Title:
CORONA PROPERTIES
By:_________________________
Name:
Title:
BACHMANN INDUSTRIES INDIA, LTD.
By:_________________________
Name:
Title:
Accepted and acknowledged by:
WEXFORD MANAGEMENT LLC
By:_________________________________
Name:
Title:
-8-
<PAGE>
Exhibit C-1
to 1998 Credit Agreement
FIRST AMENDMENT TO PATENT ASSIGNMENT
FIRST AMENDMENT TO PATENT ASSIGNMENT, dated as of January 30, 1998 (the
Agreement") among WAHLCO ENVIRONMENTAL SYSTEMS, INC., a Delaware corporation
("Borrower"); WES ACQUISITION CORP., a Delaware corporation ("WESAC"): the 1998
Lenders (as hereinafter defined); and WEXFORD MANAGEMENT LLC, a Connecticut
limited liability company, as administrative and collateral agent for the
Lenders (the "Agent").
W I T N E S S E T H
WHEREAS, Borrower is the sole and exclusive owner of the Letters of Patent
identified on Schedule I hereto, and of the patent applications in the United
States Patent and Trademark Office identified on such Schedule I (all of the
foregoing, collectively, the "Patents"), and of the inventions described and
claimed therein; and
WHEREAS, Borrower and WESAC entered into that certain Term Loan Agreement
dated as of July 28, 1995 (the "1995 Loan Agreement"); and
WHEREAS, to secure Borrower's obligations under the 1995 Loan Agreement,
Borrower and WESAC entered into that certain Security Agreement dated as of July
25, 1995 (the "Security Agreement") and Borrower granted a security interest in
the Collateral described therein to WESAC; and
WHEREAS, pursuant to the Security Agreement, Borrower executed a Patent
Assignment in favor of WESAC as of December 28, 1995 (the "Existing
Assignment"), whereby Borrower assigned all right, title and interest in and to
the Patents to WESAC; and
WHEREAS, to amend and supplement the 1995 Loan agreement, and to provide
for additional credit facilities to Borrower, Borrower, each of the Lenders
named therein and the Agent, as agent, have entered into that certain Amended
and Restated Loan Agreement dated as of January 30, 1998 (the "1998 Credit
Agreement"), pursuant to which the Lenders have agreed to make loans to Borrower
and its Subsidiaries; and
WHEREAS, in connection with the execution and delivery of the 1998 Credit
Agreement and as security for all the obligations of Borrower thereunder, the
Lenders and the Agent are requiring that Borrower shall have executed and
delivered this Agreement and granted and confirmed the security interests in the
Patents contemplated hereby;
<PAGE>
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained and to induce the Lenders and the Agent to enter into the
1998 Credit Agreement, and to make the loans provided for therein, it is agreed
as follows:
1. Definitions. Unless otherwise defined herein, terms defined in the 1998
Credit Agreement are used as therein defined and shall have (unless otherwise
provided elsewhere in this Agreement) the following respective meanings (such
meanings being equally applicable to both the singular and plural form of the
terms defined):
"Agreement" shall mean this First Amendment to the Patent Assignment,
including all amendments, modifications and supplements and any exhibits or
schedules to any of the foregoing, and shall refer to the Agreement as the same
may be in effect at the time such reference becomes operative.
"Existing Obligations" shall mean any Obligations now existing or
hereafter arising under the 1995 Loan Agreement or any Loan Document;
"1998 Lenders" shall mean all the parties named as Lenders in the 1998
Credit Agreement.
2. Assignment. WESAC hereby assigns to the Agent, for the benefit of all
the Lenders, the Existing Assignment of the Patents held by WESAC as of the date
hereof. Borrower hereby consents to such assignment.
3. Security for Obligation. Borrower acknowledges, confirms and agrees that
this Agreement sercures, and the assignment of the Patents is security for, the
prompt payment in full when due, whether at stated maturity, by acceleration or
otherwise, and performance of the Obligations, whether for principal, premium,
interest, fees, costs and expenses, and all obligations of Borrower now or
hereafter existing under this Agreement and under the First Amendment to the
Security Agreement (collectively, the "Secured Obligations") including the
Existing Obligations, and any and all other future advances, as well as all
interest, fees, charges expenses, attorneys' fees and any other sum chargeable
to borrower of any or all of its subsidiaries under any of the Loan Documents.
Concurrently with the execution and delivery of this Agreement, each of the
UCC-1 financing statement listed on Schedule I attached hereto shall be amended
to assign the security interests represented thereby to the Agent.
4. Effect of Amendment. Borrower hereby confirms and agrees that, except as
specifically amended hereby, the Existing Assignment continues in full force and
effect.
5. Waiver. No delay on the part of the Agent in exercising any power of
sale, Lien, option or other right hereunder, and no notice or demand which may
be given to or made upon Borrower by the Agent with request to any power of
sale, Lien, option or other right hereunder, shall constitute a waiver thereof,
or limit or impair the
-2-
<PAGE>
Agent's rights to take any action or to exercise any power of sale, Lien,
option, or any other rights as against Borrower in any respect.
6. Assignment. Each Lender may assign, endorse or transfer any instrument
evidencing all or any part of the Secured Obligators as provided in, and in
accordance with, the 1998 Credit Agreement, and the holder of such instrument
shall be entitled to the benefits of this Agreement.
7. Miscellaneous
(a) The Agent may execute any of its duties hereunder by or through
agents or employees and shall be entitled to advice of counsel concerning all
matters pertaining to its duties hereunder;
(b) Borrower agrees to promptly reimburse the Agent for actual
out-of-pocket expenses, including, without limitation, reasonable counsel fees,
incurred in connection with the administrator and enforcement of this Agreement.
(c) Neither the Agent nor any of its respective officers, directors,
employees, agents or counsel shall be liable for any action lawfully taken or
omitted to be taken by it of them hereunder or in connection herewith, except
for its or their own gross negligence or willful misconduct.
(d) The Agreement shall be binding upon Borrower and its successors
and assigns, and shall inure to the benefit of, and be enforceable by, the
Agent, and its successors and assigns, and shall be governed by and construed
and enforced in accordance with, the internal laws in effect in the State of New
York without giving effect to principles of conflict of laws, and none of the
terms or provisions of this Agreement may be waived, altered, modified or
amended except in writing duly signed for on behalf of the Agent and Borrower.
8. Severability. If for any reason any provision or provisions hereof are
determined to be invalid and contrary to any existing or future law, such
inability shall not impair the operation of or effect those portions of this
Agreement which are valid.
9. Notice. Whenever it is provided herein that any notice, demand, request,
consent, approval or other communication shall or may be given to or served upon
any of the parties by any other party, or whenever any of the parties desires to
give or serve upon any other a communication with respect to this Agreement,
each such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and shall be given as provided in Section
10.11 of the 1998 Credit Agreement.
10. Section Titles. the section titles contained in this Agreement are and
shall be without substantive meaning or content of any kind whatsoever and are
not a part of this Agreement.
-3-
<PAGE>
11. Counterparts. This Agreement may be executed in any number of
counterparts, which shall, collectively and separately, constitute one document.
IN WITNESS WHEREOF, each of the parties hereto has caused this First
Amendment to the Patent Agreement to be executed and delivered by its duly
authorized officer on the date first set forth above.
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
By: ___________________________
Name:
Title:
WES ACQUISITION CORP.
By: ___________________________
Name:
Title:
The foregoing First Amendment to the Patent Assignment is hereby accepted
by the Agent:
WEXFORD MANAGEMENT, LLC.
By: __________________________
Name:
Title:
-4-
<PAGE>
SCHEDULE I
TITLE: Hot Side Electrostatic Precipitator
PATENT NO.: 5,300,270
FILE DATE: 08/20/92
SN: 933,489
ISSUE DATE: 04/05/94
EXPIRATION DATE: 04/05/11
ABSTRACT: A process for reducing the NOx in flue gas, comprising the
steps of: furnishing a flow of gas containing particular
matter and NOx; providing an electrostatic precipitator having
therein collecting surfaces coated with a catalyst for the
reduction of NOx in the flue gas by reaction with a
nitrogeneous compound, the electrostatic being positioned in
the flue gas flow at a location such that the temperature of
the flue gas is no less than about 450 degrees F at the point
of flue gas from the electrostatic precipitator; and operating
an electrostatic precipitator to remove particulate from the
flue gas, the NOx from the flue gas reacting with the
nitrogeneous compound in the presence of the catalyst to
reduce the NOx content of the flue gas.
<PAGE>
SCHEDULE I
TITLE: Temperature Stabilized Heat Exchanger
PATENT NO.: 5,323,842
FILE DATE: 06/05/92
SN: 894,438
ISSUE DATE: 06/28/94
EXPIRATION DATE: 06/28/11
ABSTRACT: A heat exchange module comprises a rotating-wheel type
regenerative heat exchanger unit having a plurality of heat
exchange elements mounted in baskets through the volume of the
heat exchanger wheel. The heat exchanger wheel rotates about
its axis so that the heat exchange elements are heated by a
hot gas flow over a portion of the rotation, and transfer the
heat to an air flow over another portion of the rotation. At
least some of the heat exchange elements include phase change
materials, such as salts, that absorb heat while maintaining a
constant temperature. The phase change materials narrow the
range of temperatures reached by the heat exchange elements
located at various positions of the heat exchanger wheel. The
phase change materials prevent excessively low temperatures
that can result in condensation of corrosive acids on the
surfaces of the heat exchange elements in particularly
desirable temperature ranges for the operation of catalysts
coated onto the heat exchange elements.
<PAGE>
SCHEDULE I
TITLE: Catalytic Sulfur Trioxide FGC
PATENT NO.: 5,320,052
FILE DATE: 03/01/93
SN: 25,034
ISSUE DATE: 06/14/04
EXPIRATION DATE: 06/14/11
ABSTRACT: A sulfur trioxide conditioning system includes a catalytic
converter that converts a portion of the sulfur trioxide. The
catalytic converter includes a catalyst support, which is
disposed across at least a portion of the cross section of a
main duct from a burner to a heat recovery apparatus, and a
catalyst on the catalyst support. The amount of the catalyzed
surface exposed to the flow of flue gas is selectively varied
to control the conversion of sulfur dioxide to sulfur
trioxide.
<PAGE>
SCHEDULE I
TITLE: Method and Apparatus for Reducing NOx Emissions
PATENT NO.: 5,237,939
FILE DATE: 08/20/92
SN: 933,487
ISSUE DATE: 08/24/93
EXPIRATION DATE: 08/24/10
ABSTRACT: Apparatus for reducing NOx from a flue gas stream produced
from a burner, comprising: means for reacting a flow of flue
gas with a nitrogeneous compound in the presence of a catalyst
to react and reduce NOx in the flue gas, the means for
reacting exhibiting a variation of temperature therein; means
for adding a spatially controllably variable flow of a
nitrogeneous compound to the flow of flue gas prior to the
entry of the flue gas into the means for reacting; and means
for adjusting the spatial distribution of the flow of the
nitrogeneous compound responsive to the variation of
temperature within the means for reacting.
<PAGE>
SCHEDULE I
TITLE: Control of NOx Reduction In Flue Gas Flows
PATENT NO.: 5,233,934
FILE DATE: 08/20/92
SN: 933,488
ISSUE DATE: 08/10/93
EXPIRATION DATE: 08/10/10
ABSTRACT: The NOx content in a flow of gas is reduced by passing the
flue gas through a first treatment zone and a second treatment
zone. A nitrogeneous treatment agent is introduced into the
first treatment zone for the selective non-catalytic reduction
of part of the NOx, and the flue gas is thereafter passed
through the second treatment zone which includes a catalyst
for further selective catalytic reduction of NOx. Optionally,
a second nitrogeneous treatment agent is added to the flue gas
in the second treatment zone. The quantity of NOx in the flue
gas is detected intermediate the first and second treatment
zones and, optionally, after the flue gas has left the second
treatment zone. The quantity of ammonia in the flue gas
exiting from the second treatment zone is also detected. The
amounts of the treatment agents exiting from the second
treatment zone added to the flue gas are controlled responsive
to the variations and absolute levels determined by these
measurements.
<PAGE>
Exhibit C-2
to 1998 Credit Agreement
FIRST AMENDMENT TO PATENT ASSIGNMENT
FIRST AMENDMENT TO PATENT ASSIGNMENT, dated as of January 30, 1998 (the
Agreement") among WAHLCO INC., a California corporation ("Assignor"); WAHLCO
ENVIRONMENTAL SYSTEMS, INC., a Delaware Corporation ("Borrower"); WES
ACQUISITION CORP., a Delaware corporation ("WESAC"): the 1998 Lenders (as
hereinafter defined); and WEXFORD MANAGEMENT LLC, a Connecticut limited
liability company, as administrative and collateral agent for the Lenders (the
"Agent").
W I T N E S S E T H
WHEREAS, Assignor is the sole and exclusive owner of the Letters of Patent
identified on Schedule I hereto, and of the patent applications in the United
States Patent and Trademark Office identified on such Schedule I (all of the
foregoing, collectively, the "Patents"), and of the inventions described and
claimed therein; and
WHEREAS, Assignor is a wholly-owned subsidiary of Borrower, and Borrower
and WESAC entered into that certain Term Loan Agreement dated as of July 28,
1995 (the "1995 Loan Agreement"); and
WHEREAS, to secure Borrower's obligations under the 1995 Loan Agreement,
Assignor, Borrower and WESAC entered into that certain Security Agreement dated
as of July 25, 1995 (the "Security Agreement") and Assignor and Borrower granted
a security interest in the Collateral described therein to WESAC; and
WHEREAS, pursuant to the Security Agreement, Assignor executed a Patent
Assignment in favor of WESAC as of December 28, 1995 (the "Existing
Assignment"), whereby Assignor assigned all right, title and interest in and to
the Patents to WESAC; and
WHEREAS, to amend and supplement the 1995 Loan agreement, and to provide
for additional credit facilities to Borrower, Borrower, each of the Lenders
named therein and the Agent, as agent, have entered into that certain Amended
and Restated Loan Agreement dated as of January 30, 1998 (the "1998 Credit
Agreement"), pursuant to which the Lenders have agreed to make loans to Borrower
and its Subsidiaries; and
WHEREAS, in connection with the execution and delivery of the 1998 Credit
Agreement and as security for all the obligations of Borrower thereunder, the
Lenders and the Agent are requiring that Assignor shall have executed and
delivered this
<PAGE>
Agreement and granted and confirmed the security interests in the Patents
contemplated hereby;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained and to induce the Lenders and the Agent to enter into the
1998 Credit Agreement, and to make the loans provided for therein, it is agreed
as follows:
1. Definitions. Unless otherwise defined herein, terms defined in the 1998
Credit Agreement are used as therein defined and shall have (unless otherwise
provided elsewhere in this Agreement) the following respective meanings (such
meanings being equally applicable to both the singular and plural form of the
terms defined):
"Agreement" shall mean this First Amendment to the Patent Assignment,
including all amendments, modifications and supplements and any exhibits or
schedules to any of the foregoing, and shall refer to the Agreement as the same
may be in effect at the time such reference becomes operative.
"Existing Obligations" shall mean any Obligations now existing or
hereafter arising under the 1995 Loan Agreement or any Loan Document;
"1998 Lenders" shall mean all the parties named as Lenders in the 1998
Credit Agreement.
2. Assignment. WESAC hereby assigns to the Agent, for the benefit of all
the Lenders, the Existing Assignment of the Patents held by WESAC as of the date
hereof. Assignor hereby consents to such assignment.
3. Security for Obligation. Each of Assignor and Borrower acknowledges,
confirms and agrees that this Agreement sercures, and the assignment of the
Patents is security for, the prompt payment in full when due, whether at stated
maturity, by acceleration or otherwise, and performance of the Obligations,
whether for principal, premium, interest, fees, costs and expenses, and all
obligations of Borrower now or hereafter existing under this Agreement and under
the First Amendment to the Security Agreement (collectively, the "Secured
Obligations") including the Existing Obligations, and any and all other future
advances, as well as all interest, fees, charges expenses, attorneys' fees and
any other sum chargeable to borrower of any or all of its subsidiaries under any
of the Loan Documents. Concurrently with the execution and delivery of this
Agreement, each of the UCC-1 financing statement listed on Schedule I attached
hereto shall be amended to assign the security interests represented thereby to
the Agent.
4. Effect of Amendment. Assignor hereby confirms and agrees that, except as
specifically amended hereby, the Existing Assignment continues in full force and
effect.
5. Waiver. No delay on the part of the Agent in exercising any power of
sale, Lien, option or other right hereunder, and no notice or demand which may
be given to or made upon Assignor by the Agent with request to any power of
sale, Lien,
-2-
<PAGE>
option or other right hereunder, shall constitute a waiver thereof, or limit or
impair the Agent's rights to take any action or to exercise any power of sale,
Lien, option, or any other rights as against Assignor in any respect.
6. Assignment. Each Lender may assign, endorse or transfer any instrument
evidencing all or any part of the Secured Obligators as provided in, and in
accordance with, the 1998 Credit Agreement, and the holder of such instrument
shall be entitled to the benefits of this Agreement.
7. Miscellaneous
(a) The Agent may execute any of its duties hereunder by or through
agents or employees and shall be entitled to advice of counsel concerning all
matters pertaining to its duties hereunder;
(b) Assignor agrees to promptly reimburse the Agent for actual
out-of-pocket expenses, including, without limitation, reasonable counsel fees,
incurred in connection with the administrator and enforcement of this Agreement.
(c) Neither the Agent nor any of its respective officers, directors,
employees, agents or counsel shall be liable for any action lawfully taken or
omitted to be taken by it of them hereunder or in connection herewith, except
for its or their own gross negligence or willful misconduct.
(d) The Agreement shall be binding upon Assignor and its successors
and assigns, and shall inure to the benefit of, and be enforceable by, the
Agent, and its successors and assigns, and shall be governed by and construed
and enforced in accordance with, the internal laws in effect in the State of New
York without giving effect to principles of conflict of laws, and none of the
terms or provisions of this Agreement may be waived, altered, modified or
amended except in writing duly signed for on behalf of the Agent and Assignor.
8. Severability. If for any reason any provision or provisions hereof are
determined to be invalid and contrary to any existing or future law, such
inability shall not impair the operation of or effect those portions of this
Agreement which are valid.
9. Notice. Whenever it is provided herein that any notice, demand, request,
consent, approval or other communication shall or may be given to or served upon
any of the parties by any other party, or whenever any of the parties desires to
give or serve upon any other a communication with respect to this Agreement,
each such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and shall be given as provided in Section
10.11 of the 1998 Credit Agreement.
10. Section Titles. the section titles contained in this Agreement are and
shall be without substantive meaning or content of any kind whatsoever and are
not a part of this Agreement.
-3-
<PAGE>
11. Counterparts. This Agreement may be executed in any number of
counterparts, which shall, collectively and separately, constitute one document.
IN WITNESS WHEREOF, each of the parties hereto has caused this First
Amendment to the Patent Agreement to be executed and delivered by its duly
authorized officer on the date first set forth above.
WAHLCO, INC.
By: _______________________________
Name:
Title:
WAHLCO, ENVIRONMENTAL SYSTEMS, INC.
By: _______________________________
Name:
Title:
WES ACQUISITION CORP.
By: _______________________________
Name:
Title:
The foregoing First Amendment to the Patent Assignment is hereby accepted
by the Agent:
WEXFORD MANAGEMENT, LLC.
By: _______________________________
Name:
Title:
-4-
<PAGE>
SCHEDULE I
TITLE: Gas Conditioning Apparatus
PATENT NO.: 4,466,815
FILE DATE: 05/03/82
SN: 374,516
ISSUE DATE: 08/21/84
EXPIRATION DATE: 08/21/01
ABSTRACT: A gas conditioning apparatus for conditioning flue gases and
more particularly an improved means for purging a gas
conditioning system of latent or residual sulfur trioxide
which is normally produced by the gas conditioning system for
conditioning of flue gases.
<PAGE>
SCHEDULE I
TITLE: Apparatus for Preheating Combustion Air, etc.
PATENT NO.: 4,602,673
FILE DATE: 10/03/84
SN: 637,394
ISSUE DATE: 07/29/86
EXPIRATION DATE: 07/29/03
ABSTRACT: An apparatus for preheating air for combustion for a
combustion process while simultaneously reducing the NOx
content of hot flue gases utilized to effect said preheating,
said apparatus comprising: a regenerative revolving air heater
which includes heat exchange elements having surfaces which
are exposed to said hot flue gases, and a coating which acts
as a catalyst for the reduction of NOx and is only on those
heat exchange surfaces which are contacted by flue gas having
a temperature greater than the condensation temperature of
reaction produces resulting from material contained in said
flue gas and from the added reducing agent.
<PAGE>
SCHEDULE I
TITLE: Gas Conditioning Means for a Plurality of Boilers
PATENT NO.: 4,333,746
FILE DATE: 04/24/81
SN: 257,343
ISSUE DATE: 06/08/82
EXPIRATION DATE: 06/08/99
ABSTRACT: A gas conditioning means for a plurality of boilers and more
particularly improved means for providing a contitioning
mixture of sulfur trioxide (SO3), from a single system, for
injection into the flues gas streams of a plurality of
bolilers for the conditioning thereof.
<PAGE>
SCHEDULE I
TITLE: Apparatus for Preheating Combustion Air, etc.
PATENT NO.: 4,739,826
FILE DATE: 07/07/86
SN: 882,245
ISSUE DATE: 04/26/88
EXPIRATION DATE: 04/26/05
ABSTRACT: An apparatus for preheating air for combustion for a
combustion process while simultaneously reducing the NOx
content of hot flue gas utilized to effect said preheating to
attain advantages which relate to combustion and which result
from higher combustion chamber tempearatures, such as
accelerated ignition and more complete combustion, comprising:
a recuperative air heater which includes heat exchange
elements having surfaces which are exposed to said hot flue
gases, and a coating which acts as a catalyst for the
reduction of NOx, said coating being provided only with those
heat exchange surfaces which are contacted by flue gases
having a temperature greater than the condensation temperature
of the reaction products resulting from the material contained
in said flue gas and from added reducing agent in order to
avoid formation of deposits on catalyst contact surfaces such
as a result of flue gas, which is cooled off as it flows
through the heat exchanger, falling below the condensation
temperature.
<PAGE>
SCHEDULE I
TITLE: Removal of Participate Matter From Combustion Gas Streams
PATENT NO.: 4,987,839
FILE DATE: 05/14/90
SN: 523,312
ISSUE DATE: 01/29/91
EXPIRATION DATE: 01/29/08
ABSTRACT: Unburned particulate matter is removed from a combustion gas
stream by adding a conditioning agent to modify the
resistivity of the particulate matter and passing the
conditioning combustion gas stream through an electrostatic
precipitator whose precipitating elements are energized with
an intermittent applied voltage. The addition of conditioning
agent and the precipitating voltage signal are mutually
optimized. A controller receives measurement signals from
sensors that monitor the total flow rate of the particulate
matter in the gas stream before the electrostatic precipitate
treatment, and the concentration of particulate matter in the
gas stream after the treatment. Performance of the system may
be optimized according to selected combinations of variables.
<PAGE>
SCHEDULE I
TITLE: Apparatus for Preheating Combustion Air, etc.
PATENT NO.: 4,903,755
FILE DATE: 04/25/88
SN: 185,861
ISSUE DATE: 02/27/90
EXPIRATION DATE: 07/29/03
ABSTRACT: An apparatus for preheating air combustion for a combustion
process while simultaneously reducing the NOx content of hot
flue gases utilized to effect said perheating, said apparatus
comprising: a revolving regenerative air heater that includes
heat exchange elements having surfaces that are exposed to
said hot flue gases, with said surfaces having a coating that
acts as a catalyst for the reduction of NOx, whereby said
regenerative air heater is a revolving drum that is divided in
a radial direction into individual chambers that contain said
heat exchange elements, which are in the form of a heat
storage mass comprised of a plurality of movable individual
elements that are respectively provided with said catalyst
coating.
<PAGE>
SCHEDULE I
TITLE: Conditioning of Gas Streams Containing Particulate
PATENT NO.: 4,966,610
FILE DATE: 06/05/89
SN: 361,272
ISSUE DATE: 10/30/90
EXPIRATION DATE: 10/30/07
ABSTRACT: A method for precipating particulate matter from a flowing gas
stream, comprising the steps of: furnishing a flowing gas
stream containing particulate matter entrained therein;
pretreating the particulate matter of the gas stream, by
supplying to the gas stream a conditioning agent selected from
the group consisting of sulfur trioxide, a gaseous compound
containing ammonia, and water vapor, and substantially
simultaneously, establishing an electrostatic potential
between the conditioning agent and the particulate matter
whereupon the conditioning agent deposits upon the particulate
matter; and electrostatically precipating the particulate
matter from the conditioned gas stream.
<PAGE>
SCHEDULE I
TITLE: Reduction of Acidic Emissions From Combustion of Sulfur, Etc
PATENT NO.: 5,024,171
FILE DATE: 03/19/90
SN: 496,872
ISSUE DATE: 06/18/91
EXPIRATION DATE: 06/18/08
ABSTRACT: The sulfer trioxide in the combustion stream of a power plant
is reactered with injected ammonia to produce a solid ammonia
sulfate that is captured, and not released to the atmosphere.
A feedforward signal indicative of the total mass flow os
sulfur trioxide is determined as the product of the measured
boiler and measured prior to the addition of ammonia. The
ammonia mass flow injection rate is preferably at a normal
stoichiometric ratio of from about 1.0 to 1.1 relative to the
sulfur dioxide mass flow rate (that is, from about 2.0 to 2.2
times the molar mass flow rate of the sulfur trioxide),
avoiding the production of ammmonia bisulfate. The ammonia
content of the combustion gas stream is added. Based upon this
feedback measurement, the amount of ammonia added is adjusted
to be just sufficient to react with all of the sulfur
trioxide, but not in such excess as to be environmentally
detrimental.
<PAGE>
SCHEDULE I
TITLE: Control of Addition of Conditioning Agents to Flue Gas
PATENT NO.: 5,029,535
FILE DATE: 05/14/90
SN: 523,311
ISSUE DATE: 07/09/91
EXPIRATION DATE: 07/09/08
ABSTRACT: Additions of contitioning agents to a particulate containing
flue gas stream are controlled by a controller operating from
feedforward and feedback signals received from sensors in the
combustion and gas cleanup system, and, optionally, from the
power consumption level of the electrostatic precipitator. The
flow rates of the conitator poditioning agents, such as sulfur
trioxide and ammonia, are thereby balanced to achieve an
optimal remolval of particulate matter and also sulfur and
sulfur compounds from the gas stream before it is exhausted to
the atmosphere. A typical feedforward signal is the boiler
loading, and typical feedback signals include residual sulfur
trioxide and ammonia levels and stack gas opacity.
<PAGE>
SCHEDULE I
TITLE: Control System for Flue Gas Conditioning
PATENT NO.: 5,122,162
FILE DATE: 03/19/90
SN: 496,873
ISSUE DATE: 06/16/92
EXPIRATION DATE: 06/16/09
ABSTRACT: The volumetric flow rate for the addition of a flue gas
conditioning agent, such as sulfur trioxide, is established by
maintaining the deriative of the electrostatic precipitator
power with respect to flow rate within a preselected operating
range. The derivative of the precipatator power with respect
to time and the derivative of the flow rate with respect to
time are measured, and then the deriatives are divided to
determine the derivative of precipitator power with respect to
flow rate. This calculated value is compared with a
preselected operating range. If the calculated value is
greater than the preselected operating range, the flow rate is
reduced, until a steady state calculated derivative value
within the operating range is reached.
<PAGE>
STATE OF CALIFORNIA )
) ss.:
COUNTY OF ORANGE )
I, ______________, a Notary Public in and for said County, in the State
aforesaid, DO HEREBY CERTIFY that ________________, personally known to me to be
the _________ of Wahlco, Inc., a corporation organized under the laws of the
State of California, and personally known to me to be the same person whose name
is subscribed to the foregoing Patent Assignment, appeared before me this day in
person and acknowledged that (he)(she) signed and delivered the said Assignment
as (his)(her) free and voluntary act, and as the free and voluntary act and deed
of said corporation, for the uses and purposes therein set forth.
GIVEN under my hand and seal this ______ day of December, 1995.
Notary Public
[NOTARIAL SEAL
My Commission Expires:
<PAGE>
Exhibit C-3
to 1998 Credit Agreement
FIRST AMENDMENT TO PATENT ASSIGNMENT
FIRST AMENDMENT TO PATENT ASSIGNMENT, dated as of January 30, 1998 (the
Agreement") among WAHLCO INTERNATIONAL, INC., a California corporation
("Assignor"); WAHLCO ENVIRONMENTAL SYSTEMS, INC., a Delaware Corporation
("Borrower"); WES ACQUISITION CORP., a Delaware corporation ("WESAC"): the 1998
Lenders (as hereinafter defined); and WEXFORD MANAGEMENT LLC, a Connecticut
limited liability company, as administrative and collateral agent for the
Lenders (the "Agent").
W I T N E S S E T H
WHEREAS, Assignor is the sole and exclusive owner of the Letters of Patent
identified on Schedule I hereto, and of the patent applications in the United
States Patent and Trademark Office identified on such Schedule I (all of the
foregoing, collectively, the "Patents"), and of the inventions described and
claimed therein; and
WHEREAS, Assignor is a wholly-owned subsidiary of Borrower, and Borrower
and WESAC entered into that certain Term Loan Agreement dated as of July 28,
1995 (the "1995 Loan Agreement"); and
WHEREAS, to secure Borrower's obligations under the 1995 Loan Agreement,
Assignor, Borrower and WESAC entered into that certain Security Agreement dated
as of July 25, 1995 (the "Security Agreement") and Assignor and Borrower granted
a security interest in the Collateral described therein to WESAC; and
WHEREAS, pursuant to the Security Agreement, Assignor executed a Patent
Assignment in favor of WESAC as of December 28, 1995 (the "Existing
Assignment"), whereby Assignor assigned all right, title and interest in and to
the Patents to WESAC; and
WHEREAS, to amend and supplement the 1995 Loan Agreement, and to provide
for additional credit facilities to Borrower, Borrower, each of the Lenders
named therein and the Agent, as agent, have entered into that certain Amended
and Restated Loan Agreement dated as of January 30, 1998 (the "1998 Credit
Agreement"), pursuant to which the Lenders have agreed to make loans to Borrower
and its Subsidiaries; and
WHEREAS, in connection with the execution and delivery of the 1998 Credit
Agreement and as security for all the obligations of Borrower thereunder, the
Lenders and the Agent are requiring that Assignor shall have executed and
delivered this
<PAGE>
Agreement and granted and confirmed the security interests in the Patents
contemplated hereby;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained and to induce the Lenders and the Agent to enter into the
1998 Credit Agreement, and to make the loans provided for therein, it is agreed
as follows:
1. Definitions. Unless otherwise defined herein, terms defined in the 1998
Credit Agreement are used as therein defined and shall have (unless otherwise
provided elsewhere in this Agreement) the following respective meanings (such
meanings being equally applicable to both the singular and plural form of the
terms defined):
"Agreement" shall mean this First Amendment to the Patent Assignment,
including all amendments, modifications and supplements and any exhibits or
schedules to any of the foregoing, and shall refer to the Agreement as the same
may be in effect at the time such reference becomes operative.
"Existing Obligations" shall mean any Obligations now existing or
hereafter arising under the 1995 Loan Agreement or any Loan Document;
"1998 Lenders" shall mean all the parties named as Lenders in the 1998
Credit Agreement.
2. Assignment. WESAC hereby assigns to the Agent, for the benefit of all
the Lenders, the Existing Assignment of the Patents held by WESAC as of the date
hereof. Assignor hereby consents to such assignment.
3. Security for Obligation. Each of Assignor and Borrower acknowledges,
confirms and agrees that this Agreement sercures, and the assignment of the
Patents is security for, the prompt payment in full when due, whether at stated
maturity, by acceleration or otherwise, and performance of the Obligations,
whether for principal, premium, interest, fees, costs and expenses, and all
obligations of Borrower now or hereafter existing under this Agreement and under
the First Amendment to the Security Agreement (collectively, the "Secured
Obligations") including the Existing Obligations, and any and all other future
advances, as well as all interest, fees, charges expenses, attorneys' fees and
any other sum chargeable to borrower of any or all of its subsidiaries under any
of the Loan Documents. Concurrently with the execution and delivery of this
Agreement, each of the UCC-1 financing statement listed on Schedule I attached
hereto shall be amended to assign the security interests represented thereby to
the Agent.
4. Effect of Amendment. Assignor hereby confirms and agrees that, except as
specifically amended hereby, the Existing Assignment continues in full force and
effect.
5. Waiver. No delay on the part of the Agent in exercising any power of
sale, Lien, option or other right hereunder, and no notice or demand which may
be given to or made upon Assignor by the Agent with request to any power of
sale, Lien,
-2-
<PAGE>
option or other right hereunder, shall constitute a waiver thereof, or limit or
impair the Agent's rights to take any action or to exercise any power of sale,
Lien, option, or any other rights as against Assignor in any respect.
6. Assignment. Each Lender may assign, endorse or transfer any instrument
evidencing all or any part of the Secured Obligators as provided in, and in
accordance with, the 1998 Credit Agreement, and the holder of such instrument
shall be entitled to the benefits of this Agreement.
7. Miscellaneous
(a) The Agent may execute any of its duties hereunder by or through
agents or employees and shall be entitled to advice of counsel concerning all
matters pertaining to its duties hereunder;
(b) Assignor agrees to promptly reimburse the Agent for actual
out-of-pocket expenses, including, without limitation, reasonable counsel fees,
incurred in connection with the administrator and enforcement of this Agreement.
(c) Neither the Agent nor any of its respective officers, directors,
employees, agents or counsel shall be liable for any action lawfully taken or
omitted to be taken by it of them hereunder or in connection herewith, except
for its or their own gross negligence or willful misconduct.
(d) The Agreement shall be binding upon Assignor and its successors
and assigns, and shall inure to the benefit of, and be enforceable by, the
Agent, and its successors and assigns, and shall be governed by and construed
and enforced in accordance with, the internal laws in effect in the State of New
York without giving effect to principles of conflict of laws, and none of the
terms or provisions of this Agreement may be waived, altered, modified or
amended except in writing duly signed for on behalf of the Agent and Assignor.
8. Severability. If for any reason any provision or provisions hereof are
determined to be invalid and contrary to any existing or future law, such
inability shall not impair the operation of or effect those portions of this
Agreement which are valid.
9. Notice. Whenever it is provided herein that any notice, demand, request,
consent, approval or other communication shall or may be given to or served upon
any of the parties by any other party, or whenever any of the parties desires to
give or serve upon any other a communication with respect to this Agreement,
each such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and shall be given as provided in Section
10.11 of the 1998 Credit Agreement.
10. Section Titles. the section titles contained in this Agreement are and
shall be without substantive meaning or content of any kind whatsoever and are
not a part of this Agreement.
-3-
<PAGE>
11. Counterparts. This Agreement may be executed in any number of
counterparts, which shall, collectively and separately, constitute one document.
IN WITNESS WHEREOF, each of the parties hereto has caused this First
Amendment to the Patent Agreement to be executed and delivered by its duly
authorized officer on the date first set forth above.
WAHLCO INTERNATIONAL, INC.
By: _______________________________
Name:
Title:
WAHLCO, ENVIRONMENTAL SYSTEMS, INC.
By: _______________________________
Name:
Title:
WES ACQUISITION CORP.
By: _______________________________
Name:
Title:
The foregoing First Amendment to the Patent Assignment is hereby accepted
by the Agent:
WEXFORD MANAGEMENT, LLC.
By: ______________________________
Name:
Title:
-4-
<PAGE>
SCHEDULE I
TITLE: Gas Conditioning Apparatus
PATENT NO.: 4,466,815
FILE DATE: 05/03/82
SN: 374,516
ISSUE DATE: 08/21/84
EXPIRATION DATE: 08/21/01
ABSTRACT: A gas conditioning apparatus for conditioning flue gases and
more particularly an improved means for purging a gas
conditioning system of latent or residual sulfur trioxide
which is normally produced by the gas conditioning system for
conditioning of flue gases.
-5-
<PAGE>
SCHEDULE I
TITLE: Apparatus for Preheating Combustion Air, etc.
PATENT NO.: 4,602,673
FILE DATE: 10/03/84
SN: 637,394
ISSUE DATE: 07/29/86
EXPIRATION DATE: 07/29/03
ABSTRACT: An apparatus for preheating air for combustion for a
combustion process while simultaneously reducing the NOx
content of hot flue gases utilized to effect said preheating,
said apparatus comprising: a regenerative revolving air heater
which includes heat exchange elements having surfaces which
are exposed to said hot flue gases, and a coating which acts
as a catalyst for the reduction of NOx and is only on those
heat exchange surfaces which are contacted by flue gas having
a temperature greater than the condensation temperature of
reaction produces resulting from material contained in said
flue gas and from the added reducing agent.
-6-
<PAGE>
SCHEDULE I
TITLE: Gas Conditioning Means for a Plurality of Boilers
PATENT NO.: 4,333,746
FILE DATE: 04/24/81
SN: 257,343
ISSUE DATE: 06/08/82
EXPIRATION DATE: 06/08/99
ABSTRACT: A gas conditioning means for a plurality of boilers and more
particularly improved means for providing a contitioning
mixture of sulfur trioxide (SO3), from a single system, for
injection into the flues gas streams of a plurality of
bolilers for the conditioning thereof.
-7-
<PAGE>
SCHEDULE I
TITLE: Apparatus for Preheating Combustion Air, etc.
PATENT NO.: 4,739,826
FILE DATE: 07/07/86
SN: 882,245
ISSUE DATE: 04/26/88
EXPIRATION DATE: 04/26/05
ABSTRACT: An apparatus for preheating air for combustion for a
combustion process while simultaneously reducing the NOx
content of hot flue gas utilized to effect said preheating to
attain advantages which relate to combustion and which result
from higher combustion chamber tempearatures, such as
accelerated ignition and more complete combustion, comprising:
a recuperative air heater which includes heat exchange
elements having surfaces which are exposed to said hot flue
gases, and a coating which acts as a catalyst for the
reduction of NOx, said coating being provided only with those
heat exchange surfaces which are contacted by flue gases
having a temperature greater than the condensation temperature
of the reaction products resulting from the material contained
in said flue gas and from added reducing agent in order to
avoid formation of deposits on catalyst contact surfaces such
as a result of flue gas, which is cooled off as it flows
through the heat exchanger, falling below the condensation
temperature.
-8-
<PAGE>
SCHEDULE I
TITLE: Removal of Participate Matter From Combustion Gas Streams
PATENT NO.: 4,987,839
FILE DATE: 05/14/90
SN: 523,312
ISSUE DATE: 01/29/91
EXPIRATION DATE: 01/29/08
ABSTRACT: Unburned particulate matter is removed from a combustion gas
stream by adding a conditioning agent to modify the
resistivity of the particulate matter and passing the
conditioning combustion gas stream through an electrostatic
precipitator whose precipitating elements are energized with
an intermittent applied voltage. The addition of conditioning
agent and the precipitating voltage signal are mutually
optimized. A controller receives measurement signals from
sensors that monitor the total flow rate of the particulate
matter in the gas stream before the electrostatic precipitate
treatment, and the concentration of particulate matter in the
gas stream after the treatment. Performance of the system may
be optimized according to selected combinations of variables.
-9-
<PAGE>
SCHEDULE I
TITLE: Apparatus for Preheating Combustion Air, etc.
PATENT NO.: 4,903,755
FILE DATE: 04/25/88
SN: 185,861
ISSUE DATE: 02/27/90
EXPIRATION DATE: 07/29/03
ABSTRACT: An apparatus for preheating air combustion for a combustion
process while simultaneously reducing the NOx content of hot
flue gases utilized to effect said perheating, said apparatus
comprising: a revolving regenerative air heater that includes
heat exchange elements having surfaces that are exposed to
said hot flue gases, with said surfaces having a coating that
acts as a catalyst for the reduction of NOx, whereby said
regenerative air heater is a revolving drum that is divided in
a radial direction into individual chambers that contain said
heat exchange elements, which are in the form of a heat
storage mass comprised of a plurality of movable individual
elements that are respectively provided with said catalyst
coating.
-10-
<PAGE>
SCHEDULE I
TITLE: Conditioning of Gas Streams Containing Particulate
PATENT NO.: 4,966,610
FILE DATE: 06/05/89
SN: 361,272
ISSUE DATE: 10/30/90
EXPIRATION DATE: 10/30/07
ABSTRACT: A method for precipating particulate matter from a flowing gas
stream, comprising the steps of: furnishing a flowing gas
stream containing particulate matter entrained therein;
pretreating the particulate matter of the gas stream, by
supplying to the gas stream a conditioning agent selected from
the group consisting of sulfur trioxide, a gaseous compound
containing ammonia, and water vapor, and substantially
simultaneously, establishing an electrostatic potential
between the conditioning agent and the particulate matter
whereupon the conditioning agent deposits upon the particulate
matter; and electrostatically precipating the particulate
matter from the conditioned gas stream.
-11-
<PAGE>
SCHEDULE I
TITLE: Reduction of Acidic Emissions From Combustion of Sulfur, Etc
PATENT NO.: 5,024,171
FILE DATE: 03/19/90
SN: 496,872
ISSUE DATE: 06/18/91
EXPIRATION DATE: 06/18/08
ABSTRACT: The sulfer trioxide in the combustion stream of a power plant
is reactered with injected ammonia to produce a solid ammonia
sulfate that is captured, and not released to the atmosphere.
A feedforward signal indicative of the total mass flow os
sulfur trioxide is determined as the product of the measured
boiler and measured prior to the addition of ammonia. The
ammonia mass flow injection rate is preferably at a normal
stoichiometric ratio of from about 1.0 to 1.1 relative to the
sulfur dioxide mass flow rate (that is, from about 2.0 to 2.2
times the molar mass flow rate of the sulfur trioxide),
avoiding the production of ammmonia bisulfate. The ammonia
content of the combustion gas stream is added. Based upon this
feedback measurement, the amount of ammonia added is adjusted
to be just sufficient to react with all of the sulfur
trioxide, but not in such excess as to be environmentally
detrimental.
-12-
<PAGE>
SCHEDULE I
TITLE: Control of Addition of Conditioning Agents to Flue Gas
PATENT NO.: 5,029,535
FILE DATE: 05/14/90
SN: 523,311
ISSUE DATE: 07/09/91
EXPIRATION DATE: 07/09/08
ABSTRACT: Additions of contitioning agents to a particulate containing
flue gas stream are controlled by a controller operating from
feedforward and feedback signals received from sensors in the
combustion and gas cleanup system, and, optionally, from the
power consumption level of the electrostatic precipitator. The
flow rates of the conitator poditioning agents, such as sulfur
trioxide and ammonia, are thereby balanced to achieve an
optimal remolval of particulate matter and also sulfur and
sulfur compounds from the gas stream before it is exhausted to
the atmosphere. A typical feedforward signal is the boiler
loading, and typical feedback signals include residual sulfur
trioxide and ammonia levels and stack gas opacity.
-13-
<PAGE>
SCHEDULE I
TITLE: Control System for Flue Gas Conditioning
PATENT NO.: 5,122,162
FILE DATE: 03/19/90
SN: 496,873
ISSUE DATE: 06/16/92
EXPIRATION DATE: 06/16/09
ABSTRACT: The volumetric flow rate for the addition of a flue gas
conditioning agent, such as sulfur trioxide, is established by
maintaining the deriative of the electrostatic precipitator
power with respect to flow rate within a preselected operating
range. The derivative of the precipatator power with respect
to time and the derivative of the flow rate with respect to
time are measured, and then the deriatives are divided to
determine the derivative of precipitator power with respect to
flow rate. This calculated value is compared with a
preselected operating range. If the calculated value is
greater than the preselected operating range, the flow rate is
reduced, until a steady state calculated derivative value
within the operating range is reached.
-14-
<PAGE>
STATE OF CALIFORNIA )
) ss.:
COUNTY OF ORANGE )
I, ________________, a Notary Public in and for said County, in the State
aforesaid, DO HEREBY CERTIFY that ________________, personally known to me to be
the _________ of Wahlco, Inc., a corporation organized under the laws of the
State of Delaware, and personally known to me to be the same person whose name
is subscribed to the foregoing Patent Assignment, appeared before me this day in
person and acknowledged that (he)(she) signed and delivered the said Assignment
as (his)(her) free and voluntary act, and as the free and voluntary act and deed
of said corporation, for the uses and purposes therein set forth.
GIVEN under my hand and seal this ______ day of December, 1995.
Notary Public
[NOTARIAL SEAL
My Commission Expires:
<PAGE>
Exhibit D
to 1998 Credit Agreement
FIRST AMENDMENT TO SECURITY AGREEMENT
FIRST AMENDMENT TO SECURITY AGREEMENT, dated as of January 30, 1998, among
WAHLCO ENVIRONMENTAL SYSTEMS, INC., a Delaware corporation ("Borrower"), each
subsidiary of Borrower listed on the signature pages hereof (Borrower and each
such subsidiary being individually a "Grantor" and collectively, the
"Grantors"); WES Acquisition Corp., a Delaware corporation ("WESAC"); the 1998
Lenders (as hereinafter defined); and Wexford Management LLC, a Connecticut
limited liability company, as administrative and collateral agent for the
Lenders (the "Agent").
W I T N E S S E T H :
WHEREAS, Borrower and WESAC entered into that certain Term Loan Agreement
dated as of July 28, 1995 (the "1995 Loan Agreement"); and
WHEREAS, to secure Borrower's obligations under the 1995 Loan Agreement,
Borrower, each Grantor and WESAC entered into that certain Security Agreement
dated as of July 25, 1995 (the "Security Agreement") and Borrower and each
Grantor granted a security interest in the Collateral described therein to
WESAC; and
WHEREAS, to amend and supplement the 1995 Loan Agreement, and to provide
for additional credit facilities to Borrower, Borrower, each of the Lenders
named therein and the Agent, as agent, have entered into that certain Amended
and Restated Loan Agreement dated as of January 30, 1998 (the "1998 Credit
Agreement"), pursuant to which Lenders have agreed to make loans to Borrower and
its Subsidiaries; and
WHEREAS, Lenders have determined to appoint the Agent as their agent for
administrative and collateral purposes, including holding the Collateral and
exercising all rights under the Security Agreement, as amended hereby; and
WHEREAS, in connection with the execution and delivery of the 1998 Credit
Agreement and as security for all the obligations of Borrower thereunder,
Lenders and the Agent are requiring that Grantors shall have executed and
delivered this Agreement and granted and confirmed the security interests
contemplated hereby;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained and to induce the Lenders and the Agent to enter into the
1998 Credit Agreement, and to make the loans provided for therein, it is agreed
as follows:
<PAGE>
1. Definitions. Unless otherwise defined herein, terms defined in the 1998
Credit Agreement are used as therein defined, and shall have (unless otherwise
provided elsewhere in this Agreement or the Security Agreement) the following
respective meanings (such meanings being equally applicable to both the singular
and plural form of the terms defined):
"Agreement" shall mean this First Amendment to the Security Agreement,
including all amendments, modifications and supplements and any exhibits or
schedules to any of the foregoing, and shall refer to the Agreement as the same
may be in effect at the time such reference becomes operative.
"Existing Obligations" shall mean any Obligations now existing or
hereafter arising under the 1995 Loan Agreement or any Loan Document;
"1998 Lenders" shall mean all the parties named as Lenders in the 1998
Credit Agreement.
2. Delivery of Collateral. WESAC hereby assigns to the Agent, for the
benefit of all the Lenders, all Liens and Security Interests in the Collateral
held by WESAC as of the date hereof. Grantors hereby consent to such assignment.
3. Security for Obligation. Each Grantor acknowledges, confirms and agrees
that this Agreement serves, and the collateral is security for, the prompt
payment in full when due, whether at stated maturity, by acceleration or
otherwise, and performance of the Obligations, whether for principal, premium,
interest, fees, costs and expenses, and all obligations of Grantors now or
hereafter existing under this Agreement and under the First Amendment to the
Guaranty (collectively, the "Secured Obligations") including the Existing
Obligations, and any and all other future advances, as well as all interest,
fees, charges expenses, attorneys' fees and any other sum chargeable to borrower
of any or all of its subsidiaries under any of the Loan Documents. Concurrently
with the execution and delivery of this Agreement, each of the UCC-1 financing
statement listed on Schedule I attached hereto shall be amended to assign the
security interests represented thereby to the Agent.
4. Effect of Amendment. Each Grantor hereby confirms and agrees that,
except as specifically amended hereby, the Security Agreement continues in full
force and effect.
5. Waiver. No delay on the part of the Agent in exercising any power of
sale, Lien, option or other right hereunder, and no notice or demand which may
be given to or made upon Grantors by the Agent with request to any power of
sale, Lien, option or other right hereunder, shall constitute a waiver thereof,
or limit or impair the Agent's rights to take any action or to exercise any
power of sale, Lien, option, or any other rights as against Grantors in any
respect.
6. Assignment. Each Lender may assign, endorse or transfer any instrument
evidencing all or any part of the Secured Obligators as provided in, and in
accordance with, the 1998 Credit Agreement, and the holder of such instrument
shall be entitled to the benefits of this Agreement.
-2-
<PAGE>
7. Miscellaneous
(a) The Agent may execute any of its duties hereunder by or through
agents or employees and shall be entitled to advice of counsel concerning all
matters pertaining to its duties hereunder;
(b) Each Grantor jointly and severally agrees to promptly reimburse
the Agent for actual out-of-pocket expenses, including, without limitation,
reasonable counsel fees, incurred in connection with the administrator and
enforcement of this Agreement.
(c) Neither the Agent nor any of its respective officers, directors,
employees, agents or counsel shall be liable for any action lawfully taken or
omitted to be taken by it of them hereunder or in connection herewith, except
for its or their own gross negligence or willful misconduct.
(d) The Agreement shall be binding upon the Grantors and their
successors and assigns, and shall inure to the benefit of, and be enforceable
by, the Agent, and its successors and assigns, and shall be governed by and
construed and enforced in accordance with, the internal laws in effect in the
State of New York without giving effect to principles of conflict of laws, and
none of the terms or provisions of this Agreement may be waived, altered,
modified or amended except in writing duly signed for on behalf of the Agent and
the Grantors.
8. Severability. If for any reason any provision or provisions hereof are
determined to be invalid and contrary to any existing or future law, such
inability shall not impair the operation of or effect those portions of this
Agreement which are valid.
9. Notice. Whenever it is provided herein that any notice, demand, request,
consent, approval or other communication shall or may be given to or served upon
any of the parties by any other party, or whenever any of the parties desires to
give or serve upon any other a communication with respect to this Agreement,
each such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and shall be given as provided in Section
10.11 of the 1998 Credit Agreement.
10. Section Titles. the section titles contained in this Agreement are and
shall be without substantive meaning or content of any kind whatsoever and are
not a part of this Agreement.
11. Counterparts. This Agreement may be executed in any number of
counterparts, which shall, collectively and separately, constitute one document.
-3-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this First
Amendment to the Security Agreement to be executed and delivered by its duly
authorized officer on the date first set forth above.
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
By: ______________________________
Name:
Title:
SUBSIDIARIES:
BACHMANN COMPANIES, INC.
By: ______________________________
Name:
Title:
WAHLCO ENGINEERED PRODUCTS GROUP, LTD.
By: ______________________________
Name:
Title:
WAHLCO, INC.
By: ______________________________
Name:
Title:
FIELD SERVICE ASSOCIATES, INC.
By: ______________________________
Name:
Title:
-4-
<PAGE>
WAHLCO POWER PRODUCTS, INC.
By: ______________________________
Name:
Title:
WES TECHNOLOGY, INC.
By: ______________________________
Name:
Title:
WAHLCO ENGINEERED PRODUCTS, INC.
By: ______________________________
Name:
Title:
LAGUNA SERVICE CORPORATION
By: ______________________________
Name:
Title:
WAHLCO GAS FLOW TECHNOLOGIES, INC.
By: ______________________________
Name:
Title:
WAHLCO SERVICE CORPORATION
By: ______________________________
Name:
Title:
-5-
<PAGE>
WAHLCO ENGINEERED PRODUCTS PTY., LTD.
By: ______________________________
Name:
Title:
WAHLCO ENGINEERED PRODUCTS CANADA, INC.
By: ______________________________
Name:
Title:
FLOWRITE DAMPERS, LTD.
By: ______________________________
Name:
Title:
WAHLCO ENGINEERED PRODUCTS, LTD.
By: ______________________________
Name:
Title:
WAHLCO ENGINEERED INTERNATIONAL, LTD.
By: ______________________________
Name:
Title:
PENTNEY ENGINEERING, LTD.
By: ______________________________
Name:
Title:
-6-
<PAGE>
TEDDINGTON BELLOWS (HOLDINGS), LTD.
By: ______________________________
Name:
Title:
TRESTE PLAN HIRE, LTD.
By: ______________________________
Name:
Title:
WAHLCO INTERNATIONAL, INC.
By: ______________________________
Name:
Title:
WAHLCO ENGINEERED PRODUCTS ITALIANA SRL.
By: ______________________________
Name:
Title:
TEDDINGTON BELLOWS, LTD.
By: ______________________________
Name:
Title:
BACHMANN H&T, GmbH
By: ______________________________
Name:
Title:
-7-
<PAGE>
EXERGETIC SYSTEMS, INC.
By: ______________________________
Name:
Title:
CORONA PROPERTIES
By: ______________________________
Name:
Title:
BACHMANN INDUSTRIES INDIA, LTD.
By: ______________________________
Name:
Title:
WAHLCO ENVIRONMENTAL SERVICES, INC.
By: ______________________________
Name:
Title:
WES ACQUISITION CORP.
By: ______________________________
Name:
Title:
-8-
<PAGE>
WEXFORD CAPITAL PARTNERS II, L.P.
By: ______________________________
Wexford Capital II, L.P.
Its General Partner
By: ______________________________
Wexford Capital II, L.P.
Its General Partner
By: ______________________________
Name:
Title:
WEXFORD OVERSEAS PARTNERS I, L.P.
By: ______________________________
Wexford Capital Overseas II, L.P.
The General Partner
By: ______________________________
Wexford Capital Limited
Its General Partner
By: ______________________________
Name:
Title:
WEXFORD SPECIAL SITUATIONS 1996, L.P.
By: ______________________________
Name:
Title:
-9-
<PAGE>
WEXFORD SPECIAL SITUATIONS 1996 INSTITUTIONAL, L.P.
By: ______________________________
Name:
Title:
WEXFORD SPECIAL SITUATIONS 1996 LIMITED
By: ______________________________
Name:
Title:
WEXFORD-EURIS SPECIAL SITUATIONS 1996, L.P.
By: ______________________________
Name:
Title:
WEXFORD MANAGEMENT LLC, As Agent
By: ______________________________
Name:
Title:
-10-
<PAGE>
SCHEDULE I
FILINGS
1. Bachmann Companies, Inc. UCC-1 financing statement number 114530 filed with
the Maine Secretary of State on September 18, 1995
2. Wahlco Engineered Products, Inc. UCC-1 financing statement number 114531
filed with the Maine Secretary of State on September 18, 1995
3. Wahlco, Inc. UCC-1 financing statement number 9526460275 filed with the
California Secretary of State on September 18, 1995
4. WES Technology, Inc. UCC-1 financing statement number 9526460337 filed with
the California Secretary of State on September 18, 1995
5. Wahlco Environmental Systems, Inc. UCC-1 financing statement number 952460286
filed with the California Secretary of State on September 18, 1995
<PAGE>
Exhibit E
to 1998 Credit Agreement
FIRST AMENDMENT TO STOCK PLEDGE AGREEMENT
FIRST AMENDMENT TO STOCK PLEDGE AGREEMENT, dated as of January 30, 1998,
among WES ACQUISITION CORP., a Delaware corporation, WAHLCO ENVIRONMENTAL
SYSTEMS, INC., a Delaware corporation (the "Borrower"), and BACHMANN COMPANIES,
INC., a Delaware corporation, WAHLCO, INC., a California corporation, WAHLCO
ENGINEERED PRODUCTS GROUP LIMITED, a United Kingdom corporation, and TEDDINGTON
BELLOWS (HOLDINGS), LTD., a United Kingdom corporation, each a subsidiary of
Borrower (individually as a "Pledgor" and collectively as "Pledgors"); in favor
of (a) the 1995 Lender (as hereinafter defined), (b) the 1998 Lenders (as
hereinafter defined, and together with the 1995 Lender, the "Lenders"), and (c)
Wexford Management LLC, a Connecticut limited liability company, as
administrative and collateral agent for the Lenders (the "Agent").
W I T N E S S E T H:
WHEREAS, the Borrower and WESAC entered into that certain Term Loan
Agreement dated as of July 28, 1995 (the "1995 Loan Agreement"); and
WHEREAS, to secure Borrower's obligations under the 1995 Loan Agreement,
the Borrower and the Pledgors entered into that certain Stock Pledge Agreement
dated as of July 28, 1995 (the "Stock Pledge Agreement") and pledged the Pledged
Collateral described therein to WESAC; and
WHEREAS, to amend and supplement the 1995 Loan Agreement, and to provide
for additional credit facilities to the Borrower, the Borrower, each of the
Lenders named therein and the Agent, as agent, have entered into that certain
Amended and Restated Loan Agreement dated as of January 30, 1998 (the "1998
Credit Agreement"), pursuant to which the Lenders have agreed to make loans to
the Borrower and its subsidiaries; and
WHEREAS, the Lenders have determined to appoint the Agent as their agent
for administrative and collateral purposes, including holding the Pledged
Collateral and exercising all rights under the Stock Pledge Agreement; and
WHEREAS, in connection with the execution and delivery of the 1998 Credit
Agreement and as security for all of the obligations of Borrower thereunder, the
Lenders and the Agent are requiring that Pledgors shall have executed and
delivered this Agreement and granted and confirmed the security interest
contemplated hereby;
<PAGE>
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained and to induce the Lenders and the Agent to enter into the
1998 Credit Agreement, and to make the loans provided for therein, it is agreed
as follows:
1. Definitions. Unless otherwise defined herein, terms defined in the 1998
Credit Agreement are used herein as therein defined, and the following shall
have (unless otherwise provided elsewhere in this Agreement or the Stock Pledge
Agreement) the following respective meanings (such meanings being equally
applicable to both the singular and plural form of the terms defined):
"Agreement" shall mean this First Amendment Stock Pledge Agreement,
including all amendments, modifications and supplements and any exhibits or
schedules to any of the foregoing, and shall refer to the Agreement as the same
may be in effect at the time such reference becomes operative.
"Existing Obligations" shall mean any Obligations now existing or
hereafter arising under the 1995 Loan Agreement or any Loan Document.
"1995 Lender" shall mean WES Acquisition Corp., a Delaware
corporation.
"1998 Lenders" shall mean the parties named as Lenders in the 1998
Credit Agreement.
2. Delivery of Pledged Collateral. WESAC hereby delivers to the Agent the
Pledged Collateral, the receipt of which is hereby acknowledged.
3. Security for Obligations. Each Pledgor acknowledges, confirms and agrees
that this Agreement secures, and the Pledged Collateral is security for, the
prompt payment in full when due, whether at stated maturity, by acceleration or
otherwise, and performance of the Obligations, whether for principal, premium,
interest, fees, costs and expenses, and all obligations of Pledgors now or
hereafter existing under this Agreement and under the Amended Guaranty
(collectively, the "Secured Obligations") including the Existing Obligations,
and any and all other, future advances, as well as all interest, fees, charges,
expenses, attorneys' fees and any other sum chargeable to Borrower or any or all
of its Subsidiaries under any of the Loan Documents.
4. Effect of Amendment. Each Pledor hereby confirms and agrees that, except
as specifically amended hereby, the Stock Pledge Agreement continues in full
force and effect.
5. Waiver. No delay on the part of the Agent in exercising any power of
sale, Lien, option or other right hereunder, and no notice or demand which may
be given to or made upon Pledgors by the Agent with respect to any power of
sale, Lien, option or other right hereunder, shall constitute a waiver thereof,
or limit or impair the Agent's, right to take any action or to exercise any
power of sale, Lien, option, or any other right hereunder, without notice or
demand, or prejudice any of their rights as against Pledgors in any respect.
6. Assignment. Each Lender may assign, endorse or transfer any instrument
evidencing all or any part of the Secured Obligations as provided in, and in
accordance with, the 1998 Credit Agreement, and the holder of such instrument
shall be entitled to the benefits of this Agreement.
-2-
<PAGE>
7. Miscellaneous.
(a) The Agent may execute any of its duties hereunder by or through
agents or employees and shall be entitled to advice of counsel concerning all
matters pertaining to its duties hereunder.
(b) Each Pledgor jointly and severally agrees to promptly reimburse
the Agent for actual out-of-pocket expenses, including, without limitation,
reasonable counsel fees, incurred in connection with the administration and
enforcement of this Agreement.
(c) Neither the Agent nor any of its respective officers, directors,
employees, agents or counsel shall be liable for any action lawfully taken or
omitted to be taken by it or them hereunder or in connection herewith, except
for its or their own gross negligence or willful misconduct.
(d) This Agreement shall be binding upon Pledgors and their successors
and assigns, and shall inure to the benefit of, and be enforceable by, the
Agent, and its successors and assigns, and shall be governed by, and construed
and enforced in accordance with, the internal laws in effect in the State of New
York without giving effect to principles of conflict of laws, and none of the
terms or provisions of this Agreement may be waived, altered, modified or
amended except in writing duly signed for and on behalf of the Agent and the
Pledgors.
8. Severability. If for any reason any provision or provisions hereof are
determined to be invalid and contrary to any existing or future law, such
invalidity shall not impair the operation of or effect those portions of this
Agreement which are valid.
9. Notices. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration or other communication shall or may be
given to or served upon any of the parties by any other party, or whenever any
of the parties desires to give or serve upon any other a communication with
respect to this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and either shall be given
as provided in Section __ of the 1998 Credit Agreement.
10. Section Titles. The section titles contained in this Agreement are and
shall be without substantive meaning or content of any kind whatsoever and are
not a part of the agreement between the parties hereto.
11. Counterparts. This Agreement may be executed in any number of
counterparts, which shall, collectively and separately, constitute one
agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
Stock Pledge Agreement to be duly executed as of the date first written above.
WES ACQUISITION CORP.
By:_________________________
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
By:_________________________
Name:
Title:
BACHMANN COMPANIES, INC.
By:_________________________
Name:
Title:
WAHLCO, INC.
By:_________________________
Name:
Title:
WAHLCO ENGINEERED PRODUCTS GROUP LIMITED
By:_________________________
Name:
Title:
TEDDINGTON BELLOWS (HOLDINGS), LTD.
By:_________________________
Name:
Title:
Accepted and Acknowledged by:
WEXFORD MANAGEMENT LLC, as Agent
By:_________________________________
Name:
Title:
-4-
<PAGE>
xxxxxx
Schedule 3.6
Defaults
1/30/98
Description
Amount
London International Mercantile Bank (LIM) is in $459,812
default of deposits owed to WEP Ltd. These
deposits were originally restricted by LIM as
collateral for outstanding letters of credit. Due to
LIM's Financial problems/reorganization, they will
not allow WEP Ltd. to withdraw these funds.
( 280,544 @ 1.639 = $459,812)
- --------------------------------------------------------------------------
Total
459,812
<PAGE>
Schedule 3.10
Taxes
1/30/98
None
<PAGE>
[Wahlco Environmental Systems, Inc. Letterhead]
SUBSCRIPTION AGENT AGREEMENT
Date: January 20, 1998
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Rd.
Ridgefield Park, NJ 07660
Attn: Reorganization Department
Gentlemen:
Wahlco Environmental Systems, Inc., a Delaware corporation (the "Company") is
making an offer to issue (the "Subscription Offer") to the holders of record of
its outstanding shares of Common Stock par value $0.01 per share (the "Common
Stock"), at the close of business on March 3, 1998 (the "Rights Record Date"),
the right to subscribe for and purchase (each a "Right") shares of Common Stock
(the "Additional Common Stock") at a purchase price of $0.10 per share of
Additional Common Stock (the "Subscription Price"), payable by cashier's or
certified check, upon the terms and conditions set forth herein. The term
"Subscribed" shall mean submitted for purchase from the Company by a stockholder
in accordance with the terms of the Subscription Offer, and the term
"Subscription" shall mean any such submission. The Subscription Offer will
expire at the close of business, New York City Time, April 6, 1998 (the
"Expiration Date"), unless the Company shall have extended the period of time
for which the Subscription Offer is open, in which event the term "Expiration
Time" shall mean the latest time and date at which the Subscription Offer, as so
extended by the Company from time to time, shall expire.
The Company filed a Registration Statement relating to the Additional Common
Stock with the Securities and Exchange Commission under the Securities Act of
1933, as amended, on or about December 19, 1997. The terms of the Additional
Common Stock will be more fully described in the combined Prospectus/Proxy
Statement (the "Prospectus") forming part of the Registration Statement when
declared effective, and in the accompanying Letter of Instruction. Copies of the
Prospectus as originally filed, the Letter of Instruction and the Notice of
Guaranteed Delivery are annexed hereto as Exhibit 1, Exhibit 2 and Exhibit 3,
respectively. All terms used and not defined herein shall have the same meaning
as in the Prospectus. Promptly after the Rights Record Date, the Company will
provide you with a list of holders of Common Stock as of the Rights Record Date
(the "Record Stockholders List").
The Rights are evidenced by transferable subscription warrants (the "Warrants"),
a copy of the form of which is annexed hereto as Exhibit 4. The Warrants entitle
the holders to subscribe, upon payment of the Subscription Price, for shares of
Additional Common Stock at the rate of one (1) share for each Right evidenced by
a Warrant (the "Basic Subscription Privilege"). No fractional shares will be
issued.
The Company hereby appoints you as Subscription Agent (the "Subscription Agent")
for the Subscription Offer and agrees with you as follows:
1. As Subscription Agent, you are authorized and directed to:
(a) Issue the Warrants in accordance with this Agreement in the names of the
holders of the Common Stock of record on the Rights Record Date, keep
such records as are necessary for the purpose of recording such
issuance, and furnish a copy of such records to the Company. The
Warrants may be signed on behalf of the Subscription
Page 1 of 9
<PAGE>
ChaseMellon Shareholder Services, L.L.C.
January 20, 1998
Page 2
Agent by the manual or facsimile signature of a Vice President or
Assistant Vice President of the Subscription Agent, or by the manual
signature of any of its other authorized officers.
(b) promptly after you receive the Record Stockholders List:
(i) mail or cause to be mailed, by first class mail, to each holder of
Common Stock of record on the Rights Record Date whose address of
record is within the United States and Canada, (i) a Warrant
evidencing the Rights to which such stockholder is entitled under
the Subscription Offer, (ii) a copy of the final Prospectus, (iii) a
Letter of Instruction, (iv) a Notice of Guaranteed Delivery and (v)
a return envelope addressed to the Subscription Agent; and
(ii) mail or cause to be mailed, by air mail, to each holder of Common
Stock of record on the Record Date whose address of record is
outside the United States and Canada, or is an A.P.O. or F.P.O.
address (i) a copy of the Prospectus, (ii) a Notice of Guaranteed
Delivery and (iii) a Letter of Instruction (different from the
Letter of Instruction sent to stockholders whose address of record
is within the United States and Canada). You shall refrain from
mailing Warrants issuable to any holder of Common Stock of record on
the Rights Record Date whose address of record is outside the United
States and Canada, or is an A.P.O. or F.P.O. address, and will hold
such Warrants for the account of such stockholder subject to such
stockholder making satisfactory arrangements with the Subscription
Agent for the exercise or other disposition of the Rights evidenced
thereby, and follow the instructions of such stockholder for the
exercise, sale or other disposition of such Rights if such
instructions are received at or before 11:00 a.m., New York City
time, on the Expiration Date.
(c) Mail or deliver a copy of the final Prospectus (i) to each assignee or
transferee of Warrants upon your receiving appropriate documents to
register the assignment or transfer thereof and (ii) with certificates
for shares of Additional Common Stock when such are issued to persons
other than the registered holder of the Warrant.
(d) Accept Subscriptions upon the due exercise (including payment of the
Subscription Price) on or prior to the Expiration Time of Rights in
accordance with the terms of the Warrants and the final Prospectus.
(e) Subject to the next sentence, accept Subscriptions from stockholders
whose Warrants are alleged to have been lost, stolen or destroyed upon
receipt by you of an affidavit of theft, loss or destruction and a bond
of indemnity in form and substance satisfactory to you, accompanied by
payment of the Subscription Price for the total number of shares of
Additional Common Stock Subscribed for. Upon receipt of such affidavit
and bond of indemnity and compliance with any other applicable
requirements, stop orders shall be placed on said Warrants and you shall
withhold delivery of the shares of Additional Common Stock Subscribed
for until after the Warrants have expired and it has been determined
that the Rights evidenced by the Warrants have not otherwise been
purported to have been exercised or otherwise surrendered.
Page 2 of 9
<PAGE>
ChaseMellon Shareholder Services, L.L.C.
January 20, 1998
Page 3
(f) Accept Subscriptions, without further authorization or direction from
the Company, without procuring supporting legal papers or other proof of
authority to sign (including without limitation proof of appointment of
a fiduciary or other person acting in a representative capacity), and
without signatures of co-fiduciaries, co-representatives or any other
person:
(i) if the Warrant is registered in the name of a fiduciary and is
executed by, and the Additional Common Stock is to be issued in
the name of, such fiduciary;
(ii) if the Warrant is registered in the name of joint tenants and is
executed by one of the joint tenants, provided the certificate
representing the Additional Common Stock is issued in the names
of, and is to be delivered to, such joint tenants;
(iii) if the Warrant is registered in the name of a corporation and is
executed by a person in a manner which appears or purports to be
done in the capacity of an officer, or agent thereof, provided
the Additional Common Stock is to be issued in the name of such
corporation; or
(iv) if the Warrant is registered in the name of an individual and is
executed by a person purporting to act as such individual's
executor, administrator or personal representative, provided, the
Additional Common Stock is to be registered in the name of the
subscriber as executor or administrator of the estate of the
deceased registered holder and there is no evidence indicating
the subscriber is not the duly authorized representative that he
purports to be.
(g) Accept Subscriptions not accompanied by Warrants if submitted by a firm
having membership in the New York Stock Exchange or another national
securities exchange or by a commercial bank or trust company having an
office in the United States together with the Notice of Guaranteed
Delivery and accompanied by proper payment for the total number of
shares of Additional Common Stock Subscribed for.
(h) Accept Subscriptions even though unaccompanied by Warrants, under the
circumstances and in compliance with the terms and conditions set forth
in the final Prospectus under the heading "THE RIGHTS OFFERING --
Exercise of Rights".
(i) Refer to the Company for specific instructions as to acceptance or
rejection, Subscriptions received after the Expiration Time,
Subscriptions not authorized to be accepted pursuant to this Paragraph
1, and Subscriptions otherwise failing to comply with the requirements
of the final Prospectus and the terms and conditions of the Warrants.
(j) Upon acceptance of a Subscription:
(i) hold all monies received in a special escrow account for the
benefit of the Company. Promptly following the Expiration Time
you shall distribute to the Company the funds in such account and
issue certificates for shares of Additional Common Stock issuable
with respect to Subscriptions which have been accepted.
(k) Advise the Company daily by telecopy and confirm by letter to the
attention of Anne Anderson (the "Company Representative") as to the
total number of shares of
Page 3 of 9
<PAGE>
ChaseMellon Shareholder Services, L.L.C.
January 20, 1998
Page 4
Additional Common Stock Subscribed for, the total number of Rights sold,
the total number of Rights partially Subscribed for and the amount of
funds received, with cumulative totals for each; and in addition advise
the Company Representative, by telephone at (714) 979-7300, confirmed by
telecopy, of the amount of funds received and identified, deposited,
available or transferred in accordance herewith, with cumulative totals;
and
(l) as promptly as possible but in any event on or before 3:30 p.m., New
York City time, on the first full business day following the Expiration
Time, advise the Company Representative of the number of shares
Subscribed for, the number of Subscription guarantees received and the
number of shares of Additional Common Stock not subscribed for.
(m) Upon completion of the Subscription Offer, you shall requisition
certificates from the Transfer Agent for the Common Stock for shares of
Additional Common Stock Subscribed for.
2. The Warrants shall be issued in registered form only. The Company shall
appoint and have in office at all times a Transfer Agent and Registrar for
the Warrants, satisfactory to you, which shall keep books and records of the
registration and transfers and exchanges of Warrants (such books and records
are hereinafter called the "Warrant Register"). The Company shall promptly
notify the Transfer Agent and Registrar of the exercise of any Warrants. The
Company shall promptly notify you of any change in the Transfer Agent and
Registrar of the Warrants.
(a) All Warrants issued upon any registration of transfer or exchange of
Warrants shall be the valid obligations of the Company, evidencing the
same obligations, and entitled to the same benefits under this
Agreement, as the Warrants surrendered for such registration of transfer
or exchange.
(b) Any Warrant when duly endorsed in blank shall be deemed negotiable, and
when a Warrant shall have been so endorsed the holder thereof may be
treated by the Company, you and all other persons dealing therewith as
the absolute owner thereof for any purpose and as the person entitled to
exercise the rights represented thereby, any notice to the contrary
notwithstanding, but until such transfer is registered in the Warrant
Register, the Company and you may treat the registered holder thereof as
the owner for all purposes.
3. You will follow your regular procedures to attempt to reconcile any
discrepancies between the number of shares of Additional Common Stock that
any Warrant may indicate are to be issued to a stockholder and the number
that the Record Stockholders List indicates may be issued to such
stockholder. In any instance where you cannot reconcile such discrepancies
by following such procedures, you will consult with the Company for
instructions as to the number of shares of Additional Common Stock, if any,
you are authorized to issue. In the absence of such instructions, you are
authorized not to issue any shares of Additional Common Stock to such
stockholder.
Page 4 of 9
<PAGE>
ChaseMellon Shareholder Services, L.L.C.
January 20, 1998
Page 5
4. You will examine the Warrants received by you as Subscription Agent to
ascertain whether they appear to you to have been completed and executed in
accordance with the applicable Letter of Instruction. In the event you
determine that any Warrant does not appear to you to have been properly
completed or executed, or where the Warrants do not appear to you to be in
proper form for Subscription, or any other irregularity in connection with
the Subscription appears to you to exist, you will follow, where possible,
your regular procedures to attempt to cause such irregularity to be
corrected. You are not authorized to waive any irregularity in connection
with the Subscription, unless you shall have received from the Company the
Warrant which was delivered, duly dated and signed by an authorized officer
of the Company, indicating that any irregularity in such Warrant has been
cured or waived and that such Warrant has been accepted by the Company. If
any such irregularity is neither corrected nor waived, you will return to
the subscribing stockholder (at your option by either first class mail under
a blanket surety bond or insurance protecting you and the Company from
losses or liabilities arising out of the non-receipt or non-delivery of
Warrants or by registered mail insured separately for the value of such
Warrants) to such stockholder's address as set forth in the Subscription any
Warrants surrendered in connection therewith and any other documents
received with such Warrants, and a letter of notice to be furnished by the
Company explaining the reasons for the return of the Warrants and other
documents.
5. Each document received by you relating to your duties hereunder shall be
dated and time stamped when received.
6. For so long as this Agreement is in effect, the Company will reserve for
issuance and keep available free from preemptive rights a sufficient number
of shares of Additional Common Stock to permit the exercise in full of all
Rights issued pursuant to the Subscription Offer. Subject to the terms and
conditions of this Agreement, you will request the Transfer Agent for the
Common Stock to issue certificates evidencing the appropriate number of
shares of Additional Common Stock as required from time to time in order to
effectuate the Subscriptions.
(a) The Company shall take any and all action, including without limitation
obtaining the authorization, consent, lack of objection, registration or
approval of any governmental authority, or the taking of any other
action under the laws of the United States of America or any political
subdivision thereof, to insure that all shares of Additional Common
Stock issuable upon the exercise of the Warrants at the time of delivery
of the certificates therefor (subject to payment of the Subscription
Price) will be duly and validly issued and fully paid and non-assessable
shares of Common Stock, free from all preemptive rights and taxes,
liens, charges and security interests created by or imposed upon the
Company with respect thereto.
(b) The Company shall from time to time take all action necessary or
appropriate to obtain and keep effective all registrations, permits,
consents and approvals of the Securities and Exchange Commission and any
other governmental agency or authority and make such filings under
federal and state laws which may be necessary or appropriate in
connection with the issuance, sale, transfer and delivery of Warrants or
Additional Common Stock issued upon exercise of Warrants.
Page 5 of 9
<PAGE>
ChaseMellon Shareholder Services, L.L.C.
January 20, 1998
Page 6
7. If certificates representing shares of Additional Common Stock are to be
delivered by you to a person other than the person in whose name a
surrendered Warrant is registered, you will issue no certificate for
Additional Common Stock until the Warrant so surrendered has been properly
endorsed (or otherwise put in proper form for transfer) and the person
requesting such exchange has paid any transfer or other taxes or
governmental charges required by reason of the issuance of a certificate for
Additional Common Stock in a name other than that of the registered holder
of the Warrant surrendered, or has established to your satisfaction that any
such tax or charge either has been paid or is not payable.
8. Should any issue arise regarding federal income tax reporting or
withholding, you will take such action as the Company instructs you in
writing.
9. The Company may terminate this Agreement at any time by so notifying you in
writing. You may terminate this Agreement upon thirty (30) days' prior
notice to the Company. Upon any such termination, you shall be relieved and
discharged of any further responsibilities with respect to your duties
hereunder. Upon payment of all your outstanding fees and expenses, you will
forward to the Company or its designee promptly any Warrant or other
document relating to your duties hereunder that you may receive after your
appointment has so terminated. Paragraphs 10, 12, and 13 of this Agreement
shall survive any termination of this Agreement.
10. As agent for the Company hereunder you:
(a) shall have no duties or obligations other than those specifically set
forth herein or as may subsequently be agreed to in writing by you and
the Company;
(b) shall have no obligation to issue any shares of Additional Common Stock
unless the Company shall have provided a sufficient number of
certificates for such Additional Common Stock;
(c) shall be regarded as making no representations and having no
responsibilities as to the validity, sufficiency, value, or genuineness
of any Warrants surrendered to you hereunder or shares of Additional
Common Stock issued in exchange therefor, and will not be required to or
be responsible for and will make no representations as to, the validity,
sufficiency, value or genuineness of the Subscription Offer;
(d) shall not be obligated to take any legal action hereunder. If, however,
you determine to take any legal action hereunder, and where the taking
of such action might, in your judgment, subject or expose you to any
expense or liability you shall not be required to act unless you shall
have been furnished with an indemnity satisfactory to you;
(e) may rely on and shall be fully authorized and protected in acting or
failing to act upon any certificate, instrument, opinion, notice,
letter, telegram, telex, facsimile transmission or other document or
security delivered to you and believed by you to be genuine and to have
been signed by the proper party or parties;
(f) shall not be liable or responsible for any recital or statement
contained in the Prospectus or any other documents relating thereto;
Page 6 of 9
<PAGE>
ChaseMellon Shareholder Services, L.L.C.
January 20, 1998
Page 7
(g) shall not be liable or responsible for any failure on the part of the
Company to comply with any of its covenants and obligations relating to
the Subscription Offer, including without limitation obligations under
applicable securities laws;
(h) may rely on and shall be fully authorized and protected in acting or
failing to act upon the written, telephonic or oral instructions with
respect to any matter relating to you acting as Subscription Agent
covered by this Agreement (or supplementing or qualifying any such
actions) of officers of the Company;
(i) may consult with counsel satisfactory to you, including Roger M. Barzun,
Esq. and the advice of such counsel shall be full and complete
authorization and protection in respect of any action taken, suffered,
or omitted by you hereunder in good faith and in accordance with the
advice of such counsel;
(j) may perform any of your duties hereunder either directly or by or
through agents or attorneys and you shall not be liable or responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with reasonable care by you hereunder; and
(k) are not authorized, and shall have no obligation, to pay any brokers,
dealers, or soliciting fees to any person.
11. In the event any question or dispute arises with respect to the proper
interpretation of the Subscription Offer or your duties hereunder or the
rights of the Company or of any stockholders surrendering Warrants pursuant
to the Subscription Offer, you shall not be required to act and shall not be
held liable or responsible for your refusal to act until the question or
dispute has been judicially settled (and, if appropriate, you may file a
suit in interpleader or for a declaratory judgment for such purpose) by
final judgment rendered by a court of competent jurisdiction, binding on all
parties interested in the matter which is no longer subject to review or
appeal, or settled by a written document in form and substance satisfactory
to you and executed by the Company and each such stockholder and party. In
addition, you may require for such purpose, but shall not be obligated to
require, the execution of such written settlement by all the stockholders
and all other parties that may have an interest in the settlement.
12. Any instructions given to you orally, as permitted by any provision of this
Agreement, shall be confirmed in writing by the Company as soon as
practicable. You shall not be liable or responsible and shall be fully
authorized and protected for acting, or failing to act, in accordance with
any oral instructions which do not conform with the written confirmation
received in accordance with this Paragraph.
13. Whether or not any Warrants are surrendered to you, for your services as
Subscription Agent hereunder, the Company shall pay to you compensation in
accordance with the fee schedule attached as Exhibit A hereto, together with
reimbursement for out-of-pocket expenses, including reasonable fees and
disbursements of counsel.
14. The Company covenants to indemnify and hold you and your officers,
directors, employees, agents, contractors, subsidiaries and affiliates
harmless from and against any loss, liability,
Page 7 of 9
<PAGE>
ChaseMellon Shareholder Services, L.L.C.
January 20, 1998
Page 8
damage or expense (including without limitation any loss, liability, damage
or expense incurred for accepting Warrants tendered without a signature
guarantee and the fees and expenses of counsel) incurred (a) without gross
negligence or bad faith or (b) as a result of your acting or failing to act
upon the Company's instructions, arising out of or in connection with the
Subscription Offer, this Agreement or the administration of your duties
hereunder, including without limitation the costs and expenses of defending
and appealing against any action, proceeding, suit or claim in the premises.
You shall promptly notify the Company of any action, proceeding, suit or
claim by letter or telex or facsimile transmission confirmed by letter. The
Company shall be entitled to participate at its own expense in the defense
of any such action, proceeding, suit or claim. Anything in this agreement to
the contrary notwithstanding, in no event shall you be liable to the Company
for special, indirect or consequential loss or damages of any kind
whatsoever (including but not limited to lost profits), even if you have
been advised of the likelihood of such loss or damage and regardless of the
form of action.
15. If any provision of this Agreement shall be held illegal, invalid, or
unenforceable by any court, this Agreement shall be construed and enforced
as if such provision had not been contained herein and shall be deemed an
Agreement among us to the full extent permitted by applicable law.
16. The Company represents and warrants that (a) it is duly incorporated,
validly existing and in good standing under the laws of its jurisdiction of
incorporation, (b) the making and consummation of the Subscription Offer and
the execution, delivery and performance of all transactions contemplated
thereby (including without limitation this Agreement) have been duly
authorized by all necessary corporate action and will not result in a breach
of or constitute a default under the certificate of incorporation or bylaws
of the Company or any indenture, agreement or instrument to which it is a
party or is bound, (c) this Agreement has been duly executed and delivered
by the Company and constitutes the legal, valid, binding and enforceable
obligation of it, (d) the Subscription Offer will comply in all material
respects with all applicable requirements of law and (e) to the best of its
knowledge, there is no litigation pending or threatened as of the date
hereof in connection with the Subscription Offer.
17. In the event that any claim of inconsistency between this Agreement and the
terms of the Subscription Offer arise, as they may from time to time be
amended, the terms of the Subscription Offer shall control, except with
respect to the duties, liabilities and rights, including compensation and
indemnification of you as Subscription Agent, which shall be controlled by
the terms of this Agreement.
18. Set forth in Exhibit B hereto is a list of the names and specimen signatures
of the persons authorized to act for the Company under this Agreement. The
Secretary of the Company shall, from time to time, certify to you the names
and signatures of any other persons authorized to act for the Company under
this Agreement.
19. Except as expressly set forth elsewhere in this Agreement, all notices,
instructions and communications under this Agreement shall be in writing,
shall be effective upon receipt and shall be addressed, if to the Company,
to its address set forth beneath its signature to this Agreement, or, if to
the Subscription Agent, to --
Page 8 of 9
<PAGE>
ChaseMellon Shareholder Services, L.L.C.
January 20, 1998
Page 9
ChaseMellon Shareholder Services, L.L.C.,
450 West 33rd Street, New York, New York 10001
Attention: Reorganization Department,
or to such other address as a party hereto shall notify the
other parties.
20. This Agreement shall be governed by and construed in accordance with the
laws of the State of New York, without giving effect to conflict of laws
rules or principles, and shall inure to the benefit of and be binding upon
the successors and assigns of the parties hereto; provided that this
Agreement may not be assigned by any party without the prior written consent
of all other parties.
21. No provision of this Agreement may be amended, modified or waived, except in
a written document signed by both parties.
Please acknowledge receipt of this letter and confirm your agreement concerning
your appointment as Subscription Agent, and the arrangements herein provided, by
signing and returning the enclosed copy hereof, whereupon this Agreement and
your acceptance of the terms and conditions herein provided shall constitute a
binding Agreement between us.
Very truly yours,
Wahlco Environmental Systems, Inc.
By:___________________________________
C. Stephen Beal
President & Chief Executive Officer
Address for notices:
3600 West Segerstrom Avenue
Santa Ana, California 92704
ACCEPTED AS OF THE DATE
ABOVE FIRST WRITTEN:
ChaseMellon Shareholder Services, L.L.C.,
As Subscription Agent
By:___________________________________
Name:
Title:
Page 9 of 9
<PAGE>
ChaseMellon Shareholder Services, L.L.C.
January 20, 1998
Page 10
Exhibit List
Exhbit A Schedule of Fees
Exhibit B Specimen Signatures
Exhibit 1 Preliminary Prospectus
Exhibit 2 Letter of Instruction
Exhibit 3 Notice of Guaranteed Delivery
Exhibit 4 Form of Warrant
<PAGE>
ChaseMellon Shareholder Services, L.L.C.
January 20, 1998
Page 11
EXHIBIT A
ChaseMellon Shareholder Services, L.L.C.
Schedule of Fees as Subscription Agent For
Wahlco Environmental Systems, Inc.
I. Set Up and Administrative Fee $2,500
II. Processing Basic subscriptions, each $10.00
III. Transferring subscription certificates, split-ups,
reissuing new certificates, round-ups, each $7.50
IV. Issuing subscription certificates to record date holders,
each and follow-up mailings $7.50
V. Processing over subscriptions, including proration and
refunds, each $3.00
VI. Sale of Rights for holders, each $7.00
VII. Subscriptions requiring additional handling (window items,
defective presentations, correspondence items, legal items,
and items not providing a taxpayer identification number),
each $10.00
VIII. Processing Guarantee of Delivery items, each $10.00
IX. Handling Selected Dealer payments, each $10.00
X. Broker fees for selling Rights, per Right By Appraisal
XI. Special Services By Appraisal
XII. Out-of-pocket Expenses (including but not limited to
postage, stationary, telephones, overnight couriers,
messengers, overtime, dinners, transportation, shipping
and trucking) Additional
XIII. Minimum Fee $25,000
<PAGE>
ChaseMellon Shareholder Services, L.L.C.
January 20, 1998
Page 12
EXHIBIT B
[Wahlco Environmental Systems, Inc. Letterhead]
Name Position Specimen Signatures
C. Stephen Beal President & Chief Executive Officer _________________________
Anne Anderson Vice President - Administration _________________________
A. Noel DeWinter Vice President & Chief Financial _________________________
Officer
Roger M. Barzun Secretary & General Counsel _________________________
<PAGE>
[LOGO] THE CHASE MANHATTAN BANK
PROMISSORY NOTE
(XGLCA)
$ 750,000.00 New York , N.Y.
-------------- ------------------
September 2 , 1997
------------------ -
On March 2, 1998 (insert specific date or "DEMAND"), for value
received, the undersigned hereby promises to pay to the order of THE CHASE
MANHATTAN BANK (hereinafter the "Bank") at its offices at 380 Madison Avenue,
14th Floor, New York, N.Y. Seven Hundred Fifty Thousand and 00/000------ DOLLARS
with interest payable on October 1, 1997 (specific date) and the 1st day of each
Mth (quarter, month, etc.) thereafter (and at maturity) at a per annum rate of
1.0% above the Bank's Prime Rate (which shall be the rate of interest as is
publicly announced at the Bank's principal office from time to time as its Prime
Rate), adjusted as of the date of each such change. The foregoing rate shall be
computed for the actual number of days elapsed on the basis of a 360-day year,
but in no event shall be higher than the maximum permitted under applicable law.
Interest on any past due amount, whether at the due date thereof or by
acceleration, shall be paid at a rate of one percent per annum in excess of the
above stated rate, but in no event higher than the maximum permitted under
applicable law. Time for payment extended by law shall be included in the
computation of interest.
In the event of: default in the prompt payment of this note or any other
liability or obligation now or hereafter owed by the undersigned to the Bank,
contracted with or acquired by the Bank, whether joint, several, direct,
indirect, absolute, contigent, secured, unsecured, matured or unmatured (all of
which are hereafter collectively called "Liabilities"); default in any other
indebtedness of the undersigned (which, for the purposes of this sentence, means
the undersigned or any guarantor, surety or endorser of, or any person or entity
which has pledged any of its property to secure any Liabilities); complete or
partial liquidation or suspension of any business of the undersigned;
dissolution, merger, consolidation or reorganization of the undersigned; death
of or loss of employment by an individual or any member of any partnership (if
the undersigned is an individual or a partnership); failure to furnish any
financial information or to permit inspection of any books or records at the
Bank's request; a representation, warranty or statement of the undersigned
proving false in any material respect when made or furnished; general assignment
for the benefit of creditors or insolvency of the undersigned; commencement of
any proceeding supplementary to any execution relating to any judgment against
the undersigned; attachment, distraint, levy, execution or final judgment
against the undersigned or against the property of the undersigned; appointment
of a receiver, conservator, rehabilitator or similar officer for the
undersigned, or for any property of the undersigned; tax lien by the United
States Government or any state or political subdivision thereof against the
undersigned; the taking of possession of or assumption of control over, all or
any substantial part of the property of the undersigned by the United States
Government, or any state or political subdivision thereof, foreign government
(de facto or de jure) or any agency of any thereof; calling of a meeting of
creditors, assignment for the benefit of creditors or bulk sale or notice
thereof; any mortgage, pledge of or creation of a security interest in any
assets without the consent of the holder of this note; filing of a petition in
bankruptcy, commencement of any proceeding under any bankruptcy or debtor's law
(or similar law analogous in purpose or effect) for the relief, reorganization,
composition, extension, arrangement or readjustment of any of the obligations by
or against the undersigned; then, and in any of those events (each, an "Event of
Default"), all Liabilities, although otherwise unmatured or contingent, shall
forthwith become due and payable without notice or demand and notwithstanding
anything to the contrary contained herein or in any other instrument. The Bank,
in addition to any other rights (including rights of set-off and banker's lien)
available to it under applicable law, shall have the right immediately upon the
occurrence of an Event of Default to set-off against this note and/or any other
Liabilities all monies owed
<PAGE>
by the Bank in any capacity to any of the undersigned, whether or not
due or matured, and the Bank shall be deemed to have exercised such
right to set-off and to have made a charge against any such money
immediately upon any such occurence even though such charge is made or
entered on the books of the Bank subsequent thereto. Further, acceptance
of any payments shall not waive or affect any prior demand or
acceleration of these Liabilities, and each such payment made shall be
applied first to the payment of accured interest, then to the aggregate
upaid principal or otherwise as determined by the Bank in its sole
discretion. The undersigned hereby irrevocably consents to the in
personam jurisdiction of the federal and/or state courts within the
State of New York over controversies arising from or relating to this
note or the Liabilities and irrevocably waives trial by jury and the
right to interpose any counterclaim or offset of any nature in any such
litigation. The undersigned further irrevocably waives presentment,
demand, protest, notice of dishonor and all other notices or demands of
any kind in connection with this note or any Liabilities. The
undersigned shall be jointly and severally liable hereon.
The undersigned agrees to pay to the Bank, as soon as incurred, all
costs and expenses incurred in connection with the enforcement or
collection of this note, or in any way relating to the rights of the
Bank hereunder, including reasonable inside or outside counsel fees and
expenses. Each and every right and remedy hereby granted to the Bank or
allowed to it by law shall be cumulative and not exclusive and each may
be exercised by the Bank from time to time and as often as may be
necessary. The Bank may release any party (including any partner of any
undersigned) without notice to any of the undersigned, whether as
co-makers, endorsers, guarantors, sureties, assigns or otherwise,
without affecting the liability of any of the undersigned hereof or any
partner of any undersigned hereof.
No modification or waiver of any of the provisions of this note
shall be effective unless intially requested in writing, by the
undersigned, signed by the Bank, and only to the extent therein set
forth; nor shall any such waiver be applicable except in the specific
instance for which given. This agreement sets forth the entire
understanding of the parties, and the undersigned acknowledges that no
oral or other agreements, conditions, promises, understandings,
representations or warranties exist in regard to the obligations
hereunder, except those specifically set forth herein.
If the undersigned is a partnership, the agreement herein contained
shall remain in force and applicable, notwithstanding any changes in the
individuals composing the partnership or any release of any partner or
partners and their partners shall not thereby be released from any
liability. If this note is signed by more than one party, the term
"undersigned", as used herein, shall include and mean the "undersigned
and each of them" and each undertaking herein contained shall be their
joint and several undertakings, provided, however, that in the phrases
"of the undersigned", "by the undersigned", "against the undersigned",
"for the undersigned", "to the undersigned" and "on the undersigned",
the term "undersigned" shall mean the "undersigned or any of them"; and
the Bank may release any of the parties hereto and it may renew or
extend any of the liabilities of any of them and may make additional
advances or extensions of credit to any of them or release or fail to
set-off any deposit account or credit to any of them or grant other
indulgences to any of them, all from time to time, before or after
maturity hereof, with or without further notice to or assent from any of
the other parties hereto. Each reference herein to the Bank shall be
deemed to include its successors, endorsees and assigns, in whose favor
the provisions hereof shall also inure. Each reference herein to the
undersigned shall be deemed to include the heirs, executors,
administrators, legal representatives, successors and assigns of the
undersigned, all of whom shall be bound by the provisions hereof.
The provisions of this note shall be constructed and interpreted
and all rights and obligations hereunder determined in accordance with
the laws of the State of New York and, as to interest rates, applicable
Federal law.
WHALCO Environmental Systems, Inc.
/s/ signature illegible See Attached
- ------------------------------- ------------------------------
Address: 3600 W. Segerstrom Ave Address:
----------------------- ---------------------
Santa Ana, CA 92704-6495
<PAGE>
ATTACHMENT
WEXFORD CAPITAL PARTNERS II, L.P., as Indemnitor
Dated: 9/10/97 By: /s/ Jay Maymudes
_________________________________________
Jay Maymudes, Vice President of Wexford
Capital Corp., the general partner of Wexford
Capital II, L.P., the general partner of Wexford
Capital Partners II, L.P.
WEXFORD OVERSEAS PARTNERS I, L.P., as Indemnitor
Dated: 9/10/97 By: /s/ Jay Maymudes
_________________________________________
Jay Maymudes, Vice President of Wexford
Capital Limited, the general partner of Wexford
Capital Overseas L.P., the general partner of
Wexford Overseas Partners I, L.P.
<PAGE>
[LOGO] THE CHASE MANHATTAN BANK
PROMISSORY NOTE
(XGLCA)
$1,000,000,000.00 New York , N.Y.
---------------- -------------------
October 13 , 1997
--------------- -
On March 2, 1998 (insert specific date or "DEMAND"), for value received,
the undersigned hereby promises to pay to the order of THE CHASE MANHATTAN BANK
(hereinafter the "Bank") at its offices at 380 Madison Avenue, 14th Floor, New
York, N.Y. One Million and 00/100 DOLLARS with interest payable on November 1,
1997 (specific date) and the 1st day of each Mth (quarter, month, etc.)
thereafter (and at maturity) at a per annum rate of 1.0% above the Bank's Prime
Rate (which shall be the rate of interest as is publicly announced at the
Bank's principal office from time to time as its Prime Rate), adjusted as of
the date of each such change. The foregoing rate shall be computed for the
actual number of days elapsed on the basis of a 360-day year, but in no event
shall be higher than the maximum permitted under applicable law. Interest on
any past due amount, whether at the due date thereof or by acceleration, shall
be paid at a rate of one percent per annum in excess of the above stated rate,
but in no event higher than the maximum permitted under applicable law. Time
for payment extended by law shall be included in the computation of interest.
In the event of: default in the prompt payment of this note or any other
liability or obligation now or hereafter owed by the undersigned to the Bank,
contracted with or acquired by the Bank, whether joint, several, direct,
indirect, absolute, contigent, secured, unsecured, matured or unmatured (all of
which are hereafter collectively called "Liabilities"); default in any other
indebtedness of the undersigned (which, for the purposes of this sentence, means
the undersigned or any guarantor, surety or endorser of, or any person or entity
which has pledged any of its property to secure any Liabilities); complete or
partial liquidation or suspension of any business of the undersigned;
dissolution, merger, consolidation or reorganization of the undersigned; death
of or loss of employment by an individual or any member of any partnership (if
the undersigned is an individual or a partnership); failure to furnish any
financial information or to permit inspection of any books or records at the
Bank's request; a representation, warranty or statement of the undersigned
proving false in any material respect when made or furnished; general assignment
for the benefit of creditors or insolvency of the undersigned; commencement of
any proceeding supplementary to any execution relating to any judgment against
the undersigned; attachment, distraint, levy, execution or final judgment
against the undersigned or against the property of the undersigned; appointment
of a receiver, conservator, rehabilitator or similar officer for the
undersigned, or for any property of the undersigned; tax lien by the United
States Government or any state or political subdivision thereof against the
undersigned; the taking of possession of or assumption of control over, all or
any substantial part of the property of the undersigned by the United States
Government, or any state or political subdivision thereof, foreign government
(de facto or de jure) or any agency of any thereof; calling of a meeting of
creditors, assignment for the benefit of creditors or bulk sale or notice
thereof; any mortgage, pledge of or creation of a security interest in any
assets without the consent of the holder of this note; filing of a petition in
bankruptcy, commencement of any proceeding under any bankruptcy or debtor's law
(or similar law analogous in purpose or effect) for the relief, reorganization,
composition, extension, arrangement or readjustment of any of the obligations by
or against the undersigned; then, and in any of those events (each, an "Event of
Default"), all Liabilities, although otherwise unmatured or contingent, shall
forthwith become due and payable without notice or demand and notwithstanding
anything to the contrary contained herein or in any other instrument. The Bank,
in addition to any other rights (including rights of set-off and banker's lien)
available to it under applicable law, shall have the right immediately upon the
occurrence of an Event of Default to set-off against this note and/or any other
Liabilities all monies owed
<PAGE>
by the Bank in any capacity to any of the undersigned, whether or not
due or matured, and the Bank shall be deemed to have exercised such
right to set-off and to have made a charge against any such money
immediately upon any such occurence even though such charge is made or
entered on the books of the Bank subsequent thereto. Further, acceptance
of any payments shall not waive or affect any prior demand or
acceleration of these Liabilities, and each such payment made shall be
applied first to the payment of accured interest, then to the aggregate
upaid principal or otherwise as determined by the Bank in its sole
discretion. The undersigned hereby irrevocably consents to the in
personam jurisdiction of the federal and/or state courts located within the
State of New York over controversies arising from or relating to this
note or the Liabilities and irrevocably waives trial by jury and the
right to interpose any counterclaim or offset of any nature in any such
litigation. The undersigned further irrevocably waives presentment,
demand, protest, notice of dishonor and all other notices or demands of
any kind in connection with this note or any Liabilities. The
undersigned shall be jointly and severally liable hereon.
The undersigned agrees to pay to the Bank, as soon as incurred, all
costs and expenses incurred in connection with the enforcement or
collection of this note, or in any way relating to the rights of the
Bank hereunder, including reasonable inside or outside counsel fees and
expenses. Each and every right and remedy hereby granted to the Bank or
allowed to it by law shall be cumulative and not exclusive and each may
be exercised by the Bank from time to time and as often as may be
necessary. The Bank may release any party (including any partner of any
undersigned) without notice to any of the undersigned, whether as
co-makers, endorsers, guarantors, sureties, assigns or otherwise,
without affecting the liability of any of the undersigned hereof or any
partner of any undersigned hereof
No modification or waiver of any of the provisions of this note
shall be effective unless intially requested in writing, by the
undersigned, signed by the Bank, and only to the extent therein set
forth; nor shall any such waiver be applicable except in the specific
instance for which given. This agreement sets forth the entire
understanding of the parties, and the undersigned acknowledges that no
oral or other agreements, conditions, promises, understandings,
representations or warranties exist in regard to the obligations
hereunder, except those specifically set forth herein.
If the undersigned is a partnership, the agreement herein contained
shall remain in force and applicable, notwithstanding any changes in the
individuals composing the partnership or any release of any partner or
partners and their partners shall not thereby be released from any
liability. If this note is signed by more than one party, the term
"undersigned", as used herein, shall include and mean the "undersigned
and each of them" and each undertaking herein contained shall be their
joint and several undertaking, provided, however, that in the phrases
"of the undersigned", "by the undersigned", "against the undersigned",
"for the undersigned", "to the undersigned" and "on the undersigned",
the term "undersigned" shall mean the "undersigned or any of them"; and
the Bank may release any of the parties hereto and it may renew or
extend any of the liabilities of any of them and may make additional
advances or extensions of credit to any of them or release or fail to
set-off any deposit account or credit to any of them or grant other
indulgences to any of them, all from time to time, before or after
maturity hereof, with or without further notice to or assent from any of
the other parties hereto. Each reference herein to the Bank shall be
deemed to include its successors, endorsees and assigns, in whose favor
the provisions hereof shall also inure. Each reference herein to the
undersigned shall be deemed to include the heirs, executors,
administrators, legal representatives, successors and assigns of the
undersigned, all of whom shall be bound by the provisions hereof.
The provisions of this note shall be constructed and interpreted
and all rights and obligations hereunder determined in accordance with
the laws of the State of New York and, as to interest rates, applicable
Federal law.
WAHLCO Environmental Systems, Inc.
/s/ signature illegible See Attached
- ------------------------------- ------------------------------
Address: 3600 W. Segerstrom Ave Address:
----------------------- ---------------------
Santa Ana, CA 92704-6495
<PAGE>
ATTACHMENT
WEXFORD CAPITAL PARTNERS II, L.P., as Indemnitor
Dated: 10/10/97 By: /s/ Jay Maymudes
-------------------------------------------
Jay Maymudes, Vice President of Wexford
Capital Corp., the general partner of Wexford
Capital II, L.P., the general partner of Wexford
Capital Partners II, L.P.
WEXFORD OVERSEAS PARTNERS I, L.P., as Indemnitor
Dated: 10/10/97 By: /s/ Jay Maymudes
--------------------------------------------
Jay Maymudes, Vice President of Wexford
Capital Limited, the general partner of Wexford
Capital Overseas L.P., the general partner of
Wexford Overseas Partners I, L.P.
<PAGE>
[LOGO] THE CHASE MANHATTAN BANK
PROMISSORY NOTE
(XGLCA)
$ 400,000.00 New York , N.Y.
-------------- ------------------
November 17 , 1997
--------------- -
On (insert specific date or "DEMAND"), for value
received, the undersigned hereby promises to pay to the order of THE CHASE
MANHATTAN BANK (hereinafter the "Bank") at its offices at 380 Madison Avenue,
14th Floor, New York, N.Y. Four Hundred Thousand and 00/00 DOLLARS with
interest payable on (specific date) and the day of each
(quarter, month, etc.) thereafter (and at maturity) at a per annum rate of %
above the Bank's Prime Rate (which shall be the rate of interest as is publicly
announced at the Bank's principal office from time to time as its Prime Rate),
adjusted as of the date of each such change. The foregoing rate shall be
computed for the actual number of days elapsed on the basis of a 360-day year,
but in no event shall be higher than the maximum permitted under applicable
law. Interest on any past due amount, whether at the due date thereof or by
acceleration, shall be paid at a rate of one percent per annum in excess of the
above stated rate, but in no event higher than the maximum permitted under
applicable law. Time for payment extended by law shall be included in the
computation of interest.
In the event of: default in the prompt payment of this note or any other
liability or obligation now or hereafter owed by the undersigned to the Bank,
contracted with or acquired by the Bank, whether joint, several, direct,
indirect, absolute, contigent, secured, unsecured, matured or unmatured (all of
which are hereafter collectively called "Liabilities"); default in any other
indebtedness of the undersigned (which, for the purposes of this sentence, means
the undersigned or any guarantor, surety or endorser of, or any person or entity
which has pledged any of its property to secure any Liabilities); complete or
partial liquidation or suspension of any business of the undersigned;
dissolution, merger, consolidation or reorganization of the undersigned; death
of or loss of employment by an individual or any member of any partnership (if
the undersigned is an individual or a partnership); failure to furnish any
financial information or to permit inspection of any books or records at the
Bank's request; a representation, warranty or statement of the undersigned
proving false in any material respect when made or furnished; general assignment
for the benefit of creditors or insolvency of the undersigned; commencement of
any proceeding supplementary to any execution relating to any judgment against
the undersigned; attachment, distraint, levy, execution or final judgment
against the undersigned or against the property of the undersigned; appointment
of a receiver, conservator, rehabilitator or similar officer for the
undersigned, or for any property of the undersigned; tax lien by the United
States Government or any state or political subdivision thereof against the
undersigned; the taking of possession of or assumption of control over, all or
any substantial part of the property of the undersigned by the United States
Government, or any state or political subdivision thereof, foreign government
(de facto or de jure) or any agency of any thereof; calling of a meeting of
creditors, assignment for the benefit of creditors or bulk sale or notice
thereof; any mortgage, pledge of or creation of a security interest in any
assets without the consent of the holder of this note; filing of a petition in
bankruptcy, commencement of any proceeding under any bankruptcy or debtor's law
(or similar law analogous in purpose or effect) for the relief, reorganization,
composition, extension, arrangement or readjustment of any of the obligations by
or against the undersigned; then, and in any of those events (each, an "Event of
Default"), all Liabilities, although otherwise unmatured or contingent, shall
forthwith become due and payable without notice or demand and notwithstanding
anything to the contrary contained herein or in any other instrument. The Bank,
in addition to any other rights (including rights of set-off and banker's lien)
available to it under applicable law, shall have the right immediately upon the
occurrence of an Event of Default to set-off against this note and/or any other
Liabilities all monies owed
<PAGE>
by the Bank in any capacity to any of the undersigned, whether or not
due or matured, and the Bank shall be deemed to have exercised such
right to set-off and to have made a charge against any such money
immediately upon any such occurrence even though such charge is made or
entered on the books of the Bank subsequent thereto. Further, acceptance
of any payments shall not waive or affect any prior demand or
acceleration of these Liabilities, and each such payment made shall be
applied first to the payment of accured interest, then to the aggregate
upaid principal or otherwise as determined by the Bank in its sole
discretion. The undersigned hereby irrevocably consents to the in
personam jurisdiction of the federal and/or state courts within the
State of New York over controversies arising from or relating to this
note or the Liabilities and irrevocably waives trial by jury and the
right to interpose any counterclaim or offset of any nature in any such
litigation. The undersigned further irrevocably waives presentment,
demand, protest, notice of dishonor and all other notices or demands of
any kind in connection with this note or any Liabilities. The
undersigned shall be jointly and severally liable hereon.
The undersigned agrees to pay to the Bank, as soon as incurred, all
costs and expenses incurred in connection with the enforcement or
collection of this note, or in any way relating to the rights of the
Bank hereunder, including reasonable inside or outside counsel fees and
expenses. Each and every right and remedy hereby granted to the Bank or
allowed to it by law shall be cumulative and not exclusive and each may
be exercised by the Bank from time to time and as often as may be
necessary. The Bank may release any party (including any partner of any
undersigned) without notice to any of the undersigned, whether as
co-makers, endorsers, guarantors, sureties, assigns or otherwise,
without affecting the liability of any of the undersigned hereof or any
partner of any undersigned hereof.
No modification or waiver of any of the provisions of this note
shall be effective unless intially requested in writing, by the
undersigned, signed by the Bank, and only to the extent therein set
forth; nor shall any such waiver be applicable except in the specific
instance for which given. This agreement sets forth the entire
understanding of the parties, and the undersigned acknowledges that no
oral or other agreements, conditions, promises, understandings,
representations or warranties exist in regard to the obligations
hereunder, except those specifically set forth herein.
If the undersigned is a partnership, the agreement herein contained
shall remain in force and applicable, notwithstanding any changes in the
individuals composing the partnership or any release of any partner or
partners and their partners shall not thereby be released from any
liability. If this note is signed by more than one party, the term
"undersigned", as used herein, shall include and mean the "undersigned
and each of them" and each undertaking herein contained shall be their
joint and several undertaking, provided, however, that in the phrases
"of the undersigned", "by the undersigned", "against the undersigned",
"for the undersigned", "to the undersigned" and "on the undersigned",
the term "undersigned" shall mean the "undersigned or any of them"; and
the Bank may release any of the parties hereto and it may renew or
extend any of the liabilities of any of them and may make additional
advances or extensions of credit to any of them or release or fail to
set-off any deposit account or credit to any of them or grant other
indulgences to any of them, all from time to time, before or after
maturity hereof, with or without further notice to or assent from any of
the other parties hereto. Each reference herein to the Bank shall be
deemed to include its successors, endorsees and assigns, in whose favor
the provisions hereof shall also inure. Each reference herein to the
undersigned shall be deemed to include the heirs, executors,
administrators, legal representatives, successors and assigns of the
undersigned, all of whom shall be bound by the provisions hereof.
The provisions of this note shall be constructed and interpreted
and all rights and obligations hereunder determined in accordance with
the laws of the State of New York and, as to interest rates, applicable
Federal law.
/s/ signature illegible See Attached
- ---------------------------------- ------------------------------
Wahlco Environmental Systems, Inc.
Address: 3600 W. Segerstrom Ave Address:
------------------------- ---------------------
Santa Ana, CA 92704-6495
<PAGE>
ATTACHMENT
WEXFORD CAPITAL PARTNERS II, L.P., as Indemnitor
Dated: 11/14/97 By: /s/ Jay Maymudes
_________________________________________
Jay Maymudes, Vice President of Wexford
Capital Corp., the general partner of Wexford
Capital II, L.P., the general partner of Wexford
Capital Partners II, L.P.
WEXFORD OVERSEAS PARTNERS I, L.P., as Indemnitor
Dated: 11/14/97 By: /s/ Jay Maymudes
_________________________________________
Jay Maymudes, Vice President of Wexford
Capital Limited, the general partner of Wexford
Capital Overseas L.P., the general partner of
Wexford Overseas Partners I, L.P.
[LOGO]
Silicon Valley Bank
18872 MacArthur Boulevard, Suite 100 Irvine, CA 92715 714-252-1800
December 19, 1997
A. Noel DeWinter
Wahlco, Inc.
3600 West Segerstrom Avenue
Santa Ana, CA 92704
Dear Noel:
Silicon Valley Bank, if asked, will extend the maturity of existing loans and
Letters of Credit to Wahlco, Inc. to December 31, 2000, provided that the
existing structure, including collateral and guarantees, continues throughout
the extension period. Prepayment of the loans can be made at any time, and
Letters of Credit can be canceled upon receipt of the originals by Silicon
Valley Bank.
Sincerely,
/s/ Terry E. Bess
- ---------------------------
Terry E. Bess
Senior Vice President
<PAGE>
CONSENT OF INDEPENDENT PUBLIC 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
----------------------------
Arthur Andersen LLP
Orange County, California
February 2, 1998
<PAGE>
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. 333-42805) and related Prospectus of Wahlco Environmental Systems, Inc.
for the registration of 27,112,000 shares of its common stock.
/s/ Ernst & Young LLP
February 4, 1998
Orange County, California
<PAGE>
EXHIBIT 10.193
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
1996 EMPLOYEE STOCK OPTION PLAN
--------------------------------------------------------
1 Purpose of the Plan. The purpose of this plan (the "Plan") is to secure for
Wahlco Environmental Systems, Inc. (the "Company") and its shareholders the
benefits arising from capital stock ownership by employees, officers,
directors, consultants and advisors of the Company and its parent and
subsidiary corporations who are expected to contribute to the Company's
future growth and success. Except where the context otherwise requires, the
term "Company" shall include the parent and all present and future
subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the
Internal Revenue Code of 1986, as amended or replaced from time to time
(the "Code"). Those provisions of the Plan that make express reference to
Section 422 of the Code shall apply only to incentive stock options (as
defined below).
2 Types of Options and Administration.
2.1 Types of Options. Options granted pursuant to the Plan may be
either incentive stock options meeting the requirements of Section
422 of the Code ("Incentive Stock Options") or Non-Statutory
Options, which are not intended to meet the requirements of Section
422 of the Code ("Non-Statutory Options").
2.2 Administration.
2.2.1 The Plan shall be administered by the Board of
Directors of the Company, whose construction and
interpretation of the terms and provisions of the
Plan shall be final and conclusive. The Board of
Directors may in its sole discretion grant options to
purchase shares of the Company's Common Stock
("Common Stock") and issue shares upon exercise of
such options as provided in the Plan. The Board shall
have authority, subject to the express provisions of
the Plan, to construe the respective option
agreements and the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan,
to determine the terms and provisions of the
respective option agreements, which need not be
identical, and to make all other determinations which
are, in the judgment of the Board of Directors,
necessary or desirable for the administration of the
Plan. The Board of Directors may correct any defect,
supply any omission or reconcile any inconsistency in
the Plan or in any option agreement in the manner and
to the extent it shall deem expedient to carry the
Plan into effect and it shall be the sole and final
judge of such expediency. No director or person
acting pursuant to authority delegated by the Board
of Directors shall be liable for any action or
determination under the Plan made in good faith.
2.2.2 The Board of Directors, to the full extent permitted
by, or consistent with, applicable laws or
regulations and Section 3.2 of the Plan may delegate
any or all of its powers under the Plan to a
committee appointed by it (the "Committee"), and if
the Committee is so appointed, all references to the
Board of Directors in the Plan shall mean and relate
to such Committee, except as expressly otherwise
provided herein.
2.3 Applicability of Rule 16b-3. Those provisions of the Plan that make
express reference to Rule 16b-3 promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act"), or any successor rule
("Rule 16b-3"), or that are required in order for certain option
transactions to qualify for exemption under Rule 16b-3, shall apply
only to such persons as are required to file reports under Section
16(a) of the Exchange Act (a "Reporting Person").
Rev. February 3, 1998 Page 1 of 10
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC. 1996 STOCK OPTION PLAN - continued
- --------------------------------------------------------------------------------
3 Eligibility.
3.1 General. Options may be granted to persons who are, at the time of
grant, employees, officers, directors or consultants of the
Company; provided, that the class of persons to whom Incentive
Stock Options may be granted shall be limited to employees of the
Company. A person who has been granted an option may, if he or she
is otherwise eligible, be granted additional options if the Board
of Directors shall so determine. Subject to adjustment as provided
in Section 16, below, the maximum number of shares with respect to
which options may be granted during the ten-year term of the Plan
to any one employee under the Plan in any one year shall not exceed
300,000 shares of common stock during the ten-year term of the
Plan. For the purpose of calculating such maximum number, (a) an
option shall continue to be treated as outstanding notwithstanding
its repricing, cancellation or expiration and (b) the repricing of
an outstanding option or the issuance of a new option in
substitution for a canceled option shall be deemed to constitute
the grant of a new additional option separate from the original
grant of the option that is repriced or canceled.
3.2 Grant of Options to Directors and Officers. From and after the
registration of the Common Stock of the Company under the Exchange
Act, the selection of a director or an officer (as the terms
"director" and "officer" are defined for purposes of Rule 16b-3) as
a recipient of an option, the timing of the option grant, the
exercise price of the option and the number of shares subject to
the option shall at a minimum be determined in such manner and with
such terms as qualifies such grant for exemption under Rule 16b-3
as the same is in effect from time to time (or any successor rule
thereto).
4 Stock Subject to Plan. The maximum number of shares of Common Stock which
may be issued and sold under the Plan is 2,250,000 shares, subject to any
adjustment provided for in Section 16, below except that no such adjustment
shall be made as a result of the first reverse stock split effected by the
Company subsequent to the date this Plan was adopted by the Board of
Directors of the Company. If an option granted under the Plan shall expire
or terminate for any reason without having been exercised in full, the
un-purchased shares subject to such option shall again be available for
subsequent option grants under the Plan. If shares issued upon exercise of
an option under the Plan are tendered to the Company in payment of the
exercise price of an option granted under the Plan, such tendered shares
shall again be available for subsequent option grants under the Plan;
provided, that in no event shall such shares be made available for issuance
to a Reporting Person or pursuant to the exercise of an Incentive Stock
Option.
5 Forms of Option Agreements. As a condition to the grant of an option under
the Plan, each recipient of an option shall execute an option agreement in
such form not inconsistent with the Plan as may be approved by the Board of
Directors. The terms and conditions of such option agreements need not be
the same for all option recipients.
6 Option Price.
6.1 General. Subject to Section 3.2, the exercise (purchase) price per
share of stock deliverable upon the exercise of an option shall be
determined by the Board of Directors; provided, however, that in
the case of an Incentive Stock Option, the exercise price shall not
be less than 100% of the fair market value of such stock (as
determined pursuant to Section 7) on the grant date, or less than
110% of such fair market value in the case of Incentive Stock
Options.
Rev. February 3, 1998 Page 2 of 10
<PAGE>
WAHLCO ENVIRONMENTAL SYSTEMS, INC. 1996 STOCK OPTION PLAN - continued
- --------------------------------------------------------------------------------
6.2 Payment of the Purchase Price. Options granted under the Plan may
provide for the payment of the purchase price by delivery of cash
or a check to the order of the Company in an amount equal to such
purchase price or, to the extent expressly authorized by the Board
of Directors on the date of grant or on any date subsequent thereto
(a) by delivery to the Company of shares of Common Stock of the
Company already owned by the optionee having a fair market value
equal on the date of exercise in amount to the exercise price of
the options being exercised; or (b) by any other means (including,
but without limitation thereto, by delivery of a promissory note of
the optionee payable on such terms as are specified by the Board of
Directors) which the Board of Directors determines are consistent
with the purpose of the Plan and with applicable laws and
regulations (including, without limitation, the provisions of
Regulation T promulgated by the Federal Reserve Board). The fair
market value of any shares of the Company's Common Stock or other
non-cash consideration which may be delivered upon exercise of an
option shall be determined by the Board of Directors.
7 Fair Market Value. The fair market value of a share of Common Stock on a
given date shall be determined as follows:
7.1 If the Common Stock is listed on the Nasdaq National Market, the
Nasdaq SmallCap Market or other nationally recognized exchange or
trading system on the date as of which a determination of fair
market value is to be made, the fair market value per share of
Common Stock shall be deemed to be the last reported sale price or
closing price per share on such market, exchange or system on the
trading day immediately preceding such date (or, if no such price
is reported on such date, the price on the nearest preceding date
on which such a price is reported).
7.2 If the Common Stock is not listed on the Nasdaq National Market,
the Nasdaq SmallCap Market or other nationally recognized exchange
or trading system on the date as of which a determination of fair
market value is to be made, the fair market value per share shall
be determined by the Board of Directors based on all factors deemed
relevant for such purpose.
8 Option Period. Each option and all rights thereunder shall expire on such
date as shall be set forth in the applicable option agreement, except that
in the case of an Incentive Stock Option, such expiration date shall not be
later than ten years after the date on which the option was granted and, in
all cases, options shall be subject to earlier termination as provided in
the Plan.
9 Exercise of Options. Each option granted under the Plan shall be
exercisable either in full or in installments at such time or times and
during such period as shall be established at the time of the grant,
subject, however, to the provisions of the Plan.
10 Transferability of Options. No option shall be assignable or transferable
by the person to whom it was granted, either voluntarily or by operation of
law, except (a) to immediate members of such person's family; or (b) by
such person's will or by the laws of descent and distribution. "Immediate
family members" shall consist only of a person's father and mother; sisters
and brothers; spouse; and children and grandchildren (in both cases,
including by adoption). A transfer of an Incentive Stock Option as such
pursuant to this provision will only be permissible if and to
Rev. February 3, 1998 Page 3 of 10
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the extent that Section 422 of the Code, as in effect from time to time,
does not cause such Incentive Stock Option to be treated as a non-statutory
stock option that does not meet the requirements of Section 422 of the
Code.
11 Effect of Termination of Employment or Other Relationship. Except as
provided in Section 12.4 with respect to Incentive Stock Options, and
subject to the provisions of the Plan, the Board of Directors shall
determine the period of time during which an optionee may exercise an
option following (a) the termination of the optionee's employment or other
relationship with the Company; or (b) the death or disability of the
optionee. Such periods shall be set forth in the agreement evidencing such
option.
12 Incentive Stock Options. Options granted under the Plan that are intended
to be Incentive Stock Options shall be subject to the following additional
terms and conditions:
12.1 Express Designation. Each Incentive Stock Option granted under the
Plan shall, at the time of grant, be specifically designated as
such and in the option agreement covering such Incentive Stock
Option.
12.2 Ten Percent Shareholders. If any employee to whom an Incentive
Stock Option is to be granted under the Plan is, at the time of the
grant of such option, the owner of stock possessing more than 10%
of the total combined voting power of all classes of stock of the
Company (after taking into account the attribution of stock
ownership rules of Section 424(d) of the Code), then the following
special provisions shall be applicable to the Incentive Stock
Option granted to such individual:
12.2.1 The purchase price per share of the Common Stock
subject to such Incentive Stock Option shall not be
less than 110% of the fair market value of one share
of Common Stock at the time of grant; and
12.2.2 Such Incentive Stock Option shall expire not later
than five years after the date on which the option
was granted.
12.3 Dollar Limitations. For so long as the Code shall so provide,
options granted to any employee under the Plan (and any other
incentive stock option plans of the Company) that are intended to
constitute Incentive Stock Options shall not constitute Incentive
Stock Options to the extent that such options, in the aggregate,
become exercisable for the first time in any one calendar year for
shares of Common Stock with an aggregate fair market value
(determined as of the respective date or dates of grant) of more
than $100,000.
12.4 Termination of Employment, Death or Disability. No Incentive Stock
Option may be exercised as such unless, at the time of such
exercise, the optionee is, and has been continuously employed by
the Company since the date of grant, except that:
12.4.1 an Incentive Stock Option may be exercised within
such period as may be specified in the applicable
option agreement or in any applicable employment
agreement to the extent that the option was
exercisable at the date of cessation of employment,
provided, that if such exercise occurs more than
three months after such cessation of employment, it
shall be treated as the exercise of a Non-Statutory
Option under the Plan;
12.4.2 if the optionee dies while in the employ of the
Company, or within three months after he or she
ceases to be an employee, the Incentive Stock Option
will be
Rev. February 3, 1998 Page 4 of 10
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accelerated in full and may be fully exercised by the
person to whom it is transferred by will or the laws
of descent and distribution within one year
immediately following the date of death (or within
such lesser period as may be specified in the
applicable option agreement); and
12.4.3 if the optionee becomes disabled (within the meaning
of Section 22(e)(3) of the Code or any successor
provision thereto) while in the employ of the
Company, the Incentive Stock Option will be
accelerated in full and fully exercisable within the
period of one year after the date the optionee ceases
to be such an employee because of such disability (or
within such lesser period as may be specified in the
applicable option agreement).
12.4.4 An Incentive Stock Options shall not be affected by
any change of employment within or among the Company
and any parent or subsidiary corporation, so long as
the optionee continues to be an employee of either
the Company or such parent or subsidiary corporation.
12.5 Employment. For all purposes of the Plan and any option granted
hereunder, "employment" shall be defined in accordance with the
provisions of Section 1.421-7(h) of the Income Tax Regulations (or
any successor regulations). Notwithstanding the foregoing
provisions, no Incentive Stock Option may be exercised after its
expiration date.
13 Additional Provisions, Acceleration and Extension. The Board of Directors
may, in its sole discretion, include additional provisions in option
agreements covering options granted under the Plan and after the grant date
may take other actions with respect to options granted under the Plan. Such
provisions and actions may include, but shall not be limited to the
following:
13.1 Restrictions on transfer, repurchase rights, commitments to pay
cash bonuses, to make, arrange for, or guaranty loans, or to
transfer other property to optionees upon exercise of options;
provided that such additional provisions or actions shall not be
inconsistent with any other express term or condition of the Plan
and such additional provisions shall not cause any Incentive Stock
Option granted under the Plan to fail to qualify as an Incentive
Stock Option within the meaning of Section 422 of the Code; and
13.2 To accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised and to
extend the period during which all, or any particular, option or
options granted under the Plan may be exercised.
14 Securities Laws.
14.1 Investment Representations. The Company may require any optionee as
a condition of exercising his or her option, to give written
assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to
the option for his or her own account for investment and not with
any present intention of selling or otherwise distributing the
same, and to such other effects as the Company deems necessary,
appropriate or advisable in order to comply with federal and
applicable state securities laws, or with covenants or
representations made by the Company in connection with any public
offering of its Common Stock.
14.2 Compliance With Securities Laws. Each option shall be subject to
the requirement that if at any time counsel to the Company shall
determine that the listing, registration or
Rev. February 3, 1998 Page 5 of 10
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qualification of the shares subject to such option upon any
securities exchange or under any state or federal law, or the
consent or approval of any governmental or regulatory body, or that
the disclosure of non-public information or the satisfaction of any
other condition is necessary as a condition of, or in connection
with, the issuance or purchase of shares thereunder, such option
may not be exercised, in whole or in part, unless such listing,
registration, qualification, consent or approval, or satisfaction
of such condition shall have been effected or obtained on
conditions acceptable to the Board of Directors. Nothing herein
shall be deemed to require the Company to apply for or to obtain
such listing, registration or qualification, or to satisfy such
condition.
15 Rights as a Shareholder. An optionee shall have no rights as a shareholder
with respect to any shares covered by the option (including, without
limitation, any rights to receive dividends or non-cash distributions with
respect to such shares) until the date of issue of a stock certificate to
him or her for such shares. No adjustment shall be made for dividends or
other rights for which the record date is prior to the date such stock
certificate is issued.
16 Adjustment Provisions for Recapitalization and Related Transactions.
16.1 General. If through or as a result of any merger, consolidation,
sale of all or substantially all of the assets of the Company; any
reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split; or any other similar transaction
(a) the outstanding shares of Common Stock are increased, decreased
or exchanged for a different number or kind of shares or other
securities of the Company; or (b) additional shares or new or
different shares or other securities of the Company or other
non-cash assets are distributed with respect to such shares of
Common Stock or other securities, an appropriate and proportionate
adjustment may be made in (x) the maximum number and kind of shares
reserved for issuance under the Plan; (y) the number and kind of
shares or other securities subject to any then outstanding options
under the Plan; and (z) the price for each share subject to any
then outstanding options under the Plan, without changing the
aggregate purchase price as to which such options remain
exercisable. Notwithstanding the foregoing, (i) no adjustment shall
be made pursuant to this Section 16 if such adjustment would cause
the Plan as it relates to Incentive Stock Options to fail to comply
with Section 422 of the Code; and (ii) no adjustment will be made
in the maximum number of shares authorized for issuance hereunder
in the event of the first reverse stock split occurring after the
adoption of this Plan, notwithstanding that the shares issuable
under then outstanding options and the exercise price thereof shall
be adjusted in such event.
16.2 Board Authority to Make Adjustments. Any adjustments under this
Section 16 will be made by the Board of Directors (but the
Committee), whose determination as to what adjustments, if any,
will be made and the extent thereof will be final, binding and
conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.
17 Merger, Consolidation, Asset Sale, Liquidation etc.
17.1 General. In the event of a consolidation or merger or sale of all
or substantially all of the assets of the Company in which
outstanding shares of Common Stock are exchanged for securities,
cash or other property of any other corporation or business entity
or in the event of a liquidation of the Company, the Board of
Directors of the Company, (but not the Committee) or the board of
directors of any corporation assuming the obligations of the
Rev. February 3, 1998 Page 6 of 10
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Company, may, in its discretion, take any one or more of the
following actions, as to outstanding options:
17.1.1 Provide that such options shall be assumed, or
equivalent options shall be substituted, by the
acquiring or succeeding corporation (or an affiliate
thereof), provided that any such options substituted
for Incentive Stock Options shall meet the
requirements of Section 424(a) of the Code;
17.1.2 Upon written notice to the optionees, provide that
all exercisable but unexercised options will
terminate immediately prior to the consummation of
such transaction unless exercised by the optionee
within a specified period following the date of such
notice;
17.1.3 In the event of a merger under the terms of which
holders of the Common Stock of the Company will
receive upon consummation thereof a cash payment for
each share surrendered in the merger (the "Merger
Price"), make or provide for a cash payment to the
optionees equal to the difference between (a) the
Merger Price times the number of shares of Common
Stock subject to such outstanding options (to the
extent then exercisable at prices not in excess of
the Merger Price); and (b) the aggregate exercise
price of all such outstanding options in exchange for
the termination of such options; and
17.1.4 Provide that all or any outstanding options shall
become exercisable in full immediately prior to such
event.
17.2 Substitute Options. The Company may grant options under the Plan in
substitution for options held by employees of another corporation
who become employees of the Company, or a subsidiary of the
Company, as the result of a merger or consolidation of the
employing corporation with the Company or a subsidiary of the
Company, or as a result of the acquisition by the Company, or one
of its subsidiaries, of property or stock of the employing
corporation. The Company may direct that substitute options be
granted on such terms and conditions as the Board of Directors (but
not the Committee) considers appropriate in the circumstances.
18 Change in Control. For purposes of this Plan, a "Change in Control" shall
be deemed to have occurred only if any of the following events occurs:
18.1 any "person", as such term is used in Sections 13(d) and 14(d) of
the Exchange Act (other than the Company, any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company, or any corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportion as
their ownership of stock of the Company), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the
Company's then outstanding securities;
18.2 the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than a merger or
consolidation that would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of
the combined voting power of the voting securities of
Rev. February 3, 1998 Page 7 of 10
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the Company or such surviving entity outstanding immediately after
such merger or consolidation;
18.3 the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets; or
18.4 individuals who, on the date on which the Plan was adopted by the
Board of Directors, constituted the Board of Directors of the
Company, together with any new director whose election by the Board
of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least a majority of the
directors then still in office who were directors on the date on
which the Plan was adopted by the Board of Directors or whose
election or nomination was previously so approved, cease for any
reason to constitute at least a majority of the Board of Directors.
19 No Special Employment Rights. Nothing contained in the Plan or in any
option shall (a) confer upon any optionee any right with respect to the
continuation of his or her employment by the Company; (b) interfere in any
way with the right of the Company at any time to terminate such employment
or to increase or decrease the compensation of the optionee; or (c)
restrict the right of an optionee to resign his or her employment.
20 Other Employee Benefits. The amount of any compensation deemed to be
received by an employee as a result of the exercise of an option or the
sale of shares received upon such exercise shall not constitute
compensation with respect to which any other employee benefits of such
employee are determined, including, but without limitation thereto,
benefits under any bonus, pension, profit-sharing, life insurance or salary
continuation plan, except as to plans which by their terms include such
amounts as compensation, and except as otherwise specifically determined by
the Board of Directors.
21 Termination and Amendment of the Plan and Option Agreements.
21.1 The Board of Directors (but not the Committee) may at any time
terminate the Plan and may from time to time modify or amend the
Plan in any respect, except that if at any time the approval of the
shareholders of the Company is 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, the Board of Directors may not effect such modification or
amendment without such approval.
21.2 The termination or any modification or amendment of the Plan shall
not, without the consent of an optionee, affect his or her rights
under an option previously granted. With the consent of the
optionee, the Board of Directors may amend any outstanding option
agreement in a manner not inconsistent with the Plan. The Board of
Directors shall have the right to amend or modify (a) the terms and
provisions of the Plan and of any outstanding Incentive Stock
Options granted under the Plan to the extent necessary to qualify
any or all such options for such favorable federal income tax
treatment (including deferral of taxation upon exercise) as may be
afforded incentive stock options under Section 422 of the Code; and
(b) the terms and provisions of the Plan and of any outstanding
option to the extent necessary to ensure the qualification of the
Plan or any such option under Rule 16b-3.
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22 Withholding.
22.1 The Company shall have the right to deduct from payments of any
kind otherwise due to an optionee any federal, state or local taxes
of any kind required by law to be withheld with respect to any
shares issued upon exercise of options under the Plan. Subject to
the prior approval of the Company, which may be withheld by the
Company in its sole discretion, the optionee may elect to satisfy
such obligations, in whole or in part (a) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the
exercise of an option; or (b) by delivering to the Company shares
of Common Stock already owned by the optionee. The shares so
delivered or withheld shall have a fair market value equal to such
withholding obligation. The fair market value of the shares used to
satisfy such withholding obligation shall be determined by the
Company as of the date that the amount of tax to be withheld is to
be determined. An optionee who has made an election pursuant to
this Section 22.1 may only satisfy his or her withholding
obligation with shares of Common Stock that are not subject to any
repurchase, forfeiture, unfulfilled vesting or other similar
requirements.
22.2 Notwithstanding the foregoing, in the case of a Reporting Person,
no election to use shares for the payment of withholding taxes
shall be effective unless made in compliance with any applicable
requirements of Rule 16b-3 (unless it is intended that the
transaction not qualify for exemption under Rule 16b-3).
23 Cancellation and New Grant of Options etc. The Board of Directors shall
have the authority to effect, at any time and from time to time, with the
consent of the affected optionees, (a) the cancellation of any or all
outstanding options under the Plan and the grant in substitution therefor
of new options under the Plan covering the same or different numbers of
shares of Common Stock and having an option exercise price per share which
may be lower or higher than the exercise price per share of the canceled
options; or (b) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share that
is higher or lower than the then-current exercise price per share of such
outstanding options.
24 Effective Date and Duration of the Plan.
24.1 Effective Date. The Plan shall become effective upon its adoption
by the Board of Directors (not the Committee), but no option
granted under the Plan shall become exercisable unless and until
the Plan and such options shall have been approved by the Company's
shareholders. If such shareholder approval is not obtained within
twelve months after the date of the Board's adoption of the Plan,
options previously granted under the Plan shall not vest and shall
terminate and no options shall be granted thereafter.
24.2 Amendments to the Plan not requiring shareholder approval shall
become effective when adopted by the Board of Directors; amendments
requiring shareholder approval (as provided in Section 21.1) shall
become effective upon their adoption by the Board of Directors, but
no option granted after the date of such amendment shall become
exercisable (to the extent that such amendment to the Plan was
required to enable the Company to grant such option to a particular
person) unless and until such amendment shall have been approved by
the Company's shareholders. If such shareholder approval is not
obtained within twelve months of the Board's adoption of such
amendment, any options granted on or after the date of such
amendment shall terminate to the extent that such amendment was
required to enable the
Rev. February 3, 1998 Page 9 of 10
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Company to grant such option to a particular optionee. Subject to
this limitation, options may be granted under the Plan at any time
after the effective date and before the date fixed for termination
of the Plan.
24.3 Termination. Unless sooner terminated in accordance with the Plan,
the Plan shall terminate upon the close of business on the day next
preceding the tenth anniversary of the date of its adoption by the
Board of Directors. Options outstanding on such date shall
nevertheless continue in full force and effect in accordance with
the provisions of the instruments evidencing such options.
25 Provision for Foreign Participants. The Board of Directors may, without
amending the Plan, modify awards or options granted to participants who are
foreign nationals or employed outside the United States to recognize
differences in laws, rules, regulations or customs of such foreign
jurisdictions with respect to tax, securities, currency, employee benefit
or other matters.
--------------------------------------------------
Adopted by the Board of Directors this 15th day of November, 1996 Amended
by the Board of Directors on September 4, 1997 and February 3, 1998
Approved by the Shareholders of the Company on __________________
Rev. February 3, 1998 Page 10 of 10
